艾睿電子 (ARW) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to Arrow Electronics conference call to discuss their first quarter earnings. As a reminder, this call is being recorded.

At this time I would like to turn the call over to Sabrina Weaver for opening remarks and introductions. Please go ahead.

Good morning, everyone, and welcome to the Arrow Electronics first quarter conference call.

I am Sabrina Weaver, Arrow's Director of Investors Relations, and I will be serving as the moderator on this morning's call. Today's call is also available via web cast. To access this webcast or future webcasts, please visit our Investor Relations website and click on the "Webcast" icon.

With us on the call today are Bill Mitchell, Chairman, President, and Chief Executive Officer, Paul Reilly, Senior Vice President and Chief Financial Officer, Mike Long, President of Arrow Global Components, and Kevin Gilroy and Cathy Morris, Presidents of Arrow Enterprise Computing Solutions.

By now you all should have received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website.

Before we get started, I would like to review Arrow's Safe Harbor statements. Some of the comments to be made on this morning's call may include forward-looking statements, including statements addressing future financial results that 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 several 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, but please feel free to contact us after today's call with any questions you may have.

At this time, I would like to introduce our Chairman, President, and CEO, Bill Mitchell.

Thanks, Sabrina, and thanks to all of you for taking the time to join us this morning.

We demonstrated yet another quarter of strong execution on our strategic and tactical objectives for the quarter. We outgrew the market globally. And we set record first quarter sales in earnings per share, while growing earnings at twice the rate of sales organically. We continue to manage the Company for consistent growth and continuous improvement, and that enables us to outperform the market regardless of the market conditions we operate in.

Enterprise computing solutions continues to post industry-leading performance and significantly outgrew the market with 39% year-over-year growth in sales. Pro forma for the acquisition of Alternative Technology and the storage and distribution business at InTechnology, ECS grew 12%, approximately two times the rate at which this market is expected to grow.

They also demonstrated strong year-over-year growth in industry standard servers, storage, software, and services. On March 31st, we closed on our acquisition of KeyLink Systems Group and successfully integrated KeyLink's people, systems, and facilities. Alternative Technology, which became an integral part of our enterprise business at the end of 2006, has exceeded our expectations to date and grew in excess of 50% year over year in the first quarter.

We are now the number one value-added distributor of enterprise products for IBM and HP, as well as the number one value-added distributor of storage and security and infrastructure software. We continue to transform our industry-leading enterprise computing solutions business into a much stronger organization with an expanded geographic reach, increased exposure and faster growing product segments and a much more robust customer and supplier base.

With increased scale and greater levels of operating efficiency, we will further strengthen our industry-leading financial performance, and we continue to see significant cross-selling opportunities which will further accelerate our growth in the global enterprise computing solutions marketplace. This is a really exciting and still a developing story for us at Arrow.

On the component side of our business, we grew faster than the overall market and gained share in our core small and medium sized business segment. Europe's performance was exceptional as sales reached a record level and operating income reached its highest level since 2001.

Our core business serving small and medium-sized customers continues to perform well in all regions, as evidenced by strong sales growth of 10% year over year in this customer segment. Sales in North America and Asia-Pacific, not surprisingly, were impacted by the continued well publicized weakness in the large EMS segment.

Despite this weakness, our North American business achieved the second highest level of operating income for a first quarter since 2001, and our Asia-Pacific business increased operating income by over 70%. Again, we continue to demonstrate our ability to consistently perform despite pockets of market weakness.

Book-to-bill ratios remained positive worldwide and strengthened relative to the December quarter in both North America and Asia-Pacific. Pricing at the supplier level remains stable, cancellation rates remained low, and lead times are still within a normal range.

Let's now review some of the first quarter's key financial highlights. Consolidated sales increased 10% to $3.5 billion, the highest level for a first quarter in Company history, and an increase of 5% pro forma for acquisition over a very strong first quarter of 2006.

Earnings per share of $0.74 also reached a record level for a first quarter, and we grew earnings at twice the rate of sales organically. With consistent focus on efficient management of our asset base, our return on working capital increased to the second highest level for a first quarter since 2000.

We had strong operating cash flow performance in the first quarter, with positive contributions from every region generating $114 million of operating cash flow. And our return on invested capital was higher than our weighted average cost of capital for the 13th consecutive quarter.

In summary, we had a very good quarter and once again executed well on our strategic and tactile objectives. Despite the choppy components markets in North America and Asia-Pacific, we continue to show consistent execution and industry-leading levels of profitability. We have shown that we can post strong financial results regardless of of the current market dynamics, and we are expect to continue to manage our Company for consistent steady improvement.

Paul Reilly will now give you a more detailed review of the first quarter and then Kevin and Mike will discover their business's performance in greater detail. Paul?

Thanks, Bill.

As reflected in our earnings release, there are a number of items that impact the comparability of our results with those in the trailing quarter in the first quarter of last year. I will review our results excluding these items, to give you a better sense of our operating results. As always, the operating information we provide to you should be used as a complement to our GAAP numbers. For a complete reconciliation between our GAAP and non-GAAP results, please refer to our earnings release or the "Earnings Reconciliation" slide at the end of the webcast presentation.

Sales for the first quarter were $3.5 billion, that's up 10% year over year and flat sequentially. Pro forma for the impact of the Alternative Technology and InTechnology acquisition, we grew sales by 5% over last year. Worldwide computer product sales were $776 million, up 33% over last year, on strong performance in industry standard service, storage, software, and services.

Pro forma for the acquisitions of Alternative Technology and InTechnology, sales increased a solid 10% over last year. Our operating margin for the worldwide computer products group excluding the recent acquisition, improved 20 basis points year over year.

