Arrow Electronics - Q2 2020
July 30, 2020
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the Arrow Electronics second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Steve O'Brien. Thank you. Please go ahead, sir.
Steve O'Brien (Head of Investor Relations)
Thank you, Takang. This is Steve O'Brien with Arrow Electronics, and welcome to our second quarter 2020 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, some of the figures discussed on today's call are non-GAAP. 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'll now hand the call to our Chairman, President, and CEO, Mike Long.
Mike Long (Chairman, President, and CEO)
Thanks, Steve, and thanks to all of you for joining us today. First off, I'd like to thank our global employees for their commitment, professionalism, and teamwork during these extraordinary times. The critical engineering, design, and supply chain services they provide to our customers, our suppliers, and partners, create technology that protects and improves our way of life. The health of our people always comes first, and thanks to their thoughtful and diligent work, our offices, our facilities, have been kept safe, and our business is moving forward. Over the course of a few months, we've learned a lot about the practices necessary to keep the business going while protecting our people. We remain diligent.
We're increasingly optimistic that we have found a sustainable way to do business and actually thrive in the coming quarters. On April thirtieth, we provided an outlook for the second quarter. We recognized then, and now, that to guide innovation forward, we must maintain our reputation for transparency. In addition, we have a long-held belief in the power of data from the billions of transactions we do with thousands of customers across dozens of industries. As a result, I'm pleased to report that we exceeded our quarterly earnings guidance for the quarter. In fact, we've met or exceeded our guidance 46 times in the last 50 quarters.
As we reflect on what we can do to achieve long-term success, it's important to recognize both the items that are in our control and those that are not. We can't control the demand for cars, data center equipment, or electronic devices. However, we can continue to position our business for rapid sales acceleration and mix shift to higher-margin engineered components and solutions.
One way we're doing that is by adding to our engineering and our sales teams today. We've seen great opportunity to drive leverage from design, engineering, and marketing that will benefit our customers and suppliers. Another way for Arrow to position for the eventual improvement in demand is to execute on the business model and to strengthen the balance sheet. Our results this quarter showed just that. Cash flow from our operations totaled $418 million, $1.7 billion over the last 12 months, and we have also reduced debt by $1.1 billion over the last year. We remain confident in our long-term strategy and execution. Therefore, we increased our commitment to returning excess cash to our shareholders with an additional $600 million of share repurchases. Arrow remains focused on maximizing our near-term opportunities while positioning our business for the long term.
Design activity reached an all-time record for any quarter in our history, and our design activity has actually increased year-over-year for the third quarter in a row. Typically, this is a good leading indicator of an improving market, and this is why we keep investing in our engineering capabilities. Other indicators are consistent with short-run stability. Second quarter backlog increased from the first quarter, the third quarter in a row of sequential improvement. Lead times were consistent with the first quarter and with last year. Global Components book-to-bill was 1.07, exiting the second quarter. Book-to-bill was highest in the Asia region, where the pandemic recovery is happening sooner. Our Americas Customer Sentiment Survey showed some improvement.
The percentage of customers saying they had too little inventory increased compared to last year, and the percentage of customers saying they had too much inventory decreased compared to last year, but also remained higher than normal. To date, we've not faced significant challenge securing the parts our customers need. Turning to enterprise computing, in the second quarter, sales were slightly above our midpoint expectation. Like last quarter, we experienced strong demand for the solutions that enable the work from home and the business continuity. Security software sales were strong and storage sales increased compared to last year.
We remain confident in the consistent growth from data, from connected devices and objects, and we believe that that will be a long-term tailwind for our business.... Taking a step back, I want to emphasize that as a company, we have a long history on capitalizing on downturns and disruptions. Despite the current environment, we continue to improve our team's leading design and demand creation for Global Components, hybrid cloud for Enterprise Computing Solutions, and we can fund these investments with efficiencies that we gained from our superior operational platform.
We expect these investments to drive exceptional profit leverage in the long term. In closing, we're continuing to support our stakeholders and communities. We're committing to providing our customers with the products and solutions they need when they need them. We remain disciplined and focused as we operate our facilities and businesses through these uncertain times. Over the last several months, we've worked diligently to avoid disruption and are confident we'll continue to do so as we operate as a critical provider to the global technology and industrial ecosystems.We will not stop looking for opportunities to expand our business, drive innovation, and improve the performance of our end customers everywhere. I'll now hand the call over to Chris to provide more details on the second quarter results and our expectations for the third quarter.
