Semiconductor Units To Exceed 1 Trillion Devices in 2020
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High demand for electronics components is likely to continue through at least the first half of 2018, according to the industry’s largest distributor. Andy King, president of Arrow Electronics Inc.’s global components business, said demand has remained consistent across all geographies and all vertical markets. “It’s not being driven by any one end-market,” King told analysts on Arrow’s Q3 earnings conference call. “It’s very broad based.”
Arrow’s third-quarter 2017 sales reached $6.95 billion, an increase of 17 percent from sales of $5.94 billion in the third quarter of 2016. Third-quarter net income was $135 million, compared with $118 million in the year-ago period. Global components third-quarter sales of $4.86 billion grew 25 percent year over year.
Arrow, like nearest competitor Avnet Inc., interfaces with hundreds of component suppliers and thousands of customers. Arrow CEO Mike Long said more customers are currently reporting that they don’t have enough inventory than during the [post-recession] 2011 to 2015 time frame. “That tells us underlying demand continues to be strong and if there is a slowdown it will be slower than in past years,” Long said.
Arrow is also benefiting from consolidation in the semiconductor industry, particularly from Analog Devices Inc.’s acquisition of Linear Technology. ADI named Arrow its sole global volume distributor after the merger. Arrow global components’ third-quarter operating income grew 21 percent year over year and grew 20 percent year over year excluding amortization of intangibles expense.
“As we expected, we have started to capture leverage on our market share gains as evidenced by our accelerating profit growth,” said Long. However, Arrow, like the rest of the distribution industry, is still feeling a margin squeeze. Texas Instruments eliminated its higher-margin demand creation business with distributors and high-volume sales – the bulk of distribution’s business—command lower margins than engineering-related sales. Long said Arrow is steering more of its customers to its digital platform which lowers the distributor’s SG&A, and he expects to see a lot of design win activity convert to volume production in six to eight months.
Distributors’ ability to increase prices during periods of high demand is limited as suppliers determine price. Long said it’s possible the channel may see price increases if scarcity continues. “I would suggest there are some products, as they become more scarce, will increase in price. I think that’s interesting because there has been good balance between what customers can get versus what they want. I am aware that customers want more inventory than they have – call it just-in-time versus just-in-case. We are looking for anomalies and we have not seen any hard stops in products. Products are still flowing and this day in age customers are pretty well covered.” Widespread order cancellations could signal that customers were double-booking, which could inflate future demand signals.
Arrow’s Q4 sales are forecast to be between $7.2 billion and $7.6 billion, with global components sales between $4.75 billion and $4.95 billion. At the midpoints of its Q4 guidance ranges, Arrow’s full-year 2017 sales would total approximately $26.58 billion, and would grow 12 percent compared to full-year 2016.
“We typically see a seasonal decline in [component demand] in Q4 and we aren’t seeing that decline,” Long added. “There’s more to come on the overall sales line. Over time, with new sales, we will be able to add to design wins and sell more products and raise profit margins back up. We have done that before as we got into the engineering business. I’d suggest we’ll see more in the future and it won’t be changing that much – we expect growth through the first half of next year.”
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