Arrow Electronics, Inc. (ARW) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Arrow Electronics Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Steven O’Brien. Thank you. Please go ahead, sir. Steven O’Brien: Thank you, Tican. This is Steven O’Brien with Arrow Electronics, and welcome to our second quarter 2020 earnings conference call. 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 the webcast of this call. We will begin with a few minutes of prepared remarks, which will then be followed by question-and-answer period. I will now hand the call to our Chairman, President and CEO, Mike Long.

Thanks, Steve, and thanks to all of you for joining us today. First off, I’d like to thank our global employees for their commitment, professionalism and teamwork during these extraordinary times. The critical engineering, design and supply chain services they provide to our customers, our suppliers and partners create technology that protects and improves our way of life. The health of our people always comes first. And thanks to their thoughtful and diligent work, our offices, our facilities have been kept safe, and our business is moving forward. Over the course of a few months, we’ve learned a lot about the practices necessary to keep the business going while protecting our people. We remain diligent. We’re increasingly optimistic that we have found a sustainable way to do business and actually thrive in the coming quarters. On April 30th, we provided an outlook for the second quarter. We recognized then and now that to guide innovation forward, we must maintain our reputation for transparency. In addition, we have a long-held belief in the power of data from the billions of transactions we do with thousands of customers across dozens of industries. As a result, I’m pleased to report that we exceeded our quarterly earnings guidance for the quarter. In fact, we’ve met or exceeded our guidance 46 times in the last 50 quarters. As we reflect on what we can do to achieve long-term success, it’s important to recognize both the items that are in our control and those that are not. We can’t control the demand for cars, data center equipment or electronic devices. However, we can continue to position our business for rapid sales acceleration and mix shift to higher-margin engineered components and solutions. One way we’re doing that is by adding to our engineering and our sales teams today. We’ve seen great opportunity to drive leverage from design, engineering and marketing that will benefit our customers and suppliers. Another way for Arrow to position for the eventual improvement in demand is to execute on the business model and to strengthen the balance sheet. Our results this quarter showed just that. Cash flow from our operations totaled $418 million, $1.7 billion over the last 12 months, and we have also reduced debt by $1.1 billion over the last year. We remain confident in our long-term strategy and execution. Therefore, we increased our commitment to returning excess cash to our shareholders with an additional $600 million of share repurchases. Arrow remains focused on maximizing our near-term opportunities, while positioning our business for the long term. Design activity reached an all-time record for any quarter in our history, and our design activity has actually increased year-over-year for the third quarter in a row. Typically, this is a good leading indicator of an improving market, and this is why we keep investing in our engineering capabilities. Other indicators are consistent with short run stability. Second quarter backlog increased from the first quarter, the third quarter in a row of sequential improvement. Lead times were consistent with the first quarter and with last year. Global components book-to-bill was 1.07 exiting the second quarter. Book-to-bill was highest in the Asia region where the pandemic recovery is happening sooner. Our Americas customer sentiment survey showed some improvement. The percentage of customers saying they had too little inventory increased compared to last year, and the percentage of customers saying they had too much inventory decreased compared to last year but also remained higher than normal. To date, we’ve not faced significant challenges securing the parts our customers need. Turning to enterprise computing. In the second quarter, sales were slightly above our midpoint expectation. Like last quarter, we experienced strong demand for the solutions that enable the work from home and the business continuity. Security software sales were strong, and storage sales increased compared to last year. We remain confident in the consistent growth from data from connected devices and objects, and we believe that, that will be a long-term tailwind for our business. Taking a step back, I want to emphasize that as a company, we have a long history on capitalizing on downturns and disruptions. And despite the current environment, we continue to improve our team’s leading design and demand creation for global components. Hybrid cloud for enterprise computing solutions, and we can fund these investments with efficiencies that we gained from our superior operational platform, and we expect these investments to drive exceptional profit leverage in the long term. In closing, we’re continuing to support our stakeholders and communities. We’re committing to providing our customers with the products and solutions they need when they need them. We remain disciplined and focused as we operate our facilities and businesses through these uncertain times. Over the last several months, we worked diligently to avoid disruptions and are confident we’ll continue to do so as we operate as a critical provider to the global technology and industrial ecosystem. We will not stop looking for opportunities to expand our business, drive innovation and improve the performance of our end customers everywhere. I’ll now hand the call over to Chris to provide more details on the second quarter results and our expectations for the third quarter.

