Arrow Electronics - Q4 2018
February 7, 2019
Transcript
Operator (participant)
Good day, everyone, and welcome to the Arrow Electronics Fourth Quarter and Year End 2018 Earnings Conference Call, hosted by Steve O'Brien. My name is Lesley, and I'm your event manager. During the presentation, your lines will remain on listen only, and if you require assistance at any time, please press star zero on your telephone, and a coordinator will be happy to assist you. I'd like to advise all parties that the conference is being recorded for replay purposes, and now I'd like to hand you over to Steve. Please go ahead.
Steve O'Brien (Head of Investor Relations)
Thanks, Lesley, and thank you all for joining us today. 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. Please note certain prior period figures have been adjusted for the adoption of new accounting standards. 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.
Michael Long (CEO)
Thank you, Steve, and thanks to all of you for taking the time to join us today. The fourth quarter was another strong quarter, and it was capped off another great year for Arrow. We're helping customers create, make, and manage their products at an unprecedented scale, leading through sales by more than $3 billion for the second consecutive year. Clearly gained share over the last two years, but market share is not our goal. Making customers and suppliers successful is our goal. Market share is just an outcome. Our strategy is to be the foremost technology lifecycle solutions providers working well. We achieved record fourth quarter and full year sales, gross profit, operating income, and earnings per share. We delivered strong leverage in 2018. Full year earnings per share grew 50% faster than sales.
We're executing well, and as I often do in our year-end calls, I'd like to discuss our longer-term strategy. You have seen IoT allow Arrow to bring cross-enterprise solutions together to serve our customers. Now, the rise of edge computing is just as important. Companies are changing how they do business and how they run operations, bridging the gap between IT systems and operational technology systems. It's totally the key. Arrow is helping customers tackle this complex challenge. Manufacturing plants and industrial machines have been digitized to increase efficiency. These systems use sensors, logic controllers, communication gateways, and human-machine interfaces. Collectively, these are operations technology or OT. Unlike when IT systems go down, OT failures can be catastrophic. We see this difference as the biggest gap in IT and OT. OT systems are islands of control and often do not interact with other parts of the organization.
Edge computing allows organizations to benefit immensely by integrating the two worlds. Companies need to address security, business analytics services, and artificial intelligence holistically and not as silos of IT and OT. This will bring greater flexibility and efficiency. More importantly, IT and OT convergence enables real-time decision-making. This will dramatically change the way enterprises operate and the use of data for business management. Bridging IT and OT is transformative for any business. Arrow has been helping customers by leading the transformation programs that use technologies and solutions across both IT and OT. In fact, we're one of the few companies with expertise in both areas. In the next few years, we'll see more devices deployed at the edge, more connected IT and OT systems coming together to benefit business, governments, and consumers, and we're excited to help drive that transformation.
Turning back to the present, Arrow engineers from around the globe picked some of the best solutions that they had developed in 2018. Some of the products we recently displayed at CES included a connected water quality monitoring and predictive maintenance solution utilizing smart connected water dispensers. As part of the solution, we also designed a web-based software dashboard that both the company and its customers will use to monitor quality in real time. We worked with one of the biggest commercial water distribution companies on this solution. This company has millions of dispensers deployed around the world. The potential returns from offering better customer service while doing it more efficiently are huge. Speaking of bridging the IT/OT gap, we helped design a wireless connected warehouse and distribution center inventory solution. This solution also consists of both hardware and software.
Workers wear truly hands-free devices utilizing voice controls enabled by speech recognition software. With no handheld scanner or tablet, this solution can significantly reduce accidents, improve safety, all while delivering the benefits of better inventory data. Another solution we displayed was an AI-based virtual analytics tool with custom applications in food service, retail, and healthcare. The interface is intuitive enough that a beverage company with minimal technology infrastructure could use the tool to track inventory levels and consumption patterns and reduce its carbon footprint by optimizing inventory movement. We're helping customers make great products. Yet, in our countless conversations with entrepreneurs, their number one problem is not coding or prototyping. It's production. Not to mention obsolescence planning, various environmental and conflict mineral compliance, and secure asset disposal.
The good news is that our supply chain services experts have developed a plug-and-play model that connects their businesses into today's complex global manufacturing stack, and it manages it so they can focus on their technology breakthroughs. Looking at near-term market conditions, leading indicators remain unchanged. Design activity grew year-over-year. The strongest region for design activity growth was in Asia. This is notable given reports of a slowdown in the region. We would normally see a decline in design activity heading into a prolonged downturn. Backlog remains up year-over-year. Lead times were stable across the portfolio and mostly unchanged from last quarter. Cancellation rates remain within typical ranges. Book-to-bill was 0.95 for the fourth quarter. Book-to-bill was at parity in the Americas and Europe and below parity in Asia and in 2018.
