艾睿電子 (ARW) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics, Incorporated first-quarter earnings conference call. My name is Francine and I am your operator for today. At this time all participants are in a listen-only mode.

(Operator Instructions)

We would like to turn the presentation over to your host for today, Ms. Greer Aviv. Ma'am, you may proceed.

Thank you, Francine. Good afternoon everyone, and welcome to the Arrow Electronics' first-quarter conference call. I'm Greer Aviv, Manager of Arrow's Investor Relations Program and I will be serving as the moderator on today's call. If you would like to access today's call via webcast, please visit our Investor Relations website at www.Arrow.com/investor and click on the web cast icon.

With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice-President, Finance and Operations and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now you should have all received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website. I would also like to point out that we issued a CFO commentary, that has been posted to the Investor Relations section of our website, that should be used as a compliment to the earnings release.

You can access a copy of our earnings reconciliation for the first quarter in our press release or 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 today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings.

We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of the press, you 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, Mike Long.

Thank you, Greer. And thanks to all of you taking the time to join us today. Our growth strategy, and the related momentum we built throughout the second half of 2009 and 2010, have carried over into the first quarter of 2011. With the Arrow team generating the strongest first quarter results in our history. Revenue and earnings per share came in well ahead of our expectation, driven by strength in both of our business segments, and in each region around the globe.

We are focused on accelerating the growth in our core business, which can be seen in the impressive pro forma growth rate of 12% in Q1. This terrific growth was driven by contributions from all regions and businesses, and underscores the importance of our role in the supply chain as an industry leader. Our margins continue to rebound, with gross margins showing substantial year-over-year improvement. While operating income growth, once again, substantially outpaced the growth in sales.

Importantly, our returns this quarter demonstrate our unwavering commitment to creating shareholder value. Return on working capital increased 240 basis points year-over-year to almost 32%. And return on invested capital increased 190 basis points to 14%. In global components, we saw an exceptional performance in all of our regions. With our core business showing very robust growth trends well ahead of normal seasonality. Our recent acquisitions have complemented the core and are also driving growth in new markets and product sets.

We are excited about the opportunities that lay ahead for global components and would expect to continue to outgrow the market with the strong start we have had so far in 2011. Our ECS segment also had a strong quarter, with sales in line with the high end of normal seasonality. We saw exceptional year-over-year growth in industry standard servers, storage and services. And we are very optimistic about the outlook for the ECS business, as we diversified into a number of faster-growing markets, such as security, networking, virtualization and unified communications.

And we are well positioned to capitalize on the next wave of IT spending growth. We have built tremendous strength in both the global components and global ECS businesses. And we expect our strategy to continue to drive exceptional growth in momentum in these core businesses. At the same time, our strategy is transforming Arrow. Through 10 strategic acquisitions over the past year, we have greatly expanded our geographic reach, product portfolio and service capabilities.

As a result of our recent acquisition activity, Arrow's building a comprehensive product and services portfolio that complements and accelerates growth within our core business, and spans the full technology life cycle. Over time, these offerings should add tremendous value for our customers and truly set us apart from the competition. I look forward to sharing more about our strategic transformation with you at our upcoming Investor Day in New York City on May 25.

Our collective efforts in sales excellence, maximizing the value we provide suppliers and customers, and to drive even higher levels of profitable growth are clearly paying off. We are very optimist about the outlook for our business all around the globe and believe there is immense opportunity in the technology industry. Arrow has capitalized on these opportunities and is the global leader.

Paul will now provide you with an update on our financial results for the first quarter.

Thanks, Mike. First quarter sales of $5.2 billion were slightly above our expectations and represent an increase of 23% year-over-year. Pro forma for acquisitions, and excluding foreign exchange, sales were up 10% year-over-year. Operating income growth, once again outpaced sales growth, increasing more than 2 times faster than sales on a year-on-year basis. Our consolidated gross profit margin was 13.8%, an increase of 110 basis points year-over-year, with 70 basis points coming from acquisitions, and the remaining increase coming from organic growth and mix.

Operating expenses as a percentage of sales increased 20 basis points year-over-year. And on an absolute dollar basis, operating expenses increased 27% year-over-year. Both measures primarily driven by recent acquisitions. Pro forma for acquisitions, operating expenses were up only 5% year-over-year, well below our pro forma sales growth of 12%. And operating expenses as a percentage of sales would be 8.5% net of acquisitions. Operating income was $234.7 million. An increase of 54% year-over-year.

