艾睿電子 (ARW) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Arrow Electronics conference call to discuss their fourth 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.

Thank you, Anola. Good morning, everyone. And welcome to the Arrow Electronics fourth quarter and year-end conference call. I am Sabrina Weaver, Arrow's Director of Investor Relations, and I will be serving as the moderator on this morning's call. Today's call is also available via webcast. 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; Kevin Gilroy and Cathy Morris, Presidents of Arrow Global Enterprise Computing Solutions; and Mike Long, President of Arrow Global Components.

By now, you all should have received the 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 statement. Some of the comments to be made on this morning's call may include forward-looking statements including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings.

We will begin with 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 finished the year with a really strong fourth quarter. We achieved record sales, record working capital as a percentage of sales and record return on working capital. These results demonstrate the operating leverage we've built into our business over the last few years. Operating margin was, again, at industry-leading levels and our balance sheet and capital structure remain strong.

I want to again emphasize that we're managing our business for consistent performance and continuous improvement no matter what the operating environment is. And we are doing this while investing in the long-term future of Arrow to increase our opportunities in higher growth markets, better leverage our global scale and to further diversify our revenue stream.

In our enterprise computing solutions business, we performed exceptionally well despite well-publicized concerns about I.T. spending in the fourth quarter. We again outgrew the market on an organic basis and sales pro forma for acquisitions more than triple the rate for which the overall market grew. Our acquisitions are performing well and are ahead of our projections, and were contributors to our strong performance in the fourth quarter. Our strategic initiatives have gained significant traction in the marketplace. You'll be hearing about the progress we've made from Kevin Gilroy. Operating margins were again at industry-leading levels. And with increased scale, scope and capabilities, our strategy is working and is resonating strongly with our customers and suppliers. In components, we executed well in a cautious marketplace. After three quarters of declining year-over-year growth, our North American business saw a slight uptick in the fourth quarter and book-to-bill was above one in each of the regions in which we operate. Mike Long will walk you through the details of market conditions and the strategic moves we've made in the fourth quarter in just a moment.

Overall, I'm really proud that we've taken Arrow to a new level in 2007, one that has much broader geographic reach, increased opportunities in our enterprise computing business, and a more flexible cost structure. More importantly, this is resulted in a much less volatile earning stream no matter what the market conditions are. Our performance this quarter is evidence of that. Our strategic priorities for the future are clear to continue to leverage the tremendous opportunities in enterprise computing solutions, build a best-in-class global components organization to leverage our scale around the world, install world-class systems and processes throughout the corporation, pursue significant growth opportunities across products, markets and geographies. We look forward to continuing to take advantage of all of those opportunities that lie ahead in 2008 and beyond.

Paul Reilly will now give you a more detailed review of the fourth quarter, and then Kevin and Mike will discuss their businesses' performances in greater detail.

Thanks, Bill. As reflected in our earnings release, there are number of items that impact the comparability of our results that both in the trailing quarter and the fourth quarter of last year. I will review our performance 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 fourth quarter reached a new record level at $4.4 billion, an increase of 26% year-over-year and 10% sequentially. This was at the high end of expectations and demonstrated our continued success in the markets we serve.

Pro forma with the impact of the KeyLink, Alternative Technology, and InTechnology acquisitions, we grew sales by 9% over last year. Global enterprise computing solutions increased sales by 111% year-over-year and increased 37% sequentially to $1.61 billion. Pro forma for the acquisitions of KeyLink, Alternative Technology and InTechnology, we continued to outgrow the market with sales increasing 22% over last year. This represents the 16th consecutive quarter of year-over-year sales growth for ECS.

Operating income as a percentage of sales increased 190 basis points sequentially to an industry-leading 5.2%. And further improvements in managing our asset base in the fourth quarter allowed us to achieve record return of working capital for the ECS group. Global Component sales of $2.8 billion decreased 2% sequentially and increased 3% year-over-year. Intense focus on cost containment and ongoing initiatives to drive down our operating expenses enabled us to increase our operating margin by 40 basis points year-over-year, and we only saw a 10 basis point decline sequentially which is less than normal seasonality.

In the fourth quarter, we grew earnings at more than three times the pace of sales growth year-over-year. We continued to improve our working capital management as evidence by a decrease in the amount of working capital needed to support our sales in each of our regions in 2007. In the fourth quarter, working capital to sales decreased 160 basis points year-over-year.

In Asia-Pacific, sales increased 5% year-over-year and decreased 5% sequentially to $655 million. We continue to make great progress towards our profitability goals in the Asia-Pacific region this year with operating income up over 60% in 2007. Remember that we have made a strategic decision to focus on the small and medium-sized customer base and pass on the high-volume, low-margin opportunities. Coupled with better asset management, return on working capital almost doubled for the full year.

In Europe, sales of $987 million decreased 2% sequentially and increased 4% over last year's fourth quarter. Our continued focus on the broad small and medium-sized customer base combined with ongoing efficiency initiatives resulted in the highest level of operating income dollars for the full year since 2000.

In North America, total sales of $1.1 billion were up slightly compared to the previous quarter and with the fourth quarter of last year. That is breaking the three-quarter trend of declining year-over-year sales growth in this region. We also increased return to working capital in the region by 38% over the same period last year.

Our consolidated gross profit margin was 13.9%. That is an increase of 20 basis points sequentially despite an increased mix of business in our global enterprise computing solutions business which has a percentage of mix increase from 29% to 36% of total sales. The change year-over-year was predominantly due to mix. When you look at our core customer base of small and medium-sized customers in our component business, gross margins, they only decreased by 20 basis points year-over-year. Operating expenses as a percentage of sales decreased 40 basis points sequentially and 100 basis points year-over-year to 9.3%. That's the lowest level achieved since 2000. We continue to capitalize on opportunities to leverage our global scale and develop best-in-class global practices to transform our organization for the future. Included in this, the implementation of our global ERP system. In 2007, we shared with you that the estimated impact to cash flow as result of ERP would be $70 to $80 million and we executed to that range.

