Arrow Electronics, Inc.

Ladies and gentlemen, good day and welcome to the Arrow Electronics third quarter 2024 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brad Windigler, Arrow's treasurer and vice president of investor relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to the Arrow Electronics third quarter 2024 earnings conference call. Joining me on the call today is our President and Chief Executive Officer, Sean Cairns, our Chief Financial Officer, Raj Agarwal, our President of Global Components, Rick Marano, and our President of Global Enterprise Computing, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans, and future financial results, which are based on 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 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 Corps' 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 to accompany our prepared remarks and encourage you to reference these slides during the webcast. Following our prepared remarks today, Sean and Raj will be available to take your questions. I'll now hand the call over to our President and CEO, Sean Cairns.

Thanks, Brad. thank you all for joining us today i'd like to discuss our third quarter results provide some commentary on the market environment overall and then close with some thoughts as to how we're lining up for the future i'll then turn things over to raj for more detail on our financials as well as our outlook for the fourth quarter for the third quarter we delivered both sales and earnings per share that exceeded the midpoint of our guidance generating total sales of 6.8 billion dollars and non-GAAP earnings per share of $2.38. Contributing to the sales results were sequential growth in our Americas components business and solid year-over-year growth in global ECS. In our global components business, we were pleased to deliver sales in line with our expectations, but did so through a different regional and customer mix than originally anticipated. We were also pleased to see better momentum in our ECS business highlighted by steady market dynamics in Europe and an improving trajectory in North America. In addition, we continue to make positive strides related to the management of our working capital and the optimization of our cost structure, necessary initiatives in light of the current market environment. You'll hear more from Raj on both points shortly. Turning further to our global components business, the market correction appears to be more prolonged than previously estimated. We believe both excess inventory levels and macro headwinds are contributing to its persistence. Having said that, our leading indicators remained relatively stable in the quarter. Our book-to-bill ratios are still at or even above Q2 levels on a global basis. They've just not yet reached full parity overall. Our backlogs have further stabilized, and cancellation activity remains within normal ranges, and our forward bookings profile continues to trend positively. From a regional perspective and consistent with what we saw in Q2, market trends varied across regions and verticals. We think largely consistent with the later stages of any cycle. In Asia, we saw mixed patterns across the region, but stability overall. Our IP and E business grew sequentially once again in the quarter. We saw modest growth with improving trends in China, especially in the automotive sector. That was alongside some softness in parts of the industrial market and in ASEAN in the Americas we grew sequentially and with better than normal seasonality based on relative strength across a handful of verticals led by aerospace and defense offsetting a decline across our industrial markets and in EMEA the sequential decline was broad based in nature reflecting its later entry into correction territory our operating margins came under modest pressure in the quarter this was due mainly to regional mix specifically more Asia and less EMEA on a relative basis, and customer mix, as our overall sales volume skewed somewhat to the larger end of our customer base. Recall that the mass market, where pricing and margins tend to be more attractive, has been a significant go-to-market priority for this business over time. As the market normalizes, we believe that these conditions are transitory in nature and not indicative of any structural changes to our business model. Our Q4 outlook reflects continuation of ongoing market trends, especially those relevant to the markets in which we choose to compete. As such, we think we're still bouncing along the bottom. Given the different trends we're seeing across regions and verticals, we can expect to see some ebb and flow from one quarter to the next. We expect our Asia Pacific business to perform closer to seasonal trends in the fourth quarter, with sub-seasonal activity levels in the West, driven by softness across the industrial and automotive market segments. Based predominantly on lower sales volume, we do expect operating margins will decline. As has been the case throughout this piece of the cycle, the specific timing and shape of an eventual recovery remains difficult to predict. Turning to global ECS, we delivered year-over-year revenue growth well in excess of our expectations. That was a function of both continued strength in EMEA along with improving execution in North America. Once again, on a global basis, we saw healthy demand for infrastructure software related to hybrid cloud and AI-related solutions. As a result, we delivered year-over-year gross profit dollar growth in the quarter, an increasingly important proof point implied by our transition to the market for IT as a service. We believe our steady pivot toward the market for hybrid cloud solutions, as well as the realignment of our North American business to better reflect the strategy we've successfully deployed in EMEA is leading us to better outcomes overall. These include a growing backlog, more recurring revenue streams, and accretive contribution margins. Our Q4 outlook reflects consistent performance in EMEA and continued progress in North America. As a result, we expect year-over-year operating income growth and margin expansion. In closing, while we continue to manage through the cyclical correction in our components business, we also remain focused on our strategic priorities. In global components, our supply chain management and design services offerings continue to grow through customer base expansion. We've now established centers of excellence for automotive, robotics, and high power, all aimed at scaling our go-to-market model in a solution-centric fashion. and we continue to make progress in the IPD market, deploying a motion in Asia similar to what we've established in the West. In global ECS, our AeroSphere platform is becoming central to our go-to-market model, enabling the expansion of our customer base and growth in our recurring revenue streams. And in both businesses, we're expanding our line card to position us for the future. Lastly, I'd like to recognize and thank all of our employees around the world for their hard work during the quarter and throughout the year. They represent us proudly in the market each and every day. And with that, I'll turn things over to Raj.

