Earnings Call Transcript - ARW Q4 2020

Steve O’Brien, Vice President, Investor Relations

Thanks, Denise. Good day, and welcome to Arrow Electronics fourth quarter and year-end 2020 earnings conference call. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Sean Kerins, Chief Operating Officer; and Chris Stansbury, Senior Vice President and Chief Financial Officer. During this call, we will make forward-looking statements, including statements about our business outlook, strategies and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements. As a reminder, some of the figures we will discuss on today’s call are non-GAAP. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation and a replay of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. I will now hand the call to our Chairman, President and CEO, Mike Long.

Mike Long, Chairman, President and CEO

Thanks, Steve, and thank you all for joining us today. When I spoke to you in late April 2020, after our first quarter, there was much uncertainty about what the upcoming months would bring. It’s remarkable to be here now discussing record quarterly sales and earnings in the fourth quarter. Additionally, in 2020, we achieved record operating cash flow, significantly reduced debt, and returned a record amount of cash to shareholders for the year, showcasing our strengths. We also managed to transition almost 15,000 employees from office work to remote work in a very short time, which reflects the hard work and commitment of our team. Our customers have a choice every day, and we are proud that they continue to choose Arrow. They trust our engineering, design, and supply chain services to ensure their products are efficiently manufactured and well-received. Our suppliers are essential to our success, and they also choose Arrow to sell, market, and integrate their components into some of the most innovative products in the market. Our reputation is strong, and our consistency stems from prioritizing our people. I want to thank our team again for their dedication to delivering for our customers and advancing technology during a challenging year. Even though we faced some ongoing obstacles, we observed significant device upgrades followed by robust sales. The foundation of our business has never been stronger. While the business environment in our industry is ever-changing, we cautiously anticipate growth in demand in the Americas and Europe. Customers are increasing production across various industries, and the inventory corrections that happened before the pandemic lead to some components being in short supply. Orders and backlog have risen in all regions. Our Americas customer survey indicated a rise in customers facing inventory shortages and a decline in those with excess inventory. Moving to our enterprise computing solutions business, we're happy to report year-over-year growth in operating income. This growth is the most accurate measure of performance for this segment, and our operating margin reached its highest point since the fourth quarter of 2017. While we are satisfied with our Enterprise Computing Solutions performance, we believe there is significant room for further improvement in 2021. The markets we serve are still facing challenges due to lockdowns and ongoing restrictions on in-person work. At the same time, widespread remote work policies continue to drive demand for security and cloud solutions. Historically, we have seen major upgrades followed by increased infrastructure spending. We anticipate further benefits to enterprise computing from a recovery among VARs and MSP customers who cater to industries heavily impacted by the pandemic. Customers in hospitality, retail, restaurants, and healthcare have struggled with on-site work limitations. We find value in complexity and by assisting these customers in designing and selling secure multi-site hybrid cloud data solutions, we expect to see improved volumes and profits in our business in 2021. Before concluding, I want to mention our longstanding commitment to nurturing business leaders and proactive succession planning. We recently appointed Sean Kerins as Arrow's new Chief Operating Officer. Since 2007, Sean has been a valued member of our team, and his leadership and proven success at Arrow make him the perfect fit to drive innovation across our global sales, marketing, and operations. We are confident in his ability to help Arrow leverage opportunities arising from the convergence of semiconductor and electronic component industries with information and operational technology sectors. Now, I will turn the call over to Chris to go over our fourth quarter results and our expectations for the first quarter.