In our worldwide components business, we outgrew the market with sales of $2.7 billion, an increase of 4% year over year, and 2% sequentially. Our core business of small and medium-sized customers continued to perform well around the world, with sales increasing 10% year over year, while the well-publicized weakness in the large EMS marketplace continued in the first quarter.

Despite this weakness, we increased both our gross margin and operating margin by over 60 basis points sequentially, due to strength in our European business in the the core small and medium sized customer base. On a year-over-year basis, strength in Europe, and our core SMB business also drove a 10 basis point improvement in operating margin.

Our consolidated gross profit margin was 15.4%. This represents an increase of 20 basis points year over year and 80 basis points sequentially, principally due to strength in our European components business, stronger margins in the core small and medium-sized customer base in components and favorable seasonal mix. Pro forma for the acquisitions, gross margins increased 30 basis points and 90 basis points over last year and last quarter, respectively.

Operating expenses as a percentage of sales increased 40 basis points year over year, primarily due to weakness in our large customer segment, principally EMS, as well as investments we continue to make to profitably outgrow the market. Operating income was $156.5 million, that's up 4% year over year.

Operating income as a percentage of sales increased 10 basis points sequentially and declined 10 basis points year over year, excluding acquisitions. That's driven, as I said about expenses, principally due to the large weakness in the EMS business, and investments supporting our strategic initiatives in the first quarter.

Our effective tax rate for the quarter was 31.5%. And for modeling purposes you should assume that our tax rate for the remainder of 2007 will be between 31.5%, and 32%.

Net income was $91.8 million, up 9% from last year and up 5 -- 4% sequentially. Earnings per share were $0.75 and $0.74 on a basic and diluted basis, respectively, an increase of 7% and 9%, respectively, compared to last year's first quarter.

This strong cash flow performance with positive contributions from all regions leading to total cash flow generation of $114 million in the first quarter. Inventory excluding KeyLink, which closed on March 31st, and therefore was not represented in the prior quarter balance sheet, decreased 4% year over year, while inventory turns increased year over year and are now at seven times near an all-time high.

We remain comfortable with our current level of inventory. Focused management and working capital resulted in our return to working capital increasing to the second highest level for a first quarter since 2000, and our return on invested capital exceeded our cost of capital for the 13th consecutive quarter.

Net debt increased due to the KeyLink Systems Group acquisition, which closed on the last day of the March quarter. Prior to the closing of this acquisition, net debt was at its lowest first quarter level since 1997.

Our balance sheet remains very strong. We still have over $1.2 billion of existing liquidity. Also, in the last few weeks, we received favorable rating changes from both Moody's and Fitch Ratings based on the significant progress we have made to date and our ability to consistently deliver results ahead of the market.

We will now move to discuss the results of each of our business units for the first quarter. First Kevin Gilroy will discuss our enterprise computing solutions business.

Thank you, Paul. And good morning.

Enterprise computing solutions had a very strong quarter, significantly outgrowing the market with sales of 712 million, an increase of 39% year over year and a decrease of 6% sequentially. Sales on a pro forma basis including the impact of the acquisition of Alternative Technology and the storage and security distribution business of InTechnology increased 12% over last year in a market that grew in the mid-single digits.

We achieved our 13th consecutive quarter of year-over-year growth, driven by strong double-digit increases in industry standard servers, storage, software, and services, which far outpaced market growth in these segments. Our operating margins excluding recent acquisitions improved 20 basis points year over year.

Highlights for this quarter also include our recent acquisition of Alternative Technology, whose revenues were up over 50% year over year, in the first quarter. Alternative Technology brought us 3,000 new small and medium sized value-added resellers to our portfolio that we can now cross-sell hardware into.

As well, ATI has gained access to our expansive customer base in line card. ATI's experience and expertise in virtualization, security, and professional services areas has resulted in significant net new business to Arrow ECS.

On March 31st, we closed our acquisition of the KeyLink Systems Group. We executed a very smooth transition for our customer supplier and employee bases by fully integrating KeyLink's systems people, and facilities. With the achievement of scale and the deployment of best practices between the two companies, the opportunity exists to achieve new levels of operating efficiency.

Now, as the lead -- leading value-added distributor in the fast-growing segments of storage and security and virtualization software, as well as the leading value-added distributor of enterprise products for both IBM and HP, we stand poised with significant opportunities to further outgrow the market as we cross-sell our expanded product offerings around the world.

Thanks, Kevin. And congratulations to both you and Cathy and to the entire ECS team for a really terrific quarter.

I would also like to formally welcome the KeyLink employees to the Arrow family and to thank the entire integration team that worked so diligently to ensure a smooth transition for our customers and suppliers. This is something Arrow does very well, and we did it very well with the integration of KeyLink.

Mike Long will now comment on our global components. Mike?

Thank you, Bill. And good morning.

In the first quarter, we exhibited exceptional performance in Europe and achieved double-digit growth in our core business serving small and medium-sized customers around the world. We grew faster than the overall market, and gained market share in our core customer base globally. This solid execution was offset in part by the somewhat unsettled markets in North American Asia PAC that are impacted by the well publicized weakness in the large EMS segment.

Lead times are still within normal range. Pricing from suppliers continues to be stable. And we saw no notable increases in cancellation rates.

Book-to-bill ratios were in the 1 to 1.1 range worldwide, and we see stable markets in our core business through this point in the second quarter. In the European region, we had just terrific quarter with record sales of 1.1 billion, up 12% sequentially and year over year.

European components grew at an even stronger 14% compared to the first quarter of 2006. Our gross margin increased 130 basis points year over year, to a new first quarter record level. This strength in our margins resulted from a higher mix of components, ongoing strength in our broad small to medium customer base, and a disciplined focus on margins throughout the business.

