Arrow Electronics, Inc. (ARW) Q3 2026 Earnings Call Transcript

Good day, and welcome to the Arrow Electronics Third Quarter 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 of Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Third Quarter 2026 Earnings Conference Call. Joining me on the call today is our Interim Chief Executive Officer, Bill Austin, our Chief Financial Officer, Raj Agrawal, our President of Global Components, Rick Murano, 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 in our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. 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. 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 the accompanying slide presentation. 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 CEO, Bill Austin.

Thank you, Michael, and good morning, everyone. We appreciate you joining us for a discussion of our third quarter 2026 results. I would like to start by recognizing our global teams for their continued dedication and disciplined execution. Their commitment to supporting our customers and suppliers has been instrumental in driving another quarter of excellent performance. Beginning on slide three, we delivered another quarter of strong results with record total revenue and EPS. Total revenue of $10.7 billion increased 39% year-over-year, while non-GAAP operating margin expanded 130 basis points year-over-year to 4.1%. Strong revenue growth and positive operating leverage resulted in non-GAAP diluted EPS of $6.22, representing a significant year-over-year earnings growth of 158%. Our strong performance this quarter was fueled by four key drivers that contributed meaningfully to our performance. First, focused execution across the business, including effective management of expenses and working capital, while serving strong customer demand. Second, positive operating leverage resulting in meaningful year-over-year margin improvement. Third, sustained unit volume demand. Combined with pockets of limited capacity resulted in increased benefit from price inflation. And fourth, continued contribution of higher margin value-added services. From a segment perspective, both global components and global ECS contributed to our strong performance. Our global components demand remains strong and broad-based across geographies, verticals, and customers. And our leading indicators continue to give us confidence in the durability of demand and the sustainability of growth. Book-to-bill ratios remain well above parity, while our backlog continues to build into mid-2027, improving our visibility. We have also seen lead times gradually extend but remain lower than a pervasive shortage environment. ECS posted a strong quarter, exceeding expectations through a combination of robust customer demand and improved backlog conversion. Demand continues to build across key technology categories, including AI, cloud, cybersecurity, and hybrid infrastructure, driving healthy growth in our buildings and backlog. Turning to slide four, Arrow remains well-positioned to deliver long-term growth. We've discussed four pillars of our investment thesis over the past several quarters, and we continue to execute in these areas to further drive strength in our business model to solidify our competitive positioning. First, Arrow maintains a strong position across its six large and growing core end markets, industrial, transportation, aerospace and defense, medical, consumer electronics, and data centers. Each of these markets is supported by an attractive secular demand trends that continue to create growth opportunities. Second, our differentiated capabilities continue to drive profitable growth as we expand into higher margin value-added services. Third, Arrow's combination of global components and ECS creates a diversified business model that provides financial flexibility. I'd like to spend a moment here on ECS and highlight the progress we have made against our strategy to become the leading aggregator of AI and hybrid cloud solutions for the mid-market. Central to this strategy is our highly scalable value-added model, which provides technology suppliers with significant reach while expanding access and capabilities for our channel partners. Arrow's scale is especially important because it allows us to connect the world's leading technology providers with channel partners and end customers as demand continues to grow for AI, cloud, cybersecurity, and hybrid infrastructure solutions. The ongoing build-out of AI is driving customers to modernize their technology environments. Customers are investing in additional compute, storage, networking, and cybersecurity capabilities to support growing data. And performance requirements, while also expanding their use of cloud-based solutions. For Arrow, these trends are being driven primarily by mid-market and enterprise customers, who are increasingly deploying hybrid environments that blend cloud adoption with upgrades to their on-premise infrastructure. As a result, we're seeing healthy demand across the core technologies that underpin AI readiness, digital transformation, and long-term IT modernization. We're seeing continued validation of our strategy through recognition from some of the industry's most important players, including... NetApp, where we were recognized as the North American Distributor of the Year for 2026, reflecting the strength of our partnership and success driving growth across the channel. HPE, where we extended our partnership through the addition of distribution rights for the Juniper product lines across North America and select EMEA markets, further enhancing our ability to deliver HPE's full portfolio to channel partners. IBM. Oracle, where we expanded our longstanding relationship through additional distribution coverage across seven additional countries in EMEA, increasing our reach and scale with this strategic supplier. Oracle, where we were recognized as the Global Cloud Distributor of the Year, reflecting accelerated Oracle Cloud adoption through partner recruitment, technical enablement, and joint go-to-market initiatives. And finally, IDC, where we were recognized as a cloud platform leader reflecting Aerosphere's differentiated cloud lifecycle management capabilities reinforced by recent Microsoft and AWS Distributor of the Year recognitions. These achievements highlight the strength of ECS's value proposition, underpinned by our expanding ecosystem and category leadership, our deepening strategic supplier relationships, and our growing exposure to high-growth technologies. ECS continues to be uniquely positioned as a critical enabler of technology adoption, And we remain confident in our ability to drive long-term growth and value creation for this segment in the years ahead. Turning back now to our investment thesis, fourth and finally, our capital allocation priorities remain unchanged. We are focused on maximizing long-term shareholder value by deploying capital toward opportunities that offer attractive long-term risk-adjusted returns while maintaining our investment-grade rating. Turning to slide five, our strong third-quarter performance reflects the continued momentum and strong operational execution across the business. We remain focused on expanding our portfolio of solutions and capabilities across both global components and ECS for higher-margin value-added services. We are confident these offerings will deepen customer engagement, broaden our market opportunities, and drive sustainable growth. We are equally committed to delivering profitable growth and driving positive operating leverage through disciplined execution and effective financial management. We're encouraged by the strength across our business and are excited about the opportunities ahead as we continue executing our strategy to deliver sustainable long-term shareholder value. With that, I'll turn it over to Raj to discuss our financial performance in more detail. Thanks, Bill.

