Ladies and gentlemen, thank you for standing by, and welcome to the Arrow Electronics Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Steve O’Brien, Vice President and Investor Relations. Please go ahead..

Thanks, Denise. Good day, and welcome to Arrow Electronics fourth quarter and year-end 2020 earnings conference call. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Sean Kerins, Chief Operating Officer; and Chris Stansbury, Senior Vice President and Chief Financial Officer.

During this call, we will make forward-looking statements, including statements about our business outlook, strategies and future financial results, which are based on our predictions and expectations as of today.

Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements. As a reminder, some of the figures we will discuss on today’s call are non-GAAP.

We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation and a replay of this call.

We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. I will now hand the call to our Chairman, President and CEO, Mike Long..

Thanks, Steve, and thanks to all of you for joining us today. When I spoke to you in late April of 2020, right after our first quarter, there was much we didn’t know about how the coming months would unfold, which is why it’s incredible to be here today talking about record quarterly sales and earnings in the fourth quarter of the year.

Not to mention, in 2020, we generated record operating cash flow, reduced debt by a record amount and return of record cash to the shareholders for the year. It’s a true testament of our strengths. But not only did we do that, but in a very short period of time, we had almost 15,000 people that had to go from office work to work-from-home.

And this is a true testament of the hard work and the dedication of our team. Every day, our customers have a choice. We’re proud they continue to choose Arrow. Customers place their trust in Arrow’s engineering, design and supply chain services.

They rely on us to ensure their products are designed to be efficiently manufactured and well-received in the marketplace. Our suppliers are critical to our success. They continue to choose Arrow to sell, market and design their components into some of the most innovative and important products coming to market.

While our reputation speaks for itself, our consistency comes from putting our people first. Once again, I’d like to thank our team for continuing to deliver for customers and to move technology forward in a year of extreme challenges.

While some of these -- while some of the same obstacles we’ve had in the past, we’ve seen major device upgrades and major upgrade cycles followed by the strong sales. The foundation of our business has never been stronger.

While business conditions in our industry are dynamic, we’re cautiously optimistic that the demand environment for Americas and Europe can return to growth. Customers are ramping up prior production levels across many industries, and the inventory correction that occurred prior to the pandemic means that some components are in short supply.

Orders and backlog are up in all regions. In line with this, our Americas customer segment survey showed an increase in the percentage of customers that have an inventory shortage and a decrease in customers with in excess of inventory. Turning to our enterprise computing solutions business.

We’re pleased to deliver operating income growth on a year-over-year basis. Operating income growth continues to be the truest measurement of performance for this business. And in addition, operating margin reached its highest level since the fourth quarter of 2017.

While we were pleased with our Enterprise Computing Solutions results, we see strong potential for further improvements in 2021. First, the markets we serve remain challenged by lockdowns and continued restrictions to related on-site work. In the meantime, widespread work-from-home policies continue to drive security and cloud solutions.

In the past, we’ve seen major upgrades followed by strong infrastructure spending to support them. We see further benefits to enterprise computing, from a recovery by special VARs and MSP customers, who serve some of the industries that have both mostly been impacted by the pandemic.

Our customers, who service the hospitality, retail, restaurant and even the medical industries, have been hampered by an inability to work on-site at their end customers.

We drive value from complexity, so helping these customers design and sell secured multi-site hybrid cloud data solutions should benefit our volumes and profits compared to our business in 2021. Before closing, I thought I’d share a few words of our Company’s longstanding commitment to developing business leaders and proactive succession planning.

We recently announced the appointment of Sean Kerins as Arrow’s new Chief Operating Officer. Sean has been a valued member of our team since 2007. His leadership and proven track record at Arrow make him the ideal executive to now lead both businesses in advanced innovation across our global sales, marketing and operations.

We’re confident in his ability to help Arrow capture value and growth from the increasing convergence of semiconductor, electronic component industries with the information and operational technology industries.

With that, I’ll now hand the call over to Chris to provide more details on our fourth quarter results and our expectations for the first quarter..

Thanks, Mike. Fourth quarter sales were $8.45 billion. Sales increased 13% year-over-year on a non-GAAP basis. The average euro-dollar exchange rate for the quarter was $1.19 to €1 compared to the rate of $1.16 we’ve used for forecasting.

