Arrow Electronics - Q4 2015
February 4, 2016
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Arrow Electronics fourth quarter and year-end 2015 earnings conference call. My name is Derek, and I'll be your operator for today. At this time, all participants are on a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. If you require operator assistance, please press star zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Steve O'Brien. You may proceed.
Steven O'Brien (Director of Investor Relations)
Thanks, Derek. Good day, and welcome to the Arrow Electronics fourth quarter and year-end 2015 conference call. I'm Steve O'Brien, Director of Arrow's Investor Relations Program. With us on the call today are Mike Long, Chairman, President, and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operations, and Chief Financial Officer; Andy Bryant, Chief Operating Officer, Global Components and Global Enterprise Computing Solutions; 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 GFL 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.
Michael J. Long (Chairman, President and CEO)
Thanks, Steve, and thanks to all of you for taking the time to join us today. We delivered record fourth quarter results, completing a year of strong performance in 2015. We executed well on our organic strategic initiatives, we continued to deliver best-in-class financial performance, and we returned substantial capital to our shareholders. For the full year of 2015, we delivered an 8% increase in sales and operating income and an 11% increase in earnings per share, adjusted for changes in foreign currencies. For the second consecutive year, we achieved record sales, gross profit, and earnings per share on an absolute dollar basis despite currency headwinds. In Global Components, we advanced our value-added services through our investments in our design and engineering capabilities. These capabilities are allowing us to deliver increasing value to both our customers and our suppliers.
In Enterprise Computing Solutions, our unique focus on selling comprehensive solutions has allowed us to further differentiate our value-added distribution business from the competition. Our suppliers and customers value our solution-driven approach and continue to reward us with more business as a result. We're continuing our challenge and continuing to challenge our business leaders to uphold our current rapid pace of evolution. Our strategic roadmap for success in 2016 will include advancing our leadership in IoT and providing the engineering services and support that are integral for our customers to bring new, compelling products rapidly to the market. We continue to capitalize on cross-selling and lead generation opportunities for our Global Components and Enterprise Computing Solutions businesses afforded by IoT and cloud. The opportunities for our two businesses to work together have never been greater.
We're expanding adjacent market opportunities, including the public sector and e-commerce, and we have the opportunity to engage the next generation of inventors before their ideas are market-ready. Positioning our solutions portfolio to capture a greater piece of the rapidly growing opportunities in security, data analytics, and converged solutions, and broadening our cloud-based software offering to help our resellers transition to managed service provider business models. Returning to our results this year, looking at Global Components, the overall market continues to track in line with our expectations. We expect our business to be less volatile than the broader semiconductor industry due to our concentration on small to medium-sized manufacturing customers and our below-average exposure to smartphones, laptops, and PCs. Our lead times and cancellation rates continue to track within normal ranges. Our full year 2015 Global Components sales were $14.4 billion.
Sales advanced 6% year-over-year, adjusted for changes in foreign currencies. Europe delivered robust sales growth of 21% year-over-year, adjusted for changes in foreign currencies. Asia faced challenges from the slowdown in the Chinese economy, but still grew sales by 4%, adjusted for changes in foreign currencies, and achieved another record year for sales. Our Americas region also faced challenges from the economic backdrop that caused sales to decline 2% year-over-year. Operating income grew 5%, adjusted for currencies, and margins were flat year-over-year at 4.7%. Enterprise Computing Solutions delivered an exceptional year as our software-led solutions are well aligned to changes in IT spending. Our leading security offerings are matched to CIO's top priorities, and analytics solutions are helping customers harness their own data to provide powerful insights and compelling new opportunities.
ECS sales of $8.9 billion advanced 12% for the year, adjusted for changes in foreign currency, with 12% growth in the Americas and 14% growth in Europe. ECS operating income also advanced 15%, and margins expanded by 10 basis points year-over-year, adjusted for changes in foreign currency. For the second consecutive year, ECS achieved record sales, gross profits, and operating income. As we look forward to 2016, we expect to further extend our leadership in the markets we serve. We do not anticipate a meaningful change in the economic backdrop, but as we proved once again in 2015, we're able to produce strong results independent of the market environment, and we expect to continue this in 2016.
I would also like to take a moment to thank Andy Bryant for his contribution to Arrow over the last eight years. As you've seen from the announcement a couple of weeks back, at the end of April, Andy will be retiring from his position as Senior Vice President and Chief Operating Officer, Arrow's Global Components and Global Enterprise Computing Solutions. Andy's leadership was instrumental in furthering Arrow's sales and marketing strategy. His mentorship and guidance has helped foster a deep bench of next-generation leaders for Arrow, including Andy King and Sean Kerins. I personally wish Andy the best for his well-deserved retirement.
Before I turn the call over to Paul, I'd like to address the disclosure we made this morning in our press release and with the SEC regarding a criminal fraud attack against Arrow that occurred during the week of January 18, which resulted in unauthorized transfers of cash from a company account to outside bank accounts in Asia. Arrow immediately reported this crime and is working with law enforcement agencies. We also immediately implemented enhanced internal control procedures and have retained outside counsel and experts to conduct an investigation and evaluate future processes or controls that may need to be implemented in the future. To date, the findings of the ongoing investigation indicate that this is an isolated event, not associated with a security breach or a loss of data. A one-time $13 million charge will be reported within our first quarter of 2015 financial results.
