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spk00: Ladies and gentlemen, thank you for standing by and welcome to the Aeroliftonic third quarter 2020 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Stephen O'Brien, Vice President, Investor Relations. Please go ahead.
spk05: Thanks, Denise. Good day and welcome to Arrow Electronics' third quarter 2020 earnings conference call. With us on the call today are Mike Long, Chairman, President, and Chief Executive Officer, Chris Stansbury, Senior Vice President and Chief Financial Officer, Andy King, President, Global Components, and Sean Karens, President, Global Enterprise Computing Solutions. During this call, we will make forward-looking statements, including statements about our business outlook, strategies, and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements. As a reminder, some of the figures we will discuss on today's call are non-GAAP. We have reconciled those to the most directly comparable GAAP financial measures in our earnings relief. These non-GAAP measures are not intended to be a substitute for our GAAP results. You can access our earnings relief at investor.arrow.com, along with a CFO commentary, the non-GAAP earnings reconciliation, and a replay of today's call. We will begin with a few minutes of prepared remarks, which will then be followed with a question and answer period. I'll now hand the call to our Chairman, President, and CEO, Mike Law.
spk12: Thanks, Steve. Thanks to all of you for joining us today. I'm pleased to report that our hardworking and dedicated team delivered strong financial results in the third quarter. Our reputation for reliability and consistency are the hallmarks that have allowed our customers and suppliers to place their trust in Arrow for critical engineering, design, and supply chain services. To maintain that consistency, we continue to put the health of our people first, and I want to thank our employees for keeping our distribution facilities and offices running safely and smoothly and continuing to move our business forward. As I mentioned on our prior quarterly earnings calls this year, Arrowhead faced adverse conditions many times in the past and has always emerged stronger than before. Our business model is resilient and unique, Even during periods of decreased demand, our ability to generate substantial cash flow allows us to invest in areas that represent the best long-term opportunities. Our foundation will be even stronger exiting the pandemic. We're already and already we're seeing concrete proof of that. Global component sales returned to year-over-year growth, driven by record third-quarter sales in Asia. and we've only just started to see the demand stabilize and recover in the Americas and Europe. Additionally, earnings per share increased 12% year over year, and Arrow is delivering differentiated performance thanks to our customers and suppliers who recognize the value-added products and services we provide. Another way we build confidence in the marketplace is to keep our balance sheet strong. Our results this quarter show just that. Cash flow from operations totaled $275 million in the third quarter, and that's $1.7 billion over the last 12 months. And we have reduced our debt by nearly $1.5 billion since the first quarter of 2019 when the semiconductor market correction began. Additionally, we remain committed to returning excess cash to shareholders, and the third quarter was no different. We repurchased another $150 million worth of shares this quarter for a total of $375 million this year. Turning to current business conditions, as I mentioned, strong third quarter sales and global components were driven by tremendous growth in the Asia region. We see further opportunities for strengthening future performance once the Americas and Europe start to recover. We previously mentioned that regional inventories had been destocked prior to the onset of the pandemic. Starting from those lean levels, global component sales increased sequentially in each region for the first time since third quarter of 2017. Demand in Asia has been robust across all the key verticals. And the third quarter is typically the strongest quarter for that region. All regions benefited from a strong turnaround in transportation-related demand compared to the second quarter. Design activity, again, reached an all-time record for any quarter in our history. And design activity increased year over year for the fourth quarter in a row. This is a positive leading indicator. Arrow will continue to increase our engineering and design efforts as we believe this is the best way to position our business for the long term. Other indicators are consistent with improving trends. Third quarter backlog increased year over year for the second quarter in a row. Lead times increased slightly compared to last year. Global Components booked a bill with 1.03 exiting the second quarter. Booked a bill was again the highest in the Asia region where business has normalized quicker than the other two regions. Our America's Customer Sentiment Survey shows that further improvement. The percentage of customers saying they had too little inventory was slightly above the long-term average. The percentage of customers saying they had too much inventory returned to the long-term average. Turning to enterprise computing solutions, we're pleased to deliver sales that were near the high end of our prior expectations and above second quarter's level. We also achieved operating profit leverage on that sequential growth. In terms of IT spending, we continue to see purchases directed towards the tactical areas of endpoints and devices rather than transformational areas. We participate in work-from-home spending through security and cloud-based solutions but some more complex projects remain delayed as companies limit outside workers. However, we continue to believe some of those delayed investments in mission-critical technologies cannot be pushed out indefinitely. Looking at the mix, demand from larger, better capitalized VARs and MSPs who rely on fewer of our capabilities and services remains resilient. demand from the smaller customers who rely on more of our capabilities has been weaker in this environment even with a less favorable margin mix we are still able to generate strong economic returns from this business you can see this in our third quarter return on working capital return on invested capital and cash to cash cycles in the third quarter looking ahead we'll continue to support our stakeholders and communities and are committed to providing our customers with products and solutions they need when they need them. I'll now turn the call over to Chris to provide more details on third quarter results and our expectations for the fourth quarter.
