艾睿電子 (ARW) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics, Inc. first-quarter 2015 earnings conference call. My name is Ian. I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Steve O'Brien, Director Investor Relations. Please go ahead, sir.

Thank you, Ian. Good day. Welcome to Arrow Electronics first-quarter 2015 conference call. I'll be serving as moderator on today's call. 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.

As a reminder, you can access our earnings release at www.arrow.com/investor, along with the CFO commentary, the non-GAAP earnings reconciliation for the first quarter, and a webcast of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period.

I will now hand the call to our Chairman, President and CEO, Mike Long.

Thank you, Steve. Thanks to all of you for taking the time to join us today.

In the first quarter, we delivered good results. We executed well on our strategic initiatives. We continued to deliver best-in-class financial performance, and we returned substantial capital to our shareholders through our buy-back program.

We believe it may be helpful to put our first-quarter results in perspective by reviewing our long-term financial objectives. Our objective is to grow sales faster than the market, increase our markets served, grow profits faster than sales, and increase return on invested capital.

With respect to growing sales faster than the market, in the first quarter we delivered 5% overall sales growth on a constant-currency basis. Our growth was led by our European components business, which grew a robust 13% on a constant-currency basis, marking the eighth consecutive quarter of year-over-year growth. Great execution by our team, and our investments in sales resources and our ERP system, have been driving our performance in this region. Both our Americas and Europe enterprise computing solutions businesses delivered strong growth, with the segment, as a whole, growing 9% on a constant-currency basis.

In the first quarter, our enterprise computing solutions business experienced balanced growth across the portfolio. In enterprise computing solutions, we continue to sell comprehensive solutions to the higher value segment targeted at the data center. Our business is well positioned to help our customers and their organizations, and our suppliers, to achieve their objectives. We're enabling our customers to select optimal and secure solutions for running their business-critical applications, whether those solutions reside in their own data centers, in the cloud, or some hybrid combination.

In terms of increasing the markets we serve, in global components we continue to advance our opportunities from the Internet of Things and design services. In enterprise computing solutions, beyond our security and data analytics efforts, we are increasing our capabilities in the next generation storage and converged solutions. We also continue to broaden our cloud-based compute, storage, and security offerings on our WebSphere online marketplace. Additionally, we've been increasing our market scope in 2015 with our acquisition activity.

Once again, we delivered leverage on the sales growth. During the first quarter, adjusting for currency fluctuations, we grew operating income 9% year over year, compared to a 5% sales growth. We captured a 7% operating margin on our incremental sales growth, and we also expanded our global components operating margin for the seventh straight quarter on a year-over-year basis, and expanded our enterprise computing solutions operating margin for the ninth time in the last 10 quarters. Last, but not least, for the sixth consecutive quarter, we again increased our return on invested capital compared to the prior year.

On the topic of currency, let me take a moment to discuss how we operate our business to ensure consistent returns to our shareholders, and minimize risks from what has been an unprecedented currency environment over the last nine months. We have received two recurring questions.

The first question: Will Arrow's operating margins be compressed by strengthening dollar relative to the euro? As we demonstrated again this quarter, our operating margins continued to expand in the face of currency headwinds. In the first quarter, components delivered a 5.1% operating margin, and enterprise computing delivered 4.4% operating margin, with both increasing 20 basis points over the prior-year first quarter. Importantly, our components margins were up in the Americas and in Europe, and were flat in Asia. One of our key efforts has been to align our purchases and sales so they are transacted in the same currency.

The second common question is: Will the decreased purchasing power of the euro result in lower demand from the region? Our answer is: We haven't seen it. Our healthy growth rates for both our European component and our Europe ECS business reflect our strong execution, but also improving underlying demand.

As we continue on for 2015, we see no meaningful improvement in the economic backdrop or the markets we serve. But, as we proved once again for the first quarter, we are able to produce strong results, independent of the market environment, and we look forward to continuing this for the remainder of the year.

Paul will now provide more details on our first-quarter results and our expectations for the second quarter.