Gross margin strength coupled with ongoing efficiency initiatives, resulted in the highest level of operating income for this region since 2001. And as operating income increased by almost 40% year over year, return on working capital increased 470 basis points over last year to reach the highest levels since 2001.

In summary, we had a great quarter, and we continue to focus on driving results by investing in our sales and marketing efforts and enhancing our existing strong local presence with more consistent and disciplined processes across the region through our progress with one Arrow.

In the Asia-PAC region we performed in line with the overall market with sales of 545 million, an increase of 3% year over year, and a decrease of 13% sequentially. Our business in Taiwan performed exceptionally well, while performance across our businesses in Australian, the AVIAN region and India were relatively strong.

This was offset by performance in the greater China and Korean markets which slowed in the first quarter, as a result of the well-publicized weakness in our large EMS customer base. Overall, we increased profitability by over 70% year over year and reached record inventory turns for a first quarter.

Book to bill is improving, and we're beginning to see a more favorable market dynamic as distributors in the region demonstrate greater discipline and become more focused on profitable growth. We continue to be excited by the opportunities that lie ahead for us in this region, and we continue our focus on generating profitable growth and making progress towards our goal of being the clear number one in Asia.

In the North America region, solid performance in our core business was offset by continued weakness with our large EMS customers. Sales to our small and medium-sized businesses remained healthy with 6% year-over-year growth. Total sales for the region increased 2% sequentially and decreased 2% year on year, to reach 1.1 billion as continued weakness in our large customer segment offset areas of strength.

Sequential improvement in gross margins from a more favorable customer mix and improved trading margins along with strong expense control, resulted in the second highest level of operating income, for a first quarter since 2001. We continue to pursue our growth initiatives in PIMCO, to further leverage our number one position in North America, and we continue to make progress in new markets such as lighting, industrial, and transportation.

We note that book to bill for North America strengthened relative to the fourth quarter and book to bill for our large accounts specifically strengthened as the quarter progressed. Our quarterly survey indicated that the majority of our 320 customers surveyed continue to feel their inventory levels are well positioned.

Bill?

Thanks, Mike. And nice job on the quarter and congratulations to all of your worldwide team.

Let me sum up and then we can get to Q&A. Overall, had a very solid quarter. Continue to manage the Company for steady consistent growth, and we continue to execute on the long-term goals we've set out to achieve.

We reached record levels of first quarter sales in earnings per share in our Company history. We continue to take advantage of the opportunities in all of the markets we serve around the world. We continue to grow earnings faster than sales, as earnings increased at twice the rate of sales organically this quarter.

In our components business, we executed extremely well this quarter, and we grew faster than the overall market amidst uneven market conditions. Our core business, the small and medium-sized customer continues to perform well with double digit year-over-year growth, and we're focusing on increasing our penetration within this customer segment.

We continue the transformation of our industry-leading enterprise computing solutions business, by executing on our strategic goals to increase the geographic depth of our business, expand the breadth of our product offerings to focus on faster-growing segments, and achieve scale for greater operating efficiencies. Employees, customers, and suppliers are all incredibly enthusiastic about our strategy. We continue to generate strong double-digit growth in a market that grows in the mid-single digits. The tremendous cross-selling opportunities that exist in our business will ensure that we continue to do so.

We generated significant cash flow in the first quarter, while we continued to invest in the future of our business. And our strong cash flow and solid balance sheet has enabled us to pursue strategic acquisitions as well as to make investments in people and systems that will transform how we operate on a worldwide basis.

We have consistently managed our asset base to bring our return on working capital to the second highest level for a first quarter since 2000, and our return on invested capital exceeded our cost of capital for the 13th consecutive quarter. I would like to thank the entire Arrow team for their continued commitment to the Company and to the goals we have set out to achieve.

Let me turn to our guidance for the next quarter. As we look ahead into the second quarter, we expect to see normal seasonality in all of our businesses. In components, we expect our broad small and medium-sized customer base to perform well, offset in part by continued weakness in the large EMS customers.

In computer products we expect to continue to post good growth in industry standard servers, storage, software and services. We believe the total second quarter sales will be between $3.85 and $4.15 billion, with worldwide component sales between $2.725, and $2.875 billion, with worldwide computer product sales between $1.125 and $1.275 billion.

Earnings per share on a diluted basis, excluding any charges, are expected to be in the range of $0.78 to $0.84, an increase of 1% to 9% from last year's very strong second quarter. These expected results include the impact of the KeyLink acquisition, which now has been successfully integrated into Arrow.

And so we continue to manage our business for continued execution and continuous improvement that drive us to outperform the market regardless of the market conditions we operate in. We've executed on those strategic goals and we enter new geographies and new markets, we expand our product offerings to ensure we touch every region, every end market with every technology. With the ongoing focus in execution, we are committed to create value for our business partners and our shareholders as we invest in future growth and stability.

Sabrina?

Thank you, Bill. Operator, please open up the call to questions at this time.

Thank you. Today's question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS)

We will take our first question from Matt Sheerin with Thomas Weisel Partners. Please go ahead.

Good morning.

I just want to ask, just to get some more elaboration on what you're seeing in the components market. Some of the suppliers are talking about finally seeing the EMS inventory correction play out, but it sounds like, based on your guidance, you're still seeing some issues there. So could you be more specific about what you're seeing, what is the book to bill with that customer segment, and how you see that playing out through the quarter?

Mike, do you want to take that one?

Sure.