Chris Stansbury (SVP and CFO)
Thanks, Mike. As I did last quarter, I'm going to keep my review of our results relatively brief to allow more time for questions. Second quarter sales were $6.61 billion. Sales increased 4% quarter-over-quarter and decreased 8% year-over-year as adjusted. The average euro/dollar exchange rate for the quarter was exactly in line with our expectation. Global Component sales were $4.72 billion. This was above the high end of our prior guidance and represents an 8% year-over-year decrease as adjusted. I mentioned last quarter that industry destocking has been going on for more than one year. This quarter, Global Component sales increased sequentially for the first time since the second quarter of 2019.
Demand in Asia has been resilient, and as we expected, the Americas and Europe were hard hit by the aerospace and transportation industries. Global Components operating margin was 3.8%, down 10 basis points year-over-year. This was mainly due to regional mix, with Asia contributing 45% of Global Components sales, up from 37% in the first quarter and 38% last year. Enterprise Computing Solutions sales of $1.89 billion decreased 8% year-over-year as adjusted, and were above the midpoint of our prior expected range. As we've said in the past, uncertainty is bad for IT spending, and Enterprise Computing Solutions is likely a later cycle business than Global Components. That said, we believe some of the delayed investments in mission-critical technologies cannot be pushed out indefinitely.
Billings were approximately flat year-over-year, adjusting for changes in foreign currencies. We experienced strong demand for security and storage solutions, while demand for servers and networking declined meaningfully year-over-year. Global Enterprise Computing Solutions operating income margin decreased by approximately 60 basis points year-over-year to 4.3%. Similar to what we saw in the Global Components business last year, demand from smaller customers who rely on more of our capabilities has been weaker in this downturn. Demand from larger, better capitalized customers has been more resilient. Returning to consolidated results for the quarter, interest and other expense of $32 million was below our prior expectation due to lower borrowings and lower interest rates. The effective tax rate of 24.1% was in line with our expectations.
Earnings per share were $1.59 on a diluted basis, exceeding the high end of our prior expectation. Turning to the balance sheet and cash flow, we reported strong operating cash flow of $418 million. During the second quarter, we reduced borrowings by approximately $257 million, principally through the maturity of a $209 million, 6% note retirement. Our balance sheet is in great shape, and our liquidity position remains strong. Current, committed, and undrawn liquidity stands at over $3.2 billion, excluding the $206 million cash balance that we have on hand. We're closely monitoring credit and receivables. Collections remain healthy, and DSO increased, but in line with DPO. This was due to the further expansion of customer engagements during the quarter that are neutral to working capital.
As we've said in the past, it's fair to measure our performance by the cash conversion cycle, not by any one metric in isolation. The second quarter cash conversion cycle was four days shorter than last year. We returned approximately $75 million to shareholders during the quarter through our share repurchase plan. The remaining authorization under our existing plan was approximately $113 million. The new $600 million dollar authorization increases the total to $713 million. Please keep in mind that the information I've shared during this call is a high-level summary of our financial results, and for more detail regarding the business segment results, please refer to the CFO commentary published on our website this morning. Now turning to guidance. Again, this quarter, we're providing wider than normal ranges to account for increased volatility given the current environment.
With that said, we're forecasting consolidated sales to be approximately flat compared to the second quarter, with higher Global Components sales and lower Enterprise Computing Solutions sales, which is typical for the third quarter. We expect a slight increase in earnings per share compared to the second quarter. However, the percentage decline in earnings per share looks unfavorable on a year-on-year basis. Compared to the third quarter of 2019, current demand conditions in the Americas and in Europe remain significantly depressed for both businesses. With that, I'll turn the call over to the operator for Q&A.
Operator (participant)
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Shawn Harrison of Loop Capital. Your line is open.
Shawn Harrison (Managing Director and Equity Research Analyst)
Hi. I guess morning, everybody. Wanted to dig in on the free cash flow and just the expectations for the back half of the year. You've generated a heck of a lot, you know, as you said, over the past 12 months, and a substantial amount here in the first half. But do you anticipate generating, you know, free cash flow or cash flow from operations in the back half of the year, but maybe at a slightly lower level? Any details on that would be helpful.
Mike Long (Chairman, President, and CEO)
Yeah, I'm gonna have, Chris take that one. We have a pretty good forecast for the back half.
Chris Stansbury (SVP and CFO)
Yes, Sean, we do think that cash flow will remain strong. And keep in mind that in the first half, we did have favorability from the EMEA securitization of about $350 million or so. So if you, if you normalize that out, that, that, that kind of rate, I think is, is something that's not unreasonable for the back half, certainly what we're targeting.