Thanks, Mike. First-quarter sales of $5 billion were within our consolidated guidance range, with ECS in line, and components at the lower end of their respective ranges. Sales grew 5% year over year, adjusted for changes in currencies, declining 2% year over year as reported. In global components sales, we had $3.35 billion, which grew 3% year over year, adjusted for changes in foreign currencies, and decreased 2% year over year as reported. We had one fewer shipping day in the first quarter of 2015, which negatively impacted our year-over-year growth rates by an estimated 150 basis points.

In the Americas, our sales were flat year over year. Americas core sales were down 9% sequentially, near the low end of traditional seasonality. Our first-quarter performance in the Americas was affected by the continued lackluster economic environment, with first-quarter GDP growth of just 20 basis points.

In Europe, sales in constant currencies increased significantly, advancing 13% year over year; the second quarter in a row of double-digit growth. We experienced strength across the continent. Sequentially, core sales in Europe grew 14% quarter over quarter in constant currencies, which is towards the high end of normal seasonality.

Sales in Asia were flat year over year. Core sales in Asia grew 6% year over year, and declined [to] 9% quarter over quarter, towards the lower end of traditional seasonality, but in line with our expectations. We exited a high-volume supply chain engagement in Asia last year, and this negatively impacted our year-over-year growth rate in the first quarter. And it will have a larger negative impact on our year-over-year growth rates in the second and third quarters.

Total first-quarter book-to-bill was 1.02; and the overall market remained stable, with lead times and cancellation rates operating in normal ranges. Sales at our enterprise computing solutions business was $1.66 billion.

In the Americas, sales grew 8% year over year, and were down 41% sequentially, in line with our expectations following our strong fourth quarter. In Europe, sales in constant currencies advanced 8% year over year.

Sequentially, sales on a constant-currency basis declined 34%, which is better than normal sequential decline compared to our traditional seasonality. The evolving and growing requirements on data centers, our strong execution, and our solutions selling efforts all drove the strong ECS revenue growth.

Our consolidated gross profit margin was 13.7%. Year over year, gross margins declined 10 basis points due to a higher contribution from ECS America within our results. On a sequential basis, gross margins improved 90 basis points due to the normal seasonally higher contribution from our components business.

Total operating expenses declined 5% year over year, but grew 1% year over year adjusted for the impact of acquisitions, and changes in foreign currency. Operating expenses were 30 basis points lower as a percentage of sales, driven by our operating leverage and efficiency initiatives. Operating income was $205 million, a 9% year-over-year increase, adjusting for currency.

Operating margins advanced year over year as well, increasing by 10 basis points to 4.1%; the highest first-quarter level since 2012. Global components operating margin of 5.1% increased 20 basis points year over year. Global enterprise computing solutions operating margin was 4.4%, also up 20 basis points year over year.

Our effective tax rate for the quarter was 27%. Net income was $128 million, up 12% year over year on a constant-currency basis.

Earnings per share were $1.32 on a diluted basis. Diluting earnings per share advanced 8% year over year, and grew 17% year over year on a constant-currency basis.

Cash flow from operations was a negative $242 million. You may recall that, in the fourth quarter of 2014, we estimated that our cash flow from operations was $150 million better than we had expected, due to checks in transit, and a sizable customer pre-payment. And that it would reverse in Q1 2015. Adjusting for that, our pro forma cash flow in Q1 2015 was a negative $92 million.

Our negative cash flow in the quarter was the result of selective investments we made in inventory around the world to support an increase in shipping days in the second quarter when compared to the first quarter. For clarity purposes, we will have 64 shipping days in the second quarter of 2015 versus 61 days in the first quarter of 2015.

Return on working capital for the first quarter was 23%. Return on invested capital was 9.8%, up year over year for the sixth straight quarter, and significantly outpacing our long-term 8% weighted average cost of capital. We repurchased $64 million of our stock in the first quarter, and approximately $279 million over the last 12 months. Authorization remaining under our existing share repurchase program is $197 million.

This is a high-level summary of our financial results. 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 $5.45 billion and $5.85 billion. Global components sales between $3.45 billion and $3.65 billion. And global enterprise computing solutions sales between $2 billion and $2.2 billion. We expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.43 to $1.55.

