Steven O'Brien - Director of Investor Relations Michael J. Long - Chairman, President and CEO Paul J. Reilly - EVP, Finance and Operations, and CFO Andrew S. Bryant - COO, Global Components and Global Enterprise Computing Solutions Sean Kerins - President, Global Enterprise Computing Solutions.

William Stein - SunTrust Robinson Humphrey, Inc. Shawn Harrison - Longbow Research LLC Jim Suva – Citigroup Inc. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated Amitabh Passi – UBS Investment Bank Sherri Scribner - Deutsche Bank AG Mark Trevor Delaney - Goldman Sachs Group Inc. Louis R. Miscioscia - CLSA Limited.

Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc. Third Quarter Earnings Conference Call. My name is Jasmine, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr.

Steven O'Brien, Director of Investor Relations. Please proceed, sir..

Thanks, Jasmine. Good day and welcome to our third quarter earnings conference call. I'll be serving as moderator today on our call. And if you'd like to access today's call via webcast, please visit our Investor Relations' website at www.arrow.com/investor and click on the webcast icon.

With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operations and Chief Financial Officer; Andy Bryant, Chief Operating Officer, Global Components and Global Enterprise Computing Solutions; Eric Schuck, President, Global Components; and Sean Kerins, President, Global Enterprise Computing Solutions.

By now, you should have all received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website, along with the CFO Commentary and the non-GAAP earnings reconciliation for the third quarter. Before I get started, I will review Arrow's Safe Harbor statement.

Some of the comments made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons.

Detailed information about these risks is included in Arrow's SEC filings. We will begin with a few minutes of prepared remarks, which will then follow with a question-and-answer period. I will now hand the call over to our Chairman, President and CEO, Mike Long..

Thank you, Steve, and thanks to all of you for taking the time to join us today. We delivered on our aggressive financial targets again in the third quarter. Our execution across our businesses and the geographies we serve remains outstanding.

Let me immediately address head on our view of the state of the markets our global components businesses serve as I’m sure many of you will be anxious to hear about it. We’ve seen no meaningful change in the order patterns from our customers.

Book-to-bill is above parity in all regions through the first four weeks of the fourth quarter and is above last year’s October. Third quarter book-to-bill was comparable with last year’s third quarter with cancellation rates affectively unchanged.

In our customers’ views their inventory levels are well managed and their sentiment is consistent with the past year. In our view lead times of the suppliers remain normal. At Arrow our global components inventory turns in Q3 were at the highest level in the past 11 quarters. Finally, our view of the broad economic backdrop has not changed.

Our expectations entering 2014 was for a slow growth environment without any expectation for acceleration over 2013. As we started our 2015 planning process in early Q3, we took a look at the forecasted growth projections being issued by the experts and immediately discounted them as we saw no overarching drivers for accelerated growth.

We grew our global components business for the fifth straight quarter with performance that was near the high end of our expectation. Our enterprise computing solutions also performed at the high end of our expectations as we continue to build on our leading market position in software and services.

Our consolidated sales were at $5.6 billion and non-GAAP diluted earnings per share were $1.40. Revenue was at the high end of our guidance range and EPS was above the high end of our guidance range and an all-time record for a third quarter. Operating income and diluted earnings per share advanced 11% and 19% respectively year-over-year.

Returns advanced again year-over-year for the fourth straight quarter. Our global component sales of $3.7 billion advanced 8% year-over-year highlighted by double-digit growth in Asia, a six consecutive quarter of year-over-year growth in Europe and Americas growth that was ahead of normal seasonality.

Operating income grew 9% year-over-year, the fifth straight quarter of strong operating performance growth. Global components operating margins have increased five quarters in a row on a year-over-year basis.

Our global components business continues to bolster at leading value add services by extending design and engineering capabilities, allowing us to deliver increasing value to both our customers and our suppliers. Enterprise computing solutions grew 19% year-over-year and operating income grew 17% year-over-year.