However, Asia activity and orders have improved in the recent weeks. In fact, book to bill for the month of January stepped up like it normally does. January book to bill looks like prior years, and this includes Asia. We are again guiding for year-over-year growth in the first quarter. We have over 200,000 customers. No one customer is accounting for more than 2% of our sales. While we're not immune to economic conditions, we believe our geographically diverse customer base with no significant industry concentration helps insulate our performance. In closing, at Arrow, we're committed to doing things the right way for customers and our suppliers. We're honored to be named top of category in this year's Fortune Most Admired Companies for the sixth consecutive year.
Our employees constantly tell us how proud they are to see the solutions they've worked on and customers they've helped make a real difference in people's lives. That's because we believe the power of innovation is to make life better, which happens to be great for business, and you can see that in our results. I look forward to updating you on our performance and our progress in the coming quarters. I'll now hand the call over to Chris to provide more details on our fourth quarter results and our expectations for the first quarter.
Christopher Stansbury (CFO)
Thanks, Mike. Fourth quarter sales of $7.92 billion were above the midpoint of our prior guidance range. Sales increased 5% year-over-year and 7% adjusted for changes in foreign currency. Approximately $43 million, or one percentage point of the unfavorable change in foreign currencies, was not factored into our prior guidance. The actual exchange rate for the quarter was $1.14 to 1 euro below the $1.16 rate we previously used for our forecast. Fourth quarter global component sales of $5.26 billion increased 6% year-over-year and increased 7% year-over-year adjusted for acquisitions and changes in foreign currencies. Sales were at the midpoint of our prior expectation. We had record fourth quarter sales in all three regions. In Europe, sales increased 13% year-over-year adjusted for changes in foreign currencies and increased 9% as reported.
Europe sales have increased year-over-year for 23 straight quarters adjusted for acquisitions and changes in foreign currency. We continue to gain share in the marketplace. In the Americas, sales increased 5% year-over-year and increased 4% adjusted for acquisitions. Growth was driven by strong demand from industrial and aerospace and defense customers. Asia once again produced good growth this quarter. Asia sales increased 7% year-over-year, and clearly there's been a deceleration in the region, but we continue to experience growing demand from manufacturing customers. Global Components operating income increased 17% year-over-year and increased more than 2.5 times faster than sales growth. Operating margin increased 50 basis points year-over-year to 5% and increased in all three regions. It's worth noting that full year 2018 Global Components operating margin was exactly 5%.
Enterprise Computing Solutions sales of $2.66 billion increased 6% year-over-year adjusted for changes in foreign currencies, the divestiture of the Unified Communications business in the Americas, and both a small acquisition and a small divestiture in Europe. Sales increased 2% year-over-year as reported and were above the midpoint of our prior expectation. Billings increased at a low double-digit rate year-over-year adjusted for changes in foreign currencies and grew in both regions. Growth was driven by infrastructure, software, security storage, and industry standard servers. Enterprise Computing Solutions Americas sales growth remained strong. Sales in the Americas increased 9% year-over-year as adjusted and 4% as reported. Europe sales were flat as adjusted and decreased 1% year-over-year as reported. Our product mix in Europe is more skewed towards software, so net sales growth tends to be dampened by agency accounting.
Enterprise Computing Solutions operating income decreased 7% year-over-year. Operating income decreased 3% year-over-year adjusted for divestitures and acquisitions and changes in foreign currencies. We made significant progress toward our profitability improvement objectives during the fourth quarter. We expect this to continue in the first quarter and the rest of 2019. Returning to consolidated results for the quarter, total company operating expenses increased 5% year-over-year. Consolidated operating income increased 5% year-over-year, and operating margin was unchanged year-over-year. Interest expense was $55 million, slightly below our prior expectation. The effective tax rate for the fourth quarter was 24% within our 23.5%-25.5% target range. As I've mentioned on recent earnings calls, we're seeing more variance quarter-to-quarter than we have in the past due to timing of discrete items.
However, we believe this range is accurate when looking at full-year periods. For the full year 2018, the effective tax rate was 24.2%. Net income was $225 million, up $3 million year-over-year. Earnings per share were $2.57 on a diluted basis toward the higher end of our prior guidance range of $2.46-$2.62. Earnings per share increased 3% year-over-year. We estimate that the strengthening of the dollar negatively impacted earnings per share by approximately $0.06 and negatively impacted earnings per share growth by approximately 3 percentage points compared to the fourth quarter of 2017. Operating cash flow was $263 million as the slower growth environment is allowing cash flow to normalize. During the fourth quarter, the board of directors authorized an additional $600 million worth of share repurchases. We repurchased approximately 2 million shares of our stock during the quarter for $150 million.
