Q2 2026 Arrow Electronics Inc Earnings Call

August 6, 2026

Operator: Good day, welcome to the Arrow Electronics Q2 2026 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Nelson, Arrow's Vice President, Investor Relations. Please go ahead.

Speaker #1: Good day. And welcome to the ARROW ELECTRONICS second quarter 2026 earnings call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Michael Nelson, ARROW's Vice President of Investor Relations.

Speaker #2: Thank everyone to the ARROW ELECTRONICS second quarter 2026 earnings conference call. Joining me on the call today is our interim president and chief executive officer, Bill Austin.

Speaker #2: Thank everyone to the ARROW ELECTRONICS second quarter 2026 earnings conference call. Joining me on the call today is our interim president and chief executive officer, Bill Austin. officer, Raj Agrawal.

Michael Nelson: Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Q2 2026 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen, our Chief Financial Officer, Raj Agrawal, our President of Global Components, Rick Marano, 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 projections regarding 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.

Speaker #2: Our chief financial 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 projections regarding future financial results, which are based on our predictions and expectations as of today.

Speaker #2: 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.

Speaker #2: 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.

Michael Nelson: 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, Bill, Raj, Rick, and Eric will be available to take your questions. I'll now hand the call over to our Interim President and CEO, Bill Austen.

Speaker #2: 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.

Speaker #2: 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, Bill, Raj, Rick, and Eric will be available to take your questions.

Speaker #2: I'll now hand the call over to our interim president and CEO, Bill Austin.

Speaker #3: Thank you, Michael. And good afternoon, everyone. We appreciate you joining us for a discussion of our second quarter 2026 results. Before turning to our results, I want to thank our team across the globe.

Bill Austen: Thank you, Michael, good afternoon, everyone. We appreciate you joining us for a discussion of our Q2 2026 results. Before turning to our results, I want to thank our team across the globe. Their commitment to serving our suppliers and customers is a key reason why Arrow delivered another strong quarter. Starting on slide three, we delivered excellent results in Q2. Total revenue of $10 billion increased 32% year over year, operating margin expanded 120 basis points year over year to 4%, each of which exceeded expectations. The combination of broad-based demand, disciplined execution, and positive operating leverage resulted in non-GAAP EPS of $5.45, representing a significant increase of 124% year over year. Our strong results this quarter were underpinned by four primary drivers. One, sustained unit volume growth with incremental benefits from price inflation.

Speaker #3: Their commitment to serving our suppliers and customers is a key reason why ARROW delivered another strong quarter. Starting on slide 3, we delivered excellent results in the second quarter.

Speaker #3: Total revenue of $10 billion increased 32% year over year and operating margin expanded 120 basis points year over year to 4%. Each of which exceeded expectations.

Speaker #3: The combination of broad-based demand, disciplined execution, and positive operating leverage resulted in non-GAAP EPS of $5.45, representing a significant increase of 124% year over year.

Speaker #3: Our strong results this quarter were underpinned by four primary drivers. One, sustained unit volume growth with incremental benefits from price inflation. Two, disciplined execution as we managed expenses and working capital against the backdrop of solid customer demand.

Bill Austen: Two, disciplined execution as we managed expenses and working capital against the backdrop of solid customer demand. Three, positive operating leverage resulting in year-over-year margin expansion. Four, favorable mix of higher-margin value-added services. Arrow Global Components once again performed exceptionally well with strength across geographies, industry verticals, and customer mix. Similarly, within ECS, we continue to benefit from long-term secular demand trends around cloud, cybersecurity, infrastructure software, and AI-driven workloads, while continuing to execute our strategy around higher-value software and services. Raj will share more details on our financial performance in a moment, but first, I would like to spend a few minutes discussing several key themes from the quarter that reinforce our confidence in the sustainability of the business and growth strategy. First, our leading indicators continue to give us enhanced visibility and conviction in our operating model.

Speaker #3: Three, positive operating leverage resulting in year-over-year margin expansion. And four, a favorable mix of higher-margin, value-added services. Global Components once again performed exceptionally well, with strength across geographies, industry verticals, and customer mix.

Speaker #3: Similarly, within ECS, we continue to benefit from long-term secular demand trends around cloud, cybersecurity, infrastructure software, and AI-driven workloads. While continuing to execute our strategy around higher value software and services.

Speaker #3: Raj will share more details on our financial performance in a moment. But first, I would like to spend a few minutes discussing several key themes from the quarter.

Speaker #3: That reinforces our confidence in the sustainability of the business and growth strategy. First, our leading indicators continue to give us enhanced visibility and conviction in our operating model.

Speaker #3: Book-to-bill ratios improved further and remain well above parity, while our backlog continues to build into 2027. Importantly, these leading indicators further strengthen our confidence in the durability of demand and the sustainability of our growth trajectory.

Bill Austen: Book-to-bill ratios improve further and remain well above parity, while our backlog continues to build into 2027. Importantly, these leading indicators further strengthen our confidence in the durability of demand and sustainability of our growth trajectory. Second, our growth remains largely customer demand-driven. While we have seen incremental benefits from inflation, the primary driver of growth has been increased unit volume. Not only are we benefiting from ongoing AI investment trends, but we are also experiencing strength in industrial, aerospace and defense, and the re-emergence of transportation. Third, growth is broad-based, and we are still in the early stages of a mass market upturn as backlog from our mass market customers continues to slowly ramp. Fourth, value-added services remained a differentiator, with supply chain services once again contributing significantly to overall profitability. Encouragingly, these favorable demand signals are interconnected, with each contributing to a broader opportunity set across our portfolio.

Speaker #3: Second, our growth remains largely customer demand-driven. While we have seen incremental benefits from inflation, the primary driver of growth has been increased unit volume.

Speaker #3: Not only are we benefiting from ongoing AI investment trends, but we are also experiencing strength in industrial aerospace and defense, and the reemergence of transportation.

Speaker #3: Third, growth is broad-based, and we are still in the early stages of a mass-market upturn, as backlog from our mass-market customers continues to slowly ramp.

Speaker #3: Fourth, value-added services remain a differentiator. With supply chain services once again contributing significantly to overall profitability. Encouragingly, these favorable demand signals are interconnected. With each contributing to a broader opportunity set, across our portfolio.

Speaker #3: As we have highlighted previously, our remains well positioned at the intersection of several attractive secular growth markets. Allowing us to benefit from their continued expansion.

Bill Austen: As we have highlighted previously, Arrow remains well-positioned at the intersection of several attractive secular growth markets, allowing us to benefit from their continued expansion. Finally, the quality of our growth continues to improve, supported by a more favorable mix of customers and geographies, contribution from value-added services, and ongoing productivity gains across the business. Combined with the structural changes we have made to reset our business model and our disciplined expense management, these factors are enabling us to deliver meaningful operating leverage and generate strong incremental returns. Turning to slide four, I would like to briefly revisit four pillars of our investment thesis and why we believe Arrow remains uniquely positioned for long-term growth and an attractive investment opportunity. I have discussed these pillars over the past several quarters, and you are starting to see the true strength of the business come through in our results.

Speaker #3: Finally, the quality of our growth continues to improve, supported by a more favorable mix of customers and geographies, contribution from value-added services, and ongoing productivity gains across the business.

Speaker #3: Combined with the structural changes we have made to reset our business model and our disciplined expense management, these factors are enabling us to deliver meaningful operating leverage and generate strong incremental returns.

Speaker #3: Turning to slide 4, I would like to briefly revisit four pillars of our investment thesis and why we believe ARROW remains uniquely positioned for long-term growth and an attractive investment opportunity.

