Conference Transcript - ARW 2026-03-04

Melissa Dailey Fairbanks, Analyst — Raymond James

We're winding down here in Orlando. Welcome to the conference. I am Melissa Fairbanks. I cover analog semis and IT supply chain. Before I get to introducing the Arrow team, we do have the team here from Arrow. I just want to point out there is no breakout session after. So if you have questions, we're going to give you a chance to ask questions here in the presentation toward the end um so anyway from aero electronics we're really excited to have uh bill austin interim ceo and uh i hate saying interim but uh it's okay it means i'm going back to retirement yeah good for you good for you we do have in the audience we've got raj agrawal the uh the cfo and then of course from investor relations we've got michael nelson and nate traczynski so we have the whole team here. And I would like to start off, Bill, I think if we could do kind of a general overview or an introduction to Arrow, that would be great. Sure, sure. So for those of you that

Speaker 4

know Arrow, thanks for coming. And for those that don't know Arrow, hopefully we'll be able to share some insights with you today. So Arrow is a 90-year-old company, a large electronic component distributor uh we've been in business like i say for 90 years we've celebrated our 90th year this past year rang the bell closing bell at the nyse with the team which was a kind of a fun event but we have been had long-standing relationships with uh our suppliers and our customers some of our suppliers have been with us for over 50 years and we've been with them for over 50 years but we We deal in a very large and growing space of electrical components, semiconductors, IP&E, value-added services, and technology solutions from a software perspective. So it's a very large market that we address. We are the largest global components distributor in the world, and we have a diversified business model, one of which is on the hardware side, which would be components, And on the software side, we distribute infrastructure-type components. About 75% of the ECS business is hardware, and 25% is hardware, and 75% is software. So about a $30 billion business revenue-wise. And we really like the fact that we're a diversified business because it allows us to kind of level out our earnings. through the ups and down cycles that we confront on a year-in, year-out basis. Great business team, great business model. We're global in what we do. And we see ourselves right now today as an extremely value-driven company in the sense of we are undervalued.

Melissa Dailey Fairbanks, Analyst — Raymond James

I knew that was going to come up.

Speaker 4

So if you are a value investor, we are right down the center of your fairway. You know, if you look at our stock price today and where if you believe that the semiconductor cycle normally turns, we're in the early innings of that turn. We see a gradual recovery that we've embarked on. For the last few years, our business team has been focused on reducing costs both on the fixed side and on the variable side. So our fixed costs are down about 10% over the last few years, and our variable costs, which is primarily made up of variable selling costs, is also down a touch, even though we've grown revenue. So if you believe the semiconductor cycle is turning, we are extremely undervalued because if you look at our fourth quarter, we had a wonderful fourth quarter on the heels of a good third quarter, and we're approaching this year right now with our backlog is increasing. We have better visibility in the backlog, best visibility we've had in quite some time. And when I say visibility, stretching out, we see backlog now filling in into the third quarter. Book to bills in all three regions around the world are greater than one to one, and they haven't been at these levels for the past three, four, five quarters. So we see things turning. We see that it's real demand that's being created. It's not just price. It actually is volume related demand. So we're in the early stages of a cyclical turn in semiconductors, and we are extremely well positioned because we've created a tremendous amount of leverage in the P&L. So as we bring in more revenue, that revenue falls to operating income. So we feel real good about where we're at and where we're going.

Melissa Dailey Fairbanks, Analyst — Raymond James

He just wrote my note for me. I think it would shock you to know that Bill comes from a manufacturing background, not sales.

Speaker 4

Yeah, I have to say, you know, people would have called me years ago a knuckle-dragger. I came out of the operating side of the companies that I've went for.

Melissa Dailey Fairbanks, Analyst — Raymond James

I do want to address just very briefly, what's the timeline and the profile for the CEO transition? Because I know you're anxious to get back into retirement. The CEO transition, the search has been ongoing and just want a quick update on that.

