It’s been awhile since global distributors have touted their component fulfillment services in lieu of design. However, with some component lead times extending into Q1 2018, OEMs would be “a little more comfortable” with more inventory, said one channel executive.
“Customers are largely getting what they want,” Mike Long, CEO of global distributor Arrow Electronics Inc., told analysts. “They would like to have a little more inventory – anybody would be comfortable if you have three months' inventories sitting on the shelf. But when you're down to two, you kind of would like to have that extra month.”
Fulfillment activity helped propel Arrow to record sales of $6.47 billion for its second quarter, up 8 percent from the prior year. Adjusted net income reached $100 million, compared with $134 million in 2Q 2016. Foreign currencies and changes in Arrow’s business mix pressured earnings, executives said; still, its global components business increased 16 percent year-over-year to $4.46 billion.
Component sales grew by double digits across all three major regions; Asia sales increased 21 percent year-over-year; Americas sales grew 15 percent and Europe, 16 percent. However, the component group’s operating margin declined 30 basis points year-over-year due to mix of business in all regions. A bigger portion of Arrow's components business is coming from volume fulfillment orders and from Asia, Long told analysts.
Arrow and its nearest competitor Avnet Inc. have increasingly been focusing on securing low-volume engineering orders that may turn into production-level sales. Distributors have an opportunity to reap higher profit margins if they assist in creating demand for suppliers’ components. However, component lead times have stretched significantly, so distribution customers are shoring up their supply.
“Our design win activity is also up year-over-year,” said Long, “just not at the same pace as the overall sales growth. And a lot of that has to do with some of the new customers that have come in around IoT and those things, yet, which are design wins, but just haven't shipped, yet.”
Designs can take as long as 18 months to ramp into production, and not every design win becomes a finished product.
Component demand is expected to remain strong at least into the third quarter, executives said. Arrow’s global components’ Q2 book-to-bill was 1.14 -- well above 1.03 in the second quarter of 2016. “The book-to-bill continues to push on, which would indicate that we're going out with this demand sometime into next year as it looks right now and the backlogs that are starting to firm up for us with days of shipment,” said Long. “So all-in-all, right now there is pretty good balance in the market, but the market continues to be strong.”
Much of Arrow’s growth is coming from deeper commitments with current customers, Long added, “that comes through our solutions sale. We did an investment in engineers and sales people and they're out there generating new accounts. And as those accounts come in, what you're really seeing is they start to come in with the fulfillment business first and then you will start working on the projects with them. So that is the big reason for the share shift."
Arrow expects total Q3 sales will be between $6.325 billion and $6.725 billion, with global components sales between $4.4 billion and $4.6 billion, and global enterprise computing solutions sales between $1.925 billion and $2.125 billion. "We have dramatically changed our go to market with our customers,” Long concluded. “We've changed our go to market for the suppliers, and we're continuing to invest in areas that bring new customers in. So, I would probably suggest that you're going to continue to see [market growth] go for quite some time; and, it's certainly through 2018.”