Arrow Electronics, Inc. (ARW) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Arrow Electronics, Inc., Fourth Quarter and Year-end Earnings Conference Call. My name is Patrick, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Greg Hanson, Vice President and Treasurer. Please proceed, sir.

Thank you, Patrick. Good afternoon, and welcome to the Arrow Electronics Fourth Quarter Conference Call. I'm Greg Hanson, Vice President and Treasurer of Arrow. I'll be serving as the moderator on today's call. If you'd like to access today's call via webcast, please visit our Investor Relations website at www.arrow.com/investor and click on the webcast icon. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operations, and Chief Financial Officer; Andy Bryant, President of Global ECS; and Eric Schuck, President of Global Components. By now, you should all have received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website, along with the CFO commentary and the non-GAAP earnings reconciliation for the fourth quarter and full year. Before we get started, I'd like to review Arrow's Safe Harbor statement. Some of the comments made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of the press, you are in a listen-only mode on this call. Please feel free to contact us after today's call with any questions you may have. At this time, I'd like to introduce our Chairman, President and CEO, Mike Long.

Thanks, Greg. And thanks to all of you for taking the time to join us today. We had an excellent fourth quarter, completing a good year in 2013. We executed well on all of our organic strategy initiatives, we executed on M&A that further accelerated our strategy and we drove best-in-class financial performance. And we returned a substantial capital to our shareholders through our buyback program. In the fourth quarter, sales of $6.2 billion were ahead of our guidance and were up 14% over the prior year. Operating income and diluted earnings per share advanced 29% and 31%, respectively, year-over-year. Operating margins were up over last year's fourth quarter in both businesses, and we posted record operating income. Cash generation was again very strong at over $200 million, and return on working capital grew significantly to 31%. We continue to invest in our business and advance what is already one of the most comprehensive set of solutions in the market. Looking at global components. The overall market remains stable, with lead times and cancellation rates operating within normal ranges. Our sales of $3.4 billion were at the high end of expectations, advancing 8% year-over-year with increases in all 3 regions. Book-to-bill at 1.03 was ahead of prior year. Our Americas regions showed steady growth at 3%. Asia continued its strong growth trends, advancing 11% in the core business and 9% overall. The highest-growth region was Europe with sales growth of 10% year-over-year on a constant-currency basis. Gross margins, while holding steady sequentially, were down slightly in the quarter year-over-year. Operating income increased 16% year-over-year, or 2x our growth in sales. For the full year, global components grew modestly. The economic environment in Europe and the Americas tempered our growth. Asia again saw strong growth. Year-over-year sales and operating income trends improved in the back half of the year, and we look forward to continued improvement. Operating margins fell somewhat year-over-year. In enterprise computing solutions, our supplier matrix expansion and terrific execution in the quarter drove our record sales in operating income. Sales advanced, excluding the impact of Computerlinks, 13% year-over-year. Computerlinks added $208 million in revenue in the quarter. And we continue to see excellent growth in storage services and software in both regions. Our server business also saw growth year-over-year. ECS' operating income advanced 30% in the fourth quarter to a record level. Operating margins advanced to 5.6%. For the full year of 2013, again, our supplier matrix expansion and excellent execution drove growth year-over-year. We achieved a 12% increase in sales and a 19% increase in operating income, also improving operating margins to 4.7%. We continue to execute on our strategic transformation towards selling a comprehensive solution with focus on higher-growth, higher-value segments targeted at the data center. Across our business, our productivity initiatives exceeded our target of $75 million, and we chose to invest the excess into expanding our sales and engineering teams. We're pleased with our performance in 2013, as we balanced our initiatives to be more productive with continued investments to accelerate growth in sales in 2014 and beyond. As we look to the first quarter, we expect no meaningful change in the markets we serve, but as we proved once again in 2013, we're able to produce strong results independent of the market environment, and we look forward to continuing this in 2014. Paul will now provide an update on our financial results for the fourth quarter.

