Good day, ladies and gentlemen, and welcome to the Arrow Electronics Second Quarter 2018 Earnings Conference Call hosted by Steven O'Brien. My name is Angela and I'm your event manager. During the presentation, your lines will remain on listen-only. I'd like to advise all parties that the conference is being record for replay purposes. And I'd like to hand over to Steven. Please go ahead.

Thank you, Angela. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Chris Stansbury, Senior Vice President and Chief Financial Officer; Andy King, President, Global Components; and Sean Kerins, President, Global Enterprise Computing Solutions. As a reminder, some of the figures discussed on today's call are non-GAAP. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation, and a webcast of this call. Please note, prior-period figures have been adjusted for the adoption of new accounting standards. We will begin with a few minutes of prepared remarks which will then be followed by a question-and-answer period. I'll now hand the call to our Chairman, President and CEO, Mike Long.

Thanks, Steve, and thanks to all of you for taking the time to join us today. As the only complete lifecycle solutions provider, our momentum in the marketplace is stronger than ever. We've been expanding our engineering services to offer more complete solutions. This is actually bringing us closer to our customers and our suppliers and they're both relying more on us. Our strategy is working and we're executing well. We achieved second quarter record sales in gross profit, operating income, and earnings per share. We said that changes in our industry would result in tremendous opportunities for Arrow and this is evident in our results. We produced strong leverage as operating income and earnings grew meaningfully faster than sales. Our returns improved again. To drive leverage and grow returns, we're working to provide more economic value to our customers and suppliers. To do this, we're staying ahead of the market changes. We're increasing our design and engineering capabilities across the organization. We do business in the way that our customers and suppliers would like us to. This means, we're offering a full spectrum of design, engineering, marketing, supply chain services from the lowest touch to the most complex. One example of a complex engagement is the work we did for a major grocery retailer. We led the design and implementation of that company's digital shelf and video management solution. This solution provides tremendous value to the retailer by increasing automation and worker efficiency, allowing for more merchandising and promotional activity, all while improving the shopping experience, customer loyalty and satisfaction. The retailer is getting valuable business insights by capturing more data and has seen higher in-store sales. For the hardware element of the solution, we provided the prototype development, the testing, the integration, the certification, and the production services.…

Thanks, Mike. Second quarter sales of $7.39 billion were at the high-end of our prior guidance range, and increased 15% year-over-year and 13% adjusted for changes in foreign currencies. Acquisitions and divestitures did not meaningfully impact the consolidated sales growth rate. The actual exchange rate for the quarter was $1.19 to €1, below the $1.23 to €1 rate we previously used for our forecast. This negatively impacted sales by approximately $100 million and a consolidated sales growth rate by 150 basis points year-over-year. Second quarter Global Components sales of $5.28 billion increased 18% year-over-year and increased 16% adjusted for acquisitions and changes in foreign currencies. Global Component sales have been at or above the high-end of our expectations for eight quarters in a row. We had record second quarter sales in all three regions. In Europe, sales increased 21% year-over-year and increased 14% adjusted for changes in foreign currencies. Europe sales have increased year-over-year for 21 straight quarters adjusted for acquisitions and changes in foreign currencies as we continue to gain share in the marketplace. Asia again produced exceptional growth this quarter with sales increasing 21% year-over-year, marking the eighth straight quarter of greater than 15% growth. Asia sales increased 20% year-over-year adjusted for changes in foreign currencies. In the Americas, sales increased 14% year-over-year and increased 13% adjusted for acquisition. Demand continues to be strong across our base of industrial and manufacturing customers. Global Components' operating income increased 29% year-over-year and increased significantly faster than our 18% sales growth. As a result, operating margin increased 40 basis points year-over-year to 5%, and increased in all three regions. Enterprise Computing Solutions sales were $2.11 billion, up 8% year-over-year and in line with our prior guidance range. Sales increased 7% year-over-year adjusted for changes in foreign currencies, the divestiture of the…

Thank you, Chris. Angela, would you please open up the call to questions at this time?

Certainly. We have our first question which comes from Shawn Harrison from Longbow Research. Please go ahead.

Hi. Good morning, everybody.

Good morning, Shawn.

Hey, Shawn.

The first question I have is just the improved EBIT leverage in the Components business we've seen in the first half of the year. Does that stay at the same pace in the back half or could it accelerate as you see more demand creation business and growth in the digital platform?

