Arrow Electronics, Inc. Aktie

We're honored to have Arrow Electronics here. And representing Arrow, we have Bill Austen, who is with the Board of Directors. He's been on the Board since May of 2020, and he's the current interim CEO as well. Bill, thanks for joining us today. Prior to this -- prior to joining Arrow, he was with the Bemis Company, and that is a manufacturer of flexible packaging products. So Bill, thanks. We are hoping to have a great discussion today. Thanks for joining us today.

Thanks for having us, Ruplu. I'm glad to be here.

Great. For those of us who are new to the story, can you just kind of talk about overall, what does Arrow Electronics do? What are the different parts of the business and give us a lay of the land on what are the different types of services that you provide?

Sure. So for those of you that don't know the story, Arrow Electronics has been in the business for 90 years. We have a very long history. We are an electronic component and enterprise-wide software distributor. We're in 96 countries around the world. We have 23,000 employees, and we have an extremely broad and very diversified and differentiated business model. We feel that we're positioned extremely well today. We're undervalued. And if you want to play in the AI space, you could look to Arrow as somewhat of a mutual fund. If you think about all that goes into AI today, all that goes into data centers today, both on the hardware side, the component side and the software side, we are that business that distributes those products around the globe.

We have 2 businesses, Global Components and ECS, Electronic Computing Solutions, which is the software side of the house. They're both big distributors. And inside the core of that is very large engines that distribute either components or software, enterprise software. And we'll -- $30 billion to $35 billion of revenue. Last couple of quarters, we -- Q4, we hit it out of the park. Q1, we absolutely to use my CFO's term. We crushed it in Q1 with 39% year-on-year growth in both components and in ECS, and we exceeded our EPS by 190%, $5.22 a year ago, we did $1.80.

So we are -- we attribute that to a lot of things that have been going on in the business, a lot over the last few years, there's been a lot of hard work to take cost out and create leverage in the P&L. If you look at our operating expense as a percent of gross profit, it's 63%. And if you look at others in the space, they're in the low 70s and 70% from some of our competitors' percent of OpEx as a percent of GP dollars would be a good number. We're at 63%. So when we drive revenue growth, which the cycle has turned and it's moving up, we create profit because it falls through the P&L. So we've had a tremendous run over the last 2 quarters, and we just -- we see that we're just getting started. Long answer to a short question.

No, that's a great overview. Thanks for that. So as you said, this is a cyclical business, right? So where do you think we are in this cycle? And how do you see the remainder of 2026? And what are some of the things that are giving you confidence that this is maybe a more structural acceleration versus are we at the peak?

Well, I think if you look back, let's look back a couple of quarters, 3, 4, 5 quarters, and you looked at our leading indicators of book-to-bill ratios across the business, you look at what kind of visibility we had in our backlog, how far our backlog stretched out, what lead times were, they were nowhere near the levels they are today. So if you just step forward 2, 3 quarters or back a couple of quarters, quarters, we were below 1 book-to-bill ratios. We had very little visibility into our backlog. And when I say little, I'm talking within the quarter. So 90-day visibility is the backlog. As we went through the third quarter last year and the fourth quarter, that visibility started to extend a little bit. Book-to-bill ratios as we exited 2025, we're just about at parity, a little over. And then as we got into the second week, let's call it, second, third week of February 2026, our book-to-bill ratios jumped significantly above parity across all 3 geographic regions, across many of the verticals in our space and then all of a sudden backlog starts filling in.

Q1 was full. Q2 was full. We're filling in Q3 and Q4. And in some cases, we now have visibility into Q1 2027. And there's always this debate in this conversation around is it real? People want to -- their nearest point of memory is COVID and all that happened in COVID with double ordering, triple ordering. That's not -- we don't see that happening today, okay? We see very solid backlogs. We see good visibility. And we think that we're in -- to answer your question, early stages of this recovery.

Got it. I want to touch on both parts of the business, but let's start with Global Components. Can you talk about what you're seeing from a demand standpoint, both from a geography -- from a regional standpoint as well as from a product standpoint, how is demand trending in different verticals and different product categories?

Well, you asked a lot of questions.

Yes, I combined 3 or 4 into one.

My memory, I'm getting old. No, but if you just -- let's walk across the regions, right? If you go back a couple of quarters, Asia was very -- was significant, right? And Asia for us and others, that's where you have -- you got good growth, but you have low margins. So everybody bets on the West coming back at some point. We started to see that late mid-Q4 last year. We started to see that Asia was continuing to grow. A lot of that was driven from electric vehicle and the fact that the Chinese government had incentivized the car industry -- incentivized consumers to buy more electric vehicles, so there was a spike in EVs toward the end of fourth quarter last year.

Then we started to see the West coming back. And when I say starting to see the West coming back. Europe, a couple of green shoots in the Americas market, we saw more than green shoots. We saw many of the verticals across aerospace and defense, both in Europe and in North America. We see industrial and what we call our mass market. Those are our industrial markets. Those are customers that are going to buy anywhere mid million dollars, $3 million, $4 million, $5 million or less of components coming back strong.

Now to us, that's really positive because that's where you make money, okay? You make money in the West, in the mid-market, in the mass market, rather, industrial, transportation, aerospace and defense, we saw those 3 verticals starting to place more orders as we went through Q4 into Q1. And that's continuing that strength today. Obviously, compute has been strong for a while, and compute has been strong. That's been a driver in Asia.

Obviously, a lot of AI data center builds taking place in Asia. So we saw compute in Asia. We see compute in North, South America, we see compute in Europe. But the real strength is now that the industrial markets are coming back in both Europe and in North America. And we attribute that to industrial companies that are building their product that are going to attach to AI at the edge. So there's -- that's going to drive a tremendous amount of component growth as we go through the next many quarters.

Okay. Maybe I'll delve a little bit deeper into that in a bit. But one thing I want to touch on is supplier price increases. And just explain to us how that impacts your revenues and margins, and it didn't seem like it impacted the first quarter all that much. So is there a timing element here as well?

Ruplu, we've gotten this question because our first quarter was driven by volume, and that's a very positive thing. I would much rather have a volume-based recovery than a price-based recovery. And we see it in units. We had little to no impact from price in our result in Q1. It was virtually all unit volume. The way that pricing impacts us, supplier raises its price, we pass it through, okay? So we're going to see it in dollars. We're not going to see it in rate. But if you look at our operating income rate in Q1, it was 5.5%, which is far in excess of what people were anticipating.

And that again goes to the fact that it's a volume-based recovery. We get units, we get volume. We've created a tremendous amount of leverage in the P&L and that falls through to operating income. And that's the model that we've built, and we're going to continue to push on that. We're not going to get crazy and add this cost, add that cost just because we can add cost. We're doing a really good job of making the right decisions within the business units. If you think through this, if you go back you've been in the space a lot longer than I have. But if you go back a few years, I've been on the Board for 5 years. The plan was always, hey, there's growth coming. We need to hire 80 people. We need to hire 70 people. We need more feet on the street because if we have more feet on the street, we can sell more. We said, time out, what are we doing?

Do you -- why do we need to add 70 people? Why do you need to add 80 people? Why can't we do this a different way? What tools are out there that we can deploy. What processes can we put in place. So we don't need to add those 70 or 80 people. We've created a tremendous amount of momentum in our business, and I'm an engineer, and just real quick, momentum is a function of mass times velocity in a business like ours, mass comes down to the people. Velocity is how quick do you make decisions. We've reduced the mass. We've sped up the decision making and the right decision-making around what business do we really want because it has higher market versus let's take on this inventory at 2 and 3 points of margin because it's a good thing to do because we can go sell that.

Well, wait a second. If we can take on inventory that's 14 points of margin. I want to make sure that we have the right balance and how are we going to drive the margin. So that's what we've done. We've created a tremendous amount of momentum. We're not managing -- we're not running the business the way we used to run the business, add heads, you get more sales. It's not necessarily that more sales are good. Are they the right sales? And I would argue that we're on that track of making the right decisions, make the right sales so that we can drive margin. And that's what we did in Q1.

Got it. One thing that's gone up significantly in price is memory. Can you talk to us like how big is memory in terms of your product line? And how do you see memory prices trending and impacting your results?

We see it as everybody else on the price side. And memory price is going to go up -- it's going to be memory capacity to manufacturer, is going to be tight. It's going to be managed that way from the manufacturers of that memory. And we're going to always be in that band of mid-single-digit memory as a percent of our revenue in Global Components. And it's 6% to 8% on any given quarter, it's somewhere -- it's in that band of 6% to 8%. And when we get the price increase, we pass it through.

Got it. Talk to us about value-added services and how that impacts the margins? And is that a margin lever that you can employ.

It is absolutely a margin lever. So if you look at our 2 businesses, right, Global Components and ECS, the core of those businesses are really big distributors. And when we look -- when we talk about value-added services, we talk about using that engine of the core and spinning out value-added services to support those big customers and/or suppliers that create that engine. So supply chain service is a front and center portion of our value-added services. If you go back a couple of years, value-added services was about 20% of our operating income. If you looked at last year, value-added services generated 30% of our operating income in the business.

And we're going to continue to drive it in that direction. But value-added services on supply chain, we manage the supply chains of about, let's call it, a dozen and a half large companies that are heavily embedded in either global -- in global components. So for instance, hyperscalers. We manage the supply chain for about 5 of the top hyperscalers. And what that means is that if they want to build a data center in Hungary, we get notice of that. They ask us, can you help us and the answer is usually yes. What do you need? Well, we need to house all of this material.

We need to procure, deploy, ship, receive, do all this work around $5 billion plus of material. We'll build them a warehouse. We'll build a warehouse in Hungary. And they will -- we will then step into the center of the relationship between the suppliers and the building of the data center and handle that material and handle the AR and the AP. It's not our inventory, it's the hyperscalers inventory. So it's a very inventory-light model, and we get paid a fee to manage that for them. We also manage the ARAP, so they pay us in advance we might carry that float of a lot of money for some period of time that we use within our business to pay down debt or do other things, and then we pay the receivables when they come in.

So it is a really cool model. It is -- we manage complexity. We've done that for years. And now we've taken it from the core distributions, and we set it up on its own. We stood it up. We reorganized the components business earlier this year into 3 pieces: Semiconductor; IP&E; and value-added services. So we've got a leader that's -- we call him a Chief Growth Officer for value-added services, and that includes supply chain, demand creation, engineering services. And Murdoch manages that piece of the business. And what we do is we work with the core of the distribution model to pull business out and sticking into value-added services that creates a whole lot more margin than it would say in a semiconductor sale, which is at low single-digit margins. We still get the semiconductor sale, low single digit, but we're working with those suppliers at a much different level to create value for us and create ease of business for them. And it works really well, and we're going to continue to push on that.

That's helpful. As you look out into the next 6 months as demand is improving in various end markets, do you see any parts becoming in shortage? And in the past, Avnet -- sorry, Arrow has talked about shortage market business where you can help procure some parts. Is that a business that you see happening? Or do you see any parts going into short supply?

No. again, folks want to go back and relate today to COVID, we're nowhere near what was going on in COVID, okay? And don't let anybody kid you, all right? It's not there. During COVID, memory lead times were 54 weeks. Okay? Today, memory is at like 33 weeks. It's not -- it hasn't extended so far that it's in this huge shortage, it's constrained. We look at it as constrained. We get the memory we need and we're able to move it to this customer base.

But we don't see a shortage market happening, and we don't -- we're not -- there's nothing in our P&L or our guide that says there's just going to be this massive shortage market and prices are going to go through the roof and it's going to be back to the golden screw mentality that existed during COVID.

Got it. Okay. Let's move on to the ECS business I mean, talk to us about that. What is that business? And how does that relate to the Components business?

Yes. So first off, part of our business model and any business, and any strategy that is that I believe is successful is when you have diversification and differentiation, okay? If you're a one-stop shop, I mean everybody can replicate a one-stop shop and compete with you. But we've got this diversified model and differentiated model between ECS and components. Global Components is the bigger of the 2 at about $20 billion or so, ECS in the $10 billion range. But ECS deals with enterprise-wide software. 25% of what we do in that space is hardware sales, and it's high-end hardware. It's not consumers, not mouse pads, it's not laptops, it's storage, it's compute.

But the other 75% is enterprise-wide software. And I'm talking technology side of software, not application side of software. I'm talking cyber, virtualization, financial ops, things like that. That's what we distribute, and one of the things that differentiates us from others is a platform called ArrowSphere. ArrowSphere is a platform that suppliers and customers can attach to get access to product. And in ArrowSphere, we have ArrowSphere AI assistance. So it's an Agentic AI model that allows customers to attach to suppliers so that the customer can hold product from that supplier.

ArrowSphere AI assistant won us 2025's Microsoft Distributor of the Year Award because what we do for Microsoft via the ArrowSphere platform. It differentiates us from others. And what I'm coming back to here is the balance between ECS and global components is such that components in a growth cycle that we're in today is going to consume working capital, right? You got to have the inventory, you got to -- you bring in more working capital. ECS is a low working capital model, but it generates great cash flow.

So it allows us to take -- it helps us balance our balance sheet because we're bringing in cash flow from the ECS side, and we're using it to fund, if you will, some of the things we do in components. It balances out, it levels out. It gives us more financial stability across the cycles. ECS is also perfectly parked dead center of the AI explosion that's taking place on the software side. As more and more companies push their workloads to the cloud, AI workloads to the cloud, we're positioned right there to sell the products that they need to do that. It is a unique model that we have and we like it that way. We want it to be that way because we want differentiation and diversification versus our competitors.

It gives us a leg up. Again, it goes back to this comment I started with earlier that if you look to Arrow, we are in a -- somebody is going to shoot me in the back, Raj or Michael. We are a -- I was going to say, extremely cheap at this point, mutual fund that plays in the AI space, both on the component side and the software side. And there isn't another company that has that ability. If you look at our line card, we are perfectly matched with all of the electronic components that go into making data center or attaching to the edge of AI, which is what all these guys are doing. And then on the software side, we're perfectly positioned for these companies to extend their network and communications, cyber, virtualization, fin ops in the cloud through ECS. Nobody else can do that. That's why we like the 2 business pieces. Does that makes sense.

No, that makes sense. I want to talk some numbers now. If I look at the guidance for fiscal 2Q, it looks like component revenues are going up, but ECS revenues are actually sequentially down. What is driving that? And what I'm getting to is, as component costs are going up, do you see any demand destruction happening in any of the verticals? And is that a factor in this at all?

No, I don't see demand destruction taking place at all really. I see that the value prop that we have to our supply base, they're extending it further. The value prop that we have with value-added services, whether it's demand creation or engineering services, but more importantly, supply chain, we have got large customers coming to us to talk about supply chain services every week. And it's somewhat holding them back from the standpoint of we can only take on so much at a time. And so that's why we separated it. We stood it up by itself. We're putting more resources into it so we can bring on more of those supply chain customers going forward because -- again, it's working capital light, it doesn't show on the revenue line, but what does it add horsepower and to the bottom line.

Got it. I want to talk about operating margins, and you mentioned this earlier, I was surprised and I know a lot of clients were surprised by the operating margin good performance in the first quarter. I think component margins were 5.5%, something like that. So talk to us like as to what gives you confidence that this is sustainable? What are the levers that you have on the operating margin side? And should investors look for further growth in operating margins either in the components business or in the ECS business?

Yes. Let me just go, first, go back to the surprise piece. I know there were 2 people that weren't that surprised at that operating profit margin. Raj and myself. We were not. We could see it coming. As soon as we saw the volume tick up and the leverage that we have in the P&L, we're like, okay, it's going to happen. And we see that, that's going to continue. All right. I'd be foolish to say that would we get to a 6 or we get to over 6. But 5 handle on the front end, that's Raj's term using the term 5 handle. I think that's sustainable. The business is really positioned well and the decisions that the business team is making, the business teams are making in each of the regions, it's just a reset, and it's a reset of how they think. And I think at this point, it's -- we're being successful with it.

Okay. Another thing I want to ask is on working capital and inventory management. How do you see this trending? I mean, do you think Arrow's inventory increases over time? Or do you see that decreasing? And is that a good thing or a bad thing?

Yes, I think -- so when I got there, if we talk about inventory, and I told the team what my definition of inventory was, and it was the stuff that doesn't sell, okay? Inventory is the stuff that doesn't sell. If you're moving it. That's great. Let's bring it in. But let's make the conscious decision to bring in the right stuff at the right spot, put it in the right distribution center, so it attacks the market and it turns. I think if you look at our metrics, ROIC, ROWC, have all improved. Our days cash to cash have all improved. So we're making the right decisions again around inventory and the inventory that moves versus the stuff that doesn't itself.

Got it. Maybe talk to us about capital allocation. I think you just had a big buyback authorization, given where the stock is trading today, how do you see the trade-off of buybacks versus any M&A, versus any more financial leverage. How are you thinking about capital allocation?

Yes. So our capital allocation strategy is no different than others. Number one, organic growth. Organic growth. Number 2 would be M&A, strategic M&A. And I want to talk about M&A for a moment in the sense of we're not going to buy stuff to get bigger. It just makes no sense. We're going to buy stuff that again, this unique ability to set us apart from others. That's where you would see us make acquisitions. And that would be in a service since some service area. IP&E is an ideal space for us to make an acquisition. If you look at our first quarter results, it's the first time in our history that we exceeded $1 billion in revenue in IP&E and completely attribute that to the fact that we stood it up on its own. We have a focus on it. We have a team on it. We got the right amount of mass on it. They're making quick decisions, and we exceeded $1 billion in revenue Q1 in IP&E.

IP&E carries a whole lot more margin than the semiconductor. It's not as high as value-added services, but it's a lot higher than semiconductor. So you would see us being pushing in M&A on IP&E. The other would be a share buyback. And if you go back the last 5 years, I think the number is something like we bought back $3.6 billion worth of shares at an average price of about $98 a share. So we've created a tremendous amount of shareholder value just through buyback. We had $1 billion authorization. It was running out. We're down to maybe $150 million left on that.

Our Board just reauthorized another $1 billion. We don't put a time frame on it because we'll do it strategically as we go across the next several years. But share buyback is always going to be a part of it, acquisitions two, number one, organic growth. And lastly, all of that is with an eye toward making sure we maintain our investment grade rating, extremely important for us. Not to be constrained because we don't have an investment-grade rating.

Can you talk to us about the CEO transition? Is there a timeline? And what capabilities matter the most for the next stage of Arrow's strategy and what needs to be true operationally for the transition to be seamless.

Yes. Well, it's still going on because I'm still here.

You're doing a great job.

Thank you. The -- we're trying to be extremely thoughtful and we're trying to thread the needle. We want someone that -- this is a huge company. It's got a lot of scale. It's got a lot of people. It's global. It's big. There's a lot of mass to it. There's a tremendous amount of competing priorities within the business. And you just don't find somebody that has that in their background. And we're a great commercial engine. We have fantastic -- we have, I call them commercial wizards. They know how to deal in the marketplace.

What we're really trying to over-rotate on to is operating experience. Somebody that has got some operating chops, somebody that knows how to make money in a low-margin business, somebody that can squeeze pennies out. That's the kind of person we're trying to find, just not coming out of the woodwork just yet. But we're still on it. We're going to find somebody and stay tuned. And when we're ready, we'll make the proper announcement.

Got it. So we've got about 1.5 minutes left. Bill, I want you to talk to the clients. What are we missing about the Arrow story? Is there still things that you want to highlight that investors should focus on? And how do you see the next leg of growth for this company?

Yes. I've touched on it throughout our conversation Ruplu, and that I think you really have to understand the business, okay? We're not -- yes, we are a distributor, I get that, okay? But that's at the core. What we've built around the core is value-added services, both on the ECS side and on the component side. But if you put those 2 things together and you look at where the cycle sits today, we're the perfect play. We play on the software side, everything is going to the cloud. We distribute that. All the components. If you look at our line card, all these companies you hear about on CNBC and all that are driving growth we are a cheap -- if you look at our multiple versus theirs, we are a really cheap play to play across that entire spectrum of companies, whether it's in software or whether it's in components. We're a really cheap play.

Okay. Great. We've covered a lot of details. So Bill, thank you for coming today. Really appreciate it. Thanks.

Thanks for having me.

Good day, and welcome to the Arrow Electronics First Quarter 2026 Earnings Call. Today's conference call is being recorded. And at this time, I would like to turn the conference over to Michael Nelson, Arrow Vice President and Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to the Arrow Electronics First Quarter 2026 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak.

During this call, will make forward-looking statements, including statements about our business outlook, strategies, plans and projections regarding future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC.

We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to for our GAAP results. We reconcile these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast.

Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions. I'll now hand the call over to our Interim President and CEO, Bill Austen.

Thank you, Michael, and good morning, everyone. We appreciate you joining us for a discussion of our first quarter 2026 results. Before turning to our results, my sincere thanks to our colleagues around the world whose dedication and hard work continue to support our suppliers and customers and drive Arrow's success.

Starting on Slide 3. We started 2026 with very strong results in the first quarter. Total revenue of $9.5 billion increased 39% year-over-year while operating margin expanded 160 basis points year-over-year to 4.2%. The strong revenue growth combined with the significant margin expansion resulted in non-GAAP EPS of $5.22, representing an increase of 190% year-over-year. Our strong results were attributable to several items, including: one, unit volume growth, coupled with good execution; two, leverage in the P&L; three, the mix of value-added services and good execution in the core that benefited from the market that accelerated in the second half of the first quarter.

We saw a strong performance in both global components and ECS. In global components, the recovery is broad-based across geographies, industry verticals and customer mix, driven by customer demand. In ECS, we continue to benefit from strong secular demand trends in the AI-driven workloads, and we have generated year-over-year growth in billings, net sales, profit and operating income. Operating momentum across our business continues to build as our fundamentals strengthen.

Raj will provide more detail on our financial performance. But first, I would like to highlight several key themes from the quarter that reinforced this momentum. First, our leading indicators continue to improve. Book-to-bill ratios improved further, and we currently are at healthy levels sitting well above parity in all 3 operating regions. Additionally, backlog continues to build into the third and fourth quarters, providing us with confidence that the momentum is sustainable. We have also seen lead times extend, but they remain significantly lower than a pervasive shortage environment.

Second, the market recovery is unit volume-driven backed by customer demand. Third, the recovery is broad-based as we are seeing backlog from our mass market customers build quarter-over-quarter. Fourth, value-added services, and particularly supply chain services, saw a meaningful contribution to overall operating income. Finally, we are achieving good growth driven by better regional and customer mix, more accretion from value-added services and importantly, our cost structure is more efficient, demonstrating the positive operating leverage we have built into our model. We have been disciplined with our cost structure, which is now benefiting from operational momentum in the business and generating significant incremental margins.