We repurchased approximately $230 million over the last 12 months and approximately $1.2 billion over the last five years. Entering the first quarter, authorization remaining under our share repurchase programs is approximately $729 million. This is a high-level summary of our financial results. For more detail regarding the business segment results, please refer to the CFO commentary published this morning. Turning to guidance, we believe the total first quarter sales will be between $6.775 billion and $7.175 billion, with global components sales between $4.975 billion and $5.175 billion, and global enterprise computing solutions sales between $1.8 billion and $2 billion. We expect interest expense to be approximately $58 million. We expect interest expense to be slightly higher in the first quarter compared to the fourth quarter due to higher interest rates on floating rate debt.
Also, the first quarter tends to be the least favorable for cash flow from operations, and that results in higher interquarter borrowings. Our guidance assumes an average non-GAAP tax rate at the high end of our target range of 23.5%-25.5%. We expect average diluted shares outstanding of $87 million. As a result, we expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.84-$1.96. The average US dollar to euro exchange rate we're using for forecasting purposes is $1.14 to EUR 1. This will be average for the month of January. We estimate changes in foreign currencies will have negative impacts on growth of approximately $160 million or 2% on sales and $0.08 or 4% on EPS compared to the first quarter of 2018. Thank you, Chris.
Lesley, would you please open up the call to questions at this time?
Operator (participant)
Yes, of course. Thank you, everyone. Your question and answer session will now begin. If you wish to ask a question, it's star then one on your telephone. If you want to withdraw that question, it's star two. And just as a reminder, if you wish to ask a question, it's star then one on your telephone. And we have a question, and it comes from Mark Delaney. You're live in the call, Mark. Please go ahead.
Speaker 12
Yes. Good afternoon. Congratulations on the good results, and thanks for taking the question. The first question I was hoping to focus in on the margin performance, especially with components coming in at 5% for the full year. I realize that's something that Arrow has been focused on. It seems that margin guidance that's implied in your first quarter outlook implies some further or continued year-over-year growth in margins. Just hoping you can help us better understand maybe any specific areas where you're seeing that year-over-year growth in margins as you're thinking about the first quarter.
Michael Long (CEO)
Sure, Mark. A couple of things that drive that. Number one is we're not seeing sort of a downturn the way that I think is being discussed in the marketplace. If you take a look at our book to bill at 0.95, that's still $100 million over last year in the bookings department. So the 0.95 ratio doesn't totally tell the story about what we see. And our backlog is still up over $500 million over last year, and our cancellation rates are normal. We're still seeing strength in aerospace, data processing, industrial, and medical devices. And as we said, we're seeing bookings come back in Asia starting this month. So taking all of that together, we feel like we've got pretty solid guidance. We also believe we're operating at scale.
I'll let Andy talk a little bit about Asia so he can maybe give you a little deeper dive into what we see going on there.
Andy King (President, Global Components)
Yeah, thanks, Mike. Hi, Mark. Certainly, as we look at our Asia business, we've continued to add customers that have precedented rates in Asia. Our overall active customer base is now up north of 200,000, and a lot of that's coming from Asia. We're not overexposed to some of the markets that are really driving some of the short-term headwinds as much as others, and therefore, we're still pretty positive about the outlook. Obviously, we've seen growth rates slow, but we're not talking about negative territory here. So I think as we look forward within this guidance, we still see some pretty positive outcomes.
Michael Long (CEO)
Mark, just one more add there. The consumer market is driving a portion of this market decline right now. As we've said in the past, that's not a huge percentage of our business. I think that's just something else to sort of keep in mind here. We know we can't outrun a full-on economic downturn. All we can do is run the business the best we can at the time. But right now, all the indicators that I just gave you and what Andy just told you give us some pretty good confidence that we can keep this thing going for a while.
Speaker 12
That's all very helpful. I guess just to follow up along those same lines, I know in past cycles, sometimes semiconductor suppliers have seen some of these cyclical inflections a bit earlier than distributors. I certainly appreciate all the comments you said on your book to bill and what you're seeing in your backlog. I mean, as we're thinking as analysts about building our models and as you use your experience to think about past correlations between your business and what sometimes the suppliers see, should we be thinking about any below seasonal quarters, maybe beyond March, as we're trying to build our models or the investments that Arrow is making and some of these new offerings in your bookings that you talked about improving this month? Do you think you can sustain more seasonal types of trends beyond the March quarter and components?