Both regions performed well and both posted robust software and services sales growth. Storage, networking and industry standard servers also grew at healthy rates this quarter. In enterprise computing solutions, we continue to move forward selling comprehensive solutions with a focus on higher values segment targeted at the datacenter.

Our software and services business are extremely well positioned whether it is on premise, in the cloud or a hybrid combination. In summary, both global components and enterprise computing solutions are executing well and we expect our strong execution to continue into the fourth quarter.

Our fourth quarter guidance reflects sales and earnings growth and is based on factual information from our teams in the field and their customers. Paul will now provide more details on our results and our expectations for the fourth quarter..

We believe that total sales will be between $6.1 billion and $6.5 billion in the fourth quarter, with global components sales between $3.4 billion and $3.6 billion, and global enterprise computing solutions sales between $2.7 billion and $2.9 billion.

We expect earnings per share on a diluted basis, excluding any charges to be in the range of $1.75 to $1.87. Our guidance assumes an average tax rate in the range of 27% to 29%. Average diluted shares outstanding are expected to be 99 million and the average U.S. dollars to euro exchange rate for the fourth quarter to be $1.25 to 1.

Based on the midpoint of our Q4 guidance ranges, full year 2014 sales EPS would grow 6% and 17% respectively over 2013. We expect full year 2014 cash flow from operations of approximately $450 million and for returns to advance year-over-year. .

Thank you Paul. Jasmine please open up the call to question at this time..

Thank you. [Operator instructions] Your first question comes from the line of Will Stein with SunTrust. Please proceed..

Hi, thanks and good afternoon. I appreciate the commentary about the situation of your backlog and orders that’s – it's very helpful given the volatility in the market.

I am wondering what you think if you might speculate as to what’s driving the significant variation between what you and your close competitors are seeing on the one hand relative to what all of the or what many of the semiconductor and other component companies are seeing namely more volatility or a pause in demand?.

Thanks for the question.

I think that we believe the macro environment still remains sluggish, did before all of this started and still is but it has been steady, and if you just evidence it by the real GDP growth, in the second quarter 4.6 after declining to 2.1 and it [weighted] [Ph] the first quarter we saw that there was growth in Europe and that Asia basically outgrew the other two.

We have seen nothing but steady bookings. We are seeing an increase in electronic content.

I believe some of the challenges that could possibly exist as you have seen from rather large customers in Asia that maybe some companies are taking a bigger percentage of their company and their sales with that have not hit their targets but we still see the underlying business, the SMB business, the middle level business of the customers that we support to be steady still to have their inventory in control as evidenced by our inventory in the quarter.

So we don't see an inventory build. We don't see over inflated bookings and frankly we haven’t seen an allocation before a downturn. So it's there are several factors in there right now that we haven’t seen that cause us to believe the market really didn’t change since the one data point that came out that got everybody spooked..

I appreciate that Mike. Thanks.

And if I can follow-up with one other, the strength in Asia that you saw I am wondering if you might characterize in particular in China whether there has been any meaningful shift in end markets that you served to the degree you track it, perhaps one or two particular end markets might have helped demand along the way in the quarter and in the outlook.

I appreciate any color there. Thank you..

Yes, I can certainly help you with that. We obviously saw 15% uptick year-over-year adjusted for currency and acquisitions in the market. We do continue to see the growth there. We have had additional contributions to our business from transportation, wireless and the industrial power verticals.

So that’s where we’ve seen the growth - actually the growth rate of those markets for us have been from the 40s to the 70% ranges and we view it as positive, and it’s primarily the customer base expansion that we’ve seen our Asia-Pac team do, so we are relatively excited about what they have seen..

Thank you..

And your next question comes from the line of Shawn Harrison with Longbow Research, please proceed..

Hi, I guess good morning for you guys but wanted to delve into the 5% EBIT margin target, you hit 5% this quarter, I know it was a goal for the year.

How does Asia being below seasonal in the fourth quarter play into your ability to hit the 5% EBIT margin for the year?.