Strengthening of the euro relative to the dollar boosted sales by approximately $50 million compared to what we had anticipated in our prior guidance. Global component sales were $5.92 billion. Sales were above the high end of our prior guidance, and we saw improving demand across regions and most industries.

Global components non-GAAP operating margin was 4%, up 40 basis points year-over-year. This improvement was mainly due to greater operating expense efficiency in all regions as we leveraged higher sales volumes.

We continue to see substantial opportunity for further operating income leverage as all regions can capture an improving mix of higher value component sales and as the Americas and Europe regions continue to recover. Enterprise computing solutions sales of $2.53 billion were above the midpoint of our prior expected range.

Fourth quarter billings increased year-over-year adjusted for changes in foreign currencies, and we experienced growth in infrastructure software across the portfolio, security, storage and industry-standard servers.

Global enterprise computing solutions non-GAAP operating income margin increased by 30 basis points year-over-year to 6.3%, the highest level since 2017. Returning to consolidated results for the quarter, the effective tax rate was below our expectations due to timing of certain discrete items.

For the full year 2020, our effective tax rate was near the low end of our long-term range of 23% to 25%. We continue to see 23% to 25% as our appropriate target range going forward. Non-GAAP diluted earnings per share were $3.17, $0.44 above the high end of our prior expectation.

Approximately $0.04 of the upside to prior guidance was attributable to more favorable exchange rates. Turning to the balance sheet and cash flow. Operating cash flow was $200 million, despite substantially stronger demand than we anticipated. Our cash cycle improved by two days compared to the third quarter and 11 days compared to last year.

This improvement significantly aid cash flow generation in the face of working capital demand. Inventory days were the lowest level since the fourth quarter of 2015. Ending 2020, debt decreased by $715 million compared to 2019. Leverage, as measured by debt-to-EBITDA, was at the lowest level in over five years.

We returned approximately $100 million to shareholders during the fourth quarter through our share repurchase plan. The remaining authorization under our existing plan is approximately $463 million. Please keep in mind that the information I’ve shared during this call is a high-level summary of our financial results.

For more detail regarding the business segment results, please refer to the CFO commentary published on our website this morning. Now, turning to guidance. Midpoint sales and EPS guidance will be all-time first quarter records.

The diversity of the products we sell and the customers and industries we serve helps provide stability for our business as a whole. Our guidance reflects continued improvement in both, global components and the global enterprise computing solutions operating margins on a year-over-year basis.

Finally, as we discussed last quarter, please note the CFO commentary includes information on our fiscal calendar closing date for 2021. In 2021, the first, second and third quarters closed on April 3rd, July 3rd and October 2nd, respectively, unlike in 2020, where they closed on March 28, June 27 and September 26.

These closing dates have a much greater impact on enterprise computing solutions and on global components, and full year comparisons are not affected as fiscal ‘21 ends on December 31st, as always. With that, I’ll turn the call over to the operator for Q&A..

[Operator Instructions] Your first question comes from Toshiya Hari with Goldman Sachs & Company..

Hi. Good afternoon, and thank you so much for taking the question. Congrats on the very strong results. My first one, I wanted to ask about the shortage situation.

Can you sort of describe how broad and how intense, if you will, the shortage is today, the delta between demand and supply? And based on what you’re hearing from, I guess, both your suppliers on the supply side as well as demand from your customers, at what point in the year would you expect supply to catch up to demand? Thank you..

Yes. So, the first thing is, I will disconnect sort of automotive for my comments, because a lot of the shortages you’re hearing about are automotive, and they’re specialty type parts, and they’re not things that people in our business typically are in the middle of.

So, when you take that out, yes, we still do automotive business, but it typically runs in the sort of Tier 3 accounts, Tier 1 accounts, those types of things. What I would tell you is, overall, yes, we’re seeing some shortages. I believe at this point, it’s a little overblown.

It’s probably a good time to talk about the book-to-bill too, because we have seen an increase in book-to-bill. And what I mean by that is, customers are placing their orders out longer than they have in the past. So, we’re getting more visibility past 90 days. Our percentage of backlog within the quarter sales has not increased.

So, it would suggest that it’s really not double ordering, but customers are giving us a longer term view, so we can in turn share that with suppliers and help them forecast their manufacturing as things go out. We’re also seeing suppliers asking us to give them greater visibility. And I believe the market is reacting well to that.

