艾睿電子 (ARW) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Arrow Electronics Inc. third-quarter 2016 earnings conference call hosted by Steven O'Brien. My name is Steve and I am your event manager.

During the presentation, your lines will remain on listen-only. (Operator Instructions). I'd like to advise all parties this conference is being recorded for replay purposes.

And now I'd like to hand over to Steve.

Thank you Steve. Welcome to Arrow Electronics' third-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 to our Chairman, President and CEO, Mike Long.

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

Our industry is in the midst of some unprecedented change. We have and continue to see some major consolidation among our key suppliers for both our global components and global enterprise computing solutions businesses. In part, the impetus for this consolidation activity has been the need to capitalize on the opportunity presented by the Internet of Things, digital, and cloud. Our suppliers are seeing the need to broaden their capabilities to drive growth.

Arrow has been and continues to be on a multi-year journey to broaden our own solutions capabilities and to reach more customers in more regions earlier on in their life cycles. Through our own efforts and now through the activities of our competitors, Arrow is the only value-added distributor with a comprehensive portfolio of solutions from sensor to sunset. We believe our unmatched capabilities will position Arrow to extend our track record of performance for years to come.

I'm pleased to report record third-quarter sales of $5.9 billion, gross profit of $773 million, an operating income of $237 million, and earnings per share of $1.56. Our businesses are continuing to grow and our backlog remains strong.

In the third quarter, both our global components and our global enterprise computing solutions businesses delivered record sales and gross profit. Our steady performance is attributable to the investments we've made starting years ago in key areas. We continue to self-fund our investments with no degradation of near-term profits or cash flows. We are also making these investments while returning significant excess cash to shareholders.

Third-quarter Global Component sales advanced 6% year-over-year. Asia sales grew a robust 16% year-over-year. Europe delivered sales growth for the 14th consecutive quarter adjusted for acquisitions and changes in foreign currencies. Our Americas business was flat year-over-year. Our digital business grew at double-digit rates year-over-year, and we had another quarter of good growth from our core SMB manufacturing customers in all three regions.

We continue to see growing returns on our investments in engineering and technical sales resources. Our design activity grew at single-digit rates this quarter. The strongest design activity growth was again in Asia where we have concentrated our investments in sales and engineering resources.

Third-quarter global enterprise computing solutions operating income grew 13% year-over-year. Our billings continue to grow faster than the overall IT spending market.

Sales growth was again underestimated by a greater portion of software within our mix. However, our leadership in software-based solutions and next-generation hardware resulted in third-quarter ECS sales, gross profit, operating income and operating margin.

In the third quarter, we experienced strong growth from our US federal government business, demonstrating our ability to expand into adjacent markets. We again experienced strong growth from our software portfolio, and that growth was led by infrastructure software, including security and big data analytics. Our comprehensive solutions portfolio is well positioned to capture growth as IT spending priorities change.

During the third quarter, we continued to expand on our leadership position as the trusted enabler of hybrid cloud adoption. The key to our strategy is to make it easy for net MSPs as well as traditional VARs to sell and manage cloud offerings. We will provide a cloud billings run rate at the end of 2016, but, in the interim, we are very pleased with the robust growth rate for our business.

Looking ahead, as our competitors turn inward to focus on divestitures and integrations, we have compelling opportunities to do more business with our existing suppliers -- add new suppliers and new solutions to our line card, do more business with our existing customers and to add new customers, and to win these opportunities will show that no one is more focused on where the markets are headed than Arrow.

I'll now turn the call over to Chris to provide more details on our third-quarter results and expectations for the fourth quarter.

Thanks Mike. Third-quarter sales of $5.94 billion grew 4% year-over-year. When adjusted for acquisitions and changes in foreign currencies, sales grew 3.5% year-over-year. Global Component sales of $3.9 billion grew 6% year-over-year and were at the high end of our expectation. Asia lead our growth in the third quarter with sales growing 16% year-over-year with more than half of our growth coming from small to medium-size customers, principally in China. Our business with large supply chain oriented customers in the region also improved with new project starts.

In Europe, sales grew 2% year-over-year. Again this quarter, we saw growth across key verticals, including lighting, aerospace and defense and transportation. While not a large contributor to our overall Europe components business, the UK actually performed well for us in the quarter.