Michael Long (CEO)
Yeah. I want to validate for you the fact that you're exactly right when you say the semiconductor cycle, and we usually see it 3-6 months later, which is usually an early indicator for an economic downturn too. We right now in our bookings and our backlog, and that's why I wanted to make those two numbers come to light for you guys. While we totally agree we saw a little bit of a pause in bookings in Asia, the interesting fact that Asia is picking up again right now, and granted, we're a little over a month into the first quarter, we're seeing things as stable. Typically, going into a downturn for us, we would start to see a big increase in cancellation rates, and we're not seeing that.
And so that, coupled with a positive book to bill, would say, yes, we're looking pretty good going out there. But as you know, we forecast out one quarter at a time, and if we start seeing some changes, we'll certainly address them when we have to with the business. But I also think some of the semiconductor suppliers have been stating that they believe the worst is come and gone. And while I don't particularly know that to be true, I know the sentiment is changing about the year.
Speaker 12
Thank you.
Michael Long (CEO)
Yes.
Operator (participant)
Thank you. Your next question comes from Adam Tindle. You're live in the call, Adam. Please go ahead.
Adam Tindle (Managing Director)
Okay. Thanks, and good afternoon. I just want to start with a question maybe for Andy and if Mike wants to add. Obviously, nice job on components margins, and I want to touch on the operating structure there in a sec, but try to decompose what happens going forward to components margins. Just starting on the gross margin side, can you just maybe talk about what has typically happened to your gross margin during periods of moderating growth? Have you seen suppliers generally get tighter on the channel as they battle their own utilization and margin issues? Do they get more generous because growth is more scarce? Just talk about what you've seen historically and what might be similar or different now.
Sean Kerins (President, Global Enterprise Computing Solutions)
Sure. If we look at our gross margin profile, we're really seeing good positive momentum around our design activity. That has been a big driver of some of the improvements that you've seen as we went through 2018. Typically, as we bring new customers to the table, that is something that suppliers are extremely positive about and want to support us in those endeavors. And of course, as we have driven significant growth through significant customer acquisition, that gives us the opportunity to diversify the amount of products that we sell into those new customers. So all of those three things have really driven the kind of margin profile improvements that actually we talked about a year or so ago and actually started to come to fruition as we went through 2018. There's no change to those dynamics as we go forward.
We're going to continue to invest in those areas, continue to expand our capabilities, and pull that through to the margin line.
Michael Long (CEO)
Yeah. The thing that I would add to this too is don't underestimate what we've done over the last, my God, since I've been CEO. I'm happy to say that I think our IT journey is largely behind us in the components area. That started off. We saw probably 3-3.5 years ago, Europe took a dip and then came back after the new IT system was in and got a lot more efficient. We saw Asia do the same thing, but their dip was a little quicker. And then North America sort of came online, hitting the ground running. So that investment that we made that we discussed with you guys over the years in IT has helped us set a new bar internally to be more efficient.
That's yet to be tested on the downside, but our forecast would suggest that the downside negative sort of drain on our business could be less because our operational efficiencies are much higher this time.
Adam Tindle (Managing Director)
Okay. Maybe just continuing on that components operating structure. I think if we looked at OPEX as a percent of revenue below 8%, I think it might be multi-year lows. Maybe just I think you touched on some of the things that enable it, but talk about what a sustainable level looks like because I'm sure you want to invest in the business and drive the differentiated growth. And as you think about gross margin and operating structure, combining them up, do you think this is a year where we can grow profit dollars in components and expand margins? Thanks.
Michael Long (CEO)
Right now, all indicators are, we believe, we're going to have growth this year. I'll start off with that, that I believe we're not headed into sort of a disaster, albeit I'm saying it with caution. You guys know what's going on in the economy better than I do. What I will say is the levels that we're at today are levels that do allow us to invest in the business, and we are and have been. As you know, we've invested an awful lot in engineers, and that investment in engineers has helped us with our gross margin. It has helped us grow faster with our suppliers. That's where we've really put our efforts. We don't expect to back off of investing to expand our customer base. Having 200,000 customers, we know, we see, we're enjoying some of the benefits of having that many customers.
Now we need to sell more to those customers and continue to grow them at the same time. So I would say we've sort of seen some religion around our salesforce and what we expect them to do. And if we can continue to do that, if there are economic declines, we may have some new customers which could help us minimize those.
Speaker 12
Okay. Thanks, and congrats on a strong 2018.