In the first quarter, we continued to demonstrate the leverage inherent in our business model as operating income growth outpaced sales growth by more than 2 times year-over-year. Operating income as a percentage of sales increased 90 basis points year-over-year, entirely driven by our legacy business. Our effective tax rate for the quarter was 30.4%, and for modeling purposes you should assume that our tax rate for the next few quarters will be between 30% and 31%. Net income was $146 million, an increase of 58% year-over-year. And earnings per share were $1.27 and $1.24 on a basic and diluted basis, respectively.

Our working capital needs were lower than the year-ago period, and therefore we used only $180 million in cash from operations, compared to a use of $282 million in the first quarter of 2010. On a trailing 12 month basis, we generated $323 million in cash from operations in a period where organic revenue growth was 22%. Return on working capital increased 240 basis points year-over-year, and is almost 32% on a consolidated basis.

Additionally, our return on invested capital increased 190 basis points year-over-year to 14%, again demonstrating our commitment to generating superior returns for our shareholders. Return on invested capital is considerably ahead of our weighted average cost of capital. That's a high level summary of our financial results for the quarter. For more details regarding the business unit results, please refer to the CFO commentary published this morning.

Looking ahead to the second quarter, we believe that total sales will be between $5.55 billion and $5.95 billion; with global component sales between $4 billion and $4.2 billion; and global enterprise computing solutions sales between $1.55 billion and $1.75 billion. As a result of this revenue outlook, we expect earnings per share, on a diluted basis, excluding any charges, to be in the range of $1.30 to $1.40 per share.

On an organic basis, we would expect growth in both of our business segments to track slightly ahead of normal seasonality in the second quarter. The addition of our recently acquired businesses will result in above seasonal growth in global components.

Thank you, Paul. Francine, please open up the call to questions at this time.

(Operator Instructions)

Our first question comes from the line of Jim Suva from Citi.

Thank you and congratulations to the Arrow team for their results. Very impressive. The question I have is, when we look at your improvement in rebound in gross margins, and I tend to look at it on a year-over-year basis given the mixed shift of things, should we continue to expect, I guess, June to come down maybe by 10 or 20 basis points because of the mix shift due to higher computing? Or should we expect the gross margins improvement even to continue to improve quarter over quarter? Then, I will likely have a follow-up. The reason why I ask this is, it's been a long time since we have been in a normal operating environment and I am just trying to get a better feel for your profitability in swings between the different quarters from a gross margin perspective.

Jim, I will start off with we would expect that computer products will pick up in the second quarter and have a bit of an alteration, just because of mix. We are not seeing anything on the competitive side right now that changes our journey on the gross margin line with the transformation we are trying to put in to services and other high margin products. But mix changes for the near term will still have a small impact on the margin. I will let Paul go through some of the details of that for you.

Jim, good morning. You are right on about the fact that mix change will continue to impact us in the second quarter. As you know, while it may be a trend down in GP percent, because of the global ECS business, you also know that that's a business that has a very small requirement for working capital. So, while we may sacrifice 10 or 20 basis points in GP, we will also get an uplift in returns on working capital.

As we have spoken about over the long-term, we recognize that each business is a little bit different, little bit unique, and we try to manage those businesses to maximize profitability, cash flow, and return. So, there is always that tradeoff. As Mike mentioned, we have seen some very good improvement in the gross profit, even now in our core business. We expect that to continue as we move forward throughout this year.

Great. Thank you. And then, as a quick follow-up, we know that your Company traditionally has had two main segments, the components and the computer products. It seems like you are doing a lot more initiative or efforts on these additional services that you are talking about for higher value added and higher margins. Can you let us know today about how much of your business is in that, and maybe in a year from now or some milestones what we can look forward to for these new additional efforts that you are taking the business down a new strategic area, which is higher profitability?

Right. Jim, we would like to have something to be able to tell you at Investor Day, so I'm not going to give you all of the details right now because that is something that we already have teed up for our presentation. But, I will tell you that what we expect to see is a very strong year-over-year growth. So, to your point of what will it be like a year from now, I think our growth forecast for that business are between 15% and 20% top line growth year-over-year. Which you know is a great opportunity for us to accelerate Arrow, Inc.

But, we're still in the early days. But we will give you more details on that at Investor Day. So if we could just ask for your patience on that for another month or so, we would appreciate it.

Thanks. And congratulations to you and your team there at Arrow.

Your next question comes from the line of Craig Hettenbach from Goldman Sachs.

Yes. Thank you. Mike, if you can follow on the comments about above average growth and components, anything you could add by geography, product, or technology would be helpful. And then the systems business, just what you see as the backdrop for IT spending today and as we go through the year.