Thanks, Mike. Fourth quarter sales of $6.2 billion were up 7%, ahead of the midpoint of our guidance. And adjusted for the impact of acquisitions and changes in foreign currencies, sales advanced 8% year-over-year. Global components sales of $3.4 billion increased 8% year-over-year and were at the upper end of our guidance. In the Americas, sales were up 3% year-over-year. Americas' core sales advanced 2% sequentially, which is in line with traditional seasonality. In Europe, sales in constant currencies increased significantly, advancing 10% year-over-year, with all regions contributing. Sequentially, core sales in Europe decreased 4%, which is in line with traditional seasonality. Sales in Asia were also strong year-over-year, growing 9%, with significant contributions from China. Core sales in Asia Pacific grew 1% sequentially, also in line with traditional seasonality. Sales in our enterprise computing solutions business were $2.7 billion, well ahead of our expectations. As you will recall, our early third-quarter-end cutoff compared to some of our suppliers caused some sales to be pushed into our fourth quarter. In the Americas, sales grew 19% year-over-year and were up 46% sequentially, ahead of our traditional seasonality. The expanding need for computing power, our strong execution and the expansion of our value-added services and product offerings all drove the stronger-than-expected revenue growth. In Europe, sales in constant currencies advanced 23% year-over-year primarily due to the acquisition of Computerlinks. Excluding the impact of Computerlinks, sales advanced 94% sequentially in constant currencies. Our consolidated gross profit margin was 12.8%. Year-over-year, gross margins were down approximately 30 basis points principally due to our substantial growth in ECS and Asia components, and lower by 50 basis points sequentially on a higher mix -- higher seasonal mix of ECS sales. Operating expenses increased 4% year-over-year on an absolute dollar basis. Adjusted for the impact of acquisitions and changes in foreign currency, operating expenses were 90 basis points lower as a percentage of sales, driven by our operating leverage and efficiency initiatives. Operating income was $266 million, a 29% increase over last year's fourth quarter, and that growth is 2x the growth in our sales. Operating margins advanced year-over-year as well, increasing by 50 basis points to 4.3%, the highest level in 8 quarters. Revenue growth, operating leverage and our efficiency initiatives all contributed to the improvement. Global components operating margin of 4.3% increased 30 basis points year-over-year. Global enterprise computing solutions operating margins were 5.6%, also up 30 basis points year-over-year. Net income advanced 23% year-over-year to $172 million. Earnings per share, at $1.71 and $1.69 on a basic and diluted basis, respectively. Diluted earnings per share advanced 31% year-over-year. Cash generation from operating activities in the fourth quarter was a strong $215 million and was $451 million on a trailing 12-month basis. At 113% of our 2013 GAAP net income, our trailing 12-month cash flow once again exceeded our targeted level of 70%. Return on working capital for the fourth quarter was 30.9% and return on invested capital was 12.7%, significantly outpacing our weighted average cost of capital. For the full year 2013, sales increased 5% to $21.4 billion, with growth of 1% in global components and 12% in ECS. Operating income advanced 2% to $823 million. Global components operating income was down 7% year-over-year to $596 million or 4.4% of sales. ECS operating income advanced 19% year-over-year to $367 million as operating margins improved 30 basis points to 4.7%. We purchased $50 million of our stock in the fourth quarter and approximately $350 million in 2013. In the first half of 2013, our excess capital was deployed primarily towards share repurchases, with acquisitions our primary use of our capital in the second half of the year. The authorization remaining under our existing share repurchase program is $150 million. Our capital priorities remain the same: funding organic investments and strategic M&A and returning cash to shareholders, all while maintaining an investment-grade rating over the long term. That's a high-level summary of our results for the fourth quarter and full year 2013. For more detail regarding the business unit results, please refer to the CFO commentary published this morning. Now turning to guidance. We believe that total sales will be between $5.1 billion and $5.5 billion, with global components sales between $3.3 billion and $3.5 billion and global enterprise computing solutions sales between $1.8 billion and $2 billion. We expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.14 to $1.26. Our guidance assumes an average tax rate in the range of 27% to 29%. Average diluted shares outstanding are expected to be at $102 million, and the average U.S. dollar-to-euro exchange rate for the first quarter to be 1.35 to 1.