On slide 6, sales for the third quarter increased $3 billion year over year to $10.7 billion, representing a record level and up 39% versus prior year. Third quarter consolidated non-GAAP gross margin as a percent of sales was 10.8% flat versus the prior year. Our third quarter non-GAAP operating expenses increased $104 million year-over-year to $719 million, primarily driven by variable costs. Importantly, non-GAAP OPEX as a percent of gross profit declined 11.6 percentage points year-over-year to 62.3%. We remain focused on disciplined, profitable growth, and our improved operational efficiency is driving substantial operating leverage in the business model. In the third quarter, non-GAAP operating income increased $219 million year-over-year to $436 million. Non-GAAP operating margin rate expanded 130 basis points year-over-year to 4.1% of sales. Interest in other expense was $40 million in the third quarter as we benefited from lower average debt levels throughout the quarter, and our non-GAAP effective tax rate was 19% as we benefited from a tax settlement. Finally, non-GAAP diluted EPS for the third quarter increased 158% year-over-year to $6.22, a record EPS for Errol. This was above our guidance range, driven by a number of factors, primarily favorable sales volume and operational leverage from our productivity initiatives, along with lower interest expense and the aforementioned tax settlement. Turning to slide 7, let's take a closer look at our global components business. Global components sales increased $577 million sequentially to $7.9 billion in the quarter. Above our guidance range and up 8% versus prior quarter. Global Components non-GAAP operating income increased $16 million, sequentially to $413 million, up 4% from the prior quarter. Non-GAAP operating margin declined 20 basis points, sequentially to 5.2%, and was up 160 basis points versus the prior year, and well ahead of expectations. Our strong results reflect continued momentum across the business. Our growth remains broad-based, spanning geographies, end markets, and customer segments, reinforcing our confidence that demand is being driven by a diverse and healthy set of underlying factors. First, book-to-bill ratios remain well above parity. Second, lead times extended further during the quarter, though they remain well below prior peak levels. Third, our backlog continued to build and now extends into the middle of 2027, providing us with greater visibility and supporting our view that demand remains durable. Lastly, Interconnect Passive and Electromechanical Components, or IP&E, continues to grow, surpassing $1 billion in sales for the third consecutive quarter. These leading indicators strengthen our confidence in both the sustainability of current growth trends and the underlying health of the market. Importantly, demand trends remain resilient from a unit volume perspective, demonstrating continued stability and end market consumption. However, pockets of limited capacity are leading to price inflation with certain component categories, most notably memory. Higher prices are benefiting both revenue and profit dollars. In addition to product distribution, our value-added capabilities remain an important differentiator. Customers continue to leverage our supply chain services, engineering and design, and integration services to navigate an increasingly complex environment. These higher value engagements not only deepen customer relationships, but also contribute meaningfully to profitability and reinforce the strategic role we play across the electronics ecosystem. Taking a closer look at each of the regions, in the Americas, sequential sales growth was broad-based, highlighted the strength in aerospace and defense, industrial, transportation, and computing. In EMEA, the market was underpinned by sequential strength in aerospace and defense and networking. And finally, in Asia, sequential growth was driven by industrial, networking, and transportation. Turning to slide eight in our global ECS business. In the third quarter, global ECS sales increased $619 million year-over-year to $2.8 billion, above our guidance range and up 29% versus the prior year, or up 30% year-over-year on a constant currency basis. Total ECS billings were $5.9 billion, up 14% year-over-year. Third quarter non-GAAP operating income increased $34 million year-over-year to $99 million, up 53% from the prior year. Non-GAAP operating margin increased 60 basis points year-over-year to 3.6%. Our third quarter results significantly exceeded expectations, driven by strong demand and our ability to convert a larger percentage of backlog into revenue. Strong execution across the organization combined with product availability and customer readiness enabled us to accelerate backlog conversion and deliver results ahead of expectations. We also made important progress on two underperforming multi-year contracts with one of our Beyond Distribution partners. We terminated one contract, which we discussed last quarter, as well as successfully restructured another key contract with the same partner this quarter. The result of both of these actions put the business on a healthier trajectory and has created a stronger foundation for future growth and profitability. We are encouraged by the early results and believe these actions better align the business with our long-term strategic objectives. Demand trends remain favorable, with investments in AI and broader infrastructure modernization continuing to shape technology spending. Consistent with these trends, we delivered year-over-year growth across nearly every major area of strategic focus within the business, including compute solutions, business applications, storage, security, and cloud and hybrid cloud offerings. As organizations continue to modernize their environments and prepare for the next wave of AI-driven adoption, we believe Arrow remains well-positioned to help customers navigate that transition while driving profitable growth across the business. Turning to the balance sheet on slide 9, networking capital grew sequentially in the third quarter by approximately $900 million, ending the quarter at $7.7 billion. Inventory grew sequentially by $1.4 billion, ending the third quarter at $7.3 billion. Nearly half of the inventory build was related to data center activity within our Arrow Intelligent Solutions. In this offering, we're helping to design, build, and test the compute and storage infrastructure needed to run AI workloads, and this value-added service is a margin-accretive business for Arrow. As we continue to experience robust demand, we will strategically invest in inventory that is needed to support our customers. Importantly, our investments are driving attractive returns and the financial metrics that we monitor continue to illustrate a healthy business profile. Non-GAAP return on working capital increased 10.6 percentage points year-over-year, finishing the third quarter at 22.6%. Likewise, non-GAAP return on invested capital increased 7.8 percentage points year-over-year, finishing at 15.1%. Working capital as a percent of sales finished the third quarter at approximately 18%, and our cash conversion finished at 78 days. Cash flow used for operating activities in the third quarter was $441 million. On a year-to-date basis, cash flow generated from operating activities was $577 million. Gross balance sheet debt at the end of the third quarter grew sequentially by $581 million and declined year-over-year by $378 million, finishing at $2.8 billion. Overall, our lower debt levels, along with increased profitability, have improved our adjusted leverage ratio by overturn the past 12 months to 1.9 times, which provides us with increased financial flexibility. Finally, we repurchased $93 million in shares in the third quarter. Now, turning to Q4 guidance on slide 10, we expect sales for the fourth quarter to be between $11.55 and $12.15 billion, representing an increase of 36% year-over-year at the midpoint of the range. We expect global component sales to be between $8.15 and $8.55 billion, representing sequential growth of 5% at the midpoint.