I will start off and give you a little bit around component. In North America, we saw strong growth and our backlog heading into this quarter is very solid. We expect sales to still track above normal seasonality, and that was flat to minus 3% quarter-on-quarter in the Americas. We think we will be above that. The big markets that we have seen in North America really have been the lighting business, year-over-year is way up, followed by alternative energy, and then really aerospace and defense has continued to grow for us.

In Europe, we are expecting more of an inline market. We saw some solid growth from the vertical market. Again, lighting was growing. And automotive was up more than 30% year-over-year. And aerospace and military was up 15% on a year-over-year basis. So again some strong markets and strong internal manufacturing benefit. In Asia-Pac, we saw strong performance in a number of verticals including transportation, automotive again, and lighting. And our path of electro mechanical sales in the region increased more than 50% year-over-year, and that was really good news as we've had expansion in there. And we do expect to be in line with normal seasonality in Asia-Pac.

As far as IT spending, the first quarter for the ECS business was very strong. The year kicked off well and sales, as you know, were in the high end of normal seasonality. And really a terrific year-over-year improvement in margins also. There was, what I would say, impressive growth for the first time in an industry standard servers. And storage and services continued to grow for us also. Virtualization is still growing. Security is up at least 16%. And networking was up 24%.

So we are pretty optimistic about the start of the computer products business and really think we were positioned well to capture really the next wave of IT spending growth. And we still believe sales will be above normal seasonality going into the next quarter. That help you?

Very much. Thank you for that. And then if I can follow-up with Paul. Just on the cap allocation front, a lot of M&A of late, you guys have been buying back stock. Can you talk about the strategy as we move forward? And then any thoughts around dividend as well?

You are right. We completed during the first quarter the $200 million stock buy back authorization that we had from last year with our board, and we acquired those shares for an average price of less than $30. We also announced that we do have authorization from the board to acquire another $50 million, and will continue to have that dialogue in a pretty regular basis. What we are trying to do is to get the right balance between organic growth, because we see that we have dawn great job on that. And the leverage in our businesses spectacular around that.

We are also trying to get good organic -- M&A growth, and we have seen that also, both from the impact of acquisitions which are tracking a plan delivering what we want, but also because they are creating new market opportunities for us. Markets that we hadn't been in, effectively creating the size of the pie, or increasing the size of the [detan] that we can go after. Then obviously an efficient way is the third thing, of returning capital to our shareholders.

We were trying to get that right balance. We still see that there is tremendous opportunity for growth. So when we look at it, it's probably number one and number two. And we will continue to evaluate longer term what we do in our returning share holder value, whether it be through buy-back or a dividend. But no real change at this point in time, over the next couple of months, on our view on how we'll deploy capital.

Our next question comes from the line of Matt Sharon from Stifel Nicolaus.

Thank you. I just wanted a follow-up on the comments regarding the component business. Can you talk about the impact of Japan, both from your Japanese supplier standpoint, orders that you are seeing from customers; and then also have you seen any impact, or uptick in orders, in other components as customers may be concerned about or wanting to build some inventory.

Sure, Matt. As you heard from the prepared remarks, the global components business had an excellent first-quarter and sales grew above normal seasonality. Really gaining more than 20% compared to last year. We had a stronger than expected March. And we believe we may have seen some pull-in of inventory by some of our larger customers due to the recent Japan situation. Although nothing that had a material impact on the quarter. And so far looking forward we haven't seen any unusual changes in our bookings or backlogs.

Book-to-bill remains slightly above 1 in all regions. And as we look to Q2 and beyond, the real visibility from our suppliers on the Japan situation is low. And at this moment we don't expect major impact for the most part of Q2. And as always, we were working real close with our customers and suppliers to manage any potential shortages on any affected products. I think this story will unfold a little bit over the next month or so, and we will clearly keep our customers and you guys updated with any change we could possibly see.

Has that ordered uptick continued into April, related to Japan, do you think?

It really -- our belief is that it did not. And we saw, as I said, in March a slight increase. However, most of the customers that I have spoke with since that time, and we have been relatively busy on the supplier front and on the customer front, says that inventories within our customers are at a manageable level. Coupled with our inventories.

Most people believe they are protected as good as they can be right now, given the uncertainties around some the chemicals and the waivers that could have an impact more toward the second half of the year. So we have worked hard to alleviate any panic that we can, and really tried to keep the situation down to the affected components and not have it have a major impact on the overall market.

And then your own inventories were up about 8% or 9% sequentially. Did you build any inventory, or was a lot of that related to the Richardson acquisition?

