艾睿電子 (ARW) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc. third-quarter earnings conference call. My name is Jasmine and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Steve O'Brien, Director of Investor Relations. Please proceed, sir.

Thanks, Jasmine and good day and welcome to our third-quarter earnings conference call. I'll be serving as moderator today on our call and if you'd like to access today's call via webcast, please visit our investor relations website at www.arrow.com/investor and click on the webcast 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, Chief Operating Officer, Global Components and Global Enterprise Computing Solutions; Eric Schuck, President Global Components and Sean Kerins, President Global Enterprise Computing Solutions. 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 along with the CFO commentary and the non-GAAP earnings reconciliation for the third quarter.

Before we get started, I will review Arrow's Safe Harbor statement. Some of the comments 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 we will then follow with a question and answer period. I will now hand the call over to our Chairman, President and CEO, Mike Long.

Thank you, Steve, and thanks to all of you for taking the time to join us today. We delivered on our aggressive financial targets again in the third quarter. Our execution across our businesses and the geographies we serve remains outstanding. Let me immediately address head on our view of the state of the markets our global components businesses serve as I'm sure many of you will be anxious to hear about it.

We've seen no meaningful change in the order patterns from our customers. Book-to-bill is above parity in all regions through the first four weeks of the fourth quarter and is above last year's October. Third-quarter book-to-bill was comparable with last year's third quarter, with cancellation rates effectively unchanged.

In our customers' views, their inventory levels are well managed and their sentiment is consistent with the past year. In our view, lead times at the suppliers remain normal. At Arrow, our global components inventory turns in Q3 were at the highest level in the past 11 quarters.

Finally, our view of the broad economic backdrop has not changed. Our expectations entering 2014 was for a slow growth environment, without any expectation for acceleration over 2013. As we started our 2015 planning process in early Q3, we took a look at the forecasted growth projections being issued by the experts and immediately discounted them as we saw no overarching drivers for accelerated growth.

We grew our global components business for the fifth straight quarter, with performance that was near the high end of our expectations. Our enterprise computing solutions also performed at the high end of our expectations as we continue to build on our leading market position in software and services.

Our consolidated sales were at $5.6 billion, and non-GAAP diluted earnings per share were $1.40. Revenue was at the high end of our guidance range and EPS was above the high end of our guidance range and an all-time record for a third quarter. Operating income and diluted earnings per share advanced 11% and 19% respectively year-over-year. Returns advanced again year-over-year for the fourth straight quarter.

Our global components sales of $3.7 billion advanced 8% year-over-year, highlighted by double-digit growth in Asia, a sixth consecutive quarter of year-over-year growth in Europe and America's growth that was ahead of normal seasonality. Operating income grew 9% year-over-year, the fifth straight quarter of strong operating performance growth. Global components operating margins have increased five quarters in a row on a year-over-year basis. Our global components business continues to bolster its leading value-add services by extending design and engineering capabilities, allowing us to deliver increasing value to both our customers and our suppliers.

Enterprise computing solutions grew 19% year-over-year and operating income grew 17% year-over-year. Both regions performed well and both posted robust software and services sales growth. Storage, networking and industry standard servers also grew at healthy rates this quarter. In enterprise computing solutions, we continue to move forward selling comprehensive solutions, with a focus on the higher value segment targeted at the data center.

Our software and services business are extremely well-positioned, whether it is on-premise, in the cloud, or a hybrid combination. In summary, both global components and enterprise computing solutions are executing well and we expect our strong execution to continue into the fourth quarter. Our fourth-quarter guidance reflects sales and earnings growth and is based on factual information from our teams in the field and their customers. Paul will now provide more details on our results and our expectations for the fourth quarter.

Thanks, Mike. Third-quarter sales on a consolidated basis of $5.6 billion were near the high end of our guidance range. Adjusted for the impact of acquisitions and changes in foreign currencies, sales increased 6% year-over-year.

Global components sales of $3.7 billion increased 8% year-over-year, were also near the high end of our guidance. Sales in Asia grew 18% year-over-year and 14% quarter-over-quarter, well above traditional seasonality. For the sixth consecutive quarter, Europe had healthy year-over-year sales growth.

Europe sales in constant currencies advanced 3% year-over-year. Sequentially, core sales in Europe were within traditional seasonality. In the Americas, our sales were up 2% year-over-year and on a sequential basis also up 2%, which is at the high end of traditional seasonality.