Shawn Harrison (Managing Director and Equity Research Analyst)
Okay. And then as a follow-up, wanted to get in, I guess, two dynamics. Within the guidance, are you seeing any supplier share shifts begin to ramp? And then if you could talk about the big industry consolidation that was announced this quarter, and whether you think you could be a potential beneficiary as it closes in 2021.
Mike Long (Chairman, President, and CEO)
That's a great question, Sean. I appreciate you asking it the way you did. Actually, so far, anything that we've seen from any supplier programs has been not material. In fact, the growth rates we've seen, our book-to-bill being positive, the backlog increasing quarter to quarter, has been more broad-based growth for us right now. And, we really, really aren't expecting a windfall from anything, to be honest with you. If anything happens in 2021, that would be great. We'd welcome it. We don't have to add any cost. We're prepared to handle anything that would come our way.
But you know, I want to be clear that what we've seen in bookings, backlog, the inventory increases has really been broad-based with Asia Pac leading the way, and then obviously the business in North America and Europe not being as healthy as it has or as you know we've seen in the past. But things could have been a lot worse in both of those locations, too. So we're pretty comfortable that we're gonna be looking at some progress in the second half.
Operator (participant)
Your next question comes from Adam Tindle of Raymond James. Your line is open.
Adam Tindle (Managing Director)
Okay, thanks. Good afternoon. I just wanted to, maybe first touch, either Andy or Mike. Obviously, western regions and components are challenged. This was initially the case in Asia, but that seemed to bounce back very quickly. I know this is a million-dollar question, but if you could just touch on the timeline to recovery in EMEA and Americas and how that might be similar or different than Asia. Doesn't look like it's gonna be September based on guidance. Could you see year-over-year growth in the December quarter in those regions? Just any color commentary would be helpful.
Mike Long (Chairman, President, and CEO)
Yeah, what we've seen so far and is a steady increase in bookings. We've seen a steady increase in backlog. So we don't believe there's any double ordering going on or anything like that at this point in time. We have seen customers being resilient. And what I mean by that is, typically in a downturn, once you see the design activity really start to pick up, that sort of has, in the past, given us a signal. Now, we've never had COVID on top, you know, of an economic decline. And I want to be clear, if you go back and look at this, the economic decline started before COVID, and then COVID was laid on top of that. So, you know, if people can stay open, I would think we would see a steady increase in performance from here.
You know, there's just so many things that start and stop it with geopolitical tariffs, you know, some of the silver bullets that the U.S. did to themselves for manufacturing. But all in all, we're feeling pretty positive about the second half outlook. We would be expecting something a little more in the December and, you know, January quarters. Yet that would, that would fall in line with a normal decline and a normal return out, but we're not expecting this huge V-shaped thing right now. We're seeing it build steady, and, and we actually believe that that's how it's gonna work.
Adam Tindle (Managing Director)
Got it. That's helpful, Mike. Maybe you could, just as a follow-up, touch on, operationally, how you're thinking about reaching a turning point for the declines in operating margin and operating profit dollars. We know Arrow is a best-in-class operator, but the metrics are off right now, and if I heard you right in the, commentary, that you're committed to keeping investments versus cutting costs, which seems to make sense based on what you're talking about. So maybe just double-click on that decision on why and the timing to see the turning point in, operating margin and operating profit dollar declines. Thanks.
Mike Long (Chairman, President, and CEO)
Well, if you take the, you know, the operating margin of the company right now and compare it considering we're down, I don't know, something like $700 million, right? Year on year here, it's how quick that $700 million come back. But if you were to lay the $700 million on top of our costs and what you see today, I think you'd see a very different Arrow coming out of this downturn, and I think that's really a positive. We've really been able to take back office efficiencies and move them towards the front office. So if you look at our costs, an investment is really not an investment, it's a transferring of funds that we already had.
So, so I think the important thing to note is, we've made the company much more efficient than it was prior to going into this downturn, and we've added revenue-generating resources that get paid on additional revenue. So that has become a variable cost for us versus all those fixed costs we had before. And we were really able to do that because of that platform, that computer, platform change that we, as you know, finished, you know, a year and a half ago. So we're now starting to get the benefits from that investment, and, we think it's going to be even more efficient when we get back to those same levels.
Will we be back to that in January? I don't know. I don't, I don't know. I can't, I can't call it. It's really gonna be based on, Europe and North America. But the real positive that I can tell you here is look at how much the mix of Asia was this quarter, and then think about the mix of adding those other two and bringing them back. It's gonna be a pretty positive story.