Thanks, Mike. As I did last quarter, I’m going to keep my review of our results, relatively brief to allow more time for questions. Second quarter sales were $6.61 billion. Sales increased 4% quarter-over-quarter and decreased 8% year-over-year as adjusted. The average euro-dollar exchange rate for the quarter was exactly in line with our expectation. Global components sales were $4.72 billion. This was above the high end of our prior guidance and represents an 8% year-over-year decrease as adjusted. I mentioned last quarter that industry destocking has been going on for more than one year. This quarter, global component sales increased sequentially for the first time since the second quarter of 2019. Demand in Asia has been resilient. And as we expected, the Americas and Europe were hard hit by the aerospace and transportation industries. Global components operating margin was 3.8%, down 10 basis points year-over-year. This was mainly due to regional mix with Asia contributing 45% of global component sales, up from 37% in the first quarter and 38% last year. Enterprise computing solutions sales of $1.89 billion decreased 8% year-over-year as adjusted and were above the midpoint of our prior expected range. As we’ve said in the past, uncertainty is bad for IT spending, and enterprise computing solutions is likely a later cycle business than global components. That said, we believe some of the delayed investments in mission-critical technologies cannot be pushed out indefinitely. Billings were approximately flat year-over-year, adjusting for changes in foreign currencies. We experienced strong demand for security and storage solutions, while demand for servers and networking declined meaningfully year-over-year. Global enterprise computing solutions operating income margin decreased by approximately 60 basis points year-over-year to 4.3%. And similar to what we saw in the global components business last year, demand from smaller customers who rely on more of our capabilities has been weaker in this downturn. Demand from larger, better capitalized customers has been more resilient. Returning to consolidated results for the quarter. Interest and other expense of $32 million was below our prior expectation due to lower borrowings and lower interest rates. The effective tax rate of 24.1% was in line with our expectations. Earnings per share were $1.59 on a diluted basis, exceeding the high end of our prior expectation. Turning to the balance sheet and cash flow. We reported strong operating cash flow of $418 million. During the second quarter, we reduced borrowings by approximately $257 million, principally through the maturity of a $209 million 6% note retirement. Our balance sheet is in great shape, and our liquidity position remains strong. Current committed and undrawn liquidity stands at over $3.2 billion, excluding the $206 million cash balance that we have on hand. We’re closely monitoring credit and receivables. Collections remained healthy and DSO increased, but in line with DPO. This was due to the further expansion of customer engagements during the quarter that are neutral to working capital. As we’ve said in the past, it’s fair to measure our performance by the cash conversion cycle, not by any one metric in isolation. The second quarter cash conversion cycle was four days shorter than last year. We returned approximately $75 million to shareholders during the quarter through our share repurchase plan. The remaining authorization under our existing plan is approximately $113 million. The new $600 million authorization increases the total to $713 million. Please keep in mind that the information I’ve shared during this call is a high-level summary of our financial results. And for more detail regarding the business segment results, please refer to the CFO commentary published on our website this morning. Now turning to guidance. Again, this quarter, we’re providing wider-than-normal ranges to account for increased volatility, given the current environment. With that said, we’re forecasting consolidated sales to be approximately flat compared to the second quarter with higher global component sales and lower enterprise computing solution sales which is typical for the third quarter. We expect a slight increase in earnings per share compared to the second quarter. However, the percentage decline in earnings per share looks unfavorable on a year-on-year basis. Compared to the third quarter of 2019, current demand conditions in the Americas and in Europe remain significantly depressed for both businesses. With that, I’ll turn the call over to the operator for Q&A.

[Operator Instructions] Your first question comes from Shawn Harrison of Loop Capital.

I wanted to dig in on the free cash flow and just the expectations for the back half of the year. You generated a heck of a lot. As you said, over the past 12 months, it’s substantial amount here in the first half. But do you anticipate generating free cash flow or cash flow from operations in the back half of the year, but maybe at a slightly lower level? Any details on that would be helpful.

Yes. I’m going to have Chris take that one. We have a pretty good forecast for the back half.

Yes. Shawn, we do think that cash flow will remain strong. And keep in mind that in the first half, we did have favorability from the EMEA securitization of about $350 million or so. So if you normalize that out, that kind of rate, I think, is something that’s not unreasonable for the back half, certainly what we’re targeting.