You know, Matt, the EMS did affect our business in Q4 and Q1, and we have not seen that weakness turn yet, and we don't have any special knowledge as to when it will, but conditions have not gotten worse. And really, despite that weakness, we're continuing to excel in the small to medium customer base and show good performance there and in our core business.

We're going to continue to run the business for performance regardless of the market conditions, with EMS. But again, we have not seen it get worse.

Has the book to bill come up at all there?

What we saw was a slight strengthening, but we haven't seen it being noticeable.

Still below one then?

It is still in the flat range.

Okay. That's fair.

And then as that comes back, and I know you are going to be finally seeing at least seasonality in Europe, would you expect the product mix and customer mix then to adversely affect gross margin within components in the next couple of quarters, and how does that affect operating margin?

Well, I would -- Go ahead.

Matt, I think, as we said, what we see is normal seasonality and normal trends in Europe as well as North America and Asia in the components business, so there is no special news there.

Mike, anything you would like to add to that?

I think, Matt, if that comes back, it will, obviously, be a plus for us, but overall, we're still seeing it remain flat at this point in time.

And Matt, just one point of clarity, the change in that marketplace is not only at a gross revenue basis but at a net revenue basis when we had fee for service engagements. So it is hard to necessarily track what it would mean between GT mix and op-expense mix.

Factually, if that market comes back, we should see an increase in operating income percent, because we haven't taken any dramatic action through the core structure even though business has tailed off a bit.

I got you. That's helpful.

And then, just lastly, your commentary on inventory, did the KeyLink inventory -- was that included in the first quarter? Because you closed at the end of the quarter? Or no?

Yes, Matt, actually, it was included in the first quarter. We closed on the last day of March, so they got included. If you were to exclude KeyLink, we actually decreased inventory by about 4%, really in the face of weakness in the large EMS customer space.

And we all got to keep in mind that we're always looking to ensure that we have the right levels of inventory to meet our customer needs. We monitor it carefully, it changes from time to time. We actually monitor it every day, and we're ordering and cancelling and reordering, that type of thing and rescheduling, so it happens each and every day.

And Mike said, we see no sign that EMS is worsening, and when you look at our customer quarterly survey in North America, the majority of our customer base is still holding the appropriate levels of inventory. So we don't see it as a major change. When you really look at what we're managing on the asset side alone between receivables and inventory, we're managing over $4 billion of current assets, bigger than most banks, a lot of local banks.

So there is always ups and downs as we manage that, but we're pretty comfortable where we stand with inventory in general now, though we do expect to continue to make improvements in working capital.

Okay. Thanks a lot.

We will take our next question from Brian Alexander with Raymond James. Please go ahead.

Yes, just first of all, Paul, on the guidance, for computer business, if I just look at the midpoint of what you're guiding to, and if I assume roughly 400 million for the KeyLink business, it looks like you're guiding the computer business roughly flat sequentially, And normally, it is up fairly significantly quarter on quarter.

Can you just talk a little bit about what you're seeing in the computer business, and if that math is correct?

Why don't I let Cathy and/or Kevin talk about what they're seeing in the current marketplace, and I will come back to you on the numbers.

Kevin, why don't you take a shot at that one.

Well -- so in the current marketplace we're continuing to see strong pipelines. If you take a look at our virtualization software, virtualization storage and server business, we're seeing strong pipelines there.

Our storage business continues to grow quickly. From a revenue perspective, we're seeing strength.

Yes, Brian, I think the estimate you're using on the accretion from the KeyLink sales is on the high side. We actually have it lower than that in this particular quarter.

So I think when you look at it, we are looking for normal seasonality and continued growth in the business as we move into the second quarter.

Can you maybe be a little bit more specific on what you're expecting from KeyLink? I think before you said more than 1.2 billion for the year. And I think June is a stronger quarter than September. So I thought 400 would be a good place to start.

And if I use something close to that, it looks like on a year-over-year basis, you're looking for the computer business ex-KeyLink to be down high single maybe even low-double digits, which doesn't sound like growth in the core business. So I'm confused.

Yes, no. The -- when we think of the $1.2 billion, we need to think about the really large, large Q4 surge in that business. So we really can't say take a third for each of the remaining quarters, because that is the strongest quarter for the full year.

So when we look at it from that point of view, I think if you were to adjust your estimates to around $350 million for this particular quarter you would have a better feel for what is happening in the KeyLink business as we move forward.

Okay.

And then just to follow-up on Matt's question regarding the EMS business and it sounds like you haven't seen much improvement despite -- I think last quarter maybe you saw a little bit of improvement, but based on some of the comments from suppliers, as Matt said, they are seeing some signs of life, and maybe, I guess my question is, would there be a lag between when your suppliers would see that business come back, relative to when you would see that business come back? And then I have one more question.

Brian, it is Bill. The answer is yes. Almost assuredly so.

The bulk of the large EMS, and that's what we're talking about, is large EMS business, in fact, those direct, and that would be the material that would be placed first. The less than 10% that they moved through distribution, typically, would have a bit of a lag on it because those are the things that are used as sort of the final pieces to -- for final bills. So I would expect there would be a lag in that particular part of the business.

And again, as we said, we have not seen those signs yet. It has been reported. The weakness has also been reported. So we will see.

Thanks, Bill.

My final question, just relates to ASPs in the components business. Can you guys just talk about the trends that you're seeing? I think the prior quarter's ASPs were relatively stable.

And I think one of the things you said this quarter is that your gross margins in the core customer base were up, and I think historically gross margins have tended to run a little bit counter cyclical when ASP's start to fall you are able to buy better but you don't necessarily pass that through to the customer right away which helps your gross margin.

So I'm trying to understand, is part of the gross margin strength you're seeing in your core customer set a function of ASP weakness?