Adam Tindle (Managing Director)
That's helpful. Thanks, Mike.
Mike Long (Chairman, President, and CEO)
Mm-hmm.
Operator (participant)
Your next question comes from Ruplu Bhattacharya of Bank of America Merrill Lynch. Your line is open.
Ruplu Bhattacharya (Director and Equity Research Analyst)
Hi, thanks for taking my questions. Chris, I wanted to touch on your thoughts on the business mix within ECS. Looks like over the last couple of quarters, you've been having good growth in services and in software. So when you think about recurring revenues within ECS, do you think that can grow over time as a percent of total revenue? And can that add, you know, help the margins and the stability of the revenues?
Mike Long (Chairman, President, and CEO)
Yeah, I think we're gonna have Sean answer that one. He's been, he's been tracking that particular business for us pretty close.
Sean Kerins (President of Global Enterprise Computing Solutions)
Yeah, thanks for the question, and by all means, our recurring revenue is absolutely growing. Keep in mind, we're going after two really important future growth opportunities, both of which we believe, you know, represent better return opportunities for us. One is all about the market for hybrid and multi-cloud, and we're going after that through our platform called ArrowSphere. We think it'll be a big piece of our selling motion in the future. And the other is all about, you know, continuing to add line card with software suppliers that are very relevant when it comes to, you know, the management, the support, and the security of these cloud deployments. The reason we like, you know, that forward look and that investment strategy is that, in fact, more and more of that business will be recurring in nature.
And as we deliver on those revenue streams through a digital experience, we, we do expect the contribution margins will improve over time. So our recurring revenue in the second quarter grew by north of 40%, as delivered through our ArrowSphere platform, and we think that's a good sign of our, you know, continued participation in the cloud marketplace.
Ruplu Bhattacharya (Director and Equity Research Analyst)
Great. Thanks for the details on that. I appreciate it. Maybe Chris, another question for you is, you know, you talked about, you know, the free cash flow, which was strong. You know, given that your liquidity position is also strong, at this point in the business cycle, would it make sense to look at inorganic growth, maybe look at M&A? And you just had a new $600 million repurchase authorization. So maybe just give us your thoughts over the next 12 months on uses of cash, how you think about buybacks versus M&A versus, you know, reinvestment in the business. Thanks.
Mike Long (Chairman, President, and CEO)
Yeah, this is Mike. I'll start with this and let Chris add. First off, yes, we could do something. However, you know, we don't see anything out there of a size or a scale that would largely change the complexion of Arrow at this point. Secondly, you know, as you know, our uses of cash, we've been very clear, internal growth was another investment of ours, and we believe we've largely put in all the investments we need to operationally to grow in the future, which really leaves us with additional sales and engineering people down the road as the customer base would expand and as the sales would expand. And then third was our return to shareholders.
Well, as you know, going into the downturn, we had accomplished the first two, but we really didn't give our return to the shareholders. We believe right now, where we are in the cycle with the pandemic, with our balance sheet, that right now is really the perfect time for us to do a share repurchase, and so we're really going to pursue that avenue at this point. Chris, would you like to add any more to that?
Chris Stansbury (SVP and CFO)
Yeah, I just, just to add what Mike just said, obviously, the focus over the last year has been making sure that our debt was right-sized to the EBITDA that we're generating. And we think we've effectively done that and largely done that. So, you know, as we go forward with no, you know, real... you know, M&A opportunities on the horizon, the share repurchases will be the focus.
Ruplu Bhattacharya (Director and Equity Research Analyst)
Okay, great. Thanks for all the details. Appreciate it.
Chris Stansbury (SVP and CFO)
Mm-hmm.
Operator (participant)
Your next question comes from Tianxiao Hou of Citi. The line is open.
Tianxiao Hou (Analyst)
Hi, thanks for taking -
Mike Long (Chairman, President, and CEO)
Hello?
Operator (participant)
Oh, my. Sorry about that, he dropped. Your next question comes from Nikolay Todorov of Longbow Research. The line is open.
Nikolay Todorov (Senior Research Analyst)
Nick, can you hear us?
Operator (participant)
Uh.
Nikolay Todorov (Senior Research Analyst)
Hello, can you hear me?
Chris Stansbury (SVP and CFO)
Yeah, we can hear you.