Speaker #3: I have discussed these pillars over the past several quarters, and you are starting to see the true strength of the business come through in our results.

Speaker #3: First, Arrow maintains a strong position in large and growing markets, and plays a critical role in our six core markets: industrial, transportation, aerospace and defense, medical, consumer electronics, and data center.

Bill Austen: First, Arrow maintains a strong position in large and growing markets and plays a critical role in our six core markets of industrial, transportation, aerospace and defense, medical, consumer electronics, and data center. These end markets are supported by favorable secular trends that continue to create growth opportunities. Second, Arrow has differentiated capabilities driving profitable growth. We are benefiting from a richer mix of higher-value service offerings, including supply chain services, engineering and design services, and integration services. Notably, these offerings build upon our longstanding strengths in our core distribution franchise and represent a natural extension of the capabilities that have long differentiated Arrow in the marketplace. We continue to expand our suite of differentiated capabilities that deepen customer engagement and further differentiate Arrow.

Speaker #3: These end markets are supported by favorable secular trends that continue to create growth opportunities. Second, ARROW has differentiated capabilities driving profitable growth. We are benefiting from a richer mix of higher value service offerings, including supply chain services, engineering and design services, and integration services.

Speaker #3: Notably, these offerings build upon our long-standing strengths in our core distribution franchise, and represent a natural extension of the capabilities that have long differentiated ARROW in the marketplace.

Speaker #3: We continue to expand our suite of differentiated capabilities that deepen customer engagement and further differentiate ARROW. We recently introduced digital test drive, a new remote AI-driven engineering platform that allows customers to evaluate hardware, benchmark performance, and accelerate product development without the logistics and delays associated with physical evaluation of equipment.

Bill Austen: We recently introduced Digital Test Drive, a new remote AI-driven engineering platform that allows customers to evaluate hardware, benchmark performance, and accelerate product development without the logistics and delays associated with physical evaluation of equipment. This expands our ability to support customers globally while increasing the efficiency and scalability of our engineering services. Additionally, our eInfochips business continues to strengthen its position as a leader in engineering services. Its differentiated silicon-to-cloud capabilities help customers navigate increasingly complex product life cycles. During the quarter, eInfochips was recognized in Gartner's Emerging Market Quadrant for Physical AI Services, reinforcing the strength of our technical capabilities in this rapidly evolving market. We also recently expanded our ECS Experience Centers, providing partners access to more than 100 pre-built hybrid infrastructure, cybersecurity, and AI solutions alongside our engineering expertise to accelerate solution development and deployment.

Speaker #3: This expands our ability to support customers globally, while increasing the efficiency and scalability of our engineering services. Additionally, our e-info chips business continues to strengthen its position as a leader in engineering services.

Speaker #3: Its differentiated silicone-to-cloud capabilities help customers navigate increasingly complex product lifecycles. During the quarter, e-info chips was recognized in Gartner's emerging market quadrant for physical AI services.

Speaker #3: Reinforcing the strength of our technical capabilities in this rapidly evolving market. We also recently expanded our ECS experience centers, providing partners access to more than 100 pre-built hybrid infrastructure cybersecurity and AI solutions, alongside our engineering expertise, to accelerate solution development and deployment.

Speaker #3: Historically, these engagements have resulted in a proposal close rates of approximately 90%. I'm proud to share that ARROW recently earned three key Microsoft distinctions for our ECS business.

Bill Austen: Historically, these engagements have resulted in a proposal close rates of approximately 90%. I'm proud to share that Arrow recently earned three key Microsoft distinctions for our ECS business: Frontier Distributor status, specializations in Copilot, and Azure Virtual Desktop. Together, they validate our scale and expertise across AI, cloud, and the modern workplace, strengthening our ability to help channel partners deploy scalable solutions through ArrowSphere and supporting continued growth in recurring cloud consumption. Third, Arrow has a diversified business model that provides financial flexibility supported by strong balance sheet and consistent free cash flow generation. The combination of our Global Components and ECS businesses is a strategic advantage, allowing us to participate across the full technology life cycle. Fourth, our focused capital allocation strategy is designed to maximize shareholder value by deploying capital where we expect the highest long-term risk-adjusted returns.

Speaker #3: Frontier distributor status, specializations in Copilot, and Azure Virtual Desktop. Together, they validate our scale and expertise across AI, cloud, and the modern workplace, strengthening our ability to help channel partners deploy scalable solutions through ARROW Sphere, and supporting continued growth in recurring cloud consumption.

Speaker #3: Third, ARROW has a diversified business model that provides financial flexibility, supported by strong balance sheet and consistent free cash flow generation. The combination of our global components and ECS businesses is a strategic advantage, allowing us to participate across the full technology lifecycle.

Speaker #3: And fourth, our focused capital allocation strategy is designed to maximize shareholder value by deploying capital where we expect the highest long-term risk-adjusted returns. We will continue to reinvest in the business to drive organic growth, evaluate disciplined M&A opportunities, and return excess capital to shareholders, while maintaining an investment-grade credit rating.

Bill Austen: We will continue to reinvest in the business to drive organic growth, evaluate disciplined M&A opportunities, and return excess capital to shareholders while maintaining an investment-grade credit rating. Turning to slide five. We are very pleased with the strong results we delivered during Q2, which reflect our team's disciplined execution and the progress we have made over the past several years. We continue to build on our traditional distribution DNA, all while expanding our higher-margin value-added services across both Global Components and ECS, creating a broader portfolio of solutions that strengthen customer relationships and improve the quality of our earnings. We believe Arrow is uniquely positioned across both the hardware and software technology ecosystems, giving us the opportunity to participate broadly as our customers continue investing across the full technology life cycle.

Speaker #3: Turning to slide with the strong results we delivered during the second quarter, which reflect our team's disciplined execution and the progress we have made over the past several years.

Speaker #3: We continue to build on our traditional distribution DNA, all while expanding our higher margin value-added services across both global components and ECS, creating a broader portfolio of solutions that strengthen customer relationships and improve the quality of our earnings.

Speaker #3: We believe ARROW is uniquely positioned across both the hardware and software technology ecosystems, giving us the opportunity to participate broadly as our customers continue investing across the full technology lifecycle.

Speaker #3: As we enter the second half of the year, our focus remains on improving the quality of our growth through strong execution and disciplined financial management.

Bill Austen: As we enter H2, our focus remains on improving the quality of our growth through strong execution and disciplined financial management. We continue to make targeted investments in opportunities supported by customer demand and attractive long-term returns while maintaining a highly efficient business model, which we expect will drive additional positive operating leverage. We are confident in the direction of the business, encouraged by the opportunities ahead, and remain focused on creating sustainable long-term shareholder value. With that, I'll turn it over to Raj to discuss our financial performance in more detail.

Speaker #3: We continue to make targeted investments in opportunities supported by customer demand and attractive long-term returns, while maintaining a highly efficient business model which we expect will drive additional positive operating leverage.

Speaker #3: We are confident in the direction of the business, encouraged by the opportunities ahead, and remain focused on creating sustainable long-term shareholder value. With that, I'll turn it over to Raj to discuss our financial performance in more detail.

Speaker #2: Thanks, Bill. On slide 6, sales for the second quarter increased $2.4 billion year over year to $10 billion, exceeding our guidance range and up 32% versus the prior year.

