Arrow Electronics, Inc.

Good day and welcome to Arrow Electronics' fourth quarter and full year 2023 earnings call. Today's call is being recorded. And at this time, I would like to turn the conference over to Anthony Benzvega, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator. I'd like to welcome everyone to the Arrow Electronics' fourth quarter and full year 2023 earnings conference call. Joining me on the call today is our President and Chief Executive Officer, Sean Cairns, our Chief Financial Officer, Raj Agrawal, our President of Global Components, Rick Marano, and our President of Global Enterprise Computing Solutions, Kristen Russell. During this call, we'll 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 described in our most recent filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release or Form 10-K. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during the webcast. Following our prepared remarks today, we'll be able to take your questions, and I'll now hand the call over to our President and CEO, Sean Cairns.

Thanks, Anthony, and thank you all for joining us. We appreciate your interest in Arrow Electronics. For some context, I'd like to first review our 2023 full year financial results before commenting on our fourth quarter performance and the overall state of the market. I'll then turn things over to Raj for more detail on our financials, as well as our outlook for the first quarter. As I reflect on our performance over the past year, I want to start by thanking our global team. for their persistence, resilience, and dedication to our suppliers and customers. Through their efforts, we were able to deliver solid financial performance given the market backdrop. Despite excess inventory throughout the supply chain leading to softer demand in our components business and a mixed IT spending environment for our enterprise computing solutions business, we executed well in a challenging environment. Arrow posted $33.1 billion in full year 2023 revenue and achieved an operating margin of 4.8% on a non-GAAP basis. In addition, we generated healthy cash flow from operations, which enabled us to repurchase approximately $750 million in shares throughout the year. Now, moving to our fourth quarter results. To close out the year, we delivered sales of $7.8 billion in the fourth quarter. just better than the midpoint of our guidance. Based on healthy operating margins in each of our segments, we generated non-GAAP earnings per share of $3.98, comfortably above the high end of our guided range. Taking a closer look at our components business, the industry-wide inventory correction appears to be taking longer than anticipated when compared to prior cycles. This is likely due to the breadth and magnitude of the shortages that precipitated the inventory buildup along with continued softness for components in many industrial markets. However, we do believe markets will eventually improve and see gradual signs of normalizing trends. Our book to bill ratios have stabilized overall, with our IP and E portfolio trending closer to parity. Pricing is generally holding up as reflected in our fourth quarter gross margins, which were sequentially better than in the prior quarter. Our demand creation pipeline is growing as customers continue to develop new products. And while order rescheduling activity persisted, we focused on backlog conversion during the quarter and reduced inventory by over $600 million sequentially. From a regional perspective, in Europe and the Americas, customers continue to moderate their supply as reflected by their reluctance to place new orders. While we expect sub-seasonal performance in the near term, and continued softness in industrial markets, we were encouraged by robust design activity and relative strength in verticals such as aerospace and defense and medical devices. And in Asia, we expect results to normalize somewhat with respect to typical seasonality when compared to the West. And while we can't predict the timing of a broader macroeconomic recovery, we were pleased by sequential growth in segments such as data center compute and to a lesser extent, transportation. Shifting to our global ECS business. During the quarter, we continued to execute on all things IT as a service, which led to a higher mix of infrastructure software, cloud solutions, and related services when compared to the prior year. Over time, this mix drives a growing portfolio of recurring revenue volumes, as well as better contribution margins for the business overall. And given the annual nature of this business model, fourth quarter results were up sequentially as expected. From a regional perspective in Europe, we delivered year-over-year billings and gross profit dollar growth amidst the mixed IT spending environment. While storage and compute were down, they were more than offset by strength in infrastructure software and networking products. And in North America, our results for the fourth quarter reflect a muted IT spending environment with softness in storage, compute, and cybersecurity, partially offset by strength in infrastructure software and networking. As we've stated in the past, we're in the process of optimizing our customer mix and supplier line card in the region to better serve the mid-market. We've made progress in this area and are optimistic about improving our results in the region this year. Before I hand things over to Raj, I do want to reflect a little bit on the future. Despite the ongoing cyclical correction and a weaker macro demand environment, we remain optimistic regarding the overall industry backdrop and believe longer term technology trends will benefit Arrow. We're at the center of large and growing markets driven by the electrification of everything, renewable energy, autonomous vehicles, and artificial intelligence, just to name a few. Given a longer horizon, we remain committed to the growth initiatives we've previously shared with you, where our differentiation provides value to both our suppliers and customers. First, in demand creation, we added engineering resources throughout 2023, which helped demand creation revenue outpace the rest of the portfolio. Second, our engineering services have been gaining traction across attractive verticals such as renewable energy, automotive, and medical devices as a result full year engineering services revenue grew meaningfully third in supply chain services we expanded our customer base in 2023 with further penetration in the data center and automotive verticals and looking ahead we see additional opportunities to extend this offering to other verticals and oems next we've maintained our differentiated focus on interconnects passives and electromechanical components, a margin accretive growth area within our components business, and finally, in our ECS business, over the course of the year, we enhanced our digital distribution platform, AeroSphere, while onboarding new channel partners and supplier lines, demonstrating our commitment to the market's transition to IT as a service. In the meantime, as we navigate a challenging near term, We will continue to prudently manage our cost structure and working capital portfolio with an eye towards emerging even stronger as market conditions improve. And with that, I'll hand things over to Raj.