And then as a follow-up, wanted to get in, I guess, two dynamics. Within the guidance, are you seeing any supplier share shifts begin to ramp? And then if you could talk about the big industry consolidation that was announced intraquarter and whether you think you could be a potential beneficiary as it closes in 2021?

That’s a great question, Shawn. I appreciate you asking it the way you did. Actually, so far, anything that we’ve seen from any supplier programs has been not material. In fact, the growth rates we’ve seen, our book-to-bill came positive, the backlog increasing quarter-to-quarter has been more broad-based growth for us right now. And we really aren’t expecting a windfall from anything, to be honest with you. If anything happens in 2021, that would be great. We welcome it. We don’t have to add any cost. We’re prepared to handle anything that would come our way. But the I want to be clear that what we’ve seen in bookings, backlog, the inventory increases has really been broad based with Asia Pac leading the way. And then obviously, the business in North America and Europe not being as healthy as it has or as we’ve seen in the past. But things could have been a lot worse in both of those locations, too. So we’re pretty comfortable that we’re going to be looking at some progress in the second half.

Your next question comes from Adam Tindle of Raymond James.

I just wanted to maybe first touch either Andy or Mike. Obviously, western regions and components are challenged. This was initially the case in Asia, but that seemed to bounce back very quickly. I know this is a million-dollar question. But if you could just touch on the time line to recovery in EMEA and Americas and how that might be similar or different than Asia? It doesn’t look like it’s going to be September based on guidance. Could you see year-over-year growth in the December quarter in those regions? Just any color or commentary would be helpful.

Yes. What we’ve seen so far and is a steady increase in bookings. We’ve seen a steady increase in backlog. So we don’t believe there’s any double ordering going on or anything like that at this point in time. We have seen customers being resilient. And what I mean by that is, typically, in a downturn, once you see the design activity really start to pick up, that sort of has in the past given us a signal. Now we’ve never had COVID on top of an economic decline. And I want to be clear. If you go back and look at this, the economic decline started before COVID, and then COVID was laid on top of that. So if people can stay open, I would think we would see a steady increase in performance from here. And there’s just so many things that start to stop it with geopolitical tariffs, some of the silver bullets that the U.S. did to themselves for manufacturing. But all in all, we’re feeling pretty positive about the second half outlook. We would be expecting something a little more in the December and January quarters. Yes, that would fall in line with the normal decline and a normal return out. But we’re not expecting a huge V-shape thing. Right now, we’re seeing it build steady, and we actually believe that, that’s how it’s going to work.

Got it. That’s helpful, Mike. Maybe you could just, as a follow-up, touch on operationally, how you’re thinking about reaching a turning point for the declines in operating margin and operating profit dollars. We know Arrow is a best-in-class operator, but the metrics are off right now. And if I heard you right in the commentary that you’re committed to keeping investments versus cutting costs, which seems to make sense based on what you’re talking about. So maybe just double-click on that decision on why and the timing to see the turning point in operating margin and operating profit dollar declines?

Well, if you take the operating margin of the Company right now, and compare it considering we’re down, I don’t know, something like $700 million, right, year-on-year here, it’s how quick that $700 million come back. But if you were to lay the $700 million on top of our cost and what you see today, I think you’d see a very different Arrow coming out of this downturn. And I think that’s really a positive. We’ve really been able to take back office efficiencies and move them toward the front office. So if you look at our costs and investment is really not an investment. It’s a transferring of funds that we already have. So I think the important thing to note is, we’ve made the Company much more efficient than it was prior to going into this downturn. And we’ve added revenue-generating resources that get paid on additional revenue. So that has become a variable cost for us versus all those fixed costs we had before. And we were really able to do that because of that platform, that computer platform change that we, as you know, finished 1.5 years ago. So we’re now starting to get the benefits from that investments, and we think it’s going to be even more efficient when we get back to those same levels. Will we’d be back to that in January? I don’t know. I don’t know. I can’t call it. It’s really going to be based on Europe and North America. But the real positive that I can tell you here is look at how much the mix of Asia was this quarter and then think about the mix of adding those other two and bringing them back. It’s going to be a pretty positive story.

Your next question comes from Ruplu Bhattacharya of Bank of America Merrill Lynch. Your line is open.

Chris, I wanted to touch on your thoughts on the business mix within ECS. Looks like over the last couple of quarters, you’ve been having good growth in services and in software. So when you think about recurring revenues within ECS, do you think that, that can grow over time as a percent of total revenue? And can that help the margins and the stability of the revenues?