And that can minimize a lot of the problems that are being talked about out there. Short term, we don’t see too many restrictions right now on our shipments for the first quarter. There’s always going to be a couple of parts that are hard to get, but we don’t expect that there’s going to be widespread shutdowns or anything like that.

So, hopefully, that helps your question and gives you a little perspective on it..

Yes, it does. Thanks very much for the context. And then, as my follow-up, just on the profitability of the business, you guys did a great job improving margins in the December quarter. As you look out into, I guess, the middle part of ‘21 and the back half of ‘21, outside of regional mix normalizing, i.e., I guess, the U.S.

and Europe recovering, what are some of the levers that you can pull to improve margins in your business? Thank you..

Well, I think, you’re already seeing some of the margin improvements that have come through. We certainly are getting more efficient in the business in terms of our cost of sales, our cost to margin even with investments that we’ve put into handling components, our manufacturing facilities. Most of that work has been done or close to completed.

So, we’re seeing benefits there. But really, you want to get down to the big lever too. So, North America is hugely anemic. It’s been, by all terms, crack for the last couple of years. And really -- and so, we can get out of our way and focus on growing this economy. That will be a little bit of a rope around our neck.

Europe looks like it’s progressing probably a little better than North America in terms of growth again. But, the real hammer is the North American economy. And that will make a difference, because you’ll see volumes there, so you can see our infrastructure in North America, get more efficient with those volumes. And that’s a piece of the pie..

Your next question comes from Steven Fox with Fox Advisors..

For the first question, Chris, I was just wondering, last quarter, you talked about continuing to generate cash flows while you’re growing over 10%. You obviously just did that. But then, you guys mentioned that inventories are now at levels you haven’t seen since 2015, and customers are placing longer extended orders.

So, can you just sort of talk to the level of your confidence to continue to do that as supply chain dynamics seem to have changed a lot in the last 90 days? And then, I have a follow-up..

Yes. Really, we’re super pleased with the cash generation of the business over the last 12 and 24 months, record cash flow in 2020 and $2.2 billion over the last two years. So, that’s clearly a focus of ours, Steve, and that will remain.

In the near term, I think, that’s a little more challenging in the very short run as we obviously look to build working capital to support the growth. But, we’ll do that diligently. As I look forward, though, I don’t think anything really changes. We’ll be very focused on generating cash flow over the course of 2021.

And, I think, the cash conversion cycle that we’ve got now is the right target for us over time. It will move around from quarter-to-quarter. But, we like where we are, and we’re going to do our best to maintain that..

Thanks for that. That’s helpful. And then, Mike, just as a follow-up. In your prepared remarks, you mentioned that you’re cautiously optimistic about demand returning to growth in the Americas and Europe.

Can you give us some examples of maybe what’s behind that, either customer conversations or different industries that you’re hopeful about? And whether that is going to result in a meaningful shift in some of your sales mix on the component side from Asia, over the next couple of quarters? That would be helpful. Thank you..

I think, the first thing that gives me sort of that optimism, not only for the Americas but for EMEA too, would be the growth in design wins. So, we’ve seen some pretty good growth in design wins in North America, up around the 15%, 16% range, and we’ve seen just under 10% in Europe.

So, as we’re seeing the design wins grow, that’s usually a good indicator about business coming down the pipe within the next six months or so that should be an increase of what we’ve seen in the past. I think, the -- my opinion of tariffs, I think, that’s been holding us back quite a bit.

I think, it’s -- I think the whole plan backfired and put the burden on American companies to pay the tariffs. So, I haven’t seen anything lifting those, but the demand is there and there’s still business out there. And, I think, people are figuring out how to maneuver around that. We’ve seen some uptick in sort of aerospace and defense.

We’ve seen some uptick in consumer. You guys have seen that. And surprisingly, we’re seeing a little life in industrial manufacturing at this point. So, when you put those together, I would say, the conditions are in pretty good shape for things to come back.

But, that’s where the sort of cautious optimism comes in for me as will our politicians work together on the economy to make it better? And if they do, I don’t see any reason it couldn’t be better. But, I sort of duck early and say what’s the next curve ball coming. So, that’s where I hate on that one Steve..

Your next question comes from Nikolay Todorov with Longbow Research..

Yes. Thanks, and congrats guys on the great execution. Mike, can you remind us the operating profit margin delta to your Asia component business? It seems like you guys have done a great progress there and driven by scale.