Global components gross margin decreased slightly year-over-year, due primarily to a higher mix of Asia business. Global components operating margin of 5% increased 10 basis points year-over-year, and operating expense as a percentage of sales declined 30 basis points year-over-year.

Sales in our enterprise computing solutions businesses were $1.9 billion, near the high end of our expectations, driven by continued very strong growth in our software and services businesses. Adjusted for the impact of acquisitions, that's principally Computerlinks, sales grew 7% year-over-year in constant currency.

In the Americas, sales grew 11% year-over-year and declined 5% quarter-over-quarter, better than traditional seasonality. In Europe, sales grew 41% year-over-year and declined 20% quarter-over-quarter, also better than traditional seasonality. Operating income grew 13% year-over-year, and operating margin of 4% was up 20 basis points year-over-year with both figures adjusted for acquisitions and currency.

Now, turning back to our consolidated results. Gross profit margin was 13%, down approximately 30 basis points year-over-year, principally due to a greater contribution from enterprise computing solutions, and to a lesser extent, a greater contribution from Asia, with now a global components business.

Consolidated operating expenses increased 8% year-over-year on an absolute basis. Adjusted for the impact of acquisitions and changes in foreign currencies, operating expenses were flat year-over-year. They were flat even though we're investing in more sales and engineering resources and we are growing gross profit dollars.

Operating income was $215 million, an 11% increase year-over-year. Operating margins were unchanged from the prior year at 3.8%. Our effective tax rate for the quarter was 26%. Net income was $140 million. That's up 17% year-over-year. On a constant currency basis, net income would have grown 18% year-over-year.

Earnings per share were $1.40 on a diluted basis, above the high end of our guidance range, and advanced 19% year-over-year. Cash generated from operating activities in the third quarter of 2014 was a use of $67 million, as working capital grew to support our business. But on a trailing 12 month basis, cash from operating activities was $431 million, that's approximately 83% of our GAAP net income and well in excess of our goal of 70%.

We anticipate very strong cash flows in Q4. In fact, we expect it to be similar to Q4 2013 levels. We repurchased $50 million of our own stock in the third quarter of 2014, and have repurchased $55 million so far in the fourth quarter, increasing our total year-to-date balance at $230 million of repurchases. The current remaining authorization under our share repurchase program stands at $121 million.

Over the last four years, we have returned over $1 billion to our shareholders in the form of share repurchases. This is a high level summary of our financial results for the third quarter. For more detail regarding the business unit results, please refer to the CFO commentary published this morning.

Now, turning to guidance. We believe that total sales will be between $6.1 billion and $6.5 billion in the fourth quarter, with global component sales between $3.4 billion and $3.6 billion, and global enterprise computing solutions sales between $2.7 billion and $2.9 billion. We expect earnings per share on a diluted basis excluding any charges to be in the range of $1.75 to $1.87.

Our guidance assumes an average tax rate in the range of 27% to 29%, average diluted shares outstanding are expected to be 99 million, and the average US dollar to Euro exchange rate for the fourth quarter to be $1.25 to EUR1. Based on the mid point of our Q4 guidance ranges, full year 2014 sales and EPS would grow 6% and 17% respectively over 2013. We expect full year 2014 cash flow from operations of approximately $450 million, and for returns to advance year-over-year.

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

Thank you.

(Operator Instructions).

Your first question comes from the line Will Stein with SunTrust. Please proceed.

Thanks and good afternoon. I appreciate the commentary about the situation in your backlog and orders, that's very helpful given the volatility in the market. I'm wondering what you think if you might speculate as to what's driving the significant variation between what you and your close competitor are seeing on the one hand, relative to what all of the -- or what many of the semiconductor and other component companies are seeing, namely more volatility or a pause in demand.

Thanks for the question. I think that we believe the macro environment still remains sluggish, did before all of this started and still is, but it has been steady. And if you just evidence it by the real GDP growth in the second quarter of 4.6 after declining to 2.1 in the first quarter, we saw that there was growth in Europe and that Asia basically outgrew the other two. We have seen nothing but steady bookings. We are seeing an increase in electronic content.