Turning to Slide 4. I would like to remind you of the 4 key pillars of our investment thesis. The reasons why Arrow is a unique and compelling investment opportunity. First, Arrow holds a leading position in large and growing markets, maintaining a central role across our 6 core markets of industrial, transportation, aerospace and defense, medical, consumer electronics and data center, each supported by durable, long-term secular tailwinds.

Second, Arrow has differentiated capabilities driving profitable growth. We have made a shift toward an increased mix of higher-margin value-added services, including supply chain services, engineering and design services, and integration services. Our distribution capabilities around semi, IP&E and demand creation remain a fundamental part of what we do, and our value-added services are a natural extension for Arrow.

Third, Arrow has a diversified business model, which provides financial flexibility. This continues to be a key differentiator for us, providing balance, resilience and consistent free cash flow generation through cycles. Our global components and ECS segments complement each other well, allowing us to participate across the full technology life cycle while providing resilience on both the income statement and balance sheet, supporting long-term value creation.

And fourth, our focused capital allocation strategy is designed to maximize shareholder value through reinvesting in organic growth, pursuing disciplined M&A and returning excess capital to shareholders. We remain focused on deploying capital where we anticipate the highest long-term risk-adjusted returns while preserving an investment-grade credit profile and the flexibility to continue investing in the business.

Turning to Slide 5. We are very pleased with the results we delivered in the first quarter, which positions us well for the remainder of the year. We remain focused on executing against our strategy with discipline and are encouraged by the accelerated recovery we are experiencing across geographies and verticals. The momentum we are building illustrates the beginning of a recovery cycle, and the customer order patterns are currently reflecting a rational market backdrop. Our priority continues to be driving profitable growth through improved execution as we manage mix, costs and working capital carefully and align investment levels with the pace of demand.

At our core lies traditional distribution. It's the engine that has gotten us to where we are today. It's a big engine, which allows us the opportunity to get beyond the traditional business and expand margins via supply chain services, engineering and design services and integration services. Just to be clear, we will always excel at our traditional distribution and our higher-margin value-added offerings, deepening customer relationships and improving the quality and durability of our earnings over time. We will also continue to be disciplined with our cost structure, which we expect will drive additional operating leverage in the business.

I believe Arrow is well positioned for the long term. supported by a diversified business model, improving profitability and a focused capital allocation strategy that enables us to invest through market cycles and drive sustainable shareholder value.

With that, I'll turn it over to Raj to dive deeper into our financial performance.

Thanks, Bill. On Slide 6, sales for the first quarter increased $2.7 billion year-over-year to $9.5 billion exceeding our guidance range and up 39% versus the prior year or up 34% versus the prior year on a constant currency basis. First quarter consolidated non-GAAP gross margin as a percent of sales of 11.5% was up 20 basis points versus the prior year, driven by favorable business mix and global components as well as higher profit contribution from our value-added services.

Our first quarter non-GAAP operating expenses increased $95 million year-over-year to $687 million, primarily driven by variable costs and FX. Importantly, OPEX as a percent of gross profit declined 13.6 percentage points year-over-year to 63.2%. In a way, operating expenses increased at roughly 1/3 the rate of revenue growth. The restructuring efforts we have executed the past couple of years are bearing fruit as we gain operating momentum and drive substantial operating leverage in the business model. We remain focused on disciplined, profitable growth and efficient operations.

In the first quarter, we increased non-GAAP operating income year-over-year by $222 million to $401 million. Non-GAAP operating margin rate increased 160 basis points year-over-year to 4.2% of sales. Interest and other expense was $48 million in the first quarter as we benefited from lower average debt levels throughout the quarter, and our non-GAAP effective tax rate was 23%. Finally, non-GAAP diluted EPS for the first quarter increased 190% year-over-year to $5.22, which was significantly above our guidance range, driven by a number of factors including favorable sales volume in both segments, healthy contribution from our value-added services, operational leverage from our productivity initiatives and lower interest expense.

Turning to Slide 7 in our global ECS business. In the first quarter, global ECS sales increased approximately $800 million year-over-year to $2.8 billion above our guidance range and up 39% versus the prior year or up 31% versus the prior year on a constant currency basis. Total ECS billings were $6.4 billion, up 39% year-over-year. First quarter non-GAAP operating margins declined modestly by 10 basis points year-over-year due to a few different factors.

First, as pockets of supply became constrained for technologies around AI investments, hardware sales saw strong momentum in the first quarter. Additionally, we took a charge primarily related to 1 underperforming multiyear contract. We are in the process of adjusting the economics with this large long-term partner.

As we shared on our last earnings call, in the first quarter, we had 4 extra shipping days compared to the same quarter last year. This impact is predominantly relevant for the ECS segment given sales cycles tend to be end of month weighted. The results from the extra shipping days was several hundred million dollars of incremental billings in the quarter. By normalizing for the 4 extra days, our global ECS business still achieved year-over-year growth in billings, net sales, gross profit and operating income dollars, reflecting our alignment to the high-growth demand trends behind AI and data center build-out.

We believe our global ECS business is well positioned as we continue to differentiate on the more complex end of the IT spectrum. Our diversified line card of solutions for cloud, infrastructure software, cybersecurity, data protection and data intelligence are experiencing strong secular demand trends for AI-driven workloads. Today, as pockets of on-premise memory supply becomes thin, channel partners will need to find alternatives and lean more on the software and public cloud solutions that we offer. And our proprietary digital platform, Arrowsphere, allows our partners to source, provision, manage and scale these technologies, all within a user-friendly interface that drives deeper engagement and accelerates recurring revenue.

Turning to Slide 8, let's take a closer look at our global components business. Global components sales increased $758 million sequentially to $6.6 billion in the first quarter, above our guidance range and up 13% versus the prior quarter. Global Components non-GAAP operating income increased $146 million sequentially to $365 million, up 67% from the prior quarter. Non-GAAP operating margins increased 180 basis points sequentially to 5.5%.

In the back half of the first quarter, the cyclical market recovery accelerated at a pace that exceeded our expectations at the beginning of the year. The growth that we experienced was broad-based across geography, industry vertical and customer type. Booking momentum picked up and our book-to-bill ratios are at healthy levels and remain well above 1 in all three regions. Lead times continue to gradually extend; however, remain at manageable levels, lower than a broad shortage environment. This is lending itself to improving visibility as our backlog construct continues to grow in magnitude and duration with coverage building into the third and fourth quarters, supporting our confidence in the sustainability of a strong market.

Importantly, the complexion of the recovery is fundamentally unit volume-driven backed by a breadth of demand. We believe our customers are holding normal inventory levels and their order patterns illustrate a rational market environment. As we look ahead, our focus is on disciplined profitable growth and we're seeing healthy proof points that our positive operational momentum should continue.

First, the mix of our business continues to improve, both from a regional and customer standpoint. In the first quarter, our 2 largest verticals, Industrial and Transportation, saw a double-digit sequential growth in both the Americas and EMEA regions. Additionally, we're seeing backlog across our mass market customers trend positively as the segment of the market continues to normalize.

Second, we are executing well in the accretive areas of the business. Our value-added services, primarily supply chain services, made a meaningful contribution to our overall first quarter operating income. Supply Chain Services exceeded our expectations in Q1, partially due to the heavier growth from our customers, which accelerated data center builds.

Additionally, interconnect, passive and electromechanical components, or IP&E, an accretive segment of the market had a record revenue in the quarter and surpassed $1 billion for the first time. Lastly, our cost structure is becoming more efficient, which we expect to drive meaningful operating leverage as the market progresses.

Taking a closer look at each of the regions. In the Americas, sales growth was broad based, highlighted by strength in aerospace and defense, industrial and transportation. In EMEA, the market meaningfully improved underpinned by strength in industrial, transportation and aerospace and defense. And finally, in Asia, the sequential growth was driven by industrial mass market and demand for data center computing power.

Turning to the balance sheet on Slide 9. Net working capital declined sequentially for the first quarter by approximately $490 million, ending the quarter at $6.9 billion. Inventory grew sequentially by approximately $640 million, ending the first quarter at $5.7 billion. Now half of the inventory build was related to data center activity within our Arrow Intelligence Solutions. In this offering, we're helping to design, build and test the compute and storage infrastructure needed to run AI workloads. And this value-added service is margin accretive for Arrow.

Importantly, the financial metrics that we monitor continue to improve. Return on working capital increased to 11.8 percentage points year-over-year, finishing the first quarter at 23.1%. Likewise, return on invested capital increased 7 percentage points year-over-year, finishing at 13.4%. Working capital as a percent of sales declined in the first quarter to approximately 18%, and our cash conversion decreased year-over-year by 16 days. Cash flow from operating activities was $700 million.

The contributing factor was the timing of cash flows in Supply Chain Services, which may partially reverse throughout the balance of the year. This offering is generally a working capital-light model as most of the inventory is consigned and does not sit on our balance sheet because we do not own or bear the risk of holding it. However, because we are providing services within an existing customer-supplier relationship, we are also managing the associated AR and AP flows. Each program is bespoke, given the unique needs of each customer. But in general, the cash flow dynamics of the offering will impact our accounts receivable and accounts payable balances and can create material swings at the end of the quarter.

Taking a broader view, the countercyclical cash flow dynamics of our business model have not changed. Typically, in times when the business is growing, we will consume more cash and invest in working capital to ensure we can meet the needs and demand levels of our customers because that is at the core of what we do as a leading global distributor. Gross balance sheet debt at the end of the first quarter declined sequentially by $619 million finishing at $2.5 billion. Finally, we repurchased $25 million in shares in the first quarter.

Now turning to Q2 guidance on Slide 10. We expect sales for the second quarter to be between $9.15 billion and $9.75 billion, representing an increase of 25% year-over-year at the midpoint of the range. We expect global component sales to be between $6.8 billion and $7.2 billion, representing sequential growth of 5% at the midpoint. In enterprise computing solutions, we expect to be between $2.35 billion $2.55 billion, which is up 7% at the midpoint year-over-year. We're estimating a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $4.32 and $4.52.

Details about the impact of changes in foreign currencies can be found in our earnings release. As we look at the balance of the year, we are confident in the operational momentum of the business. As always, there are factors that will impact the linearity of our results. We expect global components to perform at or above seasonal trends in all of our regions for the remainder of the year. However, consistent with historical patterns, in Q2, Asia is expected to be seasonally strong. As a reminder, Asia operates at a lower margin than the other regions.

Additionally, unlike the first quarter where we experienced heavier growth from our customers, Supply Chain Services is expected to return to a more normal profit level in the second quarter. In ECS, consistent with the first quarter, we expect the business mix will experience healthy hardware sales driven by ongoing AI data center build out. Lastly, the timing of organizational annual compensation increases will impact operating expenses beginning in the second quarter. More broadly, as we expect demand levels to continue to improve, we believe that operating leverage that we have created will drive significant earnings power.

With that, I'll now turn things back over to Bill for some closing thoughts.

Turning to Slide 11. Looking forward, our key priorities are clear. We are focused on continuing to execute with discipline and drive the operational momentum that we have in the business. We are confident our strategy is delivering, and we are well positioned to sustain this momentum. Leading indicators continue to strengthen, reinforcing our confidence that the market is improving and that the actions we have taken over the last couple of years position us well to realize the positive operating leverage embedded in our model.

The path forward is clear. We plan to expand our high-margin value-added offerings across both Global Components and ECS, deepening customer relationships and enhancing the quality, resilience and durability of our earnings over time. I remain confident in Arrow's strategy, differentiated capabilities and diversified business model to drive profitable growth.

We will continue to allocate capital to the highest return on investment opportunities with the goal of creating sustainable shareholder value. And in 2026, to better align the leadership team with shareholders, they will be compensated on our relative total shareholder return. And speaking of leadership, the Board's search for a permanent CEO is ongoing. The Board continues to evaluate a range of highly qualified candidates, and we will update the market when an appointment is ready to be announced.

With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call for questions.

[Operator Instructions]

And your first question comes from the line of William Stein with Truist Securities.

It's Aidan, on for Will. I was hoping you could touch on what drove the ECS strength in Q1. How much of that may have been one time and then also what's driving the Q2 guide? And then secondly, if I could, if you could quantify the contribution from value-added services maybe to hyperscalers specifically?

Eric, why don't you take the ECS question?

Yes, of course. The trends are the same since several quarters. We are experiencing the high growth in our cloud and AI and software and infrastructure business. So this is basically not new. What's new in Q1 is that with the softage in memory, we have a higher growth in storage and compute. We believe that the customers place their orders in advance to avoid price increase and be sure to be delivered during the year. That's what drove the extra growth in Q1. And also, of course, the 4 days that we had at the end of the quarter.

How about your look forward?

The Q2, Q3 should be more or less normal quarters. Basically, the 4 days will compensate in Q4 only. And we will have the same kind of growth, I believe. We don't expect that the hardware growth will stop during this year, and the cloud and AI and software will continue. So basically, we should experience the same kind of growth during the quarter.

Very good. Rick, do you want to take the hyperscaler question?

Yes, sure. Thanks, Bill. I think on the hyperscaler side, Will, when we look at our business overall, we're experiencing the same growth expectations that the market is experiencing as it relates to them. I don't think there's anything different. The way we service that customer base is through Supply Chain Services as well as through our normal channels of business going forward. But that growth in that market, we continue to see, we continue to participate in as time goes on.

I'll just add to that. In Q1, as Raj -- what's in Raj's script, one of the hyperscalers accelerated the build of a data center, and they pulled it up into Q1. So we had some higher revenues related to hyperscaler growth in our supply chain services business in Q1, which was not expected.

Yes. And the other thing I would just add is that value-added services in total was about 30% of our operating income generated by the business areas last year. And that probably ticked down just a little bit in the first quarter because of the overall growth of the entire business, and so it's still a significant contributor to the overall bottom line. It's going to continue to be a strong contributor, and it's one of the key drivers of the margin growth that we're seeing in the business.

And your next question comes from the line of Ruplu Bhattacharya from Bank of America.

I have a couple of them. Raj, I'm going to add you for a little bit more detail on the margin performance between fiscal 4Q, fiscal 1Q. And in components, I mean obviously, 5.5% is much higher than what we had thought. What was the contribution of the extra 4 days on revenues as well as on EBIT? And on the value-added services part, as Bill mentioned, you had a pull-in of demand.

When you think about going from 1Q to 2Q, do you expect that level of demand to continue? Are you expecting some lower demand? So help us just bridge the 3.7% to 5.5% operating margin performance in the core business. And then it looks like you're guiding something lower for the fiscal second quarter, maybe like 4.5%. Can you help us bridge from 1Q to 2Q? And then I have a follow-up.

Ruplu, it's Bill. Before Raj gets into the CFO part of that answer, I'll give you the CEO part of that answer. It's what we said in our script. Our business in Q1, and as we look forward, because we got these leading indicators that are very strong, we've been saying for quite some time, once regional mix starts to change, i.e., the mass market comes back in the West, Europe and North America, and that's, as Raj had in his script, industrial and transportation has come back strong in both of those Western regions. That's a part of why we went from 3.75% to 5.5%.

Value-added services, we're pushing harder and harder in our strategy to push more value-added services, both in ECS, which is not part of the 5.5%, but in global components, okay, demand creation, Supply Chain Services. We have made a purposeful shift, and Rick has done that in his organization, to focus more and more on value-added services.

The third is the growth in the mass market is coming back. And as I've already said, it's in industrial and it's in transportation. And it's also in aerospace and defense. But we've been talking now for close to 7, 8, 9, 10 months about the leverage that the business has been building in the P&L. We've been maintaining costs flat to down on the fixed cost side, so that as we drive more and more volume growth, which is what's driven our results in Q1, volume, not price, we get fall through, and it falls through at a pretty heavy clip. So what we're doing in global components is exactly what we said we were going to do 7, 8, 9 months ago, and we're executing on that. We're executing very well. Raj will give you the details now.

Yes. Bill got into some of the details, but let me just add a little bit of color. The themes you're going to keep seeing or hearing Ruplu is that just to summarize, again, we're getting the right kind of growth. And we always said that we're going to get leverage on the bottom line with the right kind of growth. So growth in the West, the mass market customer coming back, the value-added services, and I'll address your question specifically on that here in just a second. But that's a strong contributor to the bottom line and then significant leverage, all of those factors have an impact to getting us to the 5.5% margin in the first quarter.

And I think your math might be a little bit wrong. We're not guiding to margins in the second quarter, but component margins do step down a little bit related to Asia mix and then the supply chain services step down as well as some of the OpEx that increases. But overall, I think we're still going to have very strong operating margins for components in the second quarter. And it's just indicative of the leverage that we have in the model, that those conditions will continue for the rest of the year, we believe in terms of the mix that's driving the margin expansion.

On value-added services, I wouldn't think about it as pull-in of demand into the first quarter. It's really just extra growth that we got from our customer base in that part of the business. We're assuming in our outlook a lower number for Supply Chain Services, but it's still going to be a significant contributor to the overall profit line. And we'll certainly try to do as much as we can there. So not a pulling in demand, it's more about just continued momentum in that business at a more normalized level.

And then I think you asked about 4 extra days. That's in the ECS business. It was worth several hundred million dollars of billings in the first quarter, which is what we indicated when we gave the outlook last time. And if you just apply a net revenue to that, maybe 50% or so as a good benchmark, and then you apply a margin to, you'll get to an operating profit number that benefited us in the first quarter. And that obviously isn't going to benefit us in the second quarter, and that's in our outlook as well. So hopefully, I addressed all of your questions; if not, just let me know.

Thanks for the details there, Bill and Raj. Can I ask a follow-up? So you mentioned, Raj, a couple of times that this is not related to pull-in. Can I ask how you're judging that? Like what's the risk that component costs, including memory costs are going up. And so what's the chance that customers are preordering or trying to preempt the price increases and ordering ahead of time? And what's the risk either in the ECS segment or in the components segment that as prices for components go up, end market demand for end products can be lower in the second half and the backlog that you're building could have some double ordering in it or could have some prebuys and that demand is weaker in the second half.

So just wanted to get your thoughts on it, how do you calculate whether there's any pull ahead or not? And how do you see that trending? And how do you see demand or true end demand shaping up in the second half? Thank you for the details, I appreciate your color.

Thanks, Ruplu. Good question. We monitored order flows, okay? We monitored order flows from customers. And if there's a customer that, let's say, orders at a rate of 10 and all of a sudden now they placed an order for 27. That's kind of a red flag that goes up and the team gets into that data and gets into the customer and say, what is it you're really doing here? Do you really have that demand? What's going on? So we try to monitor that the best we can. And we don't see the fact that -- we don't see at this time that customers are double ordering, placing orders this week, next week, the next week, all for the same device or component. And if they are, we track that, and we'll call them out. I'll let Rick add a little bit more color from what he sees in the branches.

Thanks, Bill, and thanks, Ruplu, for the question. I think the way to look at it is the following is, we've talked about this gradual recovery. We've talked about inventory levels in the past. If you think about it, if you look at the vertical markets or the segments we represent, inventory levels were really, really taken down to very low levels through the last cycle. And if you think about what lead times are doing, and we said this earlier, is lead times are gradually increasing, but from an overall perspective are in line with the market overall.

So I would say more of customers are looking at how they look at their buffer inventories, how they build their buffer inventories and how they plan their demand moving forward based off of lead times that we believe are in line with the market at this point in time.

I just want to add a couple of things just for the benefit of our listeners since you asked the question. And we said it in our commentary, but the growth in revenue that we saw in the quarter, quarter-over-quarter in the components business was driven by unit volume growth, and it was not driven by pricing because as we look at the average selling price of our units and the unit volume growth, the unit volume growth lines up pretty well with the level of revenue growth that we got. So we actually did not see much pricing impact in our business. Yes, it's happening around us, and we flow it through. But when you look at it in total, it's not a significant impact from a quarter-over-quarter standpoint.

And then the memory exposure that we have is probably in the mid-single-digit range. And yes, we've seen the price increases there as well, but still in the mid-single-digit range in terms of exposure to our revenue, so not a big impact. We obviously participate in the supply chain services offering from a profit standpoint, but that's much more a fee-based model. So just to clarify the pricing impacts within our results.

I appreciate all the details. If I can just sneak one more clarification in. Do you also resell GPUs? What percent of your product line is that? And from an AI standpoint, when we look at ECS, do you think that's a meaningful contributor this year? Again, thanks so much for all the detail.

Go ahead, Rick. I was going to say, we don't resell CPUs or GPUs. No, it's not what we do.

It's not our business, no.

And then ECS, I think you asked a question about ECS, it's heavily exposed to everything, AI and data center build with everything that we do. So we have a heavy, heavy exposure to all the fast-growing areas of business. Eric, do you want to add anything?

Yes. Our hardware business in ECS is only 25% of the revenue. And of course, the memory impact mostly the compute and compute is just a fraction, only 75%. So basically, the impact is pretty weak on the ECS side. The opportunity that we have is that if this continues, this will be good for our cloud business because the customers will have to do more public cloud rather than buying hardware and software. So basically, it could be good for us in the longer term.

I think, Ruplu, just to close it all up there. What we're seeing is a broad-based recovery across many, many, many verticals in all regions. It's not just related to AI and the AI build. We're seeing it across our mass market. And that's one of the things that gives us comfort, and that's how our backlog is building, that Europe and North America or the Americas, I should say, our customers there are serving demand. They're not building to inventory, they're building to order, which is a comforting site for us.

There are no further questions at this time. I will now turn the call back over to Bill Austen for closing remarks. Bill?

Thank you, operator. In closing, I'm really pleased with how we are operating with rigor focus and a cadence that has us setting our sights on serving and supporting suppliers and customers. There is, however, still room for improvement across the entire business. Thanks for joining us today, and we look forward to speaking with you all in the near future. Thanks, everybody. Have a great day.

Thank you, everyone.

This concludes today's call. Thank you for attending. You may now disconnect.

Winding down here in Orlando. Welcome to the conference. I am Melissa Fairbanks. I cover analog semis and IT supply chain. Before I get to introducing the Arrow team, we do have the team here from Arrow. I just want to point out there is no breakout session after. So if you have questions, we're going to give you a chance to ask questions here in the presentation towards the end. So anyway, from Arrow Electronics, we're really excited to have Bill Austen, interim CEO, and I hate saying interim, but...

It's okay. I'm going back to retirement.

Good for you. Good for you. We do have in the audience, we've got Raj Agrawal, the CFO; and then, of course, from Investor Relations, we've got Michael Nelson and Nate Troscinski. So we have the whole team here. And I would like to start off, Bill. I think if we could do kind of a general overview or an introduction to Arrow, that would be great.

