Arrow Electronics - Q2 2016
August 2, 2016
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc's second quarter 2016 earnings conference call. My name is Whitley, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If at any time during the call you require operator assistance, please press star followed by zero, and we will be happy to assist you. 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.
Steven O'Brien (VP of Investor Relations)
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.
Mike Long (Chairman, President, and CEO)
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've positioned Arrow to capture opportunities 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 was 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 multiyear 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 a thousand 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 a trusted enabler of hybrid cloud adoption. We made significant progress in our digital transformation efforts during the second quarter. We're 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 opportunities 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. When these IoT products reach the end of their life cycle, we're able to provide the necessary value recovery businesses.
So we see multiple touch points to capture value in any product's life cycle and believe our IoT reach and depth are unmatched. In closing, at Arrow, we're 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.
Chris Stansbury (CFO)
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 to 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 through our digital platform exceeded our expectations, and sales growth from our core small to medium-sized 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 lead times 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 ten 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 top line 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 Solutions 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 change. 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%-29%. Net income was $153 million, up 3% year-over-year. Earnings per share were $1.65 on a diluted basis, and we're 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 twelve-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. Now turning to guidance.
We believe that total third quarter sales will be between $5.65-$6.05 billion, with Global Components sales between $3.725-$3.925 billion, and Global Enterprise Computing Solutions sales, solution sales between $1.925-$2.125 billion. We expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.45-$1.57. Our guidance assumes an average non-GAAP tax rate in the range of 27%-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.
Mike Long (Chairman, President, and CEO)
Thank you, Chris. Whitley, could you please open up the call to questions at this time?
Operator (participant)
Ladies and gentlemen, if you'd like to ask a question, please press star, followed by one on your phone. Our first question comes from the line of Brian Alexander with Raymond James. Please proceed.
Brian Alexander (Research Management)
All right, 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 immixGroup last year, perhaps helping Q3 more than historical seasonality would suggest? Or are you more optimistic about the demand environment within computing?
Sean Kerins (President of Global Enterprise Computing Solutions)
So Brian, this is Sean. I think we're, you know, we're generally feeling pretty good about the second half in most markets. We have had the immixGroup over a year now. They're fully integrated. There's some good momentum at their back, and we feel pretty optimistic about the federal sector close. So I think that'll help us offset any differences in seasonality in Q3.
Brian Alexander (Research Management)
Just, could you just clarify, Sean, has seasonality changed, you know, for the third quarter and for the back half in general, relative to what we used to see?
Sean Kerins (President of Global Enterprise Computing Solutions)
You know, Brian, 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 a full year on board.
Mike Long (Chairman, President, and CEO)
Yeah, Brian, this is Mike. Maybe I can help you with that. You know, we have some 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, you know, 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, you know, the dollars haven't been big enough to have a crossover point, which would be driving the business, and that's what we're sort of dealing with inside. We do expect over the next few quarters for that crossover point to come, and then we believe we 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, that's just one of the headwinds that we've been working through. I hope that clarifies it a little more for you.
Brian Alexander (Research Management)
Yeah, it does. And just to follow up, Mike, on the components business, you mentioned declines at large supply chain customers in North America and Asia that impacted revenue. I guess, first part of the question is, is that a trend or an anomaly, particularly in North America? I haven't heard that before.
Mike Long (Chairman, President, and CEO)
I think it's a constant, Brian, that we have seen, and you actually saw some of the end user customers.
... you know, and 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, 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, you know, 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're gonna be in much better shape as that customer base comes back for us.
Brian Alexander (Research Management)
Okay. Yeah, I just wanted to clarify that there wasn't a change in strategy. Thank you.
Mike Long (Chairman, President, and CEO)
Yeah, no, no change in strategy, no change in the buying habits of those customers. Just sort of a, you know, a quarter where, I think everybody knew coming into it, it was gonna be interesting, and everybody's been waiting to see what was gonna happen.
Brian Alexander (Research Management)
Okay. Thanks, Mike.
Mike Long (Chairman, President, and CEO)
You bet.
Operator (participant)
Your next question comes from the line of Matt Sheeran with Stifel. Please proceed.
Matthew Sheeran (Managing Director and Technology Analyst)
Yes, 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 pushouts. Are those deals getting done this quarter? And are you seeing signs that you're back to seasonal demand trends in the U.K., or does that continue to be cautious?
Mike Long (Chairman, President, and CEO)
Yeah, what we saw, Matt, you know, with the Brexit thing was that we actually had a pushout that went out, that, you know, we'll 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 pushouts that 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, you know, sort of time, place, and utility things coming all together. But it was a note that we did have an actual pushout, you know, that started to equate to that kind of money, and that's why we exposed it, and we really don't see anything lasting with that right now.