For 2008 calendar year, we anticipate a $90 to $100 million cash flow impact with the annual impact decreasing by approximately $25 million in 2009. Operating expenses in the fourth quarter include an estimated $5 million or $3.4 million that are taxed of amortization of intangible assets related to acquisitions. Operating income was $203.5 million, an increase of 34% year-over-year and an increase of 26% sequentially, or more than two and a half times the increase in sales. Operating income as a percentage of sales increased 20 basis points year-over-year and 60 basis points sequentially to industry-leading levels again. Our effective tax rate for the quarter was 31.7%. And for modeling purposes, you should assume that our tax rate for 2008 will be between 30.5 and 31%. That income was $120.6 million, up 36% from last year and an increase of 27% sequentially.

Earnings per share came in at the high end of expectation at $0.98 and $0.97 on a basic and diluted basis, respectively. These represent an increase of 36% and 35% respectively compared to last year's fourth quarter and the highest level since 2000. Diluted earnings per share includes $0.03 of estimated amortization of intangibles related to acquisitions in the fourth quarter.

Our balance sheet remains incredibly strong. In today's uncertain markets, we believe our conservative debt level and access to committed liquidity facilities is a competitive advantage. We had yet another quarter of impressive cash flow performance with positive contributions from all regions around the globe generating a total cash flow of $220 million. In the last 12 months, we generated just over $850 million of cash flow, which has enabled us to self-fund many of our growth initiatives. We continue to improve upon the tens of thousands of small transactions we execute day in and day out to sure up all three levers of working capital.

In the fourth quarter, we achieved a record high level of return to working capital. We reached a record low level of working capital to sale at [$13.70] for every dollar of sale. That's a decrease of almost 500 basis points year-over-year. Return on invested capital significantly exceeded our cost of capital by approximately 400 basis points at 12.3% this quarter. As demonstrated this quarter, we continue to execute towards all of our financial goals.

We'll now discuss the results of each of our business units for the fourth quarter. First up, Kevin Gilroy will discuss our global enterprise computing solutions business.

Thank you, Paul. We finished the year with a very strong close generating sales at almost four times market growth. Performance was driven by strong double-digit year-over-year growth and proprietary servers, storage, software and services. We've made several acquisitions in the high growth segments of software and storage. Alternative Technology grew sales in excess of 50% year-over-year for the fourth straight quarter and InTechnology achieved a 20% gain in sales over the last year's Q4. And we expect software to be continued source of growth for us given the strong underlining demands for virtualization and security solution. With virtualization software in particular, only 5% of current servers are virtualized as published by IDC, which translates into a big opportunity for us.

We achieved very strong gains in operating margin and posted a record return on working capital in the fourth quarter as we leveraged our scale and continue to improve balanced performance in all aspects of working capital. The scale provided by our North American acquisitions was a key contributor to our record working capital performance Q4 and our acquisitions overall are performing well. We also continue to make investments in the future growth of our business, such as in our mid-market initiatives. We recently launched 40 new end-to-end solutions focused on the mid market as well as launch our first full online education model to assist our VAR partners and effectively go into the market. The reactions from both sides of the equation have been favorable with many vendors wanting to be part of the solution stack, and we have recruited a significant number of net new VARs that are focused on the mid market.

2007 was a very exciting and transformational year for us. With the addition of KeyLink, Alternative Technology, InTechnology and Centia/AKS, our enterprise computing solutions business is now a much stronger organization with broader geographic region to 22 countries, increased market share in the fast-growing product segments of software and storage and a more robust customer and supplier base. Execution on our objectives has resulted in ECS becoming the world's largest distributor of enterprise storage and security and virtualization software. We have increased our strategic focus on selling total solutions, and now over 60% of our revenues are generated from the storage, software, and services segments. Our cross-selling initiatives continue to take hold with a number referrals between our software and hardware organizations growing steadily. Year-to-date, we have achieved almost $90 million of additional sales through our targeted pilot programs. Our strategy is resonating with our business partners at the highest levels. We are laying the groundwork and investing in the long term to create some very, very exciting opportunities for our vendors, our reseller partners and our shareholders.

Bill, back to you.

Thanks, Kevin. That's a great quarter. Congratulations to you and the whole team. Mike Long will now comment on our global components business. Mike?

Thanks, Bill. In the fourth quarter, we executed extremely well in a cautious marketplace with sales at the high end of our expected range of $2.8 billion and better-than-seasonal operating margin performance.

As we look out across the globe, our book-to-bill was greater than one in each of our regions as we exited the December quarter and with 1.03 on a worldwide basis. The trends have remained positive in Q1 with our book-to-bill above one in each of the region through the end of January. Lead times remain stable and are still within normal ranges between the 8 to 12 weeks, and we saw no notable increases in cancellation rates. In addition, the results of our quarterly customer survey in North America did not change from the end of last quarter. The majority of our surveyed customer base continues to feel their inventory levels are well-positioned leading into the first quarter. While the stock market may be pricing in a severe downturn, we see generally stable conditions right now.

In Asia-Pac, our business outgrew the market again in the fourth quarter with particularly strong year-over-year growth in Taiwan, India, Australia, and New Zealand. Earlier this month, we announced the acquisition of the component distribution business of Hynetic and Shreyanics, a leading components distributor in India, which will provide us additional scale to increase our scale in the Indian marketplace. We also entered Japan, a very strategic marketplace, in October with the formation of a Japanese subsidiary and the acquisition of Universe Electron Corporation. In 2007, we transitioned our primary focus from building infrastructure and systems in Asia-Pac to initiatives that would achieve profitable growth. Our focus on the small- and medium-sized customer segment along with productivity initiative produced strong increases and operating income and return on working capital this year. We will continue these efforts into 2008 and look forward to continued progress in this very important region.

In Europe, our performance was led by central Europe and the Nordic region. While the book-to-bill materially strengthened in the fourth quarter, we have ongoing efforts to broaden our existing customer base and drive for a more consistent and productive operations throughout the region. These initiatives helped us deliver the strong growth in operating income for the year that Paul mentioned earlier.