Sure, sure. So for those of you that know Arrow, thanks for coming. And for those who don't know, Arrow, hopefully, we'll be able to share some insights with you today. So Arrow is a 90-year-old company, a large electronic component distributor. We've been in business, like I say, for 90 years. We've celebrated our 90th year this past year, rang the bell -- closing bell at the NYSE with the team, which was kind of a fun event.

But we have been -- had long-standing relationships with our suppliers and our customers. Some of our suppliers have been with us over 50 years, and we've been with them for over 50 years. But we deal in a very large and growing space of electrical components, semiconductors, IP&E, value-added services and technology solutions from a software perspective. So it's a very large market that we address. We are the largest global components distributor in the world. And we have a diversified business model, okay, one of which is on the hardware side, which would be components. And on the software side, we distribute infrastructure-type components.

About 75% of the ECS business is hardware. And -- 25% is hardware and 75% is software. So about a $30 billion business revenue-wise. And we really like the fact that we're a diversified business because it allows us to kind of level out our earnings through the ups and down cycles that we confront on a year-in year-out basis. Great business team, a great business model. We're global in what we do. And we see ourselves right now today as an extremely value-driven company in the sense of we are undervalued.

I knew that was going to come up.

So if you are a value investor, we are right down the center of your fairway. If you love stock price today and where -- if you believe that the semiconductor cycle normally turns, we're in the early innings of that turn. We see a gradual recovery that we've embarked on. For the last few years, our business team has been focused on reducing costs, both on the fixed side and on the variable side.

So our fixed costs are down about 10% over the last few years and our variable cost, which is primarily made up of variable selling costs is also down a touch even though we've grown revenue. So if you believe the semiconductor cycle is turning, we are extremely undervalued because if you look at our fourth quarter, we had a wonderful fourth quarter on the heels of a good third quarter, and we're approaching this year right now with -- our backlog is increasing. We have better visibility in the backlog, the best visibility we've had in quite some time.

And when I say visibility, stretching out. We see backlog now filling in into the third quarter. Book-to-bills in all 3 regions around the world are greater than 1:1, and they haven't been at these levels for the past 3, 4, 5 quarters. So we see things turning. We see that it's real demand that's being created. It's not just price. It actually is volume-related demand. So we're in the early stages of a cyclical turn in semiconductors and we are extremely well positioned because we've created a tremendous amount of leverage in the P&L. So as we bring in more revenue, that revenue falls to operating income. So we feel real good about where we're at and where we're going.

He just wrote my note for me. I think it would shock you to know that Bill comes from a manufacturing background, not sales.

Yes. [indiscernible]. People would have called me years ago a knuckle dragger I came out of the operating side of the companies that I've worked for.

I do want to address just very briefly what's the time line and the profile for the CEO transition because I know you're anxious to get back into retirement. The CEO transition, the search has been ongoing and just want a quick update on that?

Sure. So I stepped into the role on September 16. We started a search in earnest probably 4, 5 weeks later. We put a search committee together at the Board level. We've engaged with a headhunting firm. We've had a tremendous number of resumes that we've reviewed. We have a criteria that is somewhat exacting, if you will, from the sense of we want somebody that's got a set of operating capabilities and skills. We're a company made up of really good salespeople and good commercial people. We want the new CEO to have that skill set, but not to be over-indexed there. We want the new CEO to be more indexed on the operating side of things. And that's the criteria we've put out.

We're down to a small number of finalists, which will go through the normal background checks, normal interviews with the Board and presentations that they'll make to the Board, and we feel we'll have a decision sometime within the next 4 to 6 months.

Okay. Great. Now that we have that out of the way, we do need to talk about the cycle. So I'd like to know like how would you characterize the demand trends? You did mention we are in the early innings of a cyclical recovery. It's not exactly a "normal" cyclical recovery, but we're getting there for sure. But I'd like to discuss some of the demand trends within the components business, either across geography or end market?

Yes. Let's take them all.

Go for it.

Yes. So the East, Asia, normally is the first one to go into a down cycle on the first one to come out of a down cycle. We've had growing volumes across several verticals in Asia for the past several quarters. which, if you looked at our results from Q2 of last year, Q1 of last year, you'd see that our margins were depressed. Why? Because we were geographic -- poor geographic mix. Asia was stronger than was EMEA, than was North American markets, okay? So we had a lot of growth in Asia, but it's at lower margin as it is across every -- most industries.

So now fast forward, you get to Q3, we start to see green shoots coming up in EMEA and in North America. Fast forward to Q4 of last year, those green shoots are actually turning into some plants and they're starting to grow. You get into Q1 of this year and our vertical markets in transportation -- let's take -- I'll go transportation last. Aerospace and Defense, very nice volume growth in aerospace and defense, both in EMEA and in North America.

Our industrial markets, which we -- you'll hear us term on our call and in our discussions, the mass market. Okay, what the heck the mass market? The mass market is what I would term as the big middle. It's industrialized U.S., it's industrialized Europe. Those companies that buy less than $2 million of components we term as mass market customers, okay? So who are they? Honeywell, Johnson Controls, Lutron, Whirlpool, General Electric Medical systems. Those kinds of customers make up what we call the big middle or the mass market. They are coming back, okay? They are actually seeing their order book filling in. They're now starting to order, and we're getting very nice growth rates -- we're seeing good growth rates from those types of customers, both in EMEA and in North America.

Asia is still growing quite strongly, even though we went through the Chinese New Year, we see Asia continuing to do well, okay? More so on the compute side of things, okay? So AI-related...

Not surprisingly.

Storage and compute there. But we're seeing industrial Europe and Industrial North America come back. Transportation in North America is coming back. We've got a nice order load from -- in the transportation sector. And when I talk about transportation, I'm really talking the automotives, but we deal with the Tier 1s and the Tier 2s. So it's not like a Ford or General Motors, but we're dealing with all those Tier 1 and Tier 2 suppliers.

And we're actually now starting to see some growth in transportation in Europe. So that's a good sign. Not big, but a good sign all the same. So we feel really good about where we're at right now. And we believe, as I said earlier, we're at the early stages of the cyclical turn in semis, which then cascades into IP&E, into our value-added services and to everything else we do.

We'll get to that next.

Okay, but my point is that we've created real leverage in the P&L. So this revenue that comes in, we get better margin out of it, which is what we've been saying we were going to do, and now we're actually seeing that hit the P&L.

I think it's also important to note, there's no single customer that's more than 2% of revenue?

Correct, right.

Did I -- I got that right?

No single customer more than 2%...

So very broad-based, very well diversified, and...

Absolutely. And no supplier more than 8%.

Wow. Okay. Great. So in terms of the geographic footprint -- Raj gave you the thumbs up. In terms of the geographic footprint, obviously, you do have operations worldwide globally. What's your China exposure specifically? We do get asked about that quite a bit.

Yes. We look at more than China, we look at Asia Pacific. And it's less than 10% of the overall revenue, Asia Pacific.

Okay. Is there any risk -- again, unfortunately, this has come up more recently, is there any risk to your exposure in Mexico?

No. We have a big distribution center there in Guadalajara. We have a -- our back office center is there in Guadalajara. We were down for one day. We were down -- after the issue that they had, we were down on Monday. We kept everybody out. We kept everybody home. We located everybody. They all responded. Everybody was fine. And we were back in the distribution center on Tuesday.

That's amazing.

But -- and we kept our back-office folks working virtually from home that whole week. So all good.

Okay. Great. All right. I had to check that box. So the next most popular question, what's the impact of supplier price increases on your model? And I'm thinking specifically related to like memory or storage, in particular, but we have heard pricing has been relatively stable across the supplier base. But how does that flow through your business model?

That's exactly what happens. It flows through. We pass it right through, where we have contract. Where we don't have contract, we get as much in the market as we can.

Okay. All right. All right. Is there any impact of the memory shortages on your demand recently? Or do you see that -- are your customers starting to worry about potential shortages on the memory side of things?

I think that obviously, people are going to worry they got to make products. They've got to ship, right? There's always that fear out there. We have not had a major issue that, okay? We've gotten everything we needed. We've been able to push it through. We've been able to get it to the people that need it. But I will say that from a salesperson's perspective, there's a bunch of things salespeople do, right? One of which is they go get sales. They talk to customers, get orders, bring in orders.

In some cases, right now, some of those sales folks are turning into expeditors, which is another part of a salesperson's job, right, is to pound out, "Hey, you got to get this. I need this. I got to have this, got to get this." So some of our sales folks are flipping the switch to become an expeditor which says that things are getting tight, we're getting worried, and we just want to make sure that, that cadence of pounding on the supplier is there.

Okay. All right. All right. So moving on, that leads into my next question. How does Arrow actually help your customers? Is it the salesperson's responsibility? Or does Arrow have systems in place to help your customers or also the suppliers navigate some of the trade and tariffs situation?

The tariffs have been -- I don't want to say it's a nonevent, but it's been much less of an event than people think it has been on us. Stuff comes into the U.S., we pass the tariff on. There's a lot -- it's easy for me to say that. Okay. It's really easy for me to say that. There's hundreds of people in our inside sales organization that are paddling like crazy under the water to make sure that those tariffs are not an impact on our business. From a revenue standpoint, last year was probably 1%. Tariff was about 1% in our revenue. So -- but there's a whole lot of people working really hard to make it that way.

How easily are you able to kind of flex either your warehousing supply or your ability to service your customers from one geography to another. Have you seen a lot of that kind of activity?

Yes. We see that a lot. We see that a lot. Guadalajara is a free trade zone. It's somewhat easy for us. So there's been a lot of movement that's gone from some warehouse facilities in the United States down to Guad. We've had to ramp up the employee population in Guad. We had to get them trained. We've had people from other warehouse facilities go down to Guad to help the locals get trained up quickly so that we could meet the demands. We've moved some shipments out of -- from North America to Venlo.

But yes, there's -- it's a chessboard, maybe Chinese checkerboard would be a better way to say it, but this stuff is moving around all the time. And we've got an incredibly flexible organization that's dealing with it.

Okay. I think it's important to note, this is something that you've dealt with through the history of the company, I mean that's not how...

90 years old, man. You don't get there by not working hard.

All right. Now we can move on to the talk about the value-added services because I think that, that is an important, obviously, being able to work with your suppliers, working with your customers directly, moving that -- like actually moving the components through your system is one thing, but let's talk about how you're adding value to servicing those customers.

Perfect. So we're more than a distributor, and that's the point that hopefully some of you take away here from here today, is that we've had this thing called value-added services. And one of the components of value-added services is what we call supply chain services, in which we actually will go in and manage the supply chain of electronic components for a customer, okay?

So think of a large user of electronic components, think of Volkswagen. They make cars all over the world. They source components from all over the world. They put subassemblies together from all over the world. We will manage that supply chain for them. And what we end up doing is we have systems in place that -- people ask me what we're good at, and I say it's -- we're good at managing complexity because that supply chain to get what you need -- what Volkswagen needs when they need it, where they need it, is really difficult. We have systems in place to do that.

And we have been able to -- it's a fee model. It's not a revenue model. We don't -- you won't see revenue on the top line from this, but you see a lot of leverage to the OI, to the operating income because we get paid a fee to do this. And we do this for very large customers. We do it for all the hyperscalers and what they're trying to do today with their GPUs, moving them all around the world. We take that on for them. And it might be that we put a warehouse in, okay, in a location that's going to be within earshot of where they're going to build a data center.

So we'll do that, and we will manage their movement in and out of electronic components for the build of that data center. And we do this for the largest of large customers. It's not for everybody. It's a sale that gets made at the CEO and CFO level because what we're doing is we're displacing their internal systems that they're not built to do, and we've got systems that are built to do just that.

So it's part of our core competency, but not theirs. So we take that on and we get paid a fee to do that. That's one piece of it. The other would be demand creation. Everybody talks about demand creation. I know that it's out there. We have engineers. We have a lot of engineers that work with end customers that may not have a large engineering organization or the expertise within an engineering organization to design a new product. So we'll help them do that.

We have one customer, for instance, we have 150 engineers that work for that customer every day and have been for the last several years, helping them design their next iteration of electronic product. When we design that product, product A, B, C, we then register that product A, B, C with the supplier so that the supplier knows that we're the guys that created it and all of that then flows -- all of the material then flows through Arrow to the end customer, okay?

The other thing that we've done here on demand creation is we've just launched and we are launching, you'll see it out in the press here in the not-too-distant future, what we call digital test drive. The way that our field application engineers work with customers is, I'm a field application engineer, I go to your site and you say, "I'm trying to build this thing." Okay, great. What is it going to take?

In the past, what it took was 10 of these, 12 of those, 14 of these, 17 of these, we put them in a box and we ship them to the customer. And they would go into their lab and try to make this thing on a work bench, right, in a lab. They blow up half the components and ask for more. And then they get a -- they'd have a field -- application engineer to come in and help them refine that.

Well, what we've done with that now is we've put that into a virtual model, not only for design, but for test. So they can actually virtually test that device online and have an FAE work remotely with them, so that they can actually build out that product. No more hardware gets exchanged, no more stuff gets broken or blown up in the shop. And it speeds the design of that product and get it to the market a whole lot quicker than it did in the past.

So we're just rolling that out. It's called digital test drive and it's going to be out in the next several weeks, you'll see it.

Fantastic.

And then the last item, I know I'm going long winded here.

No, please.

Is our integration services, what we call intelligent solutions. And we actually build -- think of this as building high mix, low-volume appliances for a customer, a specific type of rack -- storage rack, a specific type of compute rack. Well, they only want 72 of them. Well, you're not going to get a Flex or somebody else to do that. So we take that on. And not only do we build out the hardware side of it, but we'll integrate the software into it and completely test it for whatever their test criteria is, 72 hours, 114 hours, whatever it happens to be, we will do that testing in our facility for them.

And that's been a really quickly growing piece of our business, and we're -- the business unit that leads this thing up is looking for more space. They're looking for more test capacity, more megawatts are required in the facility. So it's really a [ neat ] thing. And just real quick, what are these things? We did a job for Philips Medical, where we built these appliances, which is actually a very, very high resolution camera that get taken into operating suites so that there can be 5 doctors 3 states away or 4 states away watching the surgery and advising the operating team on what to do next. So it's really kind of cool stuff that we do.

I think it's safe to assume that's probably margin accretive?

That would be margin accretive. Yes. More of those.

All of the value-added services. Have you ever quantified how much -- you mentioned -- some of the -- like the supply chain services, you don't see that on the revenue line, but it does flow through to the OI. Have you ever quantified how big collectively those value-added services are?

So just from a needle perspective, we've moved our -- the contribution to income from value-added services from 20% to 30% in the last couple of years. And if you think about the -- what the margin level is because everybody asked that question, well, how much margin are these things? It's somewhere in the range of 2x or greater than what our gross profits would be on the normal side of the business. So that's why we're pushing on it because it makes sense.

For sure, for sure. I think we do need to actually move on to ECS and talk a little bit about the ECS business. I think that's an area where I get a lot of questions, understanding how ECS fits in with the global components business, but...

It's complementary. It's more so a fit to the overall company of -- the overall Arrow Inc. So ECS, for those who don't know, it's -- we distribute software, okay? 25% of what we do is hardware, 75% is software. But we're dealing -- it's a different animal altogether. It's not hardware components and things. But it's countercyclical to what happens in the semi side or the component side.

So it helps us stabilize our earnings over the longer term. And we really like that business because it is margin accretive, okay? It's got greater margins than those components. And it -- we do some things in that business that we don't do on the component side of things. Like, for instance, one of the new things that we're out in the market with is what we call beyond distribution.

Beyond distribution is where we will work with an infrastructure software provider, big guys. They don't want to have feet on the street, okay? They want to take their OpEx and bring it internal to develop more infrastructure software. So they will outsource their commercial arm to us. And we've done this with a couple of guys now. And they do that because we have reach, we have capability, we have scale in parts of the world that they may not, nor will they want to go hire people to go sell in that part of the world. So we take on the direct sales motion to the market in that area. And it's on -- it's for a fee. We pay them a fixed fee for the right to do this, and they're multiyear contracts. And every dollar we make above that fixed fee, we keep, okay?

Now it works to flip way, too. If we don't meet that fee, we take it as a hit. We've been successful with this thus far. Several hundred million dollars of billings last year, and we're ramping the model up. And we see it as a -- the fellow that runs this piece of the business, Eric Nowak, he's been in this game for a long time. He sees this is the next evolution of software distribution.

Okay. All right. And it does have the ability to kind of like smooth out, whereas the components business is always going to be highly cyclical, and then you get the margin cyclicality associated with that. The ECS business kind of helps to smooth that out a little bit, correct?

Absolutely, you bet. One thing I'll mention here is because everybody -- the questions that we get around this are, wow, we keep reading and all these people talking about AI is going to eat software. Software is going to go away and AI is going to create the next this and that.

There's 2 elements here, alright? There's technology software in structure, okay, networking, compute, security, okay, that your core companies layer into your organizations. And then there's all the applications: Salesforce, ServiceNow, all the applications. AI is going to start to bite at the applications, but we really don't see them biting into the technology or the infrastructure side of software. And here's why.

Because what's happening, the guys that develop the infrastructure software, the enterprise software, they're incorporating AI agents into their platforms, okay? They're going to talk to the AI agents that get built into all these applications, and they'll communicate, okay? But as more and more of this takes place, more and more of it goes to the cloud. So as your companies put more and more in the cloud, what do you need? You need more storage, you just need more network, you need more compute and you need more security.

Where does that come from? It comes from the technology side of software, not the application side of software. So that's why we feel that we're in a good spot because we're on the technology side of the software, not the application side.

Okay. All right. We are quickly running out of time. It's hard to believe, but I just want to check to see are there any questions in the audience? Oh, here we go.

I guess just you kind of characterize versioning fairly broad-based recovery growth in that geographies. Is there anywhere that you think is still softer than you'd like it to be or that you don't see necessarily a recovery happening, like what's....

Question about the recovery and if there are any areas of softness, I just wanted to...

Yes, these guys might shoot me, but I'll tell you, no. The place that would be the least amount of growth right now, but it's still little green shoots is automotive in Europe. Everything else is really starting to track, and we call it a gradual recovery. It's a gradual quickly -- a quick gradual recovery.

[indiscernible].

I'm not saying that.

Can you talk about the [indiscernible]. Do you worry that, obviously, with the first starting, you could provide that value added service. But as AI gets smarter, do you worry that that could be disintermediated by the companies themselves as opposed to you doing that for them. As we start to do that some and that gets loaded into the intelligence, would they really -- could you disintermediate yourself?

It's a good question. And the way we think through that is that these appliances that we are building, that we're putting together for these companies requires an incredible amount of testing, and it's real live physical testing. It's not a test that you're going to perform with some AI injected into it. It's a physical let it run for the next 5 days and see what burns up kind of test.

So I'm not sure that we would get disintermediated that way because we put -- we've invested in a substantial test facility. And that test facility is now just -- it's requiring more and more megawatts to test some of these appliances. I hope I answered your question.

We are amazingly out of time. Bill, I feel like we could sit here and talk for hours. Didn't even get to talk about margins.

They're going up.

I would ask for a closing commentary, but I think I know exactly what you would say.

You do.

Undervalued and...

We're a good buy.

Thank you so much for being here, guys. Really appreciate it. Yes. Thanks very much. Have a good afternoon, everyone.

Thanks, folks.

Good day, and welcome to the Arrow Electronics Fourth Quarter and Full Year 2025 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Michael Nelson, Arrow's Vice President of Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak.

During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events.

As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions.

I'll now hand the call over to our Interim President and CEO, Bill Austen.

Thank you, Michael, and good afternoon, everyone. We appreciate you joining us for a discussion of our fourth quarter and full year 2025 results. I've been serving as Arrow's interim CEO for the past 5 months, and I've also had the privilege of serving on our Board since 2020. In both roles, I continue to be impressed by the depth of talent, operational discipline and commitment to our suppliers and customers around the globe. I want to thank all of our dedicated colleagues globally who continue to deliver for Arrow.

Starting on Slide 3. We delivered a very strong fourth quarter and with solid execution across global components and ECS, I'm pleased to share that revenue increased 20% year-over-year and non-GAAP EPS increased 48% year-over-year, both ahead of expectations. In global components, demand continues to gradually recover from a prolonged cyclical correction. And in ECS, we delivered record gross profit and operating profit in the fourth quarter.

The fundamentals of the business are strengthening. Raj will dive deeper into our financial performance, but I'd like to spend a moment touching on a few metrics we are particularly pleased with. First, our leading indicators continue to improve book-to-bill and backlog are increasing, lead times are incrementally extending, visibility continues to be cloudy, but we remain disciplined in how we interpret these data points. Our strategic priority to purposely shift our mix is translating into higher quality results as value-added offerings and ECS continue to perform well, supporting margins, cash generation and positioning Arrow for profitable growth as the cycle continues to gradually improve.

Turning to Slide 4. While we are pleased with how we finished the year, we remain focused on how we are positioning to grow profitably as the cycle continues to gradually recover. Our investment thesis is unchanged. We are actively executing on our strategy, and our fourth quarter results demonstrate the momentum we are building. We will continue to focus on executing through a gradual recovery while continuing to improve the quality and durability of the business.

There are 4 key pillars of our investment thesis. The reasons why Arrow is unique, respected and a compelling investment opportunity. First, Arrow holds a leading position in large and expanding markets. Arrow operates at the intersection of electronic components and enterprise IT serving 6 large end markets, including industrial, transportation, aerospace and defense, medical, consumer electronics and data center, all with long-term secular tailwinds. We are well positioned in each of these end markets. As we saw in the fourth quarter, demand trends and ordering behavior improved sequentially with leading indicators gradually strengthening across regions.

Second, Arrow has differentiated capabilities driving profitable growth. A key part of our strategy is growing our higher-margin value-added services, which deepen customer engagement and improved returns. These offerings such as supply chain services, engineering and design, and integration services extend our role from fulfillment to embedded partnership as we become an extension of customers and suppliers product development, supply chain and go-to-market efforts.

Our distribution capabilities around semi, IP&E and demand creation remain a fundamental part of what we do and our value-added services are a natural extension for Arrow. As we saw in the fourth quarter, value-added offerings continue to gain traction and adoption, which is helping to improve our margin profile reinforcing that this is not a future ambition but an active driver of profitable growth. The contribution of value-added services as a percentage of total operating income has grown over time, historically, value-added services accounted for less than 20% of total company operating income.

