Software, Services Propel Double-Digit Growth for Arrow

Arrow Electronics reported big gains in profit and sales Wednesday driven by a conscious effort to sell more software and services for the data center.

The Englewood, Colo.-based distributor saw quarterly non-GAAP earnings rise 19 percent for its third quarter ended Sept. 27 to $140.2 million, or $1.40 per share. That beat estimates from Thomson Reuters analysts of $1.31 per share.

Year-over-year revenue jumped 11.2 percent from $5.05 billion to $5.61 billion, exceeding expectations of $5.4 billion.

[Related: Arrow Tapped For Lenovo Product Distribution]

"We are driving improved performance segment by segment, business by business," Mike Long, Arrow chairman, president and CEO, said during the company's earnings call.

The quarterly results were released before the market opened. Investors sent the company's stock up on Wednesday, when it closed up 2 percent to $55.01 per share for a market value of $5.44 billion.

Arrow's enterprise computing solutions (ECS) division saw global sales increase 19 percent to $1.88 billion. European sales grew 41 percent to $619 million, while revenue from the Americas was up 11 percent.

Excluding Arrow's $317 million purchase of Munich-based Computerlinks last year, ECS sales were up 7 percent both globally and in Europe.

Long said Arrow has oriented its ECS business around high-value software and services targeted at the data center, though the distributor's storage, networking and server revenues also grew over the quarter at healthy rates.

Software now comprises 35 percent of Arrow's ECS sales, Long said, with storage coming in at 30 percent, services coming in at 15 percent, servers coming in at less than 15 percent and networking come in at more than 5 percent.

"What we've been hearing is relatively strong," Long said. "The market is covered, and we're still seeing opportunities."

Maintenance contract renewals have become the dominant part of Arrow's service business as the distributor's install base has continued to grow, said Sean Kerins, president of the enterprise computing solutions business, during the earnings call. Arrow is also actively assessing opportunities to refresh or upgrade customer's computing environments, Kerins said.

Smaller segments of Arrow's service business include hybrid and off-premise cloud services, Kerins said, as well as educational programs for vendors and solution providers.

The company is also making significant investments into ArrowSphere, its online cloud marketplace. Kerins said the ArrowSphere business is approaching a run rate of $50 million, and has enabled partners to deliver hybrid and off-premise solutions as the market gradually grows. Demand, though, still persists for on-site deployments, Kerins said.

Arrow has additionally enjoyed better activity levels and pace in its sever sales, Kerins said, while storage customers have been moving from Unix to Intel. Other areas of continued growth in ECS include infrastructure software, virtualization and security, Kerins said.

Arrow has seen more gradual growth in its converged and hyper-converged solution sales. Kerins said customers are slowly but steadily beginning to recognize the value of a single, pre-built, multi-vendor converged solution.

In the hyper-converged arena, Kerins said Arrow has teamed up with vendors such as SimpliVity and Nutanix. Many customers, though, have remained on the sidelines evaluating the multitude of storage options both in flash and otherwise.

"Hyper-converged solutions are not yet the dominant piece of our storage or server networks," Kerins said.

For the next quarter, Arrow said it expects earnings per share of $1.75 to $1.87 and revenue in the range of $6.1 billion to $6.5 billion. Analysts had projected earnings of $1.74 per share on sales of $6.16 billion.

PUBLISHED OCT. 29, 2014