Pretty much as we said, one of the reasons you did see the acceleration was that 20% increase in demand creation. So, as the mix continues to be favorable, you would continue to see that. And if you remember, we said we had a long ways to go to be able to catch up with the additional fee for server (18:18), the additional supply chain business that we had coming in. We still believe that. We don't believe we're at the top of that. And as long as we can continue to execute on the engineering piece of the business, I think it will continue to go.

And then as a follow-up, Chris, you've converted, I guess, $200 million of the cash flow usage in the June quarter. Would you expect to be generating positive cash flow from operations in the back half of the year or are there still challenges in terms of working capital management that you have to work through?

Yes, Shawn. So, obviously, it depends on where the growth rate is. But as we've talked about in the past, when we get to 10% or below, that's where you would expect to start to see a positive cash flow from operations. I think in the near term, it will plateau for a quarter; and at that point, it should start to turn positive. So, I would expect by the end of the year at current growth rates as we guided, you would expect to see some level of positive, yes.

Okay. Thank you and congrats on the results.

Thank you.

Thanks.

Thank you. Your next question comes from Joe Quatrochi from Wells Fargo. Please go ahead.

Okay, great. Thanks for taking the question and congrats on the quarter. I had a question on the component side. I know that a lot of companies have been kind of referencing this (19:44) of MLCCs. So I was kind of curious, what's your exposure there, and then how do you think about the availability of those components negatively impacting the demand for other components?

Andy, would you like to take that?

Yeah. Yeah. You're quite right, Joe. We still have a fairly constrained supply situation on MLCC. There's more product actually coming through and out to the marketplace, but the demand is outstripping that. So we're continuing to manage our supply chains with our supplier partners very, very carefully. At this point, we are – more things are getting built, more things are getting to market. So we're sort of keeping pace with the demand, but it's a process that we keep very close tabs on and work very carefully with our customers and suppliers.

Okay. Thanks. And this is a follow-up for Chris. I just want to kind of go through the puts and takes of gross margin for this quarter and kind of – I know you don't guide, but what's kind of embedded in the guidance for the September quarter?

So really one of the things that we talked, I believe, about last year is as we transition new business in, it would come in as fulfillment margins. But then we could start to work on the demand creation behind that in addition to the higher margin activities around digital, for example. So we would expect that gross margin would continue to improve as we move into the back half of the year as a result.

Okay. Perfect. Thank you.

Thanks, Joe.

Thank you. Next question comes from Matt Sheerin from Stifel. Please go ahead. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Yeah. Thanks. Just following up on Joe's question regarding not just the MLCC situation, but as you've pointed out in recent quarters, there have been extended the lead-times on a number of components. And if you look at basically every part of the supply chain, whether it be the EMS guys, OEM distributors like yourself, inventories are at elevated levels in multi-year highs on a days basis. So it seems like, Mike, you're seeing things start to stabilize here. And as that happens, do you expect customers to adjust their working capital and inventory down commensurate with the lead-times coming in? And would that lead to any sort of ripple effect correction in the supply chain?

Yeah, Matt. Thanks. What we're seeing right now and I think I sort of indicated that in my prepared comments is a softer landing. And what I expect to see that's different from others is sort of a continued growth but at a slower pace. Remember one of the things that we did different this time which I was very clear with you guys in the beginning was that we were going to place orders on the suppliers out well in advance to make sure we had a good balance of inventory. Obviously, that uses a little bit more of our cash but it allowed us to satisfy our customer base with a wider range of products, and that has been a good thing. You know as the growth moderates, it looks like the inventory levels will come down while the growth continues to be there and that we're not expecting big changes by customers, because we do monitor sort of the double ordering process and we don't have it. When we see it, we get with a customer and try to figure out exactly what their needs are which has allowed us to be very specific with the manufacturers. And they also have the sort of double ordering catch-all in their businesses, too. So, things are much cleaner this time. I expect a softer landing. I expect things to continue. We're seeing strong design activity which also tells us that the market is still chugging along and new products are still getting developed. That's one of the first things that start to go when you when you see a pullback. So not expecting a pullback, Matt, just expecting a little slower growth. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay. Fair enough. That's helpful. And then as a follow-up, just sort of playing into that fairly favorable environment from a seller's standpoint, your margins were up nicely in components and you talked about the demand creation business driving some of that. But did you get any favorable pricing or any sort of margin lift from the strong environment and the demand environment?