In the Americas, sales were flat year-over-year. However, we experienced healthy growth from our core small and medium-size business customers in the Americas again this quarter.

Global Components third-quarter book-to-bill was 1.04, which is above 1 in the third quarter of 2015 and modestly above average for the third quarter. The improved book-to-bill compared to last year is principally attributable to better conditions for our Asia business.

Our leadtimes and cancellation rates continue to track within normal ranges and through the first four weeks of the fourth quarter, our book-to-bill was about parity and above last year's level.

Third-quarter Global Components operating income grew 6% year-over-year and our operating margin was unchanged year-over-year despite headwinds from regional mix.

Third-quarter enterprise computing solutions sales were $2.03 billion, up 1% year-over-year and above the midpoint of our expectation. Our topline growth continues to be understated by a growing portion of software within our mix where sales are required to be recognized net of cost.

In the Americas, sales grew 6% year-over-year and 1% year-over-year adjusted for acquisitions and changes in foreign currency. In Europe, sales declined 6% year-over-year adjusted for changes in foreign currencies, principally the British pound.

Our billings grew in the third quarter were up a high single-digit rate for the first nine months of 2016. Our ECS business is best measured by profit dollar growth and on a multi-quarter basis.

Our enterprise computing solutions sales in the UK continued to be negatively impacted by the uncertainty caused by the Brexit vote, and the negative translation effect caused by the devaluation of the pound. We estimate the weaker pound and related software demand negatively impacted our sales by approximately $50 million.

Overall, we remain encouraged by the momentum in our enterprise computing solutions business as measured by 13% 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% and was flat year-over-year. Total Company operating expenses increased 2% year-over-year as reported and 1% adjusted for the impact of acquisitions and changes in foreign currencies. Operating expenses decreased 20 basis points as a percentage of sales on a year-over-year basis.

Consolidated operating income was $237 million, a 9% increase year-over-year. Operating margin increased 20 basis points year-over-year, demonstrating healthy leverage on our sales growth.

Our effective tax rate for the quarter was 28.5%, and our target range remains 27% to 29%. We have expanded the non-GAAP earnings reconciliation in our press release this quarter, so please see Page 10 of that release, and the tables include a reconciliation to GAAP to non-GAAP effects of tax rate.

Third-quarter net income was $143 million, up 7% year-over-year. Earnings per share were $1.56 on a diluted basis and where at the high end of our prior guidance range. EPS grew 11% year-over-year.

Our operating cash flow was $24 million. Trailing 12-month cash flow from operations was $680 million, or approximately 130% of GAAP net income.

Consolidated return on working capital for the third quarter was 25.1%, an increase of 150 basis points year-over-year. The increase was principally driven by our higher margin. And return on invested capital was 9.8%, up 30 basis points year-over-year.

We repurchased $117 million of our stock in the third quarter, approximately $300 million over the last 12 months, and approximately $1.4 billion over the last five years. Entering the fourth quarter, authorization remaining under our share repurchase program is approximately $169 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 that was published this morning.

Moving to guidance, we believe that total fourth-quarter sales will be between $6.3 billion and $6.7 billion with global component sales between $3.7 billion and $3.9 billion and global enterprise computing solutions sales between $2.6 billion and $2.8 billion. We expect earnings per share on a diluted basis, excluding any changes, to be in the range of $1.92 to $2.08. Our guidance assumes an average non-GAAP tax rate in the range of 25% to 27%. Average diluted shares outstanding are expected to be 91 million, and the average US dollar to euro exchange rate we're using for forecasting purposes is $1.11 to EUR1.

Please note that, while we expect our fourth-quarter average tax rate to be below our usual 27% to 29% range, we expect our full-year 2016 average tax rate to be within that range.

This year, the normal seasonal upturn in our fourth-quarter enterprise computing solutions business will be muted by what we see as low potential for budget flush spend on hardware. As I previously mentioned, and as we've mentioned many times in the past, our ECS business momentum is best judged by profit or operating income growth on a multi-quarter basis.

Thank you Chris. Steve, will you please provide the Q&A instructions at this time?

(Operator Instructions). Shawn Harrison, Longbow Research.