In 2025, that mix has grown to roughly 30% and reflecting both strong demand and an intentional shift in our portfolio towards margin-accretive offerings. Looking ahead, we are focused on further increasing this mix to drive profitable growth. The secular growth in cloud, AI and data center demand is creating tailwinds for both our components and ECS businesses, particularly in areas like AI infrastructure build-out, where our supply chain services are increasingly critical.

Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates leverage in the P&L expands margins and provides reinvestment capacity for growth. Our efforts to date have focused on simplifying operations, consolidating resources and realigning geographically. We have more work to do, but our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates operating leverage and reinvestment capacity in the business.

Third, we have a diversified business model, which provides financial flexibility. Arrow's combination of global components and ECS creates balance, resilience and consistent cash generation through cycles. Our diversified model allows us to participate across the full technology life cycle from design and planning to deployment, management and support. This diversification is especially valued in this recovery as it provides resilience on both the income statement and the balance sheet supporting long-term value creation.

Our ECS business is a nice complement to our electronics business as it is a critical growth engine for Arrow. ECS is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions such as cyber security, data protection, virtualization and data intelligence, much of which is on ramp to AI. In ECS, we are also moving beyond transactional distribution toward higher-value, more strategic engagements.

We are driving channel enablement through our ArrowSphere digital platform, which supports cloud and AI scale and acceleration. I'm proud to share that Arrow was recognized as Microsoft's 2025 Distributor Partner of the Year for its ArrowSphere AI offerings, including ArrowSphere Assistant, that help channel partners drive sustainable growth through agenetic selling and insight-driven execution. This demonstrates the differentiated innovation we are bringing to the market.

In addition, strategic outsourcing recurring revenue models and digital enablement are expanding our role in the ecosystem and improving earnings quality. Many of the solutions we are providing are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes now roughly 1/3 of our total ECS billings. Additionally, [ 3/4 ] of ECS billings are software and services, the remaining 25% of billings consists of hardware solutions related to storage, compute and networking.

The fourth quarter confirmed our strategy is progressing with continued momentum in backlog, recurring revenue and cloud and AI related demand, our diversified model provides balance through cycles, which is particularly important in a recovery environment like the one we're in today, ultimately positioning Arrow to deliver sustainable long-term growth margin improvement and increasing shareholder returns. And fourth, we have a focused capital allocation strategy designed to maximize shareholder value.

We will reinvest in organic growth opportunities that strengthen our differentiated capabilities, expand our value-added offerings and position the business for profitable growth as markets recover. We will pursue strategic and financially disciplined M&A that enhances our competitive position, deepen supplier and customer relationships and delivers attractive long-term returns and we will continue to return excess capital to shareholders.

In Q4, we repurchased $50 million in stock. And since 2020, we have returned approximately $3.6 billion to shareholders through share repurchases, reflecting our confidence in the durability of our business model and our commitment to shareholder value creation. As we evaluate all the uses of capital, we remain focused on deploying capital where we see the highest long-term risk-adjusted returns while preserving an investment-grade credit profile and the flexibility to continue investing in the business.

Turning to Slide 5. We are very proud of what we accomplished in 2025. We ended the year with strong execution delivering a solid fourth quarter while continuing to operate in what remains a gradual recovery across our markets. We are improving our execution, and we are seeing tangible evidence that our strategy is delivering. The continued growth of higher-margin value-added offerings across both global components and ECS, is improving the quality and durability of our earnings.

Looking ahead, we remain cautiously optimistic as the cycle gradually recovers. We anticipate having the opportunity to drive profitable growth through a measured recovery in 2026 and we'll continue to manage the business with discipline. We believe Arrow is well positioned for the long term with a diversified business model, improving profitability and a focused capital allocation strategy that allows us to invest through the cycle and create sustainable shareholder value.

With that, I'll turn it over to Raj to dive deeper into our financial performance.

Thanks, Bill. On Slide 6, consolidated revenue for full year 2025 was $30.9 billion, which was up 10% versus the prior year or up 9% versus the prior year on a constant currency basis. The growth was driven by an 8% increase in Global Components revenue and an 18% increase in ECS revenue or 7% and 15% versus the prior year on a constant currency basis, respectively.

Non-GAAP diluted EPS for the full year increased 4% to $11.02. I would like to provide color to some of the key drivers to our 2025 performance. During the year, margins experienced headwinds from our regional mix and customer mix in global components, offset by growth in our accretive value-added services and continued productivity initiatives. We are seeing gradual improvements in both Western regions and mass market customers. Additionally, we continue to execute our strategy of increasing the mix of our value-added services while driving operating leverage in the business.

Now turning to our fourth quarter results. On Slide 7, sales for the fourth quarter increased $1.5 billion year-over-year to $8.7 billion, exceeding our guidance range and up 20% versus the prior year or up 16% versus the prior year on a constant currency basis. Fourth quarter consolidated non-GAAP gross margin as a percent of sales of 11.5% was down 20 basis points versus the prior year. Again driven primarily by regional and customer mix and global components.

Our fourth quarter non-GAAP operating expenses increased $53 million sequentially to $669 million. The increase was driven by higher variable costs to support top line sales growth as well as normal seasonality within the ECS business. Importantly, our ongoing cost savings initiatives have supported a lower OpEx as a percent of gross profit, which declined 700 basis points sequentially and 100 basis points year-over-year to 67%. We believe there is ample opportunity to drive efficiencies in how we operate and increased operating leverage in the business model.

In the fourth quarter, we generated non-GAAP operating income of $336 million, which was 3.8% of sales. Margins improved sequentially due to normal seasonality within our ECS segment. Interest and other expense was $44 million in the fourth quarter as we benefited from lower average debt levels throughout the quarter. and our non-GAAP effective tax rate was 23%. And finally, non-GAAP diluted EPS for the fourth quarter increased 48% to $4.39, which was above our guidance range. driven by a number of factors, including favorable sales results, a higher mix of our value-added services and lower interest expense.

Turning to Slide 8. Let's take a closer look at our global components business. Global components sales increased $1.1 billion year-over-year and $326 million sequentially to $5.9 billion in the fourth quarter, above our guidance range and up 6% versus the prior quarter. Our results in the fourth quarter illustrate our belief that the cyclical recovery remains on track for a gradual upswing as our business continues to build momentum. Several of the key data points that we've previously highlighted improved again in the fourth quarter.

Our book-to-bill ratio has improved further in all 3 regions in our above [ 30 ]. Our backlog continues to see healthy sequential growth and has increased for the last 4 consecutive quarters. All 3 of our operating regions performed better than seasonal trends. Our sales growth was underpinned by strength for both semiconductor and [ IP&E ] components. Demand trends across many of our core markets, such as transportation, industrial and aerospace and defense remain healthy and are showing activity levels higher than 1 year ago.

Our inventory is turning at a more normal pace compared to historical trends. stated lead times in the fourth quarter began to modestly expand indicating improving demand levels. Taking all of this together, the market environment has incrementally improved over the last 90 days, reiterating our view that the business is in the early stages of a gradual cyclical upturn.

Importantly, our focus remains on driving profitable growth. Within these efforts, a few dynamics are at play that I'd like to touch on. First, we are closely monitoring the mix of our business, both from a regional and customer standpoint. We are seeing incremental improvements in both Western regions and mass market customers, but continue to expect a gradual recovery. Second, we are making a measured shift toward an increased mix of higher-margin value-added offerings, namely supply chain services, engineering and design services and integration services, these offerings are a natural extension for Arrow, building upon our core semi, IP&E and demand creation capabilities, which remain an important piece of our business.

Our lens is focused on how we can best help the customers and suppliers position for growth, remove complexity and get to market quickly. Lastly, operationally, we are focused on efficiency, we are continuing our efforts to rightsize our cost structure, freeing up capacity to reinvest in accretive areas of the business. Taking a closer look at each of the 3 regions in the Americas, Sales saw a healthy sequential growth underpinned by strength in aerospace and defense, industrial, transportation and networking and communications.

In EMEA, we are seeing a healthy backlog build across verticals, which is a sign of the market improving. And finally, in Asia, we once again saw broad-based sales growth, highlighted by strength in compute, consumer and continued EV momentum in the transportation sector. Global Components non-GAAP operating income increased approximately $20 million sequentially to $219 million, up 10% from the prior quarter. Non-GAAP operating margins increased sequentially by 10 basis points.

Turning to Slide 9 and our global ECS business. In the fourth quarter, global ECS sales increased approximately $400 million year-over-year to $2.9 billion, above the midpoint of our guidance range and up 16% versus the prior year or up 11% versus the prior year on a constant currency basis. Total ECS billings were $7.1 billion, up 16% year-over-year. Our global ECS business continues to differentiate on the more complex end of the IT spectrum, where we are experiencing strong secular demand trends behind hybrid cloud, infrastructure hardware and software, cybersecurity, data protection and data intelligence for AI-driven workloads.

Our global ECS technology mix, regionally diversified presence and critical role in the middle of technology providers and channel partners have driven over 75% backlog growth year-over-year finishing 2025 at another all-time high. Looking ahead and building off our foundation of enabling technology providers and supporting channel partners we're expanding our global ECS addressable market opportunity by going beyond the role of a traditional distributor.

Through this new motion, Arrow becomes the exclusive go-to-market partner for a supplier taking on all or part of their commercial activities and gaining the ability to sell software licenses and software subscriptions on behalf of the supplier's brand. These agreements are a key strategic pillar for our ECS business and position us well as more suppliers look for partners who can simplify and scale their go-to-market motions. Over time, they are expected to be meaningfully margin accretive once at scale.

Turning to the balance sheet on Slide 10. Net working capital grew sequentially in the fourth quarter by approximately $180 million. Ending the quarter at $7.4 billion to support the business for growth. Importantly, the financial metrics we monitor improved with return on working capital up 170 basis points year-over-year to 18%. Likewise, return on invested capital increased 190 basis points year-over-year to 11.1%.

Working capital as a percent of sales declined in the fourth quarter to approximately 21% and our cash conversion cycle decreased year-over-year by 7 days. Relatedly, inventory at the end of the fourth quarter was $5.1 billion, and our inventory turns improved, reflecting disciplined working capital management.

Cash flow from operating activities was $200 million. Full year cash flow from operating activities was $64 million. Gross balance sheet debt at the end of the fourth quarter declined sequentially by $44 million, finishing the year at $3.1 billion. We repurchased $50 million in shares in the fourth quarter and $150 million in 2025.

Now turning to Q1 guidance on Slide 11. We expect sales for the first quarter to be between $7.95 billion and $8.55 billion, representing an increase of 21% year-over-year at the midpoint of the range. We expect global component sales to be between $5.75 billion and $6.15 billion, representing sequential growth of 1% at the midpoint. In enterprise computing solutions, we expect sales to be between $2.2 billion and $2.4 billion, which is up approximately 13% at the midpoint year-over-year.

We're assuming a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $2.70 and $2.90. Details of the foreign currency impact can be found in our earnings release.

As we look ahead to 2026, our view of the market is relatively consistent. We believe demand levels are incrementally improving in many markets highlighted by the leading indicators that we mentioned. We are pleased with the momentum that we are building. However, a few factors are leading to a more gradual recovery, inventory normalization throughout the supply chain is still in progress. Macro and geopolitical instability is creating uncertainty and overall market complexion can vary by region and market and customer type.

As you build your 2026 models, I would highlight a few items that will impact the linearity of our financial results. In Q1, we are expecting global combines to perform above seasonal trends in all our regions. While Q2 is expected to be seasonally strong for Asia. Q1 we'll have 4 additional shipping days that will result in 4 fewer shipping days in Q4, which primarily impacts the ECS business. We will provide you with updates in the quarters to come.

With that, I'll now turn things back over to Bill for some closing thoughts.

Thanks, Raj. Turning to Slide 12. Looking forward, our key priorities are clear. We remain focused on executing with discipline in an environment that continues to improve gradually, while recognizing that the recovery remains different by region, end market and customer type. .

Our priority is to accelerate profitable growth as we continue to manage mix, costs and working capital carefully and align investment levels with the pace of demand. We recently made several internal organization changes to better align our go-to-market teams in a way that creates greater focus on our growth initiatives. The changes will enable Arrow to continue to excel in traditional distribution while sharpening our focus on higher-margin opportunities with deep technical engagement, value-added services and differentiated solutions.

In our global components business, we appointed Chief Growth Officers across global classic distribution, global services and global IP&E distribution. In our ECS business, we appointed a Chief Revenue Officer, integrating sales, marketing as well as vendor and customer success to deliver optimal results across all regions. The direction is clear. We will continue to expand our higher-margin value-added offerings across both Global components and ECS, deepening customer relationships and improving the quality and durability of our earnings over time.

We remain confident in Arrow's strategy, differentiated capabilities and diversified business models while planning thoughtfully for a measured recovery as we move more through the year. We will continue to allocate capital to the highest return on investment opportunities with the goal of increasing returns for our shareholders.

Finally, on leadership, the Board's search for a permanent CEO remains ongoing. We continue to evaluate candidates, all of whom bring varied experience across complex environments, we will update the market when the process is complete and the board is ready to make an announcement.

With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call to questions.

[Operator Instructions] Your first question comes from the line of Willi Stein with Truist Securities.

Congrats on the good results and outlook. I was hoping you can comment on billing linearity through the quarter, was there anything unusual in terms of timing relative to what you would typically deliver on sort of a month-to-month basis?

And then as a follow-up, I'd like to ask the same question about billing -- pardon me, booking patterns through the quarter, whether that sort of followed a different than typical pattern.

And Will, you're referring to the fourth quarter? I assume right? The...

During the fourth quarter, month-to-month trend in both what you build and what you booked.

I don't think we saw anything unusual. I think it was largely aligned with our expectations. Obviously, ECS has its largest quarter in the fourth quarter, and that played out as we had thought it would play out, and we continue to see building momentum within our Components business, but nothing unusual. All 3 regions performed ahead of normal seasonality and components. So that's 1 call-out I would say, and that's going to continue on into the first quarter as well as we said in our prepared remarks. So I would say nothing unusual from either a billings or bookings standpoint.

Yes, nothing was pulled forward.

So above seasonal, above the normal pace, but it didn't improve or slow down through the quarter?

No. No. In fact, I would just say that based on our guide that we gave for the first quarter, momentum has continued into the first quarter. So we're seeing a lot -- we're seeing more of what we saw in the fourth quarter as we've now entered into the first quarter.

Your next question comes from the line of Ruplu Bhattacharya from Bank of America.

In global you saw strong sales in the Americas region and looks like in the ECS segment, you saw strong revenue growth in EMEA. Can you give us some more details on what drove that. And do you think the strong growth sustains into the second half of '26. I just wanted to clarify I think you said there was no pull-in of demand. Was that in both the components and in the ECS segment? And should we expect this level of demand to sustain in the second half? And I have a follow-up. .

Do you want to take it, Bill?

No, go ahead.

I think in terms of demand, I would say there wasn't anything in particular to call out within the different regions. We continue to have a pretty healthy backdrop in our key vertical segments within components, transportation, aerospace and defense and industrial as well. And I think that demand trend we've continued to see into the first quarter. As we said, the Western regions are starting to come back. So it's a better mix overall.

And we're also seeing the mass market come back. Rick, do you want to add anything to the -- can side?

Yes, I would just add, Raj, to what you said, again, very gradual, consistent build in backlog. And again, very tied to what we're seeing around industrial, mil aero. In particular, those markets are coming back in a nice fashion.

Yes. And the only thing I would add to that is what the guys have already said, Ruplu, is that if you remember from our last call and what we've talked about in the third quarter, we didn't see the industrial markets in the West coming back strong.

Not that they're coming back strong, but we're seeing more industrial more industrial activity in the West as we went through the fourth quarter.

Okay. Bill, for all the details there. Can I -- for my follow-up, I'm going to try and sneak 2 parts of the question in. In the ECS segment, 25% of billings are hardware. Can you talk about like what you saw strength in what particular categories?

And then you talked about these value-added services. I was wondering if you can talk a little bit more about that? What type of customers are using your value-added services? I think, Bill, you mentioned AI infrastructure. And so if you can just talk a little bit more about what you guys do in there? What type of customers are using it? And how high as a percent of operating income do you think over time, these type of services can get to?

Eric, why don't you take the ECS hardware piece?

Yes. So yes, hardware is 25% of our revenue. The other 75% are mostly software, cloud and services. Of course, this second part is growing faster due to the extra growth that we have in AI and cloud. In the [ Arrow side ], it's mostly storage, compute, of course, networking and security because security is a mix of software and hardware. So that's where the 25% comes the highest growth in these segments, of course, from the talking and security part.

Rick, do you want to take the value-added services on components?

Sure.Thanks, Bill. The only thing I would say on that is, Rubles what we're doing in value-added services and extension of what we do in our existing business today, we're very confident in our capabilities and the product offering that we serve from an overall standpoint there, and we're just extending that offering further and further. It's across multiple vertical markets. It's not tied to a specific vertical market, what we do in our service offering.

Yes. Ruplu, the last part of your question was what percent can it become? I don't think we have a projection for you here, but it's going to depend, obviously, on the rest of the business. So even though it's a faster growing, higher margin part of the business, as we get growth in the rest of our business, it does have an impact on the overall percentage of operating income.

I think what we've said in the past, Raj, is it's usually 2x gross margin -- gross profit of our normal business would be -- it could be up to 2x.

It's at least 2x, I'd say -- some are higher, some are lower, but it's a very profitable side of the business. But if we have the rest of the business growing much faster, the mix percentage is going to vary based on that, but it's going to be a strong contributor, regardless.

Your next question comes from Melissa Fairbanks from Raymond James.

I just had, kind of, a quick one. Normally, at this point in the cycle, we saw we would normally see a really big step-up investment in working capital. We did see inventories increase during the December quarter, I'm assuming, to support future growth. But actually, we've had 2 quarters in a row now where your interest expense -- or 3 quarters in a row now, where the interest expenses come in meaningfully lower than what your expectations were.

I think last quarter, that was due to some of the timing of that working capital investment. I see that you've guided to $60 million interest expense in the March quarter. Just wondering how we should think about working capital investment, how that flows through to the interest expense line and what to think about that in the near term?

Yes. Melissa, that's a really good observation. The interest expense level was, I'd say, much lower than we were expecting. Sometimes the cash flows, and the timing of the cash flows, have an impact that is not as predictable. And -- but we also -- we like the fact that we were sitting on a little bit more cash. We were able to pay down some debt in the short term. It is ultimately the same reason why, which is the timing of working capital and how that ramps up. Because we have another growth quarter here in the first quarter, we do believe that we're going to use more working capital as we always do when we're growing.

And so the interest expense forecast is based on our best view at this stage. But obviously, if that changes, we'll have to let you know. But right now, that's where we are. Generally, as rates have come down, we have a fair amount of debt that's short term in nature. And so that's also helped interest expense, and that was also a factor in the fourth quarter. short-term rates are at least 100 basis points lower than they were in the prior year. And so that's also having a mitigating impact on overall interest expense.

Okay. Great. That's very helpful. I just had 1 quick follow-up about seasonality in some of the end markets. You did give us some insight into Asia seasonality in the June quarter.

At this point, in a "recovery cycle", would we expect to see above seasonal results in some of the Western markets because they have been so challenged recently? Or is the visibility still just not there yet?

Well, let me start the backside of that question first, visibility. Visibility, Melissa is not as clear as we would like it to be. It's getting better. Our backlogs are extending. We feel good about that. But visibility beyond 90 days is still a little bit cloudy. And then your question about seasonality. Q1, we're above -- we think we said in Raj's notes in his script that were above seasonal in Q1, in all 3 regions. So we're seeing that, and we'll see that as we go forward.

There are no further questions at this time. I will now turn the call back to Interim President and CEO, Bill Austen for closing remarks.

Thank you, operator. Let me close with this. Industry fundamentals are improving across all regions and in many verticals. We're pleased with how our strategy execution is playing out because it's centered on growth and margin expansion, but we're not yet satisfied as there's more work to do. So we'll see you in another 90 days, and we'll talk to you a lot of you in the next day or 2. Thank you for joining.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone, and thank you for joining us today. I'm Bill Austen, Interim President and CEO of Arrow Electronics, and it's a privilege to speak with you today. Thank you for taking the time to be with us and for your interest in Arrow.

I've served on Arrow's Board since 2020, and I'm honored to lead the company during this transition period. I, along with the full Board, am committed to maintaining continuity, driving execution and delivering results for our customers, partners and shareholders. At Arrow, operational excellence and customer service are at the heart of everything we do. I'm incredibly proud of the strength of our team and the clear direction we are heading.

During this presentation, we'll make forward-looking statements, which are based on predictions and expectations as of today. I encourage you to read the safe harbor language in the accompanying presentation in its entirety.

With that, let's dive in. Let's begin with Slide 3 where I'll outline the 4 key pillars of our investment thesis, the reasons why Arrow is unique, respected and compelling investment opportunity.

First, Arrow holds a leading position in large and expanding markets. Arrow is a leading distributor at the center of global electronics and enterprise IT ecosystems, serving large and growing end markets, including industrial, transportation, aerospace and defense, medical, consumer electronics and data center. We are well aligned with all 6 core markets and believe our strategy is on point for delivering long-term sustainable growth.

These markets remain resilient, with several showing early signs of gradual recovery reflected in improving leading indicators, including book-to-bill ratios above parity in all 3 regions, expecting backlog and normalized lead times. Our global scale, long-standing supplier relationships and 90-year legacy of operational excellence give us a durable, competitive advantage as demand trends gradually strengthen.

Arrow has differentiated capabilities, driving profitable growth. A key part of our strategy is a deliberate shift toward an increased mix of higher-margin value-added services, including supply chain services, engineering and design services and integration services. These capabilities extend our role far beyond traditional distribution and deepen customer stickiness as we become an extension of our customers' and suppliers' product development, supply chain and go-to-market efforts. The secular growth in cloud and AI is creating tailwinds for both our Components and ECS businesses, particularly in areas like AI infrastructure build-out where our supply chain services are incredibly critical.

Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates reinvestment capacity for growth and margin expansion. Our efforts to date have focused on simplifying operations, consolidating resources and geographic realignment. Our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates reinvestment capacity and leverage in the business.

Third, we have a diversified business model, which provides financial flexibility. One of Arrow's key differentiators is our diversified model spanning electronic components and enterprise IT solutions, which provides balance, resilience and consistent free cash flow generation across cycles. This diversified platform enables us to play the full technology life cycle, from designing and planning to deployment, management and support.