Raj Agrawal: Thanks, Bill. On slide six, sales for Q2 increased $2.4 billion year-over-year to $10 billion, exceeding our guidance range and up 32% versus the prior year, or up 30% versus the prior year on a constant currency basis. Q2 consolidated non-GAAP gross margin as a percent of sales of 11.2% was flat versus the prior year. Our Q2 non-GAAP operating expenses increased $88 million year-over-year to $719 million, primarily driven by variable costs and FX. Importantly, non-GAAP OpEx as a percent of gross profit declined 10.5 percentage points year-over-year to 64.1%. We continue to focus on disciplined, profitable growth, and our efforts around operational efficiency are driving substantial operating leverage in the business model. In Q2, non-GAAP operating income increased $188 million year-over-year to $403 million.

Speaker #2: Or up 30% versus the prior year on a constant currency basis. Second quarter consolidated non-gap gross margin as a percent of sales of 11.2% was flat versus the prior year.

Speaker #2: Our second quarter non-gap operating expenses increased 88 million dollars year over year to 719 million dollars, primarily driven by variable costs and FX. Importantly, non-gap opex as a percent of gross profit declined 10.5 percentage points year over year to 64.1%.

Speaker #2: We continue to focus on disciplined profitable growth and our efforts around operational efficiency are driving substantial operating leverage in the business model. In the second quarter, non-gap operating income increased 188 million dollars year over year to 403 million dollars.

Speaker #2: Non-GAAP operating margin rate expanded 120 basis points year over year to 4% of sales. Interest and other expenses were $37 million in the second quarter, as we benefited from lower average debt levels throughout the quarter, and our non-GAAP effective tax rate was 23%.

Raj Agrawal: Non-GAAP operating margin rate expanded 120 basis points year-over-year to 4% of sales. Interest and other expenses was $37 million in Q2, as we benefited from lower average debt levels throughout the quarter, and our non-GAAP effective tax rate was 23%. Finally, non-GAAP diluted EPS for Q2 increased 124% year-over-year to $5.45, which was above our guidance range, driven by a number of factors, including favorable sales volume, continued strength of our value-added services, operational leverage from productivity initiatives, and lower interest expense. Turning to slide seven, let's take a closer look at our Global Components business. Global Components sales increased $726 million sequentially to $7.4 billion in Q2, above our guidance range and up 11% versus prior quarter. Global Components non-GAAP operating income increased to $32 million sequentially to $397 million, up 9% from the prior quarter.

Speaker #2: Finally, non-gap diluted EPS for the second quarter increased 124% year over year to $5.45. Which was above our guidance range driven by a number of factors including favorable sales volume, continued strength of our value-added services, operational leverage from productivity initiatives, and lower interest expense.

Speaker #2: Turning to slide 7, let's take a closer look at our global components business. Global components sales increased 726 million dollars sequentially to 7.4 billion dollars in the second quarter.

Speaker #2: Above our guidance range and up 11% versus prior quarter. Global components non-gap operating income increased 32 million dollars sequentially to 397 million dollars, up 9% from the prior quarter.

Speaker #2: Non-gap operating margins modestly declined 10 basis points sequentially to 5.4% and were up 180 basis points versus the prior year and well ahead of expectations.

Raj Agrawal: Non-GAAP operating margins modestly declined 10 basis points sequentially to 5.4%, and were up 180 basis points versus the prior year and well ahead of expectations. The growth that we experienced in Q2 was once again broad-based across geographies, industry verticals, and customer segments, underpinned by healthy trends in our leading indicators. Book-to-bill ratios continued to increase and remain well above one in all three regions. Overall lead times continue to extend for certain technologies, but they remain lower than a pervasive shortage environment. Customer order patterns broadly are normal in size and pace, reflecting a rational market environment. Our backlog construct continues to grow and is building out into H1 of 2027, giving us visibility and confidence in the sustainability of the business's momentum.

Speaker #2: The growth that we experienced in the second quarter was once again broad-based across geographies, industry verticals, and customer segments, underpinned by healthy trends in our leading indicators.

Speaker #2: Look to bill ratios continue to increase and remain well above 1 in all three regions. Overall lead times continue to extend for certain technologies, but they remain lower than a pervasive shortage environment.

Speaker #2: Customer order patterns broadly are normal in size and pace, reflecting a rational market environment. Our backlog construct continues to grow and is building out into the first half of 2027, giving us visibility and confidence in the sustainability of the business's momentum.

Speaker #2: Encouragingly, the growth that we are seeing continues to be led by customer unit demand with some incremental lift from price inflation. Price inflation contributed roughly one-third of the sequential revenue growth in our global components business.

Raj Agrawal: Encouragingly, the growth that we are seeing continues to be led by customer unit demand with some incremental lift from price inflation. Price inflation contributed roughly one-third of the sequential revenue growth in our Global Components business. Memory now represents a low double-digit percentage of total segment revenue. Our strategy remains focused on profitable growth, and our execution is driving a healthier business mix. First, while we continue to benefit from secular growth trends related to AI and data center, we are experiencing broad-based demand across our portfolio rather than concentrated in a single market. Strength in aerospace and defense, industrial, and the re-emergence of transportation, particularly in the West, are presenting tailwinds to our Global Components business. These are our three largest verticals globally. Second, book-to-bill ratios and backlog across our mass market segment continues to improve, and we believe there is still healthy runway.

Speaker #2: Memory now represents a low double-digit percentage of total segment revenue. Our strategy remains focused on profitable growth and our execution is driving a healthier business mix.

Speaker #2: First, while we continue to benefit from secular growth trends related to AI and data center, we are experiencing broad-based demand across our portfolio, rather than concentrated in a single market.

Speaker #2: Strength in aerospace and defense, industrial, and the reemergence of transportation particularly in the West are presenting tailwinds to our global components business. These are our three largest verticals globally.

Speaker #2: Second, look-to-bill ratios and backlog across our mass market segment continue to improve, and we believe there is still healthy runway. Third, interconnect, passive, and electromechanical components for IP&E continue to grow.

Raj Agrawal: Third, Interconnect, Passive, and Electromechanical components for IP&E continue to grow, surpassing $1 billion in sales for the second consecutive quarter. Fourth, our value-added services, primarily supply chain services, made another meaningful contribution to our overall Q2 operating income. These capabilities expand our addressable market, deepen customer engagement, and increase the durability of our earnings. Lastly, we have remained disciplined with our cost structure and have added positive operating leverage to our model. This discipline is expected to drive continued flow-through as the broader market grows and expands. Taking a closer look at each of the regions. In the Americas, sales growth was broad-based, highlighted by strength in aerospace and defense, industrial, and transportation. In EMEA, the market was underpinned by strength in transportation and aerospace and defense. Finally, in Asia, sequential growth was driven by industrial, transportation, and demand for data center computing power.

Speaker #2: Surpassing 1 billion dollars in sales for the second consecutive quarter. Fourth, our value-added services primarily supply chain services made another meaningful contribution to our overall second quarter operating income.

Speaker #2: These capabilities expand our addressable market, deepen customer engagement, and increase the durability of our earnings. Lastly, we have remained disciplined with our cost structure and have added positive operating leverage to our model.

Speaker #2: This discipline is expected to drive continued flow-through as the broader market grows and expands. Taking a closer look at each of the regions. In the Americas, sales growth was broad-based, highlighted by strength in aerospace and defense, industrial, and transportation.

Speaker #2: In EMEA, the market was underpinned by strength in transportation and aerospace and defense. And finally, in Asia, sequential growth was driven by industrial, transportation, and demand for data center computing power.

Speaker #2: Turning to slide 8 in our global ECS business. In the second quarter, global ECS sales increased $332 million year over year to $2.6 billion.