spk11: Thanks, Mike. Third quarter sales were $7.23 billion. Sales increased 2% quarter over quarter. The average euro-dollar exchange rate for the quarter was $1.17 to 1 euro compared to the rate of 1.12 we'd used for forecasting. Favorable foreign exchange increased sales growth by approximately $97 million. Global components sales were $5.31 billion. Sales were above the high end of our prior guidance and increased 5% year-over-year on a non-GAAP basis. Global components non-GAAP operating margin was 3.9%, down 50 basis points year-over-year. This was mainly due to regional mix with Asia contributing 49% of global component sales, up from 45% in the second quarter and 40% last year. In addition, despite significant improvement in the Americas and Europe regions as compared to the second quarter, there remains substantial opportunity for further sales recovery that should also drive future operating income leverage. Enterprise computing solution sales of $1.92 billion decreased 7% year-over-year on a non-GAAP basis, but we're near the high end of our prior expected range. Third quarter billings increased year-over-year after having been approximately flat year-over-year in the first and second quarters. We experienced strong demand for security solutions and also grew sales of services. Demand for storage and networking were weaker year-over-year. Global Enterprise Computing Solutions non-GAAP operating income margin decreased by approximately 30 basis points year over year to 4.4% due to both product and customer mix. Returning to consolidated results for the quarter, interest and other expense of $30 million was below our prior expectation due to lower interest rates and lower borrowings. The non-GAAP effective tax rate of 23.6% was approximately in line with our expectation and was within our long-term range of 23 to 25%. Non-GAAP diluted earnings per share were $2.08, 38 cents above the high end of our prior expectation. Approximately six cents of the upside to both prior guidance and year-over-year growth were attributable Turning to the balance sheet and cash flow, we reported strong operating cash flow of $275 million. During the quarter, we reduced debt by approximately $79 million through lower short-term borrowings. Our balance sheet's in great shape, and our liquidity position remains strong. Current committed and undrawn liquidity stands at over $3.4 billion, including our $227 million cash balance. We're closely monitoring credit and receivables. Collections remain healthy, and the percent current is near all-time highs. DSO decreased by more than DPO. Inventory days were the lowest level since the fourth quarter of 2017. And as we've said in the past, it's fair to measure our performance by the cash conversion cycle, not by any one metric in isolation. The third quarter cash conversion cycle was 15 days shorter than last year. We returned approximately $150 million to shareholders during the quarter through our share repurchase plan. The remaining authorization under our existing plan is approximately $563 million. Please keep in mind that the information I've shared during this call is a high-level summary of our financial results. For more detail regarding the business segment results, please refer to the CFO commentary published on our website this morning. Turning to guidance, midpoint fourth quarter non-GAAP EPS of $2.65 per share would be an all-time quarterly record. While we recognize heightened risks from the potential future return to virus-related restrictions, right now we continue to see improving trends for both businesses. Our guidance reflects global components delivering profit leverage on accelerating sales growth. It also reflects a continued recovery in enterprise computing solutions margins back to prior levels. Lastly, please note the CFO commentary includes information on our fiscal calendar closing dates for 2021. In 2021, the first, second, and third quarters close on April 3rd, July 3rd, and October 2nd, unlike in 2020 where they close on March 28th, June 27th, and September 26th. Full year comparisons are not affected as our year ends on December 31st as always. The first quarter of 2021 will benefit from the extra quarter close compared to the first quarter of 2020, while the fourth quarter of 2021 will be negatively impacted by only capturing one calendar close instead of two. We believe the second and third quarters are still comparable as each will capture one calendar close. We also believe there are few impacts for the global components business in any quarter as sales for that business tend to be more linear rather than back-end loaded like the enterprise computing solutions business. As we sit here in late October, it's difficult for us to estimate a dollar figure for this calendar shift. For modeling purposes, we would recommend starting with an expectation for full year 21 enterprise computing solutions growth, then attributing one to two percentage points of greater contribution from the first quarter and one to two percentage points less contribution from the fourth quarter. With that, I'll turn the call over to the operator for Q&A.