Yes. I think we’re going to have Sean answer that one. He he’s been tracking that particular business for us pretty close.

Yes. Thanks for the question. And by all means our recurring revenue is absolutely growing. Keep in mind, we’re going after two really important future growth opportunities, both of which we believe represent better return opportunities for us. One is all about the market for hybrid and multi-cloud, and we’re going after that through our platform called ArrowSphere. We think it will be a big piece of our selling motion in the future. And the other is all about continuing to add line card with software suppliers that are very relevant when it comes to the management to support and the security of these client deployments. The reason we like that forward look and that investment strategy is that, in fact, more and more of that business will be recurring in nature. And as we did just as we deliver on those revenue streams through a digital experience, we do expect the contribution margins will improve over time. So our recurring revenue in the second quarter grew by north of 40% as delivered through our ArrowSphere platform, and we think that’s a good sign of our continued participation in the cloud marketplace.

Maybe, Chris, another question for you is you talked about the free cash flow, which was strong. Given that your liquidity position is also strong, at this point in the business cycle, would it make sense to look at inorganic growth, maybe look at M&A? And you just had a new $600 million repurchase authorization. So maybe just give us your thoughts over the next 12 months on uses of cash. How you think about buybacks versus M&A versus reinvestment in the business?

Yes. This is Mike. I’ll start with this and let Chris add. First off, yes, we could do something. However, we don’t see anything out there of a size or a scale that would largely change the complexion of Arrow at this point. Secondly, as you know, our uses of cash, we’ve been very clear. Internal growth was another investment of ours, and we believe we’ve largely put in all the investments we need to operationally to grow in the future, which really leaves us with additional sales and engineering people down the road as the customer base would expand and as the sales would expand. And then third was our return to shareholders. Well, as you know, going into the downturn, we had accomplished the first two, but we really didn’t give our return to the shareholders. And we believe right now, where we are in the cycle with the pandemic with our balance sheet, right now is really the perfect time for us to do a share repurchase. And so we’re really going to pursue that avenue at this point. Chris, would you like to add anything more to that?

Yes. Just to echo what Mike just said, obviously, the focus over the last year has been making sure that our debt was rightsized to the EBITDA that we’re generating. And we think we’ve effectively done that and largely done that. So as we go forward, with no real M&A opportunities on the horizon, the share repurchases will be the focus.

Our next question comes from Tim Yang of Citi. Sorry about that. He dropped. Your next question comes from Nikolay Todorov of Longbow Research.

I wanted to impact a little bit ECS business. So if you can talk a little bit from what are you seeing from a pipeline perspective in the hardware side for the second half. And related to that, how should we think about the operating margins for the business? I know you commented last quarter that we’re going to see an improvement and we should have because of the higher mix of software recurring revenue. But how should we think about that in the second half of the year? You typically see a very nice double-digit incremental margin into the fourth quarter related to the budget flushes. Any comments around that would be helpful.

Sure. Sean?

Sure, Nik. So I’ll start with just suggesting Q4 is a little bit tough to call. You’re right. It’s seasonally the biggest quarter of our year. So we would normally expect pretty good operating leverage in the quarter. Right now, it’s tough to see too far past Q3. What I would say for Q3 is that we’re looking at similar mix and demand trends as compared to what we saw in Q2. There’s still some tailwind associated with work and learn from home. We think that our security pipeline looks fairly healthy. Lots of customers need to secure their virtual and remote working environments. Hardware is a little bit of a mixed bag. Obviously, the overall IT spending environment on-premise is down for lots of good reasons. But we’re actually doing okay from a data storage perspective, and that has a lot to do with the size of our installed base and frankly the adoption of the new architectures, specifically hyper-converged. We really have a good representation and good exposure to that market. I think if you look at a large company versus small, the more business we do in the larger end of the market, the more challenging that gets from a gross margin perspective. As Chris pointed out, the mid-market and the partners that serve them tend to be the places that more fully appreciate our value. That will come back. Your guess is as good as mine as to when it does. But we’re fairly confident in our strategy, and we’re going to stay on the path I just outlined a few minutes ago, and I think that will that will bode well for operating margin in the future.