Chris Stansbury, Senior Vice President and Chief Financial Officer

Thanks, Mike. Fourth quarter sales were $8.45 billion. Sales increased 13% year-over-year on a non-GAAP basis. The average euro-dollar exchange rate for the quarter was $1.19 to €1 compared to the rate of $1.16 we’ve used for forecasting. Strengthening of the euro relative to the dollar boosted sales by approximately $50 million compared to what we had anticipated in our prior guidance. Global component sales were $5.92 billion. Sales were above the high end of our prior guidance, and we saw improving demand across regions and most industries. Global components non-GAAP operating margin was 4%, up 40 basis points year-over-year. This improvement was mainly due to greater operating expense efficiency in all regions as we leveraged higher sales volumes. We continue to see substantial opportunity for further operating income leverage as all regions can capture an improving mix of higher value component sales and as the Americas and Europe regions continue to recover. Enterprise computing solutions sales of $2.53 billion were above the midpoint of our prior expected range. Fourth quarter billings increased year-over-year adjusted for changes in foreign currencies, and we experienced growth in infrastructure software across the portfolio, security, storage and industry-standard servers. Global enterprise computing solutions non-GAAP operating income margin increased by 30 basis points year-over-year to 6.3%, the highest level since 2017. Returning to consolidated results for the quarter, the effective tax rate was below our expectations due to timing of certain discrete items. For the full year 2020, our effective tax rate was near the low end of our long-term range of 23% to 25%. We continue to see 23% to 25% as our appropriate target range going forward. Non-GAAP diluted earnings per share were $3.17, $0.44 above the high end of our prior expectation. Approximately $0.04 of the upside to prior guidance was attributable to more favorable exchange rates. Turning to the balance sheet and cash flow. Operating cash flow was $200 million, despite substantially stronger demand than we anticipated. Our cash cycle improved by two days compared to the third quarter and 11 days compared to last year. This improvement significantly aided cash flow generation in the face of working capital demand. Inventory days were at the lowest level since the fourth quarter of 2015. Ending 2020, debt decreased by $715 million compared to 2019. Leverage, as measured by debt-to-EBITDA, was at the lowest level in over five years. We returned approximately $100 million to shareholders during the fourth quarter through our share repurchase plan. The remaining authorization under our existing plan is approximately $463 million. Please keep in mind that the information I’ve shared during this call is a high-level summary of our financial results. For more detail regarding the business segment results, please refer to the CFO commentary published on our website this morning. Now, turning to guidance. Midpoint sales and EPS guidance will be all-time first quarter records. The diversity of the products we sell and the customers and industries we serve helps provide stability for our business as a whole. Our guidance reflects continued improvement in both global components and the global enterprise computing solutions operating margins on a year-over-year basis. Finally, as we discussed last quarter, please note the CFO commentary includes information on our fiscal calendar closing date for 2021. In 2021, the first, second and third quarters closed on April 3rd, July 3rd, and October 2nd, respectively, unlike in 2020, where they closed on March 28, June 27, and September 26. These closing dates have a much greater impact on enterprise computing solutions and on global components, and full year comparisons are not affected as fiscal ‘21 ends on December 31st, as always. With that, I’ll turn the call over to the operator for Q&A.

Operator, Operator

Your first question comes from Toshiya Hari with Goldman Sachs & Company.

Toshiya Hari, Analyst

Hi. Good afternoon, and thank you so much for taking the question. Congrats on the very strong results. My first one, I wanted to ask about the shortage situation. Can you sort of describe how broad and how intense, if you will, the shortage is today, the delta between demand and supply? And based on what you’re hearing from, I guess, both your suppliers on the supply side as well as demand from your customers, at what point in the year would you expect supply to catch up to demand? Thank you.

Mike Long, Chairman, President and CEO

Yes. So, the first thing is, I will disconnect sort of automotive from my comments, because a lot of the shortages you’re hearing about are automotive, and they’re specialty type parts, and they’re not things that people in our business typically are in the middle of. So, when you take that out, yes, we still do automotive business, but it typically runs in the sort of Tier 3 accounts, Tier 1 accounts, those types of things. What I would tell you is, overall, yes, we’re seeing some shortages. I believe at this point, it’s a little overblown. It’s probably a good time to talk about the book-to-bill too, because we have seen an increase in book-to-bill. And what I mean by that is, customers are placing their orders out longer than they have in the past. So, we’re getting more visibility past 90 days. Our percentage of backlog within the quarter sales has not increased. So, it would suggest that it’s really not double ordering, but customers are giving us a longer-term view, so we can in turn share that with suppliers and help them forecast their manufacturing as things go out. We’re also seeing suppliers asking us to give them greater visibility. And I believe the market is reacting well to that. And that can minimize a lot of the problems that are being talked about out there. Short term, we don’t see too many restrictions right now on our shipments for the first quarter. There’s always going to be a couple of parts that are hard to get, but we don’t expect that there’s going to be widespread shutdowns or anything like that. So, hopefully, that helps your question and gives you a little perspective on it.