Michael Long (CEO)
Thank you.
Operator (participant)
Thank you. Your next question comes from the line of Sean Harrison. You're live in the call. Sean, please go ahead.
Sean Harrison (EVP and Chief AI Officer)
Hi, everybody, and congrats on the solid results. Mike, I wanted to dig into your comments on improvement in the journey in ECS. We did see less of a decline in profitability year-over-year in that business. Where are you at in terms of getting those VARs that you've added over the past 18 months to selling more software and services? And when do you think you may get EBIT dollars flat for that business on a year-over-year basis in 2019?
Michael Long (CEO)
Yeah. What I'll do is I'll start, I'll give it to Sean, and I'll come back. But in general, we believe our journey is exactly as I told you last time. We actually believe we might be a little ahead of that, but I don't want to get over my skis. So we're feeling positive. And as far as the VARs go, I'll let Sean talk about that.
Sean Kerins (President, Global Enterprise Computing Solutions)
Yeah, Sean. It's funny. We've been busy onboarding new customers throughout all of 2018. In fact, we've probably activated over 4,000 net new relationships in our major markets. And when we do that, the key is really to expand the scope of those relationships over time and help those selling partners benefit from some of the emerging demand trends that implicitly drive software. And I think what we're seeing in our Q4 results was better growth in software relative to Q3 and Q2 of last year. And that's the proof in the pudding. So we're going to stay the course when it comes to our ability to bring our new customers. There's lots of good things that are driving that.
We're going to stay the course relative to our investments in the mid-market where we tend to work with a customer set that takes more complete advantage of our full value. And so we think the improvement in Q4 will lead to better things this year. We're looking for improvement again and certainly in Q1 in the first half. So just to kind of come back and add to Sean, we have seen largely Europe grab a hold of this strategy maybe a little ahead of North America. And so our European business is relatively healthy in general and has produced growth in bottom line and is doing a very good job. So it's not like this model is being tested for the first time. We already have about half of our business that's there. And we really need North America to execute a little stronger on the software side.
But they're gaining ground on it. They're working hard on it. We believe we're still at the same place we were when we talked to you about it in December. And I think at that point, we're going to be relatively happy but never satisfied. Maybe that's the answer I'll put back to you.
Sean Harrison (EVP and Chief AI Officer)
Perfect. As a brief follow-up, Chris, it was good to see another good quarter of free cash flow. Your cash cycle days are still up a little bit year-over-year. Would you expect to be able to bring that down in the first half given a little bit slower growth out of the components market?
Christopher Stansbury (CFO)
Yeah. In a word, yes. The focus is obviously on continuing to grow faster than market, and we're going to make sure we're smart about that. But there's no question that with slightly slower growth than what we've been seeing, there's the opportunity to do that. And we're very focused on that in the first half. So yeah, that's the goal.
Sean Harrison (EVP and Chief AI Officer)
Excellent.
Operator (participant)
Thank you. Your next question comes from Param Singh. You're live in the call. Please go ahead.
Param Singh (CEO)
Hi. Thank you for taking my question. Now, really appreciate the color and the details around the margin improvement initiatives here. But if I just look at your guide, ECS implied op margins probably like the lowest in five years. And you're also talking about improving software mix over the last couple of quarters. So can you maybe give some clarity on why this is still down a lot? And then do you think you can grow this margin profile into 2019 amid, let's say, a flattened revenue environment?
Michael Long (CEO)
First, I'll start. I think maybe we should look at your model or something, but I don't agree with your premise at all. In fact, I don't see what you just said as what we're seeing or viable for that matter. That business is improving. We are seeing an increase in software sales. So I think there's something that maybe is amiss there that we can help you with. Sean, maybe you can quote some of the percentage growth or things like that that we're seeing in software. You don't have to go between North America and Europe because we just said that Europe is doing much better, and we'll expect North America to do the same. But maybe Sean can give you that information, which maybe it'll help you.
Sean Kerins (President, Global Enterprise Computing Solutions)
Yeah, Param.
Param Singh (CEO)
Yeah. Go ahead, Sean.
Sean Kerins (President, Global Enterprise Computing Solutions)
Yeah. Param. So in Q4, what I would say about our top-line growth was balanced. We saw good growth across most of our technology categories, as Mike points out, software included. In fact, that grew by low double digits on a billing basis globally. We also saw strength in security, and there's a big chunk of software associated with it. But we also grew in the hardware space as well, both industry standard server and storage. So I was pretty pleased with balance across our line card. We also got good contributions across the globe, both in North America, in Europe, and with our U.S. federal businesses all contributing to a strong close in Q4. And we're seeing similarly a pretty good start to the year so far on a year-over-year basis.