Raj Agrawal: Turning to slide eight and our global ECS business. In Q2, global ECS sales increased $332 million year-over-year to $2.6 billion, above our guidance range and up 14% versus the prior year, or up 13% year-over-year on a constant currency basis. Total ECS billings were $5.9 billion, up 14% year-over-year. Our global ECS business is strategically positioned at the complex end of the IT stack, where hybrid cloud and AI demand is driving healthy backlog growth of over 75% year-over-year, finishing Q2 at another all-time high. We are experiencing strength across our portfolio of cloud, cybersecurity, data protection, data intelligence, and infrastructure software. Today, hardware solutions for on-premise storage and compute remain constrained by thin supply, mostly due to memory and SSD shortages.

Speaker #2: Above our guidance range and up 14% versus the prior year, or up 13% year over year on a constant currency basis. Total ECS billings were 5.9 billion dollars up 14% year over year.

Speaker #2: Our global ECS business is strategically positioned at the complex end of the IT stack, where hybrid cloud and AI demand is driving healthy backlog growth of over 75% year over year, finishing the second quarter at another all-time high.

Speaker #2: We are experiencing strength across our portfolio of cloud, cybersecurity, data protection, data intelligence, and infrastructure software. Today, hardware solutions for on-premise storage and compute remain constrained by thin supply mostly due to memory and SSD shortages.

Speaker #2: However, our role in the middle of technology makers and channel partners allows us to source, provision, manage, and scale alternatives that lean more on the software and public cloud solutions that we offer.

Raj Agrawal: However, our role in the middle of technology makers and channel partners allows us to source, provision, manage, and scale alternatives that lean more on the software and public cloud solutions that we offer. Our single integrated ArrowSphere platform continues to help drive these efforts, unlocking deeper engagement and recurring revenue volumes. In Q2, we took a charge on certain underperforming multi-year contracts with one of our partners. As a result, Q2 ECS non-GAAP operating margins declined 100 basis points year-over-year due to the charge. As we have noted in prior quarters, we have been working through discussions with one of our strategic partners with whom we also have these beyond distribution relationships. This is a highly valued relationship, and we wanted to ensure we reached the right outcome.

Speaker #2: And our single, integrated bare sphere platform continues to help drive these efforts, unlocking deeper engagement and recurring revenue volumes. In the second quarter, we took a charge on certain underperforming multi-year contracts with one of our partners.

Speaker #2: As a result, second quarter ECS non-GAAP operating margins declined 100 basis points year over year due to the charge. As we have noted in prior quarters, we have been working through discussions with one of our strategic partners with whom we also have these beyond distribution relationships.

Speaker #2: This is a highly valued relationship and we wanted to ensure we reached the right outcome. We have now terminated one key element of our beyond distribution agreement with this partner and continue to work towards restructuring another.

Raj Agrawal: We have now terminated one key element of our beyond distribution agreement with this partner and continue to work towards restructuring another. We believe these actions will help to get this part of the business on the right track. Both of us remain committed to achieving success going forward. Turning to the balance sheet on slide nine. Net working capital declined sequentially in Q2 by approximately $100 million, ending the quarter at $6.8 billion. Inventory grew sequentially by $217 million, ending Q2 at $5.9 billion. Importantly, the financial metrics that we monitor continue to significantly improve. Return on working capital increased 10.9 percentage points year over year, finishing Q2 at 23.6%. Likewise, return on invested capital increased 5.8 percentage points year over year, finishing at 13.9%.

Speaker #2: We believe these actions will help to get this part of the business on the right track. Both of us remain committed to achieving success going forward.

Speaker #2: Turning to the balance sheet on slide 9. Networking capital declined sequentially in the second quarter by approximately 100 million dollars, ending the quarter at 6.8 billion dollars.

Speaker #2: Inventory grew sequentially by 217 million dollars, ending the second quarter at 5.9 billion dollars. Importantly, the financial metrics that we monitor continue to significantly improve.

Speaker #2: Return on working capital increased 10.9 percentage points year over year finishing the second quarter at 23.6 percent. Likewise, return on invested capital increased 5.8 percentage points year over year finishing at 13.9 percent.

Speaker #2: Working capital as a percent of sales declined in the second quarter to approximately 17 percent and our cash conversion decreased year over year by 23 days.

Raj Agrawal: Working capital as a percent of sales declined in Q2 to approximately 17%, and our cash conversion decreased year over year by 23 days. Cash flow from operating activities in Q2 was $318 million, taking us to over $1 billion of operating cash flow year to date. The strong cash generation is driven in part by timing effects from our supply chain services offering, which may partially unwind as the year progresses. This offering is largely working capital light because the inventory is typically consigned, but AR and AP cash flows within existing customer-supplier relationships can create quarter-end swings. In general, the countercyclical cash flow dynamics of our business model have not changed. Gross balance sheet debt at the end of Q2 declined sequentially by approximately $300 million and declined year over year by approximately $650 million, finishing at $2.2 billion.

Speaker #2: Cash flow from operating activities in the second quarter was 318 million dollars. Taking us to over 1 billion dollars of operating cash flow year to date.

Speaker #2: The strong cash generation is driven in part by timing effects from our supply chain services offering which may partially unwind as the year progresses.

Speaker #2: This offering is largely working capital-like because the inventory is typically consigned. But AR and AP cash flows within existing customer supplier relationships can create quarter end swings.

Speaker #2: In general, the countercyclical cash flow dynamics of our business model have not changed. Gross balance sheet debt at the end of the second quarter declined sequentially by approximately 300 million dollars and declined year over year by approximately 650 million dollars finishing at 2.2 billion dollars.

Speaker #2: Our lower debt levels, along with increased profitability, have improved our adjusted leverage ratio by over a turn the past 12 months to 1.75 times.

Raj Agrawal: Our lower debt levels, along with increased profitability, has improved our adjusted leverage ratio by over a term the past 12 months to 1.75 times, which provides us with increased financial flexibility. Finally, we repurchased $43 million in shares in Q2. Turning to Q3 guidance on slide 10. We expect sales for Q3 to be between $9.6 and $10.2 billion, representing an increase of 28% year over year at the midpoint of the range. We expect Arrow Global Components sales to be between $7.5 and $7.9 billion, representing sequential growth of 5% at the midpoint. In Arrow Global Enterprise Computing Solutions, we expect sales to be between $2.1 and $2.3 billion, which is up 2% year over year at the midpoint and reflects growing over a large partner addition last year.

Speaker #2: Which provides us with increased financial flexibility. Finally, we repurchased 43 million dollars in shares in the second quarter. Now, turning to Q3 guidance on slide 10.

Speaker #2: We expect sales for the third quarter to be between 9.6 and 10.2 billion dollars. Representing an increase of 28 percent year over year at the midpoint of the range.

Speaker #2: We expect global component sales to be between 7.5 and 7.9 billion dollars, representing sequential growth of 5 percent at the midpoint. In enterprise computing solutions, we expect sales to be between 2.1 and 2.3 billion dollars, which is up 2 percent year over year at the midpoint and reflects growing over a large partner addition last year.

Speaker #2: We're estimating a tax rate in the range of 23 to 25 percent and interest expense of approximately 50 million dollars. Our non-gap deluded earnings per share is expected to be between $4.83 and $5.03.

Raj Agrawal: We're estimating a tax rate in the range of 23% to 25% and interest expense of approximately $50 million. Our non-GAAP diluted earnings per share is expected to be between $4.83 and $5.03. Details about the impacts of changes in foreign currencies can be found in our earnings release. As we look to the balance of the year, we remain confident in the momentum we are seeing across the business and our ability to execute our strategy. At the same time, we recognize that a number of factors can influence the timing and linearity of results from quarter to quarter. We expect Arrow Global Components to perform at or above seasonal trends in all of our regions for the remainder of the year. However, consistent with historical patterns in Q3, Asia is expected to be seasonally strong, while EMEA is typically seasonally weaker.

