艾睿電子 (ARW) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics' fourth-quarter and year-end 2016 earnings conference call. My name is Tracy, and I will be your operator for today.

(Operator Instructions)

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

Thanks, Tracy. Good day, welcome to Arrow Electronics' fourth-quarter and year-end 2016 earnings 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.

Thanks, Steve, and thanks for all of you for taking the time to join us today. I'm pleased to report record 2016 sales of $23.8 billion, gross profit of $3.1 billion, and earnings per share of $6.63.

In all my years at Arrow, I have never seen greater opportunities for our Business than coming into 2017. It's not exaggeration, but a fact. Our customers need platform solutions in this increasingly digital world. They want solutions that help evolve their business to capture the benefits of IoT and add new revenue streams. We provide these sensor-to-sunset solutions, and no other company is better positioned to do so.

Along these lines, we've invested in engineering and technical capabilities; we've made acquisitions to broaden those capabilities and extend our reach. The services we can provide are growing, and so, too, are the results we deliver for solving our customers' problems. The returns on those investments are starting to grow, and they're going to continue to build throughout 2017 as most of the costs are already in place.

I'd like to share with you a few of the proof points behind my optimism. As you'll see on our annual report, our customer count has now exceeded 125,000 customers. And this is up from 100,000 customers in recent years. Clearly, digital is the main source for this customer growth and many of these customers are in the [Nastan] stage; however, we converted approximately 1,000 customers from digital to our core components business in 2016 alone.

We are adding new customers to our purchasing solutions across the portfolio of global components and our global enterprise computing solutions businesses. These companies tend to be far larger than our typical mid-market customers. The sales and profit opportunities also tend to be multiple times larger than average. I believe this validates our focus on selling the enterprise.

Our number-one source of IoT customer leads is actually one of our biggest ECS suppliers. This further proves you need to have the capabilities across the printed circuit board and into the data center and cloud to be relevant in IoT.

Fourth-quarter backlog is at record levels, and it grew at double-digit rates compared to the prior year. Global components' book-to-bill ratio of 1.09 was the highest we have seen in over five years, and we saw strength in all three regions. Our performance, historically, has lagged our suppliers by 3 to 6 months, but we should see more benefits come in the second quarter and second half of the year.

Our suppliers are attracted by our complete sensor-to-sunset vision and want to be a part of it. In recent weeks, we have secured several new exciting supplier agreements and partnerships for IoT. Our investments created the catalyst for these historic new business opportunities.

But candidly, we've also been fortunate that some of our competitors have chosen to narrow their product lines. We expect the incremental financial impacts from these agreements to start in the second quarter, and contribute more substantially in the second half of 2017.

Our enterprise computing solution customers are also attracted by our approach. We have now closed on over $350 million in annual business that will be switching to Arrow from other distributors in the coming quarters. We are bringing new VARs and MSPs in house, and doing more business with our existing customers. Here again, the uptake will ramp in the middle to second half of the year.

Our cloud business had an outstanding year in 2016, with no slowdown in momentum. Our annualized cloud billings run rate exceeded $400 million in the fourth quarter and is also a profitable contributor to the Business.

Turning back to results, global components had a record year with sales of $15.4 billion and a record fourth quarter with sales of $4 billion. All three regions again produced growth for both the quarter and for the full year. Our performance is attributable to the investments we made starting years ago in key areas.

Most notably, we've invested in unparalleled engineering capabilities in our digital platform. While we're still making investments in this area, digital is a profitable contributor to global components and to our overall Business.

We are pioneering the adoption of value-added engineering and distribution in Asia. Asia's sales grew 14% in 2016. Our core SMB customers continue to be our biggest source of growth. Our Asia headquarters is located in the Hong Kong Science Park at the center of innovation for the region.

Our engineering and design center is the first of its kind. It has been embraced by customers and suppliers, and Arrow even helped design Hong Kong's first electric vehicle. It is no longer fair to assume that innovation happens in the West and production moves to the East.

Our global enterprise computing solutions delivered record gross profit and operating income in 2016. Global enterprise computing solutions faced a more challenging fourth quarter than expected. We saw very little high-end budget flush, and spending on hardware and billings declined 10% in 2016.

