艾睿電子 (ARW) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc. third-quarter 2015 earnings conference call. My name is Whitley and I'll 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.

Good day and welcome to Arrow Electronics' third-quarter 2015 conference 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 investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation for the third 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 over to our Chairman, President, and CEO, Mike Long.

Thank you, Steve, and thank you to all of you for taking the time to join us today. In the third quarter, we delivered overall results that were within our expectations.

Total sales of $5.7 billion grew 2% year-over-year and 7% year-over-year, adjusted for changes in foreign currencies, and we're near the midpoint of our prior guidance range. Earnings per share of $1.40 grew 5% year-over-year, adjusted for changes in foreign currency, and were at the lower end of our prior guidance range.

We experienced mix demand trends during the third quarter. The performance by our Europe components and Europe enterprise computing solutions businesses were better than our expectations. Our Americas components and enterprise computing solutions businesses were broadly in line with our expectations. And Asia components fell short of our expectations, as the economic conditions and the demand trends deteriorated during the quarter.

We continue to execute well and experienced improved conditions in Europe during the third quarter. Europe component and Europe enterprise computing solutions both grew sales at double-digit rates, adjusted for acquisitions and changes in foreign currencies, and both delivered expanded operating margins. Our Europe components business has now posted 10 straight quarters of year-over-year sales growth, adjusted for acquisitions and changes in foreign currencies.

We began investing in sales and engineering over a year ago, and we believe our strong results in the region have validated that strategy. Our team has done an excellent job of identifying adjacent industries and targeting underserved customers. With consistent growth for over two years and following the completion of our Europe components ERP implementation, the segment has now delivered eight straight quarters of year-over-year operating margin improvement.

Our enterprise computing solutions Europe business has posted three straight quarters of robust sales growth on a constant currency basis. We've experienced good growth across our portfolio, including software, services, storage, and networking.

We believe the strong performance by our ECS Europe is a function of several factors, as in our Americas ECS region, we continue to evolve our business to the requirements of the marketplace. Our customers have growing requirements for security, data analytics, and hybrid cloud automation and orchestration, as well as the ever-growing needs for compute storage capacity. And they also have the same complex requirements to evolve their data centers as our customers do in the Americas. We are well-positioned to help our customers achieve their objectives.

Our Americas components business experienced similar demand conditions in the third quarter that we have generally experienced over the last two years. Late in the quarter, some of our manufacturing-oriented customers pared back build plans, as they await better visibility into the global economy as a result of the economic decline in China. During September, all seven of the regional manufacturing purchasing managers indexes fell into contraction. However, industry fundamentals like backlog, cancellation rates, and lead times are fairly consistent with prior quarters.

Turning to Asia components, we anticipate softer conditions in Asia during the third quarter, with decelerating growth rates. The macro-economic environment proved to be even more challenging, particularly in China, where GDP growth dropped to the lowest level since the financial crisis.

Despite the current economic slowdown, we continued to make good progress expanding the breadth and depth of our business in the region. During the third quarter, we experienced strong growth in our SMB customer count and in sales of passive, electro-mechanical, and connecter products. In short, we like what we're seeing from some of our investments in Asia.

We continue to invest in our business. In global components, we again had double-digit growth in design wins, as we engaged with inventors in the next-generation OEMs, with a focus on enabling wireless connectivity for their products. This design activity is a direct result of our investments in the sales and engineering talent.

In enterprise computing solutions, we continue to increase our capabilities in security and analytics, as well as hybrid cloud automation and orchestration. Our knowledge and solutions selling are benefiting our customers, as they face increasing complexity in their own IT infrastructure.

As Paul will discuss in more detail, we are enhancing our ongoing efforts to improve productivity. These enhancements, in part, have been enabled by the improved data and greater visibility in our business that we can now capture from our unity ERP deployments. To be clear, we are not reversing course on our investments in sales and engineer support.

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

Thank you, Mike. Third-quarter sales of $5.7 billion grew 2% year-over-year. Sales adjusted for acquisitions and changes in foreign currencies declined 1% year-over-year. Overall sales were near the midpoint of our prior guidance range.

In global component sales of $3.69 billion, we grew 3% year-over-year, adjusted for changes in foreign currencies. Adjusted for acquisitions and changes in foreign currencies, and our previously disclosed exit from a high-volume supply chain engagement in Asia, global component sales would have been approximately flat year-over-year.