Speaker 4

Sure. So, you know, I stepped into the role on September 16th. we started a search in earnest probably four or five weeks later we put a search committee together at the board level we've engaged with a headhunting firm we've had a tremendous number of resumes that we've reviewed we have a criteria that is somewhat exacting if you will from the sense of we want somebody that's got a set of operating capabilities and skills we're a company made up of really good sales people and good commercial people we want the new ceo to have that skill set but not to be over indexed there we want that the new ceo to be more indexed on the operating side of things and that's the criteria we've put out we're down to a small number of finalists which will go through the normal background checks uh normal interviews with the board and presentations that they'll make to the board and we feel we'll have a decision sometime within the next four to six months. Okay great now that we have that out of the way

Melissa Dailey Fairbanks, Analyst — Raymond James

we do need to talk about the cycle. So I'd like to know like how would you characterize the demand trends? You did mention we are in the early innings of a cyclical recovery. It's not exactly a quote-unquote normal cyclical recovery but you know we're getting there for sure but I'd like to discuss some of the demand trends within the components business, either across geography

Speaker 4

or end market. Okay. Yeah. Let's take them all. Go for it. Yeah. So, you know, the East, Asia, normally is the first one to go into a down cycle and the first one to come out of a down cycle. We've had growing volumes across several verticals in Asia for the past several quarters. which if you looked at our results from Q2 of last year, Q1 of last year, you'd see that our margins were depressed. Why? Because we were geographic, poor geographic mix. Asia was stronger than was EMEA, than was North American markets, okay? So we had a lot of growth in Asia, but it's at lower margin as it is across most industries. Yep. So now fast forward, you get to q3 we start to see we start to see green shoots coming up in emea and in north america fast forward to q4 of last year those green shoots are actually turning into some plants and they're starting to grow you get into q1 of this year and our our vertical markets in transportation let's take i'll go transportation last aerospace and defense very nice volume growth in aerospace and defense, both in EMEA and in North America. Our industrial markets, which you'll hear us term on our call and in our discussions, the mass market. Okay, what the heck's the mass market? The mass market is what I would term as the big middle. It's industrialized U.S. It's industrialized Europe. Those companies that buy less than $2 million of components, we term as mass market customers okay so who are they honeywell johnson controls lutron whirlpool general electric medical systems those kinds of customers make up what we call the big middle or the mass market they are coming back okay they are actually seeing their order book filling in they are now starting to order and we're getting very nice growth rates we're seeing good growth rates from those types of customers, both in EMEA and in North America. Asia is still growing quite strongly. Even though we went through the Chinese New Year, we see Asia continuing to do well, more so on the compute side of things, so AI-related storage and compute there. But we're seeing industrial Europe and industrial North America come back. Transportation in North America is coming back. We've got nice order load from in the transportation sector. And when I talk about transportation, I'm really talking the automotives, but we deal with the tier ones and the tier twos. So it's not like a Ford or General Motors, but we're dealing with all those tier one and tier two suppliers. And we're actually now starting to see some growth in transportation in Europe. So that's, that's a good sign. Not big, but, but a good sign all the same. So we feel really good about where we're at right now. And And we believe, as I said earlier, you know, we're at the early stages of the cyclical turn in semis, which then cascades into IP&E, into our value-added services, and to everything else we do. We'll get to that next. But, you know, my point is that we've created real leverage in the P&L. So this revenue that comes in, we get better margin out of it, which is what we've been saying we were going to do. And now we're actually seeing that hit the P&L.

Melissa Dailey Fairbanks, Analyst — Raymond James

I think it's also important to note there's no single customer that's more than 2% of revenue. Did I, I got that right? No single customer worth 2%. So very broad-based, very well diversified.

Speaker 4

And no supplier more than 8%.

Melissa Dailey Fairbanks, Analyst — Raymond James

Wow. So in terms of the geographic footprint, Raj gave you the thumbs up. In terms of the geographic footprint, obviously you do have operations worldwide, globally. um what's your china exposure specifically we do get asked about that quite a bit yeah we look at

Speaker 4

we we look at more than china we look at asia pacific um and it's uh less than 10 percent of

Melissa Dailey Fairbanks, Analyst — Raymond James

the overall revenue okay asia pacific okay is there any risk again unfortunately this has come up most more recently is there any risk to your exposure in mexico uh no uh you know we have we

Speaker 4

We have a big distribution center there in Guadalajara. We have a, you know, our back office center is there in Guadalajara. We were down for one day.

Melissa Dailey Fairbanks, Analyst — Raymond James

Wow, okay.

Speaker 4

We were down after the, you know, the issue that they had. We were down on Monday. We kept everybody out. We kept everybody home. We located everybody. They all responded. Everybody was fine. And we were back in the distribution center on Tuesday.

Melissa Dailey Fairbanks, Analyst — Raymond James

That's amazing.