However, our leadership in software-based solutions and next-generation hardware is driving growth. Solutions and services billings grew 10% in 2016 and now are two-thirds of the Business. Full-year 2016 enterprise computing solutions operating income grew 4% year over year, and grew 5% adjusted for changes in foreign currency.

We expect 2017 to be a better year for hardware. New technologies like solid-state storage and hyper-converged infrastructure are growing 50% year over year. I already mentioned the $350 million of new customer wins. In addition, we learned very recently that, effective this month, we're being authorized for Dell's enterprise offerings in all of the same markets for which we carried EMC.

In closing, we have the opportunity to make 2017 the most exciting year in our 82-year history. As we move forward in the year, I look forward to sharing with you more milestones towards our evolution. I will now hand over the call to Chris to provide more details on our fourth-quarter results and our expectations for the first quarter.

Thanks, Mike. Fourth-quarter sales of $6.44 billion were within our prior guidance range, but $57 million below the mid-point, with sales declining 5% year over year. The dollar strengthened relative to the euro and pound in the fourth quarter compared to the rates we used for forecasting purposes. So the changes in foreign currencies reduced our sales growth by about $91 million compared to the fourth quarter of 2015.

Fourth-quarter global component sales of $4 billion grew 10% year over year, adjusted for acquisitions and changes in foreign currencies. Sales were above the high end of our expectation.

Asia produced exceptional growth in the fourth quarter [of over] 22% year over year. Growth was particularly strong from Greater China. In the Americas, sales grew 4% year over year, driven by our digital platform and our reverse logistics business.

In Europe, sales grew 2% year over year, adjusted for changes in foreign currencies. Europe sales have grown year over year for 15 straight quarters, adjusted for acquisitions and changes in foreign currencies. We generally had good performance across the region, including in the UK.

Global components' fourth-quarter book-to-bill was 1.09, which is above 1.05 in the fourth quarter of 2015. Our lead times continue to track within normal ranges. Fourth-quarter global components' operating income grew 8% year over year, and operating margin declined 10 basis points year over year due to headwinds from regional mix.

Fourth-quarter enterprise computing solution sales were $2.4 billion, down 21% year over year, adjusted for acquisitions and changes in foreign currencies, and below our expectation. As Mike mentioned, we saw a difficult close to the fourth quarter for our enterprise computing solutions business, as year-end hardware spending was soft. Overall, we continue to believe our enterprise computing solutions business is well aligned to the changes in technologies and spending patterns by our customers.

Fourth-quarter enterprise computing solutions' operating income declined 6% year over year, adjusted for changes in foreign currencies, and 8% as reported. Fourth-quarter enterprise computing solutions' operating margin of 6.7% increased 90 basis points year over year due to the increasing mix of software and solutions.

Returning to consolidated results for the quarter, our gross profit margin was 12.8%, up 40 basis points year over year. Total Company operating expenses decreased 2% year over year. Operating expenses increased 20 basis points as a percentage of sales year over year, by 10% when adjusted for acquisitions and changes in foreign currency.

Consolidated operating income was $281 million, down 1% year over year. Our operating margin increased 20 basis points year over year.

As we anticipated, our effective tax rate for the quarter was 25.3%. Our target range remains 27% to 29%, and our full-year 2016 tax rate was within that range at 27.4%.

Fourth-quarter net income was $182 million, and earnings per share were $2 on a diluted basis, at the mid-point of our prior guidance range. Changes in foreign currencies negatively impacted EPS growth by approximately $0.04 a share. Fourth-quarter earnings per share grew 3% year over year as reported, and 6% adjusted for changes in foreign currencies. Full year of 2016 earnings per share of $6.63 grew 7% year over year as reported, and 8% adjusted for changes in foreign currencies.

Our operating cash flow was $220 million in the fourth quarter. Full year of 2016 cash flow from operations was $356 million at our target level of 70% of GAAP net income.

