There were two elephants in the room during Arrow Electronics Inc.’s third quarter conference call with analysts: the impact of Avnet Inc.’s sale of its Technology Solutions business to Tech Data Corp. and Texas Instruments Inc.’s decision to pull its component demand-creation sales efforts back in-house.
Although analysts acknowledged that Arrow has no direct control over either event, both have implications for Arrow’s business. Arrow’s sales for Q3, ended in September, increased 4 percent to $5.94 billion from $5.7 billion the prior year. Net income of $118 million was up from $109 million in Q3 2015; and global component sales of $3.9 billion grew 6 percent over the prior-year period.
Arrow is now the only electronic component distributor with a significant presence in the enterprise and computing market. In September, Arrow’s nearest competitor, Avnet, sold its computing solutions business to Tech Data.
“There have been a number of changes that have taken place in the market relative to our competitors,” said Arrow chairman and CEO Mike Long. Arrow has seen an uptick in computer and software sales to the federal market, Long said, attributable in part to Avnet but also the U.S. government’s fiscal year, which begins in October. This year the government spent more money earlier in the year than usual, executives said.
“We’ve also seen a lot of [value-added resellers] coming in here,” Long added, “and that’s a pleasant outcome of the competitive changes we have seen.” Arrow’s Q3 global enterprise computing solutions sales of $2.03 billion grew 1 percent year over year.
Arrow executives were quick to point out that several long-term strategies are also paying off for the global distributor. “We are starting to see a blurring of the lines [between component sales and the enterprise],” Long said. “With the recent announcement by Broadcom and Brocade, we are seeing semiconductor companies moving into the data center. As we remain the only true distributor that can offer solutions from ‘sensors to the sunset’, that consolidation is working well with our line card and our ability to service customers. We have been employing these strategies all along and the shifts within the industry has moved them ahead faster.” In addition to component and computer sales and services, Arrow provides electronics reclamation and recycling services.
Long also noted that Arrow has invested significantly in engineering talent to assist customers. Some component suppliers offer distributors incentives to get their products specced into a customer design. One of those suppliers, Texas Instruments, is discontinuing its demand-creation program with the channel.
“Texas Instruments’ position isn’t new and we’ve been working with them for an extended period of time,” said Andy King, president of Arrow Global Components. “We are building supply chain models that will support [TI] customers. We have also been focusing our engineering efforts on other technologies that will attract growth and we have been investing in those for some time. On the design-win side of the equation we are getting payback and we think that is the right path.” Arrow’s design-registration growth during the third quarter was in the single digits, the company reported.
“Many semiconductor suppliers don’t have a large salesforce so they rely on us to reach a wide base of customers,” Long added. “TI is one company that has a lot of salespeople so their strategy is to do [design wins] themselves. We will build a supply chain around that business but with the engineers we have hired every one of them has been put to use and have moved to new suppliers. Some of our suppliers have asked us to increase or double down on them and design registrations are up 3 percent in spite of the TI activity.”
Design registration programs yield a higher profit margin for distributors which are facing margin pressure in both components and computing. Tech Data, which sells computer hardware in high volumes, may put pressure on Arrow’s systems sales. Component margins have been declining for both suppliers and distributors, so suppliers are hanging on to margin points by doing design work themselves. Arrow has increased its sales efforts in software sales, executives said, which has helped offset hardware margins. Arrow’s components business has been focusing on small and midsized OEM customers, which King says is yielding results particularly in the Asia-Pacific region.
Arrow’s Americas components sales in Q3 were flat year over year. Asia-Pacific components sales grew 16 percent year over year and Europe components sales grew 2 percent year over year. Arrow expects Q4 sales will be between $6.3 billion and $6.7 billion, with global components sales between $3.7 billion and $3.9 billion, and global enterprise computing solutions sales between $2.6 billion and $2.8 billion, according to Chris Stansbury, senior vice president and chief financial officer. Based on certain assumptions, full-year 2016 sales would total approximately $23.88 billion and would grow 3 percent compared to full-year 2015.