Enterprise competing solutions should benefit

from typical fourth quarter seasonality, which historically has been the strongest quarter of the year. We expect sales to be between $3.4 and $3.6 billion, which is up 22% year of year at the midpoint. 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 $7 and $7.20. Details about the impacts of changes in foreign currencies can be found in our earnings release. I'd like to offer some additional color on both of our segments. In global components, the sequential growth in our outlook is expected to be driven primarily by unit volume, as a majority of supplier price increases took effect in the third quarter. Overall, the business remains healthy, supported by a more favorable geographic mix, continued mass market momentum, contributions from value-added services, and ongoing leverage from our productivity initiatives. In ECS, we expect hardware to represent a larger portion of revenue in the fourth quarter, which will drive a higher mix of sales recognized on a gross basis, as we've seen throughout the year. We expect margins on a billing basis to be relatively unchanged from the prior year, demonstrating the resilience of the overall business. Altogether, our focused execution and financial discipline across the business position us to continue to build momentum against our strategic priorities while enhancing operating leverage and supporting long-term earnings growth. With that, I'll now turn the call back over to Bill for closing remarks.

Thanks, Raj. 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. Arrow remains uniquely positioned at the intersection of several powerful secular growth trends. In global components, continued investment in artificial intelligence, aerospace and defense, industrial automation, and the broader digitization of the mass market continues to create opportunities These across our portfolio. We are increasingly seeing these trends expand beyond early adopters and large customers into a much broader base of enterprises and industrial customers. At the same time, in ECS, as AI deployments continue to expand, customers are investing to modernize their technology stacks. Demand remains strong for compute, storage, networking, cybersecurity, and cloud solutions as organizations build the infrastructure required to support increasingly sophisticated workloads. The quality of growth across Arrow continues to improve. We are benefiting from a healthier mix of customers, geographies, and value-added services, while strong execution is driving positive operating leverage throughout the business. As a result, we are not only delivering growth, but doing so in a way that strengthens profitability and positions us for sustained performance. We are proud of the progress we have made, confident in the path ahead, and remain focused on delivering sustainable, long-term value for all of our stakeholders. Finally, I'd like to share some recent leadership changes. After 22 years with Arrow, ECS President Eric Nowak has announced his plans to retire. He will remain in his role through the end of the year and will then serve as an advisor until the end of Q1 2027. I want to thank Eric for his exceptional leadership and many contributions to Arrow over the years. We're pleased to welcome Rodney Clark, who will join Arrow on November 9th and will succeed Eric as president of ECS, effective January 1st. Rodney brings significant global leadership experience across the commercial, channel, and technology sectors, having spent his career working closely with suppliers and customers. We look forward to welcoming Rodney as we continue to build on the success of ECS, deepen customer relationships, and execute our strategic priorities. Also, we're excited to welcome Anuj Gore as our Chief Information and Technology Officer, effective November 9th. Anuj brings extensive experience leading IT organizations and business transformations through prior senior leadership roles overseeing significant technology investments, acquisition integrations, and AI frameworks. I would also like to thank Ramey Lebe, our Chief Strategy Officer, for her interim leadership of our global IT organization during this transition. With that, Raj, Rick, Eric, and I would be happy to take your questions. Operator, please open the call for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. 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.