In the Americas, sales declined 4% year-over-year. America core sales declined 1% quarter-over-quarter, within traditional seasonality.

In Europe, sales adjusted for acquisitions and changes in foreign currencies increased significantly, advancing 11% year-over-year, the third quarter in a row of double-digit constant currency growth. Sequentially, core sales in Europe were flat quarter-over-quarter, which is in line with normal seasonality.

Sales in Asia declined 2% year-over-year, as reported, and declined 1% year-over-year adjusted for changes in foreign currencies. Sales in Asia grew 5% year-over-year, and 6% when adjusted for changes in foreign currency and the impact of the exit from that high-volume supply chain engagement last year. Core sales in Asia declined 5% quarter-over-quarter, which is higher than traditional seasonality.

Global components third-quarter book to bill was 1. This figure is encouraging, given our third-quarter book to bill is normally slightly below parity. Through the first four weeks of October, our book to bill is comfortably above parity. Overall, our backlog grew slightly in the third quarter, whereas we normally experience a sequential decline.

Third-quarter enterprise computing solution sales were $2.01 billion, up 7% year-over-year as reported, and up 14% year-over-year, adjusted for changes in foreign currency. On a nine-month basis, ECS billings grew 7% year-over-year, adjusted for acquisitions and changes in foreign currencies.

In the Americas, sales grew 11% year-over-year and were down 4% adjusted for acquisitions and changes in foreign currencies. Sales for our core ECS Americas distribution business were approximately flat year-over-year and declined 7% sequentially, in line with seasonality. A software-rich mix of business in the third quarter impacted our reported sales, but drove record operating income and operating margin in the quarter.

In Europe, sales in constant currency advanced 15% year-over-year. Europe ECS sales were better than traditional seasonality, declining 12% quarter-over-quarter. The evolving and growing requirements on data centers, our strong execution, and our solution-selling efforts all drove the strong ECS revenue growth.

Our consolidated gross profit margin was 13%, and year-over-year, margins were flat. Our global components gross margin improved year-over-year, but this improvement was offset by a greater relative contribution from ECS within our mix.

Total Company operating expenses increased 2% year-over-year, as reported, and adjusted for the impact of acquisitions and changes in currencies. Operating expenses increased 10 basis points as a percentage of sales on a year-over-year basis. In the short-term, this ratio has been negatively impacted by our acquisitions.

Operating was $218 million, a 6% increase year-over-year, adjusting for changes in foreign currencies. Operating margin was flat year-over-year. Global components operating margin a 4.7% decreased 30 basis points year-over-year, the first year-over-year decline in nine quarters. The consolidation of our recent acquisitions, including our largest acquisition in Asia, resulted in a 20-basis-point decline year-over-year.

Global enterprise computing solutions operating margin was 4.5%, up 50 basis points year-over-year, reaching a record level for the third quarter. ECS's margin expansion continues to be driven by our solution selling and growing software mix.

Our effective tax rate for the quarter was 27%. Net income was $133 million, up 1% year-over-year on a constant currency basis.

Earnings per share were $1.40 on a diluted basis and were flat year-over-year. EPS grew 5% year-over-year, adjusted for changes in foreign currencies.

Cash flow used by operations was $108 million. Cash usage was slightly more than we anticipated, due to slower growth in September in the components markets. Trailing 12-month cash flow from operations was $568 million, or approximately 125% of our GAAP net income, and well in excess of our goal to deliver cash flow at a rate of 70% of GAAP net income. We expected normal, seasonally strong positive cash flow in the fourth quarter.

As Mike previously mentioned, we are enhancing our ongoing efficiency efforts. Our plan is to drive $40 million of ongoing annual expenses out of the business. We are principally accelerating the integration of some of our recent acquisitions, increasing automation across multiple functions enabled by our Unity ERP tool, utilizing our enterprise strengths for greater purchasing leverage and rationalizing our real estate footprint.

Consolidated return on working capital for the third quarter was 23.6%. Our return on invested capital was 9.5%, outpacing our long-term weighted average cost of capital.

We repurchased $50 million of our stock in the third quarter and approximately $307 million over the last 12 months and approximately $1.3 billion over the last five years. During the third quarter, our Board of Directors authorized an additional $400 million of repurchases, in addition to our existing authorization. As we enter the fourth quarter, authorization remaining under our existing share repurchase programs is $469 million.