Toshiya Hari, Analyst

Yes, it does. Thanks very much for the context. And then, as my follow-up, just on the profitability of the business, you guys did a great job improving margins in the December quarter. As you look out into, I guess, the middle part of ‘21 and the back half of ‘21, outside of regional mix normalizing, i.e., I guess, the U.S. and Europe recovering, what are some of the levers that you can pull to improve margins in your business? Thank you.

Mike Long, Chairman, President and CEO

I believe you can already observe some of the margin improvements that we've achieved. We are becoming more efficient in our business regarding our cost of sales and margin, despite the investments we have made in managing components and our manufacturing facilities. Much of that work is either completed or nearing completion, so we are experiencing benefits. However, we need to address the more significant issue at hand. North America has been quite stagnant, remaining flat for the past few years. This scenario holds us back from focusing on growing this economy. Europe appears to be progressing slightly better than North America in terms of growth. Nevertheless, the North American economy is crucial. Improvements there will lead to increased volumes, enabling our North American infrastructure to operate more efficiently.

Operator, Operator

Your next question comes from Steven Fox with Fox Advisors.

Steven Fox, Analyst

For the first question, Chris, I was just wondering, last quarter, you talked about continuing to generate cash flows while you’re growing over 10%. You obviously just did that. But then, you guys mentioned that inventories are now at levels you haven’t seen since 2015, and customers are placing longer extended orders. So, can you just sort of talk to the level of your confidence to continue to do that as supply chain dynamics seem to have changed a lot in the last 90 days? And then, I have a follow-up.

Chris Stansbury, Senior Vice President and Chief Financial Officer

Yes. Really, we’re super pleased with the cash generation of the business over the last 12 and 24 months, record cash flow in 2020 and $2.2 billion over the last two years. So, that’s clearly a focus of ours, Steve, and that will remain. In the near term, I think that’s a little more challenging in the very short run as we obviously look to build working capital to support the growth. But, we’ll do that diligently. As I look forward, though, I don’t think anything really changes. We’ll be very focused on generating cash flow over the course of 2021. And, I think the cash conversion cycle that we’ve got now is the right target for us over time. It will move around from quarter to quarter. But, we like where we are, and we’re going to do our best to maintain that.

Steven Fox, Analyst

Thanks for that. That’s helpful. And then, Mike, just as a follow-up. In your prepared remarks, you mentioned that you’re cautiously optimistic about demand returning to growth in the Americas and Europe. Can you give us some examples of maybe what’s behind that, either customer conversations or different industries that you’re hopeful about? And whether that is going to result in a meaningful shift in some of your sales mix on the component side from Asia, over the next couple of quarters? That would be helpful. Thank you.

Mike Long, Chairman, President and CEO

I think the first thing that gives me that optimism, not only for the Americas but for EMEA too, would be the growth in design wins. So, we’ve seen some pretty good growth in design wins in North America, up around the 15%, 16% range, and we’ve seen just under 10% in Europe. So, as we’re seeing the design wins grow, that’s usually a good indicator about business coming down the pipe within the next six months or so that should be an increase of what we’ve seen in the past. I think my opinion on tariffs is that I think they’ve been holding us back quite a bit. I think the whole plan backfired and put the burden on American companies to pay the tariffs. So, I haven’t seen anything lifting those, but the demand is there and there’s still business out there. And, I think people are figuring out how to maneuver around that. We’ve seen some uptick in aerospace and defense. We’ve seen some uptick in consumer. And surprisingly, we’re seeing a little life in industrial manufacturing at this point. So, when you put those together, I would say the conditions are in pretty good shape for things to come back. But that’s where the sort of cautious optimism comes in for me as to whether our politicians will work together on the economy to make it better? And if they do, I don’t see any reason it couldn’t be better. But I sort of duck early and say what’s the next curve ball coming. So, that’s where I stand on that one Steve.

Operator, Operator

Your next question comes from Nikolay Todorov with Longbow Research.

Nikolay Todorov, Analyst

Yes. Thanks, and congrats guys on the great execution. Mike, can you remind us about the operating profit margin delta to your Asia component business? It seems like you guys have done great progress there and driven by scale. But as you look forward, can you talk about where you see that delta between the Asia component business in North America and Europe eventually getting in the medium-term future?