We do not expect this incident to otherwise have a material impact on our business. Both our investigation and law enforcement's investigation are ongoing, so we will not be able to answer questions at this time. Paul will now provide more details on the fourth quarter results and our expectations for the first quarter.
Paul Reilly (EVP, Finance and Operations and CFO)
Thanks, Mike. Fourth quarter sales of $6.75 billion grew 6% year-over-year. Sales, adjusted for acquisitions and changes in foreign currencies, grew 4% year-over-year. Overall, sales were above the high end of our prior guidance range. In Global Components, sales of $3.67 billion grew 6% year-over-year, adjusted for changes in foreign currency. Adjusted for acquisitions and changes in foreign currency, Global Components sales were approximately flat year-over-year. In the Americas, sales declined 4% year-over-year. Americas core sales were flat with the third quarter. In Europe, sales adjusted for acquisitions and changes in foreign currency increased significantly again this quarter, advancing 12% year-over-year. The fourth quarter in a row of double-digit constant currency growth. We experienced strength across the entire continent.
Sequentially, core sales in Europe were down 3% year-over-year—I'm sorry, down 3% quarter-over-quarter. Sales in Asia grew 6% year-over-year and declined 4% year-over-year, adjusted for acquisitions and changes in foreign currencies. Core sales in Asia grew 2% quarter-over-quarter, which was better than our expectations. Global Components fourth quarter book-to-bill was 1.05, which is above the 3 prior years' fourth quarter. Through the first four weeks of the first quarter, our book-to-bill remains above parity. Global Components backlog also grew slightly in the fourth quarter, whereas we normally experience a sequential decline. We believe this suggests a solid foundation for our business as a whole in the short term. Fourth quarter, Global Enterprise Computing Solutions sales of $3.08 billion, up 10% year-over-year.
For the full year 2013, ECS billings grew 9% year-over-year, adjusted for acquisitions and changes in foreign currencies. ECS billings growth in the fourth quarter accelerated up to 11% year-over-year. In the Americas, sales grew 11% year-over-year, and grew 5%, adjusted for acquisitions and changes in foreign currency. Sales for our core ECS Americas distribution business grew 50% quarter-over-quarter and were above our expectations. In Europe, sales in constant currency advanced 22% year-over-year, and Europe ECS sales grew 76% quarter-over-quarter, and this too were above our expectations. A better-than-expected performance in fourth quarter ECS sales in both regions was principally attributable to even higher growth in security and infrastructure software, off of already growth, growth levels, and to a lesser extent, some server refresh activity.
Returning to consolidated results for the quarter, our gross profit margin was 12.4%. Year-over-year, gross margins were down 30 basis points. The decline was principally attributable to bringing up relative contributions from ECS and Asia components within our mix. Total company operating expenses increased 4% year-over-year as reported, with 3% year-over-year, adjusted for the impact of acquisitions and changes in foreign currencies. Operating expenses decreased 20 basis points as a percentage of sales on a year-over-year basis. Operating income was $284 million, a 7% increase year-over-year, adjusted for changes in foreign currencies. Operating margins declined 20 basis points year-over-year due to acquisitions and a lower contribution from Americas components within our mix. Global Components operating margin of 4.3% decreased 10 basis points year-over-year.
Global Enterprise Computing Solutions operating margin of 5.8%, here, too, decreasing 10 basis points year-over-year, with both instances principally driven by acquisitions. Our effective tax rate for the quarter was 27.2%. Net income was $182 million, up 6% year-over-year, adjusted for changes in foreign currencies. Earnings per share were $1.94 on a diluted basis and grew 3% year-over-year. Earnings per share grew 10% year-over-year, adjusted for changes in foreign currencies. Cash flow from operations was $544 million for the fourth quarter of 2015.
Full year 2015, cash flow from operations was $655 million, approximately 132% of our GAAP net income, well in excess of our goal to deliver cash flow at a rate of 70% of our GAAP net income. We expect normal seasonally lower cash flow in the first quarter. Consolidated return on working capital for the fourth quarter was 33%. The return on invested capital was 12.4%, handily outpacing our long-term weighted average cost of capital. We repurchased approximately $150 million of our stock in the fourth quarter, approximately $341 million over 2015, and approximately $1.4 billion over the last five years. Entering the quarter, authorization remaining under our existing share repurchase program was $320 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 first quarter sales will be between $5.25 billion and $5.65 billion, with Global Components sales between $3.55 billion and $3.75 billion, and Global Enterprise Computing Solutions sales between $1.7 billion and $1.9 billion. We expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.34 to $1.36. Our guidance assumes an average tax rate in the range of 27%-29%.
Average diluted shares outstanding are expected to be 93 million, and the average USD to euro exchange rate we are using for forecasting purposes is $1.10 to EUR 1.0.
Steven O'Brien (Director of Investor Relations)
Thank you, Paul. Derek, could you please give the instructions and open up the call to questions at this time?
Operator (participant)
Certainly. At this time, ladies and gentlemen, if you would like to ask an audio question, please press star one on your telephone keypad. If you feel your question has been answered or you'd like to withdraw your question, press star two. Questions will be taken in the order received. And again, that's star one to ask a question. And your first question will be from the line of Matt Sheerin, Deutsche Bank.