Our guidance assumes a tax rate in the range of 27% to 29%. Average diluted shares outstanding are expected to be 97 million, and the average US dollar to euro exchange rate for the second quarter to be $1.08 to EUR1.

You are all aware that the euro has depreciated substantially relative to the dollar over the past nine months. The US dollar to euro exchange rate we are using for forecasting purposes declined 5% from $1.13 in the first quarter, and 21% from the $1.37 in the second quarter of 2014. We calculate this depreciation of the euro has resulted in a 1% negative impact on sales compared to the first quarter, and a 6% negative impact on sales compared to the second quarter of 2014. We calculate this depreciation has resulted in a $0.02 negative impact on EPS compared to the first quarter, and a $0.12 negative impact on EPS when compared to the second quarter of 2014.

We expect our recent acquisition activity to contribute approximately $125 million through sales, and be neutral to earnings per share when compared to the first quarter of 2015, and to contribute $200 million in sales and $0.04 to EPS when compared to the second quarter of 2014. Keep in mind that the third quarter is the seasonally strongest quarter for our largest recent acquisition, immixGroup, and this differs from our traditional seasonality for enterprise computing solution business. No change in our expectations for any of our acquisitions, though the quarterly seasonality is different to our historical seasonality.

Thank you, Paul. Ian, could you please open up the call to questions at this time?

(Operator Instructions) Jim Suva, Citi.

Congratulations on the results and a good outlook especially considering FX and all and addressing it directly head on. I have two questions. First of all, in this foreign exchange environment, assuming things stay where they're at, does it make things more appealing for your M&A? Just because the purchasing power of the dollar versus the euro and other currencies has gotten more favorable, or things could be at a discount? Or, with your recent acquisitions, which I believe you have a pretty powerful one, immix still holding in. Do you have to digest that still?

My second question is, I heard you mention $1.08 for FX. Is that what you meant for the past quarter just reported or the quarter outlook? The reason why I ask is the currency right now looks like it's around $1.12. Thank you very much.

Jim, I'll address the acquisition piece, and then I'll turn the currency over to Paul. But, you're right. We did have some good acquisitions announced, and we'll be closing -- in fact, one is closing today. But, as you know, from history, we are digesting these businesses relatively quick. So, don't see immix as slowing down our business in any way, shape, or form.

You're right, with the currency, we should be able to have an advantage when it comes to purchasing something. However, you've got to have a willing seller on the other side. So, whether or not somebody would be willing to sell in that environment is yet another story. As we typically try to go for good businesses that cover the cost of capital that we require, have the growth aspects we require, and then the new products we require, we will be sticking to our goals for every acquisition and not let the currency really change our approach. Hopefully, that covers that for you, and we will let Paul cover the currency piece.

Jim, good morning. The $1.13 rate that I quoted was the rate we used in the first quarter as our actual rate. You're right. In the last several days, we've seen the euro strengthen a bit. We did use $1.08 in our guidance because that was approximately the rate we saw for month-to-date in April through Monday. So, we had to lock down the guidance somehow, some way, and that looked like the average for the month so we went with that. Obviously, currency changes will continue throughout this quarter, and that will have a potential impact on the translation of our European financial statements for the quarter.

The pending acquisitions, immix and ATM, are those included in the outlook? Or, since they haven't closed, not yet?

In the outlook, immix is included. The seasonality is different there. That's principally focused on the fed marketplace. So, we'll see stronger than normal seasonality for that business in Q3 and Q4. But, it means Q1 and Q2 is different from our normal seasonality. The other one that we are referring to is not included in the guidance because we weren't closed on it yet, and we preferred only to talk about what we have closed on.

Thank you very much and congratulations.

Brian Alexander, Raymond James.

A clarification and a question. Paul, on the components guidance for June quarter, up about 6% sequentially at the midpoint. That's a bit above seasonal. If we normalize for the extra shipping days and for currency, should we view that to be more in line with normal seasonality? And, is there any variability by region that we should think about?

