Arrow Sees Mixed Results For Proprietary Systems

November 3, 2014 Timothy Prickett Morgan

As we reported in last week’s issue, Avnet saw a rebound in sales of proprietary systems in the most recent quarter ended in September. And thankfully for those of us who are in the Power Systems community, rival Arrow Electronics, which has a similar-sized business as a master distributor of electronics components and IT wares, also server a systems bounce. But the company also showed how small a portion of its business comes from systems, which is a bit striking.

In the third quarter ended in September, Arrow’s overall revenues rose by 11 percent to $5.61 billion, and net income rose by 16.9 percent to $140.2 million. As I said last week, the technology distribution business is a very tough one, and only bringing 2.5 percent of sales to the bottom line is pretty good. You have to make it up in volume.

The Enterprise Computing Solutions business at Arrow does distribution for software, storage, services, servers, and networking, and I said them in that order for a reason. The ones at the front of that list account for the larger slices of revenue while the ones at the end represent the smaller revenue streams. It all adds up to a pretty big business, mind you, with the ECS unit at Arrow seeing a stunning 19 percent growth to $1.88 billion year-on-year. The growth is strongest in software and services, and storage and networking also had a smaller rise compared to the year-ago period.

Michael Long, Arrow’s president, CEO, and chairman, came straight out and gave the percentages on a call with Wall Street analysts, which to my knowledge Arrow has never done before. Long said that on a billing basis (not revenue, which is different for some reason I am sure doesn’t make a different in a general sense), that software was now approximately 35 percent of ECS revenues, with storage representing 30 percent, services more than 15 percent, servers less than 15 percent, and networking more than 5 percent. OK, so let’s call it 13 percent for servers then, and 16 percent for services, and 6 percent for networking, and let’s assume that revenue and billing roughly correspond. That means Arrow had approximately $245 million in server revenues, with $113 million in networking and $565 million in storage.

This is woefully out of whack with the distribution of revenues in the server, storage, and networking markets, which are, roughly speaking, about $50 billion a year for servers, $25 billion for external storage, and $25 billion for networking. I don’t know what the cause for this massive difference in distribution is, but it is interesting. It doesn’t make a lot of sense for companies to buy servers and storage from different vendors or channels, but something is weird here. Arrow is selling a lot of preconfigured converged systems and is breaking down its revenues for these systems into its constituents, including virtualization software. I am not surprised at all that software would account for approximately $659 million in revenues in the most recent quarter, or services something around $301 million. In any event, the actual operating income for the ECS unit rose by 15.8 percent to $69.2 million. The components business is roughly twice as large as ECS and is throwing off nearly three times the operating income. For the moment, anyway. This changes as the economy wiggles around.

In the Americas region, ECS sales were up 11 percent to $1.26 billion, with what Arrow called very strong growth in software and services, growth in storage and networking, and growth in X86 servers that was offset by declines in proprietary servers. (This latter category includes IBM‘s Power Systems iron.) Arrow is projecting that sales into the channel will be at the high end of the normal seasonality range, and this will be driven in part by X86 and Power server refreshes during the spring and summer that will compel customers to buy in the December quarter. Including revenues from acquisitions, sales in the European ECS business at Arrow rose by 41 percent, and in this case both X86 and proprietary servers saw growth. Again, as in the Americas region, Arrow had strong growth in storage, networking, and servers and very strong growth in software and services in Europe. Europe had such a great quarter that Arrow is expecting for ECS Europe to come in at the lower end of its normal seasonal fourth quarter bump up.

Looking ahead, Arrow expects for ECS to post revenues of between $2.7 billion and $2.9 billion in the fourth quarter, which is 48 percent growth sequentially at the midpoint of that range. Arrow did $2.72 billion in ECS revenue in the fourth quarter of 2013, so that range above for the fourth quarter of 2014 represents something between a few tenths of a point decline to around 7 percent growth.

The question now is will Arrow see growth in proprietary servers in the fourth quarter? I sure hope so, and I hope many of you get that new server smell in your datacenter before the holidays start. I love the smell of new servers in the morning. . . .