Mike Long, Chairman, President and CEO

Yes. I mean, I think, while I won’t give you the numbers specifically, I think there’s a couple of things that you can just deduce by how things are operating. North America and Europe have had a little bit of negative operating margin reduction just in size and scale. That’s what happens when the economy shrinks and Asia has improved. Asia has improved more than they have reduced, which is good, which is why you see the leverage you do. And we’re really confident that that’s a good thing because we’re really sitting here doing the math. And if those two take off and end up with their rightful sort of mix inside the Company, we’re going to be right back where we think we need to be. So, we do have a view. We do have a line of sight. The real question that we have for ourselves is, how fast can we get North America and Europe back up, either through share gains or through general economy gains? And that’s really the conditions that need to exist.

Nikolay Todorov, Analyst

Okay, great. And then, as a follow-up on the components side, can you talk about the pricing environment that you see? I think maybe you can do the same and exclude the auto side and talk about what are you seeing, and what is your ability to pass through those? And as you think about that, I think last quarter, you mentioned that you expect to see the component business start approaching the prior levels of high 4% or low 5% operating profit. Do you still believe you can do that in 2021?

Mike Long, Chairman, President and CEO

Yes. We believe we can get there in 2021. Obviously, the economy is going to depend on can we consistently be there? But we actually believe we can be there. That’s not an issue in terms of the Company. In terms of the pricing environment, more and more suppliers are raising prices. We won’t hesitate to raise those prices, we have to. We don’t have enough margin to absorb price increases like that. And the suppliers are doing two things. They’re requiring that they see a better visibility of your product. They’re demanding a firmer schedule. And the ones that are really fabless are doing price increases first. So, we are seeing it. I expect it to continue through the first half of the year. It’s the nature of the business. There hasn’t been a price increase in a long time. So, this is really something new. But nobody is going to be immune from it, just a comment. Yes. Sean, why don’t you go ahead and take that one.

Sean Kerins, Chief Operating Officer

Yes, sure thing. And you kind of read it right, we have been intentionally driving a mix shift to things like cloud, software and services, the kind of things that we typically treat through agency accounting. And so, while sometimes that creates a little bit of a headwind for reported sales, it’s very favorable for gross and operating margins. And we’re going to stay that course. We think there’s a good future in it. In terms of the outlook going forward, by no means is hardware disappearing. It sort of ebbs and flows a little bit. But if you look at our overall mix, just on a volume basis, hardware is still roughly a third of the total. In fact, we saw our storage business growing a little bit year-on-year for the full year in 2020. And that tells me that there’s still a big on-premise business that we’ll benefit from in the future. I believe you can’t sweat IT assets forever. We do need a broader market to come back and data centers to reopen, but that will be ultimately a good thing when it does happen.

Operator, Operator

And your next question comes from Adam Tindle with Raymond James.

Adam Tindle, Analyst

Mike, I just wanted to start on the component trends and how global demand is above supply right now. You talked about seeing some supplier price increases and inflation is potentially becoming a theme. I just wanted you to revisit that idea and cover how inflation impacts component distributors historically, and what could be different this time during this cycle? I’d imagine that there’s a benefit to gross margin, and that’s been in decline for a number of years, but could eventually turn around here with some inflation help in Western regions coming back so that you can maybe double-click on that point.

Mike Long, Chairman, President and CEO

Yes. I think, first off, the pricing decline has largely been across the board with efficiencies. Efficiency has largely outrun the pricing declines, and that’s just sort of a basic in a lot of economics, right? The efficiency eventually does get to the market, and that’s what you’ve certainly seen in our business over the years. I would expect that to slow. And clearly in times of inflation, you’re going to see that slow, but it’s going to depend on how the inflation hits the raw materials part of the industry. But then, you have one more thing, right? You used to have most semiconductor companies who got their own fabs, and they didn’t have a third party running the fabs. Now, they have third parties running the fab. The fabs are needing to make more money too. So, that’s just another sort of curve ball in the equation. And I think, largely, manufacturers have looked at that. They’ve sort of priced that in right now to what they’re looking for. And you’re starting to see it go to the market. The inflation is going to hit the end-use products first before it hits the manufacturing products. So, I think that will be a delayed reaction if it happens. I still think there is a question as to whether or not that will happen? But the price increases are coming now. And I largely think we’ll have that price in by midyear in 2021.