Thanks, Sean. Consolidated sales for the third quarter were $6.8 billion, above the midpoint of our guidance range and down 15% versus prior year. Global component sales were $4.9 billion, down 2% versus prior quarter, ahead, of the midpoint of our expectations. Enterprise computing solutions sales were $1.9 billion, or 7% higher versus prior year due to favorable product mix and above the high end of our outlook. Moving to other financial metrics for the quarter. Third quarter consolidated gross margin of 11.5% was down approximately 80 basis points, sequentially driven primarily by regional and customer mix impacts within our global components business. Non-GAAP operating expenses declined $18 million sequentially to $568 million in the third quarter. Recall that the second quarter also included a bad debt release of $20 million, implying an even greater step down in expenses. We have been actively managing our expense base since the market turned with initiatives implemented over the past five quarters producing savings of approximately $200 million on an annualized basis. In line with our continuing focus on reducing costs, we are simplifying our operations and, beginning in the fourth quarter, are executing a plan to further reduce our annual operating expenses by approximately $90 to $100 million by 2026, while achieving approximately one-third of these savings next year. These efforts will focus on geographic realignment and consolidation of resources. We estimate total restructuring expenses related to these initiatives to be approximately $135 million. The company also intends to exit certain underperforming non-core business lines, which we estimate will generate approximately $50 million in additional costs. Based on current market conditions and given expectations for future recovery, we believe these initiatives are appropriate and comprehensive. In the third quarter, we generated non-GAAP operating income of $215 million, which represented 3.2% of sales, with global components operating margin at 3.9% and enterprise competing solutions at 4.1%, both on a non-GAAP basis. Interest and other expense was $63 million in the third quarter, as we benefited from lower average debt levels linked to our efforts to drive working capital efficiencies. Our non-GAAP effective tax rate was 15.9%, which benefited from successful resolution of recent audits. And finally, non-GAAP diluted EPS for the third quarter was $2.38, exceeding the high end of our guided range, benefiting from favorable interest and tax expense. Moving over to working capital. Networking capital grew modestly at the end of the third quarter by approximately $94 million compared to second quarter. ending the quarter at $6.9 billion. Inventory at the end of the third quarter was $4.5 billion, decreasing $125 million from Q2. Our cash conversion cycle finished the quarter at 80 days. Our cash flow from operations was $81 million in the third quarter, or $804 million year to date. This is the fifth consecutive quarter of positive cash flow generation Net debt at the end of the third quarter was lower compared to Q2 at $3 billion. We repurchased $50 million of shares in the third quarter, and our remaining repurchase authorization stands at approximately $375 million. Year-to-date, we have repurchased $200 million of our stock. In the short term, we are continuing to balance our capital priorities with managing our debt ratios. Now, turning to Q4 guidance. We expect sales for the fourth quarter to be between $6.67 billion and $7.27 billion. We expect global component sales to be between $4.5 and $4.9 billion, which at the midpoint is down approximately 5% from prior quarter. Enterprise computing solutions should benefit from typical fourth quarter seasonality. We expect sales to be between $2.17 and $2.37 billion, which is up 3% at the midpoint year-on-year. Consolidated non-GAAP operating margins are expected to benefit, quarter on quarter, from fourth quarter seasonality in ECS, more than offsetting an anticipated decline in global components operating margins, resulting primarily from negative operating leverage due to lower sales volume. We're assuming a tax rate in the range of approximately 23 to 25% and interest expense of approximately $60 to $65 million. And our non-GAAP diluted earnings per share is expected to be between $2.48 and $2.68. And finally, we estimate changes in foreign currencies to have an immaterial effect on our Q4 guide. The details of foreign currency impact can be found in our press release. With that, Shawn and I are now ready to take your questions. Operator, please open the line.