Speaker #2: Details about the impacts of changes in foreign currencies can be found in our earnings release. As we look to the balance of the year, we remain confident in the momentum we are seeing across the business and our ability to execute our strategy.

Speaker #2: At the same time, we recognize that a number of factors can influence the timing and linearity of results from quarter to quarter. We expect Global Components to perform at or above seasonal trends in all of our regions for the remainder of the year.

Speaker #2: However, consistent with historical patterns in Q3, Asia is expected to be seasonally strong while India is typically seasonally weaker. Additionally, our supply chain services is expected to return to more normal profit levels in the third quarter.

Raj Agrawal: Additionally, our supply chain services is expected to return to more normal profit levels in Q3. Overall, we are confident that our healthier business mix, diversified business model, and financial discipline will enable Arrow to deliver additional operating leverage and drive significant earnings power. With that, I'll now turn the call back over to Bill for some closing thoughts.

Speaker #2: Overall, we are confident that our healthier business mix, diversified business model, and financial discipline will enable Arrow to deliver additional operating leverage and drive significant earnings power.

Speaker #2: With that, I'll now turn the call back over to Bill for some closing thoughts.

Speaker #1: Turning to slide 11. As we look ahead, we remain focused on disciplined execution, building on the operational momentum we have established, and further improving the quality of our growth.

Bill Austen: Turning to slide 11. As we look ahead, we remain focused on disciplined execution, building on the operational momentum we have established, and further improving the quality of our growth. Leading indicators continue to reinforce our conviction that underlying demand is strong. Combined with the actions we have taken to enhance efficiency and optimize our operating model, we believe we are well-positioned to realize increasing levels of operating leverage. Our strategy is producing tangible results and strengthening our competitive position across our markets. As a result, we believe we are well-positioned to capitalize on emerging opportunities and convert them into sustainable, profitable growth. We will continue investing in innovation and customer enablement to deepen relationships and expand our value proposition with a disciplined focus on allocating capital to the highest return on investment opportunities.

Speaker #1: Leading indicators continue to reinforce our conviction that underlying demand is strong. Combined with the actions we have taken to enhance efficiency and optimize our operating model, we believe we are well positioned to realize increasing levels of operating leverage.

Speaker #1: Our strategy is producing tangible results and strengthening our competitive position across our markets. As a result, we believe we are well positioned to capitalize on emerging opportunities and convert them into sustainable, profitable growth.

Speaker #1: We will continue investing in innovation and customer enablement to deepen relationships and expand our value proposition with the disciplined focus on allocating capital to the highest return on investment opportunities.

Speaker #1: In parallel, we will strive to continue growing our portfolio of higher-margin, value-added services across both Global Components and ECS, deepening customer engagement and supporting more durable, higher-quality earnings over time.

Bill Austen: In parallel, we will strive to continue growing our portfolio of higher-margin, value-added services across both Global Components and ECS, deepening customer engagement and supporting more durable, higher-quality earnings over time. Everyone at Arrow is proud of the progress we have made, confident in the direction of the business, and remains committed to creating long-term value for all of our stakeholders. Finally, I'm excited to welcome Dee Merriwether as Arrow's new President and Chief Operating Officer. Dee's extensive distribution experience and successful leadership of commercial, operational, and financial teams will further strengthen our organization. Just as importantly, she brings the humility, transparency, and purpose-driven leadership that aligns with our culture and commitment to delivering value for all of our stakeholders. Dee's addition strengthens our succession planning, and I will continue to serve as Arrow's Interim CEO until a permanent CEO is named.

Speaker #1: Everyone at ARROW is proud of the progress we have made. We are confident in the direction of the business and remain committed to creating long-term value for all of our stakeholders.

Speaker #1: Finally, I'm excited to welcome Dee Merriweather as ARROW's new president and chief operating officer. Dee's extensive distribution experience and successful leadership of commercial, operational, and financial teams will further strengthen our organization.

Speaker #1: Just as importantly, she brings the humility transparency and purpose-driven leadership that aligns with our culture and commitment to delivering value for all of our stakeholders.

Speaker #1: Dee's addition strengthens our succession planning and I will continue to serve as ARROW's interim CEO until a With that, Raj, Rick, Eric, and I would be happy to take your questions.

Bill Austen: With that, Raj, Rick, Eric, and I would be happy to take your questions. Operator, please open the call for questions.

Speaker #1: Operator, please open the call for questions.

Speaker #3: We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality, and if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Will Stein with Truist Securities. Will, please go ahead.

Speaker #3: To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality and if you are muted locally, please remember to unmute your device.

Speaker #3: Please stand by while we compile the Q&A roster. Your first question comes from the line of Will Stein with Truest Securities. Will, please go ahead.

Speaker #4: Hey, thank you for taking my question. Congrats on the good overall results and outlook. I have a couple great just a couple quick questions.

Will Stein: Hey, thank you for taking my question. Congrats on the good overall results and outlook.

Bill Austen: Thanks, Will.

Will Stein: I have a couple. Great. Just a couple of quick questions. First, I think we're about five quarters into the component cycle in terms of expressing year-over-year growth. It's a very robust growth level now. I think it's two quarters of 39, pushing 40% year-over-year growth. What inning would you say we're in terms of that dynamic? Are you seeing things that make you concerned that we're in the sort of the last couple innings of that cycle? You think we're at the beginning still, or perhaps somewhere in the middle?

Speaker #4: First, I think we're about five quarters into the component cycle in terms of expressing year-over-year growth. It's a very robust growth level now. I think it's two quarters of 39 pushing 40 percent year-over-year growth.

Speaker #4: What inning would you say we're in in terms of that dynamic? Are you seeing things that make you concerned that we're in the sort of the last couple innings of that cycle?

Speaker #4: You think we're at the beginning still or perhaps somewhere in the middle?

Speaker #2: Hey, hey Will, thanks for the question. It's Bill. The starting picture is still in the game. All right? We haven't gone to the relief picture yet.

Bill Austen: Hey, Will. Thanks for the question. It's Bill. The starting pitcher is still in the game. All right? We haven't gone to the relief pitcher yet, it's the early innings of the game. I would say, we're in the second inning, somewhere in that range. Rick is sitting here, and he's living it every day. I'm going to turn it over to Rick.

Speaker #2: So it's the early innings of the game. I would say we're in the second inning, somewhere in that range. But Rick is sitting here and he's living it every day.

Speaker #2: So I'm going to turn it over to Rick.

Speaker #5: Yeah. Yeah, thanks Will and thanks for the question. And I'll build on Bill's response when we look at this recovery, it's really three different positions in the recovery cycle if you want to call it that.

Rick Marano: Thanks, Will, and thanks for the question. I'll build on Bill's response. When we look at this recovery, it's really three different positions in the recovery cycle, if you want to call it that. You have AI, which is not a recovery. AI is a market that's evolving and will continue to evolve. You have what's happening in mil-aero, you have what's happening in the core business, which is fundamentally the growth drivers to which we always see recoveries happen in the business. As we said before, I kind of look at it and say it from this perspective. The growth in the core business is steady. All the indicators are strong. Backlog continues to build. There's plenty of time left in the game from my perspective as it builds.

Speaker #5: You have AI, which is not a recovery. AI is a market that's evolving and will continue to evolve. You have what's happening in mill ARROW and then you have what's happening in the core business, which is fundamentally the growth drivers to which we've always seen recoveries happen in the business.