Cash flow from operations during the fourth quarter was not at our normal seasonally strong levels for several reasons. Most notably, we made some investments in inventory to support new supplier and business engagements, as well as to support a successful deployment for a part of our new ERP system in the Americas. We also experienced some back-end loaded demand in our Europe and Asia components regions, whereas sales for these regions is typically more linear through the fourth quarter. Lastly, as previously discussed, we enjoyed some favorable payables timing in the prior two fourth quarters that did not repeat in the fourth quarter of 2016.

Please also keep in mind that the growth in software resulted in an increase of net basis sales versus gross sales. This is distorting traditional calculations of days sales outstanding and days payable outstanding. The receivables and payables reflect our billings, and not our sales. It is fair to gauge our cash-to-cash performance based on the spread between these two metrics, but their absolute value is not as relevant.

Consolidated return on working capital for the fourth quarter was 29.4%, and was 26.9% for 2016, unchanged from 2015. Return on invested capital was 12.1% for the fourth quarter, and 10.5% for 2016, also consistent with 2015.

We repurchased $49 million of our stock in the fourth quarter, approximately $200 million in 2016, and over $1.4 billion over the last five years. As you may have seen in December, our Board of Directors authorized an additional $400 million share repurchase program. This new program highlights their confidence in the growth of our Business and strong cash flow generation potential. Entering the first quarter, authorization remaining under our share repurchase programs is approximately $520 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, as Mike mentioned, the investments we have made, and therefore, their costs, are largely in place. As a result, we expect leverage on those investments to grow in the second quarter and second half of 2017. We believe that total first-quarter sales will be between $5.375 billion and $5.775 billion, with global component sales between $3.775 billion and $3.975 billion, and global enterprise computing solution sales between $1.6 billion and $1.8 billion.

We expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.37 to $1.49. Our guidance assumes an average non-GAAP tax rate in the range of 27% to 29%. Average diluted shares outstanding are expected to be 91 million.

And the average US dollar to euro exchange rate we are using for forecasting purposes is $1.07 to EUR1. For the first quarter of 2017, we estimate a $70 million headwind to sales and a $0.03 headwind to earnings per share when compared to the first quarter of 2016, due to changes in foreign currencies, principally the euro and the British pound.

Thank you, Chris. Tracy, could you please provide the instructions and open up the call to questions at this time?

(Operator Instructions)

Matt Sheerin, with Stifel.

Thanks. Good afternoon everyone. A couple of questions. On the enterprise computing business your guidance implies down only on mid-single digits, which is certainly better than seasonal. But of course, you are coming off of a much worse than seasonal quarter. So maybe help us understand what's going on there. Are you seeing some of the push-outs you saw in Q4 roll over to Q1 giving you more optimism? Or is it just the function of that lower base there?

Matt I will start and I will let Sean follow-up.

As you know, we've been struggling all year long with that business and the cutoffs and the extra weeks we had in certain quarters which we are not going to talk about anymore; we believe we got a reset going into the new year. We did not see a traditional budget flush this year. While we expected that, we didn't expect it quite as big as it was.

And I would say going into the first quarter, you know, you're seeing things now like solid-state storage, even make a bigger impact for us now and in the coming quarters. So we don't have as big a crossover point that we did before with the rotating disk dilemma that has been going on and plaguing for about a year.

Having said that, as you know, we're seeing very good software and services growth. You know, that's now about 65% of our business and the profit levels we see. So, given that software and services are a bigger portion of the business, I would expect to see over time even less of a budget flush in December as a percentage of our business than it used to be when we were totally hardware. Sean, do you want to add to that?

Well said Mike. I would just add to that map that if you look at our hardware mix, we continue to grow, what I call the new tech, converged and hyper-converged and flash at really healthy rates. In fact in Q4, it grew by 50%. So while we fight through the transition from the old hardware to the new hardware, I think we are kind of well-positioned in the right place. But, you know, this will take some time to play out and the crossover is a bit difficult to follow. But as Mike said, as our mix continues to weight towards software-based solutions and services, it should have less of an impact over time.

Okay, and then looking at for the year, I mean you're starting out first quarter down mid-single digits year over year in that business. Do you think -- and you talked about some incremental opportunities with some customers coming over to Arrow from competitors. Do you think you're going to be able to grow the top line in the ECS this year?