And fourth, we have a focused capital allocation strategy. Our capital allocation priorities, which remain unchanged, are designed to maximize shareholder value. We will reinvest in organic growth, pursue disciplined M&A and return excess capital to shareholders. Since 2020, we've returned approximately $3.5 billion through share repurchases. We remain committed to allocating capital toward the highest long-term risk-adjusted returns, supported by our consistent free cash flow generation, while maintaining an investment-grade credit rating.

Turning to Slide 4. Arrow is a leading global distributor of technology solutions at the center of electronics and enterprise IT ecosystems, connecting the world's leading technology suppliers with customers across 6 large and resilient end markets. What differentiates Arrow is the breadth of our platform. We participate across the full technology life cycle, from design and sourcing to integration, deployment and ongoing management. That gives us a unique right to play a pivotal role in how technology is created, delivered and supported.

We do this across 2 best-in-class businesses, each with a distinct role in technology value chain, but both grounded in the same principles of execution, scale and customer partnership.

In Global Components, which represents roughly 70% of total revenue, we are a leading distributor of semiconductors and interconnects, passives and electromechanical, or IP&E, on behalf of original component manufacturers, which represents our core business. But we're much more than that, we also provide value-added solutions, including supply chain services, engineering and design services and integration services. In our Global Components business, we are seeing signs of gradual cyclical recovery.

Our Enterprise Component Solutions or ECS business represents roughly 30% of total revenue complements our global components business by delivering complete hybrid cloud, infrastructure software, cybersecurity and AI-driven solutions through a global channel ecosystem. Together, these businesses position Arrow to participate across the full technology life cycle and drive sustainable, profitable growth.

The secular trends in cloud, AI, automation and electrification continue to drive demand in our core end markets. This combination of scale, technical capability, market expertise and value-added services creates a diversified model that positions Arrow to deliver long-term profitable growth through market cycles.

Turning to Slide 5. Arrow is operating in large and growing markets at the convergence of physical and digital solutions, positioning our business for long-term sustainable growth. The distribution total addressable market, or DTAM, for our core distribution business is over $250 billion. Supporting the DTAM is the strength of 6 primary end markets that we serve: transportation, industrial, aerospace and defense, medical, consumer electronics and data center. We are well aligned with all 6 core markets and believe our strategy will deliver long-term sustainable growth.

Based on industry data, we estimate that the existing product distribution market is growing 6% to 10% annually. On top of our core distribution, we are also expanding our addressable market through an increased mix shift toward our higher-margin value-added offerings, which include supply chain services, engineering and design, and integration services. Importantly, value-added solutions are growing even faster than product DTAM, and they carry substantially higher margins.

On Slide 6, you can see the contribution of value-added services as a percentage of total operating income has grown over time. Historically, value-added services accounted for less than 20% of total company operating income. In 2025, that mix has grown to roughly 30%, reflecting both strong demand and our intentional shift in our product portfolio toward margin-accretive offerings.

This mix shift expands our addressable market, deepens customer engagement and increases the durability of earnings. This has been a natural extension for Arrow, building upon our core distribution platform with accretive value-added offerings. Looking ahead, we are focused on further increasing this mix to drive profitable growth.

I'd like to spend a few moments diving deeper into our 2 segments. Turning to Slide 7. Our Global Components business is the backbone of Arrow. We provide customers with one of the industry's broadest portfolios of semiconductor and IP&E products. These are critical products for our customers. IP&E includes parts like connectors, wires and cables, resistors, capacitors, inductors, switches, relays and fans. These are essential components in nearly all electronics driving connectivity, storing and regulating energy and using that energy to generate mechanical motion.

Our leadership position in Global Components is supported by a global footprint of 180 sales locations and nearly 40 distribution facilities. What's important here is the scale and diversity of this business. We work with hundreds of suppliers and thousands of customers, and no single customer accounts for more than 2% of sales. That diversification is a real strength, particularly in a market that's in the early stages of a gradual recovery.

In addition to our fulfillment business, our value-added solutions, which include supply chain services, engineering and design services, and integration services continue to differentiate us. These offerings provide customers improved supply chain visibility, design support and turnkey solutions that accelerate their time to market, and they are meaningfully margin accretive. Value-added solutions represents a significant opportunity for Arrow, and I will talk about each of them further in a moment.

Of the nearly $21 billion of Global Components sales we expect to deliver for fiscal 2025, Asia remains the largest part of the business and was first in and first out of the downturn, with growth continuing to outpace EMEA and the Americas. Altogether, Global Components enables Arrow to support customers from design to fulfillment, leveraging a model built for resilience and long-term profitable growth.

Turning to Slide 8. Our role in the components value chain is critical. We partner with suppliers or original component manufacturers, acting as their authorized distributor and extending their reach across hundreds of suppliers and thousands of customers. We deliver those components to both large OEMs and mass market customers, providing the scale, logistics and technical expertise needed to keep production moving. We define mass market customers as customers with $3 million or less of annual spend on components.

This position provides us early visibility into design activity and demand trends. It's why our book-to-bill ratios and backlog remain such important leading indicators of the broader market. In short, we connect the world's component manufacturers with the customers who build the products that power our global economy.

I'll now take a deeper dive into our value-added solutions, starting with supply chain services on Slide 9. In short, our supply chain services address a very real and evolving challenge for OEMs: control, visibility and resiliency. This is done by removing complexity across the components supply chain by removing obstacles for our clients so they can focus on their strategy. Many customers operate with multiple partners, disparate systems and inventory that's difficult to manage, all of which introduce hidden costs and risk.

Arrow brings order to that environment. We standardize processes, orchestrate material flows, layer in technology solutions and provide end-to-end visibility so customers can focus on design and demand generation instead of tactical execution. This capability has become especially important as companies scale investment in areas like AI infrastructure, where staging, sourcing and provisioning components globally is critical. Driven by a fluid and evolving geopolitical environment, we are helping OEMs mobilize their supply chains in new and different geographies, such as Southeast Asia, Eastern Europe and the Americas.

As an example, think of a hyperscaler that is buying $5 billion worth of GPUs because they are going to put a 500-megawatt data center in Indonesia. We provision, buy, relocate, store, house and then move to the customer site all the components needed when they want it. We will put in a distribution center somewhere in the region where that customer is going to be building out and we will bring in their materials, keep them in a distribution center and then provision them out to the site when required.

OEMs increasingly need visibility, so we are giving them a pane of glass to see the front and back-end silicon and rare earth mineral dependencies. This drives proactively to assure supply.

Our customers -- for our customers, the outcome is improved control, greater resiliency, faster execution and optimized working capital. And for Arrow, this is a margin-accretive offering that deepens long-term relationships. We expect that global trend toward investment in AI will create a significant tailwind for our supply chain services.

Turning to Slide 10. Our engineering and design services help customers get to market quickly. We effectively serve as an extension of our OEM customers' and suppliers' product development and design teams, helping them design the next generation of their product portfolios. This capability spans everything from design registrations and new product introductions to turnkey R&D and complex custom ASIC, or application-specific integrated circuit solutions, through our engineering service centers.

What differentiates Arrow is our ability to deliver breakthrough products, put device to the digital applications, backed by long-term customer relationships with our customer contracts having an average tenure of 7 years, and that tenure continues to grow. Today this team has delivered more than 750 products and enabled approximately 100 million deployments, demonstrate both scale and the impact of our value-added capabilities in accelerating customers' time to market.

A few examples of the products that the Arrow team has helped design include the world's first programmable Ethernet switch ASIC design, a smart surgical display platform and an electric vehicle DC fast charging station. The value for customers is speed and confidence. We help them reduce development cycles, solve technical challenges and bring innovative products to market faster by leveraging Arrow's global ecosystem of technology partners.

And for Arrow, this remains a highly margin-accretive, scalable business, and we will continue to expand our services, strengthen our operating model and use M&A to add new capabilities and vertical specialization. It's a great example of how we're moving beyond core distribution to become a deeper, more embedded partner in our customer's innovation cycle.

Turning to Slide 11, integration services, which includes Arrow's Intelligent Solutions, or AIS, is another important part of our value-added portfolio. We are involved in designing, building and testing discrete compute hardware and associated software that enables our customers to quickly bring innovative solutions to market faster by leveraging an ecosystem of world-class suppliers.

We have 5 global integration facilities with over 150,000 square feet of production space. AIS supports both OEMs and ISVs that are looking to scale quickly, accelerate time to market or overcome resource constraints. These are customers that want a partner who can manage everything from embedded computing to server and storage appliances, to full rack integration. These purpose-built rack solutions arrive fully cabled, tested and staged, which streamlines deployment and minimizes integration time across compute, storage and networking.

As an example, we have recently done some work for a shipbuilder which wanted to have different kinds of GPS tracking devices. We built 150 of these units, incorporated software, tested and outfitted the units for installation. It's a type of low-volume, high-mix and high-margin solution. We bring together components and software into an appliance and it carries a higher margin profile.

What makes AIS unique is the ability to leverage Arrow's global ecosystem of world-class suppliers and combine that with our engineering, supply chain and integration capabilities to deliver turnkey, production-ready solutions. The result for customers is improved speed, optimized cost structures and greater business continuity, especially in sectors like industrial, medical, data center and retail. And for Arrow, AIS is a margin-accretive, scalable business that deepens our involvement in customers' technology road maps and reinforces our evolution beyond core distribution into higher-value integrated solutions.

Switching gears on Slide 12. Our ECS business is a nice complement to our electronics business as it is a critical growth engine for Arrow. ECS is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions such as cybersecurity, data protection, virtualization and data intelligence, much of which is on-ramped to AI. We enable thousands of channel partners, VARs, systems integrators, telcos, ISVs and cloud providers to deliver modern IT solutions built on a broad ecosystem of hundreds of vendors.

About 3/4 of billings are software and services. The remaining 25% of billings is hardware, storage, compute and networking. We're aligned with the strongest secular trends in enterprise IT, hybrid cloud, cybersecurity, data protection and AI-driven workloads. These areas continue to drive healthy demand and strong backlog growth.

Many of our solutions we are providing are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now roughly 1/3 of our total ECS billings.

We have a well-balanced, diversified business across Europe and America. With our expectation to deliver over $9 billion of revenue and billings of approximately $20 billion in full year 2025, ECS continues to broaden our addressable market and provides a resilient, higher-return complement to our Global Components business.

Turning to Slide 12. Our ECS business plays a critical role positioned in the middle of the technology makers and channel partners. This business has evolved from a traditional distributor of products to a strategic partner in the channel with a unique set of offerings to meet the needs of suppliers and customers. We enable technology makers to focus on what they do best, creating innovative technology, while we handle the complexity of go-to-market.

On the other side of that, we support our channel partners, including VARs and MSPs, with sourcing, deploying, provisioning and managing the hardware, software and cloud solutions they rely on. This role has been the foundation of our business and is the platform from which we are now expanding into higher value, more strategic engagements.

Turning to Slide 14. Strategic outsourcing agreements are a major evolution of our Global ECS model and expand Arrow's addressable market through exclusivity, cross-sell opportunities and stickier relationships. Through these arrangements, Arrow is stepping into beyond distribution, becoming the exclusive go-to-market partner for our supplier, taking on all or part of their commercial activities and gaining the ability to sell software licenses and software subscriptions on behalf of the supplier's brand.

Arrow pays a fixed fee to become the exclusive software supplier in the market, and any sales we earn above the fixed fee is our profit. While early agreements naturally come with some learning curves, over time they are expected to meaningfully be margin accretive, with gross margins roughly double the ECS average once at scale. This is a key strategic pillar for ECS and positions us extremely well for the future as more suppliers look for partners who can simplify and scale their go-to-market motions.

Turning to Slide 15, let me bring "beyond distribution" to life with an example. A leading software provider wanted to scale and accelerate a global market presence. They don't want to dedicate the time, effort, resources, operations, compliance or logistics to develop certain nonstrategic or noncore areas of their business. Because Arrow has infrastructure and already understands this market, we were able to develop, execute and manage the supplier's entire EU go-to-market and do so exclusively.

This is a win-win for both Arrow and our supplier. It unlocks our sales and operational excellence, and it allows the software provider to reallocate resources to their core objective: making great software. We gain multiyear exclusivity, cross-sell opportunities and accretive margins.

Turning to Slide 16. Our digital platform, ArrowSphere, is a single integrated digital business platform that enables channel partners and vendors to quote, purchase, provision, manage and scale cloud, hardware, software and subscription-based solutions all within one user-friendly interface. ArrowSphere is a proprietary digital platform for our ECS business and offers several powerful applications in one easy-to-use platform.

ArrowSphere brings together the 3 things our partners need most: access to enterprise and midmarket customers; a broad ecosystem of software and cloud technologies; and the enablement capabilities required to manage everything as a service. Through ArrowSphere, partners can provision, manage, scale cloud and subscription services, automate workflows and oversee the full cloud life cycle, all on a single platform. It also integrates our hardware and software distribution capabilities, giving partners a unified way to deliver modern IT solutions.

ArrowSphere continues to see healthy adoption as more and more of our ECS business is transacted on the platform. As a result, ArrowSphere drives deeper engagement, accelerates recurring revenue and positions Arrow at the center of how the channel is transforming. We like to call ArrowSphere the thread that stitches together everything that we do in ECS.

Turning to Slide 17. One of Arrow's key differentiators is our diversified business model, combining Global Components and ECS. This combination allows Arrow to become more relevant to suppliers and customers, and it provides us the right to play more completely throughout the technology life cycle. We participate from design and planning to deployment, and further to management in support of technology solutions.

Our diversified model provides Arrow with a resilient balance sheet and consistent free cash flow generation through cycles, providing significant financial flexibility. Over the last 5 years, we've delivered approximately $3.1 billion of free cash flow, demonstrating the strength of our operating model even though varying market conditions. This allows us to reinvest in high-return opportunities, all while maintaining a strong, resilient balance sheet. It's a model built for stability in the near-term and long-term value creation for our investors.

Turning to Slide 18. This financial flexibility allows us to deploy capital effectively to drive growth and shareholder value. Our capital allocation strategy is focused in 3 areas: reinvesting in organic growth opportunities; pursuing strategic and financially disciplined M&A; and returning excess capital to shareholders. We continue to invest organically to scale our go-to-market engine, expand our value-added capabilities and strengthen our operating model across both segments.

We complement that with strategic, financially disciplined M&A, focused on extending our competitive position, strengthening supplier partnerships and adding capabilities that enhance accretive offerings like our value-added solutions.

We are also interested in further penetrating the market for IP&E. The right targets would provide us further depth and more specialization. It's very adjacent to semiconductor, and we view IP&E similar to the semiconductor industry 10 to 15 years ago. It's still very fragmented and the margin profile and ROICs are very healthy.

At the same time, we continue to return excess capital to shareholders with $3.5 billion repurchased since 2020, representing roughly 1/3 of our outstanding shares. As always, we are committed to carefully and rigorously evaluating all uses of capital, with the ultimate goal of generating the highest risk-adjusted return on investment over the long term, maintaining an investment grade credit rating and ensuring we have the flexibility to invest and create long-term value.

Let me close with where we began, on Slide 19. Arrow has a strong business that remains well positioned to create significant long-term value for shareholders. We have a leading position in large and growing markets. We execute exceptionally well in a $250 billion plus distribution market that continues to expand. Our differentiated capabilities drive profitable growth. We are focused on continuing to shift our mix toward higher-margin value-added solutions that deepen customer engagement.

Arrow's diversified business model provides financial flexibility. The combination of Components and ECS gives us balance, resilience and a consistent free cash flow generation. And finally, we have a focused capital allocation strategy. We will continue to allocate capital to the highest return-on-investment opportunities with the goal of increasing returns for our shareholders.

Thank you very much for your time today, and we look forward to engaging with you in the future.

All right. Perfect. Well, I think we can go ahead and get started. I'm Joe Quatrochi, the semiconductor analyst for Wells Fargo. Excited to have Bill Austen, President and Interim CEO of Arrow Electronics. Thanks for joining us.

Thanks for having us.

So maybe to start, just kind of set the stage for the discussion what do you think like investors maybe don't appreciate about the Arrow story, and then we can kind of get into maybe a few other things that are kind of going on with the company right now.

Sure. Sure. So what don't investors understand about the Arrow story. Let's just back up. The company is 90 years old. So I think investors need to understand the legacy of the company, the history of the company. You just don't wake up 1 day at 90 years old, you've got to earn your way there. And I honestly believe that Arrow has earned its way through up cycles, down cycles, sideway cycles to be the global brand that it is today, to have the global reach that it has today and to have the employee base that it has today that I think investors might miss that.

We have tremendous employees that have a long history with the company that have a long history in the industry that really understand what makes it go. But if you look at where we are today and the work that's been going on at Arrow over the last few years on cost down, productivity, getting the model in a different position if you think through that and if you're a believer in the cycle that takes place in this industry and the cycle is at the bottom, Arrow has done a tremendous amount of work over the last few years to position itself.

So as that cycle comes back, the business is really going to outperform. And that outperformance based on where today's stock price is -- it's -- the company is way undervalued, and the stock price is undervalued. And with the work that's gone into the model to create leverage, nothing but upside.

That's helpful. So you're in the interim CEO position now, right? Kind of maybe walk us through where we're at in finding a permanent replacement for the CEO, the time line, what are you looking for in that person as well?

Sure. So I've been in the interim role for about 7 weeks. I've been on the Board for 5 years, so it's not like I'm a foreigner to the company and that the company is -- the leadership team, I know them well, they know me well. As far as the CEO search goes, we put a search committee together at the Board level of which I'm a part of. We have now selected a search firm, and we are starting to gather several resumes from the industry, just to see what's available and to see what kind of characteristics people might have.

We put a characteristic list together of -- the CEO characteristics we'd like to have in the company. And we want to make sure that the incoming person understands the legacy, understands we're 90 years old, understands the dynamic in the industry, is a humble individual, we're not looking for a chest beater, and understands how the management team has been put together, how the strategy has been put together and the Board has been involved in that strategy development for the past several years.

We've been involved in the bringing up of the leadership team over the last several years. And lastly, a key characteristic that we're looking for is someone that has operational expertise and experience. Arrow is a big sales company, a big distribution company but we really want someone that bring in some operational expertise and operational chops to the company. Not that it doesn't exist but to continue the daily cadence of hitting metrics, driving metrics and performing to expectations.

Okay. That's helpful. Maybe in addition to obviously helping with that search, I mean, on an interim basis of running the company, what have been your areas of like strategic focus?

Yes. So as I said, the Board, myself, we've all been involved in putting the strategy and helping the leadership team coalesce around the strategy, which looks at how do we margin up the company, how are we going to create margin not just from the standpoint of taking cost out, taking cost out, taking costs out, we have to be good there. There aren't any companies today that perform well that aren't always focused on productivity and cost out.

We're going to continue to do that. But the next phase is how do we get growth? What are we going to do to get growth? And if you talk to the IR folks, they'll tell you we can get all the growth you want. Well, time out, slow down, take a breath, let's make sure we get the right growth. So the focus and the attention has been on shifting the mindset from constant cost out and head down in the weeds to driving growth but growth that contains the right kind of margin.

And when I say the right kind of margin, if you look at how we have started to differentiate business. We're big in semiconductor, obviously, that's part of the core, if you will. But other pieces of the business that the strategy contains is services. Okay, if you think about 1 piece of that would be Arrow Intelligent Solutions, that is a business within Arrow that builds very unique pieces of appliance, that brings software and components together to build an appliance and I say an appliance, a component, a device that would be think about high mix, low margin -- No, not low margin, high mix, low volume, sorry, high mix low volume in that 150 units.

So we've recently done some work for some shipbuilders that they wanted to have different kinds of GPS tracking devices. So we built 150 of these units incorporated software into it, and then it gets installed, onboard a ship, we've done some things like that. So think about low volume, 150, 100 units, but high mix. Each 1 wants purple, 1 wants green, 1 wants blue. And these bring together components, software into an appliance, and it carries a higher margin profile.

That's a piece of the strategy that we're pushing on. Another piece of the strategy that you've heard us talk about is on the service side, engineering services. We use our engineering folks that we have and whether it's eInfochips or whether it's silicon experts to offset engineers within our customers pool of engineers to help them design and create and develop their next product. And we might do that for a quarter. We might do that for 6 months or they might sign us on for a year, to be an offset to their engineering talent.

Another piece of our service business is supply chain services, where we're pushing on and leading the management team to go out and get more of these contracts, supply chain services is we take on the supply chain operation for some of our customers.

Now I'll give you an example, think about hyperscaler, right? Just -- hyperscaler buys $5 billion worth of GPUs because they're going to put in a 500-megawatt data center in Indonesia, we will provision, buy, relocate, store, house and then move to the customer's site when they want it. So we'll put in a distribution center somewhere in region where our customer is going to be finally building out, and we will bring in their materials keeping in our -- keep them in a distribution center and then provision them out to the site when required.

Now you don't see a lot of that on the revenue line because it's a fee-based model, we get paid a fee to do that. And those fees are in excess of 2x what our fees would be in the semiconductor side of the business. The Arrow Intelligence Solution is the same thing. Margins are 2x what they would be in the semi side of the business. So trying to create more of a mix around services and ECS would be the other piece is what I'm pushing on what the leadership team is pushing on and what we're getting focused on as we move into '26.

That's helpful. Maybe also kind of like as you take a more day-to-day role from relative to being on the Board, I mean, has there been things that -- about Arrow that have surprised you that you thought was a good decision when you're out of the Board, but then when you're kind of more day-to-day is maybe your opinion changed at all?

So I got this question earlier at the one-on-ones. What really you've seen is different? And what I said was blue jeans I mean, I've been retired for 5 years. And when I'm up to work, I want to work like this, but I've seen a lot of folks coming in blue jeans, so guess what, I'm wearing blue jeans to work now, which I think is really great, okay?

But to answer your question more specifically, Joe, the focus on cost within the business and cost out and productivity and heads down internally focused over the last couple of years is, I guess, if I step back from my Board role, and I said, Geez, I didn't realize that it was hands in and eyes in. And I think right now, what we're trying to do is we want to maintain that rigor on the productivity and cost out, but we got to get hands and eyes out focused on how we drive in volume and the right volume.

So that -- and those have been my conversations. I have a conversation with our Chairman every couple of weeks, what's going on, how you're doing, is your head still in a good spot, that kind of thing. And those are the conversations that he and I have.

Okay. That's helpful. Maybe shift gears a little bit, kind of looking at the demand side, can you talk about just the trends that you're seeing within the global components business? Maybe any color about geography or vertical markets?

Yes. Yes, absolutely. Look, let's start in the East because that's where components has come back first and the quickest, if you will. So if you look at the East, and I'm talking to Asia Pacific, the components volumes have come back -- have been back strongly in that region of the world but to the big accounts where you have a lot of volume, but lower margins. And that's across the market segments in Asia Pacific, probably the largest would be transportation that has come back the quickest.

