• Total Sales: $6.9 billion, in line with expectations.

• Non-GAAP Earnings Per Share: $2.41, above the high end of the guided range.

• Global Components Sales: $5.2 billion, down 24% year-over-year.

• Enterprise Computing Solutions Sales: $1.7 billion, down 8% year-over-year.

• Consolidated Gross Margin: 12.5%, down approximately 20 basis points year-over-year.

• Non-GAAP Operating Income: $251 million, representing 3.6% of sales.

• Inventory Reduction: Decreased by $390 million from the previous quarter.

• Cash Flow from Operations: $403 million in the first quarter.

• Net Debt: Lower compared to the previous quarter, standing at $3.3 billion.

• Stock Repurchase: $100 million in the first quarter, with remaining authorization approximately $475 million.

• Q2 Sales Guidance: Expected to be between $6.2 billion and $6.8 billion.

• Q2 Non-GAAP Diluted EPS Guidance: Expected to be between $2.05 and $2.25.

• Warning! GuruFocus has detected 4 Warning Sign with ARW.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Arrow Electronics Inc (NYSE:ARW) reported Q1 sales of $6.9 billion, aligning with expectations and achieving non-GAAP EPS of $2.41, above the high end of the guided range.

• The company successfully reduced its inventory by $390 million in Q1, continuing effective inventory management with a total reduction of over $1 billion in the past two quarters.

• Book-to-bill ratios have improved steadily across all operating regions since late Q3 of the previous year, approaching parity.

• Arrow Electronics Inc (NYSE:ARW) saw design win counts grow sequentially in the West, indicating a pivot to new product design and introduction activities.

• The company generated strong cash flow during the quarter, amounting to $403 million from operations, enhancing financial flexibility for capital allocation priorities.

Negative Points

• Consolidated sales for Q1 were down 21% versus the prior year, with Global Components sales down 24% year-over-year due to ongoing semiconductor inventory correction.

• Enterprise Computing Solutions sales decreased by 8% year-over-year, influenced by a mix of product offerings and lower discretionary IT spending in North America.

• The company experienced a backlog decline, consistent with shorter lead times, although it remains above pre-pandemic levels.

• First quarter consolidated gross margin decreased by approximately 20 basis points year-over-year, primarily driven by the overall mix in the components business.

• Arrow Electronics Inc (NYSE:ARW) expects Q2 global component sales to be down about 28% from the prior quarter, indicating continued challenges in the market.

Q & A Highlights

Q: Can you provide details on the business exit and inventory write-down mentioned in your remarks? A: (Rajesh K. Agrawal, Senior VP & CFO, Arrow Electronics, Inc.) The business we exited was small and unprofitable, leading to an inventory write-down. This is part of our operating expense reduction initiatives, which should help us throughout the year.

Q: How should we anticipate inventory trends and working capital targets moving forward? A: (Sean J. Kerins, President, CEO & Director, Arrow Electronics, Inc.) We're managing inventory effectively, focusing on backlog conversion and maintaining quality inventory aligned with customer demand. We aim to manage working capital to support our business needs effectively.

Q: Can you quantify the operational expense savings expected for 2024? A: (Rajesh K. Agrawal, Senior VP & CFO, Arrow Electronics, Inc.) The charges taken for operational expense reductions in Q1 are expected to pay back within the next 12 to 15 months, contributing to a downward trend in absolute operating expense dollars throughout the year.

Q: How is the focus on the mid-market in the Americas progressing, and what impact does it have? A: (Sean J. Kerins, President, CEO & Director, Arrow Electronics, Inc.) The strategy mirrors our successful model in Europe, focusing on a substantial mid-market customer base and a rich line card. The transition in North America is taking longer than expected, but we are committed to this strategic shift.

Q: What are the expectations for the components segment in the June quarter, given the current market dynamics? A: (Sean J. Kerins, President, CEO & Director, Arrow Electronics, Inc.) We're approaching the bottom of the market cycle, with improving book-to-bill ratios and some regional recovery signs. However, the recovery timeline may vary by region, with continued destocking and inventory adjustments.

Q: Was there a meaningful contribution from netted down items to gross margins in the ECS segment this quarter? A: (Rajesh K. Agrawal, Senior VP & CFO, Arrow Electronics, Inc.) The step down in gross margin in the ECS segment from Q4 to Q1 is primarily due to seasonality. Year-over-year, the business grew gross margins, reflecting ongoing adjustments and strategic focus.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.