We do, Matt. And as you know, we are actively recruiting customers and suppliers all the time. In fact, the big three priorities for our business globally is all about our pivot to the Cloud. You've heard Mike talk about the growth in our run rate as we exited Q4. Customer base expansion and we're already starting to see customers come our way that are intrigued by the way we differentiate ourselves. And certainly new line card and as proof points already mentioned for all three on this call.

So I think, over time, I think the outlook is promising. I think sometimes these shifts and these adds take time to ramp up over the course of the year.

Okay, and let me just -- a question in regarding the components business where you're obviously -- very strong growth from Asia. As you look at that business, and I know your gross margin in that business was down modestly because of mix.

But you also talked, Mike, about the fact that you are increasing your value add business on the component side in Asia, particularly targeting smaller local OEMs. Are those efforts going to help finally grow gross margin or is that going to continue to be some pressure because of the mix and the way that business is shaking out?

We expect, Matt, over time for actually Asia to improve even more from where it is today profitability wise. You know, the old model was really the pick, pack and ship and supply chain. We are now seeing more and more opportunities in engineering and more and more design wins in the Asian market with the smaller SMB manufacturing customers, which tend to be more profitable.

You know our sales in the fourth quarter were up 22%. A lot of that driven by some of the design wins we had earlier in the year and we have been building engineering support there. And I will just tell you, the biggest increase we had in Asia was in the industrial power market. So the good old-fashioned manufacturing market and then transportation and wireless were about the same.

But places that we play and we play significantly are coming out. And that is what we really were hoping to see. Again we think it's going to take some time, but we have shown that when we start to migrate upstream, just like helping design with the first electric car in Hong Kong, that just goes to show the customers are calling on our service and our expertise and for that we actually sent some engineers from North America to help out.

And that is great because we are building experts in pretty much every vertical now and they are being called upon.

All right. That is helpful. Thanks a lot.

Steven Fox, with Cross Research

Good afternoon. A couple of questions from me. First of all, with regards to the digital platform, if I think back a year ago, it wasn't as pronounced in terms of you guys publicly talking about it and a year later, you mentioned customer expansion and then also converting some of these customers into core components business.

I'm just curious, now that you had some more experience with it over the year, how much -- what kind of conversion rates would you expect going forward? What kind of -- how does this transfer meaningfully into the top line growth for the components business maybe over long-term? And any other thoughts around how it may move the needle financially.

We think that it's going to be a huge contributor for us. As we said there was 1000 customers this year. One of the reasons we didn't really talk about it is we've been trying to get these metrics ourselves, Steve, because as we are forecasting out our own business, we would like to know.

And so far, if you take the Indiegogo relationship that we have, they see about 75% of the startups in the electronics industry for crowdfunding. We do have a strong position with them. We see customers coming out of there that buy our complete enterprise product, as well as components.

We validate the design and in some cases, we actually monitor and maintain their business on the Cloud for them. We expect that to continue and I would say that, right now, I think we're seeing something like 35% or 36% growth out of the digital business, pretty much quarter in, quarter out. Some quarters, it's even bigger than that. And I would say towards the second half of the year we can start exposing maybe some more metrics that would give you what you're looking for.

But right now that business is throwing off income, it's throwing off income in line of where we are, even with the expenditures. And with the growth this year, we expect it to be more than a meaningful contributor in the second half of the year. Does that answer your question?

That is very helpful. And then, just on a more near-term question on the components business.

So, you mentioned the 1.09 book-to-bill, but you also seem to suggest that lead times are fairly stable but a lot of your suppliers are also putting up some pretty positive book-to-bill and order growth numbers. So, I guess I want to get a sense for whether you expect lead times to expand or whether that was a general comment and you're seeing lead times expand on certain products? How would you describe that environment? Thank you.

I'll start, and then I'll give it to Andy. Hopefully, I don't take all the meat off the bone for him. What we are seeing is what we have seen. What I believe we're going to see is coming off of our customer surveys.