Then if you move West you go to EMEA. It has -- EMEA has been a weak in the components business across pretty much all of the verticals with the exception of aerospace and defense, and you can imagine why. We've had good growth there, transportation is flat. If you look now where we're at in EMEA, industrials are starting to sprout some green shoots in the industrial space. Compute and communications has been reasonably solid in EMEA but the big driver, transportation has been flat. And industrials are now just starting to tick up.

And if you come back, you keep coming further west in North America. We're seeing now the industrial markets, what we would call the mass market, so the mass market is coming back in North America, not strongly, but gradually. And if you listen to our third quarter call, that's the terminology we're using is, we're using gradual recovery, but we are seeing a gradual recovery.

And if you look at North America, transportation has got some growth. Aerospace and defense now is flat. Compute, communications networking has got growth and now we're starting to see industrials. And we term industrials as the mass market, if you will, and that's the industrial base within the United States. And we would term those customers as a customer that buys $3 million or less of components. So think of companies like Carrier, Whirlpool, Honeywell, companies like that, that are -- we're now starting to see them pick up a bit, but -- and then if you look forward a touch from where we -- our third quarter call, what we were saying is that we're now at above parity with book-to-bills in all regions, which is -- that's the first time in a while that we could say that.

So as I said -- as I started out this conversation around if you believe that there's a turn coming and all the cycles bottom and then come back up, we're in a great position to go after the gradual comeback.

So you think that -- I mean, do you think about, obviously, like visibility is difficult, but as you think about just kind of '26, and like how do you think about like your kind of initial expectation is, you think it's still more gradual? Or maybe we start to kind of see interest rates come down, you got to get maybe a little macro help less uncertainty. Is that...

I'm a real firm believer in the gradual recovery, okay? I'm firmly parked in that spot. And you know what? If I'm wrong, it's okay.

Okay. Okay. Sticking with global components, you talked earlier about like value-added services and things. Where do those exactly kind of fit? I mean I think the hard thing for investors is you look at the reporting segments, and it's hard to kind of see those things. You see global components. You think semis, IP&E, right? But how do we think about just where those value-added services fit? And then maybe just touch again on kind of the margin structure there?

Yes. to us, they fit in global components, okay? And as I said, they don't drive the revenue line but they drive the profit line. And we've been on this journey of trying to shift mix to services for maybe a year. So it's not like it's all falling through, but it certainly is helping the bottom line. And as we get more traction which our plan's for '26, are going to measure, monitor and track that traction into the business units with rigor, we'll know where -- we and you will know that we're executing on those because we should see our OI line go up.

Okay. You talked about kind of like the things that you're focused for '26, I mean, what -- what do you think are the steps to accelerate that business? Is it just more headcount? Is it just kind of educating customers? Like how do we think about like what can really kind of pour some fuel on that fire to accelerate the services?

I'll give you my perspective, and I'll be very honest. It's focused within the company. It's just focusing and measuring those items. My point around part of the CEO search is a CEO that has some operational background. Raj, our CFO has got great operational background, okay? He understands and he knows how -- what moves the needles.

But the CEO has got to be a partner to that. The CEO has got to be part and parcel driving the business unit leaders to measure, monitor, track those things that are going to move the needle. And in the past, moving the needle was always getting more sales. okay? That's not necessarily the case today. Let's go get the right sales that have the right -- that contain the right margins and let's go push on services and set the organization up and we are in such a way that services can be stood up, measured, monitored, tracked.

Okay. What would you be sitting here next year at this time? Hopefully, as you...

Joe I'm telling you, I'm not going to be sitting here next year this time.

What would you view as like measured success, right? And like...

We've talked about it. As you think out and maybe not next year, but we should be getting back to margin levels that were prepandemic. There's no reason for the business not to be able to do that. Just in my mind and in the mind of the leadership team, that's doable. It isn't going to be next quarter, next 2 quarters, but that's the trend line.

Okay. Maybe we'll shift over to the ECS business. Maybe first start just kind of the value that, that brings to Arrow and why it makes sense for that to still be part of the business with the components, a little bit different. But same philosophy a bit...

There you go, you hit it. It's a distribution business, right? Is it -- does it completely mesh and tie the components? No, it doesn't have to. It helps us differentiate from the other guys, which I think is extremely important, okay, to have a differentiated model that sets us apart from other pure distis. We distribute on the ECS side of the business. But if you look at where our business is headed and where the market for that business is headed, that's a better way to look at it. Technology software with what we are presenting to the marketplace is anticipated to grow 10% to 15% over the course of the next 5 years.

And we're good at it. We have a great brand within ECS with -- and it was kind of founded and put together, I don't know, say founded, but it was put together very successfully in Europe. And we've done a great job in Europe. We've now taken the European model and brought it to United States. And the fellow that ran Europe now runs our global ECS business, and he's taken the same philosophies, same tools, same strategies to the U.S. with ECS.

The next phase is which we've embarked on already as we call Beyond Distribution. Beyond Distribution, is where we feel this software selling is headed. And it's -- what's happening is that software providers want to do what they do best. They want to develop and create software and modify their existing platforms of software. They don't want to have feet on the street selling to the mass market, they want to sell for the Big 10 directly.

And then everybody else, I got to get my brand out there. I got to get my software out there. They're coming to -- we've gone to them and said, we'll be your exclusive seller in this region of the world, this is an interesting opportunity. We pay them a fixed fee. We pay the software guy a fixed fee, and then we have the right to sell those software packages into the mass market in that region of the world. If our fixed fee is $10, and we sell $12, we keep $2. If we sell $13, we keep $3. So it's a fee-based model, and it has the opportunity to really upsize our margins.

And we started in Europe. We've been successful with it in Europe. We brought it to the United States, and now we're doing it in the U.S. as well. And we think that this is the direction that, that segment is headed, and we like it. That's the other thing. We like it. We don't want to sell it. We don't want to get rid of it. We want to continue to drive it. We have great leadership. We have a great brand recognition, and it brings us financial stability to the balance sheet when one is down, the other is up, when that one's down, the other one is up. So it helps us flatten out the ups and downs within the financials.

Okay. That's helpful. I mean I guess, like maybe spend another second on just kind of the components aspect of you talked about earlier, just kind of like being able to come out with like more unique solutions for customers of doing small volume but very specific tailored solutions to your customers' needs. I mean -- are there more opportunities like that? And do you need to like change your line card on the ECS side to support some of that? Or like how do we think about like that dynamic?

That's a good question, and I haven't been asked that question before, and I'm not sure I've thought through it.

Not to put you on the spot.

No, that's okay. That's okay. I mean that's what this is about, right? I think if we -- yes, yes, the answer is yes. As we broaden out the line card on the ECS side of the house. And what allows us to do that is a platform we have called ArrowSphere, which is a very unique platform that it's interesting because now that you asked that question, we have suppliers coming to us saying, we want to be on your ArrowSphere platform. So that indirectly answered your question, which I think makes a whole lot of sense.

So yes, the answer would be yes. We would like to continue to fill out that line card on ECS, and we're going to do it through ArrowSphere.

Okay. That's helpful. I guess like maybe shift gears a little bit like think about like the margin outlook, right, a gradual recovery, and it seems like maybe you guys are making some investments and things along the way to try and kind of reaccelerate growth. How do we think about just like total company like margin structure near term? And then where do you think you kind of talked about it a little bit ago, but where do you think it could go if you look out 18, 24 months?

Yes. Well, like I said, we'll be -- this is -- sorry, this is me. I won't be here in 18 to 24 months, so I'm going to talk for the next person, we're going to be on the trend to get back to pre-pandemic levels. That's where we're headed. And we're going to measure and track it and hold people accountable to make those things happen. That's the operational rigor that we got to instill.

Yes. Okay. Can you talk about just kind of views on capital allocation priorities, M&A.

Yes. Our capital allocation priorities haven't changed. They're the same that they have been organic growth, one: M&A, two; and return capital to shareholders through share buyback. And all of those are going to have an eye on what's got the highest return for the shareholder in terms of how is it -- are we ahead of our ROIC targets in any of those 3 categories.

Now I know the question might be, you didn't buy any shares back in Q3, right? And we've been buying back at a $50 million quarter clip which is insignificant from the standpoint. If you miss a quarter, you can always make it up. You shouldn't read anything into the fact that we didn't buy any shares back in Q3, just -- we just didn't. So we've got to make sure that we maintain our investment grade rating and we didn't want to put any of that in danger but don't read anything into the fact that we didn't buy shares back in Q3.

Okay. Maybe on M&A, you guys have talked about potential opportunities like that might present itself. I mean if you think about you as looking to maybe further consolidate like this pretty -- can be fragmented distribution market. Is that something that you're interested in? Or how I guess what do you think about what's the right M&A like strategy?

Yes. So I'm a firm believer and I've said this to the team and the Board, we're just not going to buy something to add bulk, okay? That's not what we're going to do. That's my view, my words a waste of capital. But if there's -- if there are things that we could buy that add to the -- what we're doing from a strategic perspective and margin up the company, those are the things that we're going to go do. They have to be accretive, we're just not going to go buy to buy because we can. We're going to buy things that make sense that fit the strategy and are accretive both to ROIC and EPS, obviously.

So things like things in the space of the other areas that we're pushing on within the company to expand margins IP&E, okay. We've got nice growth around all regions in the IP&E space. So IP&E would be an area that we would want to -- that makes sense from an M&A perspective. But just adding another distributor to consolidate in our view, doesn't make sense.

Okay. Okay. That's helpful. Maybe just as we think about free cash flow and just kind of working capital management, I mean, you talked about a gradual recovery of demand. How do you think about that from like an inventory level and what Arrow has, and if there is a gradual recovery, how much inventory do you need to add? Or do you need to add inventory?

We'll obviously need to add it in certain places, but as -- as revenue increases, we'll see our inventories come down. I think you need to think about working capital and we're into what, mid-20s today. And I think we used to be somewhere in the upper teens I don't know if we'll ever get back to the upper teens or middle teens, I should say, but we should certainly be able to drive it down from where we are today. So it's another area that the business needs to get a bit more rigor around and tied to some metrics and some incentives.

Okay. Okay. I think that's a perfect place to leave it. Thank you for joining us.

Thank you.

Good day, and welcome to the Arrow Electronics Third Quarter 2025 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Michael Nelson, Arrow's Head of Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Third Quarter 2025 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak.

During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events.

As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions.

I'll now hand the call over to our Interim President and CEO, Bill Austen.

Thank you, Michael, and good afternoon, everyone. I am humbled, honored and excited to serve as Interim President and CEO of Arrow Electronics. I have been a Director at Arrow since 2020, and I deeply believe in the management team and strategic direction that we have been charting. I, along with the full board, are committed to maintaining continuity, driving execution and delivering results for our customers, partners and shareholders while we search for a permanent successor.

During my first few weeks, I have been meeting with employees, customers, suppliers and investors. The message is simple. There will be no change in Arrow's commitment to excellence and customer service, which has been foundational within this business for 90 years. I have also taken the opportunity to listen to all parties to get an understanding of what makes us unique, respected and sets us apart from the competition.

Our management team remains committed to our strategic direction. We remain focused on delivering high-quality innovative technology solutions for our stakeholders. As we review today's results and outlook, you'll see that we are executing well in a market that continues to gradually recover from a prolonged cyclical correction. The fundamentals across both our global components and enterprise computing solutions or ECS businesses remain resilient, and we believe we are positioned to emerge with improved momentum.

I would like to comment on the U.S. Department of Commerce's Bureau of Industry and Security, or BIS, placing 3 of Arrow's Chinese subsidiaries on its entity list in early October. The Arrow team took decisive action and 10 days later, BIS informed us that it intends to remove these subsidiaries from the entity list and granted a letter of authorization to resume normal business activities. I am pleased with the prompt resolution to this matter, which underscores Arrow's robust and continuously evolving trade compliance program, a significant reason why suppliers and customers choose Arrow.

Starting on Slide 3. In the third quarter, we delivered revenue above the midpoint of our guide as well as earnings per share above the high end of our guidance range. With contributions from both our global components and ECS segments. While we are taking decisive action to navigate the current environment and continue to improve operational and financial performance, I want to remind the investment community of Arrow's strengths and opportunities for growth.

Turning to Slide 4. Arrow is a leader in electronic components and enterprise IT industries underpinned by a platform-based data-driven business model. We play a pivotal role in connecting the world's leading technology manufacturers and service providers. Our business operates in a large and growing market. We know that there are ample opportunities to grow our core product distribution business by leveraging our global logistics footprint to deliver the latest technologies to the market.

The distribution total addressable market, or DTAM, for our core distribution business is over $250 billion, with demand for value-added services, extending Arrow's addressable market even further. Supporting the DTAM is the strength of 6 primary end markets that we serve, transportation, industrial, aerospace and defense, medical, consumer electronics and data center. We are well aligned with all 6 core markets and believe our strategy is on point for delivering long-term sustainable growth.

As our business continues to evolve, we intend to drive profitable growth through a deliberate shift toward an increased mix of higher-margin value-added offerings in relation to the product distribution services. Suppliers and customers can rely on Arrow for a broad range of services, deepening our legacy relationships and opening the door to new opportunities.

This has been a natural extension for Arrow, building upon our core distribution platform with accretive value-added offerings like supply chain services, engineering and design services and integration services, drilling down into a few examples. First, within our global components segment, our supply chain services offering is well established and positioned to support growth in AI infrastructure build-out. For example, many of the hyperscalers and even some of the other players that are making massive infrastructure investments in large language models need help with sourcing, managing, staging and provisioning of electronic components globally.

Arrow supply chain services provides the support so hyperscalers get the right source in the right region of the world at the right time so they can build out their points of presence. In short, our customers stick to their competency and releverage ours, staging and moving materials throughout a very complex global supply chain, and we do it with confidence and ease.

We are effectively enabling customers to outsource a piece of their entire supply chain or a piece of their bill of material to Arrow. They can then focus on what they do best, like research and development or go-to-market, we focus on what we do best and the result is a win-win. Supply chain services are accretive to our core business, and we expect that the global trend toward investment in AI will create a significant tailwind.

Second, let's focus on our engineering and design services. Engineering and design services is another area where we become an extension of OEMs and suppliers product development and design team, not for days or weeks, but for quarters and potentially years to help them design the next generation of their product portfolio, gives us a completely different way to not only serve our OEM customers, but in some cases, even our traditional suppliers. Like supply chain services, engineering and design services carry a higher margin profile than the core business.

And lastly, in our Intelligent Solutions business, we are involved in designing, building and testing discrete compute hardware and associated software that enables our suppliers to quickly bring unique appliances to the market. This is a growing unit and margin accretive to the core business. Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates reinvestment capacity for growth and margin expansion.

Our efforts to date have focused on simplifying operations, consolidating resources and geographic realignment. Our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates reinvestment capacity and leverage in the business. One of Arrow's key differentiators is our diversified business model which enables Arrow to become more relevant to suppliers and customers, and it provides us the right to play more completely throughout the technology life cycle. In other words, we participate from design and planning to deployment and further to management and support of technology solutions.

Our ECS business is a nice complement to our electronics business and is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions, such as cyber security, data protection, virtualization and data intelligence, much of which is on the ramp to AI. This reflects our ongoing alignment to the higher growth demand trends across enterprise IT, many of which are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now roughly 1/3 of our total ECS billings.

Within our ECS business, we are capitalizing on an opportunity to expand our addressable market and accelerate growth through evolving strategic outsourcing arrangements, which we have implemented with multiple large suppliers. Under the strategic outsourcing model, Arrow becomes the brand and the exclusive partner of the supplier in the region, taking control of the go-to-market activities.

Our diversified business model that includes electronic components and enterprise IT solutions contributes to our capital allocation strategy because it creates more resilience on the balance sheet and helps us to continue to generate strong free cash flow over time.

Our capital allocation strategy is focused in 3 areas: reinvesting in organic growth opportunities, M&A opportunities and returning excess capital to shareholders. As a reminder, we have returned approximately $3.5 billion to shareholders via share repurchase since 2020. As always, we are committed to carefully and rigorously evaluating all uses of capital with the ultimate goal of generating the highest risk-adjusted return on investment over the long term and maintaining an investment-grade credit rating.

Before I turn the call over to Raj, I want to emphasize that Arrow remains committed to disciplined execution, strengthening our supplier and customer partnerships and delivering sustainable value for our shareholders.

With that, I'll now hand things over to Raj, who will walk you through the financial results in more detail. Raj?

Thanks, Bill. On Slide 5, sales for the third quarter increased $890 million year-over-year to $7.7 billion, exceeding the midpoint of our guidance range and up 13% versus prior year or up 11% year-over-year on a constant currency basis. Third quarter consolidated non-GAAP gross margin of 10.8% and was down approximately 70 basis points versus prior year, driven primarily by regional and customer mix and global components and by product mix and a $21 million charge we took in ECS, which I'll detail in a moment.

The charge reduced consolidated non-GAAP gross margin by 30 basis points. Our third quarter non-GAAP operating expenses declined $15 million sequentially to $616 million. The decline was largely driven by a reversal of stock-based compensation expense and cost savings initiatives, which more than offset higher variable costs to support top line sales growth as well as the impact of currency exchange rates.

In the third quarter, we generated non-GAAP operating income of $217 million, which was 2.8% of sales. Margins remained flat sequentially due to continued headwinds from our regional mix and customer mix. offset by growth in our accretive value-added offerings and continued productivity initiatives. Interest and other expense was $55 million in the third quarter, and our non-GAAP effective tax rate was 22.5%. And finally, non-GAAP diluted EPS for the third quarter was $2.41, which was above our guided range, driven by a number of factors, including favorable sales results and a lower interest expense. The aforementioned charge lowered EPS by $0.31.

Turning to Slide 6. Let's take a closer look at our global components business. Global components sales increased $610 million year-over-year and $271 million sequentially to $5.6 billion, above the midpoint of our guidance range and up 5% versus prior quarter. We continue to believe that the business remains in the early stages of a modest cyclical upturn reported by several key data points. Our book-to-bill ratios remain above parity in all 3 regions.

Our backlog continues to improve, growing again in the third quarter. All 3 of our operating regions continue to perform at or better than seasonal trends. Sales for both semiconductor and IP&E components grew sequentially in the third quarter. Activity levels across our industrial and transportation markets remain healthy. These are our 2 largest verticals globally. Our value-added offerings, namely supply chain services, engineering and design and integration services performed well and remain margin accretive to our business.

Stated lead times remain at low levels, and despite our continued backlog growth, visibility is needed relative to a normal environment. Inventory levels in aggregate have normalized, however, mass market customers are not recovering as quickly as compared to larger OEMs, which is a headwind to profit margins. This is not a typical to prior cycle, and we believe this sale of the market remains healthy and we're still seeing destocking among mass-market customers.

Lastly, our APAC business was first in and first out of the downturn and continues to outpace the Americas and EMEA at this stage of the upturn. This again is not atypical, however, it does create a headwind to overall profit margins. Taking a closer look at each of the regions. In the Americas, sales were flat sequentially at $1.7 billion and strength in industrial and transportation markets drove our results. Sales in EMEA were $1.4 billion with industrial and aerospace and defense markets including resilient despite macroeconomic and geopolitical headwinds.

And finally, our sales in Asia grew sequentially 12% to $2.4 billion, our growth was once again broad based, highlighted by strength in industrial, compute and consumer, along with continued EV momentum in the transportation sector, similar trends to what we observed in the second quarter. Global components non-GAAP operating income increased $10 million sequentially to $199 million, representing 6% growth. Non-GAAP operating income margin was flat sequentially at 3.6%.

Turning to Slide 7 in our global ECS business. Global ECS sales increased $300 million year-over-year to $2.2 billion, above the midpoint of our guidance range and up 15% versus prior year. Global ECS billings were $5.2 billion, up 14% year-over-year. We experienced continued momentum in hybrid cloud infrastructure software, hardware and services to deliver solutions for cybersecurity data protection and data intelligence related to data center activity for AI investment.

We again enjoyed healthy backlog growth in excess of 70% year-over-year to an all-time high as our mix of business continues to shift to more recurring multiyear revenue. As Bill mentioned, our ECS go-to-market strategy is broadening as we continue to improve the value that we provide in the distribution channel. From technical expertise and project management to mid-market channel enablement through our Aerosphere digital platform, which supports cloud and AI scale and acceleration, our ECS business is growing beyond the traditional distribution model and expanding our addressable market through new strategic outsourcing engagements.

This new motion provides aero exclusivity, cross-sell opportunities and stickier relationships as Arrow becomes the sole operator in the market. From a margin point of view, if we are successful in selling the product well in the strategic outsourcing model, engagement is accretive. In the third quarter, we took a $21 million charge, largely due to lower profit expectations on multiyear contracts that have underperformed. Broadly, we believe these strategic outsourcing agreements will be margin accretive at a key part of our long-term business.

We are learning from each agreement and believe it will better position our ECS business for the future. ECS non-GAAP operating income declined $12 million year-over-year to $65 million, driven by the $21 million charge. Non-GAAP operating income margin was 3% as the charge lowered margin by 100 basis points.

On Slide 8, net working capital grew sequentially in the third quarter by approximately $450 million, ending the quarter at $7.3 billion, driven primarily by sales growth that led to higher accounts receivables. Our cash conversion cycle increased sequentially by 5 days in the third quarter to 73 days as a result. Inventory at the end of the third quarter remained at $4.7 billion, and our inventory turns continue to improve. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues.

Cash flow used for operating activities in the third quarter was $282 million. On a year-to-date basis, cash used for operating activities was $136 million, which supported revenue growth of approximately 6%. Gross balance sheet debt at the end of the third quarter was $3.1 billion.

Now turning to Q4 guidance on Slide 9. We expect sales for the fourth quarter to be between $7.8 billion and $8.4 billion representing an increase of 11% year-over-year at the midpoint of the range. We expect global component sales to be between $5.1 billion and $5.5 billion, in enterprise computing solutions, we expect sales to be between $2.7 billion and $2.9 billion, which is up approximately 13% at the midpoint year-over-year.

We're assuming a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $3.44 and $3.64 and Details of the foreign currency impact can be found in our earnings release. I want to provide some color as you build your 2026 model.

At this stage, the pace of the cyclical upturn is proving to be gradual given the level of broader macroeconomic uncertainty, many of the primary end markets that we serve are finding momentum and achieving year-over-year growth. However, regional and customer mix dynamics are presenting headwinds to profitability.