Thank you, Paul. Patrick, will you open the line for questions at this time?

[Operator Instructions] And our first question comes from the line of Jim Suva with Citi.

My question is regarding there's been a recent amount of news of IBM selling its x86 servers. Can you help us understand how much of your total company's or computing systems is IBM in total, and then the breakdown of how much is -- of it is x86? And how do you see this relationship in transition playing out?

Thanks, Jim. First off, for putting the x86 business that's for sale to Lenovo in perspective, it generates less than 1% of our company's growth profit. And I'm sure you've already seen that the new owners have said that they do not expect any disruption with their VARs or distribution network. And in addition, we do have an expanded relationship with Lenovo around the ITAD business and the EAD business that we have, so we already do, do -- already do have business with them. We don't expect any impact and we don't expect that there'll be any impact in the business going forward. The other one, around the franchising of sort of tucking [ph] Ingram, as you put it, we've really transformed the ECS business over time as these markets have evolved. And we are really not a big-box shipper of product; we're more solution-oriented selling organization. And you can obviously see that by the operating incomes that get generated versus the different category of distributor. The large majority of our sales come from software, services and storage, and you can really see that success of transformation over the last 5 years and what that's done to both our growth and operating margins. I would still say our goal is to be the leader in the data center and to have the proper expertise to do that, and that's what we're doing. So we don't expect any impact from that either. Hopefully, that gets to your question.

Yes, great. And then as a quick follow-up, specifically for 2014, are there any other quarters that end like on an odd weekend or odd date that we should be mindful of as we build out seasonality for 2014 for your company?

Yes, Jim, there is. I'll let Paul highlight it. I'm kind of laughing because this happens to be our year where we have some of that weirdness in the calendar. And I'll let Paul go through it with you.

Right, Jim. For the full year, it all equals out to the same thing. In the first quarter, though, it's out [ph] exactly to your point. We have 1 less shipping day than we had in last year's first quarter. And as you can imagine, because we've transitioned quite a bit of our business to have a greater focus on software, and much of the software business goes out in the last day or 2 of a quarter from the suppliers, that will have a negative impact on our first quarter so that we'll lose a day of shipment. And that could be anywhere from $70 million to $100 million on a gross billing basis. That would mean a contribution margin of 8% to 10%. So you can see why there's some impact in Q1. I think Q2 evens out. And I think we're short again in Q3. And I think we pick up 2 days in Q4. So this kind of funky, we -- even internally, we have to try to remember that as we do our comparisons year-over-year and try to think about how we're managing the business and how we can improve the business.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

I'm hoping you can help us to better understand what's happening with gross margins because gross margins, on a consolidated basis, have come down on a year-over-year basis in 4Q for 2 years in a row. So can you help us think about your gross margins going forward, and if we should think about any stabilization or if you can maybe even improve the gross margins?

Sure, Mark. Thanks for the question. And you're right, when we look at it, 2 years in a row now, we've seen the quarterly trend in the fourth quarter downward in GP. It's kind of interesting in that our success in computing, as an example, where we're driving really great returns and great incremental operating income dollars does come with a lower GP. So mix is changing that. And while we say that, we also have Asia, which is also growing faster than the other 2 businesses. So it's a bit of a mix issue. When I look at it though, each of the last 2 -- fourth quarters of the last 2, 3 years, we've seen both ECS and our Asia Pac business drive operating income percent up. So when I look at it, big drivers absolutely are at the mix level. For sure also we're seeing still some of that carryover of the weakness in our European components business, where the economies are still very fragile, where maybe the "consumer," so our end customer, has a little bit of leverage over us today. But I think that's more situational. And as the world's economies tilt back to being more stable, we'll see improvement. I mean, I kind of look at it also on a consolidated basis. And you look at it, just go back to a couple of years ago, we actually were able to get it to be flat sequentially. We were down a little bit this year, but I look at it as definitely going to go back up. But we also need a little bit more vibrancy in our components business in North America and in Europe.