And you know, we survey customers every quarter. And there's a percentage of people that usually say they have too much inventory. That percentage is at its lowest level in 10 years, meaning customers don't have the inventory levels that they had before. So inventory is becoming a conversation. At the same time, there is a larger percentage saying they do not have enough inventory and that they will need to increase that meaningfully over the next couple of quarters.

So, you put that into combination with our backlog being up in the strong double-digit rates year over year, coupled with the 1.09 book-to-bill and, as we said before, most of what we see starts to really happen in the second quarter. So if everything comes together, I wouldn't be surprised at your insinuation, but I wouldn't validate it just today.

Okay I appreciate the comments

Andy, do you want to add to that?

Yes, Steve, I think Mike covered it. I think if you look across the entire product range, generally we have seen relatively stable lead times for some considerable period of time. We are starting to see some movement and some (technical difficulty) products driven by higher demand and if you kind of couple that with the fact that our backlog is actually up across the board, it is not in like, one region or one market or one set of customers. It's up across the board. I think that we're starting to see that manage through in one or two pockets.

Thank you so much

Param Singh, with Merrill Lynch.

Hi, thank you for taking my question. As I look towards your EPS guide, it would imply that your operating margins overall are flat year over year. And this is a bit of a reversal from the trend in the past three quarters.

I mean, how should we think about the trend there? Can we expect margins to start expanding again? And then, in that vein, are you seeing any impact to components operating margins from supplier consolidation? I know one of your competitors talked about it, briefly.

So far, on the supplier consolidation, we have seen wins for Arrow and we see that as a positive. The declines that we have seen have largely been mix so far. And what I would also say is we have been very much increasing our engineering capabilities. And as I said, we invested also in Asia.

And at this point, what I would see is more volume coming in, but the costs not necessarily rising with that because we are fully invested. So what you see in the first quarter are all the investments around engineering. The investments around digital. The investments around Cloud. All in place, all of those units are operating effectively.

The same thing with reverse logistics, and now we are expecting the volumes to start leveraging those investments. So we do expect a good year. And we knew there was going to be a crossover point; we never really talked about it before, but I think we are indicating right now going into the second quarter, we are in the best position I have seen in Arrow's 82 year history.

It's about as much as I can give you right now without pinpointing it more.

And Param, it's Chris. I would just add that there is also a little bit of currency headwind year over year as we go into first quarter, as well. Just given what's happening with the euro. That's part of the guide.

And then, I guess, as you go through the year given all the other commentary I'll expect your inventory levels to come down a little bit and generate a little bit more cash flow. This quarter your inventories didn't generate the kind of cash you typically do in the December quarter. So would that be a fair assessment? And I have one more question.

No, I think the fair assessment is we expect to see sales growth. So, I think if you want an assessment that is what we are looking for.

Part of the inventory growth is that we have been converting, as you know, our computer systems. This was nothing new that we haven't done in any other region. And we have not had any problems. We're not anticipating any problems, but we are making sure on our customers' behalf that if there is a shortage, if there is some kind of a glitch in the marketplace, that we have our customers protected. And on top of that, we expect a lot of that to go out.

So the best case you would see is the inventory levels go down and the sales go up, and thereby throwing off a lot more cash. Right now, we're just getting ourselves positioned for the sales growth that we expect to see.

And then as a final question. Your billings ECS, you mentioned, were at a $400 million annual run rate. How much do you think that is offsetting any business loss toward the Cloud? And net net, would you expect to mitigate any further impact on the Cloud? I mean, it seems that the acceleration to AWS Azure has increased.

This is Sean. It's interesting. We are not ignoring the Cloud by any stretch. In fact, we will invest even more aggressively this year in our Cloud initiative and I think the growth in our run rates, you know, demonstrate that. However, if you look at our growth in what I call the new hardware, most of that's on premise, funny enough. And if you look at our growth in software most of that is still on premise.

So I think while the Cloud is certainly moving workloads to public platforms, and it does create some headwind for our business, we still benefit from new technologies that I referred to earlier. We still benefit from our pivot to software-based solutions in Cloud. And so while it's not a one-for-one, part of our Cloud business is net new because it involves net new customers and net new suppliers.