We see all three regions being in line with normal seasonality. You're absolutely right. There's a lot of moving parts around currency and that type of thing. But, we feel good about the position we're in right now, and we feel that we'll see the normal seasonality which is reflective of, as Mike referenced, the economic backdrop. More importantly, our strong execution around investing in sales as well as the impact of the ERP tool.

My question would just be on acquisitions. Could you just remind us the return on capital framework that you use when you're approaching acquisitions? Whether it's an absolute return that you look for? Or, a spread above your cost of capital? And, whether that has changed at all in recent years given where interest rates are? I'm just curious relative to the $400 million, it looks like you are spending on immix and ATM, how should we think about the returns on those acquisitions? Thanks.

We haven't changed the return hurdle. So, you may recall that we have said that we want to have a return on invested capital in year one that is in excess of our weighted average cost of capital, and we still have that longer-term target three years out at 12.5%. So, we haven't changed it, even though we have driven down our weighted average cost of capital. We haven't changed to a percentage increase. We just left it as a targeted number at this point in time. So, while our weighted average cost of capital is down, the hurdle rate still remains at a higher level.

Okay. Thank you.

Steven Fox, Cross Research.

Couple of questions from me just on the acquisition. I understand the long-term implications of it. In terms of near-term, how you are looking at the public sector markets and what immix brings to maybe add to that growth rate? Can you talk about that a little bit? And then I have a follow-up.

Steve, Sean Kerins here. We're pretty optimistic about the immix acquisition. We've had a good presence in the federal marketplace, and this will only give us that much more depth and breadth. If you think about our strategy, which has been to continue to move to software-based solutions in the data center, they bring a great portfolio in that regard. Very consistent with where we are headed and also some very good value from an enablement perspective in that sector. So, we think it?s just going to help us for the long-term, and we think it's consistent with our strategy.

And, the near-term public sector markets feel okay to you guys, given everything that's going on in the world?

Yes, they do. We think they were as expected in Q1, and we're more or less on plan in the way that we look at the market, both federal and state and local for the balance of the year.

Okay. And then just as a follow-up, just looking at the ECS business. Obviously, 7% organic growth in this environment is good. Mike, you mentioned it revolves around some things you guys are doing to gain share. And, I wonder if you could just maybe elaborate a little bit on that? You mentioned how data centers are evolving, and you're trying to meet some of those requirements. Can you just talk specifically about how you're gaining share versus what doesn't seem like a very robust market?

Yes, I think the first thing that we said we were going to do is widen the products that we had that we were bringing to market. And, I think Sean and his team have done a very good job of that. And I think you'll notice that the opening statement where I said we had good balanced sales, which means that customers are now buying more of the complete solution from us than sort of scatter-shotting us with just products. That's where we wanted to be. We saw really good uptick in servers this quarter. Security software continues to be a real good place for us. We've really kicked up the performance of that over the last couple of years.

Notably, infrastructure software is up, which says that the data centers are alive and well and still growing, and there's a lot of work to be done. We're seeing what I would say good, balanced sales. We had -- storage was up for us. I know that there is a lot of talk about the change of the storage and the products, but there's still a lot of activity that we see in storage and would expect to continue to move and migrate with the business around storage, too. So, all in all, I would have to say that not only in the Americas, but we saw the exact same type of balance in Europe. And, for us, it was exactly what we were looking to do. Hopefully, that answers your question.

Yes, it does. Thank you very much.

Matt Sheerin, Stifel.

A question regarding the component business. Avnet and others have been talking about selective price increases from suppliers in Europe. Are you seeing that as well? Are you seeing any movement on customers' part to build inventory? Are you building inventory? It sounds like the inventory build is really related to those extra selling days and the seasonality in the business more than anything else?

Matt, thanks. In the first quarter, I would say that we saw that book-to-bill of about 1.02. So far in this quarter, we are seeing a 1.12 book-to-bill. So, any idea that in the first quarter, customers were over-ordering for the marketplace, we've only seen their ordering increase going into the second quarter. We don't believe there was any change of customers' order patterns in the first quarter from what we've seen in past history.

Billings are up a couple of percent right now. We're still seeing Europe very strong with billings up 20% over the same type of period. We are refuting the idea that there was early buying going on, and saying, we are seeing more consistent buying, which caused us to increase our inventory in the first quarter to take care of the demand that we were seeing into the second quarter.