Paul, why don't you have a shot at that?

Yes. I think what we're seeing, generally, is that -- is not dramatic change in average selling prices at this point in time. We've been able to get some changes in our customer side, so we've been able to drive up our net GP to the small, medium-sized customer base, but pricing seems to be relatively stable at this point in time.

Okay. Thanks, guys.

Brian, I just want to get one other point of clarity on your question around computer products. Keep in mind when we're talking about computer products, we also have the small computer products business in Europe, which has seen very little growth over the last several years, and that's not really -- that's not really the ECS business, which is where the KeyLink business is at this point in time.

Got it. Thanks, Paul.

We will take our next question from Jim Suva with Citigroup. Please go ahead.

Great. Thank you, very much.

Since a lot of the focus so far has been on the top line, maybe I can switch the focus a little bit to talk a little bit about, kind of, the expense line. Particularly, the SG&A line, can you talk about kind of what went on there with the increase? Is that having to do anything with your I.T. systems? And there is kind of no comments around -- I believe you have been accelerating your implementation of your I.T. systems, and, kind, of what should we expect for SG&A?

Well, Jim, good question. I think your comparison was to the trailing quarter. Keep in mind that we did not include Alternative Technology or InTechnology in the fourth quarter.

So when you factor those two acquisitions as well as a bit of a stronger Euro, it is something like $17 million of the change that you referred to, the $23 million change. Obviously, ERP impacts comparability to a certain extent, but it is not all ERP that drove the difference between the $23 million number I think you had quoted previously, or earlier today, and the $17 million.

We're investing in other parts of the business. Quite honestly we've seen an increase in field -- what we call field sales and marketing types and people with their feet on the street. That's a conscious decision by us.

We want to make investments in the business. We think that they are going to pay off over the longer term. We think that will be part of our strategy for outgrowing the marketplace. We talked about investments we're making in lighting or Eastern Europe as examples of areas that we're investing in.

So when you invest in a sales and market person, there is naturally a lag between when they come on board and when we pay their salaries -- start paying their salaries and really when they start earning their keep as they go out prospecting, learning the customer base, learning the product set and developing a rapport with customers and suppliers to really be able to sell our value-added services.

And Jim, just going back to the ERP question, we are on track as we reported last quarter. What we have seen, we did accelerate some expenses in the fourth quarter of last year, which we reported. We're right on track and very pleased with the progress that we're making on the ERP systems. We brought up one additional section of it this last quarter, brought it up successfully, and we're continuing to move forward on that.

But I think the point that Paul is making is really important one. We will continue to invest in the business, and we're investing it in it for the long term. And we think we're making the right longer-term investments that will generate the returns for shareholders, and that is where I think we get paid to do, and we will continue to do that.

And Jim, one of the closing points from my side, there are other ways of funding these types of investments and you see our interest expense would actually be down a substantial amount year over year if it wasn't for the acquisitions. You see our tax rate are down.

We are looking at ensuring that our net earnings are not diluted by any of our investment, and those are alternative ways for us to be able to pay for those investments we're making.

Okay. That's very understandable.

Maybe just a forward-looking a little bit of guidance, as you're investing, what should we expect for, kind of, SG&A like maybe as a percent of revenues or something? It is kind of around 10.6% now. And I understand you're investing.

But should we expect that to continue to go up or stable around those levels?

My expectation it would be stable to coming down as the investments in field sales and marketing types begin to generate new sales for us and begin to pay for themselves.

Great. Thank you very much, gentlemen.

We will take our next question from Thomas Dinges with JPMorgan. Please go ahead.

Hi. Good morning, guys.

A quick one for Kevin. Just on the strength you're seeing in the industry standard server side, can you talk a little bit about what the pricing environment there had been? Obviously, most of the ASP commentary here so far has been centered a lot more on components, but just curious to get your take there.

And then also, if you've seen any of the VARs starting to talk about any impact as they roll through the year from the implementation of virtualization software on overall server volumes? And then I have a quick follow-up.

Okay. So we see tremendous strength in industry standard servers in blades in our space, and I -- we don't see downward pressure on the margins as we continue to sell in a solutions environment. We're not fulfilling straight demand. We're actually creating demand in a rather complex IT solution sale.

So we continue to see our margins holding, as you heard from the report out, we increased our margins 20 basis points year over year. So we see strength there. And we see our motion or go-to-market strategy of selling solutions and complex IT environments, winning in the marketplace.

As far as virtualization, we may be the leading, if not the leading distributor of virtualization software for both the storage product line and the server product line. We see those as a positive enablement of new sales of servers downstream and to the mid market.

We're seeing a lot of our growth in the mid market, our value propositions playing strong in the mid market, and virtualization software is wrapped around probably the vast majority of our server sales and storage sales. In the enterprise space, there clearly is some optimization of CPU through-put and CPU processing by virtualization software.

So maybe less servers, but we also believe that virtualization is enabling acceleration of swap-outs of old gear versus new gear. So we are actually bullish on virtualization relative to server and storage sales in 2007.

Okay. Thank you.

And then, Paul, maybe I missed it or you guys didn't disclose it, but inherent in the guidance what is the expectation that you have for the interest line as you move into the next quarter and then maybe for the rest of the year with the increased funding that you -- the increased debt that you got on the balance sheet now?

Yes, well, we're looking at it as probably -- it is a good question. First, let me look at the quarter and then I will come backed to other question you have about the rest of the year. We see interest expense probably being up a couple million dollars in the second quarter in the short term, because we had to borrow about $145 million to be able to complete the funding on the KeyLink acquisition.

Our expectation fully is that we will be able to pay for that acquisition through our own cash flow generation -- our free cash flow generation before the end of the year. So we will be able to take that $145 million of borrowings off the books, if you will.