And at the same time we've done a pretty good job with what I call shift, where legacy suppliers are converting their on-premise offering to something that I would call an as-a-service equivalent and we are enabling our channels to make sure that even that business stays with them. So I think we've got a line of sight to what's growing and what's not, and I think our Cloud initiative will continue to grow nicely for us and bring us new customers and new suppliers as well.

Thank you so much.

Lou Miscioscia, CLSA Limited

Hello, this is Garrett Hinds on for Lou. Just had a quick clarification. Any color on the mix of the growth in inventory between components or computer equipment?

We virtually have almost no inventory in the ECS business. We carry a little bit of inventory in Europe. But almost all of our inventory is driven towards the components business.

And is it fair to say a lot of it is in Asia? The growth industry?

No. The reality is if you look at inventory turns by region, our turns in Asia are actually faster than the other regions. So on a relative basis, I would say Asia is lower. That said, with 22% growth in Asia, as we mentioned many times before, when sales are down we generate a lot of cash because we're liquidating inventory. When sales are growing, we've got to make investments in inventory. And that's some of what's driving this quarter.

That's helpful, thanks. And in the Cloud opportunities, on the services side I'm just trying to understand. Are your Cloud services more recurring revenue type of things? Or is it services doing migrations which are more one time or one quarter or one half kind of a time frame?

You know, generally they tend to be multi-quarter, multi-year subscriptions. Whether it be for a software or for an infrastructure. We do do some work and some migration work, but most of it involves multi-period subscriptions.

Okay that is helpful. And then, do you guys have any plans to play in the hardware side of Cloud, selling into the hyper-scalers, possibly AWS, Microsoft Azure or Google?

We serve channel partners today that serve companies just like those. So we certainly tend to stay engaged with them and will look to do more in the future.

So it's mostly components, less assembling the components?

I'm sorry

No. I think what you're getting at is that in the case of some of the appliances, absolutely we sell that to our OEM computing business where for some of those companies, we actually build the appliances and then turn around and sell them. So there's a complete end-to-end distribution arrangement on those. As well as some of the companies you mentioned, we do sell through our resellers to them, and then in some cases, we sell their products to other end-users through resellers.

So, sort of the web we have weaved goes all the way through Cloud, goes all the way through appliance, goes all the way through security and even as Sean indicated, handles some of the mult-year service arrangements that go with that. And then, our Cloud, we are either prepared to sell software through or we will monitor others' activities as they want us to do that. That's especially good for startups so they don't need to build infrastructure and they can concentrate on their products with all of their money which will help them grow faster.

So hopefully that gives you a little better view of how we're thinking about it.

Mark Delaney, Goldman Sachs

Good afternoon, and thank you very much for taking the questions. The first question is a follow-up on the strong [summary] book-to-bill of 1.09 that you reported. How much of that would you attribute to potential share gain? And how much of it is more some of the company specific efforts? And you know, is some of this just a read on the broader macro environment?

Yes, Mark, it is Andy. Like you might imagine, it is a bit of both. We are definitely seeing some significant wins from the marketplace which is really share shift to us. But also as we have made the investments, particularly in our digital platform and our engineering and our field sales resources we are actually adding new customers to our portfolio. So, we are kind of pulling both levers at the same time.

Got it.

What we can tell you is the 25,000 new customers we have in here, I probably could do some research, but off the top of my head I can't tell you how many of those are first-time electronics buyers and how many have purchased from somebody else before.

We will try to get something like that for the future maybe.

Okay, and it leads me to my follow-up question on the ECS side. It seems like the macro environment is at least generally positive and, you know, supportive of a good book-to-bill. In the components business, you talk about a lack of budget flush though, in ECS.

I'm just trying to maybe marry the use of the macro benefits for components with some headwinds in ECS and kind of why that disconnect may be. Is any of that a potential acceleration of customer shifting over to Cloud?

Yes Mark I'm not sure that you can necessarily correlate the two. I think to the extent that we see headwinds in ECS, it's really mainly about legacy hardware. You know and that transition from the old tech to the new tech that we talked about, it's still going to take some time to play out.