Matthew Sheerin (Analyst)
Yes, thanks, and good afternoon. Just a question on the overall gross margin. Paul, I know that mix plays a role here, but you're down, I think, 40 basis points year-over-year. You're going into a quarter where typically mix works in your favor, and you see margins expand because of components, and you're guiding more seasonal on the computing side. But just trying to figure out the trajectory of margins, and is pricing pressure playing a role at all on the component side of things?
Paul Reilly (EVP, Finance and Operations and CFO)
Thanks, Matt, for the question. You know, as we look at this, there's a lot more to our results than just components and computing. There's a lot more to the mix than what we usually talk about. I expect to see margins to rebound in the first quarter, similarly to what we've seen in the seasonal first quarter trend in the past. So when I look at it, it's really mix of acquisitions, a little bit of geographies, but we're not seeing any dramatic change to indicate that we are coming under GP pressure.
Matthew Sheerin (Analyst)
Okay, so it's more mix related. Okay, and just a bigger picture, given the semiconductor consolidation going on, a lot of your vendors are. They've announced deals, but we're starting to see some of these deals close. So it would seem like you're gonna have a more concentrated, you know, revenue exposure to a handful of vendors when this consolidation is all said and done. How does this set up for Arrow? Is that a positive? Is that a negative in terms of leverage with your suppliers?
Michael J. Long (Chairman, President and CEO)
... Well, Matt, this is Mike. So far, it has been good for us because the acquisitions have brought us new products and, new product lines that we didn't have before. So in essence, Arrow now has, more things to sell than we had to sell before, which will allow us to expand our market. The second thing about it, which is usually unknown, is as they do their integration, most of the way we deal with our suppliers, can be electronic and those types of things, so we will actually gain some efficiencies of dealing with some less people, also, which is not a, you know, not a relatively known sort of benefit, but you get that because of the scale and volume of that, of that supplier.
So, so far, we have seen this work in our favor, and we expect even the other ones we're hearing about to continue to work in our favor for some time here. I just wanted to also, when you were talking about mix for the first quarter, it was mix and acquisitions. So I want to make sure that you took away the acquisition piece because I only heard you say the mix. But, you know, it's hard these days, given the way we've been performing in the business to buy an acquisition that is immediately better than the numbers that we have on there. And so we have a couple of them, we've got some work to do, and I think that's where Paul's alluding, we'll have some of that done into the first quarter.
Matthew Sheerin (Analyst)
Okay, well, then, then sort of in line with that then, and, I know some of the deals have been on components and some computing, and given really what we're looking at, sort of, a low, if not no growth this year on the component side, do you- are you confident that you can get to that 5%+ margin target for the full year?
Michael J. Long (Chairman, President and CEO)
Yeah, we're working, we're working towards that. In fact, if you look at the guidance, in the first quarter and take that on a year-over-year basis, you'll see that, we are, we are looking for some increase right away in the first quarter.
Operator (participant)
Your next question will be from the line of Jim Suva, Citigroup.
Jim Suva (Research analyst)
Thank you, and congratulations. You mentioned strength in this quarter coming from security and software. Can you help us understand the economics behind those type of transactions, like the recurring nature of them versus one-time in nature for them? And can we extrapolate sustainability coming from that or some lumpiness? And then my follow-up question is on seasonality. I believe there was a comment made on the prepared remarks about thus far in January, the book-to-bill was above 1. I was just curious. I kind of assume that might be normal. Is the book-to-bill above normal, in line with normal, slightly below normal? How's that compare to normal? Thank you.
Michael J. Long (Chairman, President and CEO)
Yeah. So far, what we've seen, Jim, is our book-to-bill above one, as we've said, and that is a little bit higher than last year. I would say just a tick better than in line if we were to take it year-over-year and look at it. That's one of the reasons for the strong guide so far. We're seeing the bookings hit the backlog, and we're seeing the backlog grow. So, right now, we're feeling, you know, fairly confident going into the new year. I'll have Sean talk to you about the software economics and how that works out.
Sean Kerins (President of Global Enterprise Computing Solutions)
Sure thing. Thanks, Mike, and hello, Jim. You have correctly surmised that we are aggressively pursuing our software-based solution strategy. And just as you point out, endpoint security, also analytics and big data, certainly what I call the software-defined or hybrid cloud data center of the future, we think they're all pretty good demand trends that we're well positioned to participate in. Specifically to your question, and this is part of, you know, our approach to cloud, is we view our strategy in cloud as really all about propelling our software-based solution strategy versus just cloud for cloud's sake. And what I mean by that is software is all about choice. Customers may want to buy software in a traditional fashion, or they might want to buy it on a subscription basis, and our job is to bring that choice to the market.
As we do that, you know, we make ourselves really sticky by building a, basically, a recurring revenue business model. So software is key to our solution strategy and certainly going to be good from an annuity perspective going forward.
Jim Suva (Research analyst)
Great. Thank you, and congratulations to you and your team there.
Sean Kerins (President of Global Enterprise Computing Solutions)
Thanks, Jim.
Operator (participant)
Next question is from the line of Shawn Harrison, Longbow Research.