spk05: Denise, would you please give the Q&A instructions?
spk01: certainly ladies and gentlemen to ask a question please press star then the number one on your telephone keypad your first question comes from matt sheeran with steeple your line is open uh yes uh thanks very much for taking the question uh the question uh is just just regarding um how we should be thinking about uh gross margin and and opex uh in the december quarter um i know there's some moving parts it looks like the asia business and components maybe lower sequentially seasonally. I'm wondering if that has a positive impact on gross margin. Same thing for the ECS business. And in terms of what we should be thinking about kind of heading into next year in terms of that mix, because the mix seems to be working against you in terms of margins, but there's drop through there. Thanks.
spk12: Yeah, Matt, this is Mike. Clearly, you know, the company is operating at a pretty good pace right now with Asia being, you know, 50% of the global component sales. So I know there was a time that nobody thought the company could still have the leverage and the cash flows and everything that we have with Asia being that much. But it's been, you know, a good year and they returned. Certainly we would expect the mix to improve in the fourth quarter because the third quarter is typically the Asia's biggest quarter due to the, you know, the holiday bills and the things going in. So we would expect things to firm up. The real question there is, when will the Americas and Europe take off? We are seeing signs now that those markets are getting better, but I wouldn't expect them to get overly better until we get into next year. Of course, the computer products group has their biggest quarter. We are excited to see that come. As you can see from what we've seen in that business with the work from home, those types of things, it's been good for us. We do expect a bit of an acceleration of that business going in to the first quarter also. All in all, Matt, it's really exciting. Good news, because as you know, North America and Europe are typically more profitable regions than Asia. So it's sort of at this point, when the volumes start to come back there, we're expecting another uptick in what we see.
spk01: Okay, got it. And just in terms of follow-up, it just seems like gross margin, you know, at best will be sort of flattish to perhaps down sequentially due to that mix issue. But you also should get a really strong OPEX leverage. I know you were kind of flat to down slightly year-on-year. So should we expect sort of a similar year-on-year comparison in terms of OPEX this quarter?
spk12: I think what you're going to see is OpEx go up a little bit because of the change of mix. I'll have Chris sort of highlight that.
spk11: Yeah, so Matt, just to make sure we're aligned because we talked about sequential and we also talked about year over year. So sequentially, we would expect gross margins to be up a little bit. We would expect that operating expense as a percentage of sales will come down. Dollars will be up a bit because of the sales growth, but we expect operating expense as a percent of sales to come down as we drive operating leverage. So all in, we're guiding to improved operating income margins sequentially in the quarter. And actually, we'll see how it sorts itself out, but that could actually mean we're up a little bit year on year in OI margin.
spk01: Okay, thank you. And just lastly, does your guidance for the component segment include incremental share gains from TI or other suppliers?
spk12: Our guidance assumes everything that we see coming our way in Q4. Okay. All right, thanks a lot.
spk01: Yeah.
spk00: Your next question comes from William Stein with Truist Securities. Your line is open.
spk03: Great. Thanks for taking my question. I think in the prepared remarks, you referred to the significant recovery and the sort of all-time record outlook. And it sort of makes me consider perhaps with the recovery being as strong in your business as it's been, some might question sort of the sustainability and follow through the rest of let's say next, you know, into next year, let's say, perhaps customers are overshooting and overordering a little bit and building a bit of inventory. I'm wondering if you have any judgment on that. Do you think that could potentially explain what's going on, or do you have confidence that you're shipping to end demand, customers aren't building any inventory? Thanks.