But, as you look forward, can you talk where do you see that delta between the Asia component business in North America and Europe eventually getting in the medium-term future?.

Yes. I mean, I think, while I won’t give you the numbers, specifically, I think, there’s a couple of things that you can just deduce by how things are operating. The North America and Europe have had a little bit of negative operating margin reduction just in size and scale. That’s what happens when the economy shrink and Asia has improved.

Asia has improved more than they have reduced, which is good, which is why you see the leverage you do. And, we’re really confident that that’s a good thing because we’re really sitting here doing the math.

And if those two take off and end up with their rightful sort of mix inside the Company, we’re going to be right back where we think we need to be. So, we do have a view. We do have a line of sight.

The real question that we have for ourselves is, how fast can we get North America and Europe back up, either through share gains or through general economy gains? And that’s really the conditions that need to exist..

Okay, great.

And then, as a follow-up on the components side, can you talk about the pricing environment that you see? I think, maybe you can do the same and exclude the auto side and talk about what are you seeing, and what is your ability to pass through those? And as you think about that, I think last quarter, you mentioned that you expect to see the component business start approaching the prior levels of high 4% or low 5% operating profit.

Do you still believe you can do that in 2021?.

Yes. We believe we can get there in 2021. Obviously, the economy is going to be dependent on can we consistently be there? But, we actually believe we can be there. That’s not an issue in terms of the Company. In terms of the pricing environment, more and more suppliers are raising prices. We won’t hesitate to raise those prices, we have to.

We don’t have enough margin to absorb price increases like that. And the suppliers are doing two things. They’re requiring that they see a better visibility of your product. They’re demanding a firmer schedule. And the ones that are really fabless are doing price increases first. So, we are seeing it.

I expect it to continue through the first half of the year. It’s the nature of the business. There hasn’t been a price increase in a long time. So, this is really something new. But nobody is going to be immune from it, just comment..

Okay. And just lastly on ECS, on the enterprise computing segment. It seems like the mix of business has shifted quite favorably towards software and security.

Maybe can you give us an update on the percentage mix? And then, any color on what are you expecting for the hardware side of that business in 2021?.

Yes. Sean, why don’t you go ahead and take that one..

Yes, sure thing. And you kind of read it like, we have been intentionally driving a mix shift to things like cloud, software and services, the kind of things that we typically treat through agency accounting. And so, while sometimes that creates a little bit of a headwind for reported sales, it’s very favorable for gross and operating margins.

And we’re going to stay that course. We think there’s a good future in it. In terms of the outlook going forward, by no means is hardware disappearing. It sort of ebbs and flows a little bit. But, if you look at our overall mix, just on a volume basis, hardware is still roughly a third of the total.

In fact, we saw our storage business growing a little bit year-on-year for the full year in 2020. And that tells me that there’s still a big on-premise business that we’ll benefit from in the future. I believe you can’t sweat IT assets forever.

We do need a broader market to come back and data centers to reopen, but that will be ultimately a good thing when it does happen..

And your next question comes from Adam Tindle with Raymond James..

Mike, I just wanted to start on the component trends and how global demand is above supply right now. You talked about seeing some supplier price increases and inflation is potentially becoming a theme.

I just wanted you to revisit that idea and cover how inflation impacts component distributors historically, and what could be different this time during this cycle? I’d imagine that there’s a benefit to gross margin, and that’s been in decline for a number of years, but could eventually turn around here with some inflation help in Western regions coming back so that you can maybe double click on that point..

Yes. I think, first off, the pricing decline has largely been across the board with efficiencies. Efficiency has largely outrun the pricing declines, and that’s just sort of a basic in a lot economics, right? The efficiency eventually does get to the market, and that’s what you’ve certainly seen in our business over the years.

I would expect that to slow. And clearly in times of the inflation, you’re going to see that slow, but it’s going to depend on how the inflation hits the raw materials part of the industry.

But, then, you have one more thing, right? You used to have most semiconductors companies who got their own fabs, and they didn’t have a third-party running the fabs. Now, they have third-parties running the fab. The fabs are needing to make more money too. So, that’s just another sort of curve ball in the equation.

And I think, largely, manufacturers have looked at that. They’ve sort of priced that in right now to what they’re looking for. And you’re starting to see it go to the market. The inflation is going to hit the end use products first before it hits the manufacturing products. So, I think that will be a delayed reaction, if it happens.

