艾睿電子 (ARW) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Arrow Electronics Inc. second-quarter 2016 earnings conference call. My name is Whitley and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the conference over to your host for today, Mr. Steven O'Brien. Please proceed.

Thanks Whitley. Good day and welcome to Arrow Electronics' second-quarter 2016 conference call. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer, Chris Stansbury, Senior Vice President and Chief Financial Officer, Andy King, 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 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 thanks to all of you for taking the time to join us today. To be successful, Arrow is required to be more than just a provider of today's technology. We need to rely on our broad reach and our deep understanding so we can anticipate market changes. Our Company's history of adaptation has served us well in recent quarters as we positioned Arrow to capture opportunity presented by the Internet of Things, digital and the cloud. We constantly monitor where global markets are headed, and that has both the information and the infrastructure to capitalize on existing markets and capture new ones as they are emerging. This is a point of competitive advantage and differentiation for Arrow that has become increasingly more acute.

Going forward, our Company will continue to transform and meet the realities of the markets we serve. I'm pleased to report second-quarter sales of $6 billion, gross profit of $800 million and earnings per share of $1.65, all records for our business.

Our businesses continue to grow and our backlog is very healthy. In the second quarter, both our Global Components and our Global Enterprise Computing Solutions delivered strong results. Both businesses grew sales and expanded operating margins year-over-year.

Our steady performance is attributable to the investments we made starting years ago in key areas. Had we not been willing to change our business, we would be far more impacted by the ups and downs of the markets we serve.

Second-quarter Global Components sales advanced 4% year-over-year. Europe delivered sales growth for the 13th consecutive quarter adjusted for acquisitions and changes in foreign currency. Our Americas business is flat year-over-year. Asia sales grew 5% year-over-year. And growth from our core SMB manufacturing customers in both the Americas and Asia overcame weaker demand from larger customers with greater sensitivity to the muted economic environment.

We continue to see growing returns on our investments in engineering and technical sales resources. Our design activity grew at a high single-digit rate this quarter. The strongest design activity we had was in Asia and Europe where we have concentrated investments in both sales and engineering resources.

Our Global Components team announced a number of new and expanded distribution agreements with key suppliers during the second quarter. Some of these announcements were hastened by supplier consolidation. Overall, we see a multi-year trend of suppliers allocating more business to distribution continuing.

Second-quarter Global Enterprise Computing Solutions income grew 10% year-over-year. Our billings continue to grow faster than the overall IT spending market. Sales growth was understated by a greater portion of software within our mix. However, our leadership in software-based solutions and next-generation hardware resulted in record second-quarter ECS sales, operating income and operating margin.

We continue to pivot our business towards new technologies, including next-generation storage and hyper-converged infrastructure. Another part of that pivot is enhancing our cloud capabilities. We had several cloud-related announcements in the second quarter, and you can expect several more in the coming months. We are expanding our leading cloud portfolio, and we are enabling our growing base of MSPs as well as traditional VARs to sell and manage cloud offerings.

We reached a milestone in the second quarter with over 1,000 MSPs now actively utilizing our ArrowSphere platform. A great example of our hybrid cloud strategy is the way that we bring multiple vendors on premise and off to deliver preconfigured ready-to-use cloud-based solutions. We believe this approach will further entrench our position as the trusted enabler of hybrid cloud adoption.

We made significant progress in our digital transformation efforts during the second quarter. We are measuring our new digital customer additions now in the thousands. Our digital sales exceeded our plan by a wide margin again this quarter.

During the second quarter, we further expanded our global Internet media portfolio focused on technology and electronic design. This will complement our existing properties and allow Arrow to engage with even more engineers online.

Also during the second quarter, we announced an alliance with Indiegogo to create a new crowdfunding to production platform designed to accelerate the pace of innovation for IoT entrepreneurs. In short, we continue to strengthen our position as the foremost thought leader and trusted advisor in the IoT and technology design, and we are engaging with the next generation of inventors before their ideas become businesses.

Looking ahead, the technology trends that are enabling IoT align perfectly with Arrow's capabilities. These trends are also creating unprecedented opportunity for Arrow to bring Global Components and Enterprise Computing Solutions together to sell the whole enterprise. We have a growing business of sensors wireless products in Arrow components and estimate approximately 10% of what we sell today is attached to a sensor wireless solution. Every one of those sensor wireless solutions is ready and able to connect to an IoT platform either to or through the cloud. And when these IoT products reach the end of their life cycle, we are able to provide the necessary value recovery businesses. So we see multiple touch points to capture value in any product lifecycle and believe our IoT reach and depth are unmatched.