Yes, there are a few extra days. At the end of a quarter, those days can be pretty substantial. That could be the partial reason for the first quarter, and that's why we are looking at the business right now on a six-month basis and then bringing it in by the quarter. So, we don't think there is anything happening here that is going to change the outlook for the first half of the year. And, right now, we're still as bullish on the year as we were when we came into it.

That's helpful. Just back to that acquisition and the seasonality -- that immix acquisition. I know that in your CFO commentary, you have seasonality down 4% to down 12% in North America. With the federal business picking up in Q3, shouldn't that segment look more flattish in September?

Matt, you are getting the numbers directionally correct. The reality is, it's brand-new to our portfolio. And then, we have got to factor in also that we have a cut-off at the end of our third quarter that is a couple days short of September 30. So that actually, what will happen is we will be picking up some of that federal surge, if you will. Mostly, in Q3. But, some of it will trail off into Q4.

Okay. That's helpful. And just lastly, you've got other acquisitions closing, including one today you talked about. I think immix is running at around a $600 million revenue run rate. What's left in terms of acquisition contribution revenue? It seems like it's still a few hundred million more to come online, is that right?

If we talk about them individually, right. We have one that we did in Germany, but we own 53.7% of it. And, that's a public Company. So, we have to be very careful in disclosing anything ahead of what they disclose around future performance. So, that's not in our number, and we probably won't be putting that in our number since we don't want to run afoul of any type of selective disclosure for a German public company. So, that one's not going to be in our guidance in the near-term as we go forward and I really would prefer not to quantify expectations around that because we don?t, as I say, want to run afoul of the German requirements.

The other one, we are talking about one that's closing at the end of April, and then we've got to look at the seasonality there and factor in only two months versus a full quarter. I think your couple hundred million dollar number might be a little bit too high for us at this point in time.

Okay. I was just looking for annual contribution, not for this year. But, that's helpful. Okay. Thanks a lot.

Sherri Scribner, Deutsche Bank.

You guys have done a great job in improving the margins over the past couple of quarters. I wanted to get a sense of how much more margin expansion you think you have? What is the additional opportunity to reduce your costs and potentially move the margins higher? Thanks.

Thanks, Sherri. We actually believe that there is still room in the margins, although we think it's important to first show a sustainability of where the margins are in components over a period of time here. So, you will see some fluctuations up-and-down in those margins as we stabilize those businesses. In the computer group, as we see more software sales and more services sales become a bigger piece of the portfolio, we would expect to see the margins there continue to grow right along with the change in mix, as that occurs over the next few years.

The good news of that is we?re sitting here looking at two businesses that are far from mature and far from just being what I would say something that has historically been a lower operating income business. We're producing more for the customers, which means they are paying us more. We're doing more design wins with the customers. There is more web activity with the customers, and we expect that to continue.

While I don't have a number for you now, I would say as we go into the second half of the year, we want to get through the currency fluctuations that we're seeing now and really see how the business acts in a stable environment. Because if you look at what components has done with the currency fluctuations on top of a market that hasn't been usually robust, I would say that's pretty good right now.

Okay. That's helpful. And then just following up on ECS with the shift to more software and services. Also, maybe you could give us some detail on what's going on with your cloud initiatives and how that impacts the margins? I know that you guys have been shifting to software and services, but you've also talked about cloud in the past. Thanks.

Hi, Sherri. We continue to invest in the cloud transition. We believe it's one that playing out over time, not overnight. In our ArrowSphere platform where we do a lot of the provisioning and the billing and the enablement of the sales channel to cloud offerings, we now represent well over 100 different as-a-service offerings with some 50-odd different suppliers.

So, we are there for the channel as the channel continues to move down that path. Our run rates each quarter continue to improve with that segment of the business. It did again in Q1. I would say, though, it's going to be a long transition. It's one that won't play out in any given quarter.

Thank you.

Will Stein, SunTrust.

I'm hoping you can help us understand approximately what portion of the components sales in Europe would be to brokers or EMS companies as opposed to OEMs?