Speaker #5: And as we said before, I kind of look at it and say it from this perspective the growth in the core business is steady.

Speaker #5: All the indicators are strong. Backlog continues to build and there's plenty of time left in the game. From my perspective as it builds.

Speaker #4: Yeah, that's really helpful. Next, I want to highlight sort of a question mark in the guidance. Your ECS guidance is below typical seasonality. It was a bit surprised by that.

Will Stein: Yeah, that's really helpful. Next, I want to highlight sort of a question mark in the guidance. Your ECS guidance is below typical seasonality. I was a bit surprised by that. Perhaps related to this, there was a report mid-quarter noting that there was a departure of a supplier relationship. I think this called out a $1.4 billion revenue level of business, I think that might not have been perfectly accurate. I'd like you to maybe set the record straight in terms of whether there was a loss, the timing of it, the sizing of it, and whether that's perhaps what we're seeing in-

Speaker #4: And perhaps related to this, there was a report mid-quarter noting that there was a departure of a supplier relationship. I think this called out a $1.4 billion revenue level of business.

Speaker #4: But I think that might not have been perfectly accurate. And so I'd like you to maybe set the record straight in terms of whether there was a loss, the timing of it, the sizing of it, and whether that's perhaps what we're seeing in the Q3 guide.

Raj Agrawal: Yeah

Will Stein: the Q3 guide. If it wasn't that, maybe elaborate on that. Thank you.

Speaker #4: If it wasn't that, maybe elaborate on that. Thank you.

Speaker #2: Yeah. Will, great question and thanks for bringing that up. It was a misreport on the 1.4 billion. It's roughly half that at 700 million on the revenue line to us.

Bill Austen: Yeah. Will, great question, and thanks for bringing that up. It was a misreport on the $1.4 billion. It's roughly half that, at $700 million on the revenue line to us. Eric is here, I'll let Eric dive into that deeper if you'd like.

Speaker #2: But Eric is here and I'll let Eric dive into that deeper if you'd like.

Speaker #5: Yes. There would be no impact in terms of revenue and margin and profits for ECS with this loss of a contract. It's in fact it's a mutual agreement.

Eric Nowak: Yes. There would be no impact, in terms of revenue and margin and profits for ECS with this loss of a contract. It is a mutual agreement. Sometimes the strategy between the vendors and the distributors are diverging, and this was the case here. Basically, we are not a volume distributor or laptop or PC distributor. We are an infrastructure software, hardware distributor in cloud, and we are focusing on this. Basically, this particular vendor wanted to have distributor that can do both, and this is not our case. So we will focus on alternative solutions, and our partners will buy from us alternative solutions, and we do not expect any change at all in terms of the growth or whatsoever.

Speaker #5: Sometimes the strategy between the vendors and the distributors are diverging. And this was the case here. And basically we are not a volume distributor, a laptop or PC distributor.

Speaker #5: We are an infrastructure software hardware distributor and cloud. And we are focusing on this. And so basically this particular vendor wanted to have distributors that can do both.

Speaker #5: And this is not our case. So we will focus on alternative solutions. And our partners will buy from us alternative solutions. And we do not expect any change at all in terms of the growth or whatsoever.

Speaker #2: And then Will, just the other part of your question was the below seasonal guide that you referred to. The growth rate in the quarter on a year-over-year basis is primarily the result of growing over a large partner addition last year.

Raj Agrawal: Will, just the other part of your question was the below seasonal guide that you referred to. The growth rate in the quarter on a year-over-year basis is primarily the result of growing over a large partner addition last year. There's no change in trajectory of the overall business. We still expect to get to low double-digit billings growth during the course of this full year, so it's really a grow-over issue for this particular timeframe.

Speaker #2: There is no change in trajectory of the overall business. We still expect to get to low double digit billings growth during the course of this full year.

Speaker #2: So it's really a grow over issue for this particular timeframe.

Speaker #5: Yeah. I'll just add to

Bill Austen: Yeah. I'll just add to that, Raj, for a moment. The ECS business, the base business, the core business is quite strong. Our backlog is up 75%, as Raj noted in his script. If you look at the product segment, the performance within the product segments on a year-over-year basis, security is up 21%, compute's up 51%. Business application is up 26%. There's a really strong, healthy demand out there, and we're parked, as we've always said, right in the center of that ecosystem. The business is doing very well.

Speaker #1: that, Raj, for a moment. The ECS business, the base business, the core business is quite strong. Our backlog is up 75 percent, as Raj noted.

Speaker #1: In his script. And if you look at the product segment, the performance within the product segments on a year-over-year basis, security is up 21 percent, compute's up 51 percent, business application is up 26 percent.

Bill Austen: Business application is up 26%. There's a really strong, healthy demand out there, and we're parked, as we've always said, right in the center of that ecosystem. The business is doing very well.

Speaker #1: So there's a really strong healthy demand out there. And we're parked as we've always said kind of right in the center of that ecosystem.

Speaker #1: So the business is doing very well.

Eric Nowak: Okay.

Speaker #4: Thank you.

Will Stein: Thank you.

Speaker #2: Thanks, Will.

Rick Marano: Thanks, bro.

Speaker #3: Your next question comes from the line of Melissa Fairbanks with Raymond James.

Operator: Your next question comes from the line of Melissa Fairbanks with Raymond James.

Speaker #6: Hey guys.

Melissa Fairbanks: Hey, guys.

Speaker #2: Hey Melissa.

Rick Marano: Hey, Melissa.

Speaker #6: Thanks for taking my question. Hello, good to talk to you again. Congrats on a great quarter, and welcome to Arrow. You're joining a great team.

Melissa Fairbanks: Thanks for taking my question. Hello.

Rick Marano: How are you?

Melissa Fairbanks: Good to talk to you again. Congrats on a great quarter. Dee, welcome to Arrow. You're joining a great team, so I look forward to meeting you. I wanted to see if you might be able to comment on some of the things that we've heard from some of your suppliers during this earnings season about how automotive OEMs are now beginning to pressure some of their tier 1s to maybe carry more inventory because we went way too far into the correction territory and things are too lean, now we're seeing lead times extend. I'm wondering if you're seeing any of those types of dynamics where this is going to be now we're back to normal, kind of not just in case, but also not as lean as the just in times were.

Speaker #6: So I look forward to meeting you. I wanted to see if you might be able to comment on some of the things that we've heard from some of your suppliers.

Speaker #6: During this earnings season, about how automotive, OEMs are now beginning to pressure some of their tier ones. To maybe carry more inventory because we went way too far into the correction territory and things are too lean and now we're seeing lead times extend.

Speaker #6: I'm wondering if you're seeing any of those types of dynamics where this is going to be now we're back to normal kind of not just in case but also not as lean as the just-in-time times were.

Speaker #5: Yeah, Melissa, it's Rick. Thanks for the question. I'll answer the question this way. I think if you kind of put the cycle into play, we went from a cycle where obviously we went through the pandemic.

Rick Marano: Yeah, Melissa, it's Rick. Thanks for the question. I'll answer the question this way. I think if you put the cycle into play, we went from a cycle where obviously we went through the pandemic, inventories got elevated. The cycle we went through, everyone bled off a lot of inventory or held a lot of inventory and had to bleed it off. Then we've seen this progression of a really nice slow recovery, and in that recovery, discipline has come back into the supply chain overall. Customers are now adding buffer inventory back into their supply chains, as well as giving us more visibility and extended visibility to what their MRPs are showing from a longer period of time. I don't think any one particular segment is reacting or acting much differently from an overall perspective.