Speaker 4

And we kept our back office folks working virtually from home that whole week. So all good.

Melissa Dailey Fairbanks, Analyst — Raymond James

Great. All right. Had to check that box. So the next most popular question, what's the impact of supplier price increases on your model? And I'm thinking specifically related to like memory or storage in particular. But we have heard, you know, pricing has been relatively stable across a supplier base. But how does that flow through your business model?

Speaker 4

That's exactly what happens. It flows through. We pass it right through where we have contract. Where we don't have contract, we get as much in the market as we can.

Melissa Dailey Fairbanks, Analyst — Raymond James

All right. Is there any impact of the memory shortages on your demand recently? Or do you see that? Are your customers starting to worry about potential shortages on the memory side of things?

Speaker 4

You know, I think that obviously people are going to worry. They've got to make product. They've got to ship, right? There's always that fear out there. We have not had a major issue with that. We've gotten everything we needed. We've been able to push it through. We've been able to get it to the people that need it. But I will say that from a salesperson's perspective, there's a bunch of things salespeople do, right? One of which is they go get sales. They talk to customers, get orders, bring in orders. In some cases right now, some of those sales folks are turning into expediters.

Melissa Dailey Fairbanks, Analyst — Raymond James

Oh, okay.

Speaker 4

which is another part of a salesperson's job, right, is to pound on, hey, you got to get this, I need this, got to have this, got to get this. So some of our sales folks are flipping the switch to become an expediter, which says that, you know, things are getting tight, people are getting worried. And we just want to make sure that that cadence of pounding on the supplier is there.

Melissa Dailey Fairbanks, Analyst — Raymond James

Okay. All right. All right. So moving on, that leads into my next question. how does Arrow actually help your customers? Is it the salesperson's responsibility or does Arrow have systems in place to help your customers or also the suppliers navigate some of the trade and tariffs situation?

Speaker 4

You know, the tariffs have been, you know, I don't want to say a non-event, but it's been much less of an event than people think it has been on us. Okay. You know, stuff comes into the US. We pass the tariff on. There's a lot. It's easy for me to say that, okay? It's really easy for me to say that. There's hundreds of people in our inside sales organization that are paddling like crazy under the water to make sure that those tariffs are not an impact on our business. From a revenue standpoint, last year was probably 1% of our tariff was about 1% in our revenue. But there's a whole lot of people working really hard to make it that way.

Melissa Dailey Fairbanks, Analyst — Raymond James

How easily are you able to kind of flex either your warehousing supply or your ability to service your customers from one geography to another? Have you seen a lot of that kind of activity?

Speaker 4

Yeah, we see that a lot. We see that a lot. You know, in Guadalajara is a free trade zone. It's an FDZ for us. So there's been a lot of movement that's gone from some warehouse facilities in the United States down to Guad. We've had to ramp up the employee population in Guad. We had to get them trained. We've had people from other warehouse facilities go down to Guad to help the locals get trained up quickly so that we could meet the demands. we've moved some some shipments out of it from North America to Venlo but yeah there's this it's a it's a chessboard you know maybe Chinese checkerboard would be a better way to say it but this stuff is moving around all the time and we've got an incredibly flexible organization that's dealing with it okay I think it's

Melissa Dailey Fairbanks, Analyst — Raymond James

important to note this is something that you've dealt with through the history of the the company I mean that's 90 years old man yeah get there by not working All right, now we can move on to talk about the value-added services. Because I think that that is an important, obviously, being able to work with your suppliers, working with your customers directly, moving that, like actually moving the components through your system is one thing, but let's talk about how you're adding value to servicing those customers.