For my follow-up, I'm hoping you can help to better contextualize the revenue guidance in the components part of your business for the March quarter. You guys have mentioned the book-to-bill was 1.03 in the fourth quarter and that was the best book-to-bill ratio that you've had in a fourth quarter for several years. So can you help me understand the positive book-to-bill? What's the outlook for the components revenue to decline slightly on a quarter-to-quarter basis in the March quarter?

Well, the components business itself, as we're seeing it, is falling largely within seasonality. And the positive book-to-bill helps us to build the backlog, but the shipment schedules that we see, we would call falling within norm. We, right now, are not expecting a big change in the market conditions that we've seen in the near term. There are some signs that things are getting better, but overall, our plan is based off of more of the same market conditions and, as Paul indicated before, 1 day less of sales for the quarter. And all 3 regions are really right in there. I would say North America right now is within or is at the high end of normal seasonality in the components business. Europe, we're expecting it to be actually in line with normal seasonality. And Asia Pac, we're expecting it to be at the low end of normal seasonality's range right now with all the writeups that have been there. But if you add it all up, the expectations are to be right in seasonality.

Your next question comes from the line of Amitabh Passi with UBS.

Mike, just a quick one. On the book-to-bill, the 1.03, was that across all geographies? Could you maybe just overlay that with more specific geographic commentary? And I was wondering if you're actually starting to see Europe accelerate. Or would you again characterize that as relatively stable?

I would call Europe, for us, relatively stable right now. And the book-to-bill of 1.03 in the fourth quarter, that was up over the prior year, as we had indicated. All 3 regions, North America, Europe and Asia, were all above 1. So there was no particular region pulling the other 2 out, but the regions themselves were all above 1.

Got it. And then just for my follow-up, Paul, for you. I think we've now seen restructuring charges about 5 years in a row. Can you just help remind us where we are? Are you anticipating any more charges flowing through the P&L or are you largely done?

Well, look, we always have a continuous process improvement approach to what we're doing in the way we look for efficiencies in our business. It is always a better customer experience and supplier experience if we're simple to do business with. So I think we'll still be going at it as we move forward. We kind of look at it as a pretty good trade. I look at the fact that we were able to this year, as Mike mentioned, generate more than our targeted $75 million on an annual basis. A lot of that did take place in Europe, as an example, which has higher statutory requirements for folks having severance. But the payback is about a year. Looking at it at a high level, the restructuring cost itself was around $80 million, and we got more than $75 million and we're able to reinvest it back in the business. So when I look at it, I look at it a pretty good trade with 1-year payback. So we'll keep at it.

Your next question comes from the line of Matt Sheerin with Stifel. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Just another question on the operating margins as it relates to the component business. You did grow year-over-year. You -- it looks like you're going to be getting into some tougher comps. Particularly, last September, you were closer to 5%. And so as you've got that mix issue, with Asia still doing better than Europe and North America, and short lead times still putting pricing pressure out there, are you still confident that you can get to 5% margins sometime this year in components?

Yes, Matt. We continue to make pretty good progress towards the long-term goal. We feel confident that we'll return this business to the targets. We exited 2013 30 basis points higher than 2012 and fully expect to return to 5% this year. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. That's helpful. And then just this bigger picture, Mike. It looks like we've been -- this components cycle sort of been stuck in this period of equilibrium, a 1:1 book-to-bill for a while, still pricing pressure, lead times still relatively short. What do you think is going to take for the cycle to kick into at least a faster gear, if you will, over the next couple of quarters? Is there really just demand at this point?