I believe some of the challenges that could possibly exist is, you've seen some rather large customers in Asia that maybe some companies are taking a bigger percentage of their company and their sales with that have not hit their targets. We still see the underlying business, the SMB business, the middle level business of the customers that we support to be steady, still to have their inventory in control, as evidenced by our inventory in the quarter. So we don't see an inventory build. We don't see over-inflated bookings.

Frankly, we haven't seen an allocation before a downturn. So there's several factors in there right now that we haven't seen that cause us to believe the market really didn't change since the one data point that came out that got everybody spooked.

I appreciate that, Mike. Thanks. And if I can follow up with one other. The strength in Asia that you saw, I'm wondering if you might characterize in particular in China, whether there's been any meaningful shift in end markets that you serve to the degree you track it, perhaps one or two particular end markets might have helped demand along the way in the quarter and in the outlook, I'd appreciate any color there. Thank you.

Yes, I can certainly help you with that. We obviously saw 15% uptick year over year, adjusted for currency and acquisitions in the market. We do continue to see the growth there.

We've had additional contributions to our business from transportation, wireless and the industrial power verticals. So that's where we've seen the growth. Actually, the growth rate of those markets for us have been from the 40%'s to the 70% ranges and we view it as positive.

And it's primarily the customer based expansion that we've seen our Asia-Pac team do, so we're relatively excited about what they've seen.

Thank you.

Your next question comes from the line of Shawn Harrison with Longbow Research. Please proceed.

Hi, I guess good morning for you guys. Wanted to delve into the 5% EBIT margin target. You hit 5% this quarter. I know it was a goal for the year.

How does Asia being below seasonal in the fourth quarter play into your ability to hit a 5% EBIT margin for the year?

Well, obviously it's all a mix issue for us. Asia's profits are generally less than Europe and North America. So therefore, you might argue that it makes it easy. But the truth is, once we get past our fixed cost basis as a corporation, most of the dollars drop to the bottom line.

We've made really good progress towards improving these margins up to the 5% range, and I would have to say we feel very confident that we're going to continue in that range for the targets, especially during 2015. We've seen an increasing income margin by 10% and almost 50 basis points over the 2013 year, so again, we were comfortable with the 5% or we never would have put it out there.

Whether it actually hits every single quarter, I don't know, given seasonality. But we're certainly honing in to where that will be the standard that you would expect to see for us and then once we hit that, we'll go higher.

Okay. Thanks for that.

Would you like to add to it?

Thanks Mike, let me fill in a couple of blanks. We expect to see operating income a percent improvement in North America components year over year. We expect to see Europe to continue to make operating income percent improvement year over year. And we expect some of our other business to do the same thing.

So while maybe it's a question around mix for Q3, keep in mind that we're going to go back to a more normalized mix in Q4. We are really doing it by driving improved performance segment by segment, business by business.

Okay. To be clear, so you expect at least a 5% EBIT margin in the fourth quarter or higher in components?

Yes.

Okay. Then as a brief follow-up, toward the low end of seasonality in terms of ECS sales in Europe for the fourth quarter. Is that inclusive of FX or is there something else going on there just regarding decision making in the region?

FX definitely has an impact on the comparison, right. We see the Euro's gone from about $1.35 in Q3 to $1.25 in Q4. So there is a bit of an impact there also as we look to the fourth quarter.

Okay. But no elongated decision cycles or anything of that nature affecting the quarter?

Not at all.

Thanks and congrats on the results.

Your next question comes from the line of Jim Suva with Citi. Please proceed.

Great, thank you very much. When we think about your -- you really covered a lot of the key questions about the inventory and distribution order slowdown, I think I'd like to switch over to a different topic since that one's been pretty well covered by you guys. That topic is on uses of cash and M&A.

Can you talk about your M&A outlook as it appears like M&A maybe the cadence or whatever has slowed down a bit. Is that the case? Are there other internal priorities you're dealing with, whether it's ERP systems or restructuring or integrating of past acquisitions, or am I just picking one point in time right now where maybe the cadence will come back up for M&A?

I would give you a couple of things. First off, I'll reiterate our use of cash is internal growth. M&A and return to shareholders. So that's it.

I'm not sure I would read a lot into it, as if you look this year, we've done four acquisitions. I guess you could say that is a slowing pace because we were on kind of a terror pace. But what we're not doing, Jim, is we're not forcing anything into the system. It has to be good.