Thank you. And we will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And your first question comes from the line of Matt Sheeran with Stifel. Your line is open.

Yes, thank you, and good afternoon, everyone. Just first question relative to your guidance for components guiding down around 4% sequentially. I think, Sean, you said that you expect Asia to be seasonal and the Western markets to be down. Could you just clarify what that means? Should we mean that Asia should be sort of flat in Europe and North America down some high single digits? And I have a follow-up question.

Sure, Matt. So I think the question is about the seasonality, right? So if you're looking for how that compares to Q3, we see modest step-downs in the West. And we see something that looks flattish in Asia, if that helps you out.

Got it. In terms of your book, Bill, you said it's a little bit better, but below one. Is it below one in all regions and basically Asia the best, followed by the two other markets?

Yeah, you got it. It's below one overall. It's still advancing just more slowly than we'd like. And Asia is leading the way.

Okay, great. And then on the gross margin, which you said has been weak, and I think that's the lowest number in a few years, you talked about mix and talked about large steals. With Europe expected to be down, as you said, lagging the other markets by at least two to three quarters, when would you expect gross margin to be back to kind of 12% plus? Because it sounds like you're guiding gross margin to be flattish, give or take, for next quarter.

Matt, I'd love to be able to say when that occurs. Obviously, when the market improves again, I think you'll see the mass market return. Remember that the mass market typically follows the larger OEMs into recovery. Right now, it's a little bit more about the larger OEMs in our customer base than it is about the mass market. When that happens, you won't see the impact from that piece of our our gross margin hit, you know, that we experienced in Q3. Tough to call. I think part of the challenge related to the recovery is that, you know, look, there's still excess margins, or I should say excess inventories, you know, throughout the industry, not just at, you know, distribution levels, but at customer levels as well. And, you know, if you look at excess inventories, a long time, shorter lead times, that means we're not quite getting you know, the visibility that we would need to lead us to be more certain about the timing of a broader recovery. We do believe it's coming, but, you know, really tough to call it, you know, beyond more than, say, 90 days at a time.

Yep, fair enough. Okay, thanks a lot, Sean.

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

Great, thank you for taking my questions. When you're discussing the results, I think perhaps even more so in the guidance that was a bit below expectations, you cited customer mix and geomix. I think the geomix, we get that. But on the customer side, I'm hoping you can linger on that for a minute. Maybe, I'm not sure exactly how to ask it, but maybe you can tell us more, be a little bit more specific about end markets or what's driving that. And sort of in particular, Can you tell us if there was any change of either policy or a change generally among any of your larger suppliers that could be influencing your performance in the outlook? Thank you.

Yeah, sure thing. Well, let's start there because there certainly wasn't any programmatic changes that impacted us in Q3 or that we see impacting us in a material way in Q4. So I wouldn't cite any big policy shifts, if you will. If you go back to what I tried to answer with Matt's question, I think, remember, the way the market typically exits a recovery, it tends to be Asia first, and then the West follows, typically North America, and then eventually Europe. And I think that's what we're seeing play out now. And then by customer type, and you're right, it does vary a little bit across verticals. But by customer type, you know, we typically see recovery, you know, before we see it. We see it in the large end of the market before we see it in the mass market. And that's playing out now. And so it's a little bit tough to predict exactly what our mix will look like. You know, at the start of each quarter, we do a pretty good job of it. Last quarter, we think we saw a little more rotation to the larger end of our demand profile, which, you know, impacted us on the gross margin line. We think we've got it read fairly accurately for Q4, which is why we talk about the main headwind to operating margin being strictly about the downturn in volume versus other factors. I'd say if you look at our traditional mix, we're very strong in the automotive sector, especially across a whole variety of industrial markets. And the industrial markets themselves tend to involve not just the big names that we'd all understand, uh, but lots of smaller companies too. And so, um, you know, we're not seeing all the, all the small companies come back at the same rate. We are, uh, the large ones, uh, aerospace and defense, uh, in the west has been more steady for us. Uh, but that tends to at times involve, you know, larger programmatic deals as well. Uh, so a little bit more color, uh, we think we've got it read well for, you know, at least the, uh, the fourth quarter.