In closing, at Arrow, we are committed to the succession management and have completed the orderly transition of several key leadership roles over the past two years. As such, Chris Stansbury has now wrapped up his first quarter as CFO. I'll now hand the call over to Chris to provide more details on our second-quarter results and our expectations for the third quarter.

Thanks Mike. Second-quarter sales of $5.97 billion grew 2% year-over-year. Sales adjusted for acquisitions were flat year-over-year and approximated the midpoint of our prior guidance range.

Global Components sales of $3.83 billion grew 4% year-over-year, and when adjusted for acquisitions grew 1% year-over-year. Sales to our digital platform exceeded our expectations and sales growth from our core small to medium-size manufacturing customers was very good in all three regions.

In Europe, sales grew 7% year-over-year. Sales adjusted for acquisitions and changes in foreign currencies increased 3% year-over-year. We saw growth across key verticals, including lighting, aerospace and defense and transportation. Our Europe components did not experience a noticeable impact from Brexit as our business is far more aligned to the manufacturing countries of the region.

In the Americas, sales were flat year-over-year. Sales in Asia grew 5% year-over-year and when adjusted for acquisitions and changes in foreign currencies were flat year-over-year. We experienced healthy growth from our core SMB customers in both the Americas and Asia.

Global Components second-quarter book-to-bill was 1.03, which is slightly above 1.02 in the second quarter of 2015, and is roughly average for a second quarter. Our leadtimes and cancellation rates continue to track within normal ranges. Through the first four weeks of the third quarter, our book-to-bill was above parity and slightly above last year's level.

Second-quarter Global Components operating income grew 6% year-over-year and operating margin expanded 10 basis points, demonstrating healthy leverage on our sales growth.

Second-quarter Enterprise Computing Solutions sales were $2.14 billion and were flat year-over-year. Our topline was understated by a greater mix of software.

In the Americas, sales were down 2% year-over-year. In Europe, sales advanced 6% year-over-year. Our billings grew in the second quarter and grew at a high single-digit rate for both the first half of 2016 and over the last 12 months. We continue to believe our ECS business is best measured by profit dollar growth and on a multi-quarter basis.

Our Enterprise Computing Solution sales in the UK were negatively impacted by the uncertainty caused by the Brexit vote and the unfortunate timing, falling just before the last week of the quarter. We estimate delayed purchases and the weakening of the pound negatively impacted our sales by approximately $40 million.

We experienced growth across our software portfolio in the second quarter, and that growth was led by infrastructure software, including big data analytics and security. Our Comprehensive Solutions portfolio is well-positioned to capture growth even as IT spending priorities changed.

Overall, we remain pleased with the momentum in our Enterprise Computing Solutions business as measured by 10% year-over-year growth in operating income and a 50 basis point increase in operating margins.

Returning to consolidated results for the quarter, our gross profit margin was 13.4%. Gross margins increased 20 basis points year-over-year. Total Company operating expenses increased 3% year-over-year as reported and were flat year-over-year adjusted for the impact of acquisitions and changes in foreign currencies. Operating expenses were unchanged as a percentage of sales year-over-year, and we continue to see potential for operating margin expansion in the second half of 2016, having completed our productivity enhancements in the second quarter and as we capture greater returns from our prior investments. Even though we have successfully completed our previously announced productivity enhancements, our ongoing cost optimization efforts will continue.

Consolidated operating income was $254 million, a 7% increase year-over-year. Operating margin increased 20 basis points year-over-year.

Our effective tax rate for the quarter was 29.2%. This was slightly higher than our target range and related to a number of discrete items that we do not expect to repeat in the coming quarters. Our target range remains 27% to 29%.

Net income was $153 million, up 3% year-over-year. Earnings per share were $1.65 on a diluted basis and were at the midpoint of our prior guidance range. Earnings per share grew 7% year-over-year.

Our operating cash flow was $148 million, and trailing 12-month cash flow from operations was $547 million, or approximately 110% of GAAP net income.

Consolidated return on working capital for the second quarter was 28.5%, and increased 80 basis points year-over-year. The increase was principally driven by our higher margins. Return on invested capital was 10.6%.