It has to meet our returns and we have to be able to improve on the business we're acquiring to make it better than it was when it was standalone, otherwise it doesn't have the value for us. And I would say possibly the pipeline slowed a little this year, but that doesn't mean that we're slowing and that doesn't mean that there's not targets in the pipeline.

Okay. Great. And then can we talk a little bit about what you see going on like with the different end markets such as servers and storage, specifically with servers, IBM sold their X86 to Lenovo and then on storage you've got a lot of newer startups, smaller ones and EMC the big guys. What type of growth rates you've been seeing there recently and how you transition and think about the Lenovo X86.

I'm going to -- I'll take on, so we can just get off the table the Lenovo thing, and then I'm going to have Sean kind of weigh in on some of the growth. As far as Lenovo goes, we did issue the press release earlier this month announcing their authorization of everywhere that we sell those products. We really look forward to having what I would say is a continued relationship with Lenovo.

We've already had a long-term relationship that goes way beyond the server business and I would expect that to continue. So the truth is, with that one we don't see any change other than sort of a reporting address for the sales and I'm sure Sean's team will continue to do a good job for Lenovo, like we have with IBM.

With that, Sean, you want to go through some of your growth rates?

Sure, Mike. Thank you.

We continue to see our mix shift to software and services. That's a conscious effort on our part to help our partners enable the sale of complete solutions in the data center, while servers and hardware aren't necessarily as big a piece of our mix as they once was. We have seen a return to better activity levels and pace with storage.

We continue to see a mix shift from Unix to Intel based solutions. Nevertheless, we continue to support the server business where we need to. We are seeing growth in the industry standards space and again, as Mike mentioned in his opening remarks, infrastructure software, virtualization and certainly security all represent very healthy growth rates for us, both in North America and Europe and we will see and should see the same sort of pace in Q4.

Thanks very much, guys.

Your next question comes from the line of Matt Sheerin with Stifel. Please proceed.

Just a follow-up from that question. Could you give us the percentage breakdown of products of software, services, storage, et cetera for the computing business?

Are you talking about the growth rates?

Just the breakdown. I know there's a mix and software and services are going up but I don't remember getting a specific breakdown.

You mean within the business?

Yes.

We do have that for you. On a billings basis, if you take the billings and don't net anything out, software is now approximately 35%, storage is 30%, services are 15%. Servers are less than 15%, and networking is more than 5%.

Okay. And then on the services side, Mike, I know that you've done a lot on the asset disposition, the logistics side and there's also a big service component, a big opportunity in the data center in terms of integration, managed services, that sort of thing. Are you seeing growth in both areas or what's really driving the services business now?

I would say that right now if you took the genuine order, you would see the reverse logistics just starting to pan out. As you know, we've been basically investing every penny that has been generated by that business into expansion because we believe there needs to be scale there for it to be successful.

It would be our hope that we'd probably talk about that more over the next year, as it starts to make a difference in the system. I can have Sean give you some background of how the services is playing in the computing business because that would be the next area that we've seen the most growth.

Sure, Mike. So just to build on that. In the ECS side of the business, our services mix is dominated by maintenance contract renewals and as you think about our business, our installed base is now pretty massive, over several years. And every one of those assets is an opportunity to help create a refresh or upgrade opportunity for our suppliers and with our partners and if not, it becomes a maintenance contract renewal.

That's always been the case in hardware and certainly it's now the case in software as that becomes a bigger piece of our mix. In addition to that, our services number is comprised to a smaller degree of education services for some of our suppliers, and a small but continued ramp in our cloud-based services for hybrid and off-premise business.

Okay. Great. That's very helpful. And that's it from me. Thanks very much.

And your next question comes from the line of Amitabh Passi with UBS. Please proceed.

Thank you. Mike, my first question for you was on your EMEA Global Components, EMEA components business. We saw year-over-year growth sort of decelerate to 4% relative to last couple of quarters.

Just wanted to get your thoughts. Is that just a function of comps getting tougher or did you see maybe some incremental sluggishness in the region as the quarter progressed, any incremental insight would be helpful.

First off, I'd say we have to be a little encouraged here by the continued firming trend of the European business against the slower macroeconomic backdrop. While you may call it slowing, they've been at it for quite some time now, so their growth rates are probably catching up to them in the comps. But we've also had five straight quarters of operating margins increasing.