We didn't raise the prices on our customers. I think as I told you going into this, we had supply chain orders from customers. We were bringing business over. So we did not sort of take that and up it if a customer was in trouble. We lived up to the commitments we made to the customers prior to the increase in sale, and I think that has paid off. As a benefit, the entire increase in margin that you're seeing is based upon the mix change of design activity and design products versus fulfillment products. And so, we do expect that to continue for us because obviously when we design something, we add a little more cost into it than we do when we don't. And I don't expect a downturn in the margin when the market softens. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc.: Okay. Thanks, Mike.

Yes.

Thank you. Next question comes from Adam Tindle and he's from Raymond James. Please go ahead. Adam Tindle - Raymond James & Associates, Inc.: Okay. Thanks. Good afternoon. Chris, I just wanted to start on cash flow but should probably first acknowledge your growing profit dollars, north of 20% while improving ROIC, which is probably more important now. But it does sound like there's a number of cyclical items that are suppressing cash flow. So, I wanted to ask if there's anything more structural that would keep cash generation more muted than previously where you were converting north of 100% of net income for a number of years. And is it reasonable to assume that when cash flow reverses and becomes positive that this will materially increase the buyback level?

Yeah, Adam. First of all, thanks for the kind comments. But our feeling on this is that when things do return to more normalized growth rates, we should be delivering about 100% of GAAP net income in terms of cash flow from operations. That's the way we think about it. So, I don't expect that there's anything structural that's changed. It's really all about the growth rate now and absorbing that, to your point. What we'll do with that, we will continue to buy back stocks when we believe we're well below intrinsic value and in today's valuations, that's exactly where we think we are. We think there's a lot of room for us to do buybacks. We've got a lot under authorization from the board, and the board is very receptive to expanding that if it continues to stay suppressed. As we've also mentioned in the past, we will bring down debt a little bit, but buybacks are a key part of what we'll do with that cash. Adam Tindle - Raymond James & Associates, Inc.: Okay, very clear and helpful. Thanks. And, Mike, I know you mentioned we should see some improvements here. But the operating profit dollar growth in the computing business has been minimal for seven quarters or so now. I just wanted to ask, how do you think about the portfolio in that business strategically? Are there areas that you could either add or maybe even subtract or divest to improve that trend?

Yeah. Actually, we must remember what we have been going through there. We went through the change of rotating disk to solid state. We went through a no-growth scenario on servers. And at the same time, we were building our software practice. If you look at the – where that business is today, all of those issues have reversed themselves to right now. So I expect this business to continue to improve going forward. And so, there's nothing different than what we've exposed in the past. The bookings are good. The backlog is good. The business is looking pretty sustainable. Just to note and it's obviously something we don't really talk about that much, but you take just the conversion rates in Europe. I think Europe is up something like 11%...

Currency.

...currency adjusted. So we are seeing the growth. Now it's a matter of getting that to the bottom line and we think the growth will take care of that. That's why I made those comments in the sort of opening session that I believe that that business is going to improve. Adam Tindle - Raymond James & Associates, Inc.: Okay. Thank you.

Thank you. Next question comes from Steven Fox from Cross Research. Please go ahead.

Thanks. Good afternoon. I know you mentioned that the new tariffs that are in place globally are sort of a 1% impact to your sales. But what – can you talk a little bit about the indirect impact that you may see in the supply chain. My understanding is a lot of your suppliers are raising prices into the channel. And could you talk about what impact that might be and then I had a couple of follow-ups.

Yeah. Steve, just a few things. So there's a number of suppliers that are taking care of the tax themselves. There's a few suppliers that are not. So where they don't, we'll pass that on. It's not our job to make suppliers that don't want to pick up their sales tax to make them more competitive for the ones that do. So that will sort of keep that balance. There are moves by some suppliers and by us to reroute supply chains to make it even more favorable and that's why we say the impact right now is minimal based off of the information we have. I can't speculate on where it's going. I'm not overly concerned today. And as I said, it's minimal to us and I think just with some of the supply chain stuff we're talking about, it could even be less than that.