This is a high level summary of our financial results. For more detail regarding the business units, please refer to the CFO commentary published this morning.

Now turning to guidance. In light of the current uncertain economic climate, we are taking a more cautious approach to our fourth-quarter guidance.

We believe that our total fourth-quarter sales will be between $6.15 billion and $6.55 billion, with global component sales between $3.45 billion and $3.65 billion, and global enterprise computing solution 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 $1.91.

Our guidance assumes an average tax rate in the range of 27% to 29%. Average diluted shares outstanding are expected to be 95 million, and the average US dollar to euro exchange rate we are using for forecasting purposes is $1.12 to EUR1.

The US dollar to euro exchange rate we are using for forecasting purposes declined 10% from $1.25 in the fourth quarter of 2014. We calculate this depreciation of the euro has resulted in a 3% negative impact on sales growth compared to the fourth quarter of 2014. We also calculate this depreciation has resulted in a $0.08 negative impact on earnings per share growth compared to the fourth quarter of 2014.

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

(Operator Instructions)

Steven Fox with Cross Research.

A couple questions for me, just in regards to the components business first off, how are some of the acquisitions performing within the context you just laid out? If you could separate whether they are feeling the same pressures or whether the sales are benefiting from being part of Arrow, that would be helpful. Also within components, I understand what's going on in China. But I was wondering if you can explain the regional difference between what you're seeing in demand in Europe versus the Americas right now. And then I had a quick follow-up.

Paul, do you want to take the acquisitions first, and I'll take the broader question.

Sure. Thank you for the question. When we look at the acquisitions, remember that what we were looking for was sales synergies. We are looking to be able to bring our broader line card to the targeted companies. It's still early days in many of those acquisitions. ATM has been part of the Arrow Organization for less than six months, but we are seeing great interest in the supplier base in being franchised with a very strong acquisition in Taiwan. So what I would say is they're probably seeing the same thing right now as our businesses are by region. But what we're seeing is very positive thoughts around being able to franchise more suppliers and getting that sales synergy, which you know is going to take more time than really just a standard integration of back-office function. We feel real good about where those are, US specifically about the components. But we're really excited about what's also going on in the ECS site with the acquisitions, where this matrix expansion strategy we pursued, really in Europe and we validated that approach, is really gaining great traction with the UNIX acquisition.

Steve, as far as Europe versus North America, we -- before I get into those, what I'll tell you is the quarter was an interesting quarter for us because as you know, coming off of Q2, our book to bill was above 1 and it stayed that way through July and August. And then in September is when we saw the dip, and we saw the dip not only in bookings but also in billings, primarily out of AsiaPac. Europe, as you know, now has had the computer under their belt for some time and we started investing in sales and engineering resources to go after some more underpentrated accounts in that marketplace. So we've seen them execute very well on that strategy as well as expanding the line card to do some of the similar things that happen in North America. North America has been an interesting one, because it has been virtually a no-growth market now for almost four years. We've seen it go back and forth, and it's continuing to act the same. The difference we saw this quarter is some of the old study industrial-type accounts slowing in the month of September. And some of those are also people that have some manufacturing in Asia, as we noted there. So we saw the slowing in the factories in both places.

The encouraging thing that we have heard or that we've heard so far, is some of the suppliers starting to talk about their bookings increasing, and that usually hits us somewhere between three and six months out. We saw, interestingly enough even with the bookings, our backlog grew over the quarter. So that gives us another positive sign that there's probably not a significant dip from here in the business. Our design win activity is also way up, and in fact, up over 20% year on year. And anytime we see that, we see more projects coming down the road. After average-type design win activity, we saw that spike. There was some mixed messages coming out of the quarter. Hopefully, that gives you all the indicators we had between the regions. What we are looking at are the bookings into the fourth quarter. It appears the bookings are picking up this month, and the fourth quarter is going to be dependent upon if they continue to pick up and it will be okay if they don't. We've given you the guidance that we see.

Great, that's really thorough. And if I could just round it off real quickly with one other question. In terms of just the implications on the ECS business for the enterprise spending budget flush, it seemed you wouldn't be the first one to downgrade this expectation. But it seems like it is more limited this year. And I don't know if there's any, one or two reasons you would put behind it besides macro, but I just thought I'd ask the question.