Shawn Harrison (VP, Senior Research Analyst and Associate Director of Research)
Hi, everyone. A couple of months ago, you did us a big favor and gave us kind of your mix of ECS sales in terms of software, storage, et cetera. I was wondering if we could get an update on that just to see how it's changed coming into 2016. And then also, just, I guess, a comment on the first quarter being maybe down a little bit more than seasonally for ECS, if there's anything into that other than that shift in mix.
Michael J. Long (Chairman, President and CEO)
I'll take that piece first, and then I'll give you the numbers. I'm sort of surprised that you would indicate that it's down because we're showing our guide, if we counted it right, to be up about 9% year-over-year, and I don't think the markets are growing that fast. So and, you know, my guess is there might be something wrong with the seasonal numbers that we have in there, or you have in there. But, you know, we're looking at that as a pretty strong start. On a billing basis, software is about 40%. Storage is now about 25%, services are about 15%, and servers are about 15%, networking is approximately 5%.
So hopefully that gives you a better view into what you're looking at when we talk about solutions, why we might be seeing a little bit different growth rates.
Shawn Harrison (VP, Senior Research Analyst and Associate Director of Research)
That's very helpful, Mike. Then two brief follow-ups. Last quarter, it was mentioned $40 million of cost takeout. Wondering how much of that's been realized to date? And also, have you bought back any stock here during January, early February?
Michael J. Long (Chairman, President and CEO)
Okay, I'm gonna let Paul answer those for you.
Paul Reilly (EVP, Finance and Operations and CFO)
Sure. So, I'll go reverse order. We had hit our limit on spend, on buyback, so we have not bought back any shares yet in the first quarter, as a starting point. And then the other question, be honest with me again, you given me-
Michael J. Long (Chairman, President and CEO)
There's no way about it.
Paul Reilly (EVP, Finance and Operations and CFO)
Okay, thanks. I actually had it on the tip of my tongue, and you got the question. So we probably got about $10 million annual run rate savings in the fourth quarter, so that's like $2.5 million. We think we'll be able to accelerate that, so that we'll probably be at 75% full year by the end of the second quarter and full year by the end of the third quarter.
Shawn Harrison (VP, Senior Research Analyst and Associate Director of Research)
Okay. All right, Paul, thanks a lot, and congrats everyone on the quarter.
Paul Reilly (EVP, Finance and Operations and CFO)
Thank you.
Operator (participant)
The next question will come from the line of Brian Alexander, Raymond James.
Brian Alexander (Senior Managing Director and Director of Equity Research)
All right, thanks. Good afternoon. Just wanna go back to Matt's question on profitability in the components business. So it sounds like you're comfortable with hitting 5% or better margins in the first quarter, and that's generally the high watermark for the year. So I wasn't sure, Mike, if you were also comfortable in getting to 5% margins in the components business for the full year. And if you are, how much are the cost savings contributing to that versus gross margin improvement?
Michael J. Long (Chairman, President and CEO)
Well, first off, Brian, you know, we had a pretty good quarter in Asia. We're seeing some growth in Asia. We had a big acquisition in Asia, and most of that is what really pushed us down. We do expect as things start to normalize over the first quarter, we'll be, you know, closer to the 5% and then the 5% mark. Really, it's been, it was geographic mix and acquisition totally that changed the trajectory of our number. And, you know, we fully expect that to correct itself. We didn't see anything in the numbers to suggest that the profits would be sort of worse than what we had, and it was purely sales driven.
Frankly, a way to make it easy for us is if the economy in the U.S. turned around, we would, you know, very easily be there. But we're not seeing the same kind of growth rates out of North America, so we have to sort of do it the old-fashioned way, get it out in the other regions and get them more productive than they were, and that's what we're doing.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay. And then just maybe a follow-up on Europe. Very strong growth, again, in both businesses, up 12% in components and 22% in computing, obviously, outpacing the market. So just your thoughts on sustaining growth in 2016 as you go up against double-digit, you know, growth comparisons in 2015. And just overall, how do you explain the very strong performance in light of the sluggish macro that we see over in Europe?
Michael J. Long (Chairman, President and CEO)
Well, the first thing is, you know, the comps will get tougher, but we're pretty confident going into the year, and we're pretty confident going into Q1, as you can see by the guidance there. Really on the computing side, you know, we've moved away from selling individual products to really trying to guide towards the entire solution. It's a more efficient sale. It's what our customers want. It requires a little bit higher engineering costs on our part, but so far, it really gives better customer service and satisfaction. And we think as a result of that, you know, we're getting more around software security, virtualization and infrastructure. You know, the security piece is growing something like 28%.
I mean, it's a pretty good launch for us, so really, we're playing right into what the CIO's problems are out there, and Sean and his team have done a good job to move the business that direction. On the component side, as you know, it's been a little bit more of a grind, a little bit more of a, I guess I'll use one of Andy's terms now that he's retiring, sort of a tractor pull between everybody, really looking for the growth. And where we're confident this year is we have seen some of these mergers bringing us some new products that we didn't have before. And the nice thing about the new products that are coming in is that they're largely engineering-based products, so there will be a higher GP associated with that.