I appreciate that clarification. Maybe if I can just ask one more. I want to make sure I understand it. I think you answered it, but let me just go at it a different way. Several years, maybe quite a number of years ago, one of the very big analog companies sort of changed the way they deal with distribution. And that has sort of continued to play out over the years. there's another one a competitor to them in that space um where i think there's this idea circulating that that company is sort of following suit and for example not paying for design wins and just going for fulfillment only is that a dynamic that you're seeing or is that not happening in either the cube has that not happened recently or in the outlook

Well, as you probably might guess, we never talk about our suppliers other than in very general terms. But I'm actually glad you asked the question because it does allow me to talk a little bit about how we see our role in the broader industry as we look to the future. But maybe first, just for a little bit of context, our supplier portfolio is fairly diverse. Not any one supplier accounts for more than 10% of our total revenue. And the fact is that over time, suppliers do make program changes. It's been true in this business as long as I can remember. But we feel like by and large, we're kind of too big at this point for any single change to alter our thinking as to the potential for growth and margin that we see in this market, especially as we look longer term. And then I would also say, look, we're not running away from opportunities related to things like channel consolidation. We've got proven supply chain assets and processes across the globe. They're far-reaching. They're scalable. They're resilient. They're compliant. And frankly, we're delighted to exercise them even further on behalf of our suppliers and large customers around the world. And I think over time, we're certainly well-positioned to benefit from the economies of scale that would come with doing that. So I... I took the high road to your question because, again, we don't talk about specific suppliers, but we don't see anything altering our view of the potential in the landscape and in the market over time.

Appreciate that. Thank you.

Thanks, Will.

And your next question comes from the line of Joe Quattrochi with Wells Fargo. Your line is open.

Thanks for taking the question. I kind of wanted to ask about the Asia demand that you're seeing. I think, you know, your competitor that reported yesterday saw quite a bit stronger kind of recovery in Asia. So I just kind of wanted to understand, you know, what you're seeing from an end market there and then maybe what's kind of different.

Yeah, sure. No, fair enough. You know, if you look at Q3 or as we look at it, you know, we think our Asian business approached typical seasonality and that included, some modest growth in China. We saw that as an improving sign. And a good part of that came from really healthy growth in automotive, specifically the EV market in China. And our Q4 outlook suggests something in line with normal seasonality, as I said earlier. So I think in general, things are moving in a better direction than they were in that market this time last year. I guess I would say without speaking to any of our competition, we play in a number of verticals in this region. our go-to-market priorities have always you know largely centered on the the broader industrial mass market uh especially in mainland china you know where frankly things have been slower to recover and so you know we've got you know our eye on the ball relative to our strategy uh and where we play um and that's that's what i try to keep the team focused on that's really helpful uh and then to make this a follow-up for raj any help on just how to think about modeling

the OPEX given the cost reduction plans that you outlined today? And then just to be clear, the 90 to 100 million, is that a net savings or should we think about some of that being reinvested? And then is it mostly in components or is it spread across the entire organization?

Yeah, Joe, let me just give you some background. I mean, as I mentioned in my comments, you know, we've done a pretty good job of taking OPEX out the last few quarters. You can see that The run rate of our OpEx is down materially from where it was just a year ago. And with the new actions today, we do expect to get an incremental $90 to $100 million. And I would say that's net. We're always looking for investment opportunities that may come along, but we do see that as a real savings to us. It is going to be across the organization. So we are really consolidating certain functions and operations and focusing on more of the cost-efficient regions around the world and really going to more of a shared services delivery model. And so I think you'll see that across the board. And I think it's real structural savings in the business because we are consolidating and putting certain functions and other things in other locations around the world. So we do expect to see that. Obviously, you've got to take into account the trajectory of the business and how that moves along next year. But in isolation, we'll certainly see that.

And Joe, I would just add that, you know, these are no regrets actions that we already chosen to undertake, you know, we think they make a lot of sense for the company over the long haul, regardless of our near term outlook. And in fact, this kind of structural stuff actually creates reinvestment capacity and reinvestment potential for us. And we're looking to put some of that to work right away. Perfect. Thank you.

Thanks, Joe.

And your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open.

Hi, thanks for taking my questions. Sean, on the ECS side, can you talk about what product lines were strong and which ones were weak? And as we look into the next quarter, are you expecting the same seasonal uptick in operating margin that you get in a typical year, going from 3Q to 4Q?