Hey, good morning, guys. It's Aidan on for Will. Thanks for taking my question. I was wondering if you could discuss the impact that memory prices had, maybe in both segments, please. Thanks. Go ahead, Raj.

Yeah. For the third quarter, memory prices were certainly up quite a bit. Most of our revenue growth in the components business was driven by price increases. In the third quarter, we have not assumed a lot in terms of memory price increases or other things in the fourth quarter. That's primarily unit volume driven. Having said that, the demand environment continues to be extremely strong. If we had gotten our hands on more product, we would have sold more. And so the environment itself is very, very strong. We feel very good about where things are, and that's what we've assumed at this stage.

Great. And then if I could sneak in another one, could you maybe quantify how much the value-added services are contributing to profitability today?

Well, for last year, they contributed about 30% of our operating profit as a company. This year, because we've had so much growth in the rest of the company and in our core components business, that number is going to be lower than it was last year. We haven't quantified it yet, but it's certainly going to be drifting lower, not because it's not performing well, but primarily because everything else is growing so much this year. So it's still a significant contributor to our bottom line.

Awesome. Thanks, guys. Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Ruplu, please go ahead.

Hi, thanks for taking my questions. My first question relates to working capital. Raj, a couple of things. Inventory was up $1.4 billion sequentially. You mentioned Arrow Intelligence Solutions, and you said something about building compute and storage. Can you just kind of describe what that business is? Is this a manufacturing business? What are the margins in that business, and how big is it from a revenue standpoint? And the second question I have on working capital is if we look at slide nine, it looks like DSO and DPO both have increased about 100 days year on year. So what is it that you're having to give more payment terms, extended payment terms to clients, or is this related to supply chain services business? If you can just kind of explain or just describe what's happening with the DSOs and the DPOs and I have a follow-up. Thank you.

Yeah, maybe I can start with, or do you want to start?

Hey, Ruplu, this is Bill. On the AIS, what we call Arrow Intelligence Solutions, that's AIS. That's what we've talked about in the past. It's part of our value-added services, and that's where we build specific appliances that are low-volume, high-mix for customers. So, we have got... You know, business with lots of customers building racks, storage, compute racks, and the inventory is up because we have large orders in the pipeline that didn't ship within the quarter, and they're just going to ship within the next quarters. We need to bring that inventory in ahead of time so that we can build it, test it, and then ship it. So that's all going to go through, and of the $1.4 billion of inventory, about $600 of that would have been related to AIS. Yeah, and I'll let Raj answer the other part of the question.

Yeah, and so the second part of your question, Rupalu, you're right. The DSOs and DPOs are up about 100 days year on year. That's being primarily driven by our supply chain services offering. Just as a reminder, that's a working capital light offering that we have, but we are settling AR and AP in that business, and so you will see those things ballooning out. So nothing different than we've been calling out every call. So it's the same factors that are driving it. So nothing unusual there.

Okay, thanks for the clarifications. Can I ask a follow-up on margins, specifically for the ECS segment margins? You know, the fourth quarter is typically a strong quarter, and, you know, when we look year on year, I mean, it typically has good growth. I mean, you get into the sixth handle in terms of operating margins. You made a point that this year you're going to have more hardware versus software and services. How does that impact – was there any – is there anything to keep in mind as we model out operating margin for ECS in the fourth quarter? Thank you.

Yes. Yeah, let me start, and then, Eric, please feel free to add in. You know, the margins for ECS, you know, the net sales are driven by more hardware sales, as we had mentioned, and so that does depress. Thank you. So the business is firing on all cylinders. Yes, you're right. The net sales margins have historically been about 6% in the fourth quarter. But, you know, and we're implying something that's lower than that in this fourth quarter, but nothing has really changed there. And we're actually doing very well in the business. Eric, do you want to add anything to that?

Yes, exactly as Raj described, it's difficult for us to basically manage the mix of the business. We had much more hardware sales in Q3. It will be the same in Q4 because our suppliers are very efficient in our ability to ship the hardware. And that's why basically on a net sales basis, the margins are down, but on a billings basis, which is what we are looking for, it's flat. So basically, it's on track. Good.