About $150 million, I believe, was related to Nu Horizons and to Richardson. As you know, Nu Horizons came in early in the first quarter and Richardson came in with a month left. So, that is where the growth of our inventories were. And we believe our inventories are actually in line with the second-quarter forecast we put out there.

Just one quick last question, if I may, just regarding your expenses regarding Nu Horizons and Richardson, how much expense do you expect to take out of the business? Over the next few quarters. How much is left in terms of integrations?

Richardson, Matt, it's a very, very small insignificant amount. That whole acquisition is built upon sales synergies and very little around integration. So integration that's taking place is in logistics and that has a minimal expense impact. The Nu Horizons will really start to accelerate on that, plus the end of the second quarter, really will accelerate more so into the third and fourth quarter. And our targets there are probably, I would say, in round numbers, about $10 million.

$10 million. Okay. Great. Thanks a lot.

Our next question comes from the line of William Stein from Credit Suisse.

Thanks. At the risk of sounding argumentative, I want to dig into Japan just a little bit. So, very strong results in components with a stronger outlook, bookings ticking up in March and extending into April, one of the very strong markets you highlighted is automotive, which people naturally link to Japan. So really the question is, how can you give investors the comfort that none of this strength that you are seeing in the bookings and shipments, perhaps that came in at the end of March and that you see in the backlog today, are linked to the desire to ensure supply? In other words, something that could roll over and go the other way later?

Yes. What I would tell you is, typically, when people are attempting to capture inventory in an allocation mode, or in a case of a manufacturer running into parts problems, you see your book-to-bill skyrocket. And demand comes in at a much faster pace than you can get your product out the door. And what you do is, you end up building exceptional backlog during that time that at a later date could be shut off, so to speak. We did not see that phenomenon.

We did not see bookings increase, as a result of Japan. Coupled with, we didn't see our backlog days go way out. And then thirdly we have not seen an increase of cancellations on the order and the backlog that we have in-house. So when you start to explode by supplier, and even affected suppliers, that gives you a fairly good comfort level that what you are seeing is really de minimus at this point in time.

Okay. A follow-up, or frankly a little bitten related, question. Can you remind us of the margin targets in the two segments? And what the key levers are to get from where you are today to those levels, I think in particular in systems you are still operating, if my model is updated, I think fairly well below the target level, so a lot of leverage or something left there, and then on the system side I think you are closer -- pardon me, on the component side, I think you are closer, maybe at the low end. Can you remind us of that?

So we will -- while Greer is getting us the information, because that's also something also included in our Investor Day presentation. The low end of the range for components was 5.5%, and we are at 5.9%. I know Peter Kong is on the phone calling, he's trying to figure out how he's going to get the 6% quickly. Thanks for helping us for setting goals and objectives for him. And that is exclusive of the impact of acquisitions in the value added areas.

So when you look at it, you will see that our operating income percent in components in the core businesses in North America are ahead of plan. In Europe are within the range of the plan, and in Asia also, are right at the plan levels. So we feel we are in good shape there. And it's a battle to make sure that we get more uplift in revs for leverage, it's a battle to get more GP. As always, we want to make sure we have expense control containment, simply because of the fact, as we demonstrated in the first quarter, it's something we want to do.

So, yes, the actual target was 5.3% to 6.6% for component, and in ECS was 4.3% to 5%. When we look at ECS on a sustainable basis in North America, we are at that low end of that target, over a 12 month period of time. European business is not at it, and that's simply because of fact that it's not as mature, organizationally, as our North American business. [Laurant Zidoon] and his team are doing a nice job of pushing that forward, and we are constantly looking for ways of being smart about how we spend our dollars. As a example, Laurant has a nice shared service center that he's is looking to expand, and able to get greater efficiencies there.

That's an area where we can do that type of thing. There is a lot of levers we are pulling to get there, and we think we are going to get there. Of course, as you know, a return of vested capital is well ahead of the low end of our target, so these lower margin businesses still have a very nice return, which drives share holder value also.

Nothing changed in the margin targets then, in the key to getting the European systems part of your business to the higher, let's say the targeted margin ranges, is really a matter of leverage more than anything else? Just revenue growth?

Not just revenue growth. I would say also better organizational structure around expenses.

Thank you.

That's within our control.

Our next question comes from the line of Amitabh Passi.

Mike, the question for you. Can you give us a sense of the supply chain today, in terms of lead times, maybe across your major product categories? And any components that you believe are still in shortage, or has the supply chain largely now normalized?

