Arrow CEO: Avnet-Tech Data Deal Is Bringing More Partners To Us

Arrow Electronics CEO Michael Long said the distributor has seen an influx of new solution providers and has an edge around the Internet of Things (IoT) thanks to competitor Avnet selling its Technology Solutions business to Tech Data.

"Over the last month or so, we've had a big uptick in VARs and MSPs in here figuring out how they can do more business with us … given the fact that we're the only true value [-added distribution] business left out there," said Long during an earnings call Thursday. "These market shifts have caused some opportunities to move forward faster."

Long said Broadcom's $5.9 billion acquisition of networking systems supplier Brocade is further evidence of a blurring of the lines between the semiconductor and data center markets. Arrow is uniquely positioned to take advantage of that convergence, Long said, since it will be the only distributor with both an IT and a components practice once the $2.6 billion sale of Avnet TS closes in early 2017.

[RELATED: Avnet TS Misses Big In Q1, But Proposed Buyer Tech Data Is Not Shaken By The Earnings Shortfall]

"Being the only true business that can go from sensor to storage really helps with our IoT line card and our ability to service business for customers that are moving into that space," Long said. "To win these opportunities, we will show that no one is focused more on where the markets are heading than Arrow."

A prime catalyst for consolidation activity at both the supplier and distributor level, Long said, has been a need to broaden capabilities around cloud, digital and the Internet of Things to better capitalize on growth opportunities. Arrow multi-year journey to broaden its solution capabilities is already well-underway, Long said, and the distributor today is reaching more customers earlier in their lifecycle.

"As our competitors turn inward to focus on divestitures and integrations, we have compelling opportunities to do more business with our existing suppliers, add new suppliers and new solutions to our line card, do more business with our existing customers, and win new customers," Long said.

Once the Avnet TS-Tech Data deal closes, the combined company will continue partnering with Avnet's legacy Electronics Marketing (EM) business to leverage EM's IoT capabilities. Avnet also has IoT capabilities in its TS business, while Tech Data formally launched an IoT program in July.

Arrow doesn't expect the Avnet TS sale to impede its ability to preserve existing hardware and software margin levels, according to Sean Kerins, president of Arrow's Enterprise Computing Solutions (ECS) business. The distributor hasn't seen much of a change in pricing as of late, Kerins said, and feels good about its existing channel and supplier relationships.

"They [Tech Data] are spending a pile of money for a value-added business [Avnet TS] that they see is solution-oriented and that needs to get them closer to the market than we are," Long said. "Cutting the price of that [products and services distributed today by Avnet TS] is going to make it pretty difficult to get a payback on it, so that just doesn't seem practical."

Competitive changes also contributed to a big uptick in Arrow's U.S. government business as the federal fiscal year wrapped up on Sept. 30, Long said. Arrow competes heavily with Ingram Micro in the federal space, and observers have expressed concern that Ingram's pending $6 billion sale to Chinese logistics firm Tianjin Tianhai could complicate the distributor's ability to sell to U.S. government customers.

Revenue for the Centennial, Colo.-based distributor in the quarter ended Oct. 1 increased to $5.94 billion, up 4.2 percent from $5.7 billion a year ago. That beat Seeking Alpha's projection of $5.86 billion.

Net income jumped to $117.7 million, or $1.28 per share, up 7.8 percent from $109.2 million, or $1.15 per share, a year ago. On a non-GAAP basis, net income climbed to $143.1 million, or $1.56 per share, up 7.3 percent from $133.4 million, or $1.40 per share, a year ago. That bested Seeking Alpha's estimate of $1.51 per share.

Arrow's stock fell 2.8 percent in trading Thursday to $59.25 per share. Earnings were released before the market opened Thursday.

Year-over-year sales for Arrow's global ECS business inched ahead to $2.03 billion, up 1.3 percent from $2.01 billion last year. The distributor saw double-digit growth in its software business thanks to demand around security, infrastructure and big data analytics software, Long said.

Although Arrow's storage sales fell by 2 percent, Kerins said next-generation storage technologies – notably flash, converged and hyper-converged infrastructure – now account for nearly half of Arrow's storage sales, up from less than 30 percent a year ago. Kerins expects the crossover from legacy spinning-disk storage to emerging storage technologies to continue in the coming quarters.

"We believe that solid-state storage is starting to come to a level where we can show growth in that [overall] product segment next year," Kerins said.

Arrow's Americas ECS business climbed to $1.49 billion, up 6 percent from $1.41 billion last year. The picture was gloomier in Europe, where Arrow's ECS sales fell to $539.9 million, down 9.9 percent from $599.1 million last year.

Arrow is projecting total sales of $6.3 billion to $6.7 million in its next quarter, with ECS contributing revenue of between $2.6 billion and $2.8 billion. Diluted earnings per share excluding charges are expected to come in at between $1.92 and $2.08 a share, the company said.

That projection is less than what investors were expecting. Thomson Reuters predicted Arrow would earn $2.09 per share on sales $6.84 billion overall.