Yes, actually, there's a couple of things, that, as you've noted over the last five years with this business, we have seen a change of mix from software, security, storage, and servers. Servers have declined as a percentage of the business. Well, when you look at the huge budget flush activity, it came from a couple of vendors and it came primarily on the hardware side. That's where you saw that big budget flush in the fourth quarter. While we still see the big budget flush relative to those types of products, in terms of our total mix, it is less. I would guess that anybody who's keeping up with the marketplace should see more stable sales over time down the road and less budget flush and counting only on the fourth quarter. So hopefully, that gives you the overall reason, and it has to do primarily with mix.

Jim Suva with Citigroup.

Thank you very much, can you hear me?

Yes, Jim, we can.

Quick question, you had mentioned cash flow was a little less than expected and I'm sure it has to do with the linearity that didn't turn out the way it was. But you've mentioned you expect a normally strong December quarter of cash flow. Why wouldn't, in this environment where cash flow came in softer in the September quarter, cash flow not actually be stronger than normal in the December quarter? And then the second question I had is, can you help us a little bit on the SG& A outlook as you're seeing different trends globally? You've had a lot of acquisitions to integrate and things like that. How should we be thinking about SG&A going forward.

Sure, Jim. Thank you for most questions. First, on the cash flow, we do expect it to be better than normal. Really when we look at it and you look at the last five years, it's been very strong. Our expectation is it will be stronger than normal. We also believe that that will put us right on track for our target for the full year. We do expect that as a starting point, so thank you for asking that. I wasn't clear enough, so I appreciate it, around that question. What we would expect, when I think about this cost-efficiency program, is we will begin to see some impacts in Q1. I would expect this to be a full run rate by the third quarter of next year. That's the most meaningful item that's going to impact the expense load as we go forward, right? Because that's a substantial reduction around being more efficient in what we do global enterprise purchasing power using the ERP tool to create information from data. We're pretty excited about that as we go forward. When I look at the M&A specifically, we really haven't added any new, meaningful acquisitions in the third quarter. The run rate that they're at now will obviously, trend down as part of that $40-million reduction program we have next year, which as I said will be a full run rate, quarterly run rate come July 1 of next year.

Thank you very much for the details, gentlemen.

You bet.

Sherri Scribner with Deutsche Bank.

Thank you. I wanted to get a little more detail from you, Mike, on what you're seeing in the US industrial segment. That segment tends, at least we've heard from a number of companies, that segment has been particularly weak. And wanted to know if there's anything in particular that you're seeing. I know that you said that that segment has been a no-growth segment, but wanted to know if there's anything in particular that you're seeing in industrial, probably in the US but maybe some other regions too.

I would say, Sherry, as I said before, what we saw in the quarter were those customers that are actually global, we saw them decline here in the states as well as in AsiaPac. We saw a contraction of the manufacturing, primarily in the center part of the US where a lot of that lies for us. It carried over to some of the plants in China, and it really started slowing down in the September, the month of September. That's where we were hit particularly hard for the quarter. In fact, that's where I would -- if I were to call it, that's what I'd have to say, was the entire miss for us would have been because of that. We did see or we are seeing now a pickup of bookings, and what we can't tell is how soon those bookings are going into production. We don't know yet whether or not the market is coming back in the fourth quarter and ready for the first quarter. We will see that over the next month or so. But right now, there's some encouraging indicators on the bookings side, and as I said, the backlog is building as well as the design registration. There are new products coming out, there are new things scheduled for manufacturing. It's just going to be when that stuff takes off and it's purely a bookings game. But all the indicators in-house are looking okay. We would like to see the increase in bookings.

Okay, Thank you for that additional detail. That's helpful. And then a question for you, Paul. I was struck by the detail in the CFO commentary that sales were down 1% on an adjusted for acquisitions basis year over year. But EPS was down 7% on an adjusted basis, despite the fact that you guys have been doing buybacks, and that suggests that your expenses are going up. And I know some of that is related to acquisitions and I know that some of that you're going to work down with this new plan. How should we think about that going forward? I know there's negative leverage in the business, but how do we turn those trends around? Thank you.