We repurchased $31 million of our stock in the second quarter, approximately $233 million over the last 12 months, and approximately $1.4 billion over the last five years. Entering the third quarter, authorization remaining under our existing share repurchase programs is approximately $286 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.

Turning to guidance, we believe that total third-quarter sales will be between $5.65 billion and $6.05 billion with Global Components sales between $3.725 billion and $3.925 billion, and Global Enterprise Computing Solutions sales between $1.925 billion and $2.125 billion. We expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.45 to $1.57. Our guidance assumes an average non-GAAP tax rate in the range of 27% to 29%. Average diluted shares outstanding are expected to be 92.5 million. And the average US dollar to euro exchange rate we are using for forecasting purposes is $1.11.

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

(Operator Instructions). Brian Alexander, Raymond James.

Thanks, good afternoon. Just on the guidance, the ECS revenue guidance looks to be above historical seasonality at minus 5% sequentially if I use the midpoint. So has seasonality changed at all, given some of the acquisitions that you've made, like immix last year perhaps helping Q3 more than historical seasonality would suggest? Or are you more optimistic about the demand environment within computing?

This is Sean. I think we are generally feeling pretty good about the second half in most markets. We have had the immix group under our belt for over a year now. They're fully integrated. There is some good momentum at their back and we feel pretty optimistic about the federal sector close, so I think that will help us offset any differences in seasonality in Q3.

Can you just clarify? Has seasonality changed for the third quarter and for the back half in general relative to what we used to see?

I think we've stopped the practice of updating seasonality on a frequent basis. We tend to look at this business, as you know, over a longer horizon, so I can't quite give you that data. But we do feel pretty good about the size and shape of our federal business and the contributions from immix now with a full year on board.

This is Mike. Maybe I can help you with that. You know, we have old products, as you know, rotating storage, those types of things that are being overtaken by solid-state. And what we have been seeing is the decline of storage has been faster than what solid-state could make up. And while you look at our solid-state storage growing, I don't know, 125% year-over-year, the dollars haven't been big enough to have a crossover point, which would be driving the business. And that's what we are sort of dealing with inside. We do expect over the next few quarters for that crossover point to come, and then we believe we would be back to more of the seasonal type activity that you're looking at. But what we are dealing with, as you know, that's an issue for the Company because it's been 40%. And thank goodness we started on this years ago so we have the suppliers to grow our way out of it. But that's just one of the headwinds that we've been working through. I hope that clarifies it a little more for you.

It does. And just to follow-up on the components business, you mentioned declines at large supply chain customers in North America and Asia that impacted revenue. I guess the first part of the question is is that a trend or an anomaly, particularly in North America? I haven't heard that before.

I think it's a constant that we have seen, and you actually saw some of the end-user customers in their guidance were out. I would fully expect that to start to abate in the third quarter and the fourth quarter, especially as we start to get to the Christmas build for some of the big supply chain guys who are building for some of these bigger customers. But that is where we saw it. There's not a change in the direction of the business or anything like that, but that's just a note that we saw. And we were pretty fortunate there because we started out with the extra sales and engineering over the last year, year and a half, and those customers actually grew into it. So, we are going to be in much better shape as that customer base comes back for us.

Okay. I just wanted to clarify that there wasn't a change in strategy. Thanks.

No, no change in strategy, no change in the buying habits of those customers, just sort of a quarter where I think everybody knew coming into it it was going to be interesting and everybody's been waiting to see what was going to happen.

Okay. Thanks Mike.

Matt Sheerin, Stifel.

Thanks. Just following up on Brian's question regarding Q3 and the Brexit impact, you said you saw I think $40 million or so in some push-outs. Are those deals getting done this quarter, and are you seeing signs that you're back to seasonal demand trends in the UK or does that continue to be cautious?

Yes, what we saw with the Brexit thing was that we actually had a push out that went out that will build this quarter. That's not what we're worried about. I don't know if what we will see, will that sort of those push outs with those customers maintain, or will they pull back in and we'll be back on track with them. But totally expect that it was more of a market hiccup and a reaction to a time frame, sort of time place and utility things coming all together, but it was a note that we did have an actual push out that started to equate to that kind of money, and that's why we exposed it. And we really don't see anything lapping with that right now.