Matthew Sheeran (Managing Director and Technology Analyst)
Got it. Okay. And then on the semiconductor side, 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 this, or how does it shake out?
Mike Long (Chairman, President, and CEO)
Yeah, right now we've actually seen, and are seeing, I should say, a benefit because our book-to-bills, 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're 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, you know, quarter or two, we will see another jump in our components business. It doesn't look like it was related to any one incident, you know, a 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?
Andy King (President of Global Components)
No, you're right. It wasn't a particularly, you know, driven by one event. You know, we've been in that order book backlog gaining mode for some time now, and it just continued to build momentum.
Matthew Sheeran (Managing Director and Technology Analyst)
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, you know, quarters between the design wins and actual production, so that's something that you should see next year on top of the backlog strength that you're seeing?
Mike Long (Chairman, President, and CEO)
Yeah, you-
Andy King (President of Global Components)
Yeah, you got it right. I mean, typically, we see the design indices precede to kind of bookings one, so one kind of leads into the other, which is why we track it so carefully, and you know, why we remain positive about the outlook.
Mike Long (Chairman, President, and CEO)
You know, Matt, it's interesting because we had, I think, in the second quarter of last year, around 69,000 design wins. We were about 75,000 this quarter, this year, so that's up about, you know, what is that? 8% or 9%, something like that. And some regions more, some regions a little less. So you know, 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 gonna go to, as long as it goes and it goes through us.
Matthew Sheeran (Managing Director and Technology Analyst)
Got it. Okay, thanks very much.
Mike Long (Chairman, President, and CEO)
Yeah, you bet.
Operator (participant)
Your next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed.
Mark Delaney (VP)
Yes, good afternoon. Thanks for taking the questions. 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, you maybe can update us on where you stand with your efforts to win that additional business. And, you know, what do you think that pipeline opportunity goes to now that we have the Linear and ADI news?
Mike Long (Chairman, President, and CEO)
Well, I think the Linear and ADI deal will, you know, specifically will play out. While we don't predict what they'll do. You know, we have great relationship with both of them. We have good sales with both of them. We frankly don't see anything changing of any magnitude. You know, 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 look at it, our sales are up. I think what you're going to see is exclusive relationships being just that. They're gonna be exclusive, and they're gonna be done very lightly. And it's gonna depend on the technology, you know, 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, you know, all that much. And, 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, you know, that's really what they're, they're looking for access for, that and the engineering capabilities of their products. So that underlying, you know, 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. You know, they're gonna push us to do 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.
Mark Delaney (VP)
That's helpful. And for a follow-up question, just 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 basis points year-over-year, and maybe not quite as much of a growth that we saw year-over-year in the June quarter. Is that just maybe more normalization in mix? Because it sounded like mix was particularly good in June, or any color you can provide there will be helpful.
Chris Stansbury (CFO)
Yeah, Mark, it's Chris. Really, from our standpoint, we expect the, you know, the margin improvements 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, you know, where we're headed.
Matthew Sheeran (Managing Director and Technology Analyst)
Thank you.
Operator (participant)
Your next question comes from the line of William Stein with SunTrust. Please proceed.
William Stein (Managing Director and Senior Analyst)
Great. Thanks. 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? Pardon me, and then if you anticipate any ongoing benefits from that.
Mike Long (Chairman, President, and CEO)
First, I think that, you know, while I'm not over there and don't know the situation, I think what I did know is there was about a six-day hangup. Customers don't switch for six days. I think they'll figure out, you know, whatever their issues are, and they'll, they'll fix them. So, you know, that's not really what we attempt to do. And, I think that, you know, we're growing our business sort of the old-fashioned way, going to customers, giving them better service, and that's what's, that's what's helping us. We're bringing them more products. We're gonna continue playing 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, it never builds a lasting customer, so that's really not our focus.
William Stein (Managing Director and Senior Analyst)
I appreciate that. Thanks, Mike. One follow-up, if I can,
Mike Long (Chairman, President, and CEO)
Mm-hmm.
William Stein (Managing Director and Senior Analyst)
regarding the supplier consolidation.
Mike Long (Chairman, President, and CEO)
Sure.
William Stein (Managing Director and Senior Analyst)
I just wanna 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 in 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 in distribution, is it a narrowing or a broadening?
Mike Long (Chairman, President, and CEO)
Right. And, you know, if you take the Avago Broadcom, we really didn't have the line in the US and in Europe, you know, and what we did have-
William Stein (Managing Director and Senior Analyst)
Mm-hmm.