spk12: Yeah, let me bring it back a little bit. Remember, we started going into a downturn the prior December, I think it was. It showed earlier in the year. But there was an economic downturn that we were starting to go through. And then COVID hit. So COVID hit. That pretty much put the brakes on a lot. We had to put 20,000 people to work from home in a matter of a couple of weeks. And we were able to accomplish that. So that showed some resiliency and could start building back with our customers at that point. I would say that one of the reasons you're seeing, you know, the suppliers and us sort of go up at the same time is that we've been through sort of the timeframe that it would take for us to catch up with the suppliers. And COVID was just sort of that false economic downturn as it came. We are seeing steady growth. We are seeing steady growth book to bills. We are not seeing crazy book to bills that would suggest inventory build at this point. And we're seeing consistent order patterns from our customers. We're more consistency in the order patterns. And as I said to you right now, slightly. The number of customers that are slightly don't have enough inventory is slightly bigger than normal. But the average number of customers that have the right inventory are within normal trends. So we don't see a crazy supply chain. We do see consistent growth. Our backlogs are up. The backlogs are looking solid. And the, you know, ship within the window, nothing is tail-end loaded. So we're feeling pretty good about going through December and into the new year at this point.
spk03: That's really helpful. Maybe a follow-up if I can. Mike, you mentioned that you expect to emerge from this downturn stronger than previously. It seems to an earlier generation question that TI being available effectively only through Arrow is a major advantage. Let's put that aside for a minute. What metrics can we look at or will you talk about to make a judgment as to a stronger business? Is it expected operating margin, what you achieve, what you can target, or some other metric, perhaps growth rate?
spk12: I think if you look at it, the growth rate within the industry is clearly one. We've emerged stronger. Obviously, $1.5 billion less in debt. I think you're seeing its cash flow better now for a couple of quarters. We expect cash flow to get better going forward. You know, despite some of the questions on the efficiency, I think the company is going to get even more efficiency. We still have plenty of places to go that we have been investing that over the next year has increased our capacity significantly to be able to ship more product. You know, clearly the number of design wins that we have going on in the business would tell you right there that there's a nice increase coming down the road. So where I would say virtually every metric right now um seems to be operating in a good way uh you know you're looking at it right now that a lot of the suppliers also had strong q3 performance so you know i think what's what's notable what i can tell you is while i will never talk about one supplier no matter how many times you guys ask or one individual supplier, no matter where it is, whether you guys want to get into the Xilinx AMD deal, the ADI Maxim deal, the TI deal. I'll never do it. But what I can tell you is we had a very strong quarter with many of our suppliers on the line card. It was a good, solid quarter across the board.
spk03: Well, that's clear. Hey, Mike, thanks for the comments. I appreciate it. You bet. You bet.
spk00: Your next question comes from Sean Harrison with Loop. Your line is open.
spk02: Hi, all, and congrats on the strong results. I wanted to get back to the profitability question because you brought this up a little bit, Mike, but last time the components did a 5% or greater, you know, operating margin asia sales were i don't know seven eight hundred million dollars and a quarter lower and so i wonder is is europe in in european and north american demand comes back what does that mean for kind of future normalized margins in the business given your performance right now with asia so much stronger well i think you could expect it to be right back up uh where it was before
spk12: You know, I mean, it's really a testament to the organization that the efficiency has got into a place it has. And the mix being at the percentages that it is for Asia right now says a lot, A, for our Asia business. It says a lot for the other businesses to remain, you know, profitable as those businesses are down. But as far as the long-term numbers go, We actually see, with the situation we're in now and how we could come out of this, greater longer-term profitability than what you've seen in the past. And our engineering business is operating very strongly right now, as you can tell by the design wins. And we fully expect that to continue, and we continue to invest in that business. And that business is even getting more efficient, which was not the expectation.
spk02: Great. Then on ECS, I guess the worry out there is that 2021, you know, we don't see spending come back on the on-prem site. I know you guys have been long proponents of hybrid cloud, but even if that weakens a little bit, what does that do to kind of the growth profile and maybe the profitability of the business? We don't see, you know, boxes sold anymore. I know it's been a declining business for a while with maybe that, you know, that deceleration, you know, accelerates in the downside in 2021?
spk12: Yeah, I don't see that gloom and doom that you see. Don't think that's, you know, a big legitimate concern. I think you'll continue to see us expand in software. You'll continue to see us expand the line card into more items that the customers are buying. you'll continue to see expansion and networking, cloud, Aerosphere, which are all doing very well for us right now. Sean, do you want to add a little to this? Because the outlook is really not bad.