Got it, okay. And then on the semiconductor side of the component business, you talked about the semiconductor supplier consolidation that we've been seeing, and the impact on your business. You've seen some line card changes. But net-net, are you seeing a positive in terms of your revenue and margin impact from all of this, or how does it shake out?

Right now, we've actually seen and are seeing, I should say, a benefit because our book-to-bill, even when you think about are above parity from where they were last year. What's also notable is our backlog is at the highest level we have ever had. So we are not only booking orders now for the future, but we are at the highest backlog levels we've ever seen, which would indicate, over the next quarter or two, we will see another jump in our components business. It doesn't look like it was related to any one incident of business switching or anything like that because it's long-term and the booking rates are continuing at the same pace, in fact a little better than what they were a year ago.

Andy, do you have anything to add to that?

You're right. It wasn't particularly driven by one of event. We've been in that order book backlog gaining mode for some time now and it just continues to build momentum.

And the design activity, you talked about high single-digit growth there. Does that play into this or is that sort of separate where there's a big lag of several quarters between the design wins and actual production, so that's something you should see next year on top of the backlog strength that you are seeing?

Yes, you got it right. Typically, we see the design indices proceed to kind of bookings one, so one kind of leads into other, which is why we track it so carefully, and we remain positive about the outlook.

It's interesting, because we had I think in the second quarter of last year around 69,000 design wins. We are at about 75,000 this quarter this year, so that's up about -- what is that, 8% or 9%, something like that? And some regions more, some regions a little less. So that always bodes well for us, and that's what we've been seeing. And frankly, I don't care what part of the world it's going to go to as long as it goes and it goes through us.

Got it, okay. Thanks very much.

Mark Delaney, Goldman Sachs.

Good afternoon. Thanks for taking the questions. The first question is a follow-up on the semiconductor consolidation. I think the Company talked about a $2 billion revenue gain opportunity from some of the semi consolidation or semi companies picking to go with more of an exclusive relationship through distribution. Now that we've had some of the news come out with Avago, Microsemi, maybe you could update us on where you stand with your efforts to win that additional business and what do you think that pipeline opportunity goes to now that we have the linear and ADI news?

Well, I think the linear and ADI deal will -- specifically will play out. While we don't predict what they will do, we have a great relationship with both of them. We have good sales with both of them and, frankly, don't see anything changing of any magnitude.

If you go back to the other two, we've had a big impact with one supplier coming over to us. And net-net, if you looked at it, our sales are up.

I don't think -- I think what you're going to see is exclusive relationships being just that; they're going to be exclusive and they are going to be done very lightly, and it's going to depend on the technology, sort of the Altera and Xilinx type activities. But anybody that is broad line that needs to get to a big customer base is not likely to reduce their channel all that much. And that's something to keep in mind. It doesn't do any good, and most of these suppliers don't have the resources to get to 100,000 customers like we can. And that's really what they are looking for access for, that and the engineering capabilities of their products. So that underlying benefit to the suppliers has not gone away, and in fact it becomes more pronounced. As they have to come up with synergies for the acquisitions, they're going to push us to even more and become more responsive and even be more important to them in terms of size. So, I see it as an overall win for the channel, not just for Arrow but for the channel in total.

That's helpful. And for a follow-up question, for the overall consolidated business, when we think about EPS guidance for September quarter, it seems like EBIT margins are implied up something in the range of 10 BPS, year-on-year and maybe not quite as much of a growth that we saw year-on-year in the June quarter. Is that just maybe more normalization and mix, because it sounded like mix was particularly good in June. Any color you can provide there will be helpful.

It's Chris. Really, from our standpoint, we expect the margin improvement to continue, which we mentioned earlier. To your point, I think there's a little bit of mix going on in the numbers, but overall that continued focus on margin and margin growth remains, and we feel good about where we are headed.

Thank you.

William Stein, SunTrust.

Great, thanks. The first question relates to a competitive issue. Your nearest competitor has had some ERP implementation issues recently, and I'm hoping you can let us know if, in the quarter, there was any benefit to your business from customers needing to switch (technical difficulty) and then if you anticipate any ongoing benefits from that?

First, I think that, while I am not over there and don't know the situation, I think what I did know is there was about a six day hang up. Customers don't switch for six days. I think they will figure out whatever their issues are, and they will fix them. So, that's not really what we attempt to do.