In North America, we saw our first increase in daily run rates since the third quarter of 2006. This was evidenced in all business units in North America. The lighting and military segments continue to produce additional growth opportunities for the region, and they achieved record performance in Q4. We also saw sequential strength in our small- to medium-sized customer business and we continue to move ahead with strategic initiatives to further penetrate this customer segment. 2007 proved to be a challenging year in components with the weakness in the large EMS customer segment. Yet, we rose to the challenge as we continue along the pass of building the best-in-class global capability and leveraging our global scale. We moved closer to our financial targets for the global components business. Operational efficiency is a continuous process and we are always looking for ways to consistently improve our operating performance while meeting the needs of our business partners. And we are doing this while continuing to invest in the important initiatives that will take us to the next level of growth and profitability.

Bill?

Thanks, Mike. And then, congratulations to you and your team also. Or as you say, a really nice year in challenging environments. Overall, we performed exceptionally well in the fourth quarter and for the full year of 2007. We continue to manage the company for consistent growth and continuous improvement and we once again executed well on our strategic objectives.

For several years, we have been on a journey to build platform for sustainable profitable growth for the future and I am really proud of what the team has accomplished and what we created. I'd like to go through it for you and look back kind of five years with more than doubled in size since 2002 mainly through organic growth but also via acquisitions that have strategically accelerated our sales growth. We aligned our cost structure to increase its variability to react to market changes. And we have grown earnings at five times the rate of sales during that same period.

In 2007, our continued and focused efforts drove operating expenses sales down 50 basis points over the prior year and below 10% as a total percentage of sales. We have created a very strong balance sheet with net debt at the lowest level in ten years. And we are very well poised to make investments for the future. We have decreased the amount of working capital needed to generate dollars from [$19.2] to around $0.15 in 2007 and we still see more room for improvement.

Our business is one of managing tens of thousands of small transactions a day and we are working on ways to improve each and every one of those transactions. And that's why we know there is more opportunity to achieve even higher levels of efficiency going forward. We generated an impressive $850 million of operating cash flow this year, making it the fifth consecutive year of cash generation during periods of growth. This allowed us to self-fund our acquisitions and investments that we made this year and makes us very well poised for the future. We also generated return on invested capital well in excess for our cost of capital and we've done this consistently for four years. I would like to emphasize this simply was not done previously but now is deeply embedded in the fabric of our operating culture. We remain focused on achieving our targeted level of ROIC. It is a key measure for internal performance and compensation, as well as a strong indicator for sustained shareholder value creation.

I'd like to thank the entire Arrow team for their continued commitment as we move ahead with our strategic initiatives and build the future forever for Arrow. The best is yet to come. I want to look forward now and look ahead. The macroeconomic environment is clearly more negative than it was a few months ago. There's much commentary in both the financial and general press about economic conditions in the U.S. and in the world. There is quite frankly considerable sentiment that a severe downturn is just ahead.

We'd be foolish to ignore all of this. But from where we sit and from the daily conversations we have with a wide array of customers and suppliers, in general, we see business within normal seasonal and cyclical patterns. I'd point out that our visibility is at best about 90 days. However, should a downturn occur, we are well prepared to respond quickly and strongly and we will do so. I would also point out and this is often overlooked that with our strong financial and market position, we are well positioned to take advantage of opportunities for market share growth and opportunities for M&A that may occur should a downturn occur. And we will also pursue these with equal vigor. We, of course, will continue to watch the leading indicators closely. And if we do see signs of softening, we will react quickly and take quick and strong actions to maintain our level of profitability. We'll also emphasize that we will also move equally and quickly to take advantage of market opportunities as they arise, and we are well positioned to do so.

Looking ahead into the first quarter, we generally expect normal seasonality in both our components and ECS businesses. We believe that total first quarter sales will be between $3.925 and $4.225 billion with Global Component sales between $2.775 and $2.975 billion and Global Enterprise Computing Solutions sales between $1.15 and $1.25 billion. Earnings per share on a diluted basis, excluding any charge -- charges and including estimated amortization of intangible assets of $0.03 to $0.04 are expect to be in the range of $0.81 to $0.87 a share and increase of 9 to 18% from last year's first quarter.

In closing, we had a terrific 2007. And as we look forward, we'll continue to manage our business with a strong financial discipline that we put in place. We are executing well on our strategic goals to achieve profitable, sustainable growth by entering new geographies and new markets, by expanding our product service and solution sets to make sure we touch every region, every end market, and every technology. We are confident about our ability to perform in any marketplace and in any market condition given our financial strength, our market position, our broad customer base, our expanded capabilities, and our global scale. We are well prepared should a downturn occur. And with ongoing focus and execution, we will continue to create value for our business partners and for our shareholders.

Sabrina, over to you.

Great. Thank you, Bill. Anola, we'd like to open up the call to questions at this time.

Thank you. The question-and-answer session is conducted electronically. (OPERATOR INSTRUCTIONS) We'll take our first question from Matt Sheerin with Thomas Weisel Partners.

Yes, thank you. I'd like to ask a few questions regarding the components business. Could you tell us what the growth rate in Europe was on a constant currency basis? And then on Europe, are you seeing seasonal patterns in the March quarter? I know that your book-to-bill is above one but normally you grow sequentially in the double digits. Your big competitor, Avnet, had said that they've seen a little bit more sluggish trends and a couple of other distributors had said the same thing about your -- could you comment specifically about your first thing?

Matt, good morning. Year-over-year on a constant dollar basis, Europe was down about 6% in the fourth quarter. So that continues -- to think about it, it continues to [better] with the same trend we saw with a strong 2006 and then the European marketplace softening a bit for 2007. And then, we're seeing pretty much what you would expect to see for the first quarter and normal seasonality. And we kind of feel [like] what the market is. I mean, you know, all indications are that -- it's not going to be a -- it will be normal business going forward?