It is our belief that similar to cycles of the past that the West will catch up to the east along with a recovery among mass market customers. We're seeing this in the leading indicators that we've highlighted. However, the pace of this shift appears measured as we look into 2026. We will provide more color during the fourth quarter earnings call.

I'll now turn things back over to Bill for some closing thoughts as we look ahead.

Thanks, Raj. Turning to Slide 10. Looking forward, our key priorities are clear. First, we are seeing trends in our global components business that suggest we are in the early stages of a gradual recovery. Second, we will continue to leverage the strong secular trends in cloud and AI that is driving strong growth in both our Supply Chain Services business and in our ECS segment.

Third, we are focused on delivering profitable growth through a persistent shift toward an increased mix of higher-margin value-added offerings and a continued execution of our productivity initiatives. Finally, we will continue to allocate capital to the highest return on investment opportunities with the goal of increasing returns for our shareholders.

With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call for questions.

[Operator Instructions] We'll take our first question from Will Stein at Truist Securities.

First, Bill, thank you for this introduction. I appreciate it and congrats on the good results. I'm hoping you can maybe clarify whether you might be a candidate for the permanent CEO position or are you limiting yourself to an interim role?

Thanks, Will. Nice to meet you. Good question. I'm really happy, humbled and honored to be in the interim role and I'm in the interim role. I am not on the candidate list for the full-time CEO role.

At the Board level, we put a search committee together, led by Steve Gunby, our Chair. We have several Board members, and myself, on the initial committee. We are fully moving down the path at this point to finding a candidate. We have selected a search firm, of which I will not name at this point. And we are going to be in the throes of reviewing candidates in the not-too-distant future, but I am not -- I will not be one of them. I will go back to retirement. And I will remain on the board. Thanks for the question.

Got it. As a follow-up, really sort of taken into a different direction a little bit, whether it's you or Raj, could you maybe linger on the on the charge that the company took during the quarter, maybe explain what this contract was. Is it still in force? Is it completed? Is it abandoned? And what was the economic condition that gave rise to the charge?

Yes. Well, it's a good question. Let me -- since Eric Nowak is here, let me give it to him first to talk a little bit about what we're -- what these contracts are in terms of the strategy, and then I'll come back to the financial impact that we've seen.

Thank you, Raj. We are talking about strategic outsourcing, and this is a fast-growing part of our business. Our suppliers are contracting to us diverse noncore parts of their business to focus on their own priorities. So we are implementing these models with several large suppliers in both North America and EMEA. And as Bill said already, under this agreement, Arrow is acting on behalf of the vendor for a given perimeter and becomes the brand. We take control of the go-to-market activities.

So this new merchant provide us exclusivity, cross-selling opportunities, better margin and stickier relationships as we become the sole operator in the market, including for the white space of the supplier and sometimes also in other parts of the world.

Yes. So Will, I would just also add that we're really excited about these contracts. We've already gotten several hundred million dollars of billings this year, and that's going to be a big growth vehicle for us longer term for ECS and for the company. We do evaluate the performance on these contracts every period and the charges related to underperformance I would think about it as underabsorption of fixed fee payments that we're supposed to be making.

And what I would say is that we're going to continue to grow through some growing pains. We're going to get some margin variability. But if you were to think forward a couple of years in terms of when these things get to steady state, we should be able to achieve double the gross margins on these versus what we achieve in the rest of ECS. So that's why we're really excited about it. So it should give us really good top line growth and bottom line growth.

We called out the $21 million charge this quarter only because it's more material in size. We have taken some smaller charges during the first part of the year, but this one was more material we would hope that we wouldn't have anything material like that in the future, but we're likely to have some additional charges in the future that are just going to be part of our normal P&L.

We'll move next to Ruplu Bhattacharya at Bank of America.

Raj, I want to delve a little bit more into the ECS margins. Typically, you see a strong growth between the September quarter and the December quarter. Can you talk about what you're seeing in terms of mix, hardware versus software? And how should we think about that sequential change in margins given this quarter had the charge and so it was lower than expected. So how should we think about that ramp between September and December?

Yes. Look, I would think about -- and we quantified the impact of the charge in the third quarter. So it was worth almost 100 basis points, so about 100 basis points. If you were to adjust for that, we would still we expect fourth quarter to be very strong for the ECS business, and that's really reflected in our outlook.

You can see we gave you sort of the net sales outlook, but the billings growth, GP dollar growth and operating profit dollar growth should be quite good in the business. And margins should also be strong compared to last year. So we have no concerns about what the performance will be in the fourth quarter for ECS.

Okay. Maybe as a follow-up, if I can ask you, Raj or Bill. Bill, by the way, congrats on the interim role. If you guys can give a little bit more detail on the comment you made about things being recovering a little bit slower, which end markets or which verticals are you seeing slower growth in?

And as it pertains to the outlook for regions, it looks like Asia remains strong. So just how should we think about margin progression in this environment? I know you're not giving full guide for '26 right now. But how does this temper your to 90 days ago versus what you have thought about components sgement margins and ECS segment margins going forward?

Yes. I'm going to -- this is Bill. I'm going to have Rick Marano answer that question to give you the insight as to how the verticals look in Asia.

Yes. So thank you, Ruplu, for the question. I would say kind of touching on what both Bill and Raj said overall, look we firmly believe we're in a recovery in the early stages of a gradual recovery in the marketplace overall. The leading indicators in all 3 markets remain robust, meaning book-to-bill, meaning backlog coverage and design starts as well are very positive for us at this point in time.

Transportation and industrial, which are 2 very large verticals for us continue to respond in positive results for us, and they are leading the way for us in our Asian markets as well. And again, as Bill and Raj touched on earlier, we truly believe that based off of what we're seeing in APAC today as the market recovers in the West and the mass market recovers, we'll see both increased sales and margin accordingly as the year goes on in '26.

Yes. And Ruplu, let me just add on your question around the '26 trajectory. I did make some comments towards the end of my prepared remarks. .

Primarily because we continue to see a gradual recovery. As we look at our leading indicators and how we see the business playing out during the course of next year, we do believe that it is recovering, that will be a gradual recovery. As we've looked at some of the models that are out there for the space that we operate in, they seem to be quite aggressive. And so we just wanted to make a point that we see more of a gradual recovery in the business next year.

Okay. If I can sneak one more in. Given the recovery that you're seeing in hardware and maybe it's a gradual recovery, you also talked about some new type of contracts.

How would this impact your working capital and inventory requirements going forward? How should we think about cash conversion cycle in this environment?

Yes. I mean this is more on the ECS side with the newer contracts, newer distribution agreements that we talked about. Yes. I mean, look, we -- as I mentioned, we're still in the early stages. So we're learning from how these things will ramp up. There may be some more working capital required in some of these contracts, but we're still learning in its early stages.

I think the key point to remember here, Ruplu, is that these things can be very margin accretive. And so it's okay to deploy a little bit more working capital if we have margins that are coming with it. And that's how we really think about it. So we're certainly going to manage the working capital appropriately. But ECS overall is relatively light working capital business, and it provides us higher returns, and I wouldn't see that changing time.

[Operator Instructions] We'll go next to Joe Quatrochi at Wells Fargo.

Maybe just a couple, if I could. How big is the supply chain services today and some of the focus that you talked about in the prepared remarks is going after some of these AI insertion opportunities. What type of investment do you need to make on your side to address those?

Yes. Let me just start off. When we talk about value-added services, one of the items is supply chain services, the other couple areas are engineering design and then the integration services business that we have. Supply chain and most of these are not going to be that impactful from a revenue standpoint, but they're higher-margin businesses because we typically will get paid a fee for the supply chain services offering, and then for the engineering and design services. So we don't really talk about them in terms of what's the mix of the business.

And -- but from a profit standpoint, all of these are very margin accretive. And they could easily be, in some cases, double or the gross margins that we get in the regular part, if I can say it that way, in the components business. And the great thing about these things is that we get paid fees for the services that we're providing. So whatever investment we're putting into this, we want to get compensated for it. And yes, and we certainly want to make sure that our costs are being covered in this kind of an offering.

So these are -- this is really a win-win, win for all parties involved here. We're getting paid for the services we provide, and we're making money on that, but the parties that we're serving here, the large customers are also benefiting with our supply chain services. So we like the business, and it's a really good margin accretive part of our components business.

And that concludes our Q&A session. I will now turn the conference back over to Bill Austen for closing remarks.

Thank you. And thank you, everybody, for joining the call today. Once again, I'm excited, humbled and happy to be here. Looking forward to being the interim CEO at Arrow until we find the permanent CEO and I'm really glad to be leading this team amongst this big global powerhouse of Arrow Electronics. So thanks for joining.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Good day, and welcome to Arrow Electronics Second Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rick Seidlitz, Arrow's Vice President of Investor Relations. Please go ahead.

Thank you. I'd like to welcome everyone to the Arrow Electronics Second Quarter 2025 Earnings Conference Call. Joining me on the call today is our President and Chief Executive Officer, Sean Kerins; and our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano, and our President of Global Enterprise Computing Solutions; Eric Nowak.

During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release in our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events.

As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Sean and Raj will be available to take your questions.

I'll now hand the call over to our President and CEO, Sean Kerins.

Thank you, Rick, and thank you all for joining us. Today, I'd like to discuss our second quarter results, provide some commentary on the broader market environment and then close with some thoughts as we look to the balance of the year. I'll then turn things over to Raj for more detail on our financials as well as our outlook for the third quarter.

For the second quarter, we delivered sales as well as earnings per share that exceeded the high end of our guidance ranges, with solid contributions from both of our operating segments. In Global Components, our momentum was punctuated by year-over-year growth for the first time since Q4 of '22 with strength in Asia and improving trends across our industrial and transportation market segments. And in enterprise computing solutions, we delivered year-over-year billings and gross profit dollar growth based on strength both on-premise and in the cloud as well as in both of our operating regions.

Taking a closer look at our global components business the prolonged cyclical correction is yielding to early signs of a market recovery. All three of our operating regions again delivered sales in excess of typical seasonality. Demand trends were highlighted by broad strength in Asia, improving activity levels in our industrial and transportation markets on a global basis and healthy aerospace and defense patterns in Western markets. Additionally, our sales for IP&E components once again grew sequentially and but now also year-over-year, underscoring our continued commitment to specialization in this accretive and resilient market segment. Lastly, our value-added offerings, namely supply chain management, engineering and design and integration services contributed nicely to our operating margin stability.

And for some color commentary on a regional basis, in the Americas, the industrial and aerospace and defense markets drove our results, supported by resilience in transportation. In Asia, our sequential growth was broad-based in nature, highlighted by strength in industrial, compute and consumer, along with continued EV momentum in the transportation sector. And finally, our sales in EMEA grew sequentially despite macroeconomic and geopolitical headwinds. Results were marked by strength in industrial, transportation and aerospace and defense markets.

Now as we look at the market more broadly, our book-to-bill ratios are above parity in all three regions. While lead times still approximate pre-pandemic norms, our backlog further improved, growing for a second consecutive quarter. Throughout our large OEM customer base, inventory levels are normalizing, illustrated through more sustainable order patterns, providing us with visibility into their real demand. We also believe our mass market customers are still in the later stages of destocking, suggesting there's still runway for a broader market recovery, particularly in the West. And finally, as in prior cycles, we expect to follow the suppliers that we represent, many of whom are now calling for growth through the balance of the year and beyond. The shape and slope of this recovery remain difficult to predict, but we believe these leading indicators point to a modest recovery taking flight.

Our Q3 guidance reflects the continuation of these trends highlighted by mid-single-digit sales growth and operating margin stability while still navigating headwinds related to regional and customer mix. In regard to tariffs, due to uncertainty around future trade policy, we saw modest order acceleration in Asia alongside less tariff uplift than anticipated in the U.S. These dynamics did not materially impact our second quarter results, nor have we contemplated any material impact in our third quarter guidance. While the current trade environment continues to evolve, I'd like to reiterate Arrow's focus on helping our customers navigate the associated complexity. We will continue to lean on our global footprint of supply chain assets as well as our portfolio of services to help them do so.

Now turning to our global ECS business. In the second quarter, we delivered year-over-year double-digit growth in billings and gross profit as well as operating income when normalized. The results were highlighted by solid contributions from both of our operating regions. Our performance in EMEA was broad-based with year-over-year billings growth in cloud, infrastructure software and cybersecurity. And in North America, we saw continued acceleration in our cloud portfolio alongside strength in infrastructure software and data storage. Our efforts to align our go-to-market strategy in North America in a way that mirrors our success in EMEA is starting to pay dividends.

Looking to the future, we again enjoyed backlog growth in excess of 50% year-over-year. We believe this reflects our alignment to some very promising demand trends, many of which are now served on an as-a-service basis. Examples include hybrid cloud solutions, the deployment of infrastructure software in areas such as virtualization and data protection and the early innings of AI in the traditional data center. In addition, our focus on the mid-market, enabled by the continued adoption of our digital platform, ArrowSphere positions us nicely for ongoing customer base expansion. With all of that in mind, our third quarter outlook again suggests healthy performance in both operating regions poised for year-over-year growth in billings, gross profit and operating income.

In closing, despite various market and geopolitical uncertainties, we are optimistic as we look to the near future. In global components, the evidence of cyclical recovery suggests will enjoy better than seasonal sales patterns for the balance of the year. In enterprise computing solutions, it's clear to us that our momentum will continue to build across the full second half and for the company overall, our ongoing productivity initiatives will benefit us at more scale. As always, the credit for our progress belongs to all of the Arrow teams and employees throughout the world. I'm thankful for their dedication to our suppliers, our customers and each other.

And with that, I'll hand the mic over to Raj.

Thanks, Sean. Consolidated sales for the second quarter were $7.6 billion, exceeding our guidance range and up 10% versus prior year or up 8% year-over-year on a constant currency basis. Global components sales were $5.3 billion, above our guidance range and up 11% versus prior quarter or up 8% sequentially in constant currency terms. You will recall that in our Q2 outlook that we provided last quarter, we highlighted a potential 2% to 4% incremental lift to global component sales from tariff billing impacts. In our second quarter results, we attribute around 1% of sales to these impacts. Additionally, as Sean mentioned, we saw modest order acceleration related to tariff expectations, particularly in Asia, and we believe the impact could be 1% to 2% on second quarter sales. Enterprise computing solutions sales were $2.3 billion, above our guidance range and 23% higher than prior year or 20% higher year-over-year in constant currency. ECS billings grew 15% in the second quarter compared to the same period last year.

Moving to other financial metrics for the quarter. Second quarter consolidated non-GAAP gross margin of 11.2% was down approximately 110 basis points versus prior year driven primarily by regional and customer mix in global components and by product mix in ECS. Global components' non-GAAP gross margin was 11.2%, down 40 basis points sequentially due to regional and customer mix and enterprise computing solutions was 11.2% on a non-GAAP basis. Our second quarter non-GAAP operating expenses grew $38 million sequentially to $631 million due largely to variable costs to support top line sales growth as well as the impact of currency exchange rates.

Also, although we have returned to growth, we remain committed to executing against our productivity initiatives, which will provide increasing benefits in the second half of this year. In the second quarter, we generated non-GAAP operating income of $215 million, which was 2.8% of sales with Global components operating margin at 3.6% and enterprise computing solutions at 4.3% and both on a non-GAAP basis. As a reminder, ECS operating income in the second quarter of 2024 included a $20 million benefit for the collection of certain aged receivables related to one customer. Interest and other expense was $60 million in the second quarter, and our non-GAAP effective tax rate was 17.6%, which is well below our typical range of 23% to 25% due to certain benefits which we are not expecting to recur in the third quarter. We expect both interest expense and taxes to be a drag on third quarter EPS when compared to the second quarter.

And finally, non-GAAP diluted EPS for the second quarter was $2.43, which was above our guided range, mainly due to favorable sales results and a lower tax rate. Turning to working capital. Net working capital grew sequentially in the second quarter by $456 million, ending the quarter at $6.8 billion. However, our cash conversion cycle improved by 10 days in the second quarter to 68 days. Inventory at the end of the second quarter was $4.7 billion, down modestly quarter-over-quarter and our inventory turns improved to our highest rate in over 2 years. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues.

Cash flow used for operating activities in the second quarter was $206 million. In conjunction with cash generated in the first quarter, on a year-to-date basis, cash flow from operations was $146 million. Gross balance sheet debt at the end of the second quarter was $2.8 billion or flat quarter-over-quarter. We repurchased $50 million of shares in the second quarter and our remaining repurchase authorization stands at approximately $225 million. In the short term, we are continuing to balance our capital priorities with managing our debt ratios.

Now turning to Q3 guidance. We expect sales for the third quarter to be between $7.3 billion and $7.9 billion. We expect global component sales to be between $5.3 billion and $5.7 billion, which, at the midpoint, is up 4% from prior quarter. In enterprise computing solutions, we expect sales to be between $2 billion and $2.2 billion, which is up approximately 12% at the midpoint year-on-year. In our outlook, we have factored in the direct billing impact from tariffs. Based on tariffs already in place, we estimate that this impact on global component sales will be similar in magnitude when compared to the second quarter. We have not factored in our guidance any assumptions around evolving trade policies nor does our outlook assume any order acceleration from customers.

We're assuming our tax rate to return to our typical range of approximately 23% to 25% and interest expense to increase to approximately $65 million as compared to $60 million in the second quarter and our non-GAAP diluted earnings per share is expected to be between $2.16 and $2.36. And finally, given weakness in the U.S. dollar, particularly relative to the euro, we estimate changes in foreign currencies to be a tailwind in the third quarter. The details of foreign currency impact can be found in our earnings release.

With that, Sean and I are now ready to take your questions. Operator, please open the line.

[Operator Instructions] Your first question comes from the line of Joe Quatrochi with Wells Fargo.

Maybe just kind of trying to understand the demand dynamics relative to your inventory? How do you think about having the right inventory for maybe signs of a recovery here?

Sure, Joe. Well, as you know, because you've been following us for some time, our inventories are down well more than maybe $1 billion from the peak that we saw in late '23. And I think in Q2, they came down roughly $50 million or more, something in that range. And we know our turns definitely improved as well. So I would say in the aggregate, we feel like we've done a pretty good job managing inventory throughout this prolonged correction. There are still some pockets of excess, but we continue to eat away at them. We're not concerned about the aging profile of the inventory. We believe we'll sell through it over time. And certainly, we're adequately reserved for any risk that we would contemplate.

But I think the bigger picture to your question is really all about the market. We pay real close attention to our customers and what they tell us and what they see going forward. We want to be leaning in as the market recovers, so we can best support them. And I think with some of the improving leading indicators, we continue to see, we don't intend to be caught flat-footed. So we can expect -- we will invest in working capital to support growth where and when it makes sense. And I think we're at that inflection point where we need to best support our customers.

That's helpful. And then maybe one for Raj. Just trying to kind of like the puts and takes of the margin -- implied margin guidance for the September quarter and then also kind of balancing that with the cost efforts that you guys have been undertaking over the last few quarters. Like I guess, is it right to think that the margins are slightly down I think sequentially in the September quarter?

That's probably not a right conclusion, Joe. We see margins being relatively stable, certainly at an Arrow Inc. level and also in components. ECS has its own cyclicality that we have to deal with. But the gross margin is likely to see continued mix shift given the APAC growth in components as well as the large customer mix that we have, but we are certainly offsetting that with some of our productivity and cost savings initiatives. So that is certainly going to mitigate that impact, but we see relatively stable margins quarter-over-quarter.

And Joe, I would just add in the Global Components business, the gross margin pressure that Raj alluded to is strictly a function of regional and customer mix. As you know, Asia typically leads the globe into recovery, and that's been the case now for a good couple 3 quarters, and they're performing well on the sales line. The West will come back, but it's also a function of customer mix. The larger OEMs are driving our sequential sales growth.

We know the mass market will return at more scale. We're starting to see evidence of that in our backlog as it builds out in time into Q4 and even a little bit into Q1. When that happens, you'll see the gross margin line benefit and the operating leverage improve. So we feel good about the fact that the sales momentum has returned. We've always known that the operating leverage won't come until the scale comes back. So we think this is an encouraging sign.

Your next question comes from the line of William Stein with Truist Securities.

I'm hoping you can talk about your customer inventory level to the best of your ability. You talked a moment ago about when the broad-based end markets come back that, that should be more beneficial to margins. And I think it suggests that perhaps they still have some excess inventory or maybe just demand in those broader end markets is not as robust. Can you clarify and help us understand that a little bit?

Yes. Sure thing, Will, and thanks for joining. I think we made mention of it in the prepared remarks. But as you know, we're pretty disciplined about the leading indicators that we monitor and I would say we definitely are seeing customer level inventories normalize, especially in the larger OEM piece of the market, and that's been driving a level of replenishment activity and we're seeing normal booking patterns reemerge if you will. We do think the mass market customer base lacks the larger OEMs, to your point, with still some destocking playing out. Obviously, visibility will improve as either lead times extend or end market demand improves more sharply. But I think there's still some destocking going in -- going on in a broader piece of our customer base. And that's -- that will play out over time.

And as it does, we'll see that piece of the market return to our mix at more scale, and that's where the gross margin line will benefit most. But there is a difference playing out, inventories normalizing in the high end, destocking still playing out in the lower end. And if you think about it, given the shortage market, the larger accounts got the inventory first and have certainly worked their way through good portions of it. The mass market got it later on and they're still digesting some of it as we speak.

That's very helpful for sort of more of a demand picture. So thank you for that. On the supply side, are you seeing still very short lead times, as I would expect from the supply base. I think they haven't seen a huge recovery that would lead to extended lead times, but are we still seeing many of your suppliers quote stock in terms of their lead times or has that begun to reach a more normalized level?

Yes. You're right, Will. The lead times basically are stable. We have not seen lead times come in any further, but we also haven't seen them go out. They've been quite level at roughly pre-pandemic rates. If you go back to late '19, early '20 and haven't moved much over the past 2 to 3 quarters at all.

Your next question comes from Ruplu Bhattacharya.

Maybe I'd like to dig a little bit deeper into the ECS segment margins. I mean ECS sales were up 23% year-on-year. but margins were down about 90 bps. I think, Sean, you said something had to be normalized for. So if you can just kind of explain that. And then how are you thinking about ECS segment margin for fiscal 3Q and beyond?

So Ruplu, let me just start with the basics on Q2 performance in ECS. On a sales basis, we show operating margins declining by maybe 20 basis points year-on-year. But as we've said on multiple occasions, the sales number will vary in some cases, quite significantly from one quarter to the next based on mix. And based on the rules of agency accounting, and that the best way to look at both gross and operating margins is really on a billings basis. And that's partly why we now disclose our billings activity. And if you look at the billings base operating margins in ECS year-on-year in Q2, they were stable. So we're very comfortable with the margin profile of the business.