Mike Long (Chairman, President, and CEO)
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, you know, 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, you know, we were a huge winner in the transition of that and the new products that they have to sell, and we believe that's gonna bring big upside for them and a big upside for us. Overall, I don't think this is anything you guys should be losing any sleep over, because it's really not anything we're losing sleep over at this point.
I think you could speculate all day long, but the bottom line is, you know, whether you like it or not, Avnet 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.
William Stein (Managing Director and Senior Analyst)
Thanks, Mike.
Mike Long (Chairman, President, and CEO)
Mm-hmm.
Operator (participant)
Your next question comes from the line of Shawn Harrison with Longbow Research. Please proceed.
Shawn Harrison (Senior Research Analyst)
Hi, 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? And do you have a full year target you could give me?
Chris Stansbury (CFO)
Yeah, we don't obviously, you know, put out full year targets. But I would say that the fact that we're delivering, you know, 110% of GAAP net income versus our target of seventy percent, you know, speak to the fact that really, I think we're on trend, and there's gonna be, you know, slight movement around that average. But overall, we don't expect to see any significant change in that trend line.
Shawn Harrison (Senior Research Analyst)
Okay. And then as a follow-up, Mike, a big picture question. Early in the presentation, you highlighted, you know, 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, you know, 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 wanna 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?
Mike Long (Chairman, President, and CEO)
Yeah, I would say that 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. You know, 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, you know, 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're 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 gonna stick to the guns that we have. We already have a big, robust digital business. We're 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. The other thing is, we just have no interest in moving into the industrial distribution space, so that's a clear differentiator now between the two companies.
Shawn Harrison (Senior Research Analyst)
Perfect. And just as that, the IoT, you know, where was it a couple of years ago? I think you said it was 10% of components right now, or something in that, in that-
Mike Long (Chairman, President, and CEO)
Yeah, 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 we're measured, and I think it's a pretty big surprise that it's growing to that in our business. It's sort of the race 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 gonna be something that's gonna continue to grow, and I think it'll ultimately drive the market.
I mean, just think of anything IoT, when you—I mean, you can take it as simple as the door locks on your front door, or somebody knocks on your door, and you got a camera on them, and you can talk through your cell phone to tell them you don't want anything of what they're selling and send them on their way and have a picture of them. You know, 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, you know, down the road over the next five years.
Shawn Harrison (Senior Research Analyst)
That's great. If you have a few of those solicitation cameras, you can send them my way.
Mike Long (Chairman, President, and CEO)
There you go.
Operator (participant)
Your next question comes from the line of Steven Fox with Cross Research. Please proceed.
Steven Fox (Managing Director)
Hi, thanks. Good afternoon. Just, first question, following up on some of those comments, Mike. As you guys build out this digital platform, can you just 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, are you just 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, on why you're optimistic sector spend into the fall, and if there's any difference between the types of products that they're spending on versus what we'd look at across a typical commercial bank?
Mike Long (Chairman, President, and CEO)
Yeah.
Steven Fox (Managing Director)
Thanks.
Mike Long (Chairman, President, and CEO)
Yeah, sure. Actually, I'm gonna let Andy take the digital piece of that.
Andy King (President of Global Components)
Yeah. I mean, from our standpoint, we have our customers that are basically, you know, trading with both parts of our channels to market. We have customers that are doing, you know, online design activity, and then as that project becomes more tangible and more real, then we're deploying more of our traditional sort of hard resources in the field to take that product through to production 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, you know, our customers. They choose how to interface with us. We need to provide them with the necessary capabilities to do 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.
Mike Long (Chairman, President, and CEO)
So in essence, that's really been our strategy from the beginning. You know, trying to be as customer focused as we are, we're 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, you know, that's a direct tie with our internet.
Steven Fox (Managing Director)
Right.
Mike Long (Chairman, President, and CEO)
And then on Indiegogo, a lot of the designs that are coming up are basically going to be now Arrow approved designs, which should tell people that the product can be built for the price that they say it can, and will also say that we sort of validated the engineering and the product should be pretty good. So, you know, that's gonna be sort of a good housekeeping label that you'll 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're really doing is, we are 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 with their supply chain. That's our strategy, has been our strategy, and is gonna continue to be our strategy. Sean, you wanna answer the federal government piece?
Sean Kerins (President of Global Enterprise Computing Solutions)
Yeah, sure, Steven. So 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, you know, we're helping add to their line card, we're helping them expand their customer base. And as you know, September is the end of the U.S. federal budget season. And so there's always a pretty big uptick in Q3, and specifically in September. And, you know, 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.
Steven Fox (Managing Director)
Great. That's all very helpful. Thank you very much.
Sean Kerins (President of Global Enterprise Computing Solutions)
Mm-hmm.
Operator (participant)
Your next question comes from the line of Ananda Baruah, Brean Capital. Please proceed.