So we think we're going to -- we continue to see the trend that we've seen before and the group has the ERP behind them, and so they've invested more in sales to focus on the external market as a result of some of the savings they've had there and that's also driving their operating income. We've really seen some extra penetration in transportation, the aerospace and defense and a little less on the lighting side. But those would be kind of the three verticals that have played for us over the last year, year and a half.

Okay. Got I and just a quick follow-up for you, Paul. OpEx, you've had some very tight control over the last couple of quarters. Any help in terms of how we should be thinking about OpEx as we look forward?

Right. Well, I'm sure you recall that we talked about the fact that we over-performed on our cost efficiencies last year for the third, fourth year in a row. We decided to turn those costs, those extra savings into investments in sales and engineering talent so that we could ensure we get growth in both sales and GP dollars, a profitable share growth.

As I think about expense for the fourth quarter, compared to the third quarter, we'd naturally see some uplift because we're going to have an uplift in sales. Variable costs will trend up a bit. I don't see any meaningful massive change in the pace of spending or for that matter -- I look at the bottom line, expense dollars did not increase year over year while we're investing in the business.

So we must be becoming more efficient to fund that and we're driving GP dollars up. So I think it's kind of like a good formula for us to follow.

Excellent. Thank you.

And your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed.

Hi, thanks. I wanted to ask you a question that I also asked one of your competitors which is about what you're seeing on the cloud side. I know last quarter I think you guys talked a little bit more about what you were doing in cloud and it's been a threat that people are worried about impacting your business. But just wanted to see what you see as opportunities and have you seen any impact because the ECS business actually seemed to see pretty good growth this quarter. Thanks.

I would say that we believe as a general backdrop that customers really continue to seek a choice in what their cloud offerings are, and three basic areas, off-premise, on-premise and hybrid. So we believe that. And sort of as a result of that, we talked about building SKUs that will position us nicely as that market is developing.

This isn't overnight and some of the consumption models will change, but we really built a nice proprietary system that'll help with the adoption of those SKUs and we have seen that start to take off. Sean, would you like to add some more color to that?

Yes, sure, Mike. It has been a fairly unique investment on our part. It's called ArrowSphere. Think of it as our online market place with the right set of cloud solutions to help our partners serve end users. We still believe end users are looking for choice.

While demand for on-prem and private cloud solutions is still fairly robust, we also want our partners to be able to deliver hybrid and off-prem solutions where it makes sense. So inside ArrowSphere we represent things like soft layer with IBM, VMware's vCloud hybrid services, even helping Microsoft with their SaaS model through the service provider channel. We recently signed Rackspace, a number of the security players are interested in SaaS selling and deployment models.

ArrowSphere serves those providers very well and we'll continue to add to that line card purposefully. This is a business now that's approaching roughly a $50 million run rate, and we're going to continue to invest in that on behalf of this transition as it evolves.

Great. And then can I just follow up. In terms of converged infrastructure, are you guys selling very much converged infrastructure and where would it fall in terms of servers or storage or networking? Thanks.

I'll be happy to take that. We are an active participant in the converged infrastructure marketplace. We represent several including VCE and Vblock, FlexPod, Vspecs. We're certainly now aligning with HP in the same regard.

There's a variety of solutions there. We are in a great position to help vendors participate in these because they're multi-vendor in nature and customers are slowly but steadily recognizing that there's a value prop associated with a single preconfigured solution versus one that's built in pieces and separate sales cycles. So we're optimistic that we'll continue to see growth in that segment of the market.

And where does it fall? Server? Storage?

Servers, storage, networking and then by definition, virtualization.

You split it all out?

Yes, we do split it out. It rolls into our various sales categories, even though much of those obviously are sold in conjunction with converged solutions.

Okay. Great. Thank you for the clarification.

And your next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed.

Good afternoon and I appreciate the opportunity to ask a question. I had a follow-up question on the plan to add more resources in the components business to drive a higher mix of demand creation revenue going forward. How far along would you say the Company is with those hires?

When do you expect to have that fully in the model. Maybe related to that, if you can just remind us what the normal timeline it is between adding new resources and those people driving higher gross profit dollars.

We're about halfway through adding those heads. Remember that we're adding them around each of the three regions. Obviously, we slowed down in Asia because of the unity roll-out which has been our best execution to date.

There was about a six month lag between someone coming on-board and beginning to earn their keep and then going beyond that. Our expectation is that over time every dollar invested in sales and engineering support would drive anywhere from 1 x to 4 x that amount in GP. We feel it's got a good payoff with low risk and it's something that we can continue to focus as we move forward throughout this year and into next year.