Yes, it's kind of funny because you're absolutely right. We haven't seen the lead times extend, as a general rule. We've seen customers get pretty much what they want when they want it. And as you know, we've been through that cycle before. Although, what's kind of interesting now is you're seeing at different times different regions pick up and have a good quarter. And I would say, if you saw 2 regions pick up and start growing a few percentage points more, you'll start to see some stress on the demand. It's really not going to take a lot to stress the demand because there's not a lot of excess capacity out there right now because the manufacturers have been supplying products that have been really equal with the demand they have, so their ability to sort of crank up their factories is not immediate. And just a little good news in the economy or in a couple of regions are going to change things pretty dramatically, I believe.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Two clarifications on ECS, first. How much will Computerlinks contribute to the March quarter? And then secondarily, Paul, based upon that $70 million to $100 million number, my math says it's something around maybe $0.05 of earnings headwind. Just if you could, I guess, see if my math makes sense.

Yes. So going in reverse with your questions. You're right. So this 1-day cutoff could be 4%, 5%, 6% -- $0.06, sorry, not percent, but a negative impact for us year-over-year. So that's in the ballparks, I would agree. We had some seasonality that runs through -- we had 2 months of Computerlinks in Q4. We'll have 3 months. It looks like the revenue on 3 months will be about -- in Q1 will be about flat with the 2 months we had in Q4.

Okay. And then as a follow-up, I noticed the $50 million of share repurchase activity during the fourth quarter. If you could comment on just kind of what your total available liquidity is right now and kind of plans for cash deployment during 2014.

Okay. So yes, Shawn, let me start with our strategy, right? We have a long-term capital structure strategy to be mid-tier investment-grade rated. We believe that organic investments have the highest reward and the lowest risk, we'll continue to do that. As Mike alluded to in his comments, we were able to get our higher targeted savings levels. So we reinvested some of that back in sales and field application engineers. You can't grow sales without more sales people, it's just kind of like one of the laws of nature. So that's what we're investing in. Strategic M&A, so Computerlinks, which we did in the second half of 2013. And we'll continue to look for great opportunities to expand and strengthen us geographically, new product sets and service offerings. And then finally, excess capital will be returned to investors. Right now, our bias is towards our buyback program, which we feel has been very successful. $350 million last year going back to investors is a pretty healthy level of return. So that's kind of how we think of it going forward. We've also mentioned around our target on cash flow was to convert $70 million of operating income. We've exceeded that now for, I think, more or less, 5 years. But that would, based upon whatever model you have, take 70% of that to get you cash flow from operations, and then we have CapEx at about $100 million, give or take. So that gives you an idea of the remaining capital between $300 million and $400 million, if my math's right, at a high level based upon what expectations are or consensus to Q1 from you all out there and in looking for the full year. So somewhere between $300 million and $400 million which we'll look to utilize for further organic investments or strategic M&A; or whatever is excess, return to investors.

Your next question comes from the line of Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay, first question on computing, maybe for Andy. I think the -- your organic growth this quarter was 13%, which is obviously much faster than the overall market and faster than the suppliers that you serve. So you referenced -- or Mike referenced in the prepared remarks the supplier matrix expanding a couple of times. Is there any way to parse out how much of your organic growth is coming from new versus existing suppliers? And when you look at your existing suppliers and the growth with them, are you growing faster than they are across-the-board? Or are there specific areas within your supplier base where you're gaining more share? Then I have a follow-up.

Okay. So Brian, it's Andy. I'll take it in reverse. So when you ask the question about new lines, certainly, a tremendous amount of our organic growth is coming from the recruitment of new vendors who are attracted to the value model. As an example, today, in North America, we've got over 130 vendors that we support. If you go back 5 years in time, that number was maybe half of that. So we've had tremendous growth in new vendor, I'll call it new vendor acquisition. As far as the existing lines that we have, we see a trend by some of our big suppliers to use the channel more and more, particularly in the mid-market, which is the customer base that we serve. And yes, we are outgrowing them, for a couple of reasons: again, the focus on the channel, number one; and then two, I think, the mid-market customer maybe doing just a bit better in some cases than some of the large enterprise customers. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: So as you look at 2014, do you think that your growth will continue to meaningfully outpace your supplier base? Or are we coming toward the end where maybe the growth rate for Arrow will converge with the supplier base?