I still think, there is question as to whether or not that will happen? But, the price increases are coming now. And I largely think we’ll have that price in by midyear in 2021..

Got it. That’s helpful. And just one follow-up for Sean. First of all, congrats on the new role. And I just wanted to ask you a strategic question on ECS. You’ve had some changes at the competitor level, one splitting their business and other changing from Chinese ownership to now a new PE firm ownership.

And each of those competitors seems determined to continue to consolidate and get bigger in that entity.

I’d just be curious your kind of long-term strategic view and the moves that you can make in ECS to perhaps consolidate as well, or does it make sense to kind of stay where you’re at? What does the chessboard look like in three to five years, let’s call it?.

Sure, thing. Well, first of all, thank you for the congrats, and I appreciate that. I’m very aware of the fact that the -- at least the capital structure or the finance structure for some of our competitors has changed. In terms of what that means for their go-to-market strategies, be it public or private, probably better for them to answer.

But you can imagine we’ve got a healthy respect for all of our competitors. But intentionally, we are going to continue to focus on what we think is a promising market for hybrid and multi-cloud solutions. We’re going to stay in the more complex end of the IT spectrum, and we think that that will continue to stand us apart.

With regard to consolidation in the industry overall, we’re always sort of keeping our eyes open for markets and players that we think offer us a value-based return. And so, I’ll make sure that we continue to look at those. By no means, here would we not do something if it made sense.

But we’re -- we like our space in the more complex end of the enterprise, IT environment, as I said. And I think in the near term, our intention is to largely stay there, although obviously, we’ll compete differently over time. If you look at the investments we’ll make in our cloud go-to-market motion among others..

This is Mike. I’ll add one thing to that. We now have overlap between our computer business and our core components business in the range of $1 billion, $1.5 billion of customers. So, we’ve seen that consolidation -- or not the consolidation, but that sort of movement together over the last couple of years.

We knew it was coming, and we knew there was a gap there, but we’re starting to see that now with really a big trend in the OEM computing business to start doing these specialized appliances that we had talked about, and from the design to the supply to the chip to the build of those.

And we’re now seeing that through not only our contract manufacturer customers but ourselves and also in the designs that are coming in. So, that does give us a synergy that these two businesses working together are playing better in our sandbox, and you can see that from the efficiency numbers in here.

So, yes, we don’t have any intentions of splitting anything, selling anything off, or changing our strategy. We believe we have a good strategy. We believe it’s served us well so far. And there’s no desire to change that..

Your next question comes from Tim Yang with Citi..

Back in 2017 and 2018, there were component shortages and you benefited from that. But, in 2019, you experienced some headwinds due to destocking.

What have you learned from that experience? And what are you doing differently in this cycle to protect the potential destocking risk after this shortage?.

Yes. I think, in the past, you would see that book-to-bill, panicked everybody that there was double ordering and they would talk themselves into it. We’ve spent a lot of time just go around with our customers asking for better visibility in their products and product flow, as being the best way to help them.

And that keeps them from sort of doubling up on their current orders asking for all of it at once. Because the truth is they’re not going to get as they never were in a shortage before. But, this certainly helps us have orders that now coincide with the lead times that are out there from the suppliers.

And that will help with a better flow and hopefully keep inventories at a level that we don’t have a big crash at the end of this, which is something that you guys have seen before, not recently, because we haven’t had a shortage level like this for some time, almost 10 years or something.

But I think the way of being handled, we’re planning on it being a smoother ending than the rough ending that we typically expected in a downturn. So, we’ll see how much we’ve learned if the visibility helps to solve, but I believe it’s going to..

Got it. That’s very helpful. As a follow-up on ECS, I think, American ECS revenue was down 10% year-over-year. And I think that’s consistent with the previous two quarters.

Can you maybe just talk about what you’re seeing in the end markets? And we have heard some SMB demand recovery, but it seems like that’s not quite reflected in your ECS segment?.

Yes, sure. So, just in terms of some of the market and technology trends that we saw in Q4, and this is generally true for all of our regions. But, I think, we’re still seeing some benefit from the remote work initiative, if you will, still has some legs. And that benefits multiple pieces of our technology portfolio.

I think right now, all things cloud, and cybersecurity remain in good demand. And the good news is, we’ve got good exposure to both of those technology sets. And then, I think, you heard Mike talk a little bit in his opening remarks, there is a reality where you can’t get inside all the data centers yet.