Okay. That's very helpful. And then secondly, Mike, you threw out a lot of the services that are sort of gaining traction quarter-over-quarter or as you go back over the last 12 months. If you had to sort of highlight some of the biggest drivers in terms of your expanded capabilities right now, what would you call out and how do you see that changing over the next couple of quarters?

Sean, since you've been driving that, I'll put that one on you.

Yeah. Sure. No, absolutely, Steve. We're doing more and more from a cross enterprise perspective. So as Mike pointed out in the opening script, Andy and I now partner much more closely with our major component suppliers and with our major IT suppliers. So we find ways to kind of diversify those relationships. Where we once talked to an IT supplier strictly about go-to-market, now we talk about things like design, engineering, and production of the actual systems that we help themselves. And where we once talk strictly about go-to-market in a two-tier fashion, we now introduce our supply chain people to their supply chain people, and we find that there's things that they choose not to do themselves and they can rely on us in a much more efficient fashion. And if you look at it in reverse, we have a kind of growing pipeline related to, what I would call, the intelligent edge or sort of a big use case around IoT where my sales team will partner with Andy's sales team to try to capture the down team benefit that emerges from an IoT use case and that just opens up a whole lot more opportunity and a whole lot more DTAM for us to go after. So, we feel good about the progress we're making to collaborate across the enterprise and I think it will continue to pay dividends over time.

Great. That's really – yeah. I appreciate that color. And then, lastly, Chris, the $200 million of sort of working capital drag in the quarter, you said it was related to one customer. Is this a special type of engagement or why was that number so large? Is there any other color you can provide on that? And that was the last one for me. Thanks.

Yeah. No, it really relates to the services offering that we've talked about an expanded services offering. It's in that category. I want to keep it kind of at that level. We do think that, going forward, it should be relatively working-capital-neutral, so I don't expect this would be recurring.

And, Steve, I might add to that that a lot of the services that we're now offering have become attractive to some of the bigger customers that exist out there today. And we fully expect to have some more engagements around some of these bigger customers, and it would not be uncommon to see it. Obviously, this engagement being the first one of this type, it started late in the quarter. We got the program set up. It cost us some money. We were able to collect the money within a period of time. But most of these deals are working capital-neutral for us. So I wanted to highlight that that I don't really expect in future quarters we're going to be seeing a lot of one-timers like this, and it really was just when we got the things set up that caused that.

Understood. Thanks for all the color.

You bet.

Next question comes from Param Singh from Merrill Lynch. Please go ahead.

Great. Thank you for taking my question. So, firstly, I wanted to go back to the component side. There are other private distributors in the channel that have commented that given the strength of the backlog, that book-to-bill might actually trend down again towards parity or possibly below parity, but that might belie underlying strength. I mean, what are your thoughts on that given that you've come from 1.2 to 1.08 this quarter and has the backlog strength changed – or do you have any cause for concern given the downtrend and sequential – and year-over-year strength in your backlog?

No. And remember, we really started building our inventories and increasing our sales during the upcoming quarters, so it's a harder lap for us in the first place. The second place is we're still seeing very good growth at 1.08. That tells us that the economy is even better than what we thought it was then. I don't expect that parity thing to go on for a while. We've seen the increase in customer backlog. We've seen the increase in bookings. We've seen higher demand generation opportunities. And our sales growth plans continue like we saw before. So I can't tell you what's happening to others. I can only tell you what our growth rates look like and I guess you just have to look at the growth rates compared to others and see what's happened over the last five quarters, but we're in good shape.

So in that vein, do you think at some point over the next few quarters book-to-bill could reach parity again, not because this is an issue with strength but because now that you have such a strong backlog that customers might pause briefly on order patterns? Do you have any view on that?

Well, look, even if it does that would be a positive because it wouldn't go negative. And really if it did go to parity that would really indicate a soft landing and we would get there much faster because you would bleed off the inventories you had and the current shipments you had and they would continue on. You would just be probably bringing in your future order pattern a little bit until you got to that parity. So it's not a negative. That, in fact, for me right now would be a positive because we started throwing off some pretty good cash at that level because we've grown the company to a big size which means a lot more cash than we've ever thrown off in history. So it isn't bad.

Got it. And as my follow-up, switching to the ECS side, how much impact to your margin in ECS this quarter was due to higher hardware mix versus any FX impact? And similarly for next quarter, what – can you delineate the different impact between higher software mix and FX and that $7 million cost that you mentioned that's impacting your revenue and margins?