Yes, that's always our goal. Our goal is to outgrow the market. And I think it will continue in '14. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay. And then a follow-up for Paul, just to make sure I understand the March quarter guidance as it relates to seasonality. You mentioned the vendor cutoff issue and then you also mentioned 1 less day of sales. For ECS specifically, are those the 2 reasons that cause your guidance to be below seasonal? Excluding those factors, you basically would be looking for a seasonal outlook. And on the cutoff issue, is that one vendor, or multiple vendors?

Yes, we would be more in line with traditional seasonality absent the cutoff, the 1 day less shipping. And it's a couple -- a handful of suppliers. It's not a broad swath of suppliers.

Your next question comes from the line of Steven Fox with Cross Research.

Just following up on Brian's question. Just took a quick look through your 10-K, and you talked about just different enterprise computing sales by products. And it looks like services business was down for the full year and it looks like storage contributed the bulk of the growth. And I was just curious if you can maybe comment on those observations in terms of whether that's accurate. And what would be the drivers there? And then I have a follow-up.

Steve, just one point of clarity before we get into some of those details. Remember that storage is recorded on a gross revenue basis and services are recorded on a net revenue basis. So the mix change is a bit distorted because we're talking about big storage sales and we're talking about small services sales. So the mix changes, but the rewards in GP and operating income are not out of balance. So sometimes, it's a little bit -- we can make some broad assumptions around how the business is operating because of the difference in accounting for revenue dollars.

Right. Yes, I would just add, Steve, it's Andy, that services still grew 19% year-on-year. And services, particularly in the resold maintenance area, are a following indicator of the sales we make on the infrastructure. So when you see storage rising at 23% and servers start to grow again, our annuity base grows in the services area and the growth follows. So I think we're in good shape.

Great. And then just a little quick follow-up on that, Andy. So in terms of storage, would you then not say that it's -- was especially beneficial of the strategy you laid out in the answer to Brian? Or is there something else going on specific to storage?

No, storage is a great story. I mean, remember, the 23% growth is coming on top of record revenue performance in that segment. So to be growing 23%, given the position we have in the market, it's a great story. And we are adding some flash vendors and we're adding some of the emerging storage vendors into our portfolio. So very much a part of the strategy.

Great. And then just one real quick question on components. The 5% target, I assume that's for at some point during the year, not for the full year. And also, on the book-to-bill for the components business, the 1.03, given what you said about the market, does that imply that the backlog is more weighted towards over-90-day type of shipments?

Yes, the backlog, any time we see that, we do see an expanded backlog, but let's remember, 1.03, it's not negative. And I would call that slightly over positive. So we would not take something like that and really alter our thinking on shipments throughout the quarter given normal cancellation cycles and things like that. So I would plan it as a small uptick. Our plans are still to deliver 5% this year on the components business in total for the year, and we expect it to go up quarter-over-quarter as we progress throughout the year.

Your next question comes from the line of Sherri Scribner with Deutsche Bank. Your next question comes from the line of Christie Shetti [ph] with Deutsche Bank.

This is Sherri Scribner. Sorry about the confusion. I wanted to ask a little bit about the Europe business. The growth there was pretty strong this quarter. I wanted to know if you think that you guys are gaining share there, or what in particular you're seeing.

So Sherri, is your question driven towards components European growth year-over-year, or is it on the ECS side year-over-year?

Both.

Okay.

Well, the -- in the components business, Sherri, if you remember, we were in the middle of converting our computer system in the first half of the year in Europe. And we believe that slowed our growth a little bit. As that system came online and people got familiar with it, we've now seen the business pick up there for us, which I think is good news for us. I wouldn't call a huge market share victory yet because we've really only seen a couple of quarters of that growth in the second half of the year and we'd fully expect to see Europe do better even this year. But I think the new computer system is a big help for them because if you remember, we were sitting with something like 5 inventory pools there. Now we have one. So the ability to really service a customer need is right at our fingertips for every sales rep and can happen on a much faster basis. So that's good there. And then as you know, in our computer products group, between the acquisitions and the matrix strategy, we've really been growing significantly and much faster than our suppliers in the European market with that business. And we would really expect that to continue as we've loaded up now with even a bunch of new software vendors that we didn't have before through the acquisition of Computerlinks. So all in all, Europe, for us, is looking pretty good.