spk10: Yeah, Sean, I understand your sentiment, but I'm certainly more optimistic than that as well. I mean, if you look at you know, our hardware business in total, you know, remember it's still at any given time, it's roughly a third of our mix. And we do have a great big install base, and I think when the broader market comes back, we're going to see, you know, more of that on-prem, you know, business and mission-critical application environments return. Just as a proof point for that, you know, both our storage and compute businesses improved their year-over-year performance in Q3 compared to the first half quite significantly. And, you know, I think it speaks to the fact that, you know, there's still pent-up demand out there in mission-critical environments that customers can't sit on indefinitely. And I think it's a good sign, again, that when the broader market returns, you know, our install base is going to be a benefit to us. Very helpful. Thanks, Sean. Thanks, Mike.
spk00: Your next question comes from Joe Quattrochi with Wells Fargo. Your line is open.
spk14: Yeah, thanks for taking the question, and congrats on the results. I was wondering if, you know, you could talk about, as we see improved demand for the other regions, and maybe we start to think about some investments more in your working capital, can you talk about, you know, what level of, I guess, components growth you think about where you can still generate positive cash flows? And then maybe, you know, Is there any difference that we should think about relative to historic just given the mix of the revenue now?
spk12: Yeah, I think one thing you'll see, and I'll let Chris highlight it, but as you know, we've been working very hard on the cash side of our business for some time. And it used to be we would start using cash at, you know, 10% to 15%. We're in a position where we think we'll continue to throw off cash now well past that, you know, going into the next year. So the dynamics have changed. Our cash-to-cash days have come in. You know, we're not seeing big credit risks. We're not seeing craziness in the inventory. In fact, I mean, I understand you guys. A couple times I've mentioned, I've heard even on other calls, this double ordering phenomena, but our inventory was down, I think, $200 million roughly, quarter on quarter, and the book to bills up. So we're not seeing the dynamics that we'd use cash. And again, remember, the growth rate could be there, but it's the... rate and pace of that growth rate. So if all of that growth came immediately tomorrow, yeah, you might see a little cash usage. But for the most part, that's not how we're seeing ourselves come out of this. So I think you're going to see some pretty good cash benefit this year, Chris. You want to add?
spk11: No, I think Mike answered it really well. I mean, we've shared with you guys in the past that kind of above that 10% growth level in components operating cash flow gets a little lean. But to Mike's point, we've been very focused on getting the cash conversion cycle going. back down into the high 40-day range. We're going to be very focused on maintaining that. Personally, I like the reduced credit risk exposure when we're staying as current as we are in our receivables, and that's not something we're going to let go of easily. And aside from that, just our continued focus on services within our business that allow us to drive more margin EBITDA and cash flow with less working capital investment are things that we're going to continue to focus on.
spk14: That's super helpful. And then just following up on that, I mean, the pace of share repo, obviously you stepped it up this quarter sequentially. Should we think about that kind of pace going forward, I guess, then?
spk12: Yeah, this is Mike. I think, you know, we've said what our use of capital is and is going to be, and I would expect that pace for the near term here.
spk00: Thank you. Your next question comes from Adam Tindall with Raymond James. Your line is open.
spk15: Thanks. Good afternoon. Mike, I just wanted to start to try to understand. You sound like you have a very positive tone, but the Q4 revenue outlook is just seasonal overall in components. Seasonal, but the environment seems better. Suppliers are upbeat. Whatever share shift is left to come in Q4 is And then in ECS, you've got the timing benefit, and we back that out. It would be below seasonal in that. But the hardware suppliers are talking about sequential improvement. It seems like things are upticking. So I'm just wondering if there's anything maybe I'm missing there or headwinds that I'm not considering trying to put the positive tone with the Q4 revenue outlook.
spk12: Well – It's an interesting thing you would say that if it's seasonal, but the Q3 numbers were pretty high, weren't they, as far as sales go? So, you know, while you take that account as only seasonal, it was a pretty good uptick in the third quarter, and it was the uptick for the industry. So if it was an uptick for only us and others didn't feel it, I guess I wouldn't be as bullish. But as I said before, we saw a nice uptick from several of our suppliers. It was broad-based. We saw a nice uptick in DesignWinds. That was broad-based. We've seen an increase in our book to bills. That has been broad-based. That's what I would tell you right now. And a seasonal outlook off of what we've come off of, I would say if, you know, you've got the seasonality numbers correct would be pretty good. But I think we see continued growth going in and through next year at this point with all of our metrics.