And I think that we are growing our business sort of the old-fashioned way, going to customers, giving them better service, and that's what's helping us. We are bringing them more products. We're going to continue playing in the same game that we've been playing with changing our business, and these issues may be good for a week here or there, but it never builds a lasting customer, so that's really not our focus.

I appreciate that. Thanks Mike. One follow-up if I can regarding the supplier consolidation. I just want to make sure I understood the earlier response correctly. In some of these cases, you've seen sort of a broadening out of the supply base, not only more in aggregate through distribution but sort of evening out what goes through partners. In other cases, you've seen a narrowing of the supplier base. It may be more business and distribution, but for example I think, in Broadcom's case, perhaps more through distribution, but a narrowing of the supply partner list. Which of those two do you anticipate the more likely or more frequent outcome going forward, understanding that you think it means more distribution? (technical difficulty) narrowing or a broad (multiple speakers)

Take the Avago Broadcom, we really didn't really have a line in the US and in Europe. And what we did have was relatively small. So there wasn't a relationship. Where we did have the relationship was in China. That remains intact, and Korea, that remains intact. So while they did what they did, that didn't really have an impact on us, and we have other competitive lines that we actually sell and do well with.

If you take Microsemi, on the other hand, we were a huge winner in the transition of that and the new products that they have to sell, and we believe that's going to bring big upside for them and a big upside for us. Overall, I don't think this is anything that you guys should be losing any sleep over because it's really not anything we are losing sleep over at this point.

And I think you could speculate all day long, but the bottom line is, whether you like it or not, Avnet's got a set number of accounts out there, we've got a set number of accounts out there, and suppliers want all of them. They don't only want a portion of them. So I don't see a huge change.

Thanks Mike.

Shawn Harrison, Longbow Research.

Good morning everybody. Chris, I guess the free cash flow number for the first half of the year was a little bit lighter than comparative years. It was still a good number. But how do you expect free cash flow to ramp or even cash flow from operations to ramp in the second half? Do you have a full-year target you can give me?

We don't obviously put out full-year targets, but I would say that the fact that we are delivering 110% of GAAP net income versus our target of 70% speaks to the fact that really I think we are on trend and there's going to be slight movement around that average. But overall, we don't expect to see any significant change in that trendline.

Okay. And then as a follow-up, a big picture question. Early in the presentation, you highlighted your IoT exposure, your online and publication investments recently. I guess considering that maybe you could let us know what that IoT number was a couple years ago? And second, Avnet recently looking to buy Premier Farnell stepping up their online and to an extent IoT presence, how would you compare and contrast where you're at right now versus where you want to be in kind of I guess both the online and IoT landscape considering it's going to be changing a bit if Avnet acquires Premier?

I would say we don't see that particular transaction as something to affect us. In fact, I think it's something that really shows that there is a delta in strategy between the two companies that we've been talking for a long time, because we looked at this about a year ago, and the truth is half of that company is industrial distribution, the other half is electronics, and about half of the half goes through a digital presence. And for us, that was just too much heavy lifting to go for having about 25% of the business actually be digital. So it wasn't something that we saw as a threat and/or as a benefit to our business, which is why we built our online capabilities the way that we did.

We spent time now, we are out in publications educating customers how to do designs in IoT, how to tie the sensors all the way to storage, and bring those two worlds together, which brings our computer business and our components business together, in some cases as a selling motion. We're going to stick to the guns that we have. We have, already have a big, robust digital business. We are happy with it. We expect it to continue to grow. It's already growing at great leaps, but for us, it's about staying external to the market. And we just didn't see that as something that would do that. And the other thing is we just have no interest of moving into the industrial distribution space, so that's a clear differentiator now between the two companies.

Perfect. Just the IoT, where was it a couple of years ago? I think you said it was 10% of components right now or something in that --

Yes, it was really nothing. You had some things that you could define as IoT, but it really wasn't something we measured. Today, as you know, that is something that is measured and I think it's a pretty big surprise that it's growing to that in our business at sort of the rates that it is. It shows that the market is embracing bigger, stronger cloud computing and more data transferring from what would be an end customer to a manufacturer for service possibilities. This is going to be something that is going to continue to grow and I think it will ultimately drive the market. I mean just think of anything IoT when you -- I mean you can take it as simple as the door lock on your front door or somebody knocks on your door and you've got a camera on them and you can talk through your cell phone to tell them you don't want anything of what they are selling and send them on their way and have a picture of them. This is our world and this is where it's going. And I wouldn't doubt that it wouldn't be 40%, 50% of the business down the road over the next five years.