Yeah. So what I'll do here is, I'll let Sean go through the individual products with you because there was a mix change and then I'll have Chris talk about the tax issue.

Thank you.

Yeah. So if you look at the business mix year-over-year, you're kind of looking at an apple and an orange. We got to our sales guidance in Q2 but a little bit differently than we thought. We had better hardware and a little bit less software, so that certainly contributed to some of the margin pressure. But one of the factors surrounding the lighter software that we expected in the quarters is that we are seeing a more meaningful growth in our, what I would call, unbilled or as-a-service software solution revenue which we'll bill out in future periods as Chris mentioned. We ultimately think that's a good thing because recurring relationships tend to be very sticky and it will help to build a bigger pipeline for us in the future. But as we look to Q3, you're kind of seeing a reverse of that. We see a return to a more normal, in fact, overweighted mix of software versus hardware which creates a little bit of a different year-over-year compare. And certainly things like the size of our public sector business will contribute to that. This is the federal government buying season and we expect a strong top line quarter from our mix business and that's one that's decidedly pointing to software and services.

And then was there any FX impact on your guide or maybe what's the underlying billings growth assumption in your ECS guide?

Yeah. We don't obviously provide the guidance around the billings. I would tell you that the FX is relatively flat quarter-on-quarter, $1.18 (39:29) in Q2 and $1.17 (39:31) in Q3.

Great. Thank you, guys.

Next question comes from Adrienne Colby from Deutsche Bank. Please go ahead.

Hi. Thanks for taking the question. Most of my questions have been asked already. But going back to the operating margins on the component side of the business, I'm just wanting to understand a little bit better, with the stronger mix of Asian and European sales which are typically lower margin, if you could just talk about again how you got to that 5% target margin and just wondering how geographically diverse your design activity is.

Well, first off, let me thank you for noticing the 5%. I was sort of sitting here, waiting, going is anybody going to even acknowledge, which sort of goes back to my question, I think, a year ago was do we get some sort of prize if we get there and, obviously, I've learned today the answer is no. But it's – basically, all of our businesses have become more efficient. We are doing much more design work in Asia which has helped us raise the profits for us in Asia. We've seen the same in Europe, we've seen the same in North America, and all those businesses combined to have really driven us to that number and it's largely been because of the change of mix of design services. We aren't sure – I guess not sure but I'm not ready to commit to any other number for you around that because I think we need a couple of quarters to stabilize that and to make sure we know exactly how the business is reacting to all of this. There was no heroics in there. There was nothing special we did to get to it. It was the same plan that we had indicated to you all along. So, I don't expect it to change, I expect it to continue. And, in future quarters, we'll get more specific about it. But I'm also going – if I said 6% and there'd be no price when we finally got to 6%, there'll only to be beatings along the way. So, I'm kind of comfortable with where we are.

As a quick follow-up then, so there's no benefit so from the ERP system rollout that you completed last quarter, for example, or an expectation that that's going to give a lift on that front (42:03)?

Oh, yeah. Yeah, yeah. What happens with the ERP system, which I think you're going to see in future quarters, is that makes us more efficient. That gives us better productivity. That means we can do more. That also means that we can invest more in engineers to even grow our profits higher. So, there's a lot of changes in our business that we can either reroute the money or take it to the bottom line. But there is no big investments right now of anything that we need to do or put in there that are going to drain from that efficiency. It's all going to be put towards the go-to-market side.

Great. Thanks. And let me be the first (42:44) to congratulate you on hitting that 5% target.

Thank you. Very good. Thank you.

Next question comes from William Stein from SunTrust. Please go ahead.

Great. Thanks for taking my question. I promise I was going to congratulate you on hitting 5% (43:04) op margins. If only you called on me first, you would have heard it earlier, but (43:10). The beatings will cease from now on. But I do want to ask something about that segment, in particular supplier additions that you've had over the last couple of years owing to some dislocations at one of your bigger competitors. Can you update us on any additional changes from a supplier perspective? I think there was an announcement from one of them just this past week that they're going to be sort of reauthorizing the one that they cut out earlier. Any additional gains and how you expect that change that I just mentioned to influence the model going forward? Thank you.