Sure. Overall I would say lead times are at a near normal historical level. And haven't had any meaningful changes at this point in time. We believe that going forward that supply chain is continuing to operate pretty efficient, but we were seeing lead times in the range of 10 to 20 weeks at this point in time. About 15 weeks on average, and really in line with last quarter.

You know, for me, if lead times, at an average, hit something like 12 weeks, I consider that normal balance. We have seen some extension past that in certain passive components. And on the electro-mechanical side and some on the power side. But for the most part, the vast majority of the semiconductors have been closer to the near normal than they had been prior to the end of last year.

Great. Then just a follow-up on the situation in Japan again, and apologize for belaboring the issue here. It's been about six weeks since the earthquake happened. I'm curious, as you talk to suppliers and customers, is there any greater visibility today than it was six weeks ago, of things still highly uncertain, just any commentary around that?

I believe there are some of the suppliers that have solved the chemical issue, by switching to some different chemicals in their processes, depending upon their technology. There is a couple of manufactures that had found alternative ways to keep their fabs going. The most uncertain piece, I believe right now, really is around the wafers and how the wafers will end up going into the second half of the year.

Most manufacturers right now are taking steps to correct anything that, or any problems that were caused by the earthquake, and most feel that they will minimize any problems that they have. I think the collective issue, as more information comes out, will be just what technologies, and will that have any impact on the entire supply chain. But at this point in time, we still feel comfortable going into the second quarter. And again, we will continue to update our website as more comes out around Japan. And obviously you will be able to check that on a daily, weekly basis, whatever you choose.

Okay. Thanks.

Our next question comes from the line of Scott Greg from Banc of America.

Thanks. Good afternoon. Paul, when you look at the components business, if operating profit was to continue to go up, and maybe you guys even at some point revise your operating profit guidance or targets there, how much improvement do you think would come from, say gross margin, versus getting operating expense leverage?

And then a question for Mike, with regards to filling in some of your product portfolio and ECS on either regional or global basis, is there anything in particular you guys feel you need to add on the ECS side of the business? Thanks.

Well, as you know, Scott, especially on the ECS side, we have gone into the unified communications business. We believe that, that business has legs. We believe there is more around the services portfolio that we can add. We certainly believe that there is more work to be done around the cloud and software service. And we will continue to hone in on products that fall within the data center that have an impact on the cloud.

And what's interesting is that people are building out their private clouds. We are already a large supplier to those types of customers. And that will have a positive impact on the core business. But all in all, we've put some stakes in the ground, and will continue to build out the service and revenue opportunities there. On the components side, we have been in the reverse logistics business. We find that business attractive to us.

As well as services that we put around components, and also built out some engineering services that make our OEM customers more efficient and how they do designs. So there is still a lot of places to go in technology to increase the value of the company and increase the value to our share holders. And we are taking, or making, a concerted effort to get into those. So five years down the road, customers are going to want to deal with Arrow, given all of the different service avenues we have.

Scott, on the margin profile for the components business, there is still 20's and 30's of basis points of margin left to go, at a minimum, gross profit margin, in that business, if you ask me. Then we still always believe that there is opportunities to do -- to be a little bit more efficient from a cost point of view. And we talked about whether it's Europe, whether it's Asia, now that they are getting up to size and scale. So I still think, also, there is more room there, in 20's and 30's of basis points for the entire segment. So I still think we have a good ways to go.

We are in the midpoint of the range of our targets for that segment. That's without the impact of acquisition. So we feel we can continue to push it forward, to get to the upper end of the range and have it be sustainable longer term.

Our next question comes from the line of Brian Alexander from Raymond James.

Thanks. Good afternoon, and very nice results as well. Mike, appreciate the comments earlier on book-to-bill, and backlog not spiking, but you did beat the high end of your components sales guidance by about 3.5%. You haven't done that actually in the last five years. And many of your suppliers are reporting closer to inline results.

If you didn't materially benefit from pull forward, why do you suppose your sales were well above your internal expectations? Was it driven by market share gain, and is that why gross margin in the components business was up 20 basis points sequentially, versus normally in the first quarter I think you are up more than that? Trying to put that together.

We did see, Brian, some nice spikes in different technologies. We do believe there was some market share growth overall for the business, which is good news. Part of that from the expansion of our product portfolio over the last year that we've seen. And again, I did highlight lighting as being a high growth area. The automotive area had an impact, and the reason for that is, you know there is just more and more electronics going in to automobiles.

Our industrial segment was also very strong, and as you know, that's something that was sort of plaguing the business over the last several years, in terms of growth. But we have really seen a return of core manufacturers increasing their performance over the last couple of quarters, now that they have their factories more efficient and in line with what is happening overall.