On the last point in the computer products business, it looks like, at the midpoint, it will be down $400 million, give or take, year-over-year. How much of that is solely tied to hardware versus FX versus other dynamics? Does that also mean that the normal seasonality you would see into the March quarter is lessened as well? Is there any geographic dynamic where you are expecting less of an uptick than typical in, say, the Americas versus EMEA?

I'll talk to the seasonality piece. It's Chris. I would say that the one thing we've really got to be careful with when looking at seasonality is obviously the changing pace of the business. As you know, our federal government business continues to grow, and so the seasonality implications from that I think are very difficult to read year-over-year. But Sean, I'll have you answer the rest of that question.

Yes. I think there's two things going on. One is we've executed pretty well with our Pivot 2 software-based solutions. And our growth with software on a billings basis is nicely into double digits in Q3. We expect to continue that progress over time. So, by definition, that's going to create some downward pressure on reported sales.

The other factor is hardware. As we said, there is some headwinds on traditional hardware in the market overall. Certainly, our experience is not consistent, or not inconsistent with the industry overall, but we actually think we are doing well with next-generation architectures and technology.

The hardware headwinds I think are less about cloud and more about the Pivot 2, those new architectures and technologies. And with those, we are really well-positioned with the right suppliers and growing nicely year-over-year. So I think, if you looked at this thing on a multi-quarter basis, our Q4 forecast still implies growth in billings and operating income on a full-year basis. So, we are pretty comfortable with how we are positioned.

Are you seeing the deceleration in hardware demand greater in North America versus Europe, or is it the same negative trend globally?

I think it's basically similar on a global basis. I think the technology shift I talked about from traditional spinning disk to flash, for example, or from traditional compute deployments to things like converged and hyper converged, are starting to gain traction in all major markets throughout the world, and we are actively repositioning our line card to help our customers take advantage of that shift.

Okay. As a follow-up, Chris, EBIT margins within electronic components, understanding there are some mix headwinds with the very robust growth in Asia, but would you expect to see EBIT margins begin to expand year-over-year in that business either in the fourth quarter or as you enter 2017?

The focus remains, as we've said in the past, to continue to work towards the 5% margin goal. That is the target; it remains the target. And we will continue to work towards that in the fourth quarter and beyond.

Okay. Thank you.

Sherri Scribner, Deutsche Bank.

I wanted to continue on the hardware theme. I was wondering if you could give us some perspective in terms of your mix of business now on the traditional side versus the newer architectures. It seems like, for most companies, the older architectures are still a higher percentage of the mix, but just wondering how long that takes before the newer architectures outweigh the legacy piece.

Sure, Sherri. This is Mike. We are seeing, on a billings basis, software now about 40% of the total business. Storage is about 25%.

What's interesting is that, in storage, it's really down about 2% right now. So, the crossover points are really close. And when I finish up, I'll have a Sean sort of come back and give you some of the facts around that piece.

Services are 15%. Servers are 15%. So the server business still has less impact on our overall business, but it is still a nice percentage and a nice amount.

We think, on the servers side, it's just some of the new upgrades and the technologies that are a little bit behind, but most exciting is we believe that solid-state storage is starting to come up to a level that, with any luck, we should be able to show growth in that product segment next year. Sean, do you want to continue on?

Sure thing, Mike. So just a moment ago, I mentioned converged and hyper converged and flash certainly. And if you look at that piece of our total storage category a year ago, Sherri, it was less than 30% of total storage. This year, we are now approaching 50% of our total storage mix being derived from the new technologies. So, again, to my point, it speaks to the way in which we've repositioned ourselves with those technologies going forward. And we think that crossover will continue over the next few quarters.

That's very helpful. Thank you very much for that detail. And then looking at the margins, you guys had a great performance on the ECS side in operating margin year-over-year. I assume a lot of that is related to the higher mix of software, which, as you mentioned, is recognized on a net basis. But just wanted to clarify that that was the case and think about how to think about margins in ECS going forward. Thank you.

Yes, it is. Our goal is to continue with that trend. Although we have no desire to get out of hardware, we are going to maximize the amount of business that we can do through cloud, through the new VARs and MSPs. And the federal market has been a benefit for us. So, we fully expect that the servers will be self-correcting, and we actually think the storage piece is going to correct much faster than the servers. So, we are still in there, but services and software is certainly going to drive the growth going forward into 2017.

Thank you.

Matt Sheerin, Stifel.