Yeah. I think much like you've seen in the past, acquisitions sometimes change things. I don't expect it to be a big deal. The supplier you referenced was not exclusive with us in the first place. So that's another piece of this. And where they'll ultimately go will be their decision. We don't see any change in the performance we have going forward. We certainly, to be honest with you, would love it as our competitor gets stronger because that's just going to validate the entire supply chain to what we've been telling you all along. Again, I don't see any change for us. I don't think you're going to see any massive changes on a go-forward basis. The business is what it is right now and we're performing well. Our engineers are performing well. And we expect things to stay pretty much like they are.

Thanks. That's it for me.

Okay. Thank you for asking about the 5%.

Next question comes from Mark Delaney, Goldman Sachs. Please go ahead. Mark Delaney - Goldman Sachs & Co. LLC: Yes. Thanks for taking the questions. I actually have another one on the Global Components EBIT margins. So, yeah, also nice to see you coming in at that 5% level. I know you worked hard as an organization to get there.

Everyone's going to say that... (45:23) Mark Delaney - Goldman Sachs & Co. LLC: But a typical seasonality in the third quarter for components EBIT margins is usually flatter, it may be down slightly just as some of the regional mix shift changes. There's some tailwinds though coming in with this increased design work. So I was just trying to get the sense for how you're thinking about the margin in that segment for the third quarter. Is there maybe some just some normal seasonality or is there enough of these tailwinds coming in that you can stay at the 5% level?

Yeah. Actually we're expecting to. I think the guidance sort of suggests a flat to up for us going into the third quarter. And the growth rates continue, the design win activity continues. So you're absolutely correct. If you go back a couple of years, it was pretty much the third quarter was always down like 1% or something like that, pretty close to parity to down. We're now kind of saying parity to up, and we're expecting the same thing. Mark Delaney - Goldman Sachs & Co. LLC: Got it. That's helpful. And a follow up on the tariff topic, I appreciate all the comments that the company had, that was helpful to understand. But just trying to better understand some of these indirect potential impacts. So when you talk to your customers, given the potential for the tariff situation to escalate and some of these potential extra costs, do you think any customers have pulled forward demand to try and get ahead of any of these potential tariffs that may occur?

Yeah. We're not seeing any customers pulling any demand ahead. In fact, I think most customers are looking at this thing, it's just – it's pretty ludicrous to start playing this game, which it is just a game and I think we should all figure that out. I think it's a matter of quarters for this thing to get solved. None of us like tariffs. None of these businesses like tariffs. These tariffs that are coming in and I'll tell you the same thing I told the senators, all they do is they hurt American businessmen. They're not doing anything to the Chinese right now. So that's the only message I wanted to get across. So I think they're crazy. And we'll do what we have to do. But as I said, right now, I'll go back, these tariffs are not material to the electronics industry at this point. I think virtually every supplier that came out said the same thing I do. They are less than 1%. Some of them are going to absorb it. There's a couple of them that aren't going to absorb it. But that – so if you're a customer, you're sitting there looking at less than 1% of your purchasers are going to do it and you know in an upturn, you have that kind of a problem to deal with anyway. So I don't see it with us. I mean, I guess if you're bending steel or aluminum or something like that, you might see it and how that ripples through the supply chain. I don't know. But right now, we're not seeing a slowness in demand. We're not seeing an increase of people bringing their business in and, frankly, manufacturers are all over the world today. So they have plants all over the world. And if they want to start something up, we can redirect supply chain completely out of the U.S. in a moment's notice and totally eliminate the tariffs. So I'm not worried. Mark Delaney - Goldman Sachs & Co. LLC: Thank you very much.

You bet.

Next question comes from Jim Suva from Citi. Please go ahead.

Thank you very much and again congratulations on the 5% margins as well as just overall good results.

You know, Jim, coming from you, that's like the best comment of the day.

And I'm very sincere with that.

I know. I appreciate it.

I have a strategy question for Mike and then more of a financial question for Chris.

Okay.

Mike, your business has grown geographically very strong in all the different regions and the breadth of it was very broad-based this quarter and has been consistently across all the various regions. Is there ever a need to go into Asia with the computing segment or is it just most of North America, Europe focused? The reason why I asked is your components have been very strong in Asia also. So I just didn't know if there reaches a time and point where you need to have a footprint there or not or is it just completely different business conditions. And then, Chris, on the finance side, you made a comment about, I think, it was $0.05 impact to sales tax or something like that. I assume that's a onetime cumulative rolled up of multiple quarters of that item and then we don't see it going forward or maybe you can correct me if I'm wrong on that $0.05 impact.