Ananda Baruah (Director of Research and Sr Equity Analyst)
Hi, thanks for taking my question, guys. Two for me, if I could. I guess, the first is, was there anything that manifested during the quarter, that was different from your expectations, 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, you know, sort of just ongoing demand trends and some of the areas you're exposed to, are you expecting to be, you know, kind of contributive to the second half of the year in your forecast? And I have a follow-up. Thanks.
Mike Long (Chairman, President, and CEO)
Yeah. Okay. So, your first question, the only thing that we had a little bit of surprise was sort of Brexit, you know, coming into the quarter. Everything really went off of plan. We, we sort of disclosed how we saw that push out, you know, affect our business. My guess is that's the only difference between you guys calling this quarter a home run and, and sort of being, you know, ho-hum about it, which, you know, for us, we set records in all three categories, so it's, it's kind of exciting. But, but in the end, you know, that's a, that's sort of a difference, and we saw that.
I guess, you know, I've become accustomed now that there's 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, you know, 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, you know, the new cloud server stuff, really often running at a rate that can, you know, offset for us, what is and has been a normal storage decline. That'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.
I mean, it's, it's kind of funny, if we didn't have those headwinds, we would, we would be sitting here with unbelievable records. But the fact is, that is the nature of the business. The business is always gonna change. We're gonna have to adapt. We're gonna have, you know, more investment in cloud, we're gonna have more investment in digital, we're gonna have more investment in IoT, and I would expect that those things are gonna be upsides for us in the second half, past what we've, we've thought of. So hopefully, that answers your question. But we're not going into the second half with a bad attitude. We're going into the second half thinking that, we're gonna do a pretty good job in the market.
Ananda Baruah (Director of Research and Sr Equity Analyst)
Hey, 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 their March quarter results, you know, your biggest competitor actually on the earnings call, and then at some of the subsequent conferences, have talked about the need to sort of get more competitive in certain areas and 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, you know, sort of, so how is it showing up?
Mike Long (Chairman, President, and CEO)
I think there's, there's a difference of strategy now that probably is highlighting itself in a more acute way, that shows there's, really differences in, in the companies, and it's something I've been touting for, you know, five years now, where we've been headed, I think it's starting to show up. And, you know, come on in, the water's warm.
Chris Stansbury (CFO)
Okay, guys. Thanks a lot.
Mike Long (Chairman, President, and CEO)
You bet.
Operator (participant)
Your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed.
Matthew Sheeran (Managing Director and Technology Analyst)
Hi, thanks. I wanted to dig into the ECS segment a little bit. The growth rate decelerated, and in the press release, you talked a lot 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 gonna 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're seeing pretty significant shifts? Thanks.
Mike Long (Chairman, President, and CEO)
Yeah, from a high level, Sherry, one of the reasons that we're not coming out with new targets for the computer business is that, you know, the hardware will catch up again and grow. Especially, you know, 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, you know, there will be some crossover points where we're not sort of artificially diluted by, you know, rotating storage piece.
And once that crossover point comes, you will have, you know, growth again in hardware, which is typically a little less profitable than our services and software piece that, you know, we actually do some work on, and you know, help customers get that integrated. That's what we are struggling with. It looks good now. I mean, 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're not gonna have the solution, which is what we're known for, and that's what we're gonna continue to drive. But that's the-- that's sort of the, you know, the macro problem that...
Actually, it's more of a micro problem that we're dealing with now, but we fully expect for that to be self-correcting over the next few quarters.
Matthew Sheeran (Managing Director and Technology Analyst)
Thanks very much.
Mike Long (Chairman, President, and CEO)
Mm-hmm.
Operator (participant)
Your next question comes from the line of Jim Suva with Citi. Please proceed.
Jim Suva (Managing Director)
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're 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 went, was lower?
Mike Long (Chairman, President, and CEO)
Oh, yeah. Yes, Jim, I, 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're 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, you know, 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 gonna 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 gonna spend the money whether they like it or not, and I think that's the, that's the situation here also. I'll turn the second piece over to Chris.
Chris Stansbury (CFO)
Hey, Jim. Yeah, on the cash flow, again, overall, we're very confident that we'll continue on this 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're seeing internally and externally is a little bit of distortion around the quarter cutoff. This year, we closed on July 2nd, whereas last year, we closed before the end of June. And I think with those, 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.
Jim Suva (Managing Director)
Thank you so much for the clarification and, the details, gentlemen. Thank you.
Operator (participant)
There are no further questions in queue. I'll now turn the call over back to Mr. Steve O'Brien. Please proceed.
Steven O'Brien (VP of Investor Relations)
Thanks, Lee. 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, 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.
Operator (participant)
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.