And as the transactional volume continues to scale, we see the operating leverage improving further. In fact, I think if you look at it in Q2, billings were roughly in the neighborhood of 15% year-on-year. OI grew by almost 18% year-on-year. So they drove a little bit of leverage in Q2. And I think our guide reflects even better leverage in Q3. So we're comfortable with the margin profile, and we do believe it will improve in the future. The team is driving the right things from a mix perspective. But again, try not to read too much into the sales-based margin profile because it can mislead you from time to time.

And Ruplu, the adjustment, you do have to make was from the second quarter of last year, we did receive a $20 million release from a bad debt reserve that we'd previously taken. And as Sean was explaining, if you make that adjustment, then you can see exactly what he was referring to.

Okay. Can I ask you on component sales, it looks like EMEA sales were down year-on-year. How do you see that region progressing? And Sean, overall, your guidance for fiscal 3Q components is pretty strong. It's like above seasonal growth. So what is giving you confidence that, that growth continues. I think you said there's no benefit from tariff-related prebuys. So I mean, can you -- is ArrowSphere, I think, is another thing you highlighted, is that -- does that come in, in Europe? And just your overall confidence in the guidance for components.

Sure thing. Well, Ruplu, as you might recall, ArrowSphere is a function of our ECS business, it's the digital go-to-market platform for that team. So it's not relevant in the components realm. But if you look at our components business, you're right, we were better than seasonal in Q2 in all three regions. Our forecast means better than seasonal again in Q3 in all three regions. And our backlog grew again in Q2. And this time, even more substantially than it did in Q1. And the important thing there, Ruplu, is when we look at our backlog is that it's not just growing in magnitude, it's growing out in time, meaning into Q4 and a little bit into Q1. But I also think we're seeing better vertical trends throughout the world, and those vertical trends vary a little bit. So I thought I might have Rick Marano, who is the architect of our go-to-market motion in global components, just give you a little more color on that front.

Yes. Thanks, Sean. And building off, Ruplu, what Sean had said is if you look at globally, what we're seeing is in the West, in both aerospace and defense and transportation in aggregate and some industrial in the larger markets, we're seeing [Audio Gap] market. And in Asia, we are in the cycle of recovery, we're seeing growth [Audio Gap] as well. But to Sean's point, key is the fundamentals of backlog and backlog growth, book-to-bill are giving us confidence in a recovery that is starting to take place.

And there are no further questions at this time. I will turn the call back over to Rick Seidlitz for closing remarks.

Thank you all again for joining today's call, and have a great day.

This does conclude today's conference. You may now disconnect.

Day 2 of our Global Technology Conference. My name is Ruplu Haracharyia, and I'm with the IT hardware equity research team, and I cover distributors, and we're honored to have Arrow Electronics today, and we have President and CEO, Sean Kerins.

Sean is a veteran in the industry. He's been with Arrow for 18 years or it's his 18th year with the company. So he's seen many ups and downs. So we hope to have a great conversation. Sean has held many different hats. I think he was COO as well, and he's headed their ECS business, which is the enterprise computing solutions business. So Sean, thank you so much for coming today.

Thank you, Ruplu, and good morning, everybody. Thanks for having me.

Great. So as is tradition, I'm going to start with a very high-level question. So give us your opinion on where we are in the semi cycle. And as you look out, what's your vision for Arrow for the medium term? And maybe even what your focus areas are for the next 12 months?

Absolutely, absolutely. So the semiconductor cycle, as many of you know, has probably been one of the longest and most profound, both to the upside and the downside that the industry has maybe ever experienced or at least in quite some time. And I think as we said during our Q1 earnings report, we do believe we've seen the bottom. I think the slope of recovery is a little bit harder to predict. But we believe the leading indicators always suggest that recovery is in flight. If we look at our own leading indicators like book-to-bill ratios, they're all above parity in all 3 of our regions.

Our backlog is building again, not just in magnitude, but also out in time. which gives us basically the benefit of improving visibility. And of course, we -- if we look at the preponderance of the suppliers that we represent in the electronics market, we typically follow our suppliers by a quarter or 2, and you're seeing many of those guides now trending more positively. So we believe the right things are happening and things should improve from here.

Now as far as -- sorry, as far as our priorities, obviously, we didn't sit still while we were managing the down portion of the cycle. We got real clear about our investment thesis, our growth priorities. We feel like we have good exposure to good end markets in both segments. And so we have a lot of clarity as to where we want to go from here. And we also spent time on the things that we can control like working capital efficiency and making incremental progress with respect to our cost structure. That work will continue even as the recovery unfolds. But I think we're feeling more optimistic now certainly than we've been in quite some time.

That's great. And I want to touch on many of these things that you mentioned. As people would know, there are 2 segments to the business. There's the global components business and then there's the ECS business which is the enterprise computing solutions business. So let's start with the core business. And just talk to us about where we are, which innings are we in terms of -- there was an inventory correction that was happening for a long time. Are we still in an inventory correction? Are we out of it? Just give us your thoughts on that.

Yes. Broadly speaking, I would say that the inventory piece of the correction is behind us. Now are there still pockets of excess inventory at different places throughout the ecosystem? Yes. But by virtue of the way our backlog is building and the longer-term visibility that we're now getting to real OEM production plans and demand projections, we feel like the worst of the excess is behind us. And obviously, some level of replenishment is what's been driving better activity levels for us since the start of the year. And I think we have a lot of good data to support that conviction.

So let's talk about that. Like are you getting any indications that customers are actually pulling inventory now? And maybe we even -- what are you seeing in terms of your backlog? What's the typical backlog? What's the backlog now? What are lead times doing? What's your -- what type of visibility do you have going forward?

So if you think about -- if you start with lead times, obviously, supplier lead times extending well beyond normal levels is what drove the big disconnect between supply and demand, which drove the upside of the cycle. Supplier lead times have long since normalized, and they're at sort of historical averages across most technology categories for us. We haven't seen any of them go out yet. And that's making customers more comfortable that they don't have to place orders as earlier as they once did.

But to your point and to your question about visibility, if you go back a year, our backlogs typically didn't project much beyond any given current quarter. Now our backlog is building out in time, meaning well into the third quarter, even with customer request dates now into Q4 in various places throughout the world. So that tells us visibility is improving, and we're getting a better snapshot of real customer demand versus that, which was impaired by the excess inventory levels. So again, we think the right things are happening consistent with cyclical recovery.

Are you getting any longer-term forecast from your customers, say, in the automotive segment because they've been burned coming during COVID in terms of getting piece parts. I mean, do you think that has changed the industry in terms of how soon they order product from you?

I think that most OEMs of any size and scale are all revisiting the way in which they manage their supply chains in total, not just the electronics piece of it. And that's really given rise to our ability to leverage all of our supply chain assets throughout the world and actually play a different role for them going forward, right? And that's a good thing.

How quickly they make those changes, especially in industries like automotive, that's a little harder to call. As you know, some of those processes and patterns were fairly well entrenched. But I do think people are now much more sensitized to the criticality of electronic components in all of their products and therefore, looking at ways to how they can streamline and improve their visibility to their supply chains to get what they need, where they need it, when they need it. And that's our job, right? And that means we can play a really good role on behalf of large OEMs, not just the mass market in the form of traditional distribution.

Are we getting longer-term forecast per se from any given customer or vertical? Not necessarily, but all the market data that we've assembled would suggest the long-term CAGR for the electronics industry is still a healthy one. It's in the 5% to 6% range. Even if you exclude for things like memory and GPU, which we don't participate in as significantly, we still like the growth rates where in one of our pillars of our investment thesis is really growing at or above market. We think the electronic technology is now so pervasive in so many verticals and use cases that the opportunities are only going to continue to multiply. So we feel good about the long term, but the inventory did have to correct and recovery patterns do have to emerge and they are.

Got it. No, that makes sense. Let's talk a little bit about demand by region and demand by vertical. I mean, give us -- like margins, at least from my experience in the components business depend on the regional mix. So talk to us about how different regions are trending and how different verticals within the regions are trending.

So broadly speaking, the biggest verticals for Arrow are, first and foremost, industrial and then transportation, including automotive and then aerospace and defense in the West. And then after that, you get into a handful of pretty material verticals. But probably lower tier in nature versus the first 3, one being medical systems and devices, one being alternative energy, one being network and comms, infrastructure and then the others being consumer and compute. Those would sort of comprise our top 8 or 9, if I count it correctly.

But obviously, that mix varies across region. And so typical with a cyclical recovery, Asia and China kind of leads the global market out of the bottom. And we're seeing that with the activity in our Asia business, and they were above seasonal in the first quarter. Our guide reflects the same for them in the second quarter. And that is what's driving your point about regional mix. When Asia is really strong relative to the West, you get a little bit of a margin headwind. On the other hand, as the market normalizes in the West returns to fuller scale, that will normalize.

The other aspect of margins is a function of customer mix. And in the West, we've seen a return from the large OEMs as the mass market returns at more scale. And that really is our sweet spot with a DTAM probably on the order of $200 billion globally with tens of thousands of customers for us to go serve. As and when that really returns at full scale, that's where our suppliers want us to be. That's where our demand creation motion is most relevant and the margins are most attractive.

So we think as those things normalize, we're going to like the longer-term trajectory for operating margins in the business. Obviously, we're starting from a lower jump-off point, right? The baseline was reset. So that will take some time, but those are the steps that are necessary for that to play out.

Makes sense. You talked about growing faster than the market. And one of the things that I think Arrow has done better than competitors is to really be able to capture share at least over the last year. So talk about some of the competitive advantages you have? And how are you driving this above-market growth? And what's the playbook here? How do you -- what is driving that growth for Arrow?

Well, if you're talking just electronic components for a second, we think the playbook is still pretty consistent with the playbook that has served us well so far, right? We have a vast array of supply chain assets throughout the world. And that really positions us to serve the large multinationals for those that want a very consistent experience throughout the world as well as go deep in the mass market in each of our operating regions.

So we've always been focused on the mass market. We've always led with engineering. And we have engineering both in the form of field application engineers where we get design-in, demand creation opportunities as well as engineering and design services, where we actually function as a product of the product development or an extension of the product development teams of some of our larger OEM customers and suppliers. And so we think the engineering leadership and the investments we made in engineering, along with our supply chain assets really gives us some great capabilities and advantages throughout the world.

And then I would say the fact that we've devoted time in building up some of our value-added offerings and capabilities, those that take us beyond traditional distribution alone, it gives us a chance to distinguish us in the market depending on what a supplier or customers' needs are. It's really important, Ruplu, to recognize that the market is enormous. And customers and suppliers oftentimes have different needs. It's not a one-size-fits-all market. And our electronic components business spans the spectrum from fulfillment all the way through demand creation. It includes the value-added offerings and capabilities I talked about. And so when we sit down with a large customer or supplier, we have the opportunity to really listen to what it is they're trying to solve for and then position the right combination of assets and capabilities to fashion the right solution for them.

And it means that, in some cases, we're playing primarily a fulfillment role and leveraging our global footprint to do so. In some cases, it means we're playing a supply chain management as a service role where we're not participating in the traditional distribution model at all. We're actually helping them manage their electronic supply chain on an outsourced basis so that they can go focus on the things that they're really good at, and we can earn a fee for helping them do so, right, which, by the way, is another way for us to participate in not just the market for DTAM, but the market for TAM, right?

Now I know that over time, it will be helpful for us to give you something to help you quantify the impact of that contribution to the business in total, but it's one of the examples of how we can serve the market in a variety of ways, and we try to do so with the right set of capabilities to be flexible to deliver.

You talked about value-added services. For those in the audience who don't know, maybe just talk to us about in the components business, how much -- like what is it that you're distributing? How much of the business is semiconductors? How much is IP&E? What are these value-added services that you're providing? And how do you see that growing over time?

So if you -- broadly speaking, if you think about our mix from a pure component perspective, I think we reported at the end of fiscal 2024 that IP&E was 16% of our global component sales, right? That tells you, obviously, the rest was semi. But a subset of the rest was also in the form of services, supply chain management services, engineering services and then integration services. Supply chain management services, I just talked about, engineering services I mentioned, right? And we made an acquisition a few years ago called eInfochips to give us scale, to give us relevance and to give us great credentials in the market for long-term engineering services engagements with some pretty large OEMs throughout the world, both in the automotive sector and beyond.

And then integration services is a business where we design and build bespoke solutions in edge environments that embed all the necessary compute, storage, software and even things like wireless connectivity. That's a business that shows up in use cases like medical imaging, physical surveillance, digital displays and retail environments and even data center appliances on the traditional data center floor. And we like that because, as you know, compute and electronics are now moving into all kinds of edge environments. They aren't as concentrated in a few spots and verticals as they once were, and that gives us exposure to other pieces of the market and therefore, more things to sell to more customers.

All of those services are accretive to the gross margin profile of the electronic components business in total. And so that's why they're high on the list for investment. as and when the market continues to recover.

Since we're on the topic of margins, talk to us about what are the drivers, both for upside and downside for operating margins in the components business? Like what drives margins? And how do you see margins trending over the medium term?

So we think that -- now that we're in some form of recovery, we think the outlook for the operating margin equation continues to get better. Again, things will take some time to play out. But if you think about the building blocks for operating margin, first, it starts with more scale, right? That will give us the benefit of additional operating leverage just based on a similar, if not lower fixed cost structure. The second will be kind of the return of the mass market at more scale, which lends itself to more design starts, more design-in and demand creation win opportunities. And as those win rates improve again, those are helpful to us on the gross margin line.

The third building block is our continued specialization into the market for IP&E. The gross margin profile relative to semiconductor is significantly higher, right, by an order of magnitude. Hence, our interest in continuing to pursue it. It's also highly complementary to our presence in the markets for things like industrial, transportation and aerospace and defense. And so there's lots of cross-sell, upsell that we can take advantage of just by way of relationships.

And then the last building block is really the continued growth in our value-added offerings, as I just described. All of that taken together is what puts us back on a path to what we think will be not just mid-cycle but long-term operating margin targets that obviously are healthier than where we are today.

Okay. Okay. That makes sense. I want to talk about a topic that's a very fun topic, which is tariffs. And everybody seems to be -- that seems to be a question at every meeting nowadays. So...

I'm guessing this is the first time this came up at the conference.

Yes, that's right. So talk to us about how tariffs impact both the top line as well as the bottom line. And can you talk about like for the stuff that you're selling in the U.S., how much of that is coming from China and other regions that are impacted by tariffs? And are tariffs a good thing for Arrow? Or are they negative? So give us your thoughts on this.

Well, let's take that question last, but I'll try to unpack the tariff story as best we see it. So first thing I would do is just draw you back to what we guided for our second quarter. Turns out we did something pretty unique compared to most of the other people in our space. We actually separated the top line impact that we saw from tariffs, right, for things that we had to pass on to our customers from the guidance we gave around the underlying core business. And we did that because we wanted to give you our best view of how the cycle was actually playing out, not something that was going to be muddied by how much of this is really an impact of tariffs or tariff pull-ins. That's number one.

And I think in the course of doing that, we estimated a number that was maybe 2% to 4% of our global component sales in the quarter, which not overly material. And that was even based on policies that were in effect at the time, which have changed since. So that number likely will even be smaller yet again. That's the top line assessment.

We look at this thing in 2 ways. One is we look at making sure we're really clear on what tariffs will be assessed, some of which we can draw back from the government, right, for product that will be re-exported outside the U.S., some of which will land in the U.S., and therefore, we have to pass on the appropriate tariff to customers. We do so with no intent to make even $0.01 of margin. It's a complete pass-through. So ultimately, we would view the top and bottom line impact as being entirely neutral. Obviously, there's a collection process that has to ensue and that takes a little bit of time to play out.

But that's the stance we've taken. And based on the experience we've gleaned since 2018 when the first round or an earlier version of this regime was in place, we have certain processes in place. We've implemented foreign trade zone capability. We've got intelligent sourcing and routing capabilities to assist customers. We're implementing processes at the quote front line as well as the customer support functions in the back end to mitigate all of this as much as possible.

So I feel very comfortable that we've got lots of great people and expertise focused on it. You can imagine like many companies, we're all working really diligently to get our arms around it, but we feel like we have a good handle on what it could look like. The wildcard is what a steady-state tariff environment will look like. I don't think anybody knows. So we got to be prepared for the most extreme version of all of this, but hope for something better. But right now, we don't think that it's been overly material to demand for us in Q1 or in our outlook for Q2, and we'll take it one quarter at a time.

So have you seen any change in customer or supplier behavior? Have you seen any pricing changes as a result of this? And -- or have you seen any change in end market demand?

We haven't seen -- obviously, there's been lots of conversations with large customers as to how best to manage all this, right? And quite frankly, that's our job. And yes, we want to make sure that we assess the tariffs that we'll be exposed to and how best to recover them, right? But ultimately, one of our competitive advantages is we sit in a perfect position to help customers navigate this, right? And that's where we spend a lot of time.

So yes, a lot of customers are really exploring, hey, what kind of exposure does their bill of materials present for them, what can we do for them to optimize around things like country of origin, how can we help them think about the next generation of their products so they can design for optimizing around tariff exposure among other variables. So those conversations are only picking up in frequency and intensity, and that's a good thing because we think it sheds a light on some of our nontraditional capabilities that you might not always think of that we spend a lot of time resourcing and executing on in the market.

We haven't seen significant pull-in behavior in the U.S., for example. If that were the case, you'd see a pretty big uptick in our backlog for relative -- shipments relatively soon. That's not been the case. As I said earlier, our backlog is building, but it's also extending out in time, and that wouldn't fit the bill for someone that was trying to avoid of tariff. We also have pretty good visibility to all the content that we import from China as a country of origin. And so we haven't seen a material buildup in the backlog for any of it, which would be another signal.

So look, it doesn't mean there isn't some of this going on. There is. We're probably seeing some of it in China on a reciprocal basis, which might be contributing to some of the really good activity we're seeing in that market. But again, overall, we don't anticipate it as material, at least not yet. But great opportunity for us to serve our customers in different ways with capabilities that they haven't fully appreciated until they really need this kind of help.

Okay. Let's move on to the ECS segment. So talk to us about what are some of the products that Arrow focuses on in terms of distributing? And how is that business trending? Can you talk to us about backlog and revenue trends which products are hot, which are not?

Yes. I think I may have dropped my mic. Let me just get remiced here. So if you think about that business, the strategy is really simple. Right technologies, we focus on the market for cloud, hybrid cloud and then infrastructure software, number one. Right market segments, we focus on the mid-market versus the very large enterprise because that's where our suppliers want to see us, and that's where we're best rewarded for our value-add capabilities. And then three, right go-to-market model, which is increasingly all about the adoption at further scale of our Aerosphere digital enablement platform, which is also contributing to the continued buildup in the recurring revenue piece of our total volume.

So good things are happening in that business. We've seen both GP dollar and OI dollar growth over the last 3 quarters year-on-year in succession. Our guide reflects the same again for Q2. We've enjoyed some recent wins from pretty good-sized suppliers that recognize what we're doing and feel like we're well suited for them, a VMware appointment in North America, a Citrix appointment, both in North America and Europe, a CrowdStrike appointment in North America, which will deepen our presence in the market for cybersecurity.

So we feel like we've got the right strategy. We feel like we're replicating the success that we've enjoyed in Europe for some number of years to put us on the same path in North America. That will take a little time to continue to get more scale, but things are improving there from here and the trajectory for the business based on the end markets in which we compete, we think are pretty promising.

One thing I think that is underappreciated by investors is this recurring revenue portion of the ECS business. So talk to us about how that is trending? How large is it? How should we think about trends in that business? And if you can weave in how that impacts margins because I think last quarter, revenues were up strong, 18%, but I think operating margin was down year-on-year, 34 bps. Not that it's a big thing, but like how should we think about margin trends versus revenue in this business?

So probably 2 separate questions here. One is just about the recurring piece of our total mix. So as you know, we now disclose billings because we think that's an accurate reflection of the real market activity in which we participate each quarter. So if you did the math on that, you'd figure out roughly what it looks like on a full year basis. But the recurring piece of our total volume on a gross billings basis is now approaching 1/3. And it's been steadily growing a little bit each year for the past few years. This is one of the reasons why we're now starting to disclose it.

We agree with you that we think the more recurring in nature our business is, the better the contribution margins ultimately will look like, right? We serve it differently, which is digitally. It's very sticky, and it gives us a chance to reengage customers on an ongoing basis. So given our strategy, which is more cloud and more infrastructure software, which increasingly is being sold on a subscription basis versus with a perpetual license, we think that mix will only continue to grow in that fashion.

The question you have about margins is really just a function of whether or not you're talking about margins as a percent of sales, reported sales or margins as a percent of billings. The reported sales number will be a little bit volatile from one quarter to the next, simply as a function of agency accounting. So it's a little bit of a distraction. So it's why we started to report billings. And our operating margins as a percent of billings were flat year-over-year in Q1. We guided they would be at least flat year-over-year in Q2. So the margin profile for the business is stable. And given what I just talked about, we think it continues to improve a little bit over time.

But don't let the reported sales metric alone be too much of a distraction. That's simply a function of accounting, and that will vary a little bit from one quarter to the next. We like the markets in which we play. We like the offerings that we're driving, and we like the nature of them mainly in the software and services realm and what that means for the margin profile of the business over time.

Got it. We have about 2 minutes left, and I'd like you to cover how you think about shareholder returns, how you think about investing in the business, capital allocation? And finally, like what is the market missing? Why should investors invest in Arrow right now?

Well, if I start there, I'll be a little bit repetitive, but we think we're aligned to attractive end markets with healthy growth potential in both operating segments. We think we have an investment thesis based on growing at or above market in both Part 1, Part 2. We think we have clarity around our go-to-market and investment priorities such that we can drive margin expansion over time. through part one, mix; and part two, kind of an enduring productivity flywheel, which will create reinvestment capacity back into those growth priorities I talked about.

And then part three, making really constructive use of excess cash. Historically, our capital allocation priorities have been very specifically about organic growth, selective M&A and then capital return in that order. I would say that's still the right set of priorities in the right order. However, I would also say we're taking a more constructive look at the role that M&A will have to play as a way to augment and accelerate our progress with respect to the priorities, the growth priorities I outlined.

Great. I think we covered a lot of different topics. So Sean, thanks for coming. I think you're doing a great job. Arrow is on the right path. So thanks again for coming. Thanks for sharing all these details, and great to have you today.

Thank you, Ruplu. Great to meet you in person. Thanks, everybody, for joining. Appreciate it.

Thank you.