spk15: Okay, that's a fair point and helpful. Maybe just as a follow-up, a bigger picture on the component's competitive environment. Supplier M&A is obviously heating up again. You alluded to it earlier. Last time that led to exclusive deals, share shift. You were largely a beneficiary. I'm not asking to get into individual suppliers, but maybe just reflect on what might be similar or different about this cycle of supplier consolidation from a share shift perspective, and any thoughts on distributor gross margin as that unfolds.
spk12: You know, mergers are inevitable. I know to you guys they seem like, you know, massive discrete deals one at a time. And I think that, you know, I don't – I think the industry, first off, is going into a growth mode. And I think that some of these mergers are for efficiency purposes. And I think some of these mergers have a natural home and some of these mergers don't. As I've said, and as you guys have said, we've had a good run at it, but there was times over the last 12 years that we didn't have such a good run at it either. But, you know, the overall profitability of the business has been strong and I think will continue to be strong. And I think the engineering piece does have a play in it. You know, the ability to have the number of engineers that we have all over the world is a plus. But I'm not expecting anything to seriously hurt us going into the new year. I mean, I think we could be aided by some of these. And, you know, it's an interesting, I mean, You know, one of them sold off portions of their business to private equity, so what would that be? You know, they typically want as many sales as they have, so, you know, does that suggest channel reduction or not? You know, I would say no. And some of them are just natural mergers and just stay right where they sit. Others will, you know, have a change. But as far as thinking everything that is out there is going to have a wholesale change, I just don't see it. Understood. Thanks for the details.
spk00: Your next question comes from Rupu Bhattacharya with Bank of America. Your line is open.
spk08: Hi. Thanks for taking my questions. Is there a way to quantify what the mix of recurring revenue was in ECS in the quarter? And as that recurring revenue mix grows, how should we think about the impact of that on your operating margins?
spk12: Yeah, I don't think we've put a number out on that. reoccurring revenue. I'm not sure how much of that we would share for competitive reasons. I think what we do is sort of once a year we update you on the size of sort of our cloud and our hybrid business, and that would be scheduled to happen in the fourth quarter.
spk08: Okay. All right. Thanks for that. And just wanted to clarify with respect to the quarter ending dates, I think beginning of the year you had, you know, suggested a number of $225 million. As we look to fiscal 21, to the next year, would that same number apply? I mean, are we talking about that kind of a revenue shift, $225 million, or was that only for this year?
spk11: Yeah, no, so as I was trying to cover in the guidance, what I would do is take your estimates for next year for the full year and assume about a 1% to 2% shift from fourth quarter to first quarter because we've got two calendar quarter ends in Q4-20, and next year we're going to have one in every quarter.
spk08: Okay. Okay, thanks for that. I appreciate the clarification. Thank you.
spk00: Your next question comes from Nikolai Todorov with Longbow Research. Line is open.
spk07: Yeah, thanks. Hello, guys. I think you mentioned that on the component side, Asia billings remain strong, and it appears that the region is coping better than North America and Europe with the COVID wave. So I just wonder if you expect Asia as a percent of the mix to remain elevated here maybe into next year, relatively historical patterns. And if that is the case, how should we think about the incremental margins in the component business? And when can you expect that you're going to achieve back that 5% component targets on the EBIT margin?
spk12: Well, you know, it's pretty simple. I think you guys have your models to do the math. You guys have this thing pretty nailed. I think the Asia levels will, you know, not have as robust growth going into next year as you saw this year. Their ability to cope with the virus was clearly better than the other two regions saw. Their ability to keep manufacturing going was better than we saw in the other two regions. It doesn't take much of an uptick. you know, went up 10% or so, which would not be unheard of going into next year, you're going to be right there.
spk07: You mean next year, 5% component margin is pretty achievable?
spk12: Yeah, I think you're going to work into it. It isn't going to happen in the January quarter, but if you see the growth rates over the course of the year, it's totally dependent upon know, the other regions. You know, this performance right now is interesting because two regions are dragging, which is Europe and North America. You know, they're not back to growth. And right now the book to build suggests for us that Europe is coming back before North America. Good news, but, you know, it all depends when those volumes in those two regions come back. You know, I'm fairly bullish that they will come back and we will continue to see improvement. But as far as to when they'll come back fully, I don't have that answer for you. I don't know. Okay. Probably you can tell me.
spk07: Yeah, I wish I can. Just as a quick follow-up on the component side, I think you mentioned that lead times have started to tick up. I wonder if you can give us any more color, maybe by product line or specific end market. What are you seeing specific to that?
