Arrow profits pummeled 29 April, 2009 By Liam Lahey

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Sales decreased 15 percent year over year. Pro forma to include the impact of the acquisition of LOGIX S.A., sales decreased 18 percent year over year.

"We executed well in the first quarter, despite the persistent backdrop of global economic uncertainty and turbulence, with sales and earnings per share in line with our expectations. Cash flow generation was again a bright spot, as we generated more than $230 million in cash flow from operations, marking our 10th consecutive quarter of positive cash flow generation," said William E. Mitchell, chairman and CEO, Arrow. "We achieved our targeted level of cost reductions, and reduced expenses at a faster rate than the decline in sales. Our disciplined financial strategy and solid market position are competitive advantages, and we will continue to manage the company in a prudent, fiscally disciplined manner to increase profitability, maintain positive cash flow, and strengthen our already strong balance sheet.

"However, we cannot ignore the fact that economies around the world are still struggling with recessionary conditions, and this will continue to have an impact on our business. Our visibility remains extremely limited, and we are not prepared to call a bottom yet."

Arrow's global enterprise computing solutions (ECS) sales of $1.07 billion decreased 3 percent year over year. Pro forma to include the impact of the acquisition of LOGIX, sales decreased 13 percent year over year.

"Our ECS segment performed well despite the macro environment. We continue to see the integration of LOGIX in Europe going well, as sales in this region came in ahead of expectations due to strong performance in the U.K. and Southern Europe," added Michael J. Long, president and COO, Arrow. "While our visibility on revenue and demand remains challenging, we would expect second quarter sales growth to be at the low end of our normal seasonal range."

Global components sales of $2.35 billion decreased 20 percent year over year, primarily due to weakness in Europe and North America.

The results for the distributor's closest competitor, Avnet Technology Solutions, appeared fairly similar, although with a lower operating margin. For the third quarter fiscal 2009 ended March 28, 2009, it reported sales of $1.60 billion, down 10.8 percent year over year on a reported basis and down 3.8 percent when adjusted to exclude the impact of changes in foreign currency exchange rates. Sales in the Americas were down 11.1 percent. TS operating income was $42.2 million, an increase of 2 percent year over year, and operating income margin increased by 33 basis points to 2.6 percent.

Compared to Avnet's results of a 2.84 percent operating margin, Arrow's was better at 3.25 percent, noted Denise Sangster, president and CEO, Global Touch Inc.

Sangster said overall Arrow generated a healthy operating cash flow of $230 million. "Frankly, this was a positive," she said. "Arrow reduced its' inventory level by 11 percent. I would expect inventory levels to continue to drop for at least one or two more quarters.

"Sales dropped 15 percent on a quarter over quarter basis, which is not unsurprising. Given the 'cold' January/February sales period, I take this as a positive."

She also pointed out Arrow's ECS results were better than expected by most analysts. "Revenue was $1.07 billion, which was well above what most analysts expected. And, it is the fourth consecutive quarter that Arrow's computing margins (2.99 percent) were better than Avnet's (2.63 percent)."

On the whole, Arrow, like all channel partners, is under great pressure but it seems to be navigating the challenges, Sangster said.

"The key to managing their profitability will be to closely manage what's sold in each geography, which may reduce some margin pressure . . . and a continued focus on cost cutting programs," she said.

Paul Edwards, director, SMB & channel strategies, IDC, said his research firm's overall market assumptions for 2009 has gone down over time based on what's been happening from a macro economic perspective. And it's noteworthy that both Avnet and Arrow are value-added distributors with higher-cost models than broadline distributors, he said.

"Ostensibly they get a higher margin as well for that but they also rely more than other distributors on services that they provide to partners," he remarked. "If you look at the market overall in terms of demand for IT and things that are being cut back on within IT, it tends to be things like services . . . then there's the fact that distributors play more in the enterprise product space and with more value types of solutions . . . with a higher cost than what the broadline folks might pay attention to, so that's going to have an impact."

Michelle Warren, principal analyst, MW Research & Consulting, said despite Arrow's earnings tumble, it's important to note that due to the economy, distributors were hit by the lessening demand of IT departments. While there is significant benefits to upgrading and replacing IT equipment on a regular basis (i.e. improved performance, lower maintenance costs), it is an area where firms have cut back dramatically.

"Looking at Arrow's results -- they were hit on two levels. One by the lower demand of finished products (IT equipment) but also on the OEM side, as manufacturers cut back on manufacturing schedules (and therefore component purchases) due to weakened customer demand," she said. "In this case, its' diversification didn't help smooth its sales performance."

Economically, Warren said to look for some signs of improvement towards the end of the year. "The first quarter of 2010 should demonstrate some significant improvements over 2009," she remarked.

IDC's Edwards said he too is hearing 2010 will be when the earliest signs of an economic recovery will emerge.

"At least from a distributor perspective, when that up-tick happens it'll have a direct impact on them," he said. "Everyone in the IT industry has been hard hit here. When the rebound comes, the distributors will be on the front-end of that.

"If you look at the market, even though it's dropped, it's still a huge market . . . there's still a huge opportunity but you might not see the likes of Arrow and Avnet growing at the clip they may have in the past. That's not a possibility based upon business and consumer confidence as we have it."

Arrow officials said the company expects total second quarter sales will be between $3.15 billion and $3.75 billion, with global component sales between $2 billion and $2.4 billion and global enterprise computing solutions sales between $1.15 billion and $1.35 billion.