I also believe, Brian, that there is a amount of business right now where electronics are in and another expansion mode, getting into markets that really didn't exist before, especially around alternative energy, and a lot of those businesses were just in startup mode last year that have gone to more production. And I think that will help this growth.

You know, the other interesting thing that is going on. As you know, the business over the last five years, there has been quite a run, if you will, out of the US and somewhat less in Europe, to Asia-Pac for manufacturing. And we have seen business transfers slowing out of the US at a rapid pace. And while people have talked about sluggish growth, if you will, in the US, that has been caused because there has business going out the other end. And I believe the underlying growth in the US has been strong, but there is a strong transfer of business out, and we've actually seen that slow now for a couple of quarters. I'm pretty bullish on what will happen in the US over time, giving that manufacturers really are finding their footprint.

That's interesting. Just a follow-up on the acquisitions, I realize a lot of the deals you have done, like Converge and Tech or Richardson and Shared have better margin profiles than your existing business, and there is a couple that may be in line or lower like, Nu Ho and Diasa. You showed, on a pro forma basis, the acquisitions are collectively helping gross margins by about 70 basis points in the first quarter. But they actually hurt operating margins by about 10 basis points. Is that temporary? Do you expect the collection of acquisitions you have done to drive consolidated operating margins higher? And if so, by roughly how much and over what time frame?

Yes. What I will do is I will take a first stab for you, Brian. Remember, Nu Horizons did come in and Nu Horizons was not operating at with a we believe was an optimal place for that business. And we are only 1 quarter into the results of that. We also had Richardson come in with only a month of activity in the business. So those two businesses alone skewed our results some.

We did have a geographic expansion and into Spain and Portugal with Diasa. And again, that was in December, so we still have some working out to do, if you will, with those businesses. But when you consider the higher margins of, for example, [Entegra] and the reverse logistics business, if that's growing, we do expect more, But businesses like that have a little bit higher cost of sale, as well as a higher return, so there will be some explanation on our part over the next couple of quarters around it.

And I will let Paul give you some of the actual numbers and input on that right now.

Right. So, the myth is right, that it was about flattish, maybe a 10 basis point decline in the consolidated results, because acquisitions, delivering to the returns targets, delivering to earnings per share. And we do think over time, the operating income percent will trend up, both as we better manage the businesses, which we have demonstrated we can do. As well as get them integrated, as well as we create greater scale and scope of the services that we have in the revenue dollars that we are generating. We are very confident over the long term that those operating income margins will be ahead of our legacy business. And the returns, combined with earnings per share growth, will create share holder value.

And any sense of magnitude? Are we talking 10 basis points, or 30 or 40?

Well, keep in mind that, you just look at this quarter as an example, and you look at Arrow, Inc., the acquisitions we are talking about were less than 10% of revenues. Right? So, that means you have to get a lot more growth in those businesses before they can impact Arrow, Inc. overall margins at the operating income levels. It will take time, as I say, but we have a plan in place that will accelerate growth in those areas, compared to our other businesses, and it will be tens and 20s of basis point as we move forward. And then get the size and scale and I imagine it will be more than that.

Very helpful. Thanks.

Our next question comes from the line of Shawn Harrison from Longbow Research.

Hi, good afternoon. Just two brief questions. The low end handset business in Asia. I guess, with your biggest customers there, is that what's driving the better expectations into the second quarter? Is there something else that you are seeing in the market that will lead to a sequential rebound in that business other than, say, seasonality?

Well, for sure the low end handset of business for us is off, and has been off, but coupled with our core business having an exceptional growth quarter. And we have now seen that for a couple of quarters and -- which is great, because that business growing faster has put off better results for us, just given the mix of business. We would certainly welcome the low end handset market to come back, because that does generate share holder returns. But even without that, the core business is growing at substantial rates right now.

We have seen good growth in automotive. We have seen it in lighting. And we do believe that we will eventually get a rebound in the mobile handset market as the year progresses.

Okay. And then my follow-up question is just the year-over-year growth you saw an industry standard servers. Do you think some of that was more company specific? Or are you seeing now, I guess, a resurgence in industry standard server demand that you are going to see continue throughout 2011?

Well, for us, we saw a fair of rebound, not only in industry standard but also in proprietary servers for the quarter. And I believe as long as the cloud continues to be built out, it should be a good robust year for IT spending. The storage business, which augments that, was also up. And software, especially security software, had another good quarter. And given everything we have been reading in the paper these days, about what is going on with people hacking in, my guess is that business has a lot of legs to it.