We're working it hard. We expect to be cash positive in the second quarter. We expect to be cash positive throughout the year.

So I would say for now assume that it will be about a $2 to $2.5 million negative impact for us on interest as we move forward in this quarter. On the borrowings, we, obviously, have the interest that we're going to lose on the cash we had invested. we will have a pit of an impact there, but we will be able to repay this before the end of the year.

Okay. Thank you.

We will take our next question from Bernie Mahon with Morgan Stanley. Please go ahead.

Good morning. A question for you, going back to the components. It seems like in the March quarter to the midpoint of guidance it was up 6% sequentially and you came in below that at 2% sequentially. And now, you're expecting kind of normal seasonality in the June quarter. I guess I'm just, -- maybe I'm not sure of the linearity of the March quarter.

Did you see strengthening at the end of it? It sounds like you continue to see this weakness. So I guess the question is, what gives you confidence that we will have kind of normal seasonality in the June quarter?

Brian, it's Bill. Let me take a shot at that, and I will ask Mike for a follow-up.

In terms of what we saw, if you remember a couple of things were going on, we certainly did see some continued weakness in the large EMS space and we talked about that before, and we didn't see that turn around. There had been lots of expectations as of the beginning of the third quarter that said that should start turning at the end of the first quarter. We didn't see it, and we haven't seen it to date in this quarter. And as we talked on previous questions, we don't have any indications that it is turning, it is clearly not getting worse.

If anything, it is modestly, modestly strengthened. The other thing that happened, as you well know, is that Chinese New Year's was late this year. The bounce-back from Chinese New Year's wasn't quite as strong as we had expected. Again, that was virtually entirely in the large EMS customers that we have in greater China. And that didn't bounce back.

Having said that, again, what we see is going forward that things appear pretty stable, and therefore, we would predict normal seasonality as we look at our markets for the second quarter. And that's -- and, again, as usual, that's about as much visibility as we have.

I guess for the -- it sounds like in the March quarter, that Asia-Pacific, North America, we're probably a little bit below plan, Europe was a little bit better. I mean, is that how you would, kind of, expect the June quarter to play out at this point? I mean, are you seeing -- it sounds like are you seeing the continued strength in Europe and maybe that is going to carry the other regions.

Well, what you usually expect in the second quarter is normal seasonality is that -- a couple of things happen, one, there are lots of holidays in Europe this quarter, with the Easter holidays, and Saint's Days, and also, as you start getting towards the June period, you begin to get into the summer season in certain parts of Europe, and so there is the beginning of a summer slowdown. That's what we expect to occur.

Having said that, you're exactly right. Europe has been very strong for us. And the strength in that business, which is driven in the Nordic countries, in Germany, et cetera, is really in that small and medium-sized customer base, which is very good for us.

That is a very powerful part of our business and that's where the strength is and that's where it continues to be. And I was there just a few weeks ago I'm very, very pleased with what we're seeing there.

Okay. And then just in terms of inventory, what are your -- given the guidance that you have for a little bit of growth, what are your expectations for building inventory in absolute dollars? Do you have to build in any region? Or are you expecting to stay about flat?

Hey, Bernie, it is Paul.

Really, the inventory number at the end of June is predicated on what we think is going to happen during the summer months. So we see no reason to think that it would be anything but normal seasonality, and it's hard to even guess looking in that quarter, it is so far away, and visibility is limited.

So I think what -- our plan is to buy inventory on a timely basis, sell it on a timely basis and collect it on a timely basis throughout the second quarter, and we will see where we shake out as we move into the June month as to whether we need to have more or less as we move into the third quarter.

All right. Thanks a lot.

We will take our next question from Steven Fox with Merrill Lynch. Please go ahead.

Hi, good morning.

A couple of quick ones. On the KeyLink acquisition, you had talked about $0.15 accretion or so for the year. For the calendar year. How much is that adding to the earnings in the second quarter?

Hey, Steve, it is Paul. What we said was $0.15 to $0.17 for the remainder of this year, for nine months, three quarters. That is net of the amortization of goodwill and estimates there. So what we're looking at, broadly, is $0.01 to $0.03, in that range, for the second quarter.

Great.

And then, secondly, can you talk about how order trends went on the component side? You mentioned book to bill, but can you talk about orders, say, since Chinese New Year into April by region?

Mike, do you want to take that one?

Could you ask that question again?

Yes. Instead of just talking about the book-to-bill metrics, I was wondering if you could talk about trends just in orders, forgetting about the revenue, I'm just curious how your orders have trended since, say, the Chinese New Year.

Well, we have seen a strengthening since Chinese New Year, albeit it came late in the year. And what we continue to see is a relative strength in our small to medium customer base, not only in Asia, but everywhere.

So that customer base is tending to have stronger order patterns, and as we've said before, the EMS customer base has remained flat for us.

In orders, too. Great.

Yes.

Thank you, very much.

We will take our next question from Josh [Golden] with JPMorgan. Please go ahead.

Hi, good morning. Congratulations on your positive outlook for Moody's on the debt side.

A quick question for you in terms of CapEx. Do you happen to know what you're forecasting for the CapEx for 2007?

I'm sorry, for the whole year, Josh, or for the next quarter?

For the whole year.

Okay. Well, what I would say is that we will see an increase in the second quarter, and we are looking at something that would be in the -- I would say around $28 million.

We spent about $22 million in the first quarter. And I would think that probably the $28 million quarterly rate is pretty consistent for the rest of the year.

Okay. Thank you.

My next question sort of centers around accounts receivable. Was there an increase in receivables at all during the first quarter of '07 here? And if so, what was that related to?