That's great. And if you have a few of those solicitation cameras, you can send them my way.

Steven Fox, Cross Research.

Thanks. Good afternoon. Just a first question following us on some of those comments, Mike. As you guys build out this digital platform, can you sort of explain without going into too much detail I guess in terms of how it doesn't impact your high touch business. In other words (technical difficulty) moving some high touch business over to digital, and would that come at the expense of margins over time?

And then secondly if you could just expand on why you're optimistic on the federal IT sector spend into the fall, and if there's any difference between the types of products that they are spending on versus what we would look at across a typical commercial (multiple speakers). Thanks.

Sure. Actually, I'm going to let Andy take the digital piece of that.

From our standpoint, we have our customers that are basically trading with both parts of our channels to market. We have customers that are doing online design activity and then as that project becomes more tangible and more real, then we are deploying more of our traditional sort of hard resources in the field to take that through to production and out the other side. So rather than being in conflict with each other, we see them as being complementary to the way that we support our customers. They choose how to interface with us. We need to provide them with the necessary capabilities to do so. So we continue to see customers trading with us increasingly through both channels to market rather than just purely switching from one to the other.

So in essence, that's really been our strategy from the beginning, trying to be as customer focused as we are, we are not forcing anything down a customer. But when you think about the new inventors that are coming up, things that you've seen around crowdfunding, Indiegogo in specifics, that's a direct tie with our Internet. And then on Indiegogo, a lot of the designs that are coming up are basically now Arrow-approved designs, which tell people that the product can be built for the prices they say it can, and we will also say that we sort of validated the engineering and the product should be pretty good. So that's going to be sort of a good housekeeping label that you will see on those products for new startups and companies that are going that will be able to use our engineering online to help them sell their products in a crowdfunding way.

So, what we are really doing is we're going to what used to be the lowest and earliest level of a product's inception all the way up to the largest customers out there and finding more efficient ways to deal with them at their supply chain. That's our strategy, has been our strategy, is going to continue to be our strategy.

Sean, do you want to answer the federal government piece?

Yes, sure. As I was telling Brian, we've had immix on board now for over a full year, and in that, time we've been able to kind of take the best of our ECS core business in North America alongside the best of the capabilities that immix brings to the table and kind of create a one plus one equals three. So, we are helping add to their line card. We are helping them expand their customer base.

And as you know, September is the end of the US federal budget season, and so there's always a pretty good uptick in Q3, and specifically in September. And the immix acquisition from a line card perspective was very consistent with our overall strategy focused on software-based solutions, including security. Security is a pretty significant piece of their mix. And obviously the market is strong in that area as well.

Great. That's all very helpful. Thank you very much.

Ananda Baruah, Brean Capital.

Thanks for taking my question guys. Two from me if I could. I guess the first is was there anything that manifested during the quarter that was different from your expectation heading into the quarter one way or another that would be notable for us to be aware of?

And then I guess along those lines, what -- is there anything specifically, aside from sort of this ongoing demand trend in some of the areas you're exposed to, are you expecting to be kind of contributed to the second half the year in your forecast? And then I have a follow-up. Thanks.

So your first question, the only thing that we had a little bit of surprise was sort of Brexit coming into the quarter. Everything really went off of plan. We sort of disclosed how we saw that push out, affect our business. My guess is that is the only difference between you guys calling this quarter a home run and sort of being ho-hum about it, which for us, we set records in all three categories, so it's kind of exciting. But in the end, that's sort of a difference, and we saw that.

I guess -- I've become accustomed now that there is becoming more and more of those types of surprises than we ever saw before, although I don't have any of that in our planning for the second half. The planning in the second half for the computer business is still about us getting the new products up to speed as fast as we can, faster than sort of the decline of storage and the new cloud server stuff really off and running at a rate that can offset for us what is and has been a normal storage decline. It's nothing new for you guys, but that was something we had to overcome in our business, and I think we've done a pretty credible job of doing that and growing the business. It's kind of funny. If we didn't have those headwinds, we would be sitting here with unbelievable records. But the fact is that is the nature of the business. The business is always going to change. We're going to have to adapt. We are going to have more investment in cloud. We are going to have more investment in digital. We're going to have more investment in IoT. And I would expect that those things are going to be upsides for us in the second half past what we've thought of. So hopefully that answers your question. But we are not going into the second half with a bad attitude. We're going into the second half thinking that we are going to do a pretty good job in the market.