We're actually looking for up margins that are going to start to look better on a year-over-year basis or at least less worse, certainly, than we had to kind of wrestle through last year. So as Mike said, we're probably looking at different sets of data, but we're feeling a bit better about the progress we've made over the last four to six months.
Param Singh (CEO)
Got it. Now, thank you for the call. I was just looking at your comments that you made on the component side and doing the math based on the overall guide, but that's okay. As a follow-up, obviously, this is a countercyclical business. So given that the overall market has kind of slowed down, would you expect to generate a lot of working capital cash going into 2019 or even in the first quarter? And then outside of buybacks, other than capital deployment plans in case cash flow increases into the year?
Michael Long (CEO)
I think there's two things. I'll give you a little bit of a color of what we typically see. Based upon what we see, the inventory levels should start coming down some. When you have the growth that we've had, you get to a peak. The interesting thing about our inventory in Q4, as we told you, the demand strength is still relatively high because it was $100 million bigger in bookings and $500 million bigger in backlog. That would give you a bit of a pause to not do anything crazy yet with the inventory, meaning start divesting the inventory. We're not in a panic situation. We are in a situation where that inventory can start coming down and doing well based off of what we've seen.
And remember, in the past, a declining inventory, and yes, it was going to generate tons of cash, but you also generate less gross margin because you're sort of in a panic situation getting your inventories in control. We're not in that right now. So I'm going to hand it off to Chris there about the cash flow, and we do believe we're going to get more cash flow, but I want to sort of preface it with that of why we see this a little different.
Christopher Stansbury (CFO)
Sure. Yeah. Param, just to follow on, as we look at the year, and we've talked about this, I know at various investor events and whatnot, as the components business grows less than 10%, we tend to see operating cash flow look a lot like our GAAP net income. And we would expect that for the year or slightly below that for the year in 2019. Obviously, we have seasonality. Q1 is a tough quarter for cash flow. But over the course of the year, we expect strong cash flow. And the focus in the near term will be on buybacks and a little bit of debt reduction to moderate where we are on interest. But those are the priorities. Thank you so much for that call, guys. Really appreciate it.
Sean Kerins (President, Global Enterprise Computing Solutions)
Yep.
Operator (participant)
Thank you. And your next question comes from the line of Tim Yang. You're live in the call. Tim, please go ahead.
Speaker 12
Hi. Thank you for taking the question. This is Tiffany on behalf of Tim. For your components business, can you comment on the size of your industrial and automotive exposure? And are you seeing softness in these two markets?
Michael Long (CEO)
We'll help you with that. We don't put out our total numbers for each of those segments. We saw in the Asia market, which is interesting, despite what's going on there, our automotive business grew 14%. North America, the business was flat up. In Europe, it was flat up also, I believe. We are seeing that. Our industrial business in the Americas was up significantly quarter-over-quarter, 6%, and I think about 46% for the year. Then, of course, aerospace and defense were up for us. We're seeing the same things that many others are in those markets.
But as you know, those have been two focus markets for us, one being automotive that we started several years ago with the building of the SAM car, which gave us a lot of credibility, many additions to that, doing some stuff with IndyCar, continuing to start to do some things, some direct engineering for some of the automotive manufacturers. So our growth rates were higher. We have seen some of the automotive growth rates slow but come back into parity of where the market is itself versus being sort of explosive for us. Andy, do you have anything you'd like to add to that?
Andy King (President, Global Components)
No, I think that's right. I think we've seen pretty broad industrial strength, particularly in Europe and particularly in North America. Transportation, if you want to be a little bit more broad, has actually continued to be a growth factor for us. And we expect that to continue as we take out more of those technologies to a wider and more diverse customer set. So we'll continue to maintain the focus on those segments, Tiffany.
Speaker 12
Okay. Thanks. And I have a follow-up for your ECS business, specifically the U.S. ECS business. Are you gaining share or are you seeing block-based end-market strength? Thanks.
Michael Long (CEO)
Yeah. So Tiffany, as you know, we grew nicely in Q4 in North America and in a number of segments that was faster than market. So in general, we're holding share across the various categories that we play in, and in some cases, we're gaining. We obviously don't talk about specific suppliers, but I feel like we're doing a bit better than holding our own. Yeah. And let me remind you the issue with the business here. This was largely just a data center business, just an enterprise business, and just a proprietary server business. And we have been working to change that over the last couple of years with the onset of solid-state storage and converting that. So it really, for us, has been a mixed issue. Frankly, we're very happy with our hardware sales.