Brokers would be hugely small. (laughter) That's not a target for us. The biggest pieces we have in terms of our vertical markets would be -- or the biggest growth areas would be lighting, automotive, and we've seen pretty good growth in aerospace and defense in Europe. As far as what percent we have for EMS companies in Europe right now, I don't have in front of me. So, I'll have to get that to you after the call.

Okay. Thank you. Maybe I can also touch on inventory days? I know you addressed this in your prepared remarks. It sounds like preparing for one extra shipping day. But by my calculation, it looks like inventory days picked up almost double what they typically do in the quarter. By my math, about 9.5 days in the last five years, you've averaged up about 4.5 in this calendar quarter. I'm wondering if there's something else that went on there from a mix perspective or maybe currency is affecting it or something else.

A little bit of that would be the investments we made in the past of an electromechanical market because we are seeing deeper and wider penetration by our businesses there. So, we have made a decision to go ahead and support the sales that we are seeing, as well as support the opportunities that are coming in. That may account for a day or two of that. I don't know, Paul, if you have anything else to add?

Will, if you are doing it on a consolidated basis or consolidated revenue, keep in mind that the transition to similar service agreements in ECS [undercalls] our real revenue growth, right, because that's on a net billing basis. So, we're seeing that become a bigger percentage of the mix when I look at it. So I think that is maybe something we've just got to keep track of.

As Mike mentioned, around passive electromechanical, that's a product line that turns about four times a year. We are investing more in that versus the semi space which turns six to seven times a year. So I think there's a couple of different factors, not one big driver or one big region, with the exception of maybe Europe because we've had two quarters in a row with double-digit, year-over-year revenue growth. Where maybe we laid in a little bit more inventory to support ongoing great performance by the team there.

If I can sneak in one more, please. Mike, you mentioned a minute ago lighting, automotive, and aerospace. I think you said those were strong points in Europe. The areas that semi companies have noted have been weak. Perhaps obviously at this point, PCs and comm infrastructure, I would suspect you have relatively little if any exposure to either of those markets on the component side? Can you --? (multiple speakers)

Yes, a lot less exposure than what we just suggested. We're still in the medical market, the industrial market, and things like that, but the PC market is very light exposure for us. The cell phone market is very light exposure to us. That's why you see the manufacturers mainly talk about those directly, unless it's some big, low-margin supply chain activity that somebody has taken and doing for that customer. But for the most part, that's not where we play.

Great. Thank you.

Shawn Harrison, Longbow Research.

Clarification, first. Did you provide the revenue expectation on an annualized basis for immix? If so, what is it?

We haven't provided it, but it's a round number of $700 million.

Okay. And then second, SG&A, I guess, was down more than what I would have viewed on a dollar basis to be seasonal this quarter. What should we expect SG&A to grow into the June quarter on an organic basis, and then how much comes over from the acquisitions?

I would say what we normally see is a variable cost of about 2% for the incremental sales volume, so that's one thing to keep in mind as we go forward around the quarter. If you just give me one moment, I'll see if I have the actual number for immix. I might not have it with me. I may have to come back to you. Immix would be, for the quarter, around -- let's call it somewhere between $10 million and $12 million.

Okay. And then last question, if I may, just the acquisition that's closing today. Is the seasonality of that business in Asia different than anything that you normally experience in that business being very back-half weighted?

It will be the same seasonality as the Taiwanese company. That really doesn't have that much of a difference from what you see in the rest of the region.

Okay. Thank you very much.

Ananda Baruah, Brean Capital.

Just a quick one for me. With regards to the ECS, the growth there has been pretty solid on a constant currency basis. And, you are re-purposing the portfolio, the product areas that are growing as well as adding a line card. I guess my question is, how do you guys ultimately think about what the growth profile of ECS can be? It seems to be pretty consistent across both geographies. But the constant currency growth profile can be, given that you are improving the mix and adding line cards simultaneously. And then, actually just a follow-up to that is how much of the growth we see now is really line card adds? And, I guess, you would probably count that as organic? Does that soften at some point?