Adam Tindle, Analyst

Got it. That’s helpful. And just one follow-up for Sean. First of all, congrats on the new role. And I just wanted to ask you a strategic question on ECS. You’ve had some changes at the competitor level, one splitting their business and another changing from Chinese ownership to now a new PE firm ownership. And each of those competitors seems determined to continue to consolidate and get bigger in that entity. I’d just be curious your kind of long-term strategic view and the moves that you can make in ECS to perhaps consolidate as well, or does it make sense to kind of stay where you’re at? What does the chessboard look like in three to five years, let’s call it?

Sean Kerins, Chief Operating Officer

Thank you for the congratulations, I truly appreciate it. I’m aware that some of our competitors have changed their capital or finance structures. As for how this impacts their go-to-market strategies, whether public or private, it might be more appropriate for them to comment on that. We hold our competitors in high regard, but we plan to continue focusing on the promising market for hybrid and multi-cloud solutions. Our aim is to remain in the more complex sector of the IT landscape, which we believe will differentiate us. Regarding overall industry consolidation, we consistently monitor markets and players that could provide us with value-based returns, and I will ensure we keep exploring those options. However, we are committed to our niche in the more complex enterprise IT environment for now. Our focus in the near term is to remain there, although we recognize that our competitive strategies may evolve. Consider the investments we will make in our cloud go-to-market efforts, among other initiatives.

Mike Long, Chairman, President and CEO

This is Mike. I’ll add one thing to that. We now have overlap between our computer business and our core components business in the range of $1 billion to $1.5 billion of customers. So, we’ve seen that consolidation, or not the consolidation, but that sort of movement together over the last couple of years. We knew it was coming, and we knew there was a gap there, but we’re starting to see that now with really a big trend in the OEM computing business to start doing these specialized appliances that we had talked about, and from the design to the supply to the chip to the build of those. And we’re now seeing that through not only our contract manufacturer customers but ourselves and also in the designs that are coming in. So, that does give us a synergy that these two businesses working together are playing better in our sandbox, and you can see that from the efficiency numbers in here. So, yes, we don’t have any intentions of splitting anything, selling anything off, or changing our strategy. We believe we have a good strategy. We believe it’s served us well so far. And there’s no desire to change that.

Operator, Operator

Your next question comes from Tim Yang with Citi.

Tim Yang, Analyst

Back in 2017 and 2018, there were component shortages and you benefited from that. But in 2019, you experienced some headwinds due to destocking. What have you learned from that experience? And what are you doing differently in this cycle to protect the potential destocking risk after this shortage?

Sean Kerins, Chief Operating Officer

Yes. I think, in the past, you would see that book-to-bill, panicked everybody that there was double ordering and they would talk themselves into it. We’ve spent a lot of time just going around with our customers asking for better visibility in their products and product flow, as being the best way to help them. And that keeps them from sort of doubling up on their current orders asking for all of it at once. Because the truth is they’re not going to get as they never were in a shortage before. But, this certainly helps us have orders that now coincide with the lead times that are out there from the suppliers. And that will help with a better flow and hopefully keep inventories at a level that we don’t have a big crash at the end of this, which is something that you guys have seen before, not recently, because we haven’t had a shortage level like this for some time, almost 10 years or something. But I think the way we’re handling this, we’re planning on it being a smoother ending than the rough ending that we typically expect in a downturn. So, we’ll see how much we’ve learned if the visibility helps solve it, but I believe it’s going to.

Tim Yang, Analyst

Got it. That’s very helpful. As a follow-up on ECS, I think American ECS revenue was down 10% year-over-year. And I think that’s consistent with the previous two quarters. Can you maybe just talk about what you’re seeing in the end markets? And we have heard some SMB demand recovery, but it seems like that’s not quite reflected in your ECS segment?

Sean Kerins, Chief Operating Officer

Yes, sure. So, just in terms of some of the market and technology trends that we saw in Q4, and this is generally true for all of our regions. But, I think we’re still seeing some benefit from the remote work initiative, if you will, still has some legs. And that benefits multiple pieces of our technology portfolio. I think right now, all things cloud and cybersecurity remain in good demand. And the good news is, we’ve got good exposure to both of those technology sets. And then, I think you heard Mike talk a little bit in his opening remarks, there is a reality where you can’t get inside all the data centers yet. And so, that tends to slow work that needs to be done on-premise with existing application environments. I think we saw a little bit of improvement in that regard in Q4. And again, depending on when the broader market comes back, we should see more of that over time.