We'd like to get our software sales to catch up to the level that will make a big difference in where the future of this business is going and where we need to be. That's the change that we're making in it. Hopefully, all of that helps you.
Speaker 12
Good. Thanks a lot.
Operator (participant)
Thank you. Your next question comes from the line of William Stein. You're live in the call, William. Please go ahead.
William Stein (CEO)
Great. Thanks for taking my question, guys. I'm hoping maybe we can just attack this difference between what you're seeing and what your suppliers are seeing in a little bit different way. Aside from your strong execution, I know there have been some supplier gains. Maybe those are a little bit more in the past than more recent. But is one of the differences maybe end-market exposure, or perhaps it's a matter of whether you're serving more of the international OEMs in China versus sort of local manufacturers? Is that part of what's driving the difference?
Michael Long (CEO)
No, I'm not going to get into where all of our suppliers have their business. I mean, you guys know where you focus when you're on calls with different suppliers. I think I said before that we think a benefit for us, unfortunately, it's a benefit. It's a negative. We're not that big in cell phone devices. That's not a big consumer item for us. Our consumer business is sort of ho-hum in the scheme of things. And while I would love to go in there and run and take everybody's market share, that's just not something that we have done. But also, we're a little more insulated as a result of not having that business when that's the business that is taking the biggest hits.
I would say to you on the industrial front for us, we have gained a lot of new customers over the last couple of years, and we're selling them more products, which has actually helped us with industrial because of the customer base increase. So we have seen the same. A medical customer for us looks a lot like an industrial customer too. So we've seen the same type of growth there. But I would largely say it has been the expansion of customer base. It has been expansions of products into that. It has been increased design activity that has turned to production that has helped us grow.
While you could say it's great right now because you're talking to me about the consumer piece, we're relatively low in general on the consumer side, given how big of a market that is in Asia-Pac for a lot of our suppliers. Hopefully, that helps you.
William Stein (CEO)
It does. And maybe just connected to that as sort of part of the same question on the supplier side, I referred to it a minute ago. I think you'd taken some suppliers to concentrate the majority of their business, if not all of it, with Arrow. I think some of those were maybe more on the order of a year ago. What are you seeing with regard to your suppliers in terms of share today? Are you still gaining in that way, or is any of it reverting? Any trend there that we could highlight? Thank you.
Michael Long (CEO)
Well, really, it was a couple of years ago. I think the market shook out. There was still some that came in, I think, in the first couple of quarters this year. And then the rest of it was just sort of gutting it out from there back into typical market activity. The big thing that has been working, which we told you it would tick up, and it has, is don't underestimate the amount of money and the amount of effort we put into designs and engineering for the customer base. It's one of the reasons that we're seeing more customers. We're doing more designs, deeper designs, and those designs have been going into production. And that all helps with the growth. And a lot of it, frankly, new customers.
I think when we started, we were around 125,000 or 130,000 customers, and we're now hitting that 200,000 customer mark. So that, to me, is a big indicator that, well, not only a big indicator, but also an insulator for us as the market slows. If we can continue selling more products to our current customer base, that will help us too.
William Stein (CEO)
Thank you.
Operator (participant)
Okay. Thank you. Your next question comes from the line of Matt Sheerin. You're live in the call. Matt, please go ahead.
Matthew Sheerin (Technology Consultant)
Yes. Thank you. A question on the enterprise computing business relative to your exposure to the federal markets and just commentary around the federal shutdown, any impact on the business, whether you're seeing deals get pushed out at all?
Michael Long (CEO)
Sure. Go ahead.
Sean Kerins (President, Global Enterprise Computing Solutions)
Yeah. Hey, Matt. Good morning. So basically, we've seen little to no impact from the partial shutdown. Assuming it doesn't recur, I'm really not concerned about risk this quarter. The other thing I'd point out, remember that Q1 is clearly the smallest seasonally quarter across our whole U.S. federal business year.
Matthew Sheerin (Technology Consultant)
Okay. And just looking at that business and the strength that you're seeing in hardware, I know there's been some drivers, particularly a server upgrade cycle in front of Microsoft expiration dates in terms of support. And then, of course, there's been, as you talked about earlier, Mike, about the transition to solid-state storage. And just relative to that, A, your comments just on the server upgrade cycle, and B, with the potentially negative impact of memory component pricing coming down, any pass-through there that could create some top-line headwind, or do you not see that happening?