Well, the line card add has everything to do with the solutions that we are trying to offer for the customers and where they are evolving to. So, as we add more software lines -- for example, over the last couple of years, we added security software virtualization software, and we saw those businesses take off retrospective and to add a fair amount of sales to us.

If you remember, I guess now it's six or seven years ago, we were primarily just a server distributor. That's what we did. That's what we're living on. During that time, you saw the sales continue to grow for ECS. But what was also happening was a decline in proprietary servers over the same period, sometimes in double-digit format that we were overcoming with our services, software, and storage business.

What you're seeing, now, is some of the servers have begun to put some life back into the marketplace. We are seeing some refresh, which is good. We're seeing an uptick, a continual uptick in security software. Virtualization is still running at probably an average of 10% to 12% quarter in, quarter out, for us. And infrastructure software is starting to come up, so that has been an area that is also bringing some light to us.

Probably, the next hurdle is going to be what happens in storage over time and how fast the solid states come in and impact rotating. But, we are prepared either way. We've been guiding this business through those changes. We're seeing more sales in ArrowSphere today than we've ever seen. We're totally prepared for what we would call cloud initiatives, whether it's on-premise, off-premise, or some sort of hybrid. In general, we think we have most of our bases covered right now. If there's anything we're not selling, you think we should be in, boy, we are all ears.

I like that. Okay. I get that. I guess with regards to the line card add, I'm familiar that you?ve -- what you've done over the last few years. I was thinking more in the context of have you had, inside of those buckets, new products coming online real time that serve as being a tailwind to growth over the last couple of quarters?

It's interesting. While we've seen some of the newer products come up, we've seen some of the older products go down. We've been in this constant balance. But frankly, that is the nature of this business and that's the nature of how it exists. And whether you are a manufacturer or a distributor or a solution provider, there are products that are hot that you get in and you start producing. And then, they hit a level of maturity and once that level of maturity hits, you start to go end-of-life and new product comes on.

I think that's probably -- our ability to anticipate that has helped us with the 7%, 8%, 9%, 10% growth rates that you see for us out of that business. What you are going to see now, is probably earnings in the future grow even faster than sales because of software and services. That's how I think you're going to see the business evolve, which actually isn't bad for anyone.

That's perfect and very helpful. Thank you.

Amitabh Passi, UBS.

Mike, my first question for you was around the book-to-bill. I think you said 1.12 quarter-to-date. Sounds quite robust, and I think you also called out a pretty uninspiring GDP environment to explain your trends in North America. I don't think GDP is that much better in Europe. I'm just trying to understand where this strength is coming from as 1.12? Is that being skewed more by Europe? Or, are you seeing general affirming of demand across the globe?

Remember how I explained Europe sales before? If you'll remember, several quarters ago we talked about an increased investment in sales people and engineers in Europe coupled with the conversion of our ERP system. Those two things combined have A, made us more efficient, allowed us to put more of our costs towards selling, and those engineers have brought in more designs, which has helped us grow faster in that market. At this point, we do see ourselves growing faster than the European market, overall, which is a positive. We are seeing an uptick there.

The North America business -- we started to invest, probably, a little longer than a quarter or go in some engineers and sales people, so we would expect that one to pick up more toward the second half of the year. But Asia, right now, has a strong, strong book-to-bill compared to last year. We've seen it start to come online after the Chinese New Year, albeit late.

But the truth is, I don't think it's going to change the overall economy of Asia. I think it's just some seasonality we are seeing and the backlog starting to build going into the second half of the year. Hopefully, that balances it out. But all in all, we are seeing a strong book-to-bill right now, and most of it makes sense to us as we see it.

Interesting. Maybe as a quick follow-up, on your computing solutions segment, did you give us a sense of year-over-year growth in your three major categories -- service, storage, and software? I didn't hear if you gave us those numbers?

I don't think we published those numbers as we saw them coming out. What we have done is we've given you the mix, if that will help you right now because I think we were looking at something like 6% or 5% for the year. The current mix of the business is around 35% software, 30% storage, services 15%. Servers are a little less than 15%, and networking is more than 5%.