Okay. Great. And as a follow-up, in the component business, can you first talk a little bit about bookings linearity in the second quarter globally maybe? And what are you seeing so far in July? And related to that, I think in the Chris, in your CFO commentary presentation, you mentioned that European margins in the component business decreased in the second quarter. I think if I recall correctly, this is one of your more profitable areas in the components business. Can you talk about the reasons behind that? If that’s what’s the outlook for that reversing in the second half? Thanks.

Nik, this is Andy. I’ll take a swing at this one. So from a bookings standpoint, it was, as Mike mentioned in his commentary, it was very much Asia led. And that started off pretty much through the April and May time frame and continues into June and beyond. So it was a slow and steady ramp through the quarter. I guess the way I would articulate it with June being the high point. July has been pretty normal in terms of the way that we see the July bookings rate continue. So that gives us some confidence in the outlook going forward. In terms of your second question, I think what Chris said was the operating margins were diluted by mix rather than any specific business having any individual dilution effect, and that was because Asia jumped from 37% to 45% of our business in the quarter, which has the dilution effect. It wasn’t about individual businesses having any quarter-on-quarter declines, if that answers your question, Nik.

Yes great. Best of luck.

Our next question comes from Tim Yang of Citi. Your line is open.

Hello. Can you hear me?

Yes.

Great. Thanks for adding me back to the question line. So your Asian business, component business grew roughly 7% year-over-year, which is much better than the America and Europe. Can you maybe just elaborate how much of that is due to share gains, given you highlighted power management strength? And how much of that is due to the market demand stress in Asia?

Actually, we sort of indicated before that the Asia growth was broad-based. It was across every line. So it’s an economic rebound for us from what we saw before and just sort of a bounce back after COVID. Hopefully, it will continue on through the year. But as you know, we’ve been increasing our engineering and sales capabilities in Asia, and that has paid off very well for us over the last couple of years. And we’re seeing that really take effect. As far as market share, I don’t have market share figures in yet. It’s way too early after the end of the quarter. But I’m not assuming any major share change quarter-on-quarter. I think it’s a pure economic there.

Great. So if I look at your guidance, component sales will be above normal seasonality, but the margins might still be down on year-over-year basis. So with your current vendor and customer exposure and potential share shifts in the future. How should we think about your margins for components segment post COVID-19?

Well, I would expect them to go up. Remember, the first thing it gets cut. And it’s not just COVID. So all of these comments are tempered by COVID and what was an economic decline before. Typically, in an economic decline, the high engineering products are the ones that customers stop buying first, so they’re trying to control their inventory because that’s where the vast majority of the dollars are. Then you go into your decline and you start seeing customers start to redesign products for the future. And I think we just said that we had a record design quarter for new customers, new products, which is good. So the expectation is clearly for the margin to go up, for the operating income to go up as demand starts to return. Because we think it will inordinately impact the engineered products as the demand starts to come back. So hopefully, that answers the question as to why and what.

Your next question comes from Steven Fox of Fox Advisors. Your line is open.

Thanks, good afternoon. Mike, just following up on that question. So if we try to think about margins by region for components, obviously, volumes help in North America and Europe. Would you say there’s any other layer on that? You mentioned investments that are kicking in different designs, et cetera. Just trying to understand like if you look region-by-region, what the relative operating leverage looks like from what you just posted? And then I had a follow-up.

Yes. Well, the leverage in North America will go up. The leverage in Europe will go up. And it’s interesting because the leverage in Asia is going up as we speak, given the additional engineering resources we put out there, the design win sales in all regions going up also. And if you really look at the mix and sort of how the operating income came and everything else, if you just went back to traditional and as I argued before, put the other two regions at normal run rate back on top of this, and you’ll see a very, very interesting story.

Okay. And then from just the broad set of SMBs you guys are dealing with on the ECS business, any sense of where we are in that spend cycle? I know you mentioned that you can’t these companies can’t afford not to spend on technology, but obviously, there’s severe economic pressures on your smaller customers. So where would you put this in the cycle? And maybe how does their spending change on the way out of the cycle?