Jim, I'll start with the Asia piece. First off, we don't see the need, just because Asia components is doing well, to migrate ECS to Asia. We do have ECS in a few places in Asia but, basically, what we are doing is bringing together the IoT pieces of the ECS business to Asia so they can enjoy the same type of opportunistic benefit from that that our components business in the other two regions is doing. What we did say about ECS expansion into Asia was that when we saw conditions being favorable, and the software conditions in Asia are not really favorable for anybody to expand there, the hardware conditions are not that favorable either. So we just don't see the business model working to the success of our investors at the rate that makes it worth it to make that kind of expansion. We continually monitor it as we see it over time, and we do see benefits will certainly be there. But I'm not into investing a lot of money into something that I don't see a return, never have been. And what I do see is a return on the IoT pieces. So, our cloud work and some of our specific software-defined work and some of the hyper-converged work and the edge work. Yeah, we do seeing moving that as an expansion of the components product line card and hopefully that answers your question.

Indeed, it does.

Yeah. And then, Jim, just on that sales tax thing, yes, it's a one-time issue that we are resolving. It will be contained in the third quarter. To put it in perspective, the midpoint of our guidance is $2.15 including that issue. So, the other way of looking at is excluding that issue, the underlying business is really at midpoint at $2.20.

Okay. And, Chris, as a follow-up. That doesn't impact your, like, future corporate tax rate or anything. It's just kind of a...

No.

... low (52:40) dilution and then move forward. Am I correct?

Correct. It's a dispute over a sales tax issue in one of our acquired entities, and we're resolving that.

Okay. Thank you. Again, congratulations to you and your team for very good results. Thank you.

Thanks.

Next question comes from Lou Miscioscia from Daiwa (53:00) (sic) [Pivotal Research Group]. Please go ahead.

Okay. Thank you. Well, I'm not sure if I'm last or not. But it might be, what have you done for me lately and back to business as soon as we're done with the call. So, good luck for (53:12). So on the ECS side, you mentioned subscriptions. Maybe just a little bit of detail, what specifically that is and are you going about it and at what level is it possibly a bit material since you mentioned it?

First off, we – as you know, we normally don't mention anything here until we at least have a little bit of a track record around it. So, I think it's probably okay for Sean to give you a little more color on that.

Yeah, absolutely. I think we've seen it accelerate. And if I look at the levels of that number year-on-year, we've seen it accelerate meaningfully, so we're paying closer attention to it. And part of it is related to pure cloud growth. I think part of it comes from the fact that customers are looking to take advantage of the benefits of consumption-based IT for software licensing for example without necessarily going to the cloud. Part of it reflects suppliers looking to build recurring revenue portfolios. So, we noted it because it did have a modest sales impact to our Q2 results. But ultimately, it's still with us and we'll recognize it in future periods. So again, I feel good about it because it's sort of an extension of our solution selling motion, and we expect it to grow further over time.

Okay. And then sticking with this area, you guys mentioned storage and servers obviously are hanging there, doing very well with the drivers probably are flash and also Intel's upgrade cycle and as we are heading the doldrums of summer, any view as to how either September or the back half finishes up, just from in general, not necessarily your particular guidance?

Yeah. I think what we said with more software – you have our guidance in the business. We're expecting things for us to improve and improve year-over-year. Right now, we're not seeing anything that diminishes the fourth quarter although that, as we said before, we don't go out that far. But we're not – hey, frankly, we're not expecting any bad news in this business from a change of circumstance, product line, go-to-market. Cloud is going to tear us apart, too. Amazon is going to kill us. I think we're pretty stable going forward here.

Okay. Thanks, guys. Good luck on the rest of the year.

You got it. Thank you.

Thanks, Lou.

I'd now like to hand back to Steven O'Brien for closing remarks.

Thank you, Angela. In closing, I will 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, and the company undertakes no obligation to update publicly or revise any of the forward-looking statements. Detailed information about these risks is included in Arrow's SEC filings. If you have any questions about the information presented today, please feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day.

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining. Have a good day.