The second piece of that, Brian, is we've seen our design wins this year grow in the quarter something like 24%. And if you remember how we tracked that over time, we usually see, you know, those start to pay off some six to eight months later from that initial design. But we've now seen a couple of quarters of the design wins creeping up, which is also good for our margin because those products sell at a higher margin than does commodity. So all in all, there's some good things right now working in favor of our business, and those are things that we think can help us continue to grow despite what's going on in the sluggish market.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay. Thanks, Mike. Goodbye to Andy, and go Broncos.
Michael J. Long (Chairman, President and CEO)
Yeah, you bet. Thanks.
Operator (participant)
The next question will be from the line of Mark Delaney, Goldman Sachs.
Mark Delaney (Managing Director and Senior Equity Analyst)
... Yes, good afternoon, and thanks very much for taking the questions, and also congratulations on the nice quarter. Yeah, on the last call, Arrow talked about in the month of September that there was a drop in the bookings within components. And obviously, with the 1.05 book-to-bill, you turned that around. Is that delta, I mean, is that all just company-specific execution, or are there any areas where macro trends have gotten a little bit better incrementally versus what you were seeing during the prior quarter?
Michael J. Long (Chairman, President and CEO)
You know, we were, we were not sure where it was going when we were in the third quarter. We knew that our numbers were sort of telling us, but there was a fair amount of bad news coming out of the suppliers. And what we've, what we've noted is sort of the bad news that came out of the suppliers hasn't been as bad as was originally indicated. And I think what we've seen are some of the biggest, largest supply chain customers, you know, have a pause, but underneath that, we've seen pretty steady growth.
You know, the second area that we've seen, just like everybody else, has been some of the traditional industrial accounts haven't been growing like they used to, but we've seen some, you know, increase in lighting, aerospace and defense, transportation, and you know, basically some of our alternative energy verticals have sort of picked up the tab. So this, you know, this sort of IoT piece right now is starting to play out a little bit, and we think the growth is gonna be coming from a few nontraditional places over the next year.
Mark Delaney (Managing Director and Senior Equity Analyst)
All right. It's very helpful. And then for a follow-up question, I wanted to just dig in a little bit more on the comment about the proprietary server refreshes. Can you just help us, you know, how much, to, you know, the percentage of revenue those refreshes were adding? And is it, you know, a couple percent ECS revenue? And then is there some sort of point in time where, just given that it's a product refresh, that we should have in mind that that goes away?
Michael J. Long (Chairman, President and CEO)
Keri, you wanna, you wanna take the refresh question?
Sean Kerins (President of Global Enterprise Computing Solutions)
Yeah, good question. It certainly contributed to our performance in Q4. I don't think that, you know, that recurring cycle goes away because, remember, in the high-end server market, you know, we still see a lot of mission-critical workloads and applications that live on premise. And so that means we get to participate in and support that refresh cycle as it reoccurs over time. So I don't see it going away, but obviously, there's ebb and flow to, you know, its contribution to our revenue.
Michael J. Long (Chairman, President and CEO)
It's interesting if you think about it. It's what I would say, you know, if I gave you the numbers at about 15% of the business, and you, you know, think of the growth rates, over time, you know, servers have still, sort of held their own. And whether it's proprietary or, you know, standard servers, this really hasn't changed that much, and we've seen proprietary make a big comeback. But, you know, think about it, it's not really unusual. We've seen proprietary servers pick up in the December timeframe almost every year for the last several years. So I would expect it to continue.
You know, and if it's not at the same rate, that'll be okay because, you know, frankly, they're not the most profitable items anymore, but it's, it's still a good sale for us.
Mark Delaney (Managing Director and Senior Equity Analyst)
Thank you very much.
Michael J. Long (Chairman, President and CEO)
Mm-hmm.
Operator (participant)
The next question will be from the line of William Stein, SunTrust Robinson Humphrey.
William Stein (Managing Director and Senior Analyst, Technology)
Great. Thanks for taking my question, and congrats on the good quarter and outlook. Defining a little bit what we're seeing in the rest of semis, it seems like you've posted two quarters of what appeared to be negative year-over-year, year-over-year organic growth, and you're guiding for year-over-year positive growth next quarter. It's a little bit better than what we've seen through the rest of semis. And I'm hoping you can talk a little bit about, you know, why you think you're seeing better performance than your suppliers overall, and then I do have a follow-up.
Michael J. Long (Chairman, President and CEO)
I think it's, it can be as simple as sort of customer base expansion. You know, when you look at where our suppliers focus their direct businesses, they're on a very limited number of very large type accounts. And so when, when those accounts start to sneeze, some of the suppliers really get the clue. And what we've been seeing is if you, if you take some of the opportunities that are coming in from the acquisitions, some of the opportunities that will come in from the design work that was done over the last couple of quarters that, you know, hadn't panned out or had been pushed out for whatever reason, we actually see that coming in. You know, we've got Asia that's forecasting pretty good. We've got Europe that's still forecasting well.
And, you know, for the first time, you see the Americas sort of coming in with some growth in the first quarter. So when you add it up, it looks pretty good for us overall. But it's really, you know, sort of what I would say, more products to sell, more design wins, and more customers, and that's really how we're getting it.
