Arrow Boosts ECS Sales Despite System Slowdown In Q3

November 5, 2012 Timothy Prickett Morgan

Despite an expected and somewhat abrupt drop off in server sales in the third quarter that most IT suppliers experienced, master reseller Arrow Electronics was nonetheless able to boost its sales of software and storage to compensate and post growth in its Enterprise Computing Solutions (ECS) group in the third quarter. However, overall revenues took a hit and profits took an even bigger dive in the quarter thanks to falling margins in ECS and components and falling revenues in components.

In the quarter ended in September, Arrow had $4.96 billion in revenues, down 4.3 percent. Net income at the company came to $103.6 million, falling 21.6 percent. This was more or less in line with expectations.

The ECS group was the bright spot in the quarter, despite the issues it faced in an uncertainty economy and with so many different server transitions underway right now. Sales at ECS were up 3.4 percent, to $1.59 billion, and the group even posted slightly higher operating profits, with an increase of 2.9 percent to $55.3 million. The Global Components group of the company, on the other hand, did not fare so well, with revenues down 7.6 percent, to $3.37 billion, and its operating profit shrinking 20.1 percent to $155.1 million. Most of this decline was due to a change in the way components revenue is recognized over time as part of complex contracts, but some of it was due to the jittery economy and a slowdown by the channel in acquisitions of components.

This was the eleventh straight quarter of organic revenue growth for the ECS group. Arrow said that software and storage growth more than offset ongoing weakness in the server racket, and added that the performance in the Americas region was good with normal seasonality. Ditto for Europe, which was in line with normal seasonality and expectations.

In a conference call with Wall Street analysts going over the numbers, Michael Long, who has all the three top titles at Arrow (president, CEO, and chairman), said that Europe expanded its sales channel into new geographies this year and that $20 million in revenues came from this EMEA expansion. He said that virtualization sales (presumably meaning hypervisors and related tools like VMware ESXi and vSphere and vCloud extensions) were up 15 percent in the quarter, and network equipment and software sales rose by 20 percent. In North America, security products (presumably hardware appliances and software) had a 24 percent bump, and networking revenues were up a very impressive 39 percent.

“As we look ahead to the fourth quarter, we believe the macro-environment will continue to be an overhang and we expect the markets we serve to remain weak,” explained Paul Reilly, Arrow’s chief financial officer, in the call. “We expect to see a year-end budget flush in our global ECS business, but it will be in line with the low-end of historical seasonality.”

Andy Bryant, president of the ECS group, said that the “server market is still pretty challenged” going into the fourth quarter, but that the server business “usually comes back a little stronger” in Q4. He said with October done, Arrow was off to a good start in this regard. He added that the normal Q3-to-Q4 sequential bump is somewhere on the order of 28 to 34 percent in North America and sometimes as high as 50 to 60 percent growth in Europe. And based on what Arrow has seen in October and the normal trends, the company is pretty bullish on Q4. September came in “back-end loaded” but met expectations, with some deals being pushed out to October. But nothing major. So if you think you can squeeze your reseller extra hard for a deal on a server or storage, it might not be as easy as you’d expect. But, that doesn’t mean you shouldn’t try.

In the fourth quarter, Arrow expects for the ECS group to post sales of $2.1 billion to $2.3 billion, with component sales of between $3.0 billion and $3.2 billion, which puts overall revenues at $5.1 billion to $5.5 billion. Earnings per share, not including any charges the company might incur during Q4, should fall between $1.01 and $1.13, which is a bit better at the midpoint than the $1.02 per share that Arrow turned in during Q3.