Nikolay Todorov (Senior Research Analyst)
Okay. Okay. All right. I don't know what happened. All right. Sorry. Thanks for taking the question, guys, and good morning. I wanted to impact a little bit the ECS business. So if you can talk a little bit from what are you seeing from a pipeline perspective in the hardware side for the second half? And related to that, how should we think about the operating margins for the business? I know you commented last quarter that we're going to see an improvement, and we should have because of the higher mix of software and recurring revenue. But how should we think about that in the second half of the year? You typically see a very nice double digits incremental margin into the fourth quarter related to the budget flushes. Any comments around that would be helpful.
Chris Stansbury (SVP and CFO)
Sure, Tom.
Sean Kerins (President of Global Enterprise Computing Solutions)
Sure, Nick. So, you know, I'll start with just suggesting, you know, Q4 is a little bit tough to call. You're right, it's seasonally the biggest quarter of our year, so we would normally expect pretty good operating leverage in the quarter. You know, right now it's tough to see too far past Q3. What I would say for Q3 is that we're looking at similar mix and demand trends, you know, as compared to what we saw in Q2. You know, there's still some tailwind associated with, you know, work and learn from home. We think that our security pipeline looks fairly healthy. Lots of customers need to secure their virtual and remote working environments. Hardware is a little bit of a mixed bag.
Obviously, you know, the overall IT spending environment on premises is down, you know, for lots of good reasons. But we're actually doing okay from a data storage perspective, and that has a lot to do with the size of our install base, and frankly, the adoption of the new architectures, specifically hyperconverged. We really have a good representation and good exposure to that market. I think if you look at, you know, large company versus small, you know, the more business we do in the larger end of the market, you know, the more challenging that gets from a gross margin perspective, as Chris pointed out. You know, the mid-market and the partners that serve them tend to be, you know, the places that more fully appreciate our value. That will come back.
Your guess is as good as mine as to when it does, but we're fairly confident in our strategy, and we're going to stay on the path I just outlined a few minutes ago, and I think that will, that will bode well for, you know, operating margin in the future.
Nikolay Todorov (Senior Research Analyst)
Okay, great. And as a follow-up, in the component business, can you first talk a little bit about bookings linearity in the second quarter, globally, maybe? And what are you seeing so far in July? And related to that, I think, and Chris, in your CFO commentary presentation, you mentioned that European margins in the component business decreased in the second quarter. I think if I recall correctly, this is one of your more profitable areas in the component business. Can you talk about the reasons behind that, and if that's what's the outlook for that reversing in the second half? Thanks.
Andy King (President, Global Components)
Hey, Nick, this is Andy. I'll take a swing at this one. So from a booking standpoint, it was, as Mike mentioned in his commentary, it was very much Asia-led. And that started off pretty much through the April and May timeframe, and continued into June and beyond. So it was a slow and steady ramp through the quarter, to get out of the way I would articulate it, with June being the high point. July has been pretty normal in terms of the way that we see the July bookings rate continue. So that gives us some confidence in the outlook, you know, going forward.
In terms of your, your second question, I think what Chris said was the operating margins were diluted by mix rather than any specific business having any individual dilution effect, and that was because Asia jumped from 37%-45% of our business in the quarter, which had the dilution effect. It wasn't about individual businesses having any quarter-on-quarter decline. If that answers your question, Nick.
Nikolay Todorov (Senior Research Analyst)
Yes. Okay, great. Thanks, guys. Bye.
Andy King (President, Global Components)
Welcome.
Operator (participant)
Your next question comes from Tianxiao Hou of Citi. The line is open.
Tianxiao Hou (Analyst)
Hello, can you hear me?
Chris Stansbury (SVP and CFO)
Yeah.
Sean Kerins (President of Global Enterprise Computing Solutions)
Yep.
Tianxiao Hou (Analyst)
Hello. Great. Thanks for adding me back to the question line. So your Asian business, component business grew roughly 7% year-over-year, which is much better than the Americas and Europe. Can you maybe just elaborate how much of that is due to share gains, given you highlighted power management strengths, and how much of that is due to the market demand strengths in Asia?
Chris Stansbury (SVP and CFO)
Actually, we sort of indicated before that the Asia growth was broad-based.... it was across every line. So it's an economic rebound for us from, what we saw before and just, you know, sort of a bounce back after COVID. Hopefully, it will, it will continue on through the year. But as you know, we've been increasing our engineering and sales capability in Asia, and that has paid off very well, for us over the last, couple of years, and we're seeing that, really take effect. As far as market share, I don't have market share figures in yet. It's way too early after the end of the quarter, but I'm not assuming any major, share change, quarter-on-quarter. I think it's just pure economic there.