Okay. So normally, you see Europe up in the 10 to 15% range. U.S. is up [load] with single digits and then Asia is down. Is that basically what you're seeing in those regions right now?

Our expectation is that we see normal seasonality in Asia-Pac, which would be down because of the Chinese New Year. We expect to see normal seasonality in North America, which I think our numbers have been more in that 3 to 5% range for the last several years. And Europe, we'd expect to see some normal seasonality there also, approaching the numbers you're talking about.

Okay. And then, maybe Mike, you could comment a little bit. Why you are seeing sort of a snap back in North America? Are you starting to see refresh of inventory from some of the Europe taking EMS and OEM customers where things have been a little bit weaker or is it more broadly better than that?

Well actually, Matt, we have not seen a real big pickup in our large EMS customer base. But despite that, we have seen improvements in our small to medium customer base. You know, the military and industrial segments have been doing very nicely for us in the year. But we have seen really the broad base of customers pick up, but we clearly have not seen a large pickup in the EMS segment yet.

Okay. Great. And just my last question, just a question for you, Paul. In terms of the costs related to the ERP rollout, could you tell us how much of that is noncapitalized and is going to hit your SG&A line or did so far?

We really haven't talked about that, Matt. As far as what is going to P&L and what goes to the balance sheet, I think if you were to look, though, at the rate of our spend in 2007 on statement of cash flow compared to prior years for capital expenditures, you could work your way into what amount would be about capitalized and you can kind of figure out what the amount would be expensed for 2007.

We did talk a bit about increase in spending this year as we start to turn the system on in certain parts of the business which we are quite excited about. That means, it's a little bit more spending and a bit more expense for the year. But that also means that beginning in 2009, we will begin to reap some of those benefits of having a system that is much more efficient, much more effective. Let's us really focus on how we can purchase better. Let us focus on how we can really sell better and this is a business all predicated on top-line growth. Look at our performance where we've been able to outgrow the marketplace each in the last several years and we are excited that will accelerate our growth. So -- I hope that it helps you out a bit and you can work through that.

Okay. Thank you.

We'll take our next question from Brian Alexander with Raymond James.

Thanks. Good morning. Paul, in terms of your EPS guidance, it implies operating margins are going to contract somewhere in the range of 20 basis points sequentially. And year-over-year, they may be flat to down a little bit. So, a little bit of change in trend there.

Can you just walk us through on a sequential basis what's really driving that decline? Historically, you had a little bit of an increase and I know the mix of your business has changed and the KeyLink acquisition probably changes the margin profile of your computer business. Just help us understand what the key drivers of that sequential decline are. And with KeyLink in the hold now, how should we be thinking about seasonality in the computer business both in terms of revenue and margin as we move through 2008?

Right. Okay, Brian. Let me try. You've a couple different points there. First of all, I would start with the change in what I would call seasonality as the result of the KeyLink acquisition. As Bill mentioned, all of our acquisitions are at least at or -- in most cases, ahead of what we thought they would deliver. So when you look at it in the fourth quarter, KeyLink really changed the impact of IBM so that when we look at it, almost 50% of fourth quarter ECS sales are driven by a very large suppliers whose year ended at that time period. We know that they always have a very spiky Q4. So that means that we will have more upside in Q4 because the change in mix but also more downside quite honestly from an operating income percentage going into the first quarter. And in fact, if you are on the webcast, we actually have laid out what we expect seasonality to be for all to see because we do recognize it is changing. That's the first thing.

Second thing is we talked the fact that we are investing ahead of sales. We invested ahead of sales at the end of the second quarter into the third quarter. Admittedly, we had a short-term negative impact on the third quarter but certainly paid off for us in the fourth quarter and we are going to pursue that some more. We really think that we can invest in this business for the long term. Sometimes, the changes the way folks evaluate the business for sure. But we think over the long term is the right thing to do. As I mentioned, at least for -- what we did in ECS for late Q2, Q3 paid off in the fourth quarter.

The third thing, as I mentioned, it's a bit of a change in pace suspending around ERP, and that will have a bit of a negative drag also. So, those are the kind of the factors that you looked at sequentially, all changing what might be "normal seasonality" making it a little different going forward.

As we look to the full year of 2008 and we try to gage whether you are still confident that you can deliver the operating margin objectives in the timeless business model by segment, components 5.7 to 7 and computers being 4.9 to 5.3. And current run rate would suggest you are below both -- the low ends of both of those targets. How should we just be thinking about you're ability to hit those if things do slow? How committed are you to hitting those targets? What actions would you take to get there?

Brian, that's a great question. I'll take it in two different ways.

First off, our cost structure is very different today than it was in past economic downturns. If you look at the last five years, we have taken out over $200 million of fixed cost. So, we're more nimble today, more variable to begin with. We talked about our variable cost running round numbers about 4% and we think that is an improvement for us. When I say "variable" there, I am talking salaries and commissions. That type of thing. We have done some modeling that if we saw a 15% decline in sales, our earnings per share would be between $2 and $2.50. And that would be without any type of actions to resize the business. So basically just a variable cost. So, we think it a positive sign for us because that kind of put a floor on our stock prices based upon historical multiples. By the way, that also would put that on a multiple basis right around our book value which is $27 a share. That's kind of put a floor on the stock price.

I think the other thing though is that we'd have to evaluate the slope of the decline. You know if it is going to be extended and protracted downturn, we take a different action, a course of action and maybe it's going to be a short one. As Bill mentioned, our balance sheet is strongest as it's been in ten years. Our cost structure is strong as it's been in five years. We are prepared to take advantage of the marketplace and it's a good argument to see. We go on the offensive if there is some type of downturn to accelerate our organic growth which paid off for us quite a bit in the last five years as well as M&A activity.

And Brian, it's Bill. I just reiterate the point Paul is making. You asked about the timeless business model. We are committed to those targets. We still think we are going to get those targets. We are moving forward to do that. Should there be the downturn as Paul said, we will take vigorous and strong action. We know what to do and we'll do it to make sure that we maintain the levels of profitability. And I would really emphasize what Paul said is that if there is a downturn, there will be very good opportunities for us to gain share and to look at some M&A opportunities and we are well positioned to do that. So, we see that there's opportunity even if there is a downturn. But no backing off of the commitments to meet our timeless business model targets.