William Stein (Managing Director and Senior Analyst, Technology)
Got it. And the next one is a bit, out of the ordinary, so bear with me for a moment. But, I believe, Arrow has a Super Bowl commercial this year. And can you confirm that and help us understand the strategy behind, that marketing spend, given your traditional customer base, I think, is very-
... well, it's sort of a B2B model. I don't think of this as a consumer business. Maybe help us understand that? Thank you.
Michael J. Long (Chairman, President and CEO)
Yeah, it's an interesting thing, but if you look at the ads and where they've been, whether it's been the work with the SAM Car, the SAM Car itself, you know, brought us a fair number of new customers around automotive. We've seen some IoT opportunities come outside of, you know, that specific advertising. And what's interesting is customers, it's probably a bigger education for customers that already know us and now know that we've got engineering capabilities, and we can help with solutions. You couple that with, if you look at the markets that those ads were run, they're also in markets where we're strong in their big customer bases, so those are not nationwide ads that are going to run. So everything is, you know, really thought through.
We've been at this, as you know, some of you know now for three years, where we've been placing ads at certain sporting events and things like that, and I'm quite comfortable that, you know, we're happy with the returns we're getting on them.
William Stein (Managing Director and Senior Analyst, Technology)
Great. Thank you.
Michael J. Long (Chairman, President and CEO)
Yes.
Operator (participant)
The next question will be from the line of Steven Fox, Cross Research.
Steven Fox (Managing Director, Technology Supply Chain)
Yeah, thanks. Good afternoon, guys. First question, just looking at the year-over-year growth for sales and profits, I think this is a little nitpicky since you had such a good quarter, but sales were up 4%, excluding acquisitions, currencies, and profits were flat year-over-year. So can you just explain the difference there? I've seen some of it's with the acquisitions and how quickly before you sort of seeing profits and sales grow similar rates again?
Michael J. Long (Chairman, President and CEO)
I'm gonna, I'm gonna let Paul take it because he, he's gracefully digging through it. 'Cause he was-- you're right, he probably didn't expect that question.
Paul Reilly (EVP, Finance and Operations and CFO)
Yeah, I think there's several ways of looking at this, right? We keep talking about the fact that we're taking actions to expand our customer reach, our geography reach, and we're making investments in the business at the same time. So I think that's one thing to keep in mind as you look at this, that we are getting really best-in-class financial performance by any measure as we move forward. So we feel that we can selectively, maybe chamfer down a little bit the traditional leverage we've gotten in sales so that we can make the investments, and it doesn't always match up region by region. So I would say that's a high level explanation of what we're seeing around the pace of growth, top line, versus the pace of growth and operating income.
Steven Fox (Managing Director, Technology Supply Chain)
Okay, that's helpful. And then just a big quick picture question. Mike, I think in your prepared remarks, you talked about the two businesses working more together because of some of the cloud and IoT. Can you just give a couple examples of how that's gonna work and what you foresee in terms of whether that's sales leverage, profit leverage, both?
Michael J. Long (Chairman, President and CEO)
Yeah, I'll give you one that's coming up on Sunday. Every one of the scoreboards that you see in an NFL stadium, they have LED lighting, they have components in them, and at the same time, every one of those scoreboards has a big data center that sits up there that grabs data. So while the game is going on, they can put that, you know, all the new stats and everything that you see, plus replays and everything else. That's a perfect example where there are two sales for one project. So if you can, you know, put your teams together, you're in much better shape than if you try to leave things separate. That's about the easiest, I think, example that I could give you off the top of my head right now, where that works.
So any activity that would have a data center and would have a component device that would go with it, and either have customers or no customers, but we bring into the deals and try to work with them to make sure that they're profitable, and we can bring the entire strength of our business to our customers at one time.
Steven Fox (Managing Director, Technology Supply Chain)
Great, that's helpful. Should we assume that Paul's gonna be prominently featured in the Super Bowl commercial on Sunday?
Michael J. Long (Chairman, President and CEO)
Yeah, as you know, we'll have to, we'll have him wear a hat, and other than that, we'll be good.
Steven Fox (Managing Director, Technology Supply Chain)
Okay. Thanks very much. Good luck on the fourth.
Operator (participant)
Your next question will be from the line of Louis Miscioscia, CLSA.
Louis Miscioscia (Managing Director, Equity Research - Enterprise IT)
Okay, great, thank you. Nice quarter here. Could you just help us, I guess, bridge the linearity or the thinking or the comments that you got back from, you know, last quarter when you brought numbers down to obviously this quarter, you know, materially overachieving. But, you know, sort of getting back to what we were for fourth quarter numbers. So it's almost as if maybe the third quarter was a big anomaly, or how would you describe it for us?
Michael J. Long (Chairman, President and CEO)
I would describe that we saw a big drop-off in the third quarter, in the last couple of weeks of that quarter. And, you know, that is something that was different than what we normally see. What we normally see is, at the end of the third quarter, you start to see a build going into the fourth quarter. And, I think I said at that time, that drop-off was enough to get our attention, and then you couple it with what the manufacturers were saying, and it looked like we were, we were in for a bit of a melee, if you will. What was interesting to us is that our backlog, you know, went building, and then, you know, things sort of pushed out. So what we took was everything we had in our current forecast-...