Yes, thanks. Just getting back to the guidance relative to ECS, and I understand the explanation on the legacy servers and storage being weaker. But if you look at the overall demand environment relative to your typical seasonality and what you see now in demand, and we've heard from a number of other channel players about obviously cautious demand environment, but looking at Europe versus North America, what are you seeing specifically in terms of demand trends and what's stronger, what's weaker, etc.?

You know, our UK business has been impacted by translation, but the pound probably 20% versus the dollar and the euro, so we've seen a real demand pause in the UK market. As that business either flushes to other places in Europe or comes back there, we are really ready for that piece of it.

You know, we are still seeing growth in services and software. The real trouble I would say, Matt, is still the server business. And what we have been used to with these budget flushes in our Q4 are less this year than I think what we've seen in the past. That's both good and bad because the dependence on our software and services has gone up, but still that budget flush has been nice. We probably are seeing a little more. We actually have sort of a four-day weird calendar play this year. I don't want to maximize that and I don't want to minimize it. It just is in there. The four days in December have an impact on the total budget flush, so we feel a little bit of that. But overall, outside of servers, we're pretty confident of everything going on in the business.

Okay. And by the end of the quarter, you mean the timing of the end of the quarter, those last four days, the busiest week of the quarter, spills into Q1 of next year? Is that what you mean?

Well, there is sort of a split both ways on that. And that's why I didn't want to get into it, because I can't really maximize it just versus last year. In the fourth quarter, we have four less days, and I think that gave us an extra day or two in the third and then I don't know if it's an extra day or something -- I'm thinking like that or two in the first. But once you hit the first quarter, the budget flush is over. So, you know, that's sort of how that falls on us. But it's still -- I don't want to take away from the issue that we don't see as big a budget flush this year as we've seen in the past.

Okay. And then, on gross margin, I understand the gross margin dynamics in the component business given the higher revenue in Asia. But going forward in terms of the typical depression of gross margin in December with the computing mix, giving that you've got less sales on the legacy hardware side, should you see sort of a less pronounced decline in gross margin on a sequential basis?

Yes. I think you would normally see that, yes, absolutely. And remember, kind of the exciting thing about the components business is we invested in about 200 salespeople in Asia-Pac to attack SMB. And you know, Andy, you had some pretty good growth, if you want to talk about that, which was the depression this quarter, Matt, but going forward, that will only get better.

Thanks Mike. Matt, we saw significant growth in the small and medium-size businesses across all of our regions actually, and Asia led the way with sales growth of up around 18% in that particular area. And that's a direct result of the investments we continue to make in that area in sales and engineering, and that's attracting new customers, new relationships and new business opportunities for us. And we think that dynamic will continue as we roll forward.

Okay, thank you.

Param Singh, Merrill Lynch.

Thank you. So, I just wanted to talk about your components guidance to begin with. Your book-to-bill is pretty strong at 1.04. The last few years, actually since 2010, your book-to-bill for the September quarter has been 1 or below 1. So why wouldn't you guide that up a little bit? Even though your typical seasonality is down 1 considering (inaudible) that strong. And then I have a follow-up.

I think what we said was that we made investments in sales and engineering, and we are seeing bigger growth now in the SMB portion of our business, the small to medium businesses that are out there, which means we have an expansion of customer base.

The other nice thing we've seen is an uptick in our global design activity of valid registrations with the suppliers. That's also up 3% year-over-year in the quarter. So, right now, the addition between salespeople in regions and in registrations, we are seeing a pretty nice growth rate.

Just to be clear Param -- it's Chris -- our guidance is up 4% year-over-year for the quarter.

You have a nice point.

Yes, but sequentially it's still like slightly or in line with seasonal. And my point was if book-to-bill is good, is that strong? And if you're watching the positive trends that you mentioned, then why wouldn't you've guided better than seasonal components, or even in line with seasonality because you are missing 1 point even on that.

Book-to-bill is one measure. I wouldn't get too hung up on just that one measure. To your point, we will see how the quarter shakes out. But I view that more as a strong indicator going in, but there's obviously a lot of work to do between now and the end of the quarter. So, from our standpoint, we thought 4% was a healthy growth rate and we will see how we do against that, to your point, given the fact that we are starting out strong.