Just one clarification if I could for Kevin. I'll give a question. You mention proprietary server [strength] but not industry standard. I'm just wondering why that was the case. And then, can you tell us what the growth in KeyLink was like you did for some of the other acquisitions?

We saw strong growth in proprietary in Q4. I think that's a function of normal end-of-the-year budget flushes particularly in that one [vendor] that Paul is talking about that is so strong. We see -- moving forward, we see strength in industry standard server. Certainly virtualization software is a leading indicator of strength in that product line or in that segment. We also think that we are positioned well because interoperability will become more and more important towards the high end of market and certainly in the enterprise space. So, proprietary is good to stay and that's good news for Arrow. And I think industry standard servers will continue to grow and that's good news for Arrow, too. The two together is a very powerful combination for Arrow.

KeyLink growth.

Cath, do you have KeyLink growth right in front of you?

Well, KeyLink pretty much is fully integrated into the business. So, there's no longer a standalone KeyLink number. But to the published number, we grew 22% organically. So, that would include excluding the acquisition impact. But I mean, if you extrapolate it, you would say it would be in the mid to high [team] range.

Thank you very much.

We will take our next question from Jim Suva with Citi.

Great. Thank you very much. And I understand and appreciate your visibility into the trends for Q1, but can you talk a little bit about -- maybe a little more granularity. As you know, what we are seeing and hearing is last night Cisco said that January was below plan. Asia seems to be having some excess inventory there. Is there some type of regional strength that you are seeing that's offsetting some other things? Or maybe walk us through particularly how January, now that it is closed, has progressed?

Jim, it's Bill. Let me take a shot at that. I'll ask Mike to chime in. One of the real strengths that we have is that we are not dependent on anyone marketplace, anyone vendor, on anyone particular geography. And so as we look across that, we see by and large normal seasonalities. Again, I can't comment on the Cisco outlook. We certainly don't have a huge exposure to the networking industry. But we do serve some of the same end markets that they would go after.

Again, what we are seeing -- in what we can see -- and again, that's about a 90-day visibility, we see the patterns within normal seasonality and normal cyclicality. We've been in a bit of a downturn in North America. And as Mike mentioned, that appears to have stabilized and picked up a bit. Europe typically follows North America by six to nine quarters and that's playing out. Asia has been fine. This is a seasonally weak quarter for them as they passed the big [build] seasons for the North American and European holiday season and the lunar new year. So, we are seeing that normal seasonality.

We are seeing as we commented a bit of increase of seasonality in our ECS business as the result of some of the acquisitions that we've made in the supplier profiles that has brought to us. That is long-term good news for us. But it has created a little bit of increased seasonality in this first quarter. So again, the strength of Arrow is that we look across many markets, many geographies, and many product sets. And as we look across that, most of the signs -- all of the signs are very much in the normal range. We have not seen extensive pushouts. We have not seen extensive cancellations of the pipelines and the backlogs appear at relatively normal levels. And so, we are calling it as we see it.

The opposite side of that is we are clearly cognizant of what is going on in the marketplace around us. You can't go online. You can't read a newspaper. You can't listen to the radio or TV without hearing about it. We are certainly not immune to whatever happens in the macroeconomic conditions, and we are well prepared for that eventuality. Mike, any further color you'd like to give to that in terms of what you are seeing with the components.

Yes, I would add a couple of things here. First off, I think we should remember that the entire supply chain itself is running leaner than it did in past years. And there is really a lot of increased discipline in inventory, which allows for forecasting that let's us see the short term. We came out of the end of the year with a 1.03 book-to-bill.

And largely, where we're seeing our growth in the first quarter is around that industrial customer base, the [milk] customer base, lighting products, and also the medical customer base. And we are seeing right now a shorter cycle times to get the inventory in. But if you were to look at the positive spots in the marketplace, it's more broad. And again, we have not seen a big pickup in the EMS customer base, but we have seen a stability in that customer base. So hopefully, that add will help you.

Great. As a quick follow-up, is there any impact to the timing of Chinese New Year around your visibility or your booking as this year it's a little earlier than normal?

The Chinese New Year every year changes. And I think that gives us all a little bit complexity in terms of what will happen either before in booking or after. We generally look at the Chinese New Year happening earlier as a positive versus that happening later.

Okay. Thank you very much.

We will take our next question from Will Stein with Credit Suisse.

Thanks. Guys, just a few clarifications. First, you mentioned just a moment ago that you have 90 days of visibility for [thereabouts]. And I'm just trying to clarify that. Is that what you would consider noncancellable and nonreschedulable kind of backlog that you feel very confidently. You can deliver against without any returns or any cancellations of the orders or is it more that this is the visibility that you have with customer forecast that you feel good about because it is so close in.

Will, it's Bill. It's more closely aligned with the latter. We do get into periods where we have noncancellable orders. It's typically some of that depends on customer, depends on region, et cetera. But in terms of where we do have visibility, we find that the forecast tends to solidify in the 90-day periods and move around a lot for anything beyond that.

And again, what we see in terms of the ratio of book-to-ship, that is the business that you get in and ship the next day. That's pretty stable. We haven't seen any undue level of pushouts or cancellations. Any of the things that we follow in the ECS world, we follow the pipeline of activity that's going on. That appears within normal levels. Business activity is again within normal levels.

And our history has shown us that we have pretty good visibility. Not perfect visibility into -- for about the next 90 days and not good visibility beyond that. That's why we only give guidance 90 days in advance because that's what we think we can see.

Okay. It sounds like there's a sense that there's good visibility and all the trends are stable. But when push comes to shove, if customers wanted to cancel stuff that's scheduled for delivery only two or three weeks out, they don't have for the most part any hard obligation to take those orders. Is that fair to say?