And so, that tends to slow work that needs to be done on-premise with existing application environments. I think, we saw a little bit of improvement in that regard in Q4. And again, depending on when the broader market comes back, we should see more of that over time..

Your next question comes from Matt Sheerin with Stifel. Your line is open..

Yes. Thank you, and hello, everyone. The question, Mike, regarding your Asia component business which as you said, was up a very strong 50-plus percent year-on-year.

How much of that was from underlying business versus share gains and specifically where the TI? And could you comment on how that transition has been going? And, are you seeing opportunities for cross-selling additional semiconductors and other components into that customer base that you may not have been serving previously?.

Well, any time you get a new customer, there’s a new opportunity. Right, Matt? So, the nice thing that we have seen overall -- and I don’t know that the transition business has much play in this, but we did see an increase in sales of other components also in Asia Pac.

It was expected, even with some of the transfer business you guys have alluded to before, we’ve said they were really the first to come out of COVID. So, they’re starting to turn back on. Europe is sort of the second one to come out of this cover thing. We’re starting to see that turn on ahead of North America.

And hopefully, as North America turns back on pre-COVID, we’ll see the increase we’re all finally hoping for here. And I think that’s really what you’re seeing is that these economies are turning on at a different time, but I believe that has to play in it, and fully expect that Asia will continue to grow.

We have added a lot of salespeople in the Asia region. And that goes part and parcel with the growth. You do that naturally. There’s no change in strategy in Asia. We still believe we’re operating the way we should there, just like we believe we’re operating the way we should in Europe and North America.

And at this time, I think, the biggest hindrance we have, Matt, has nothing to do with Asia and really has everything to do with North America, and that’s where we’re focusing now to figure out is there anything we can do to make North America grow faster? And we’re going to do it, if we can..

Okay. Thanks for that. And just related to that, given the outsized exposure to Asia now, your gross margins have been trending down year-on-year. I mean, Chris, what should we be thinking about gross margin, particularly? I mean, you’ve got some improvements in North America and Europe, but the Asia business is still growing pretty fast here.

So, how should we be modeling down gross margin?.

Yes. I mean, I think as we look forward, we’ll continue to see improvement as EMEA and Americas come out of COVID, as Mike said. I think, the other thing you’ll see obviously is operating leverage. And, we have talked in the past about continued growth in our value-added services and offerings that we can bring customers that ultimately help GT.

And I think you’ll see them in that worth. So, in terms of kind of predicting that over the course of the year, tough to do. But, I fully expect that as we exit 2021, you’re going to see stronger margins than we exited 2020 with, as a result of all of those things. So, that’s a high level how I think about it.

And in the near term, we’re focused on driving the operating leverage as the mix improves..

Your next question comes from Ruplu Bhattacharya with Bank of America..

I have two for Chris. The first one on ECS margins. Fourth quarter is typically strong, and this quarter, we’re certainly at 6.3%.

Can you help us understand the 190 bps sequential improvement? How much of that was higher volumes? How much of that was FX? How much of that was mix? And then, the next part of that is, looking into the first quarter, if I look at the year ago quarter, it was -- you had a steep decline from 4Q to 1Q.

But, now that the business mix in ECS is improving to higher software and services, can you give us your sense of what type of a decline we should expect sequentially in ECS margins?.

So, Ruplu, really, if you look at Q4, the key driver was mix, as Sean mentioned earlier. So, as we see more shift to our software and services portfolio, those are higher margin.

As we said, that obviously impacts sales growth, right? We’ve talked about that a lot in the past because of the gross to net accounting that takes place, but it is margin accretive. And as we look to Q1, we’ve got margin expansion as well year-over-year, and we expect that trend to continue.

So, the mix trends -- product mix trends in that business are very positive. And as Sean mentioned earlier, our focus on hybrid and multi-cloud environments are a big reason behind that. And that’s going to continue..

Okay, got it. And then, maybe for my second question, I just wanted to delve a little bit deeper into the quarter closing dates comments that you had.

So, are we -- is the net takeaway that the first quarter is going to be stronger and the fourth quarter should be a little bit weaker, because there’s one less week in the fourth quarter and one more in the first quarter? And if so, what kind of dollar impact are we talking about?.