Tianxiao Hou (Analyst)
Great. So if I look at your guidance, component sales will be above normal seasonality, but the margins must still be down on year-over-year basis. So with your current vendor and customer exposure and potential share shifts in the future, how should we think about your margins for component segment post-COVID-19? Thank you.
Mike Long (Chairman, President, and CEO)
Well, I would expect them to go up. Remember, the first thing that gets cut, and it's not just COVID. So, you know, all of these comments are tempered by COVID, and what was an economic decline before. Typically, in an economic decline, the high engineering products are the ones the customers stop buying first, so they're trying to control their inventory because that's where the vast majority of the dollars are. Then you go into your decline, and you start seeing customers start to redesign products for the future.
And I think we just said that we had a record design quarter for new customers, new products, which is good. So the expectation is clearly for the margin to go up, for the operating income to go up as demand starts to return. Because we think it'll inordinately impact the engineered products as the demand starts to come back. So hopefully that answers the question as to why and what.
Tianxiao Hou (Analyst)
Yes, it does. Thank you.
Mike Long (Chairman, President, and CEO)
Uh-huh.
Operator (participant)
Your next question comes from Steven Fox of Fox Advisors. Your line is open.
Steven Fox (Founder and CEO)
Thanks, good afternoon. Mike, just following up on that question. So if we try to think about margins by region for components, you know, obviously, volumes help in North America and Europe. Would you say there's any other layer on that? You mentioned investments that are kicking in, different designs, et cetera. Just trying to understand, like, if you looked region by region, what the relative operating leverage looks like from, you know, what you just posted. And then I had a follow-up.
Mike Long (Chairman, President, and CEO)
Yeah, well, the leverage in North America will go up, the leverage in Europe will go up, and it's interesting because the leverage in Asia is going up as we speak, given the additional engineering resources we put out there, the design wins sales in all regions, going up also. And if you really look at the mix and sort of how the, you know, the operating income came and everything else, you know, if you just went back to traditional, and as I argued before, put the other two regions at normal run rate back on top of this, and you'll see a very, very interesting story.
Steven Fox (Founder and CEO)
Okay, thanks for that. And then, from just the broad set of SMBs you guys are dealing with on the ECS business, any sense of where we are in that spend cycle? I know, you mentioned that you can'tâ these companies can't afford not to spend on technology, but obviously there's severe economic pressures on your smaller customers. So where would you put this in the cycle, and maybe how does their spending change on the way out of the cycle? Thanks.
Mike Long (Chairman, President, and CEO)
Yeah. I was hoping you could tell me the answer to that one. But actually, what I'll tell you is, you know, we know customers are not afraid to spend, so I'll start with that. But their priorities for the last quarter or since, you know, COVID came, were to keep their workforces deployed, right? So everybody spent and went and had to create work from home opportunities for their employees, or frankly, you were shut down. So when you think of the resilience of the companies out there to be able to do that, because we know not every company was ready for this, you know, they had to take sort of any data center type purchasing and back that off.
So all of those projects that were sitting in big data center, you know, are sort of pent up demand now. I don't think they go away because I know here, our issues we have in IT didn't go away, but they didn't, they weren't the highest priority. Our highest priority was to get all of our people to be able to work from home. And when you think about being able to get 20,000 people to work from home, you know, and then effectively improve that over the quarter, so we could do it as a, you know, as a byproduct was a, was a big feat.
So if you, if you think about just even our own spending here, I'm expecting that, you know, the fourth quarter going into the first quarter, we'll start to see some change in the marketplace. I really don't know about the third quarter because I can't figure out just yet how much is COVID, how much is market. So, I think we have a pretty conservative view of our guidance going out there, but I do know that these projects are not gonna go away.
Steven Fox (Founder and CEO)
Thanks for that. I'll let you know if I figure it out.
Mike Long (Chairman, President, and CEO)
You got our number.
Operator (participant)
Your next question comes from Alvin Park of Stifel. Your line is open.
Alvin Park (Equity Research Analyst)
Yes, hi. Thank you for taking the question. Just calling on behalf of Matt Sheerin. I just wanted to follow up on that sentiment survey and inventory levels. Obviously, 2019 was a destocking period. The sentiment stated that the number of customers that have too little inventory went up, but the customers that still had too much inventory was lower year-over-year, but still elevated compared to historic. Could you comment on how you view your current inventory levels right now and coming into the future, and how the dynamic might be at play if the situation gets better with the pandemic, or if it gets worse with the pandemic, and how you guys are positioned to counteract that and fully benefit and react?