Sure, Ruplu. um and welcome um well i'll start with your your second question first the answer is yes uh uh for sure uh we'll see the the the normal seasonal uptick that we see in that business uh and we're grateful for it um given the consolidated portfolio we'll also see you know margin uplift year on year um and part of that is coming to your first question because if you look at the the mix shift that we've been driving over time consistent with our strategy you know we're getting I think, better aligned to the pieces of the market where we're seeing really good growth. And specifically, you know, we talk in terms of hybrid cloud and infrastructure software. And when we talk about infrastructure software, you can think virtualization. You can think about data protection and cybersecurity. You can think about business and data intelligence. Certainly, that also leads to, you know, the role we're playing with AI in the indirect channel. You know, many of those offerings have the, you know, the added feature of being, you know, potentially recurring in nature, you know, therefore accretive for us on the contribution line. But more importantly, they're growing. And while it may not be about billings as they do, which is why we talk a little bit about GP dollar growth, we think it bodes well for our future.

Okay. Thanks for the details there. Sean, can I ask a question on the component side? I thought earlier this year the thought was that the inventory correction would be done by the end of December. And now it sounds like it's still extending out. So any sense for like which product lines or which components are still in excess and where does that inventory sit? Is it sitting at distribution or is it at end customers? And just related to this, I think have I heard correctly that, you know, as part of the restructuring, you're also exiting some product lines or line cards. Do you think that the recovery is going to be less strong than what you had anticipated? Why, why exit these lines? Is there, are you sure that they won't come back in terms of demand? So just, just, just the rationale for, for doing this right now.

Yeah, sure. Well, I'll start there because what we're exiting is a, we would call it non-core and very immaterial from a revenue perspective. It would really have no bearing on our outlook for Q4 or much less next year. So don't read too much into that. As for the broader recovery, look, as I said earlier, I wish I knew exactly how to call it. You're right. The excess inventory challenge ultimately doesn't go away until the demand environment improves enough know for it to fully resolve itself you know we are still sitting on inventory that you know we still like uh is still relevant based on all the verticals and use cases we serve it's just taking longer to sell um but until the demand you know upticks more sharply you know the the excess inventory you know tends to be a little bit of a headwind and as part of your question it's i think it's it's broad-based right it's at the uh supplier level in some cases It's certainly in the channel at the distribution level, and it's also at the customer level as well, both large OEM and certainly in the mass market. So it's gotten better. You're right about that. We thought the pace of recovery would be a little bit healthier from where we sat earlier in the year. Things are taking longer to play out. It will resolve itself, but we're going to need a better demand environment before we see that.

Got it. If I can just sneak one more in, as part of a previous question, you said that even though you're exiting some lines, you have areas of investment and you're going to quickly get into that. So can you talk about like what areas of investment you're going to focus on so that Arrow is stronger as the recovery happens coming out of this downturn, you're going to be better positioned. So can you give us any details on what areas of focus you have in terms of investments?

Well, I can talk broadly in terms of our strategic growth priorities. In our components business, we're pretty clear-eyed about the long-term potential we see in the mass market. That's always served us well. We think that's a great spot for demand creation. So we're going to continue to look at how we increase capacity for that piece of our strategy. We will continue to look to invest in our value-added offerings related to supply chain management and design services. And we're making slow but steady progress as it pertains to the market for IP&E, which is where specialization is so important so that we distinguish our motion in that segment of the market versus our motion for semiconductor. So those priorities are really clear for us, and we've had to navigate a challenging market environment. But as we continue to make progress with structural costs, we know we can create investment capacity for those priorities at greater rates. I would say in the world of global ECS, it's all about the market for hybrid cloud, infrastructure, software. We like to talk about all things IT as a service. We like the outcomes that that piece of the market leads us to. That doesn't involve just selling capacity. It also involves investment in our digital experience, Aerosphere, and we continue to invest in that at a steady rate as well. And I think we're starting to see better outcomes as a result.

Okay. Thank you for all the details. Appreciate it.

And your next question comes from the line of Melissa Fairbanks with Raymond James. Your line is open.

Hi, guys. Thanks so much for taking my question. I have just a quick follow-up, probably beating a dead horse at this point, but trying to get some more visibility into some of the non-core business that you plan to exit. I assume that this is something that happens kind of on a continual basis. Wondering if you can give us some visibility into why this big chunk all at once, is it limited to either certain geographies or certain products or what was kind of the catalyst behind, you know, a large scale exit? Well, not large scale. I know it's not immaterial to revenue, but, but yeah, just a little bit more color.