Got it. And then on my follow-up question, I know this was asked before but I just want some clarity on your ECS margins that are coming from your software mix versus other factors. And then how do you expect that to translate into December and through other years? (multiple speakers)

I know, as we talked about before, Param, really as we grow the software piece of our business and the whole gross to net issue kind of muting the top line, it has the opposite impact on margins.

We really continue to focus in on the operating profit growth, which was up obviously 13% in the quarter. I would say that the focus on margin is obviously there, it's always there, and that will continue into the fourth quarter. So, I would think you can continue to expect there to be this fairly significant spread between what the sales growth is and what the profit growth is as a result.

So you are seeing a 50 BPS improvement year-over-year in your operating margin for ECS the last few quarters. Considering the December quarter your hardware will be worse than normal, and software is obviously increasing, so you should see a better than 50 BPS improvement in operating margin for that segment.

I think we -- you know, we obviously don't guide at that level. I think we're reasoning it there, and again, we continue to perform well on profit. So, I think that's -- you can take that where you want to take it. But we feel good about where we are.

Okay. Thanks a lot guys.

William Stein, SunTrust.

Great, thank you for taking my question. Gentlemen, I just want to clarify some things about the systems business and seasonality. So, Mike, first, can you just make sure we understand? When does the fourth quarter end this year? Is it a few days prior to the end of the calendar year?

No. This is Chris. Our fiscal year-end and our fourth quarter always ends on the last day of December.

Okay. So the change in budget flush that you are seeing in the compute hardware, do you expect that to be sort of an ongoing trend where we should contemplate seasonality being less robust in Q4s going forward? And then the corollary to that is should we, when we are thinking about Q1, should we think about a less significant fall-off then we have historically seen?

So far, I think what we are seeing, and one of the differences that probably threw off a little of the math is an increase of federal business in the third quarter. So, as you know, we've built resources, put more effort into federal sales. And this year, we saw a very nice uptick in the third quarter in the federal sales business that we have. So, that uptick does have an impact on seasonality going into the fourth quarter because, typically, what you have seen from our business in the third quarter has been the European holidays and really sort of a slower quarter overall. And that federal business is pretty much now changing that scenario.

And since we saw such a strong federal quarter, that's the first time we've seen it sort of highlight and then compare into our fourth-quarter guidance. So obviously we are not concerned because, if you string the quarters together and you string the year together, this business had a very good year. And we have -- basically we are not seeing any change in the activity in the business overall. And that's about as clear as I can get with it.

That does help. Thank you.

Brian Alexander, Raymond James.

Okay, thank you. This is Adam in for Brian. First question for Mike related to Tech Data's planned acquisition of Avnet's computing business. Can you talk about whether you see opportunities to pick up greater share from your existing vendors and/or customers, and also how you're thinking about changes to the competitive environment as a result of this transaction?

Yes, well, first, I wouldn't market it with that. There's obviously bigger changes that have taken place with all of the competitors in this space and will take place over now and the next couple of quarters. We've seen, as I said before, a bigger uptick in federal market, and I expect that we are going to see even more uptick there. Over the last month or so, we've had a big uptick in VARs and in MSPs in here figuring out how they can do more business with us. So that has been a pleasured outcome of some of the competitive changes we've seen, given the fact that we are the only true value business left out there. And then we've seen an uptick on the cloud opportunities as a result of this.

And the last piece I would say, which is you are starting to see the things that we've been talking about before, the blurring of the line, Broadcom and Brocade coming together, you're now seeing the semi guys move sort of into data center in a bigger way. And we see more of that. And being the only true business that can go from sort of sensor to sunset or sensor to storage, that really lays out and helps with our IoT line card and our ability to service businesses for customers that are moving into that space. So, there's what I would say four real good opportunities that fit right into the strategy that we've been implying all along. And some of these market shifts have just -- well, I don't want to say made it easier -- have caused some opportunities to move forward faster, if that's a better way to put it.

Okay. And one question for Andy. Based on your guidance, I think components operating income dollars are likely to finish fiscal 2016 up somewhere in the neighborhood of $40 million on a year-over-year basis. And coming into the year, you talked about $40 million of cost cuts, mainly in the components business. So, it looks like a lot of the operating income dollar growth here is attributable to cost cuts, yet revenue is growing. I just want to understand this dynamic and how operating income dollars and margin can grow moving forward in the components business. Thanks.