spk12: Yeah, we've seen a minor tick up. Andy, you want to add a little color to this?
spk09: Sure, Mike, yeah. Yeah, as Mike mentioned, we've seen a minor tick up. It's been fairly specific in certain kind of large-scale MCU, 32-bit MCU, some analog products, but heavily driven by consumer and by automotive growth is where we've seen most of the impact, Nikolai.
spk07: Okay, great. And as I switch one question on the IT business, on-prem IT suppliers have all announced the OpEx model or on-prem as a service. I just wonder if that shift starts to gain momentum as customers like to consume more on-prem hardware, the OpEx model. Would that have any impact on your ability to continue to participate in that business in any way?
spk10: Sean? Yeah, sure, Nikolai. You're exactly right. A number of our hardware suppliers are looking at deploying models that give their customers a cloud-like experience, but in a way that still keeps the infrastructure largely on-premise. I don't think that there's any downside to that for us because, A, we already have the relationships, and, B, in fact, we're helping them. We can certainly help them with all of our configuration tools and expertise and then all of our financial programs. you know, which are so essential to as-a-service business. So I expect that, you know, as they go down that path, we'll continue to partner with them to help them, you know, complete that journey. It's not unlike the, you know, the software journey from, you know, perpetual to term, you know, ultimately to SaaS. And so this doesn't worry me one bit, quite frankly.
spk07: Okay. Got it. Thanks. Very insightful. Good luck, guys.
spk00: Your next question comes from Stephen Fox with Fox Advisors. Your line is open.
spk04: Thanks. Good afternoon. Chris, I'm still trying to get my head around the idea that when you guys grow more than 10% that you're still going to be able to throw cash off. You know, if you're able to do that, that's fantastic. I mean, it has big implications for probably your equity. But can you sort of put some parameters around that? You mentioned services in the mix helping. How do you sort of maintain service levels and grow at that rate? What else are you doing to tactically advance that? And then I had a follow-up.
spk11: Yeah, I mean, there's a few things. One is we've gotten, as I said, I think much more efficient on collections. We're going to maintain that. But also let's not forget that the way suppliers go to market has changed in part, right? In some cases we've got inventory that's consigned versus inventory that's owned. that. But really, when you got above 10% in the past, there was very little to no cash flow. And we're saying that that line now creeps up a bit as we go forward. So, you know, our Q4 guide is up 11%. And I think we're going to have decent cash flow performance in the quarter. And I think that's just an early proof point. What I can't give you yet is new guidance on what we think are good parameters because we're evolving through this as well. But when we get a little more clear on that, we'll definitely provide some more structure around that thinking.
spk04: Thanks for that. That's very helpful. And then just secondly, any color, obviously you talked through the mix issues on the margins, but what about if we just sort of looked within each of the component regions. How are your margins trending within region, sort of like-to-like, and where the headroom is going forward? Thanks.
spk12: Yes, Steve, we see them firming. I think the uh the situation as we as we told you uh you know in the early days people go down and they just bring in their their commodities because nobody wants to have their lines go down over commodity sales which are typically the lower profit sales for us and they manage what i would call the design win type products as we're seeing volumes pick up we're seeing more of the demand generation-type products going out the door. So that is good news. We're also seeing the same in Asia as the design wind products are starting to pick up there. That's really the piece that we've always told you matters in the firming of the margins. And the trick is the firming of the margins, and then there's the growth that is going to take place which will be those higher-end products as we move forward and people start to get their inventories organized the way they want them. So we do expect things to firm going into next year.
spk04: Great. Thank you for that.
spk12: Yep.
spk00: Your next question comes from Toshi Ahari with Goldman Sachs. Your line is open.
spk06: Hi, thank you so much for taking the question and congrats on the results. I just had one question, which is a follow-up to the prior one. Obviously, you guys have done really, really well in the Asia pack. Asia-Pac region, I think you guys talked about doubling your business over the past five years. In terms of the go-forward strategy in the region, how do you go about striking the balance between revenue share and profitability? Obviously, you want to go after both, but to the extent you're sort of cornered into choosing one over the other with specific customer-specific deals. which one would you prioritize over the next couple of years? Thank you.