Well, obviously it’s all a mix issue for us, Asia’s profits are generally less than Europe and North America. So therefore you might argue that it makes it easy, but the truth is once we get past our fixed cost basis as a corporation most of the dollars drop to the bottom-line.

We have made really good progress towards improving these margins up to the 5% range and I would have to say we feel very confident that we are going to continue in that range for the targets especially during 2015. We’ve seen an increasing income margin by 10% and almost 50 basis points over the 2013 year.

So again, we were comfortable with the 5% or we never would have put it out there; whether it actually hits every single quarter, I don’t know, given seasonality, but we are certainly honing in to where that would be the standard that you would expect to see for us and then once we hit that will go higher.

Paul would you like to add to it?.

Yes, thanks Mike, Shawn just let me fill a couple of blanks, we expect to see operating income percent improvement in North America components year-over-year; we expect to see Europe to continue to make operating income percent improvement year-over-year and we expect some of our other business to do the same thing.

So while maybe it’s a question around mix for Q3 keep in mind that want to go back to a more normalized mix in Q4, but we are really doing it by driving improved performance segment by segment, business by business..

Okay.

And to be clear, so you expect at least 5% EBIT margin in the fourth quarter or higher in components?.

Yes. .

Okay.

Then as a brief follow-up, toward the low end of the seasonality in terms of ECS sales in Europe for the fourth quarter is that inclusive of FX or is there something else going on there just regarding decision making in the region?.

You are right. So FX definitely has an impact on the comparison. We see the euro has gone for about 1.35 in Q3 to 1.25 in Q4 so there is a bit of an impact there and also as we look to the fourth quarter..

Okay, but no elongated decision cycles or anything of that nature affecting the quarter?.

Not at all..

Okay. Thanks and congrats on the results..

Thank you..

And your next question comes from the line of Jim Suva with Citi. Please proceed..

Great. Thank you very much. When we think about your -- you covered a lot of the key questions about the inventory and distribution or the slowdown I think I’d like to switch over to a different topic since that one has been pretty well covered by you guys. And that topic is on usage of cash and M&A.

Can you talk about your M&A outlook as it appears like M&A maybe so the cadence or whatever has slowed down a bit.

Is that the case or are there other internal priorities you are dealing with whether it's ERP systems or restructuring or integrating your past acquisitions or might just kicking it one point in time right now or maybe the cadence will come back up for M&A?.

Well I would give you a couple of things. First off, I reiterate our use of cash as internal growth, M&A, and return to shareholders.

So that said, I am not sure I would read a lot into it as if you look this year we have done four acquisitions I guess you could say that that is a slowing pace because we were on kind of a [terror] [Ph] pace but what we are not doing Jim, is we are not forcing anything into the system. It has to be good.

It has to meet our returns and we have to be able to improve on the business we are acquiring to make it better than it was when it was standalone otherwise it doesn't have the value for us.

And I would say possibly the pipeline slowed a little this year but that doesn't mean that we are slowing and that doesn’t mean that there is not targets in the pipeline..

Okay, great.

And then can we talk a little bit about what you see going on like with the different end markets such as servers and storage specifically with servers, IBM sold X86 to Lenovo and then on storage you have got a lot of like newer startup, smaller ones and then ENC the big guys just kind what type of growth rates you have been seeing there recently and how you transition and think about the Lenovo X86?.

Yes, I am going to – I will take on so we can just get off the table the Lenovo thing and I am going to have to say kind of way in on some of the growth. As far as Lenovo goes, we did issue the press release earlier this month announcing the authorization of everywhere that we sell those products.

We really look forward to having what I would say is the continued relationship with Lenovo. We already have a long term relationship that goes way beyond the server business and I would expect that to continue.

So the truth is with that one we don't see any change other than sort of a reporting address for the sales and I am sure Sean’s team will continue to do a good job for Lenovo like we have with IBM. With that Sean you want to go through some of your growth rates..