We didn't account for a lot of new products coming into the quarter and going to our customers. And I think what we ended up seeing was not as big a drop, and it looked like those last two quarters were just an anomaly in the data that was coming in. And I guess we were just being overly conservative, and that's really what it was. Although even if we would have forecasted under normal circumstances, we wouldn't have forecasted a strong quarter as we actually just saw.
Louis Miscioscia (Managing Director, Equity Research - Enterprise IT)
Okay, that, that's all helpful. And then on the ECS side, obviously the Americas was a very nice quarter, up 5% after the acquisitions and FX. And that seems to be, you know, well above the market. I mean, it depends which slice of the market obviously we're referring to, but, you know, some vendors have actually seen material down revenue. So could you just describe what you think the market did in the Americas or the U.S., and then how you outperformed that?
Michael J. Long (Chairman, President and CEO)
Yeah, what I would tell you is there were some really interesting drivers when you think about it, and it was primarily around the software front. We saw security software up pretty significant. We saw infrastructure software up pretty significant. And, you know, while it wasn't better growth than Europe, you know, the proprietary server business was up in North America. So there was what I would say one of those quarters that you know everything sort of hit at once for us and was really it was sort of a welcomed deal. But these guys are really working hard at the complete solution for the customers, and that's pulling some of the other sales that we might have otherwise missed, if we were really just focusing on individual products like storage or a server or something like that.
So, we're in, we're in pretty good shape with the way we attack the market. The other interesting thing is that, you know, North America's been in place longer than Europe, and we just, you know, Europe is still really in its infancy for us when you consider it's been, I think less than six years that we took to build that up to a viable powerhouse. And, we are now four years in a row to, you know, increase earnings out of Europe-
Louis Miscioscia (Managing Director, Equity Research - Enterprise IT)
Mm-hmm.
Michael J. Long (Chairman, President and CEO)
for the computer business. So, you know, I know sometimes that, when you look back at things, that they get bigger, but, the truth is, Europe has not had a hiccup now almost since inception. We've seen, you know, pretty much back-to-back great years for that long, and we, we do expect that to run. And there's also, a good chance that Europe will learn and grow to where we get into the same profitability levels and the same sort of levels that we see in North America as we move to the, you know, sort of the next stage of that solution. So, so all in all, we're, we're still pretty bullish on that business.
Louis Miscioscia (Managing Director, Equity Research - Enterprise IT)
Okay. Thank you. Good luck in the new year.
Michael J. Long (Chairman, President and CEO)
Thank you.
Operator (participant)
The next question will be from the line of Ananda Baruah, Brean Capital.
Ananda Baruah (Managing Director and Senior Analyst)
Hey, thanks, guys, for taking the question. Yeah, congrats on this solid quarter in a softer environment. Then just real quickly, you know, Andy, it's been great working with you over the years. We'll definitely miss it, no doubt about it. I guess just two questions from me, if I could. The first is a follow-up to Steve's question with regards to the two businesses working together. Do you have—I would love to hear to what extent you guys have Salesforce integrated or how you're getting the market across the two businesses to identify the opportunities.
I guess, what, you know, what else may exist with regards to opportunities going forward or in the future, that you may not be in a position to identify yet, but you may be in a position to identify, you know, kind of going forward? I have a quick follow-up.
Michael J. Long (Chairman, President and CEO)
Yeah. The big areas are when you think of IoT, and then you think of the data. And the data that needs to be, you know, something needs to be made out of it, so a company can use that to decide, you know, how they're gonna grow, what products they need. You know, or another example is, you know, you have an air conditioner on top of the building, and instead of a service guy going out there all the time, wouldn't it be great if you got all of the particulars of what's going on with that air conditioner over the internet, so you could send somebody out there for pre-maintenance? That requires a system behind it to do that, too. And it requires more cloud work, it requires more data center work and higher levels of transaction.
But then on the other side, you've got an appliance that's built with semiconductors and, lighting devices and everything else. So it really doesn't matter. You could take into account, your automobile and, and in the future that, you know, we might be able to download information off of your automobile about the next maintenance stop. You know, all of this stuff is gonna require data center work, it's gonna require servers, it's gonna require software, and by the way, it's gonna require security software. And then on the other side, it's gonna require a lot of chips, and it's gonna require passive components. So the more and the higher level we can get into the sale, the more sticky it is for us and the more we can help customers with the total solution.
But it also changes a little bit about how we who we call on and how we call on them... and hopefully that gives you a little bit of a base hope of what's going on.
Ananda Baruah (Managing Director and Senior Analyst)
It does. That's really helpful. Thanks. And do you feel that-
Michael J. Long (Chairman, President and CEO)
I might add that there's not very many companies in the world that will be able to bring that type of a solution to a customer or even benefit our suppliers in the future.
Ananda Baruah (Managing Director and Senior Analyst)
Do you feel what did you put into place to be able to identify and capture, you know, the types of dynamics? Have you had to retrain some folks in a particular way to kind of look across the businesses? And do you feel like, to the degree you have, do you feel like that the training is completely underway and that process might be?
Michael J. Long (Chairman, President and CEO)
Well, since the opportunities are in their infancy, the training is in its infancy, too. The first step that we had to do is just get the two groups to talk to each other. And I don't, don't mean to be flippant about it, but that's really where you have to start. And then you gotta start by market, and you've gotta get salespeople to see the full opportunity and then sort of bring in their brother and sister with them into that account. And right now, we're doing account training and those types of things between the groups, but we are nowhere near where we'll need to be in the future, but we are certainly not behind the curve of where we need to be today. So hopefully, that defines that for you.