That's actually really helpful. And then I guess just one last one for me. Are you seeing -- have you seen any shift in the competitive landscape? I know, after the March quarter results, your biggest competitor actually on their earnings call and then at some of the subsequent conferences had talked about the need to sort of get more competitive in certain areas. It's actually giving you guys some kudos for the job you've done over the last handful of years. Is it too early to see anything yet? And if you are seeing anything, sort of how is it showing up?

I think there is a difference of strategy now that probably is highlighting itself in a more acute way that shows there's really differences in the companies, and it's something I've been touting for five years now where we've been headed. I think it's starting to show up. And come on in, the water is warm.

Thanks a lot.

You bet.

Sherri Scribner, Deutsche Bank.

Thanks. I wanted to dig into the ECS segment a little bit. The growth rate decelerated, and in the press release, you talked about the software mix impacting that. On the conference call now, you've talked a little bit more about the storage environment. I Guess I'm just wondering, going forward, do you think that the shift to software is going to continue to be a drag on revenue, although it clearly is benefiting the operating line? How should we think about that and is there anything else in ECS that we should be aware of where you are seeing pretty significant shifts? Thanks.

Yes, from a high level, one of the reasons that we are not coming out with new targets for the computer business is that the hardware will catch up again and grow, especially in the storage range, and what you have is that market disruption right now. What you have are high growth rates for us in infrastructure, high growth rates in security, high growth rates in solid-state storage. And there will be some crossover point to where we are not artificially diluted by the rotating storage piece. And once that crossover point comes, you will have growth again in hardware, which is typically a little less profitable than our services and software piece that we actually do some work on and help customers get that integrated. So that's what we are struggling with. It looks good now. You could just say why don't you guys just drive the heck out of software and services for the rest of your life and forget about the rest of it? But the truth is we offer customers solutions to their problems, and if we don't carry everything, we are not going to have the solution, which is what we are known for, and that's what we're going to continue to drive. But that's sort of the macro problem that -- or actually it's more of a micro problem that we are dealing with now. But we fully expect for that to be self-correcting over the next few quarters.

Thanks very much.

Jim Suva, Citi.

Thank you and congratulations to you and your team at Arrow Electronics. I have one question probably for CEO and one for CFO, and I'll ask them both. When you mentioned about the Brexit, you mentioned I believe about a $40 million deferral or push out. Can you confirm, was that closed subsequent to the quarter, or is that something you are still working on?

And then probably for the CFO, it looks like your cash flow generation, both quarter-over-quarter from a year ago and year-to-date, is lower. Can you help us understand what happened there? Maybe potentially Accounts Receivable got deferred or delayed or how should we think about why cash flow generation year-to-date and year-over-year were a bit lower?

I better answer first because I'm getting older and I might forget the question before you get to Chris. The Brexit issue is -- a good portion of that has closed. There's a portion of it we are still working on. We don't expect any hiccups in the close of it over the quarter, but that's where we stand right now on it. And as I said, we believe things will sort of flow back to normal. We believe it was a hiccup. It was inevitable when you have that kind of a hiccup that somebody is going to say oh, wait a minute, but then at the end of the day, they still need that computing power in their data center, so they are going to spend the money whether they like it or not. And I think that's the situation here also.

I'll turn the second piece over to Chris.

On the cash flow, again, overall, we are very confident that we will continue on the trajectory that we've been on. I think, for the third quarter in a row, the cash conversion cycle did improve.

I think what we are seeing internally and externally is a little bit of distortion around the quarter cut off. This year we closed on July 2, whereas last year we closed before the end of June. And I think with the calendar timing, it certainly did have an impact on DPOs and DSOs, and it's something we noticed. But overall, I have no concerns over where we are in cash flow and I think the trends will continue in terms of what we've been able to deliver.

Thank you so much for clarification and details gentlemen. Thank you.

There are no further questions in queue. I'll now turn the call over back to Mr. Steve O'Brien. Please proceed.

Thanks Whitley. 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, 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.