Sure Mike. Thank you. So we continue to see our mix shift to software and services that’s the conscious effort in our part to help our partners enable the sales of complete solutions in the data center while servers and hardware aren’t necessarily as bigger piece of our mix as they once was.

We have seen a return to better activity levels in pace with storage. We continue to see a mix ship from UNIX to Intel based solutions.

Nevertheless, we continue to support the server business where we need to and we are seeing growth in the industry standard space and again as Mike mentioned in his opening remarks, infrastructure software virtualization and certainly security all represent very healthy growth rates for us both in north America and Europe and we will see and should see the same sort of pace in Q4..

Great. Thanks very much guys..

And your next question comes from the line of Matthew Sheerin with Stifel. Please proceed..

Yes thanks, just a follow-up from that question.

Could you give us the percentage break down of products of software, servers, storage etc for a computing business?.

Are you done about the growth rates?.

You just said the breakout I know that there is a mix in software and services are going up and I don't remember getting a specific breakdown..

You mean within the business?.

Yes..

Yes. We do have that for you. On a billing basis sub stake billing then don’t let anything out. Software is now approximately 35%, storage is 30, service over 15. Servers are less than 15 and networking is more than 5..

Okay. And then on the services side Mike I know that you have done a lot on the asset disposition, the logistic side and there is also a big service component and big opportunity in the datacenter in terms of integration, managed services that sort of thing.

Are you seeing growth in both areas or what’s really driving the services business now?.

I would say that right now, if you take the genuine order you would see, the reverse logistics just starting to pan out as you know we have been basically investing every penny that has been generated by that business into expansion because we believe they are need to be scaled therefore had to be successful, it would be our hope that we probably talk about that more over the next year as it starts to make a difference in the system.

I can have Sean give you some background of how the services is playing in the computing business because I would be there the next area that we see in the most growth..

Sure Mike, so just a build on that, in the ECS side of the business our services mix is dominated by me and its contract renewals and as you thing about our business are install basis now pretty massive over several years and every one of those assets is an opportunity to help create a refresh or upgrade opportunity for our suppliers and with our partners and if not it becomes a maintenance contract renewal that’s how this been the case in hardware and certainly it’s now the case in software is that becomes a bigger piece of our mix.

In addition to that, our services number has comprised to a smaller degree of education services for some of our suppliers and a small but continued ramp in our cloud base services for hybrid and off-premise business..

Oh, okay. Great. That’s very helpful and that’s it from me. Thanks very much that’s it from me thanks very much..

And your net question comes from the line of Amitabh Passi with UBS, please proceed..

Hi, thank you.

Mike, my first question for you was on your (inaudible) global components business we saw year-over-year growth sort of decelerate to 4% relative to last couple of quarters just wanted to get your thoughts is that just a function of comps getting tougher or did you see maybe some incremental sluggishness in the region as the quarter progressed, any incremental insight would be helpful..

Okay. First off I would say we have to be little encouraged here by the continued trimming trend of the European business against the slower macro economic backdrop.

While you may call it slowing, they have been added for quite some time now so the growth rates are probably catching up to them in the comps but we have also had five straight quarters of operating margins increasing.

So we think we are going to – we continue to see the trend that we have seen before and the group has the ERP behind them and so they have invested more in sales, focus on the external market as a result of some of the savings they had there and that's also driving their operating income.

We have really seen some extra penetration in transportation, the aerospace and defense and a little less on the lighting side but those would be the kind of three verticals that have played for us over the last year and year and half..

Okay. Got it and just a quick follow-up for you Paul. OpEx you have some very tight control over the last couple of quarters.

Any help in terms of how we should we be thinking about OpEx as we look forward?.

Right. I am sure you will recall that we talked about the fact that we over performed on our cost efficiencies last year for third and fourth in the row. We decided to turn those cost, those extra savings into investments and sales and engineering talents so that we could ensure we get growth in both sales and GP dollars a profitable share growth.