Speaker #5: Inventories got elevated. The cycle we went through, everyone bled off a lot of inventory or held a lot of inventory and had to bleed it off.

Speaker #5: And then we've seen this progression of a really nice slow recovery and in that recovery, discipline has come back into the supply chain. Overall, customers are now adding buffer inventory back into their supply chains.

Speaker #5: As well as giving us more visibility and extended visibility to what their MRPs are showing from a longer period of time. I don't think any one particular segment is reacting or acting much differently from an overall perspective.

Speaker #5: But I do think it's happening is some of the traditional vertical markets to which carried more inventory, per se, than others, are building buffer inventory back into their mix.

Rick Marano: What I do think is happening is some of the traditional vertical markets to which carried more inventory per se than others are building buffer inventory back into their mix as it relates to what they're seeing from a demand perspective. I don't consider it irrational in any way at this point in time. I don't.

Speaker #5: And as it relates to what they're seeing from a demand perspective. But I don't consider it irrational in any way at this point in time.

Speaker #5: I don't.

Speaker #6: Okay. Great. Thanks, Rick. I appreciate that color. So just kind of building upon that, you are getting better visibility Raj, I think you commented that you're now you have some visibility extending into '27.

Melissa Fairbanks: Okay, great. Thanks, Rick. I appreciate that color. Just kind of building upon that, you are getting better visibility. Raj, I think you commented that you have some visibility extending into 2027. As lead times are extending, especially for some of the higher value products that are going to the data center or the IP&E stuff, are any of your customers looking to pre-position inventory, and maybe having you manage that supply chain for them, and then just put that inventory on consignment in place? I'm wondering if that's a dynamic that's been happening.

Speaker #6: As lead times are extending, especially for some of the higher value products, that are going into the data center or the IP&E stuff, are you are any of your customers looking to pre-position position inventory and maybe having you manage that supply chain for them and then just put that inventory on consignment in place?

Speaker #6: I'm wondering if that's a dynamic that's been happening.

Speaker #5: No. No. It's Rick again, Melissa.

Rick Marano: No. It's Rick again, Melissa.

Speaker #6: Okay.

Melissa Fairbanks: Okay, Rick.

Speaker #5: Yeah. As I said earlier, I don't see anything irrational from that perspective. I don't see or we don't see a lot of panic out there.

Rick Marano: Yeah. As I said earlier, I don't see anything irrational from that perspective. We don't see a lot of panic out there. Lead times, when you think about them overall, there are some lead times that are extending based off technology. Other lead times are extending based off of demand that's basically putting on them, but nothing irrational from my perspective overall. Pre-positioning of inventory or buffers or bonds established by customers are relatively normal from what we would see-

Speaker #5: Lead times, when you think about them overall, there are some lead times that are extending based off technology. Other lead times are extending based off of demand.

Speaker #5: That's basically putting on them. But nothing irrational from my perspective overall. Pre-positioning of inventory or buffers or bonds established by customers are relatively normal from what we would see in a normal cycle.

Melissa Fairbanks: Okay

Rick Marano: in a normal cycle. I don't see that necessarily panic out there in any way, shape, or form driven either by price or by end market demand at this point.

Speaker #5: So I don't see that, necessarily, panic out there in any way, shape, or form, driven either by price or by end market demand at this point.

Speaker #6: Perfect. Thanks very much, guys. I appreciate it.

Melissa Fairbanks: Perfect. Thanks very much, guys. I appreciate it.

Speaker #2: Thanks, Melissa.

Rick Marano: Thanks, Melissa.

Raj Agrawal: Thank you.

Speaker #5: Thank you.

Speaker #3: Your next question comes from the line of Rupalu Bhattacharya from Bank of America.

Operator: Your next question comes from the line of Ruplu Bhattacharya from Bank of America.

Speaker #2: Hey, Rupalu.

Rick Marano: Hey, Roopu.

Ruplu Bhattacharya: Hi. Thanks for taking my questions. Hi, Raj. I want to start with the ECS billings. It looks like in Q2, EMEA had very strong billings, 22% year-on-year change. Americas was more in the mid-single digit range. Can you talk about what drove the difference in performance between the two regions?

Speaker #4: Hi. Thanks for taking hi. Thanks for taking my questions. Hi, Raj. I want to start with the ECS billings. It looks like in the second quarter, EMEA had very strong billings 22 percent year-on-year change.

Speaker #4: America's was more in the mid single digit range. Can you talk about what drove the difference in performance between the two regions?

Speaker #2: I'm going to hand it over to our expert here, Eric. Eric Nowak.

Rick Marano: I'm going to hand it over to our expert here, Eric. Eric Nowak.

Speaker #7: Yes. As we already explained, we aligned the strategies of America to Europe some, let's say, quarters ago. Now, and so basically this strategy around hybrid cloud and AI and the mid market and much more software and much more mid market, that's also now it's completely global.

Eric Nowak: Yes. As we already explained, we aligned the strategies of Americas to Europe some, let's say, quarters ago now. Basically, this strategy around hybrid cloud and AI in the mid-market and much more software and much more mid-markets, that's also now it's completely global. We are deploying our ArrowSphere platform now also in the US. Basically, we are up and running for years and years in Europe, we are taking profit of this. In the US, it's now ramping up, we still need a couple of quarters to be at the same level.

Speaker #7: We are deploying our sphere platform now also in the US. And so basically we are up and running and for years and years in Europe and so we are taking profit of this.

Speaker #7: In the US, it's now taking it's pumping up. But of course, we still need a couple of quarters to be at the same level.

Speaker #4: Okay. Thanks for the details there. Raj, can I ask a follow-up on margins? So on ECS, there was 100 bips year-on-year decline. You said there was a charge.

Ruplu Bhattacharya: Okay, thanks for the details there. Raj, can I ask a follow-up on margins? On ECS, there was 100 basis points year-on-year decline. You said there was a charge. Can you quantify how much was the year-on-year impact from the charge? How should we think about ECS segment margins as we go through the rest of the year? Typically, Q4 sees a big jump. Are you still expecting that? A similar question on the core business. In components, should we expect that you can maintain healthy 5% plus margins? What are the puts and takes, if you can give us any details you can.

Speaker #4: Can you quantify how much was the year-on-year impact from the charge? And then how should we think about ECS segment margins as we go through the rest of the year?

Speaker #4: Typically, the fourth quarter sees a big jump. Are you still expecting that? And then on a similar question about the core business, in components, should we expect that you can maintain healthy 5% plus margins?

Speaker #4: What are the puts and takes if you can give us any details you can?

Speaker #2: Yeah. Absolutely. We did take a charge within the ECS business that impacted the margins within ECS by 100 basis points. That equates to 27 million dollars.

Raj Agrawal: Yeah, absolutely. We did take a charge within the ECS business that impacted the margins within ECS by 100 basis points. That equates to $27 million. Had it not been for the charges, the margins would have been at well over 4%. The charge relates to something we've been working on with one of our key partners to restructure and change the economics around some of the beyond distribution contracts. One key point of progress we made was we terminated one key aspect of the beyond distribution relationship with this partner, and we are working to restructure the other one that has been causing us some issues. We still have a great relationship with this partner, so we want to make sure that we work it out in the right way. I think we're on the right path there.

Speaker #2: Had it not been for the charges, the margins would have been at well over 4 percent. The charge relates to something we've been working on with one of our key partners to restructure and change the economics around some of the beyond distribution contracts.

Speaker #2: And one key point of progress we made was we terminated one key aspect of the beyond distribution relationship with this partner. And we are working to restructure the other one that has been causing us some issues.