Operator, Operator

Your next question comes from Matt Sheerin with Stifel. Your line is open.

Matt Sheerin, Analyst

Yes. Thank you, and hello, everyone. The question, Mike, regarding your Asia component business which as you said, was up a very strong 50-plus percent year-on-year. How much of that was from underlying business versus share gains and specifically where the TI? And could you comment on how that transition has been going? And are you seeing opportunities for cross-selling additional semiconductors and other components into that customer base that you may not have been serving previously?

Mike Long, Chairman, President and CEO

Anytime we acquire a new customer, it presents a new opportunity. Overall, we have observed an increase in sales of other components in the Asia Pacific region. This was anticipated, especially with some of the transfer business that has been mentioned previously. Asia was among the first regions to recover from COVID and is beginning to rebound. Europe is following closely as the next region to recover, and we are starting to see progress there ahead of North America. We hope that as North America starts to recover to pre-COVID levels, we will see the growth we have all been expecting. The economies are reopening at different times, and I believe that has an impact. I fully expect Asia to continue its growth; we have been adding many salespeople in that region, which aligns with that growth. Our strategy in Asia remains unchanged, and we believe we are effectively executing our plans there, as well as in Europe and North America. Currently, the main challenge we face is in North America, and we are concentrating our efforts there to determine how we can accelerate growth in that market. We are committed to finding solutions.

Matt Sheerin, Analyst

Okay. Thanks for that. And just related to that, given the outsized exposure to Asia now, your gross margins have been trending down year-on-year. I mean, Chris, what should we be thinking about gross margin, particularly? I mean, you’ve got some improvements in North America and Europe, but the Asia business is still growing pretty fast here. So, how should we be modeling down gross margin?

Chris Stansbury, Senior Vice President and Chief Financial Officer

Yes. I mean, I think as we look forward, we’ll continue to see improvement as EMEA and Americas come out of COVID, as Mike said. I think the other thing you’ll see obviously is operating leverage. And, we have talked in the past about continued growth in our value-added services and offerings that we can bring customers that ultimately help drive that. And I think you’ll see them in that worth. So, in terms of kind of predicting that over the course of the year, tough to do. But I fully expect that as we exit 2021, you’re going to see stronger margins than we exited 2020 with, as a result of all of those things. So, that’s a high level how I think about it. And in the near term, we’re focused on driving the operating leverage as the mix improves.

Operator, Operator

Your next question comes from Ruplu Bhattacharya with Bank of America.

Ruplu Bhattacharya, Analyst

I have two questions for Chris. The first is about ECS margins. The fourth quarter is usually strong, and this quarter, we are at 6.3%. Can you explain the 190 basis points sequential improvement? How much of that was due to higher volumes, how much was from foreign exchange, and how much was from the mix? Also, looking ahead to the first quarter, last year there was a significant decline from the fourth to the first quarter. Given that the business mix in ECS is shifting toward higher software and services, what kind of decline should we anticipate sequentially in ECS margins?

Chris Stansbury, Senior Vice President and Chief Financial Officer

So, Ruplu, if you look at Q4, the main factor was the mix, as Sean mentioned earlier. With the shift towards our software and services portfolio, which are higher margin, this impacts sales growth significantly. We’ve discussed this before due to the gross to net accounting involved, but it definitely enhances margins. Looking ahead to Q1, we anticipate year-over-year margin expansion, and we expect this positive trend to continue. The trends in product mix within that business are very favorable. Additionally, as Sean highlighted earlier, our emphasis on hybrid and multi-cloud environments is a significant contributor to this progress, and we expect that to persist.

Ruplu Bhattacharya, Analyst

I understand. For my second question, I wanted to explore more about the comments regarding the quarter closing dates. Does this mean that we can expect stronger performance in the first quarter and somewhat weaker performance in the fourth quarter due to one less week in the fourth and one additional week in the first? If that’s the case, what kind of dollar impact should we anticipate?

Chris Stansbury, Senior Vice President and Chief Financial Officer

Yes. When examining the effects of the calendar change year-over-year, it positively impacts our view on EPS since much of the business depends on the calendar quarter-end. In the first quarter, we gained an extra calendar quarter end. Last year, the fourth quarter was particularly strong. Consequently, I anticipate a shift from Q1 to Q4 year-on-year, with Q1 being relatively stronger while Q4 experiences a decrease.