Mike Long (Chairman, President, and CEO)
Yeah. So, for sure, we have orders on the factories. And, we do that to give our manufacturers guidance of what they should produce. So we believe we will get enough inventory, based off of whatever the market does. Now, you know and I know, if the market is gonna increase more than 10% in a quarter, you're gonna run into bottlenecks, you know, somewhere, somewhere in the supply chain. But, by and large, I think we're covered. The book to bills have been relatively solid, so they're not overly fluctuating, and the backlog is growing at a reasonable rate. So yes, we think the inventory is about where it should be right now.
That little bit of increase you saw was sort of, late in the quarter inventory coming in for shipments that went right back out in July. So it's a minor, part, but remember, sales were up 4%. I think inventory was up 3%. Turns increased and got more efficient, you know, all good things as far as ratios go. But in general, we're in, we're in pretty good shape, given the backlog. As, the business increases, we will increase our orders, but the worst thing we can do for anybody is to, you know, dramatically increase orders on inventory and, and try to corner any market, 'cause you get burned in a hurry. I think we're, we're where we wanna be.
Alvin Park (Equity Research Analyst)
Understood. Thank you. As a follow-up, I just wanted to ask for some more color on your statement about how your demand for better capitalized, larger value-added reseller customers showed greater resilience versus your smaller customers. Is there a specific reason for that? Was it customer exposure, or is it the well-capitalized balance sheet that allowed them to offer more financing opportunities? Just some more color as to why that dichotomy occurred from your compute business customers.
Mike Long (Chairman, President, and CEO)
Yeah. I'm gonna let Chris and Sean, but what I would tell you is the resellers that are out there are each working on projects, and those projects are just as important, really, no matter where they're coming from, to a particular supplier. So many times when we're helping a reseller financially, we're also getting some benefit from a supplier to help that reseller, therefore, we sort of stay neutral in that piece of it. And so the desire is to help anybody get a deal done.
You know, that's what we built the company on, and that's how we operate the company. So there is no distinguishing factor about who we would help and who we wouldn't help. We'll literally help everybody as long as there's a premise that we're gonna get paid. With that, I'll let Chris and then Sean weigh in a little more.
Chris Stansbury (SVP and CFO)
Yeah, the only thing I'd really add is that, you know, when we look at the makeup of, you know, who we're selling to, we look obviously at our collection rate. Those are very, very strong. We're actually well above last year in terms of our ability to collect. But there has been a mixed shift as to where the product is flowing. You know, to the point that we made about better capitalized, it's exactly what we saw in components, right? Smaller customers, who are higher margin customers, who require more from us, are buying less in the near-term environment than the customers that are bigger, better capitalized, and don't need as much from us, and therefore, are lower margin. So we don't think that's a permanent trend, but it's certainly the near-term environment. Sean?
Sean Kerins (President of Global Enterprise Computing Solutions)
No, I think you nailed it. The only thing I would add is that, Mike's right, we serve all comers. You know, and the larger partners tend to be the resellers that serve the larger companies, and so they're benefiting from, you know, the resilience in the high end of the demand market. But the smaller piece of the market is gonna come back. It's just a question of when. We're gonna be there for them, you know, in the future, just as we are today, and we've got, as Chris pointed out, really rigorous process in place... you know, if your question is about risk, to make sure that we're managing our AR portfolio very carefully.
Alvin Park (Equity Research Analyst)
Thank you very much.
Operator (participant)
Your next question comes from William- William Stein of SunTrust. Your line is open.
William Stein (Semiconductor and Artificial Intelligence Equity Research Analyst)
Great, thanks for taking my question. Mike, in the past, Arrow has been a net beneficiary of some of the supplier consolidation we've seen in semis. There's been quite a bit over the last few years. There's, you know, that was on pause for a while, and then we saw a big deal announced recently. I'm hoping you can talk to us about your anticipation of, potentially more, gains from supplier consolidation.
And then if you could also comment on, what we should expect, how we might expect customers to respond to that. Is it, a sort of gravity situation, where as you get more suppliers, more, customers decide, you know, they might not need two or three distributors, they'll just concentrate it all with Arrow? Or does it go, somewhat the other way, where customers want to keep multiple suppliers, healthy? Thank you.