I think about expense for the fourth quarter compared to the third quarter we naturally see some up lift because we are going to have an up lift in sales on that variable cost will trend up a bit.

But I don't see any meaningful massive change in the pace of spending or for that matter, I look at the bottom line expense dollar didn’t increase year-over-year while we’re investing in the business so it must be coming more efficient to fund that. I mean we are driving GP dollars up so I think this is kind of like a good formula for us to follow..

Excellent. Thank you.

And your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed..

Hi thanks, I wanted to ask you a question that I also asked one of your competitors which is about what you are seeing on the cloud side.

I know last quarter I think you guys talked a little bit more about what you were doing in cloud and it's been the threat that people are worried about impacting your business but just wanted to see, what you see is opportunities and how you seen any impacts because the ECS business actually seem to see pretty good gross this quarter, thanks..

I would say that we believe as a general backdrop that customers really continue to seek a choice and what the cloud offering are and three basic areas off-premise, on-premise and hybrid. So we believe that and sort of as a result of that we talk about building SKUs at a position is nicely is that that market is developing.

This isn’t overnight and some of the consumption models will change but we’ve really built a nice proprietary system that will help us the adoption of those skews and we have seen that started to take off, Sean would you like to add some more color to that?.

Yes, sure Mike.

It has been a really unique investment and our parties called aerosphere I think it is all online marketplace with the right set of class solution to help our partner serve and users we still believe end-users are looking for choice and well demand for on-premise, private class solutions is still fairly robust, we also want our parties to be able to deliver hybrid and off-premise solutions work makes sense.

So inside aerosphere we represent things like software with IBM, VM (inaudible) hybrid services even helping Microsoft with their sass model through the service provider channel we have recently signed rack space a number of the security players are interested in sass selling and deployment models aerosphere serves those providers very well and will continue to add to that line card purposely, this is the business now that’s approaching roughly a $50 million run rate and we are going to continue invest in that on behalf of this transition as it evolves..

Okay, great.

And then can I just follow up in terms of converged infrastructure you guys selling very much converged infrastructure and where would it fall in terms of fair reserve storage or networking things?.

So I would be happy to take that.

We are an active participant in the convergence for structure marketplace we represent several including BCE and B block, flexpad V-specs were certainly now aligning with HP in the same regard and there is a variety of solutions there we are in a great position to help vendors participating these because they are multivendor in nature and customers are slowly but steadily recognizing us, there is a value prop associated with a single preconfigured solution versus one that’s built in pieces and separate sale cycle.

So we are optimistic that we will continue to see growth in that segment of the market..

And where does it fall; server, storage?.

Servers, storage, networking, and then by definition virtualization. .

So you just split it all out?.

Yes, we do split it out. So it rolls into our various sales categories even though much of those obviously are sold in conjunction with converged solutions. .

Okay. Great. Thank you for the clarifications..

And your next question comes from the line of Mark Trevor Delaney with Goldman Sachs. Please proceed..

Good afternoon and I appreciate the opportunity to ask the question. I have a follow-up question on the plan to add more resources in the component business to driver a higher mix of demand accretion revenue going forward.

How for long would you say the company is with those higher and when you expect to have full end model and then maybe related to that if you can just remind us what the normal time it is between adding new resources and those people driving higher gross profit dollars?.

Yes, Mark. So we are about half way through adding those stages, remember that we are adding them around each of three regions obviously we slowed down in Asia because of the unit rollout which has been our best execution to-date and it was about 6 month lag between someone coming on board and beginning to earn their keep and then going beyond that.

Our expectation is that overtime every dollar invested in sales and engineering support will drive anywhere from one to four X that amount in more GP. So we feel it's got a good pay off at low risk and something that we can continue to focus on as we move forward throughout this year into next year..

And Mark, the piece of it sometimes it's what we would have to say it's about six months before the sales person really gets himself going sometime they can come a little earlier but remember we are here to push design activity.