So as we pivot to the Cloud and as we continue to drive software-based solutions, I do think that will be less exposed to the headwinds associated with legacy hardware, but I don't necessarily see that it's correlated to what's happening in the -- on the components side of the house.

Mark, what we have also said is the new hardware that is out is still growing at a 50% range here. And I think the budget flush woes were the old UNIX and sort of enterprise stuff from years and years ago, that we are not seeing that continue on. But these new, whether it's solid-state storage or any other new hardware equipment that's coming out, we are seeing growth and we're seeing fast growth in that. And my expectation is there will be a crossover point sometime.

But the truth is, when we built this business and we made the model changes, we went software, we went services and we went that will draw and pull hardware in the future. And that is the way that we've played this. And that is why you're seeing the operating income go up versus more than what you see in sales.

Again Mark, just one last point. You know, I said it earlier but if you look at the growth in the new tech as well as the growth in the software, most of that is still with on-prem solutions. So it doesn't mean the Cloud is not impacting the business, but it does mean there is still healthy demand on-prem for both private and hyper-Cloud solutions.

So I would just ask one last follow-up on ECS. The $350 million of wins that you mentioned. Are there further opportunities that can be sizable just from some of the decisions your customers are making? Maybe there's another big chunk of business that you may win in the next couple of quarters, or is that going to be more gradual from here?

You know Mark, I absolutely believe there are. And as I said, these things will take some time to ramp. But you know, we are open for business and you know are having a lot of great conversations with a lot of interesting channel partners these days so we will see how it plays out. But we're confident.

Thanks very much.

Sherri Scribner, with Deutsche Bank.

Hello, it is Adrienne Colby and for Sherri Scribner. Thanks for taking my question. Within component service and weakening in Europe after several quarters of growth, I'm just wondering, is all of that attributed to FX? If you could just drill into that a little bit.

Yes, it is Andy here. You're right. There are some currency headwinds in Europe but we are still very positive about our business there and the outlook as we highlighted early on, we have 15 straight quarters of year-on-year growth.

We're still seeing good, solid performance in the core industrial segment there, which as you know, is pretty important and pretty broad in that marketplace. We still see good performance in the sort of key verticals, such as transportation and lighting. And you know, as we talked about earlier on, we are sort of coming into 2017 with pretty healthy book-to-bills and pretty strong backlogs. So we are still pretty positive about our performance and our outlook in EMEA.

Great. And then just in terms of the components operating margin. Again, some of that slowdown that we saw, is that -- how much of that is really being driven by the higher mix of business in Asia or are there other factors in there as well?

It is pretty much all mix in Asia. As we mentioned earlier on, there is a little bit of currency headwind in Europe, but it is pretty much Asia mix.

Thank you.

Jim Suva, with Citi.

Thank you very much. When we look at your total company revenue and EPS guidance for the March quarter versus a year ago, it looks, generally speaking, even though you give a range of about flattish year over year. Yet, you talked a lot about, you know, conditional relationships with suppliers and things like that.

Is there a way to bridge why we're not seeing growth [in] FX, and if so, can you help us quantify -- I think on your prepared remarks, you gave some numbers. Were those quarter-over-quarter FX adjustments or year-over-year and help us understand kind of the puts and takes? Thank you.

Hi Jim, it's Chris. So the impact of currencies in Q1 over prior year on sales was about $70 million, so no small number. And that translates into a headwind on EPS of about $0.03.

I think when you look at the guide in total to the discussion around ECS and the strength in software and solutions and the way that translates into sales, that's also having an impact on that overall growth. So when you look at where we're guiding on components and (technical difficulty) ECS, I think that's a better way to look at it than looking at the total. But yes, $70 million in headwinds on the top line.

Okay, and so to quantify, is that kind of like a 1% to maybe 2% year-over-year FX headwind that should we think about that impacts the perception of kind of the lack of growth?

Yes, that is about right.

Okay thank you very much, and we really appreciate the details.