The piece of it, sometimes it's what we'd have to say is about six months before a salesperson really gets themselves going. Sometimes they can come a little earlier, but remember, we're here to push design activity. Asia's where we did the largest amount of adds and we've seen our design activity go up by 33% quarter on quarter and we've started to see that accelerate going into the end of the year.

So I think there's pretty good scenario there about the adds. We added also in North America and they're up almost 27% now on design wins. So that activity as you know is a good barometer for the future. It's a good barometer for the gross profit and it's just one more data point for us about how we see the market coming in the future.

That's very helpful. Thanks for that.

Then for a follow-up question I wanted to talk a little bit more if we could on the Asia components business. I understand up about 15% year over year in constant currency organically. I think reported dollars up 14% sequentially, and I know some of the markets were industrial and wireless that drove some of that strength.

Can you just help us understand, though, if any of the revenue strength that you're seeing in the Asia components business is from short-term, higher volume, consumer type programs that may not repeat. I ask the question because Avnet participated in some high volume consumer programs that helped to drive some sales. I just want to get a sense for whether or not we need to be mindful of the potential for any of those to decelerate in some of the coming quarters.

Mark, it's Paul. I would tell you that we're trying lots of different customer verticals in our strategy there, but we're not going to really move much off our strategy of SMB. We'll be opportunistic if there's a customer and or supplier that needs our assistance, from a logistics types engagement. But we're really focused on adding these sales and engineering resources around growing SMB faster, because we think over the longer term that gives us a richer cash flow returns and operating income profile.

Thank you very much.

Your next question comes from the line of Lou Miscioscia with CLSA. Please proceed.

Okay. Thanks. A couple of questions.

I guess when you look at the enterprise business and what are your resellers telling you about going into year-end. Obviously your guidance implies that things are pretty normal. Any hesitation?

Some tech companies did have disappointing results I guess if you could break it down by the US and Europe. And I have a follow-up.

I think basically what you've been hearing is distribution has been relatively strong. I think you've been hearing that from your other calls, if you've been on them, that the market is covered, that we're still seeing opportunities. It's not a gloom and doom thing, especially for our resellers and or the mid-market.

We're still forecasting right in line. So we're expecting the market to be there and as we said, so far starting off in October things are looking good. So we're still relatively bullish and we're bullish going into the fourth quarter.

Okay. Then looking at the same business, you've got converged systems you sell, but maybe you could also talk about buyers' appetite to move to hyper converged and if you're seeing that to start to pick up in a material way.

Sure, Sean, you want to?

Yes, Lou. Sean here. We are seeing more customers start to ask for questions about hyper converged solutions. We have a pan EMEA authorization with SimpliVity. A North American authorization with Plantonics.

I think customers are evaluating lots of different architectures and storage models including flash, and so we're going to be well positioned with the right suppliers as those trends play out. But I would say hyper converged solutions are not yet the dominant piece of our storage or server number.

Great. Last question is on software as a service or -- yes, software as a service applications. Is that a meaningful portion of your business? And then when you actually sell or your VaRs resell that, is there a big difference in pricing in the sense of that's more on the monthly basis or quarterly basis than buying a whole system upfront?

Lou, say more, if you will. I want to make sure I understand your question.

Sure. Having a SaaS sale in comparison to selling a normal system, which is a component of software and hardware, which let's say it has a $1 million price tag. All of a sudden you're going from a $1 million price tag to maybe $50,000 per month. That's brought down some numbers for like Oracle.

Wondering if any of that is starting to play into your revenue stream, or are your SaaS reselling a very small component of your overall IT sales.

Lou, I would say reference my earlier remarks, we do think SaaS is an important part of our role in the channel in the future. ArrowSphere is designed to help to bring the right SaaS and infrastructure solutions to market. Currently, we haven't seen that price point difference that you relate to really impact our business in a material way and as I said earlier, there's still fairly sufficient level of demand for on-premise deployments.

Okay. Great. Thank you.

Ladies and gentlemen, that concludes today's portion of the Q&A session. I would you now like to turn the conference back over to Mr. Steve O'Brien for any closing remarks.

Thank you, Jasmine. If you have any questions about the information presented today, feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. You all have a wonderful day.