Actually we kind of have taken a lot of those efficiencies and productivity gains and reinvested it in the business for growth. We've been doing that for a while and that continues to be the strategy. We've invested in sales and engineering talent to drive our small medium-size business, and also we've invested heavily on the digital side to actually create an capture a bigger net to attract new customers and opportunities. And that continues to be the strategy, drive productivity and efficiency where we see opportunities and invest for growth.

Okay, thank you.

Mark Delaney, Goldman Sachs.

Good afternoon, and thanks very much for taking the questions. The first question is on the topic of semiconductor supplier consolidation. TI had talked about ending incentives for demand creation on its earnings call last week. The question is have you seen any of your other suppliers talk about trying to make some of the same types of changes that TI has an do more direct business? And any sort of quantification you may be able to give on what sort of headwinds from larger semi companies you may be seeing in terms of margins? That was kind of part one of the question.

And then I guess my second question will be the follow-up. I'll just ask that now too. The Company has laid out certain opportunities that it has on its own to offset a lot of those, and some of that was taking up share from smaller distributors and also ramping the new FAEs, especially in Asia. Any more context you can give on how well you're doing with things you can control to offset some of the consolidation at the larger accounts would be helpful. Thank you.

It's Chris. I'll have Andy jump in as well. We've talked I know in the past quite a bit about the consolidation, and in the end, we've been a net beneficiary from that as suppliers look to us to continue to drive demand creation in total.

As it relates specifically to the TI piece and reactions to that, Andy, why don't you --

Sure. happy to do that, Chris. The TI kind of position is really not new. We've been working with TI on this strategy for some extended period of time, and we continue to build world-class supply chain and fulfillment models to make sure that we can continue to support and grow our mutual customers. And we continue to focus our engineering and our design resources into other technologies and other areas where we can attract growth.

And you're smack on, Mark. We've been investing these engineering resources for some time and some of the results that you are seeing in that small medium-size business space and on the design wins side that Mike and Chris spoke to earlier on are signs that we are getting a payback on those investments so that we are on the right path.

I think it's important to note that most of the semiconductor suppliers do not have a sales force, and therefore they count on us to do that for them, especially manufacturers that are looking to get to a wide range of customers. If you have a manufacturer typically that has a few customers, that portion of it is less important to them. And TI is one that happens to have a lot of salespeople, and their strategy is to do some of that work themselves. And we are fine. We are happy to build sort of the world-class supply chain around that business.

But all in all, I think it's important to note, with all of the engineers that we've hired over the last 2.5 years, every one of them are equipped to use and every one of them have been moved into new suppliers that have asked us to increase or sort of double-down on the investments we are doing with them. And that's largely what we have done. And I think a testament of that is the design registrations are up 3% despite this activity happening, and all good, don't see any change in that going forward.

Jim Suva, Citi.

Thank you very much. Regarding the commentary on the computing solutions and the lower than normal budget flush, is that, just to be clear, Arrow's view on it, or are you getting orders and customers telling you that that's going to be the case? The reason why I ask is maybe my memory is old -- is I had thought like the last two weeks of the quarter are essential for that segment making its quarter or not. And so I was just wondering. Since we are still two months away from that time period, help me understand. Is that the orders, you're actually getting them and they are not going to come through, or is it just your view of conservatively discounting it?

We are conservatively doing it based off of what we have and what we have on backlog. And of course, as you correctly state, those last two weeks are a little bit of a free-for-all, but you still take the data that you have and what has come in. And as I said, part of the -- it was a very good third quarter, as you know. It was record sales and record profits for the Corporation, and for that business specifically, so that does have an impact because the federal business is stronger in the third quarter. And partially -- I mean without getting too crazy about it, some of the federal business flopped over into the fourth quarter last year, or most of it stayed in the third quarter this year just because of calendar timing, so I would string those two together.

Sean, you might want to comment on the last two weeks and what your resellers have been telling you.

Yes. We talk to all of our suppliers and channel partners that are in the hardware business pretty frequently, in fact pretty consistently over time throughout the year. So this is beyond just our opinion.

I would also say too, if you look at just the growth in storage, for example, for the industry overall, we've actually done better than the industry on a category basis year-to-date. So we are looking at this whole shift, if you will, in the underlying technology, as I described earlier, on a multi-quarter basis, not just for a moment in time.