Speaker 4

Perfect. So we're more than a distributor, and that's the point that hopefully some of you take away from here today, is that we've had this thing called value-added services. And one of the components of value-added services is what we call supply chain services, in which we actually will go in and manage the supply chain of electronic components for a customer. So think of a large user of electronic components. Think of Volkswagen. They make cars all over the world. They source components from all over the world. They put sub assemblies together from all over the world. We will manage that supply chain for them. And what we end up doing is we have systems in place that people ask me what we're good at. And I say it's we're good at managing complexity because that supply chain to get what you need, what Volkswagen needs when they need it, where they need it is really difficult. we have systems in place to do that and we have been able to it's a fee model it's not a revenue model we don't you won't see revenue on the top line from this but you see a lot of leverage to the OI to the operating income because we get paid a fee to do this and we do this for very large customers we do it for all the hyperscalers and what they're trying to do today with their GPUs moving them all around the world we take that on for them and it might be that we put a warehouse in, okay, in a location that's going to be within earshot of where they're going to build a data center. So we'll do that, and we will manage their movement in and out of electronic components for the build of that data center. And we do this for the largest of large customers. It's not for everybody. It's a sale that gets made at the CEO and CFO level, because what we're doing is we're displacing their internal systems that they're not built to do and we've got systems that are built to do just that so it's part of our core competency competency but not theirs so we take that on and we get paid a we get paid a fee to do that that's one piece of it the other would be demand creation everybody talks about demand creation I know that it's out there you know we have engineers we have a lot of engineers that work with end you end customers that may not have a large engineering organization or the or the expertise within an engineering organization to design a new product so we'll help them do that we have one customer for instance we have a hundred and fifty engineers that work for that customer every day and have been for the last several years helping them design their next iteration of electronic product when we when we design that product product ABC we then register that product ABC with the supplier so that the supplier knows that we're the guys that created it and all of that then flows all of the material then flows through arrow to the end customer okay the other thing that we've done here on demand creation is we've just launched we are launching you'll see it out in the press here in the not-too-distant future will be called digital test drive. The way that our field application engineers work with customers is, I'm a field application engineer, I go to your site and you say I'm trying to build this thing. Okay, great. What is it going to take? In the past, what it took was 10 of these, 12 of those, 14 of these, 17 of these, we'd put them in a box and we'd ship them to the customer. And they would go into their lab and try to make this thing on a workbench, right? In a lab. They'd blow up half the components and ask for more and you know then they'd get a they'd have a field you know application engineer come in and help them refine that well what we've done with that now is we've put that into a virtual model not only for design but for test so they can actually virtually test that device online and have an FAE work remotely with them so that they can actually build out that product. No more hardware gets exchanged, no more stuff gets broken or blown up in the shop, and it speeds the design of that product and gets it to the market a whole lot quicker than it did in the past. So we're just rolling that out. It's called Digital Test Drive, and it's going to be out in the next several weeks. You'll see it. Fantastic. And then the last item, I know I'm going long-winded here. No, please. Is our integration services, what we call intelligent solutions. And we actually build, think of this as building high mix, low volume appliances for a customer. You know, a specific type of rack, storage rack, a specific type of compute rack. Well, they only want 72 of them. Well, you're not going to get a flex or somebody else to do that. So we take that on. And not only do we build out the hardware side of it, But we'll integrate the software into it and completely test it for whatever their test criteria is, 72 hours, you know, 114 hours, whatever it happens to be. We will do that testing in our facility for them. And that's been a really quickly growing piece of our business. And we're, you know, the business unit that leads this thing up is looking for more space. They're looking for more, you know, more test capacity. More megawatts are required in the facility, so it's really a neat thing. And just a real quick, what are these things? We did a job for Philips Medical where we built these appliances, which is actually a very, very high-resolution camera that gets taken into operating suites so that there can be five doctors three states away or four states away watching the surgery and advising the operating team on what to do next so it's a really kind of cool stuff that we do I think it's

Melissa Dailey Fairbanks, Analyst — Raymond James

safe to assume that's probably margin accretive that would be margin accretive more of those more of those all of the value-added services have you ever quantified how much you know you mentioned some of the like the supply chain services you don't see that on the revenue line but it does flow through to the oi have you ever quantified how big collectively those value-added services are so just from a

Speaker 4

you know a needle perspective we've moved our valid the contribution to income from value-added services from 20 to 30 percent in the last couple years wow and if you think about the what the margin level is because everybody asks that question well how much margin are these things you know it's somewhere in the range of 2x or greater than what our gross profits would be on the normal side of the business excellent so that's why we're pushing on it yeah because it

Melissa Dailey Fairbanks, Analyst — Raymond James

makes sense for sure for sure um i think we do need to actually move on to ecs and talk a little bit about the ecs business i think uh you know that's an area where i get a lot of questions understanding how ecs fits in with the the the global components business but uh it's it's