Great. Thank you for the question. The one thing we need to be careful about when we're doing the pro forma calculations or the impact of acquisitions to ensure that we allocate the correct expense load to them. So I think maybe that's something that we should all take off line. We're happy to do in follow-up calls around how we think about the change in earnings per share. Because I actually think it's a nominal change of $0.01 or $0.02 downward. And it's more of a -- after our first half of really great, strong performance, we were caught a little bit off guard with the slowdown in Asia and the contagion issue around that. So I actually feel good about where we're going and feel better about the controls put in place around how we're running the business to ensure that we reverse that trend. So I have less concern about that going forward. I look at it as more of our more of a one-quarter anomaly more than anything else.

Thank you.

Matt Sheerin with Stifel.

Just going back to your guidance on the enterprise computing business, below the midpoint of seasonal for North America, below seasonal for Europe. I know, Mike, you just talked about mix affecting seasonality somewhat, but you're coming off of a better than seasonal quarter in Europe. And then also within that backdrop, you have lots of things going on in the vendor community with EMC and Dell, and I'm just wondering, and if you got the HP split, I'm just wondering if there's any signs from your reseller customers or their customers that this could be less than seasonal because customers are pushing things out, the decision-making processes longer, that sort of thing.

Yes. Thank you. What we are right now seeing in that business is really fairly healthy billings, but the mix is different. When you think of industry-standard servers and really storage, Matt, that could be some of the difference you're seeing. We've seen a decline in storage this year at certain times, specifically, in the third quarter. And that gets made up with software sales, so we've seen a mix. There's probably a touch of conservatism in there right now, but we're not ready to call that. It's not off that far from what you would call normal. Sean, is there anything else you'd like to add to that?

Yes, sure, Mike. Matt, just a couple things to reinforce Mike's comments. Actually from a hardware perspective on a year-to-date basis through Q3, we are up globally on a billings basis. So that tells me that traditional hardware business isn't going away overnight, especially in the more mission-critical application environments. Again, specific to hardware, we are seeing strong growth in what I would call the new architectures, which does validate our belief that customers are moving to private and hybrid cloud operating models, and we do believe we're well positioned to help them navigate that transition. And then just a comment about Europe. As you mentioned, we are below seasonality, at least in our outlook for Q4 as we sit today. But that has, I think, more to do with just really strong growth year to date in that geo, significantly up if you look at the same nine-month period last year. I would say it has more to do with that than it does any strong pessimism about the Q4 close.

Okay. That's helpful. And then on components, I understand why your margin was a little bit weaker due to the acquisition, but you're below the 5% target with the acquisition. With these cost-cutting moves and also the fact that it doesn't look like components is really growing much, are you expecting it to get back to 5% anytime soon?

Absolutely. It's really not a negotiable in-house here for us, and we expect these costs will get us back there. What's interesting, Matt, if we would've seen the slowdown like this a year ago, even though the numbers look relatively the same, we wouldn't have produced the same results, plus the fact that we had some acquisitions in here right now that we haven't taken the synergies out of. We're still producing these results. So right now some of this has to do with the productivity enhancements and the quicker work around integrating these acquisitions as we have brought them in. That's really what we've seen. And if you look at the cost line, you can see some of that in there too because it does jump off the page. And it wasn't from adding a lot of cost; it was really from bringing in acquisitions.

Got it. Thanks a lot.

You bet.

Mark Delaney with Goldman Sachs.

Good afternoon. Thank you for very much for taking the question. First question was on capital allocation. I know M&A's been an important part of the story for the Company historically and also this year, but you also mentioned you had recently reauthorized more on the buyback and have over [$400 million] remaining on that. Can you help us think about what near-term M&A pipeline there may be for the Company and how you're thinking about deploying buybacks in the next two to four quarters?

Sure, Mark. Thank you for the question. We've see no change in the pipeline or the funnel, if you will, around M&A, so over the last probably eight quarters plus. We're taking a very stringent approach to those that we are pursuing to ensure they meet the strategic requirements that we are pursuing and ensure that we have a disciplined approach around financial returns. We will continue to take a look at those opportunities, but we feel it's not a good practice to either articulate a number every quarter or a number per year, because we're being disciplined around this and that sometimes leads to poor behavior. Look, the reality is as we've been very consistent in our own thoughts around capital allocation. We're going to return excess capital to the shareholder base through the form of buybacks, and that's how we'll continue to pursue this as we go forward. Yes, there is some sensitivity to price but not much. It's just a matter of: A, what's the excess we have and let's go through a program where we return that in a thoughtful way to investors to ensure that we live to what our commitment is around capital structure, maintain our mid-BBB rating, and to invest in the Company for organic growth. Secondly, for accretive M&A from a strategic and financial point of view, and then finally, return excess capital to shareholders.