spk12: Well, I think, you know, the truth is both. Our margins have been going up in Asia. So we've seen a consistent uptick in margins and we've seen a consistent uptick in growth. So, you know, we're not going to book orders here that we don't make money at. That's really the overriding rule, I guess, within the business. Our job is to design products for our suppliers. Our job is to manage the supply chain for them. And if you're going to grow, you obviously have to generate money and you have to generate cash to grow. We are not... using the cash in Asia like the old days because it's moving to a more traditional type supply chain as we have seen ourselves over the last, oh, three quarters or so. Its business is starting to act a little more like the other two regions. And I don't expect to have to make that trade-off. But if that is a trade-off, sales for no profit, well, then we're not going to do it. How's that?
spk06: Okay. And maybe as a quick follow-up, I mean, given the evolution in profitability for the region that you see internally and, I guess, the growth in demand generation business in Asia, I mean, is there a point in time in maybe three years, five years where profitability in the region could converge towards the U.S. and Europe, or would that be a stretch?
spk12: Yeah, let me maybe talk to you a little bit about how Asia itself has evolved and maybe take it up. Asia used to be a pure supply chain marketplace. All we did was get back-to-back orders and ship those orders. The only service Asia used was really our supply chain, the shipping portion of what we had. We did work on the basis of each individual supplier at the time, and yeah, you could say there was some design work, but I would call it engineering help more than I would call design. The other thing that you're seeing is more and more designs themselves are actually moving to Asia. So our design activity in Asia is up significantly and in fact is now the largest design activity region that we have. So with that, that right there will tell you, you know, the profitability and the Asians are more apt to use our services now, engineering services. than they used in the past. We're also seeing an uptick in profitability as a result of that. And I would expect as they become more and more self-sufficient in their own economy, it'll be better for us long term.
spk06: Thank you for the context. Good luck.
spk12: Do you have something you want to add?
spk11: The only thing I'd add to that is you've got to think about Asia margins beyond OI because they're also a lower tax rate. And it's also inventory that turns more quickly. So what we really look at globally across regions is the return on capital we can earn region to region. And I would say, absolutely, when it comes to return on capital, the opportunities for continued improvement and a narrowing of the performance across those regions definitely exist.
spk06: Very helpful. Thank you.
spk00: Our last question comes from Tim Yang with Citi. Your line is open.
spk13: Hi, thanks for taking the question. On your Q4 guidance, I think you have three extra selling days in the Q4 guidance. Can you maybe just quantify what's the impact from those extra selling days for a component that you see as sales guidance? And then I'll follow up.
spk11: Yeah, it's two days. We haven't, you know, we're not providing the math on that, but I will kind of point back to the comments earlier in the script, which is that for components, that has very little impact. Those are usually scheduled orders, and two days don't make a difference. If anything, we've got, you know, OPEX dollars that are real that we have to incur during the quarter. On ECF, it's more so, and again, I would use my comments that I used as it relates to next year and the shift in that 1% to 2% range. of the four years.
spk13: Got it. OK, that's helpful. Can you share your backlog and the bookings on your basis for your ECS business? I think you mentioned the project push out, but many investors are actually concerned about demand advantage rather than delay. So I wonder if you can just provide some color on that front.
spk12: Well, it's the same thing you're saying with the suppliers. You know, as the suppliers start to tick up and show more opportunity, you know, so will we. But that business is tracking very close to what's happening in the overall marketplace with your IT suppliers. And, you know, we are seeing more and more activity. And we do expect some things to happen over the fourth quarter. But I think as you get into next year, you'll probably see some of these infrastructure investments have to you know, have to ultimately come back to play, you know, what holds them up is really the strategy of where these businesses are going to go. How much is going to be continued work for home? Is there a strategy to do that ongoing now, or is it a strategy to get everybody back in the office? I think you have that uncertainty. So, therefore, computing needs change as a result of that. But, you know, the truth is either one is not bad for us. So, you know, however the companies decide to move in that direction is going to be okay when it comes to, you know, our business.
spk13: On the bookings, on your basis or the trend, can you maybe just talk about that?
spk12: Well, that's more of an ongoing demand and project-focused management forecasting, and I don't have hard bookings for you to answer that question. Gotcha. Thank you.
spk00: There are no further questions to get up at this time. We'll turn the call back over to Stephen O'Brien for closing remarks.
spk05: Thanks, Denise. If you have any questions about the information presented on the call today, feel free to reach out to me. Thanks for your interest in Arrow Electronics, and have a nice day.
spk00: This concludes today's conference call. You may now disconnect.
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