Yes. I was hoping you could tell me the answer to that, right? But actually, what I’ll tell you is we know customers are not afraid to spend. So I’ll start with that. But their priorities for the last quarter or since COVID came were to keep their workforces deployed, right? So everybody spends, invest and had to create work from home opportunities for their employees, or frankly, you will shut down. So when you think of the resilience of the companies out there to be able to do that because we know not every company who’s ready for this. They have to take sort of any data center type purchasing and back that off. So all of those projects that we’re bidding in the big data center are sort of pent-up demand now. I don’t think they go away because I know here, our issues we have in IT didn’t go away, but they weren’t the highest priority. Our highest priority was to get all of our people to be able to work from home. And when you think about being able to get 20,000 people to work from home and then effectively improve that over the quarter, so we could do it as a byproduct with a big speech. So if you think about just, Steven, our own spending here, I’m expecting that the fourth quarter going into the first quarter, we’ll start to see some change in the marketplace. I really don’t know about the third quarter because I can’t gear up just yet how much is COVID, how much is market. So I think we have a pretty conservative view of our guidance going out there. But I do know that these projects are not going to go away.

Your next question comes from Alvin Park of Stifel.

Just calling on behalf of Matt Sheerin. I just wanted to follow-up on that sentiment survey and inventory levels. Obviously, 2019 was a destocking period. The sentiment stated that the number of customers that have too little inventory went up, but the customers that still had too much inventory was lower year-over-year, but still elevated compared to historic. Could you comment on how you view your current inventory levels right now and coming into the future? And how the dynamics might be at play, if the situation gets better with the pandemic or if it gets worse with the pandemic? And how you guys are positioned to counteract that and fully benefit and react?

Yes. So for sure, we have orders on factories. And we do that to give our manufacturers guidance of what they should produce. So we believe we will get enough inventory based on whatever the market does. Now you know and I know if the market is going to increase more than the 10% in a quarter, you’re going to run into bottlenecks somewhere, somewhere in the supply chain. But by and large, I think we’re covered. The book-to-bill have been relatively solid. So they’re not overly fluctuating. And the backlog is growing at a reasonable rate. So yes, we think the inventory is about where it should be right now. That little bit of increase you saw was sort of late in the quarter inventory coming in for shipments that went right back out in July. So it’s a minor part. But remember, sales were up 4%. I think inventory was up 3%. Terms increase and got more efficient, all good things as far as ratios go. But in general, we’re in pretty good shape, given the backlog. As the business increases, we will increase our orders. But the worst thing we can do for anybody is to dramatically increase orders on inventory and try to corner any market because you get burned in a hurry. I think we’re where we want to be.

Understood. Thank you. And as a follow-up, I just wanted to ask for some more color on your statement about how your demand for better capitalized larger value-added reseller customers showed greater resilience versus your smaller customers. Is there, just like, reason for that? Was it customer exposure? Or is it the well-capitalized balance sheet allowed them to offer more financing opportunities? Just some more color as to why that dichotomy occurred from your compute business customers?

Yes. I’m going to let Chris and Sean. But what I would tell you is the resellers that are out there each working on projects, and those projects are just as important, really no matter where they’re coming from to a particular supplier. So many times when we’re helping a reseller financially, we’re also getting some benefit from a supplier to help that reseller. Therefore, we sort of stay neutral in that piece of it. And so the desire is to help anybody get a deal done. That’s what we built the Company on, and that’s how we operate the Company. So there is no distinguishing factor about who we would help and who we wouldn’t help. We’ll literally help everybody as long as there is a premise that we’re going to get paid. With that, I’ll let Chris and then Sean weigh in a little more.

Yes. The only thing I’d really add is that when we look at the makeup of who we’re selling to, we look obviously at our collection rates. Those are very, very strong. They’re actually well above last year in terms of our ability to collect. But there has been a mix shift as to where the product is flowing. And to the point that we made about better capitalized, it’s exactly what we saw in components, right? Smaller customers who are higher-margin customers who require more from us are buying less in the near-term environment than the customers that are bigger, better capitalized and don’t need as much from us and therefore are lower margin. So we don’t think that’s a permanent trend. But it’s certainly the near-term environment. Sean?

No, I think you nailed it. The only thing I would add is that, Mike’s right, we serve all comers. And the larger partners tend to be the resellers who serve the larger companies. And so they’re benefiting from the resilience in the high end of the demand market. But the smaller piece of the market is going to come back. It’s just a question of when. We’re going to be there for them in the future just as we are today, and we’ve got, as Chris pointed out, really rigorous process in place, if your question is about risk to make sure that we’re managing our AR portfolio very carefully.

Thank you very much.

Your next question comes from William Stein of SunTrust. Your line is open.

