ARW earnings call transcript, November 5, 2026

I'd like to welcome everyone to the Arrow Electronics third quarter, 2026 earnings conference call. Joining me on the call today is our Interim Chief Executive Officer, Bill Austin, our Chief Financial Officer, Raj Agrawal, our President of Global Components. Rick Morano, and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans, and projections regarding future financial results, which are based on our business outlooks. Based on our predictions and expectations as of today, our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings. And our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information. or future events. You can access our earnings release at investor.arrow.com along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks. and encourage you to reference these slides during this webcast. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly

comparable GAAP financial measures in the accompanying slide presentation. Following our prepared remarks today, Bill, Raj, Rick, and Eric will be available to take your questions. I'll now hand the call over to our interim CEO, Bill Austin.

and customers. And our leading indicators continue to give us confidence in the durability of demand and the sustainability of growth. Book to bill ratios remain well above parity while our backlog continues to build. into mid 2027. Improving our visibility. We have also seen lead times gradually extend but remain lower than a pervasive shortage environment. ECS posted a strong quarter exceeding expectations through a combination. of robust customer demand and improved backlog conversion. Demand continues to build across key technology categories including AI, cloud, cybersecurity, and hybrid infrastructure driving healthy growth in our billings and backlog. Turning to slide four, Arrow remains well positioned to deliver long-term growth. We've discussed four pillars of our investment thesis over the past several quarters, and we continue to execute in these areas to further drive, strengthen our business model to solidify our competitive positioning. First, Arrow maintains a strong position across its six large and growing core and markets, industrial, transportation, aerospace and defense, medical, consumer electronics and data centers. Each of these markets is supported by an attractive secular demand trends that continue to create growth opportunities. Second, our differentiated capabilities continue to drive profitable growth. As we expand into higher margin value added services. Third, arrows combination of global components and ECS creates a diversified business model that provides financial flexibility. I'd like to.

Let's spend a moment here on ECS and highlight the progress we have made against our strategy to become the leading aggregator of AI and hybrid cloud solutions for the mid market. Central to this strategy is our. Highly scalable value added model which provides technology suppliers with significant reach while expanding access and capabilities for our channel partners. Arrow scale is especially important because it allows us to connect. The world's leading technology providers with channel partners and end customers as demand continues to grow for AI, cloud, cybersecurity and hybrid infrastructure solutions. The ongoing build out of AI is driving customers to modernize. Their technology environments. Customers are investing in additional compute, storage, networking, and cybersecurity capabilities to support growing data and performance requirements while also expanding. Their use of cloud based solutions. For Arrow, these trends are being driven primarily by mid market and enterprise customers who are increasingly deploying hybrid environments that blend cloud adoption with upgrades. To their on premise infrastructure. As a result, we're seeing healthy demand across the core technologies that underpin AI readiness, digital transformation and long term IT modernization. We're seeing continued validation of our strategy through recognition from some of the industry's most important players, including NetApp, where we were recognized as the North American distributor of the year for 2026 reflecting.

the strength of our partnership and success driving growth across the channel. HPE, where we extended our partnership through the addition of distribution rights for the Juniper product lines across North America and select a Mayo. markets, further enhancing our ability to deliver HPE's full portfolio to channel partners. IBM, where we expanded our longstanding relationship through additional distribution coverage across seven additional countries in EMEA, increasing our reach and scale with this strategic supplier. Oracle, where we were recognized as the Global Cloud Distributor of the Year, reflecting accelerated Oracle. Cloud adoption through partner recruitment, technical enablement and joint go to market initiatives. And finally, IDC, where we were recognized as a cloud platform leader, reflecting Aerosphere's differentiated cloud lifecycle management. Capabilities reinforced by recent Microsoft and AWS Distributor of the Year recognitions. These achievements highlight the strength of ECS's value proposition underpinned by our expanding ecosystem and category. leadership, our deepening strategic supplier relationships, and our growing exposure to high-growth technologies. ECS continues to be uniquely positioned as a critical enabler of technology adoption, and we remain confident. in our ability to drive long-term growth and value creation for this segment in the years ahead. Turning back now to our investment thesis, fourth and finally, our capital allocation priorities remain unchanged. We are focused on maximizing long-term

shareholder value by deploying capital toward opportunities that offer attractive long-term risk-adjusted returns while maintaining our investment-grade rating. Turning to slide five. Our strong third quarter performance reflects the continued momentum and strong operational execution across the business. We remain focused on expanding our portfolio of solutions and capabilities across both global components and ECS. For higher margin value-added services, we are confident these offerings will deepen customer engagement, broaden our market opportunities, and drive sustainable growth. We are equally committed to delivering profitable growth and driving positive opportunities. Operating leverage through disciplined execution and effective financial management. We are encouraged by the strength across our business and are excited about the opportunities ahead as we continue executing our strategy to deliver sustainable long-term shareholder value. I'll turn it over to Raj to discuss our financial performance in more detail.

to. $7.9 billion in the quarter. Above our guidance range and up 8% versus prior quarter. Global Components non-GAAP operating income increased $16 million sequentially to $413 million. Up 4% from the prior quarter. Non-GAAP operating margin declined 20 basis points sequentially to 5.2% and was up 160 basis points versus the prior year. And well ahead of expectations. Our strong results were... ...like continued momentum across the business. Our growth remains broad-based, spanning geographies, end markets, and customer segments. Reinforcing our confidence that demand is being driven by a diverse and healthy set of underlying factors. First, book-to-build ratios remain well above parity. Second, lead times extended further during the quarter, though they remain well below prior peak levels. Third, our backlog continued to build and now extends into the middle. April of 2027, providing us with greater visibility and supporting our view that demand remains durable. Lastly, Interconnect Passive and Electromechanical Components, or IP&E, continues to grow, surpassing $1 billion. in sales for the third consecutive quarter. These leading indicators strengthen our confidence in both the sustainability of current growth trends and the underlying health of the market. Importantly, demand trends remain resilient from a unit volume perspective, demonstrating continued stability and end market consumption. However, pockets of limited capacity are leading to price inflation with certain component categories, most notably memory.