Yes, actually, we did see a bit of a lowdown in our DSOs in the first quarter. I am going to chalk that up, quite honestly, to poor performance or less than the performance we're used to getting from our credit teams, around collections and cash applications. So I don't see any change in the quality of our receivables.

It has not been a substantial increase in write-offs, not a substantial increase in customers going cash to. And I think we need to be a little bit more focused on that, as we saw, quite honestly. That's the way I look at it, as we move forward.

When I look at it from an impact of the KeyLink acquisition, KeyLink was, as we mentioned, closed on the last day of the quarter, so it added about $160 million of receivables, if my recollection is correct.

Okay. So it is fair to say that that should improve going forward?

Yes.

Okay.

We would expect so and we are focused on that.

And just to clarify, you do expect to pay down the debt then from cash from operations for the acquisition?

We absolutely do. That's our plan to be self funding, whether it is for capital expenditures or strategic initiatives or for M&A opportunities as they come up.

Okay. Great. Thanks, guys. Keep it up.

We will take our next question from Kevin Sarsany with Next Generation Research. Please go ahead.

Hi. I've got a question on the component side.Looking back over the last two cycles, back in 2004, 2005 and then back earlier in the decade, so your component business for the last cycle looks like margins, if you considered this a trough, is about 100 basis points above last trough and 250 basis points, from the early decade.

Now, as we pull out of this cycle and the EMS guys come back and everything is pretty groovy here. Can you talk about potential peak margins and also add in there, you mentioned it a few times the more rationale of competition in Asia-Pacific.

Could you kind of talk about where these can go?

Paul, why don't you take a shot at that, and then I will follow up.

Sure. There are several different themes in there, so they are all good questions. We have seen that there has been an increase, and very interesting, you spoke about earlier in the decade, you saw during the trough that actually margins improved quite a bit as suppliers recognized the value we could create for them through demand creation.

We have been able to maintain most of that since that point in time. So it is a good position for us to be in. As we've talked about, a lot of the change in the gross profit margin in the last several years, the downward pressure that we've seen on a consolidated basis is more around a change in mix, where the fastest-growing region is Asia-Pacific where we've seen a big change in our computer products business. I mean, ECS today is on a 2X run rate than it has been only a year ago. So there has been a change of mix there.

Also, we have seen an increase in fee for service business which is good for us, because it doesn't bloat the revenue number. So all of those are very positive things for us. Customers are paying us with the value we create. Suppliers are paying us for the value we create. So what we really see more than anything else as we look at our gross profit margin on a consolidated basis is pressure downward around mix only.

When you ask about Asia-Pacific, the business model there is going to be very different. And we see signs of it already. We know that the gross profit percent will be less. We know also that the cost of serve will be less. We know the interest rate will be less there. And actually, the dedicated assets, if you will, working capital should be less than other regions of the world, so that from a return on invested capital point of view, there should be no real negative impact as that business grows and gets healthy.

We also like the idea that we have been saying we're focused on profitable growth there and we see some of the Taiwanese competitors talking publicly about their view that they're no longer in the business for just volume sake, but they're also in the business for profitable growth.

And we're all passing on very low margin sales, which is obviously saying to suppliers and customers, we need to be rewarded for the value we're actually creating in that marketplace.

And Kevin, I think it is great question and I would like to follow-up a little bit on Asia. I really like the way the Asia market is starting to set up for us. We had a quarter that showed in-line growth with the market in terms of how it grew, and yet, we increased our profitability by 70% year over year. So we're starting to move in the direction we really want to.

And a couple of things are happening. One, that the Taiwanese distributors really have figured out that profitless growth is not good for anybody and they are being much more focused on that. That's helped to strengthen.

The market is also moving in our direction, in that, as the local markets develop as that small and medium customer base develops, that plays to our strength as an international broadliner where we have all of the services that we can bring to bear and are. That business is higher margin, we are seeing that higher margin that translates into increased bottom line, better asset velocity, et cetera.

So the market is moving from a couple of fundamental aspects in our direction, and we're real pleased with that. And we made good progress this year, even though the top-line growth, though it was absolutely in line with the way the market grew, was not that strong double-digit growth that we've experienced sometimes in the past, but overall, very pleased with where we are in Asia.

Okay. And a follow-up on Asia-Pacific, your Semi versus PIMCO mix compared to the other parts of the world, is it below and is there an opportunity to get the more profitability PIMCO up to corporate average?

The answer is, it is below where it is in the other parts of the world, and we see that as an enormous opportunity for us to get it to the same kinds of profitable levels we see in other parts of the world. That is a really strong opportunity for us.

Okay. Thank you.

We will take our next question from Carter Shoop with Deutsche Bank. Please go ahead.

Good morning.

You guys talked a lot about taking share on a year-over-year basis in components, and two questions on that. One is, what are you looking at to determine share? And also, do you think that you took share on a sequential basis in components?

Mike, why don't you give a shot at that because you're the one that is deepest into that.

Right. Thanks.

So for -- if you take the overall market TAM, if you will, going from Q4, to Q4, or Q1, that market dropped so, we grew, and obviously gained share there. If you extrapolate out the EMS where we have been a pretty strong player over time, what we've seen is improvement in the core business at rates faster than the share is growing through distribution.

And that's how we've been measuring our share gains overall. We've been taking the market sampling of our product lines and basically add up the sales of those product lines all over the world. And then measure our performance within that.

Okay. So it is safe to assume that you would take share based on this calculation every first quarter, based on the seasonality and distribution, versus the TAM?