So really, when you look at the overall IT spending business, whether it's services, software, storage, and even servers, it's nice to see a rebound in servers because that tells us some of the larger projects are back out there and the money is getting spent.

Thank you very much.

Our next question comes from the line of Brendan Furlong from Miller Tabak.

Good afternoon. Thank you. Question on your Asia component business, excluding the possible media tech impact in Q2, what you are seeing out of your Asia component business, if you could?

Okay, well the core business itself, as I alluded to before, was up about 18% year-over-year. There was good performance really for us in China, Taiwan, Korea and the Asian region. Sequentially the business was up, as you know, about 7%. But we also saw strong performance, again, in transportation, automotive and lighting. Remember, transportation is more than just automobiles. Our classification is really, anything with wheels can fall into our transportation segment.

And that helped fuel our passive electro-mechanical business, that was really up more than 50% year-over-year. So an increased product mix for us also helps the gross margin and also helps the returns out of Asia. I couldn't be more pleased with the Asia team and what they are doing to drive product expansion right now for us in the market, because that helps solidify our position there.

And then I -- on the -- you're obviously exposed to the industrial end markets, you say they have rebounded. A lot of the industrial companies that have reported so far this earning season have pointed to a rebound, or things picking up particularly in the last two weeks of March. I'm just curious if you are seeing that flow through to your US and Europe industrial related businesses.

Yes, we have. And I have been out talking to several of our OEM customers. They have been very bullish, which is interesting that our March pick up, a little bit, as we had indicated, when we went back and looked at it we tried to look at what types of customers that went to. It's really caused us to agree with what you've just said. The OEM manufacturing customer, really in the Mid West, has woke up. And we are seeing good results.

My last question is for Paul. The assumption that gross margins will tick down seasonally a little bit. The big bump up in SG&A then for the June quarter. If you could, just walk us through, maybe where that's coming from, and obviously the acquisition impact there, too.

Sure. So as I said, my expectations were that we would see a trend down, because of mix of about 10 to 20 basis points in seasonally in the second quarter, and I expect also there would be a trend down in operating expense percent, also in the second quarter. So that we would be flattish to down a little bit in operating income percent. No more than what you would see seasonally. Don't see that as anything unusual other than a change in mix.

From a dollar perspective point of view, what we would expect to see, the biggest acquisition impact for us, in expense line, would be from Richardson, which was only in for one month in Q1. We will have it for all three months. That's about $11 million increase in SG&A between Q1 and Q2. That will drive the vast majority of any expense increase, other than normal costs associated with higher sale.

Understood. Appreciate it. Thanks.

Our next question comes from the line of Sherri Scribner from Deutsche Banc.

Hi, thank you. I wanted to get your thoughts at a higher level, the guidance for fiscal 2Q, you are expecting a little bit ahead of normal seasonality it sounds like in the components business, some of that's coming from North America. I just wanted to get a sense, if you think the market is growing faster? If you think you are gaining share, or is that related to the mix of business that you have?

Right now, our belief, is that we are seeing again sort of a resurgence. We've seen aerospace and defense continuing to be strong now year-over-year. The medical industry is growing. We've seen an uptick in the medical industry. Alternative energy for us has been good growth. And lighting has been good growth as it continues to be a bigger part of the product segment that exists in the marketplace today. Those things together coupled good news for us because aerospace was not as robust last year as it is this year.

Lighting, while the growth rates are not as high as they were when the product was first introduced, they are up substantially, and especially if you look at Europe, the lighting industry is up, or were up, in the 37% range. Asia-Pac is ticking the 20% range. And North America is still at 12%. So there is good growth in all of those markets. So we've seen a real rebound of electronics across the entire continuum of customers that we deal with right now.

Okay. That's helpful. And then, Paul, just a clarification really on the share buy-back's in the commentary, you say that you used remaining $33 million of the buy-back. But when you look at the cash flow statement it looks like you spent about $46 million. So I'm trying to understand that difference. Did you pull -- did you use some of that additional $50 million that's authorized? Or, I'm trying to understand that.

Sure, no. We haven't used any of the $50 million authorization, that was approved by the board after the window closed in Q1 for us. So that's full bore what we can use going forward for the rest of the year. The difference is the exercise of stock options, where you can return shares to pay the tax piece of it. Versus getting gross shares, you can get net shares. That's the difference.

Okay great. Thank you.

And we have a question from the line of Louis Miscioscia from Collins Stewart.

Okay, great. I just wonder if you might want to update the last May prediction of about 5% IT growth, especially after, obviously, starting off with a pretty good quarter here.