Again, it depends on customer. It depends on region. It depends on the business that we are in. But by and large, from 30 days on, our customers have pretty good capabilities if they do want to push it. And again, we are saying we haven't seen it yet. It could show up, and again, we would be foolish to ignore all of the macro turbulence that's going on around us. It could impact our business and we will react vigorously if it does.

Okay. Great. Thanks for that clarification. There's still a couple quick one. You posted a nice inventory reduction -- inventory days in the quarter. Working capital in general is improving. I believe that's driven in part by the new investments in the ERP system. How should we think about that going to the new year here? What additional benefit do you think we could see in terms inventory and cash cycle days?

Hey, Will. It's Paul. We actually haven't gotten any real improvement from new ERP platform yet because we haven't hit the switch to turn it on. And that will be put in over a period of time. So, we have been investing in the past with better tools and continue to use. We continue to focus in general on making sure that we manage all of working capital, not just the inventory level. If you look at inventory for the quarter, we actually had good performance.

You know we were up a little bit at the end of the year in components. You'd expect that. We expect more component sales in the first quarter, but churns are at good levels and we still think we can make improvement over the long term in all of working capital. But we still -- you know, it's kind of interesting. We are making improvement each and every quarter. And yet, we haven't even used the best tools that we think will really help us out. So, we continue to expect to be able to deliver improvement in working capital as we move forward into 2008 and beyond.

So what's driving the improvement now? I'm just trying to understand it. Did you say something about ad hoc tools that you are deploying to help manage that better in the near term before the big ERP implementation? Or did I miss that?

Yes, there's a couple of things. First off, you have to keep in mind that the mix is tilted a certain way in the fourth quarter that will look to a large pierce of our business being computer products which is a drop shift model basically for that supply very strong in the fourth quarter. So that kind of distort the number when you look at it in the quarter by quarter. But when you look at it over the longer term, we've made great progress both from trying to get the basics done.

In receivables, we're trying to get the customers to pay us on time. I know it is a [hot] concept, but we rather make 100% payment on time from our customers. From the inventory side, we talked about -- wer really want to get the slow-moving inventory and make it turn faster. That lifts the turns automatically without sacrificing customer service level.

And in payables, we want to be able to have a discussion with suppliers that say, "Hey, we'll make an investment if would you like an inventory, but we need to have the right economics which could also mean extended payment terms.

So, we're working all those levers that are basics, the things that you should be doing each and every day in a good business. We are making good progress there. That's why I think when we get the tool in there, we'll see acceleration and improvement in this area.

Great. Thanks. And then, one other quick one on the Q1 guidance. You seem to include an amortization charge that in some earlier quarters was backed out. So, should we think of the clean number as $0.81 to $0.87 in your press release or when your [reporter], you going to back out to be $.04 amortization, no recommendation?

That's a great question, Will. Because actually, what we have done for all of 2007 is we have made an estimate in each quarter of the goodwill amortization associated with the acquisition even if we haven't completed the valuation of the intangible. So actually, each of the four quarters of 2007 and our guidance for 2008 include amortization expense. You are right. You're talking about -- something that happened in 2006 where we had a different approach and we [trued] it up in the fourth quarter, but we have been very consistent. Our guidance and our actual results always include amortization and intangibles in 2007 and 2008.

I appreciate the clarification. Thank you.

We'll take our next question from Mark Moskowitz with J.P. Morgan.

Thank you. Good morning. A few questions. Bill, earlier you said you see actual opportunity with a macro downturn if such the case it plays out in terms of share gain opportunities. Can you maybe just talk about some of those opportunities? What they are? What regions? What verticals. What type of [foreign] factors?

Sure. It's one of those areas where you look at organic opportunities to grow. We are in a strong financial position. We are in strong market position. And in a downturn, the weaker people don't have the ability to invest in -- in inventories to go after new opportunities. They don't have the capabilities to continue to press forward in some of our market initiatives in lighting, in military, aerospace and areas like that. So, we will use our financial and our market position to go out and aggressively compete for the business that's out there. And we think we have good opportunities to gain share at the expense of some of our weaker competitors. We will not have the wherewithal to stay with us.

Similarly on the M&A front, a couple of things that have happened. Clearly, the drying up of the private equity market has brought prices back to levels that are attainable for strategic investors which we are. We have made good progress in our M&A work over the past couple of years. We see good opportunities developing. And again, we are well prepared to access the acquisition market for those things that make strategic financial and operational sense for us to do that. And we think prices are coming down to more attractive and more affordable levels for us in a variety of geographic and market and product capabilities for us. So that's another area where we can use our very strong balance sheet, our very strong cash flow generation.

In fact, we don't have to access capital markets to go after our acquisition activities. We think we are in a nice position. And if there is a downturn and we're not calling one, but if there is a downturn, oftentimes that is when the stronger players can, in fact, really accelerate their positions and accelerate their growth and we are absolutely prepared to go do that.

And then continuing on that theme in terms of Arrow's strong financial position. This question will be either for you, Bill or Paul. I want to get a sense in terms of the SMB market. Clearly, that's a scenario focused in terms of SMB customers. But maybe if there was a macro downturn, they could have a little more difficulty just given the credit markets and the tightening of lenders' requirements and standards. Would that allow you to maybe modify some of your credit agreements with your customers to actually maybe leverage your balance sheet a little more and help facilitate the flow of SMB customers.

Mark, you have hit it right on head as it comes to utilizing our balance sheet. Bill absolutely right on saying inventory. But it also -- and how we approach the customer base and as you mentioned small- and medium-sized customers base which has had some challenge in the credit markets recently. We can utilize our balance sheet strength and in fact expand credit line and be able to support more sales growth at our customer base whether it's current customers or new customers.

It's pretty interesting because we spent quite a bit of time over the last five years really upgrading the talent that we have in that function. We have spent quite a bit of time in training them, developing credit rating tools, that type of thing. So, we think we are in a good spot right now where we can capitalize on investments we have made in people and the qualifications and training and the tools they use to go after the customer base and be more aggressive in granting credit.