Yes. I think -- so, when you look at the impacts of the change in the calendar year-over-year, it’s beneficial to the way we look at EPS because so much of that business is calendar quarter-end dependent. So, in Q1, we picked up calendar quarter end. And what happened last year is Q4 was really a big quarter.

So, I think you’re going to see a Q1, Q4 shift year-on-year, where Q1 will be relatively stronger and the offset will take place in Q4..

Your next question comes from Joe Quatrochi with Wells Fargo..

On component shortages, it seems more like that this time around, it’s on the ASIC side versus last time it was more about passes and MLCCs.

Mike, I’m just curious, how do you think about the supply side ability to catch up this time? And, how do you think about that from your approach, do you approach that any differently?.

Well, basically, look at the sales for the fourth quarter of everybody that was out there. It was largely a good quarter, right? So, not a surprise that you’re seeing some shortages given the uptick. It’s typically been kind of a 10%, if you want to put a number on it when the business goes up, before you start seeing some shortfalls out there.

And that’s just a given of the supply chain, but the supply chain has increased. It still looks as though there’s more increasing coming on, if I can say that, after COVID, things are looking up, as we said, in Europe already. So, we’re hoping North America does the same. And, the trick there is visibility.

How much visibility can we give the manufactures of what we really need during the quarter. So, in the past, as I’ve said, our book-to-bill went into the manufacturer, and they would see this big glob of stuff and we’d be active for everything right now. This time is measured.

We need X amount in January, we need a certain amount in February, we did a certain amount in March. We’re getting the next quarter. We know April, May and June, and then we can talk to you about after that. So, the industry has responded well, where we’ve asked for them to place their orders out further.

That’s one of the reasons actually that we didn’t publish our book-to-bill without an explanation this quarter, because you would see a big book-to-bill, but there is a big portion of that that goes into Q2 and starts to go into Q3.

So, my view is, yes, it could be hand to mouth for a little while, but I think things are going to largely make it through the night. And, I believe everybody is digging to make that happen, and they will..

That’s helpful. And then, on the ECS side, you recently announced an extension of our partnership with AWS. I was curious if you could talk about that opportunity.

And then, maybe can you remind us how big is your cloud business, or maybe what was that from a revenue perspective last year?.

Sure. Thanks. So, what I can tell you is, we are still growing our overall cloud business and then the recurring revenue piece of it substantially. And I think, I’ll work with Steve and Chris, and at the right time, we’ll be able to get more specific about actual numbers, but we continue to invest in that market trend.

And I think we’re lining up to it nicely. As for the cloud portfolio, we continue to add supplier solutions to it. You called out the partnership with AWS. But, we wouldn’t talk specifically about the size of any supplier relationship.

We are pleased to now be working with the five largest cloud hyperscalers in the world, and the way that we go to market and the value they see in our channel.

That particular relationship to Mike’s earlier point, is really going to help us in sort of the IoT or the IT meets OT, space we think, over time, given the potential associated with our full portfolio..

And your last question comes from William Stein with Truist Securities..

I’d just like to ask about the decrease in inventory. That was something that was certainly expected, given the comments from many of your suppliers about the shortages and such.

What does Arrow see from the perspective of the potential to refill that to improve delivery stats for customers? Is that something you think could get back to more normal levels in a couple of quarters, or do you see that as being sort of at this protracted lower level through the whole year and maybe even longer?.

I’m not sure it’s protracted lower level. I think, we’re talking about, what, $50 million, $40 million..

It’s relatively flat..

It’s basically flat. We’re seeing flat inventories, and you just saw a big number come out of the inventory level that we finished with. As I said, I think you’re going to be seeing more hand to mouth. We’re probably going to be getting more shipments in per month now than sort of just a few quarters from manufacturers.

That’s sort of the diligence that has to be on this at that point. And I don’t expect that to, as I said, be a problem. We gave you forecast for the first quarter that is largely -- I guess, it’s better than the fourth quarter for components. And, we believe we can do that.

We don’t believe that inventory level that you just brought up is an obstacle for us to be able to deliver that number. So, hopefully, that answers your question..

Okay. I’d now like to turn the call back over to Steve O’Brien for closing remarks..

Thanks, everybody, for joining us today. If you have any questions about the call or our earnings materials, feel free to reach out to me. Thanks for your interest in Arrow Electronics. And have a nice day..

This concludes today’s conference call. You may now disconnect..