Shawn Harrison, Longbow Research

Hey guys, this is Frankie, filling in for Shawn. I just had a question about your ECS and components EBIT margins and how you view them in 2017. Obviously, you said hardware is supposed to potentially have some growth this year. So your mix not as divergent as last year. So just seeing, what are the drivers of ECS growth in 2017? And do you think you'll hit that 5% target in components this year?

Yes, it's Andy. On the components side on the 5%, you know, we're still -- we still have that as our goal. Obviously, we talked about it on a previous question. You know, with 23% per year growth in Asia, that makes that a little challenging to hit and we're not going to sacrifice growth just to deliver that 5%.

But as Mike and Chris pointed out earlier on, most of the investments to actually accelerate those growths have been made through 2016. And as we see that continued top line and margin growth, that should follow through and deliver us to those sort of target levels.

On the ECS side I would you say the drivers of growth -- we talked about some of them, certainly from a GP dollar perspective, our growth in software will be a big contributor. And we, obviously, are going to look to customer base expansion, new suppliers and then our pivot to the Cloud to continue to foster gross growth for us across the full year.

Got you. Thanks. And as a follow-up, did the Chinese New Year earlier than typical play into any of the book-to-bill that you posted. Can you expect any void or cause post the New Year?

I mean, calendar wise, it was certainly a little bit earlier this year than prior years, but we have it every year and we don't really anticipate any changes to our outlook for our Asia business both in Q1 or past Q1.

Okay. Thank you.

I think our Asia guys would like to come in and, you know, tell us that it's going to be a little less because it was a little longer but we're not buying into it.

Adam Tindle, with Raymond James & Associates, Inc.

Okay. Thanks, and good afternoon.

It sounds like we will have a very different pace to this year based on Mike's excitement beyond the first quarter. Seasonality appears to have changed pretty significantly, particularly in the computing business.

So just looking for any help you can give us in thinking about the shape of 2017 and seeing if I could put a parameter -- the last couple of years you've generated about 55% of EPS in the second half of the year. Might that be meaningfully different this year? How can we think about that?

Hey Adam, it's Sean. You are talking mainly from an ECS perspective or companywide?

Companywide.

From a companywide standpoint I would say that the way things were shaped in 2016 will be pretty consistent with the way they are in 2017. You know we spent a lot of time last quarter talking about different cutoffs. We don't have that issue this year so I think you can use last year as a guideline.

The only adjustment I would make to that is to some of the commentary Mike made about some of the recent wins that we had and the fact that those will be more skewed towards second quarter and second half as they ramp. They really are not impacting Q1 very much.

Okay, and on the computing business, Sean, you talked about some of the next generation data center technologies as key growth drivers. As you think about the line card, are there any holes that you would like to fill? And do you think you could do that organically or would you consider M&A?

You know, I think that we look at all avenues for growth. You know, we're going to continue to talk to all the key suppliers in the flash and hyper-converged space. We are aligned with most of the key ones.

We never rule out M&A, although we don't talk about it that specifically, but we're going to be well-positioned given our roots in hardware, in the enterprise data center, we are well-positioned for the next gen technologies as the growth rates demonstrate. So, over the long haul, I think we will be in good shape on that front.

And Mike mentioned the Dell relationship. How quickly can that ramp? And do you think it could become a $1 billion business similar to some of your other vendors?

Well, I won't quote numbers like that at this point. It is a little bit unknown. It is still new, but given the footprint we have with EMC, we certainly think that we have, you know, a good shot at some growth with that line.

Okay. One just last quick clarification on the ERP deployment. Is that completed? Or are you still incurring costs? And are there any other regions you need to implement? Thank you.

On the ERP piece we are still doing sort of horizontal implementation in the Americas. So, we expect that we will have that completed primarily this year over time. And there's not going to be any rush or any big bang or anything like that. It's going to operate much the same way you saw Europe and Asia. In fact, it has been. There's already aspects of that conversion that have taken place. And you know, knock on wood, it's all been without a hitch so far, without any problems. And we expect it to just continue that way, given our approach.

Thank you.

There are no further questions in the queue at this time.

Thanks, Tracy.

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. And the company undertakes no obligation to update publicly or revise any of the forward-looking statements.

Detailed information about these risks is included in Arrow's SEC filings. If you have 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.