Then, one last question here. You maybe talk -- Kevin, if -- as you look at for [March] quarter in terms of the guidance, how should we think about any sort of ongoing or pending product refreshers in the server storage environment? And how that could impact your business favorably or be a drag?

Well, I mean we are seeing a lot of product refreshers and new product introductions that are focused on the mid market and were focused on the mid market, a major initiative for us. The initial returns have been excellent. So, we are seeing that for major suppliers. Tailored product sets for that specialized segment of the market. So, that's what I am seeing there and I think that plays favorably for Arrow.

Okay. Thank you.

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

Hi, good morning. Couple of things. First of all, what was your sales growth year-over-year in a constant currency basis excluding acquisitions?

Okay. We have 1,000 pieces of paper here, Steve. And you stumped us on the one question that is not right at the top of my fingers. When you ask us the second question, we will come back to that one.

Okay. Good. That was my goal with the first question.

Okay. It was 6%.

Okay . Great. And then secondly, in terms of days in this quarter, is it similar to the Q4 or are there more days of -- working days in the

There will be more working days in Q1.

Okay. All right. Do you have that number handy by any chance?

We can actually give it to you later on. The United States is probably pretty easy to track. It gets a little bit harder in Asia-Pac and Europe because of the official and unofficial holidays, both year-end holiday in Europe and Chinese New Year holiday in the first quarter. We'll get back to you on that.

Okay. And then lastly, just a more strategic question. The downside analysis you discussed is really helpful. But I am curious if you started to think about the lag effect in a recession to when your small- and medium-sized customers would start to feel some of the swelling demand or pressure your sales. Any idea of how many quarters or it would be on the component business or computer business before they felt it?

You know, one of the things that we like about the SMB segment in both parts of the business, both in the computer products, as well as in the components business is that the customer base, in fact, is quite sensitive to the real economic conditions and sort of everything we see is statistically relevant and they are quite sensitive to us because they are small businesses. They are out dealing with the day-to-day business that goes on.

So, we follow it pretty carefully and think it is a pretty good indicator and I don't think it lags a lot. I am not sure we ever really done a scientific study to say does it lag a day, a quarter. It certainly doesn't lag a lot. And we think it is one of our very best indicators of what the health of the business is. Having said that, because there are small businesses, they will tend to be very responsive. And if things turn down, they will turn down. And that gets back to the question that was asked earlier about our 90-day visibility. The smaller customers will, in fact, turn if they see it. We go out and talk to them all the time.

I mean that's something that we are out. Well, formally -- we formally access them and survey them on a quarterly basis. We are informally talking to them everyday to try and understand what they are seeing. And again, as of where we are today, as we have said, our book-to-bills are positive, the pipelines are about where we would expect them to be, the supply chain seems nobody pretty good balance. Things that we see are normal seasonality and that's how we are calling it. And like everybody else, we read everything that is going on and our -- as we said, our -- we want to be very well prepared in fact if it does turn down in the short and medium turn.

That's helpful. Thank you very much.

We will take our next question from Carter Shoop from Deutsche Bank.

Hi, guys. Can we go over maybe the past five years what the sequential growth rate was in the components division? I know there has been some reclassifications, et cetera. I was just hoping to come up with an average kind of the last five years. What the sequential growth was in the March quarter?

Carter, why don't we -- you are welcome to call us back later on. I will give you the information. I just don't have five years of data in front of me on growth rates.

Okay. I know -- with my model I'm looking at a number in the high single digits sequentially in the March quarter. It just seems a bit higher than what we are guiding for at the midpoint of 2.3% here. Historically, quarter in, quarter out, there's usually a little bit of difference between what Arrow and Avnet sequential growth rates are for the components division. But it seems like this quarter is a pretty big disconnect between what years are both considering to be normal seasonality. Has something happened over the past year in the components season that will lead to a disconnect here on a going-forward basis? Or could you help out on understanding that?

I maybe -- I can make comments on that and Bill or Mike may join in. The one thing that is absolutely out there are acquisitions that kind of destroyed what has happened in and out and that type of thing. So, you're really going to make sure that -- I am sure you are doing it both. You're going to make sure that you evaluate the impact of acquisition. The other thing I think is if you look at our sequential growth Q1 from Q4 over the last several years. It has been varied up and down a bit driven a little bit by quite honestly whether the cycles are great strong or not, whether the green initiative is coming into being or that type of thing. What we've seen is that it has changed year-over-year in each of the last three years.

Okay. Thanks. Two more quick ones. On the restructuring side, it sounds like the restructuring charge is going to be for operational efficiency improvements. Can you help us understand when we decide to call out investments in that nature and when -- I assume we are also making continued investments in operational efficiency all the time. Kind of why we called out this one and what investors should kind of expect on a going-forward basis.

Great, Carter. That's a good question. Actually if you look at the last two-plus years, all the items we pulled out. By the way, we are doing that to help you all and have a better understanding of performance. In fact, it's a net positive for us.

So, yes, we have restructuring and great charges that are negatives. We have pulled out all the tax positives that we have had because you may recall there's some $50 million last year. We also called out the sale of properties that we have had which have been in gain. So, we kind of look at it overall to try to help everybody with the analysis. You know one of the big items we had this quarter was we did get out of a facility. The two previous facilities we got out. We sold that gains. This facility was leased that we got out of and actually had a pretty big tail on it and we would be able to sublease, but we're still trying to work through that. We're always going to continue to be efficient.

The accounting rules say that the restructuring charge, if you don't replace the people, they were very keen on that. So, if we are moving people from a wide number of locations to a single location. That is not a restructuring charge for us. That's more efficient and more effective but that doesn't go in there. That goes into our normal results and we don't call that out. If we close the location and never replace the people or function and that goes into restructuring, we're just trying to follow the accounting rules.

That is very helpful. Thanks. Will that benefits from that come in the March quarter or is it going to be further down in 2008? Will that benefit from the plant closure?