[If you're going to need some] broad numbers, the server market probably combined was 20%-plus up year-over-year. In software, a range from -- anywhere from 10% to 20%, to give you an idea. That is globally year-over-year, and there's different pockets of strength between North American VAD and ECS. Still pretty robust performance when you look at those type of product sets.

Paul, just one final one for you. On the OpEx, did FX help you this quarter? Is that part of the sequential decline that we saw from 4Q to 1Q?

Sure. The FX change, or the currency change, reduced the sales, reduces GP, reduces SG&A, and it reduces operating income.

Okay. Perfect. Thank you.

Right across the board.

Okay. Thanks.

Lou Miscioscia, CLSA.

Just to dig a little bit deeper. When we look at the storage, some of the legacy vendors seem to have had a slowdown and even negative growth in some of their products. Is most of your storage growth coming from some new with the startups than more likely either all-flash or hybrid?

At this point, I think that, Lou, is a little bit ahead of itself. Most of the growth today is coming from the existing storage manufacturers. They're still doing well in the mid-market. We're still seeing a lot of opportunities, and my expectation is you'll start to see the other lines that we have -- start to come up more towards the second half. But, I don't believe it's going to be this immediate hockey stick. There still has to be acceptance in the marketplace, and that's going to take a little while. So, we fully expect our traditional vendors to be pulling the hay wagons for the next couple of quarters.

Okay. In Europe, both you and Avnet had very nice numbers for IT demand from an organic standpoint. Is it the impression that the weak euro is helping start to reignite some of the economies there? Or just what's going on under the cover? Was it just that they held off for so many years and the companies there just need to refresh?

I think you just hit both of them. I think the currency and coupled with the fact that these guys have got to upgrade these data centers, and some of the growth that we are seeing right now -- we haven't seen proprietary or industry standard servers grow at the rates that we've seen there for quite some time, that being over 10%. We've seen the services and the software piece come up very nicely.

Any time you see virtualization hanging in there at 10%-plus, tells you that something?s going on. But, infrastructure software was sitting there at about 22%. I would say right now, we are seeing it across the board, which tells us that the data centers are upgrading.

Last question. I know it was asked and answered before. But could you go into a little bit more about ArrowSphere, you've had it for now two years now. It might be growing off a small base, but is it growing well above plan? Is it starting to get close to being any kind of materiality?

And then when you look at that sale, is that supposed to be cannibalistic in that -- obviously your hardware numbers sound good this quarter. But is that what's going to suffer maybe a year or two down the road? Thank you.

I'll start off strategically. Any time we do something like that we hope it's cannibalistic because that means we are on the front end of the market, and then customers are going to adopt it from us. That's why you make those investments. We don't ever try to hold back where the market is going from going there. We want to make sure we support the market. Sean, I'll let you talk about some of the changes you've made in it that are pretty exciting.

Sure, Mike. Lou, remember, our ArrowSphere platform is not a strategy. It's just a tool set, and it enables the transition to cloud offerings over time. Our strategy is really to address the fact that customers want choice. They're going to keep some mission-critical workloads and applications on-premise. They're going to look to leverage third-party cloud offerings where and when it makes sense. And, we believe, over time, certainly in the enterprise, the Hybrid Cloud model is the one that will prevail.

These investments are all about helping customers migrate down that path and working with the right channel partners to help them get there. but again, it's not something that we see happening over time -- I should say, overnight. We see it happening over time. As I've said before, our run rates each quarter continue to improve with that piece of our portfolio.

I might add that you typically see the very large customer base that is serviced directly by some of our manufacturers move faster than you see the mid-market. That's why there is usually a clue, for us, of where to take the business over time because once something gains acceptance at those large customers, then you know it's going to happen. Once they can be convinced since they are so price-sensitive, it takes a lot less to convince the mid-market. So, we believe we are right where we need to be with that right now.

Okay. Thanks.

Thank you. There is no further questions. I'll now hand back to Steve for closing remarks. Please go ahead.

Thank you, Ian. In closing, I'll 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. If you have any questions about the information presented today, please feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day.

Thank you for your participation in today's conversation, gentlemen. This concludes the presentation and you may now disconnect. Have a good day.