That's helpful. For a follow-up question, on the computing business, with the announcement that Dell was going to acquire EMC, can you just talk about any implications that may have for Arrow?

First off, we already were close with both companies. We do some work, reverse logistics wise; we do obviously storage work with EMC. They've been good partners all along. At this point in time, we have no reason to believe anything but goodness and additional products down the road. That's the approach we'd be taking. That's the hope we would have, and it looks like it will be an interesting combination, to say the least.

Thank you very much.

Brian Alexander with Raymond James.

This is Adam Tindle in for Brian today. I wanted to build out that last question and ask it from a little bit of different approach, really about supplier consolidation in both components and computing. Obviously, in the component side, many suppliers are merging, including your largest supplier. And then in computing, you've got Dell/EMC happening. The question really is how do you think about the strategic implications for Arrow, and to what extent does this influence your decision to engage in M&A?

Actually, at this point in time, the mergers we have seen have been positives for us. On the component side where we've had the direct acquisition activity that we see, we actually see more coming down the pike as you do. And for now, what we've seen as an expansion of products usually on our line card, which we like that because it's more to sell. It widens the market and gives us a better opportunity, especially is slow growth environments. Then if you get a good growth environment, it actually maximizes for you. It's the same thing that we would expect to see on the computer side. And the truth is with changes around cloud and those types of activity, we see that as a positive too. And I think for now, we haven't seen a scenario where we've gotten hurt by this. I think our position in the marketplace on both sides of the business is good, and with good relationships and that should bode well into the future.

Okay, and I wanted to ask about Europe. Your commentary suggested that specifically in computing, that the guide was really a result of strong year-to-date results more than anything. The question really is to what extent do you think demand may have been pulled forward? Is there any impact that you're seeing from currency and demand patterns, positive or negative?

I think we've seen something like, what was it 15% Sean, growth (multiple speakers) year to date through nine months. So if you didn't hear me, I was questioning. I think we were up about 15% in Europe through nine months. The market itself I don't believe has been that big, so I don't think we are seeing a slowness in the marketplace; what I think we're seeing comes back to what Sean was saying before, a little bit about mix and how things are changing and then how we are comparing quarter over quarter, and that's what we believe. We don't believe there's any issue in the computing business at all. We believe the low seasonality really is around Asia.

Okay. One last housekeeping one, I want to see if you had any update on ArrowSphere or any -- the cloud offering. I know you had talked about $100 million revenue run rate in quarters past. Any trends that you're seeing there that are interesting?

Sure, I'll let Sean take that.

Sure. Great question. We continue to invest in the ArrowSphere platform. We will certainly do better than $100 million in 2015, as I talked about, and we'll certainly look to grow it significantly in 2016. ArrowSphere is a great platform to enable not just our cloud suppliers to participate in the market through the channel, but also our resellers and solution providers to make it easier for them to position and sell cloud offerings in conjunction with things that they are selling on premise. So it's part of our story. We have a broader cloud strategy that we will continue to focus on in investing going forward.

Louis Miscioscia.

Thank you. I know we hit this question a couple times on the ECS side, but when you listen to the calls from IBM, EMC, VMware, they almost talked about a new normal; that is that a lot of enterprise customers are pausing in their purchasing as they try to evaluate whether they're going to go through the cloud or maybe install hyper-converged systems in their on-site. It seems that with the lower guidance from you all, so on the ECS side, maybe you're also seeing a little bit of that. Obviously, heard the answers that you had about mix and what have you, but maybe if you could parse out how is SMB attacking this same thing? Are they pausing a bit and could the lower hardware sales be trying to pull back on legacy stuff and trying to invest in digital and the cloud in the future?

Lou, it's Sean here. Thank you for the question. I think, as I commented about hardware, we have seeing growth year to date. We also are seeing very good growth in the new architectures, as I mentioned. You talked about hyper-converged, we participate greatly in the converged infrastructure movement. We are seeing very good growth from a flash perspective. I don't know that all the hardware in the upper end of the mid-market and the enterprise is in flight to the cloud. I think, as we've mentioned before, the consideration of all the various options does sometimes slow sales cycles, but growth in those new technologies I suggested does tell us that a lot of that infrastructure will still stay on premise for the more complicated workloads. But at the same time, we are driving, consistent with our strategy, a mix shift very purposely to things like security, things like virtualization, and things like other flavors of infrastructure software, including analytics, middleware, and software defined. And we think that's really healthy for us over the long term, but it does sometimes create a little bit of a downward pressure on reported sales as a result. But very consistent with where we want to go from a strategy perspective.