Yes. It would be kind of hard not to do that. But we haven't seen enough information yet going into the second half of the year. My guess is we will -- it's not my guess. We will be giving new update when we do the Investor Day. But really, we have added some product lines to our portfolio that have helped us grow, and we still have some sorting out to do of how much is coming from that, is that normal growth, but how much that will impact us for the rest of the year. There is going to be a difference, I believe this year, in what the market is going to grow and what we are going to grow, but I do believe we will outpace the market growth all through the year.

Okay. Then on the possibility of new areas, can you give us any comment what you are seeing in desktop virtualization, and just on the enterprise and small/medium business PC refresh that's been going on for a little while now?

Sure. I'm going to pass that one over to Andy Bryant, because he is closer to what's going on there.

Although we do see some of the VDI activity, because we are a big provider of virtualization software from VM ware, so that of course is the sale of a thin client verses a PC. I think that's what you are alluding to. And that is going along pretty good. But we also see the PC refresh and the server refresh equally strong. As Mike mentioned, our industry standard server business, you will notice that it's up over 30%, and then you will notice our virtualization business is up over 30%. They are tracking hand in hand, because not all the virtualization software is going on an existing server. Many of these installations are new servers. Overall we see both segments strong.

Great. Then just a quick follow-up to all of that. Obviously you gave us nice growth numbers for storage and industry standard servers. Could you possibly give us that for proprietary servers, and also enterprise PCs?

Well, if we take proprietary servers for us, year-over-year that was up about 22%. So there was a fair amount of growth in proprietary. It's something that we saw happen in Europe. North America also, for the first time in a long time, really broke growth in the first quarter. And that lends a lot of credibility to the build out that is going out there right now. Overall when you get to PC, we don't really participate, and that market doesn't have a major effect on what's happening with our business.

Okay. Thanks, guys. Good luck to the new year.

And our next question comes from the line of Ananda Baruah from Brean Murray.

Good morning, guys. Or good afternoon now. Thank you for taking the question. I guess one for Mike and for Andy. I guess in the enterprise, have you guys yet started to see any shift in the competitive dynamics now that, I guess more folks, more distribution vendors that are beginning in their own way to target your segment of the enterprise? And I guess the follow on to that is, what types of services, and I guess in partnership, whether it's cloud services or sort of anything else creative you guys can come up with, do you think are necessary for success, over the next five years, now that seemingly it's going to be a bit of a more competitive marketplace? Thanks.

I will take your first one on competition. I think there is a difference of where products go. And one of the interesting phenomenon's has been, as I alluded to before, industry standard servers for us were up 43% year-over-year. Little bit north of that number. But what we are finding is, where there is complexity in industry standards servers, that falls right into the sweet spot of the business that we have built. And we are finding more and more industry standard servers where there is complexity, those customers are coming to Arrow, and we think that is good news for our model.

Essentially you can go back a couple of years, and there was some thought that this business would have to live solely on proprietary servers to survive, and we have found that not to be true. Especially given the build out of the cloud these days, the software that's needed to go, the virtualization of these products. The security software that is required and the storage requirement that go along with it. All play data center and all play complexity. And that is right where our sweet spot is. I will let Andy answer your second question.

Just quickly, I think, about the cloud, there is two plays for our bar base. One is, I call it a cloud builder, which is our bar base helping end-users build out their private cloud. And then there's the emerging opportunity for ECS to help our resellers become cloud value added resellers. And that is more the public hybrid cloud scenario. I think it's safe to say we are in the sweet spot of the cloud builder model, with our line card and the way that companies are building out their private clouds. And the cloud reseller model is emerging. And you will see us roll out more and more managed services in that space to help our resellers move up the food chain and become more effective in reselling cloud services.

Thanks. That's helpful. Just one follow on clarification for me. Did you guys say it was European proprietary servers that was a bit stronger than North American proprietary?

Yes, we did. Europe was much stronger than North America.

Great. Thanks a lot and congrats on a solid quarter.

We have a follow-up question from the line of Amitabh Passi.

Thank you. Mike, just a clarification. When you referred to lighting, is that mainly your LED lighting business? And then, can you give us a sense of how big that business is today, and maybe just how it splits geographically?

Yes. What I can tell you is that's a fast growing product line for us. We saw Europe come a little later than Asia-Pac and North America. So the growth rates are faster there. As far as individual sales, because we have a limited line card, we don't give out the numbers, only because it would conflict possibly with what one of our manufacturers would say.

We are out of time for questions. Thank you for joining us today. If you have any questions about the information presented today, please feel free to contact Paul, Mike Long or myself. Thank you and have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. And have a great day.