Storage, Software, And Services Drive Up Arrow’s Systems Biz In Q4
February 11, 2013 Timothy Prickett Morgan
The Enterprise Computing Solutions group of master distributor Arrow Electronics ended the fourth quarter on a high, with business being brisk enough to almost make up for decline in the component business that is the other engine of Arrow and its main competitor in the distribution racket, Avnet.
In the quarter ended in December, overall sales at Arrow fell by just under 1 point to $5.4 billion, and if you look at it in local currencies, sales were actually off 3 percent. So the weakening dollar helped the numbers a bit. Sales at the ECS group rose by 11 percent to $2.22 billion, while revenues at the Global Components group fell 7 percent to $3.19 billion. Operating income at the company was up 13.8 percent to $264.2 million, which means the company is running pretty well, but Arrow booked a charge of $79.2 million in the quarter for the “settlement of legal matters” (I do not know what for, and the commentary provided by Arrow did not explain it.) These charges helped push net income down 16 percent to $132.4 million.
In a conference call with Wall Street analysts, Arrow’s top brass didn’t say much about how the server business was doing, but they did say that the double-digit growth in storage, in software, and in services helped bolster sales in what I presume was a tough market to try to sell Power Systems machines, given the impending upgrades to Power7+ processors and a slight softening in the X86 market. The good news for Arrow is that it is less dependent on “proprietary servers” for its profits. That is also the bad news if you want the Arrow channel to be motivated and actually push Power Systems iron through its channel and into customer accounts.
“If you go back to a few years ago, proprietary servers [generated] the vast majority of our profits,” explained Michael Long, president and CEO at Arrow. “And today, with most of the services that we are offering along with the software, we’re able to provide a bigger solution to what the customer requirements are. And I would say that storage has largely replaced and exceeded what proprietary servers did before.”
Arrow likes software in particular because there’s no inventory to stock and the margins are high on new software license sales. Margins in storage and networking products are strong as well. The ECS unit overall had operating income of $114.2 million, up 7.4 percent, while the components biz only had an operating income of $123 million, falling 30.4 percent.
For the full year, ECS had just over $7 billion in sales (up 7.8 percent) with an operating income of $291 million (up 10.7 percent). Arrow overall had $20.4 billion in revenues, off 4.6 percent, with a net income of $506.3 million, falling 15.5 percent.
Looking ahead, Arrow says to expect for total sales for the first quarter of 2013 ending in March to be in the range of $4.6 billion and $5 billion, with ECS generating $1.55 billion to $1.75 billion in growth and earnings per share for the whole company to be in the range of 80 cents to 92 cents. Arrow had $4.89 billion in sales in the first quarter of 2012, with $1.54 billion in ECS revenues and earnings per share of $1.00 flat. So the story for 2013 looks like this: rising enterprise product sales, flat to down components sales, and margin pressure due to components.