Operator, Operator

Your next question comes from Joe Quatrochi with Wells Fargo.

Joe Quatrochi, Analyst

On component shortages, it seems more like that this time around, it’s on the ASIC side versus last time it was more about passes and MLCCs. Mike, I’m just curious, how do you think about the supply side ability to catch up this time? And, how do you think about that from your approach, do you approach that any differently?

Mike Long, Chairman, President and CEO

Well, basically, look at the sales for the fourth quarter of everybody that was out there. It was largely a good quarter, right? So, not a surprise that you’re seeing some shortages given the uptick. It’s typically been kind of a 10%, if you want to put a number on it when the business goes up, before you start seeing some shortfalls out there. And that’s just a given of the supply chain, but the supply chain has increased. It still looks as though there’s more increasing coming on, if I can say that, after COVID, things are looking up, as we said, in Europe already. So, we’re hoping North America does the same. And the trick there is visibility. How much visibility can we give the manufacturers of what we really need during the quarter? So, in the past, as I’ve said, our book-to-bill went into the manufacturer, and they would see this big glob of stuff and we’d be active for everything right now. This time is measured. We need X amount in January, we need a certain amount in February, we need a certain amount in March. We’re getting the next quarter. We know April, May, and June, and then we can talk to you about after that. So, the industry has responded well, where we’ve asked for them to place their orders out further. That’s one of the reasons actually that we didn’t publish our book-to-bill without an explanation this quarter because you would see a big book-to-bill, but there is a big portion of that that goes into Q2 and starts to go into Q3. So, my view is, yes, it could be hand to mouth for a little while, but I think things are going to largely make it through the night. And I believe everybody is digging to make that happen, and they will.

Joe Quatrochi, Analyst

That’s helpful. And then, on the ECS side, you recently announced an extension of our partnership with AWS. I was curious if you could talk about that opportunity. And then, maybe can you remind us how big is your cloud business, or maybe what was that from a revenue perspective last year?

Sean Kerins, Chief Operating Officer

Sure. What I can tell you is, we are still growing our overall cloud business and then the recurring revenue piece of it substantially. And I think, I’ll work with Steve and Chris, and at the right time, we’ll be able to get more specific about actual numbers, but we continue to invest in that market trend. And I think we’re lining up to it nicely. As for the cloud portfolio, we continue to add supplier solutions to it. You called out the partnership with AWS. However, we wouldn’t talk specifically about the size of any supplier relationship. We are pleased to now be working with the five largest cloud hyperscalers in the world, and the way that we go to market and the value they see in our channel. That particular relationship to Mike’s earlier point is really going to help us in sort of the IoT or the IT meets OT space we think, over time, given the potential associated with our full portfolio.

Operator, Operator

And your last question comes from William Stein with Truist Securities.

William Stein, Analyst

I’d just like to ask about the decrease in inventory. That was something that was certainly expected, given the comments from many of your suppliers about the shortages and such. What does Arrow see from the perspective of the potential to refill that to improve delivery stats for customers? Is that something you think could get back to more normal levels in a couple of quarters, or do you see that as being sort of at this protracted lower level through the whole year and maybe even longer?

Mike Long, Chairman, President and CEO

I’m not sure it’s a protracted lower level. I think we’re talking about, what, $50 million, $40 million.

Chris Stansbury, Senior Vice President and Chief Financial Officer

It’s relatively flat.

Mike Long, Chairman, President and CEO

It’s essentially stable. We're observing steady inventory levels, and we've just reported a significant figure related to our inventory status. As I mentioned, I anticipate we'll be operating on a more hand-to-mouth basis. We likely will be receiving more shipments each month now compared to the previous few quarters from manufacturers. This requires a careful approach at this stage. I don't foresee this becoming an issue. We've provided a forecast for the first quarter that is largely an improvement compared to the fourth quarter for components, and we believe we can achieve that. We do not consider the inventory level you mentioned as an obstacle to delivering those results. I hope that clarifies your question.

Steve O’Brien, Vice President, Investor Relations

Thanks, everybody, for joining us today. If you have any questions about the call or our earnings materials, feel free to reach out to me. Thanks for your interest in Arrow Electronics. And have a nice day.

Operator, Operator

This concludes today’s conference call. You may now disconnect.