Mike Long (Chairman, President, and CEO)
I'll tell you, the outweighing of efficiency versus sort of the old competitive nature of customers not wanting to go to one supplier is changing the dynamics. The first thing is, we're having, and I'm gonna use the term no, I'm sure there might be one or two customers out there, but with our increases with suppliers, we've seen no customer pushback on doing business with us or doing more business. You know, this is a day and age where prices are what they are. There's no real competitive nature of just buying on price. The competitive nature is in the flow of the product and helping with cash flow, helping with designs and things like that.
The attractiveness of what we've built over the years with our engineering capabilities puts us more than double the engineers of anybody else in the marketplace today that we're competing with. In fact, it could be up to three times the amount now. The velocity is there, the ability to handle these customer designs is there, and I don't see pushback from the customer level at all. Our goal is to support our customers to the utmost of our capability and our suppliers the same thing. And, you know, we're gonna work with each of them to expand, and I don't see any particular reason why we wouldn't expand with anybody.
William Stein (Semiconductor and Artificial Intelligence Equity Research Analyst)
That helped. There's a first part of the question as to your anticipation of further supplier consolidation.
Mike Long (Chairman, President, and CEO)
Oh, well, every single time a supplier buys somebody, you know, you have that consolidation, but if you look at it, you know, now you have what I would say, medium-sized semi companies out there that could likely get bought over the next couple of years. Consolidation is inevitable. Customers do not like the mass numbers of products that they're dealing with, so that is one thing. Here's the ironic thing, you know, it's sort of the double-edged question you asked before.
Do customers wanna put more of their business with me? The funny thing is, what happens when the semi suppliers consolidate? The customers have to put more business with them, too. So I don't see either trend slowing down, and it really comes down to how the supply chain works now, what extra services you can offer that customer. That is the biggest part of the conversation, you know, not price anymore.
William Stein (Semiconductor and Artificial Intelligence Equity Research Analyst)
Thank you.
Mike Long (Chairman, President, and CEO)
Yes.
Operator (participant)
Now your next question comes from Joe Quatrochi of Wells Fargo. Your line is open.
Joe Quatrochi (Executive Director and Equity Research Analyst)
Yeah, thanks for taking the question. I was wondering if you could kind of walk through some of the puts and takes for what's implied in the gross margin guidance for the September quarter. I know obviously, mix in Asia being a strong mix, continuing in components, is negative for gross margin, but maybe just walk through what's normally kind of the seasonal sequential decline in September, is that, you know, the same magnitude this year?
Mike Long (Chairman, President, and CEO)
I'm gonna let Chris do it because he's kind of rolling his eyes of not knowing how to answer. I really want to see if he can pull it off.
Chris Stansbury (SVP and CFO)
I would just echo what Mike said last quarter, which is, it's pretty much steady as she goes right now. We're not seeing big changes in underlying margins at the region level. I mean, we continue to be focused on the things that we can do near term operationally, and therefore, the biggest shift really is the mix piece that we talked about. I think longer term, as we touched on, on the call, just given the levels of design activity, you know well how the leverage in the P&L works. That as we see volume growth recover, we think we should see some fairly notable improvements in margins. So how'd I do?
Joe Quatrochi (Executive Director and Equity Research Analyst)
Yeah, that's perfect. And on the components design activity that you talked about the record growth this quarter, can you remind us how fast does that revenue growth, I guess, follow those design wins?
Mike Long (Chairman, President, and CEO)
... Yeah, that's where usually 3-6 months. And I use the sort of the 3-6. The 3 is an upgrade of a typical system out there. The 6 months is more of a redesign that would be launched or a new product, something like that. And I don't have that mix for you. It would be something interesting for us to try to figure out if we could track down the road. But that's what we've typically seen. You know, other good news is we've seen some of the semi guys start to increase a little bit. You know, you have automotive, and automotive is a good size piece for us, too. So, you know, an automotive increase would be a positive. 5G increase is gonna be a positive.
But we do see some good things on the horizon. It's just how fast will the rest of the industrial base catch up to? And that's what we need. I mean, the sales are. The company is in good shape right now. The ratios are in good shape given, but we're still down $700 million in sales. So when that $700 million comes back, I'm sure it's gonna look a lot different. It's gonna be a lot better for us.
Joe Quatrochi (Executive Director and Equity Research Analyst)
Thank you.
Operator (participant)
There are no further questions at this time.
Steve O'Brien (Head of Investor Relations)
Thank you. In closing, I will review Arrow's safe harbor statement. Some of the comments made on today's call may have included 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. 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 any questions about the information presented today, please feel free to contact me. Thank you for your interest in Arrow Electronics, and have a nice day.
Operator (participant)
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.