Okay, that's helpful. And then in terms of thinking about the system rollouts that you guys have been talking about for a number of years, are we essentially done with that now that we've finished Europe? What else needs to happen? And then I just have one other quick question.

No, we're heading next towards Asia Pac. And we will be dealing with Asia Pac this year, and then the last one will be on the North America. So there's still some time left on that. But the good news with that is you haven't heard anything about it and the great news is we haven't had to tell you anything about it. So I think that's, all in all, the way a computer conversion should go, and we'd like to keep it that way.

Okay, sounds good. And then just looking at the ECS business, very strong growth sequentially. I know you've made some comments about this end market already, but I wanted to get a sense of if you think demand was essentially a bit stronger in the ECS group. Or do you think there was some budget flush? Or do you think, as you've talked about, it's mostly sort of your positioning?

I would call it good execution on a market that became available in the fourth quarter, how's that? The truth is both teams, North America and Europe, really were out there beating the bush to bring in a good year, that, coupled with having more vendors on the line card and really executing and increasing our share with those vendors. When you got to the end of the year and you added that up, it was a very nice year for us. And as you know, the market growth is not projected to be that great in computer products. Either Gartner or IDC, I think, are both kind of average or below-average growth rates from what we've seen in the past years, but our expectations are to still be able to outgrow the market this year given our position in the new product lines we have and the new geographies that we're now involved with.

Your next question comes from the line of William Stein with SunTrust.

I'd like to get on the components operating margin again. I apologize for following with yet another question on this topic, but you talked about 5% for the full year. I think your target is a bit higher than that. It's encouraging to hear that you can get to 5% for the full year. Can you talk about the key driver there? Is it mix related, restructuring, leverage with revenue growth, or something else? And which region do you expect to benefit the most?

Well, we expect this year better performance out of the North America region. And as we've told you, the book-to-bill in North America had picked up. We do expect better performance out of Europe this year also. That will help some of the mix change that we discussed and we got involved with, with Asia Pac outgrowing the other true -- two. But this year, we're expecting a much more balanced approach to that.

That's helpful. And then in the systems part of the business, investors have speculated that the industry's transition to cloud-based services could challenge the growth of this business, but it doesn't seem to be hurting you, and maybe even the complexity helps you. Can you give us maybe an updated view on that? And also, we haven't heard about ITAD in a while. I'm wondering if you might be able to update us on that as well.

Okay, it's Andy. I'll start with cloud. So we still see the cloud is certainly moving along quite rapidly, but it's in the early innings. And there's quite a bit on-premise acquisitions still happening from our customer base. And there's some off-premise acquisition using the cloud. But the mix is still very favorable for us. It's still a lot of private hybrid cloud activity more than public cloud activity. And we've also prepared ourselves for the resale of cloud with our ArrowSphere tool, which is a unique tool to the market. So we actually continue to see the cloud as an opportunity. And I'll let Mike take the ITAD question.

The ITAD question. As you guys probably saw, Gartner put us up in the Magic Quadrant. ITAD is still a very viable strategy in here. We haven't talked much about it, the main reason being we're still probably a year, possibly 2, from it being a huge impact that would be an interesting breakout for you guys. That's a business that we are putting together sort of a market at a time, getting it up to scale. And we expect good things from it in the future. But as to right now, there's really not a whole lot to report other than things are progressing, sales are growing and we're in progress of investing to get more and more locations.

Ladies and gentlemen, this concludes the question-and-answer portion of the call. I would now like to turn the call back over to Mr. Greg Hanson for closing remarks.

Thanks, Patrick. If you have any questions about the information presented today, please feel free to contact me. Thank you, and have a nice day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.