Speaker 4

complementary it's more it's more so a fit to the overall company of the overall arrow inc so ecs for those that don't know it's it's it's uh we distribute software okay um 25 of what we do is hardware 75 is software but we're dealing you know it's a different animal all together it's not hardware components and things but it's it's counter cyclical to what happens in the semi side or the component side so it helps us stabilize our earnings over the longer term and we really like that business um because it is margin accretive okay it's uh it's got greater margins than those components and it it we do some things in that business that we don't do on the component side of things okay um like for instance one of the one of the new things that we're that we're out in the market with is what we call beyond distribution beyond distribution is where we will work with an infrastructure software provider big guys they don't want to have feet on the street okay they want to they want to take their opex and bring it internal to develop more infrastructure software so they will outsource their commercial arm to us and we've done this with a couple of guys now uh and they do that because we have reach we have capability we have scale in parts of the world that may they may not nor will they want to go hire people to go sell in that part of the world so we take on the direct sales motion um to the market in that area and it's on a it's for a fee we pay them a fixed fee okay uh for the right to do this and they're multi-year contracts and every every dollar we make above that fixed fee we keep oh okay okay okay now it works the flip way too if we don't meet that fee we take it you know as a as a hit we've been successful with this thus far it's several hundred million dollars of of uh billings last year and we're ramping the model up and we see it as a the fellow that runs this piece of the business eric nowak um he's been in this game for a long time he sees this as the

Melissa Dailey Fairbanks, Analyst — Raymond James

next evolution of software distribution okay all right and it does have the ability to kind of like smooth out you know whereas the components business is always going to be highly cyclical yeah and then you get the margin cyclicality right associated with that the ecs business kind of helps to smooth that out a little bit correct okay sorry one thing i'll mention here is because everybody

Speaker 4

you know the questions that we get around this are why we keep reading and all these people talking about AI is going to eat software. Software is going to go away and AI is going to create the next this and that. There's two elements here. There's technology, software, infrastructure, networking, compute, security that your core companies layer in to your organizations. And then there's all the applications. Salesforce, ServiceNow, all the applications. AI is going to start to bite at the applications but we really don't see them biting into the technology or the infrastructure side of software and here's why because what's good what's happening the guys that that develop the infrastructure software the enterprise software they're incorporating AI agents into their platforms mm-hmm okay they're gonna talk to the AI agents that get built into all these applications and they'll communicate okay but as more and more of this takes place more and more of it goes to the cloud so as your companies put more and more in the cloud what do you need you need more storage you need more network you need more compute and you need more security where does that come from it comes from the technology side of software okay not the application side of software so that's why we feel that we're in a good spot because we're on the technology side of the software, not the application side.

Melissa Dailey Fairbanks, Analyst — Raymond James

All right, we are quickly running out of time. It's hard to believe, but I just want to check to see, are there any questions in the audience? Oh, here we go.

Operator

I guess just you kind of characterize versioning fairly broad-based recovery and geographical and geographical. Is there anywhere that you think is still softer than you'd like it to be, or that you don't see necessarily

Melissa Dailey Fairbanks, Analyst — Raymond James

a question about the recovery and if there are any areas of softness i just wanted to yeah um

Speaker 4

yeah these guys might shoot me but i'll tell you no i you know the place that would be the least amount of growth right now but it's still little green shoots is automotive in europe everything else is is really um really starting to track and we call it a gradual recovery it's it's a it's a gradual quickly a quick gradual recovery not saying that

Speaker 3

you talk about the what it will take initiative and the intelligent solution initiative um do you worry that obviously when they're first starting you can provide that value out of service. But as AI gets smarter, are you worried that that could be disintermediated by the companies themselves, as opposed to you doing that for them? As you start to do that some, and that gets loaded into the intelligence, would they really, could you disintermediate yourself?

Speaker 4

Yeah, it's a good question. And the way we think through that is that these appliances that we are building that we're putting together for these companies requires an incredible amount of testing and it's and it's real live physical testing it's not a test that you're going to perform you know with with some ai injected into it it's a physical let it run for the next five days and see what burns up kind of test so i i'm not sure that that we would get disintermediated that way because we've put we've invested in a in a substantial test facility and that test facility is now just it's requiring more and more megawatts to test some of

Melissa Dailey Fairbanks, Analyst — Raymond James

these appliances. I hope I answered your question. We are amazingly out of time Bill I feel like we could sit here and talk for hours. Didn't even get to talk about margins. They're going up. I would ask for closing commentary but I think I know exactly what you would say you do undervalued and we're a goodbye thank you so much for being here guys really appreciate it yeah thanks very much have a good afternoon everyone