And then my follow-up question is I do recognize that you have been gaining share and you have been growing faster than the industry but with a lack of a traditional budget flush in Q4. Did that budget dollars, do they just get re-prioritized to other spending, or is it a push-out, or is it you'll potentially get them back in Q1, or how should we think about where that money ends up going to?

I think maybe Sean can highlight budget flush, maybe, Jim, versus technology shifting on some of the servers and what we are seeing there with some of the new servers coming out versus the old servers, and when they are sort of switching over, because we know that is an issue too.

Yes, part of what we foresee with regard to "normal budget flush" every year is the reprioritization of spend to priorities like security and other software-based solutions, number one, but also number two, to the shift in the underlying technology I talked about. So remember that I said our growth rates with things like converged, hyper converged, and especially flash, are growing very nicely, well into the double digits. And so you are seeing spend from traditional compute deployments and traditional spinning disks get redeployed to the new categories or the new architectures, and that certainly is impacting what year-end might look like.

Great. Thanks so much for all the detail. That's greatly appreciated.

Lou Miscioscia.

Great, thank you. So it would be helpful I guess to know when the third quarter ends so that we can then just run our own numbers and looking at the calendar as we try to think about the four-day shortfall.

The third quarter ended on the -- sorry, last year ended on the 26th. This year, it ended on the 1st.

Okay, great. (technical difficulty) doing the math.

So, I understood the answer to the last question that there obviously is an underlying shift (inaudible) hyper converged. But aren't the ASPs and the amount of profits in power reasonably similar so that if there is actually a massive dollar shortfall in the hardware, whether it's servers or storage, there's got to be something else in addition going on because you would think at least it would be more flattish because I assume an all-flash array (technical difficulty) that much delta in cost in comparison to one with a hard disk drive system, even though obviously storage has been weak all year.

I hate to do this to you, you are a little tough to hear. Can you take us through that question again?

Sure, no problem. I guess what I was trying to understand, given the material dollar shortfall in the hardware sector, if you are still trying to get about the same computing power, I still would think that, even if you are shifting to all-flash arrays or hyper converged, you are still going to have to spend about the same amount. So just a shift in technology doesn't seem to be the total answer. Thus, could it be that we've heard from others that just companies are trying to sweat their assets for an awful lot longer, so they are trying to hold out, or alternatively is do you see material (technical difficulty) as we know from AWS' numbers over to the cloud?

So there's a couple parts to that question, Lou. I think that, when it comes to sweating assets, customers are constantly reevaluating migration to new technologies and architectures, including cloud, so that does sometimes have the impact of slowing down selling cycles. Then, again, at the same time, I would tell you that our unit counts, both current and projected, are healthier than maybe the revenue would indicate because we do see some ASP compression with the newer technologies. That's part of the value that those new technologies and architectures represent to CIOs.

So, from a unit perspective, from an install base perspective, from a footprint perspective, we believe we are holding, if not gaining, share, but you're seeing a transition in the underlying technology, which will change our mix from hardware to software gradually over time. Having said that, hardware is still a very important piece of our portfolio because we are in the solutions business, not the point product game.

Okay. We do have some big changes going on. Maybe if you could give us your view of how competition and pricing is both near term, I guess, going into fourth quarter, and then beyond, given obviously the expectation that Ingram Micro is being taken out, and obviously eventually the transition of Avnet's business to Tech Data.

We really haven't seen much of a change, Lou. We've been able to protect and hold margins for the most part throughout the year in both the software and the hardware space. We're going to continue to execute business as usual. We obviously monitor the competitive environment, but we feel really good about where we are in our relationships, both with our suppliers and certainly in the channel, both with existing or traditional VADs as well as new and emerging MSPs.

I think there's an underlying in there too about your question about Tech Data take the price down, and we end up in a price war? It doesn't seem, to me, to be very practical, given they are spending a pile of money for a value-added business that they see is solution oriented that needs to get them into the market or closer to the market than we are. And cutting the price of that is going to make it pretty difficult to get a payback on it, so that just doesn't seem practical.

Okay, great. Thanks. I'll get back in the queue.

Thank you. I will now hand the call back over to Steve O'Brien.

Thanks Steve.

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 on 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 Steve. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.