Yes, it was actually a big location and you will see some of it in the first quarter. Really, the issue -- the challenge that we had. It was a long tenured lease in the UK. So, the UK real estate marketplace today is not that robust today. So, we will have less impact in the short term. We think on longer term have more of impact though.

Great. That's helpful. The last question. Can you talk a little bit about the opportunity for LEDs. I know, you highlighted it at the most recent Analyst Day. Can you quantify the growth there and the size of the market and how much it is growing on a year-to-year basis?

Mike, why don't you take that one? You are right in the middle of the lighting initiative.

Yes. Basically, what we have seen in that for us this year was something on the order of about 40% growth rate. The lighting market, while it is growing, and you are seeing terms in the the billions of dollars. I am sure, a portion of that is changing the incandescent lights to LED lights within businesses. And what we are seeing really in North America for the electronic content of that growing, but so far, a smaller part of that market. My expectation for us would be to double that business yet again this year. And then, the following year have it be a substantial piece of our overall product portfolio.

Just to clarify. The 40% growth, was that in the fourth quarter or the full year?

That was for the full year.

Okay. And then you are expecting it to double in 2008 and then grow from there?

Yes.

Great. Thank you.

Carter, that is the kind of initiative that when we talk about that says we will continue to press forward on those initiatives. We have the financial strength in the market reach to do that. And that is a very smart long-term thing for us to do longer term. And there are many of those. We talked about lighting, military, aerospace, industrial. We talked about our mid-market initiatives or SMB initiatives, a number of those things. Those are ones that will continue to press forward.

We think if there is a downturn, we will able to gain significant capabilities and significant share in those areas because we can hang in there and then continue to press forward against weaker people that simply don't have the market reach, the financial wherewithal and capabilities that we have. That's why we think if there is a downturn again, I want to emphasize -- I am not calling one, and our signals don't tell us that there is one coming. But if there were to be one, we would see opportunities like this one and would go hard and fast to pull that in and make that grow faster.

Great. Thank you.

We will take our next question from Josh Golden from J.P. Morgan.

Hi, good morning. First and foremost congratulations on your 2007 results. You spoke a little bit about the balance sheet. You talked about committed credit facilities. Just a quick question. Do you see the need to come to the capital markets to term out any debt in the near future?

Hey, Josh. It's Paul. We don't see any real pressure when it comes to the capital markets at all in the near term. When you look at it, the next maturity we have coming through January 2010. So, we are in pretty good shape right now. With that said, it has been pretty interesting. When you look at the activity in the credit market, you know this is better than any of us. So, I don't mean to the preaching to the choir here. But you have seen high-quality credits in the next 30 days. They have been able to come to market and actually get pretty reasonable terms and convenance. So, that's another thing that lines up with us. You look at our balance sheet as strong as it has been in over ten years. We probably have a pretty nice profile such if we had to come to the market or we wanted to come to be opportunistic and take advantage of change in interest rates, we probably can do it pretty successfully. I am getting a win-win for us quite honestly.

Yes. On that note, I don't disagree with you. I'm [taking] and looking at the balance sheet and circling back again to the ratings agencies. When was the last time that you sat down down with them, looking at your balance sheet and still been low BBB-rated entity? What is the outlook for moving the ratings up?

Josh, we have a regular discussion with the folks at ratings agencies probably on a quarterly basis. You might not call -- I would call it not a formal review, but we do speak to them quarterly, giving them updates on any changes in our business, what our results look like, what our balance sheet looks like, what our strategy is like. So, we actually have a pretty regular dialogue with them and they have been supportive of us over the last couple of years and we really appreciate that. We actually have had presentations back in the summer time with the rating agencies and probably have a one-year formal visit with them and we'll be getting it on our schedule going forward so we can give them an update both on strategy, tactical execution, where we have been, and where we are going.

Are they giving you any metrics that you need to hit in order to receive an upgrade?

I would say that we focus on metrics for sure -- the rating agencies are naturally cautious right now because of the capital markets and threat of a potential recession, whether it is short term or the slope of that. We have those conversations. And it is very interesting because if there is a downturn driven by broad economy, we actually generate more cash, which we have done in the past, and we will do it again. So, we actually have protection on the downstroke also and we will have and see what happens during our discussion with them.

Okay. Just one last question. You mentioned a little bit about M&A opportunities may present themselves. Your thoughts surrounding the M&A opportunities, would they be bigger than what you have done in the recent past? Or remain around a similar size?

Again, what we do is we want to look at the -- first of all, the strategic fit. Does it accelerate our strategic gains and their strategic goals? Secondly, is it a financial fit? Can we make the numbers work and be accretive? Can we -- is it affordable? All of those questions. And finally and probably most importantly is operational. Do we have the right cultural fit? Do we have the right people? Are we extending our talent pool? Are two cultures going to mesh together, to mesh the systems and processes together, et cetera. So, we look across the wide variety of opportunities. A couple of the ones that we have done in the past couple of months that Mike mentioned, the one in India and the one in Japan are both quite small and quite strategic. They position us really well for future growth in two very important marketplaces.

Okay.

We had one last year at this time which was quite big which was KeyLink. And we are prepared to do all of those things in between big and small. Again what we see is as -- if a market weakens, the weaker players become more open to opportunities for us, and we are very well prepared to step into it in any range from small strategic acquisitions like we made in India and Japan or a very large transformational acquisition we made in KeyLink. And we can do all of those. And we have paid for all of those out of cash flow from the company, which is a really positive position to begin for us.

Okay. Great. Thank you. And once again, congratulations on your results.

Thank you very much.

It appears we have no further questions at this time. Miss Weaver, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you, Anola. Before ending today's call, for those of you participating in today's webcast, we'll quickly scroll for you the slide referenced in our webcast that contain a reconsolidation between GAAP and adjusted results. This reconsolidation is also included in our earnings release, and both the release and the presentation will be available on our website. In addition, we have included a slide on the anticipated seasonality of our ECS business, demonstrate the impact of recent acquisitions.

Would like to thank you 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 great day.

Thank you, ladies and gentlemen. Once again that does conclude today's conference. We thank you for your participation.