Asia is where we did the largest amount of ads and we have seen our design activity go up by 33% quarter-on-quarter and we have started to see that accelerate going into the end of the year so I think there is pretty good scenario there about the ads. We added also in North America and they are up almost 27% now on design wins.

So that activity as you know is a good barometer for the future it’s a good barometer for the gross profit and it's just one more data point for us about how we see the market coming in the future..

That's very helpful. Thanks for that. And then for follow-up question I wanted to talk a little bit more if we could on the Asia component business.

I understand up about 15% year-over-year in cost and currency organically I think in our reported dollars of 14% sequentially and I know some of the markets run industrial and wireless that drove some of that strength.

Can you help us understand though if any of the revenue strength that you are seeing in the Asia component business is from short term higher volume consumer type program that may not repeat, just asked the question because I have never participated in some high volume consumer program to help to drive some sales.

I just want to get sense for whether or not we need to be mindful of the potential for any of those to decelerate in some of the coming quarters?.

Yes, Mark it's Paul. I would tell you that we are trying a lot of different customer verticals in our strategy there but we are not going to really move much of our strategies of SMB.

So we will be opportunistic if there is a customer and/or supplier that needs our assistance from a logistic type engagement but we are really focused on adding these sales and engineering resources around growing SMB faster because we think over the longer term that gives us a richer cash flow returns and operating income profile..

Thank you very much..

And your next question comes from the line of Louis R. Miscioscia with CLSA. Please proceed..

Okay. Thanks. A couple of questions. I guess when you look at the enterprise business and what are your resellers telling about going into year end.

Obviously you got in supplies that things are pretty normal but I don't know any hesitation some tech companies did have disappointing results I guess if you could break it down by the US and Europe and I have a follow-up?.

I think basically what you’ve been hearing is distribution has been relatively strong, I think you have been hearing that from your other calls, if you would have been on them, but the market is covered that we’re still seeing opportunities, it’s not a glooming doom thing especially for our resellers and/or the midmarket, we’re still forecasting right in line.

So, we’re expecting the market to be there and as we said so far starting up in October things are looking good, so we’re still relatively bullish and we’re bullish going into the fourth quarter..

Okay. Then looking at the same business.

You have got converged system you sell but maybe you could also talk about buyers appetite to move to hyper converge and if you are seeing that to start to pick up in a material way?.

Sean you want to?.

Yes, Louis Sean here.

We are seeing more customers start to ask more questions about hyper converged solutions, we have a (Panamia) authorization with some (inaudible) and North American authorization with (inaudible) and the customers are evaluating lots of different architectures and storage models including flash and so we are going to be well positioned with the rate suppliers as those friends play out but I would say hyper converged solutions are not yet the dominant piece of our storage or survey number..

Okay, great.

The last question is on software as a service, yes software is a service applications is it meaningful portion of your business and when you actually sell or your borrowers resale that is there a big difference in pricing in the sense of that more on the monthly basis or quarterly basis then buying a system upfront?.

Louis, same words, I want to make sure I understand your question..

Sure, for having a sass sale in comparison to selling a normal system which is a component of software and hardware which has a main dollar price tag also you are going from the main dollar price tag to be 50,000 per month and that’s brought down some numbers -- so wondering if any of that is starting to play into your revenue stream or your sass reselling just a very small component of your overall IT sales?.

Yes, although I would say in reference to my earlier remarks we do think sass is an important part of our low and the challenge in the future aerosphere design to help to bring the right sass and infrastructure solutions to market.

Currently we haven’t seen that price point difference that you relate to really impact our business in a material and as I said earlier there is still fairly sufficient level of demand for un-premised deployments..

Okay, great. Thank you..

Ladies and gentlemen that concludes today’s portion of the Q&A Session. I would now like to turn the conference back over to Mr. Steven O'Brien for any closing remarks..

Thank you, Jasmine. If you have any questions about the information presented today, please feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day..

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. You all have a wonderful day..