Well, to project out what every single first quarter is going to be is a hard thing to do. But if you take, for example, what exactly happens in the market and this quarter the EMS business was down, that would be a place where, obviously, would reduce the entire TAM and portions of the DTAM.

And then the core business for us had strength, and that's where the improvement was for us overall in our market-share basis.

Do you have a sense on how you guys performed on a market-share basis within the DTAM on a sequential basis?

Carter, it's Bill. The answer is no. That takes a while longer to get the kind of numbers that we need to be able to be very precise about that.

And it is particularly true that we have good numbers in North America, pretty good numbers in Europe, although we don't have them yet, and the Asian numbers are a little more difficult than the PIMCO numbers, passeres, the electro mechanical, the connector numbers are -- take a little longer to get. So we will get that data. And we do study that hard.

Again, our statement that we believe we have grown share overall for a considerable period of time is true. We have done it with consistent methodology. We have done it looking at all of the elements that we can, and we're absolutely convinced that we are continuing to grow share.

We have no insight into at whose expense. That is very difficult for us to get any insight into. But we're quite convinced both on a total-market basis, as well as on a DTAM market basis that we are -- we have been consistently gaining share for quite some time.

Thanks.

As a follow-up question, we talked a lot about the hardware business, and how that grew on a pro forma basis. Could you talk about what that business did on a year-over-year basis, if you exclude all of the acquisitions that you guys made over the past year?

Paul, do you have that? I don't have that in front of me.

Yes, I can -- I don't have the pieces in front of me, Carter, right now, but we did say we grew year over year in the hardware business, so excluding acquisitions. You can call us later and I will give you the information.

Okay. Great. Last question here for you guys.

Outlook for future acquisitions, what kind of resources is the KeyLink acquisition taking up, are you going to be able to continue this acquisition spree here or are we going to slow down a little bit and try to integrate some of the recent acquisitions.

Well, I am not sure I would characterize it as a spree. We hope that it is a very well controlled and very well thought out strategic thrust for us to really transform the business. We're really pleased with where we are.

Answering your question is we are always looking at opportunities to -- acquisition opportunities. Fundamentally, our strategy will be driven by organic growth. But we always look at opportunities. We look at whether we can fit them strategically, whether we can -- financially they make sense and whether we can fit them operationally.

Obviously, we have a lot on our plate right now with the acquisitions, but we are going to continue to look and see if there are other opportunities for us that would meet our strategic financial and operational capable and operational goals.

One of the things that I really am impressed with Arrow is that there is a tremendous discipline around each one of those to make sure that, in fact, it does make good strategic sense, it fits into an overall strategic framework, two, that it is affordable and that we can make money off of it and we know how to make money off of it, and finally, that, in fact, we can integrate it.

And I was extraordinarily proud of this organization. I can brag about it, because I had absolutely nothing to do with it, in what they have done to integrate Alternative Technology and InTechnology and KeyLink over the last six months. It is quite remarkable if you were on the inside to see how that happened.

And we're up and running and ready to go. And if something good comes along, we have financial capabilities and we have the people capabilities to do that.

Great. Thank you very much.

We will take our next question from Harry Blount with Lehman Brothers. Please go ahead.

Thanks, guys. Most of mine have been knocked down already but let me just focus on a couple of things.

Obviously, we have had a meaningful change in the exchange rate for the dollar. How has that impacted your sales efforts in Europe and to a lesser extent Asia? Have you seen any kind of change and do you expect to see any kind of change in success rates based on that?

Paul?

Yes. Sure. We are not seeing any real pressure from a macro point of view because of the change in the strengthening of the Euro at this point in time. We're very encouraged by the strength that we're seeing in the German marketplace. It is really driving the broad economy in Europe. We still see the Nordic area being very strong on a macro point of view.

Though you do see some weaker market conditions in those two countries and places like France or Spain, or Italy. So not a real negative impact from the macro point of view on a strengthening Euro that we can see at this point in time. And, in fact, we were just having a discussion that it appears that the German government has done a really nice job over the last several years of being able to go under the covers to strengthen their economy and they are taking advantage of that right now.

And similarly, has that had any impact on potential acquisitions you guys might make and making them somewhat more expensive and therefore unattractive?

No. That is a good question. But nothing that we've seen at this point in time where we're really getting a negative impact from an acquisition point of view.

The fact of the matter is that while it could be more costly in U.S. dollars, the flow of earnings would be higher in U.S. dollars also, so they cancel each other out from a returns point of view. And there might be also a bit of a change from accretion, but not a big difference, and we really focus on both immediate accretion and return targets that we had in addition to, as Bill talked about, for the financial goals, strategic and operational goals.

Okay. And then lastly, I did hear you guys make commentary around lead times but I think they were overall lead times. Did you make any comments about your large EMS customer lead times specifically? Thanks.

No. In terms of lead times, those would be based on our suppliers. And they are well within normal ranges. So we -- and have been for quite some time. So that part of the market is very stable and has continued to be stable. No news this quarter.

A change notice returns business, book ship business, it hasn't been a dramatic change over the last several quarters in that part of the business. So no real change on a macro basis.

Great. Thank you, very much.

At this time, there are no further questions. Ms. Weaver, I will turn the conference back over to you.

Thank you.

Before ending today's call, for those participating today's webcast, we will quickly scroll through the slides referenced in our webcast that contain a reconciliation between GAAP and adjusted results. This reconciliation is also included in our earnings release.

We have also included a balance sheet reconciliation to walk you through the adjustments for our recent acquisition of KeyLink. Both the release and this presentation will be available on our website.

I would like to thank all of you for taking the time to participate in our call this morning. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you. And have a nice day.

Ladies and gentlemen, this will conclude today's presentation. We do thank you for your participation and you may disconnect at this time.