Speaker #2: We still have a great relationship with this partner, so we want to make sure that we work it out in the right way. But I think we're on the right path there.

Speaker #2: I do expect some more charges in the second half of the year, probably at a lesser pace than what we saw in the second quarter.

Raj Agrawal: I do expect some more charges in the H2 of the year, probably at a lesser pace than what we saw in the Q2. Once we get behind the restructure, I think we'll be on a good path there. As Bill had mentioned earlier, the core business continues to perform really well. No concerns at all there. Ruplu, on your point around the Q4 seasonality, we'll expect to see very high margins again in the ECS business in the Q4, as we always do. We get double the volume. We get margin expansion because we're leveraging the OpEx. I would not expect to see anything different there. Remember, though, that we had four extra ship days in the Q1 of this year, which will be four less in the Q4 of this year.

Speaker #2: But once we get behind the restructure, I think we'll be on a good path there. And as Bill had mentioned earlier, the core business continues to perform really well.

Speaker #2: So no concerns at all there. And Rupalu, on your point around the fourth quarter seasonality, we'll expect to see very high margins again in the ECS business in the fourth quarter as we always do.

Speaker #2: We get double the volume. We get margin expansion because we're leveraging the OPEX. And so I would not expect to see anything different there.

Speaker #2: Remember though that we had four extra ship days in the first quarter of this year, which will be four less in the fourth quarter of this year.

Speaker #2: But other than that, the dynamics should be exactly the same. With respect to components, we've been operating at around five and a half percent margins in the first half of the year.

Raj Agrawal: Other than that, the dynamics should be exactly the same. With respect to components, we've been operating at around 5.5% margins in the H1 of the year. We're really pleased with the margin expansion. In our guide for the Q3, we do believe that Asia will continue to have strong growth, and our supply chain services offering will step down a little bit to a more normalized level of profit. I would be surprised if we didn't get to 5% margins again in the Q3, and so we're on a different path now. The margin will ebb and flow for components, but we're in a great place.

Speaker #2: So we're really pleased with the margin expansion and in our guide for the third quarter, we do believe that Asia will continue to have strong growth in our supply chain services offering will step down a little bit to a more normalized level of profit.

Speaker #2: But I would be surprised if we didn't get the 5% margins again in the third quarter. And so we're on a different path now.

Speaker #2: The margin will ebb and flow for components, but we're in a great place. All the conditions that have gotten us here thus far—like the right kind of geographic mix, the mass market customer coming back, value-added services, and the leverage we're getting on the cost structure—remain in place.

Raj Agrawal: All the conditions that have gotten us here thus far, like the right kind of geographic mix, the mass market customer coming back, value-added services, and the leverage we're getting on the cost structure, all those conditions will continue to be in place, and they're not changing anytime soon. We feel pretty good about the margin profile in components.

Speaker #2: All those conditions will continue to be in place. And they're not changing anytime soon. So we feel pretty good about the margin profile in components.

Speaker #4: Okay, Raj, thanks for all the details there. I'm going to try and sneak in one more higher-level question. And this is for Bill or Raj, or anybody who wants to chime in.

Ruplu Bhattacharya: Okay. Raj, thanks for all the details there. I'm going to try and sneak one more higher-level question, and this is for Bill or Raj or anybody who wants to chime in. Right now, it seems like everything is going really well. You have good backlog, you have increasing visibility, and markets are strong. Can you just talk about as component costs are increasing, are you concerned at all, whether it's in the ECS segment or in the component segment, that end market demand can decline, or there could be some destruction of demand? What risk mitigation are you taking so that if that happens, how would you react to that? Thanks for taking my questions. Really appreciate it.

Speaker #4: Right now, it seems like everything is going really well. I mean, you have good backlog. You have increasing visibility, end markets are strong. Can you just talk about as component costs are increasing, I mean, are you concerned at all whether it's in the ECS segment or in the component segment that end market demand can decline or there could be some destruction of demand?

Speaker #4: And what risk mitigation are you taking so that if that happens, how would you react to that? Thanks for taking my questions. Really appreciate it.

Speaker #5: Yeah. It's a good question, Rupalu. It's Bill. Good to talk to you. No, we don't see demand destruction in either the global components business or the ECS business.

Bill Austen: It's a good question, Ruplu. It's Bill. Good to talk to you. No, we don't see demand destruction in either the global components business or the ECS business. We see that the fundamentals in the market are quite strong, whether it's on the component side or the software side, ECS. If you think through what Rick had said in his comment, there's three upward graphs that are taking place. One is AI, one is aerospace and defense, and the other is the mass market, and they're all trending up and to the right. If you build those three graphs on top of each other, the market has expanded, and that's what we're benefiting from, and we see the continued expansion of that market. When you look inside that market and you say, Oh, these companies now, they don't have the ability to get storage.

Speaker #5: We see that the fundamentals in the market are quite strong, whether it's on the component side or the software side—ECS. And if you think through what Rick had said in his comment, there are three upward graphs that are taking place.

Speaker #5: One is AI, one is aerospace and defense, and the other is the mass market. And they're all trending up and to the right. And if you build those three graphs on top of each other, the market has expanded.

Speaker #5: And that's what we're benefiting from. And we see the continued expansion of that market and you say, "Oh, these companies now don't they don't have the ability to get storage.

Speaker #5: They don't have the ability to get compute on-prem; it has to go to the cloud. That perfectly fits in with what Eric's business does.

Bill Austen: They don't have the ability to get compute on-prem. It has to go to the cloud. That perfectly fits in with what Eric's business does in supporting those businesses with enterprise-wide software. We're really, we've always called it the crossroads of the intersection of all of these secular demands that are going up and to the right. We really feel good, and we don't see that demand is going to be destroyed.

Speaker #5: In supporting those. Businesses with enterprise-wide software. So we're really sitting at we've always called it the crossroads of the intersection of all of these secular demands that are going up and to the right.

Speaker #5: So we really feel good and we don't see that demand is going to be destroyed.

Speaker #4: Okay. Thanks for all the details. Appreciate it.

Ruplu Bhattacharya: Okay, thanks for all the details. Appreciate it.

Speaker #2: Thanks, Rupalu.

Raj Agrawal: Thanks, Ruplu.

Speaker #3: There are no further questions at this time. I will now turn the call back to Bill Austin for closing remarks.

Operator: There are no further questions at this time. I will now turn the call back to Bill Austen for closing remarks.

Speaker #1: Thank you, operator. And thanks, everybody, for joining in today. And everybody here is excited that D is going to be joining us over the sometime in early September.

Bill Austen: Thank you, operator, and thanks, everybody, for joining in today. Everybody here is excited that Dee is going to be joining us sometime in early September. I think it's 8 September she'll be here. We're excited to have her joining us. She has great background. She's got great qualifications to come and join us in this distribution business. Until that time that the board says that the succession planning process has completed, I will continue to be the Interim CEO. I'm not going anywhere. I'll be here until the board says that it's time to end the process. Thanks for joining, and we look forward to talking with all of you over the course of the next several weeks and months. Take care, everybody.

Speaker #1: I think it's September 8th she'll be here. We're excited to have her joining us. She has great background. She's got great qualifications to come and join us in this distribution business.

Speaker #1: And until that time, that the board says that the succession planning process has completed, I will continue to be the interim CEO. I'm not going anywhere.

Speaker #1: I'll be here until the board says that it's time to end the process. So thanks for joining and we look forward to talking with all of you over the course of the next several weeks and months.

Speaker #1: Take care, everybody.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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