ECS Sales And Profit Bump Can’t Offset Components Slump At Arrow

August 27, 2012 Timothy Prickett Morgan

With the economy slowing down in Europe and China, it is not an easy time in either the electronic components or IT systems business, as the most recent financial results from Arrow Electronics show.

In the second quarter ended in June, Arrow’s revenues dropped 7 percent, to $5.15 billion, and even with lower cost of sales and other expenses, net income for the company fell 26.8 percent to $114.4 million. Arrow simply needs a higher volume of business to make its numbers, but to be fair, if it did not have $13.3 million in restructuring charges in the quarter, the profit drop would not have been as severe.

The good news is that Enterprise Computing Systems, the part of Arrow that buys IT hardware and software at wholesale from IT vendors and distributes it through its thousands of channel partners worldwide, did relatively well. ECS sales actually rose a bit–1.9 percent, to be precise–to just under $1.7 billion, and operating income from the business was up 3.6 percent, to just under $66 million. For the first six months of the year ECS sales are up 7.9 percent to $3.24 billion, and operating income for ECS is up 18.2 percent to $121.5 million. But clearly the trend is for slowing growth, and that is somewhat alarming.

In a conference call with Wall Street analysts going over the Q2 numbers, Andy Bryant, president of the ECS segment at Arrow, said that the server business was slow but going forward, with so many new server processors just out or impending, Arrow was looking for the server business to pick up in the next few quarters. X86-based server sales were off 27 percent in the second quarter, and proprietary servers were down 27 percent against an overall market that was projected to grow around 6 percent in Q2 according to stats cited by Arrow that came from Gartner.

With new Power Systems and mainframes expected from IBM, new Sparc T5 machines expected from Oracle, and new Itanium 9500 machines expected from Hewlett-Packard, proprietary and Unix servers should see a rebound in the second half, and the Xeon E5 server ramp is now well under way with all three different styles of chips that are coming out this year available from Intel. We’ll see how it plays out.

During Q2, services revenues at ECS were up 18 percent, software was up 13 percent, and networking gear was up 57 percent off a relatively small base.

The components biz was off 10.9 percent to $3.45 billion and operating profits for this two-thirds chunk of Arrow was down 23.9 percent to $170.5 million. For the six months, component sales are off 12.4 percent to $6.8 billion, and operating income for components are off 32.7 percent to $341.2 million.

The third quarter looks like it might be the same or a little worse than the second quarter, according to Arrow’s guidance. Arrow says to expect ECS sales to be somewhere between $1.5 billion and $1.7 billion, and component sales to fall between $3.3 billion and $3.5 billion. Earnings are expected to be between $1 and $1.12 per share, a bit lower at the midpoint than the $1.11 it posted in the second quarter.