Michael Long (CEO)
So Matt, I think you got a couple of questions there. One is probably just broadly around hardware. Yeah, we continue to see pretty good hardware growth, both industry standard server and storage. So far, in the early part of this year, we haven't seen that change a whole lot. Relative to Microsoft or any specific server upgrade cycle, the good news is we're fairly broadly exposed, and there isn't any one workload that tends to tip our business now that it's the size that it is one way or the other. Regarding flash and some of the new architectures that comprise the storage category in general, we've gone well past the crossover point where the newer architectures and technologies are clearly the majority of our storage business. So we think we've already kind of digested what that means. You're right.
The form factors and the performance and the capacities are subset. ASPs are smaller, but our unit counts remain healthy, and we think we've seen ourselves last that transition. And Matt, sorry. Memory. We see memory kind of as we see it as a commodity. I guess it's the best way that I can put it. There are certain products that just require memory under all cycle conditions. And yes, that changes. But some of the memory guys have announced they're going to increase their demand. So to think that those prices are going to stay up there while guys are increasing their demand, I would say no. I would say they're in their last hope right now coming into a couple of quarters from now, watching that memory prices drop again.
Speaker 12
That's just a pass-through for you, but no change in margin, obviously.
Michael Long (CEO)
Absolutely. It's a total pass-through. Whatever they do, we're going to do. We're not going to. We've never wanted to corner the market here.
Matthew Sheerin (Technology Consultant)
Yeah. Well, that's a smart move. Okay. Thanks so much.
Michael Long (CEO)
Remember, Matt, we're not in the commodity game. We're in the solutions game. So when we enter a relationship, be it around hardware or software, we're looking to help our partners benefit from the whole stack. So that ends up being a really small piece of the equation.
Matthew Sheerin (Technology Consultant)
Okay. Thank you.
Operator (participant)
Thank you. Your final question comes from the line of Joe Quatrochi. Please go ahead, Joe. You're live in the call.
Joseph Quatrochi (CFA)
Yeah. Thanks for squeezing me in. I was curious. In the past, you've kind of given an annual update on the size of your IoT business. So I was kind of curious of what that was exiting 2018. And then I kind of wanted to double-click on you've seen what looks like an acceleration in your customer adds in 2018. So I was wondering, I know that you've had the new supplier awards, but kind of can you help us understand what's driving those new customer adds?
Michael Long (CEO)
Yeah. I'll start with that, and I'll leave the IoT piece for Andy. Remember, our digital business is growing significantly over the course of the last couple of years. We also integrated in sort of design, make, build type activities for those customers. We're seeing an interesting influx of customers going from digital into our direct business and meeting the sales force and meeting some design engineers. So that has produced a lot of leads for us, significantly increased our reach, and allowed us to profile customers in a way that we don't waste a lot of time when we do send a salesperson out to them where they're not just on a fishing expedition anymore. They've got good, legitimate items to follow up on. All of that obviously makes us better.
So the more we can integrate our businesses from digital to the component business into the edge computing business that we have into sort of Sean's business on the ECS side and then on the cloud, all of those things are going to generate more business. What's interesting is we see new customers, new entrepreneurs pushing our businesses together more. So utilizing the sensors, utilizing our engineers, and then getting help with manufacturing, and then jumping over to ECS on the cloud, we're seeing that more with startups and businesses that have never built anything before. So we know that's going to matter into the future. And if you look at sort of the old line businesses, they move a little slower that way. But nonetheless, if they're going to be in IoT, they're going to need to be on the cloud somewhere. So hopefully, that answers your question.
Steve O'Brien (Head of Investor Relations)
And then if I pick up the question around IoT specifically, and actually the two questions are linked because one of the reasons why we're growing customer base so aggressively is the amount of new customers that are actually coming to us to help them solve their IoT solutions. These are outside of the traditional domain of where we may have deployed capabilities. And that's one of the big reasons why we're adding customers at unprecedented rates. But on the IoT side, we're continuing to grow our IoT business at meaningfully accretive rates versus the total business. We're seeing that very heavily led by the hardware deployment around sensors and around wireless and connectivity. But increasingly, we're seeing that pull through our services stream and indeed our enterprise computing solution stream. So we see this driving growth across the entire enterprise at an accretive rate, Joe.
Joseph Quatrochi (CFA)
That's perfect. Thank you.
Operator (participant)
Thank you, everyone. That concludes your Q&A session.
Steve O'Brien (Head of Investor Relations)
Thank you, Leslie. Let me say a couple of quick words 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. It could cause actual results or facts to differ materially from such statements for a variety of reasons, and the company undertakes no obligation to update publicly or revise any of the forward-looking statements. Detailed information about these risks is included in Arrow's SEC filings. If you have 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)
Thank you very much. Thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.