Okay. Thanks for the details. Thanks, Riple.

Your next question comes from the line of Melissa Fairbanks with Raymond James. Melissa, please go ahead. Hey, Melissa.

Hey, how are you? Good morning. Doing well. Doing well. Drinking from the fire hose, it feels like. Congrats on the results, and I know it's extremely difficult to model these businesses. Raj, I think in answering, I think it was Will Stein's question, the first question, you mentioned if you had been able to get more inventory, you could have shipped more through. And I know what we've heard from some of your supplier partners. Um, over the past couple of weeks is that lead times are extending channel inventories are probably at record lows in Asia, in particular, um, starting to come down in Europe, you know, us is a little bit higher, but, um, just wondering what you are seeing in terms of lead times, channel inventories, availability, your ability to meet and market demand.

Well, listen, maybe I'll give it to Rick Marano. He's the expert here, and so I might as well let him speak to it. Great.

Thanks, Melissa. Hi, Rick. Thanks. Thanks, Melissa. Good. How are you? Melissa, I guess I'd answer the question this way overall. You know, we've talked about this in the past. We've talked about, you know, the recovery and how the recovery has gradually come along. And if you think about it through that lens. As what we call the mass market customer base comes back and continues to come back, they come back to lead times that are expanding as well. And as lead times expand, obviously, you know, our ability to turn inventory or get inventory becomes a little bit more constrained. It doesn't mean in any way, shape, or form that we believe that we're not getting our fair share of inventory. What we're saying is the contribution of a market that's recovering, lead times are expanding, and those converging just means it gets more difficult to get inventory in when we want to get inventory in. What I would say is this, is look at it from a perspective of the health of the market overall and take outside of it, look outside the traditional verticals to which we look at. If you expand it and look at areas like robotics or automation or power, things of that nature, all those segments are coming back, and they're coming back strong and they're coming back globally as well. So it's a nice, healthy recovery. It continues to recover. Lead times continue to expand, but lead times have not expanded like we saw in the COVID period in any way, shape, or form yet. So, you know, it's, of course, we can get more inventory. We could turn more inventory, but we are getting a fair amount of inventory, and it's reflective of what we see in our bookings and our backlog out in future quarters.

Okay, thanks so much. That's super helpful. Maybe as a follow-up, you mentioned some of these end markets where there are higher value end markets, like in aerospace and defense and some of the industrial automation, robotics. All of those types of areas. Are you starting to see any behavior on behalf of the suppliers where they're going to hold more internally and not push inventory out to distributors like what we saw during the COVID times? Or is this still, you know, we're still business as usual, it's just extended lead times?

I think it's business as usual and extended lead times. And I think, quite honestly, that's reflective of what we're seeing, Melissa, when we look out in time. And, you know, Bill and Raj both talked about visibility as we move out into the first half of 27. And, you know, that visibility is reflective of a recovery across the mass market and these vertical markets as well. So I don't in any way, shape or form see suppliers in any way not, you know, not. You're not giving us product based off the end market or technology. Yeah.

Now, Melissa, our backlogs and our, you know, if you look at our sales sequentially in some of the markets that Rick talked about, robotics, power conversion, energy, automation, sequentially, these are increasing rapidly from a sales basis, and our backlog is increasing in those categories as well. So we see this as a very broad-based. Uh, you know, cycle, if you will, beyond just storage and compute, transportation, aerospace, and defense. We're now starting to see the mass market, you know, coming back with a lot of momentum.

Great. Thanks very much. Keep up the good work, guys.

Thanks so much.

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

Thank you. Thank you, everyone, for joining today, and I look forward to speaking with all of you soon. I also want to take a moment to thank all of my Arrow colleagues for delivering an excellent result in Q3, and I'm really looking forward to Q4. Have a great day, everybody.

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