Ananda Baruah (Managing Director and Senior Analyst)
Yeah, no, that's, that's, that's great. I appreciate it. And then just a quick follow-up from me. You mentioned in the prepared remarks that... I, I believe this was, the context, that you meant to convey, that exposure to the smaller industrial companies and customers actually, is helping you in the current market dynamic and backdrop. I was just wondering, first of all, could you clarify that? Did I, did I hear that correctly? And secondarily, if that is the case, could you just sort of walk through why that actually is the case?
Michael J. Long (Chairman, President and CEO)
Well-
Ananda Baruah (Managing Director and Senior Analyst)
Why, why is it, why is this helping you in the current market dynamic?
Michael J. Long (Chairman, President and CEO)
Yeah, I think that, you know, a lot of people, you know, when they hear the Internet of Things, that was almost like you heard the cloud in the beginning, right? And so what you're seeing now is, on the computer side, we have seen a lot of different types of resellers that have started up, whether they're in the cloud-born resellers or whether they're security resellers. But, you know, what I would say is resellers that have not sold a server and really don't particularly care about selling a server, but they wanna work in the cloud. Then, you know, conversely, and these guys are smaller, because the guys that were making money on hardware and we're putting some software on top of it, you know, are now trying to migrate to where they can be the entire solution.
And the other guys that are, that are in there now operating on certain pieces of that solution are what we call new, but they're smaller, and you still have to pay attention to them. Same thing goes in the marketplace now. We're seeing more appliance-type build for a single type of application. And it could talk about whether it's digital signage or whether it's something to do with automotive or whether or not it's the air conditioning on the roof of your your building. But all of that requires hardware, so there's a lot of individual engineers that are out there working on things today, that are starting to come to light. That's where I think the new customer base is gonna grow up into the future, and they're also gonna service these industrial accounts that maybe don't quite get the software piece of it.
That's what's really missing on the semiconductor side, is that software integration, and that's right where we're gonna be.
Operator (participant)
Your next question will be from the line of Sherri Scribner. Go ahead, Sherri.
Sherri Scribner (VP, Strategy and Investor Relations)
Hi, thank you. I wanted to ask about the margins in the Enterprise Computing Solutions segment. Over the past three years, you've seen operating margin expansion in that segment, and I assume it's related to your mix of business, the software and services that you've talked about, but maybe also there's some cost cutting in that number. I was hoping you could give us a little more detail on whether it's mix versus cost cutting.
Michael J. Long (Chairman, President and CEO)
Yeah. Our costs have gone up every year because we're growing the business overall, but it is principally around services and software.
Sherri Scribner (VP, Strategy and Investor Relations)
Okay. Do you expect that to continue to see operating margin leverage going forward? Should we expect those margins to continue to trend upward based on the mix?
Michael J. Long (Chairman, President and CEO)
Yeah, it's gonna trend based on growth rates, and right now, software growth rates aren't really slowing down all that much. In fact, you know, we've just gone out of our mix that I shared with you. And if those mix rates continue, yeah, we'll see it continue to improve. The biggest opportunity we have is to get Europe up to North America-type operating margins, and we don't see that keep slowing down for us anytime soon. So you will see that improvement. And I would say that, you know, over time, you'll see a little leveling in North America, because for us, that's starting to be mature as we've been doing that for a few years.
But again, we just exited the year at almost a $200 million run rate of true to the cloud sales now that Sean has put together. And, you know, that's gonna work out to be a good business for us, too. So, the more things that we can touch, the more things that we can service and the more things that we can integrate, the better off we're gonna be.
Sherri Scribner (VP, Strategy and Investor Relations)
... Okay, great. And then I wanted to ask a big picture question. Mike, I think at the beginning of your prepared comments, you mentioned that your view is that things don't meaningfully change for the economy, and it sounds like at least for the next quarter, you guys are pretty confident based on your bookings on what you're hearing from customers. But I think there's a view out there that potentially at least the US market could slow considerably. Are you getting any sense of that from any of your customers, or are you still generally pretty positive? Thanks.
Michael J. Long (Chairman, President and CEO)
Right, right now we're pretty positive on the first quarter. On the component side, we're pretty positive. As you know, there's a massive decline on the computer product side, but that is still up almost 9% year-over-year. And so we're seeing, you know, the solution hold in North America. My current view is that things are not getting worse at this point. And, you know, if there's stabilization, which we sort of believe there is right now, stabilization that'll work in our favor, because then you're not taking two steps forward and one step back. It's just you, you continue to better the situation or the hand that you're being dealt.
Sherri Scribner (VP, Strategy and Investor Relations)
Great. Thank you.
Michael J. Long (Chairman, President and CEO)
Yes.
Operator (participant)
At this time, ladies and gentlemen, we have no further questions in queue. I would like to turn the conference back over to Mr. Steve O'Brien for any closing remarks.
Steven O'Brien (Director of Investor Relations)
Thank you, Derek. In closing, I will review Arrow's safe harbor statement. Some of the comments made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from statements, 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, 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. We thank you for your participation. You may now disconnect. Have a great day.