Arrow Sees Enterprise Sales Rebound a Bit in Third Quarter

November 8, 2010 Timothy Prickett Morgan

The tech recovery is gaining momentum at IT distributor Arrow Electronics, which saw its sales rise by 26.9 percent to $4.66 billion. The company’s net income was impacted by $14.3 million in restructuring charges–a lot lower than the $37.6 million it had in the year ago quarter. But because of that revenue boost for both components and enterprise products, Arrow was able to boost net earnings by nearly a factor of 10 to $118.5 million.

While the electronics components business accounts for the largest part of the revenue stream at Arrow, with sales of $3.44 billion (up 35.3 percent) and an operating income of $196.8 million (5.7 percent of revenues), the company’s Enterprise Computing Systems business showed some life as well, posting revenues of $1.22 billion (up 7.9 percent) and an operating income of $35.5 million (a much skinnier 2.9 percent of sales). But you have to remember that in a lot of cases, Arrow gets suppliers coming and going. They buy parts to build stuff, and then Arrow sells stuff that they build. Which is why the company continues to stay in the IT distribution racket.

“Storage, software, and industry-standard servers grew at very strong double-digits rates on a year-over-year basis,” explained Michael Long, president, chief executive officer, and chairman at Arrow. “We also saw terrific growth in some of our newer initiatives including security and networking.” The remaining products–meaning IBM Power-based servers and other midrange platforms–were in line with expectations and normal seasonality, which means they were down. The Federal government spent lots of dough in the United States in the quarter as well, according to Arrow.

“Overall, IT spending has rebounded and it is estimated to be in the low single digits for the remainder of 2010,” Long said in a conference call with Wall Street analysts going over the numbers. “However, there are pockets of the IT market that are going to grow much faster than the overall IT market. The markets we serve are expected to grow in the high single digits in 2010.”

As an example, Long said that Arrow was boosting its distribution franchise for Oracle‘s Sun-branded systems in Europe. By the way, the ECS business in Europe was up 12 percent as reported to $307 million, and that was a very impressive 24 percent growth in local currencies in Europe. Arrow said that sales in the United Kingdom and the Nordic countries were particularly good for ECS. Sales of servers, storage, software, and other enterprise products in the ECS unit came to $913 million in the third quarter, an increase of 7 percent compared to last year’s $857 million. The recession started in the United States early, and the most recent ECS peak for a third quarter is $984 million during 2007. If the company continues to recover at the current pace, it should bust through that level in 2011.

It is still going to take a while for the ECS unit to get back to the peak of the third quarter of 2008, when the Great Recession had not yet kicked in and Arrow was able to push $1.31 billion in IT products downstream through its channel partners. It might be able to beat that level in 2011’s third quarter. We’ll see.

Looking ahead to the fourth quarter, Long told Wall Street to expect sales of between $1.675 billion and $1.875 billion for the ECS division, and of between $3.325 billion and $3.525 billion for its components division. All told, that works out to between $5 billion and $5.4 billion and earnings per share of between $1.22 and $1.32.

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