Prices are benefiting both revenue and profit dollars. In addition to product distribution, our value added capabilities remain an important differentiator. Customers continue to leverage our supply chain services, engineering and design and integration services. To navigate an increasingly complex environment. These higher value engagements not only deepen customer relationships, but also contribute meaningfully to profitability and reinforce the strategic role we play across the electronics ecosystem. Taking a closer look at each of the regions. In the Americas, sequential sales growth was broad-based, highlighted the strength in aerospace and defense, industrial, transportation, and computing. In EMEA, the market was underpinned by sequential strength. In aerospace and defense, and networking. And finally, in Asia, sequential growth was driven by industrial, networking, and transportation. Turning to slide eight in our global ECS business. In the third quarter, global ECS sales increased $619 million year over year to $2.8 billion. Above our guidance range, up 29% versus the prior year, or up 30% year over year on a constant currency basis. Total ECS billings were $5.9 billion, up 14% year over year. Third quarter non-GAAP operating income increased $34 million year over year to $99 million, up 53%. From the prior year, non-GAAP operating margin increased 60 basis points year over year to 3.6%. Our third quarter results significantly exceeded expectations, driven by strong demand and our ability to convert a large

percentage of backlog into revenue. Strong execution across the organization combined with product availability and customer readiness enabled us to accelerate backlog conversion and deliver results ahead of expectations. We also made a important progress on two underperforming multi year contracts with one of our beyond distribution partners. We terminated one contract, which we discussed last quarter, as well as successfully restructured another key contract with the same partner. this quarter. The result of both of these actions put the business on a healthier trajectory and has created a stronger foundation for future growth and profitability. We are encouraged by the early results and believe these action. is better align the business with our long-term strategic objectives. Demand trends remain favorable with investments in AI and broader infrastructure modernization continuing to shape technology spending. Consistent with these trends, we delivered year-over-year growth across nearly every major area of strategic focus within the business, including compute solutions, business applications, storage, security, and cloud and hybrid cloud offerings. As organizations continue to modernize their environments and prepare for the next wave of AI-driven adoption, we believe Arrow remains well-positioned to help customers navigate that transition while driving profitable growth across the business.

to the balance sheet on slide 9. networking capital grew sequentially in the third quarter by approximately 900 million dollars ending the quarter at 7.7 billion dollars inventory grew sequentially by one point four billion dollars ending the third quarter at 7.3 billion dollars nearly half of the inventory build was related to data center activity within our arrow intelligence solutions in this offering we're helping to design build and test the compute and storage infrastructure needed to run ai workloads and this value-added service is a margin accretive business for arrow as we continue to experience robust demand we will strategically invest in inventory that is needed to support our customers importantly our investments are driving attractive returns and the financial metrics that we monitor continue to illustrate a healthy business profile non-gap return on working capital increased 10.6 percentage point year-over-year finishing the third quarter at 22.6 percent likewise non-gap return on invested capital increased 7.8 percentage points year-over-year finishing at 15.1 percent working capital as a percent of sales finished the third quarter at approximately 18 percent and our cash conversion finished at 78 days cash flow used for operating activities in the third quarter was 441 million dollars on a year-to-date basis cash flow generated from operating activities was 577 million dollars gross balance sheet debt at the end of the third quarter grew sequentially by 581 million dollars and declined year-over-year by 300

million dollars finishing at 2.8 billion dollars overall our lower debt levels along with increased profitability have improved our adjusted leverage ratio by overturn the past 12 months to 1.9 times which provides us with increased financial flexibility finally we repurchase 93 million dollars in shares in the third quarter now turning to q4 guidance on slide 10 we expect sales for the fourth quarter to be between 11.55 and 12.15 billion dollars representing an increase of 36 percent year-over-year at the midpoint of the range we expect global component sales to be between 8.15 and 8. 5.5 billion dollars representing sequential growth of five percent at the midpoint enterprise competing solutions should benefit from typical fourth quarter seasonality which historically has been the strongest quarter of the year we expect sales to be between 3.4 and three point six billion dollars which is up 22 percent year of year at the midpoint we're estimating a tax rate in the range of 23 to 25 percent and interest expense of approximately fifty million dollars. Our non-GAAP diluted earnings per share is expected to be between seven and seven dollars twenty cents. Details about the impacts of changes in foreign currencies can be found in our earnings release. I'd like to offer some additional color. In global components, the sequential growth in our outlook is expected to be driven primarily by unit volume as the majority of supplier price increases took effect in the third quarter. Overall, the business remains healthy, supported by a more favorable geography.

traffic mix, continued mass market momentum, contributions from value added services, and ongoing leverage from our productivity initiatives. In ECS, we expect hardware to represent a larger portion of revenue in the fourth quarter, which will drive a higher mix of sales. recognized on a gross basis, as we've seen throughout the year. We expect margins on a billing basis to be relatively unchanged from the prior year, demonstrating the resilience of the overall business. Altogether, our focus execution and financial discipline across the business position us to continue to build momentum against our strategic priorities while enhancing operating leverage and supporting long-term earnings growth. With that, I'll now turn the call back over. to Bill for closing remarks.

Your first question comes from the line of Will Stein with Truist Securities. Will, please go ahead.

The Fairbanks with Raymond James. Melissa, please go ahead.

This concludes today's call.