Great. Thanks for taking my question, Mike, in the past, Arrow has been a net beneficiary of some of the supplier consolidation we’ve seen in semis. There’s been quite a bit over the last few years. There’s that was on pause for a while and then we saw a big deal announced recently. I’m hoping you can talk to us about your anticipation of potentially more gains from supplier consolidation. And then if you could also comment on, what we should expect, how we should, how we might expect customers to respond to that? Is it sort of gravity situation, where as you get more suppliers, more customers decide they might not need two or three distributors, they’ll just concentrate all with Arrow? Or does it go somewhat the other way where customers want to keep multiple suppliers healthy?

I’ll tell you the outweigh of efficiency versus sort of the old competitive nature of customers not wanting to go to one supplier is changing the dynamics. The first thing is, we’re having, and I’m going to use the term no, I’m sure there might be one or two customers out there. But with our increases, with suppliers, we’ve seen no customer pushback on doing business with us or doing more business. This is a D&A where prices are what they are. There’s no real competitive nature of just buying on price. The competitive nature is in the flow of the product and helping with cash flow, helping with designs and things like that. The attractiveness of what we’ve built over the years with our engineering capabilities puts us more than double the engineers of anybody else in the marketplace today that we’re competing with. In fact, it could be up to three times the amount now. The velocity is there. The ability to handle these customer designs is there, and I don’t see pushback from the customer level at all. And our goal is to support our customers to the utmost of our capability and our suppliers the same thing. And we’re going to work with each of them to expand, and I don’t see any particular reason why we wouldn’t expand with anybody.

That helped. There’s the first part of the question as to your anticipation of further supplier consolidation.

Well, every single time a supplier buys somebody, you have that consolidation. But if you look at it, now you have, what I would say, medium-sized semi companies out there that could likely get bought over the next couple of years. Consolidation is inevitable. Customers do not like the mass numbers of products that they’re dealing with. So that is one thing. Here is the ironic thing. It’s sort of the double-edged question you asked before. Do customers want to put more of their business with me? The funny thing is, what happens when the semi suppliers consolidate. The customers have to put more business with them, too. So I don’t see either trend slowing down. And it really comes down to how the supply chain works now, what extra services you can offer that customer. That is the biggest part of the conversation, not price anymore.

Thank you. Your next question comes from Joe Quatrochi of Wells Fargo. Your line is open.

I was wondering if you could kind of walk through some of the puts and takes for what’s implied in the gross margin guidance for the September quarter. I know, obviously, mix in Asia being a strong mix continuing. And components is negative for gross margin. But maybe just walk through what’s normally kind of the seasonal sequential decline in September. Is that the same magnitude this year?

I’m going to let Chris do it because he’s kind of rolling the dice of not knowing how to answer. I really want to see if you can pull it off.

I would just echo what Mike said last quarter, which is pretty much steady as he goes right now. We’re not seeing big changes in underlying margins at the region level. I mean, we continue to be focused on the things that we can do near-term operationally. And therefore, the biggest shift really is the mix piece that we talked about. I think longer term, as we touched on in the call, just given the level of design activity, you know well how the leverage in the P&L works. That as we see volume growth recover, we think we should see some fairly notable improvements in margins. So how do I do?

And on the component design activity, you talked about the record growth this quarter. Can you remind us how fast does that revenue growth, I guess, follow those design wins?

Yes. That’s where usually three to six months. And I use the sort of the three to 6. The three is an upgrade of a typical system out there. The six months is more of a redesign that will be launched or a new product, something like that. And I don’t have that mix for you. It would be something interesting for us to try to figure out if we could track down the road. But that’s what we’ve typically seen. Other good news is we’ve seen some of the semi guys start to increase a little bit. You have automotive, and automotive is a good size piece for us, too. So an automotive increase would be a positive. 5G increase is going to be a positive. But we do see some good things on the horizon. It’s just how fast will the rest of the industrial base catch up to, and that’s what we need. I mean, the sales are the Company is in good shape right now. The ratios are in good shape, given, but we’re still down $700 million in sales. So the next $700 million comes back, I’m sure it’s going to look a lot different. It’s going to be a lot better for us.

There are no further questions at this time. Steven O’Brien: Thank you. In closing, I will review Arrow’s safe harbor statement. Some of the comments made on today’s call may have included 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.

Ladies and gentlemen this concludes today’s conference call. Thank you for participating. You may now disconnect.