Yeah, sure. Maybe just a couple more words, Melissa, and then I'll let Raj talk a little bit about the financial aspects of it. But we're talking about a very isolated line of business and a remote geography that, again, isn't core to our global components business overall, not material from a revenue perspective. And the time is right in this environment to just, as you say, we're always looking at you know, being smart about the portfolio. And, you know, this just happened to be the right time for that decision.

Yeah, Melissa, and just to add about the charge that we said today for $50 million, we expect most of that will be in the fourth quarter as of right now. And it is mostly a non-cash charge because the business that we're closing down has assets associated with it. And there'll be an asset impairment and some inventory reserves as well. So that's why you see the bigger number, but it's mostly non-cash at this stage.

Okay, perfect. That's really helpful. Then as my follow-up, I was wondering about in ECS, how should we think about seasonality in the business over the long term? So moving more toward cloud-based sales, IT as a service, does that change the complexion of seasonality or does it get smoothed out over time with more of the recurring revenue?

I think we're learning more about this as the recurring revenue piece of our mix continues to grow. It's now approaching something on the order of a third of our volume. So we'll see if that changes seasonality as this plays out further because it's still growing at really nice rates. I think in general, Melissa, the IT spending cycle for most CIOs across the course of a year tends to be fairly similar. you know, over all these years and it may not ultimately change much. But I do think we're going to benefit from, you know, the recurring piece of our progress because that is generating, you know, larger and larger backlogs as that piece of our business continues to grow. So we might see, you know, we might see a little more smoothing over time, but I think that's going to be, you know, slower to play out.

Okay, perfect. Thanks very much. That's very helpful. That's all for me. Thanks.

Thanks, Melissa.

And your next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open.

Hi. Thank you so much for taking the question. I had one for Sean and then one for Raj as well. Sean, a question on the pricing environment. I think most of your suppliers so far this quarter have said pricing remains pretty stable in the marketplace. There's a concern on the part of investors that because pricing was so inflationary during the pandemic, that could reverse as this oversupply situation kind of persists. What are you seeing in the market today and any concerns going into 2025?

So I think I can make this pretty straightforward for you. Well, first, we haven't seen many, if any, of our suppliers actually reduce prices formally. So that hasn't, you know, that certainly hasn't, you know, leaked into the channel yet. We happen to believe there's a lot of reason that it won't. The second thing I would say is, look, you know, I would agree that if you look at our traditional mass market customer base, the pricing environment, and therefore transactional margins were relatively stable in Q3, we accept the same or we expect them to be relatively stable in Q4, not necessarily assuming that that would change much in 2025. At the same time, I would say, as we mentioned, as our overall mix did skew somewhat towards the larger end of our customer base, that is where pricing tends to be more heavily negotiated. That could be a factor in the near term, but as the mass market returns, you'll see that piece of the gross margin dynamic normalized for us. At least that's how we're thinking about next year and beyond.

Yeah, that's really helpful. Thank you. And then my follow-up for Raj, I'm curious how you're thinking about free cash flow going forward. You guys have done a really good job in bringing down inventory over the past year or so. How are you thinking about working capital needs as you hopefully go into an upturn in in 25. And more importantly, you know, if you can speak to your capital allocation priorities, especially given where your stock sits today, that would be really helpful. Thank you.

Yeah. Hey, Tushiya, I would say the business model hasn't changed. So, you know, typically in times of decline in the business, we're going to generate cash. And over the last 12 months, we've generated about $1.1 billion of operating cash flow. And in times of growth, we're going to want to make sure that we're well positioned to have the working capital that's needed to grow the business. And so we'll use up more cash. Generally, we generate cash on an ongoing basis, and it really is the working capital aspect of the business that varies from period to period, if you will. I'd say that from a capital allocation standpoint, nothing has changed from our perspective. We've historically always focused on investing organically in the business. whether it's capital, CapEx or working capital. We've done some small M&A. We announced a small one also earlier this week in the engineering space. And so that's been a small use of cash. And then, you know, we certainly have been very focused on buying back stock over the years. Last year in 2023, we bought back about $750 million of cash. And, you know, this year we've been more focused on debt pay down, just given the trajectory of the business. But At the right time, we'll get back into that in the same way that we've done historically. So capital allocation priorities have not changed.

Got it. Thank you.

And that concludes our question and answer session. I will now turn the conference back over to Mr. Brad Winbigler for closing remarks.

Thanks, Abby. And thank you all for joining today's call. We look forward to meeting you at upcoming investor events. Have a good day.

This concludes today's call. We thank you for your participation. You may now disconnect.