Okay. Thank you.

Shawn Harrison, Longbow Research.

A clarification first just on the $40 million of synergies or cost take-out. Is there a split between global components and ECS that's available?

Shawn, the majority of it is going to be in global components.

Okay. Second, just as a follow-up on global components demand, both looking at the third quarter and the fourth quarter, within Asia, where exactly did you see the slowdown in terms of end markets or anything you can provide within the third quarter? Because I know the second quarter at least you didn't see some of the weakness that the component companies had seen. As a follow-up to that, I wanted to get this cleared, it sounded as if that you said the guidance right now captures no real improvement in billings activity in the components business into the fourth quarter. But if you do see some of that, you'll probably be more toward the high end of guidance

That's correct, so that last part is correct. We'd like to not have another surprise of a slowed down month, and because we can't fortune tell those bookings, that's what's going to determine it. The real determination is going to be the October/November portion of those bookings, because if they do pickup, we would start to see shipments in December.

Now, as far as Asia goes, we actually saw a slowdown in industrial power. We as saw a slowdown in transportation. We saw a slowdown in lighting. And there's virtually no growth in wireless. Given that, the market did really atrophy on us. The good news, as I said, is suppliers are starting to talk about some future bookings in Asia coming to them first, which as you know, they normally see that before we do. That's the positive we are holding onto now. We do have really pretty good design win activity there at this point, which is also a positive. And hopefully, that gives you what you were looking for.

Very helpful, Mike. Thank you so much.

Ananda Baruah with Brean Capital.

Thank you for taking the question. A couple if I could. The first is on the inventory, what are you guys expecting in the context of starting to see bookings pick up, inventory levels to do beginning of quarter to exiting the quarter, both in Asia and also worldwide? And then I have a quick follow-up.

Paul, you want to take that?

Sure, so we have a target of -- the way I think of it is not necessarily reducing inventory as more of a two-step approach to get better quality inventory in, and what I mean by that is inventory that has greater demand and turns faster. I would expect that we would see an uptick in terms or a decrease in inventory days as we move through the quarter. We've already seen progress in our components team by region. We don't -- we haven't closed the month yet, where we've actually seen that we've been able to turn down the levels of inventory at this point in time in October compared to this time in July. So we definitely will see a downward motion in the quarter. The interesting thing, the art of it will be, as Mike alluded to, as orders continue to grow or pick up, if they continue, we will be making decisions on being able to profile inventory really for maybe delivery in December or maybe delivery in Q1. That's something we'd have to manage very closely. But if we're bringing inventory in, in the month of December, we have payables to offset that, so it's less of an impact on cash. I feel good about where we are right now and the progress we've made in looking at quarter-over-quarter performance in inventory, I'd say managing to the lower level of expectations right now.

That's really helpful. I appreciate that detail and my follow-on to that would be -- is that a worldwide comment as well as an Asia comment? Those dynamics? Or is it primarily Asia comments.

Dynamics in all three regions.

Got it, thank you. And the bookings that you've seen begin to energize again, is that across the different verticals and across component type, or is there some that are picking up a little bit better than others?

I think it's a little early to make that call. Our billings tracking by vertical are -- we don't have bookings tracking by vertical. Our bookings come in sort of by region. And as I said, we've seen an uptick this quarter and the real trick is going to be going forward.

I got it. That's helpful. I appreciate that. And just last one from me, the cost savings of $40 million, did you attempt to drop all that to the bottom line?

Yes.

I think -- there's two things here too I want to clarify, the bookings question you had before. Bookings are up in all three regions, so that's a plus. And yes, the target is 5% for global components, and we have expected this is the number we need to get to. That's where it's going.

That's all really helpful and appreciated.

You bet.

Ladies and gentlemen, that concludes our Q&A. I will now turn the call back over to Mr. Steve O'Brien for closing remarks.

Thank you, Whitley. In closing, 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. 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.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.