Arrow Electronics Q2 2026 Earnings Call Transcript

Arrow Electronics (NYSE: ARW ) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call. This content is powered APIs. 45, up 124% year over year.

The company's growth is driven by broad-based demand in sectors like AI, aerospace, defense, and transportation, with significant contributions from value-added services such as supply chain management. 6 billion, with both segments showing strong year-over-year growth. 2 billion and maintaining strong growth expectations across its business segments. The company announced the appointment of Dee Merriweather as the new President and COO, enhancing the executive team with her extensive distribution experience.

Full Transcript OPERATOR Good day and welcome to the Arrow Electronics second quarter 2026 earnings call. Today's conference is being recorded and at this time I would like to turn the conference over to Michael Nelson, Arrow's Vice President of Investor Relations. Please go ahead. Michael Nelson, Vice President of Investor Relations Thank you, operator.

I'd like to welcome everyone to the Arrow Electronics second quarter 2026 earnings conference call. Joining me on the call today is our Interim President and Chief Executive Officer Bill Austin, our Chief Financial Officer Raj Agrawal, our President of Global Components, Rick Marano, and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call we'll make forward-looking statements, including statements about our business outlook, strategies, plans and projections regarding 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 due to the risk factors and other factors described in this quarter's associated earnings release, our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results.

We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. com along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions.

I'll now hand the call over to our Interim President and CEO, Bill Austin. Bill Austin, Interim President and Chief Executive Officer Thank you, Michael, and good afternoon, everyone. We appreciate you joining us for a discussion of our second quarter 2026 results. Before turning to our results, I want to thank our team across the globe.

Their commitment to serving our suppliers and customers is a key reason why Arrow delivered another strong quarter. Starting on slide three, we delivered excellent results in the second quarter. Total revenue of $10 billion increased 32% year over year and operating margin expanded 120 basis points year over year to 4%, each of which exceeded expectations. 45, representing a significant increase of 124% year over year.

Our strong results this quarter were underpinned by four primary drivers: one, sustained unit volume growth with incremental benefits from price inflation; two, disciplined execution as we managed expenses and working capital against the backdrop of solid customer demand; three, positive operating leverage resulting in year over year margin expansion; and four, favorable mix of higher-margin value-added services. Global Components once again performed exceptionally well with strength across geographies, industry verticals and customer mix.

Similarly, within ECS we continue to benefit from long-term secular demand trends around cloud, cybersecurity infrastructure, software and AI-driven workloads while continuing to execute our strategy around higher-value software and services. Raj will share more details on our financial performance in a moment, but first I would like to spend a few minutes discussing several key themes from the quarter that reinforce our confidence in the sustainability of the business and growth strategy. First, our leading indicators continue to give us enhanced visibility and conviction in our operating model.

Book-to-bill ratios improved further and remain well above parity while our backlog continues to build into 2027. Importantly, these leading indicators further strengthen our confidence in the durability of demand and sustainability of our growth trajectory. Second, our growth remains largely customer demand driven. While we have seen incremental benefits from inflation, the primary driver of growth has been increased unit volume.

Not only are we benefiting from ongoing AI investment trends, but we are also experiencing strength in industrial, aerospace and defense, and the reemergence of transportation. Third, growth is broad based and we are still in the early stages of a mass market upturn as backlog from our mass market customers continues to slowly ramp. Fourth, value-added services remained a differentiator with supply chain services once again contributing significantly to overall profitability. Encouragingly, these favorable demand signals are interconnected with each contributing to a broader opportunity set across our portfolio.

As we have highlighted previously, Arrow remains well positioned at the intersection of several attractive secular growth markets, allowing us to benefit from their continued expansion. Finally, the quality of our growth continues to improve, supported by a more favorable mix of customers and geographies, contribution from value-added services and ongoing productivity gains across the business. Combined with the structural changes we have made to reset our business model and our disciplined expense management, these factors are enabling us to deliver meaningful operating leverage and generate strong incremental returns.

Turning to slide four, I would like to briefly revisit four pillars of our investment thesis and why we believe Arrow remains uniquely positioned for long-term growth and an attractive investment opportunity. I have discussed these pillars over the past several quarters and you are starting to see the true strength of the business come through in our results. First, Arrow maintains a strong position in large and growing markets and plays a critical role in our six core markets of industrial, transportation, aerospace and defense, medical, consumer electronics and data center.

These end markets are supported by favorable secular trends that continue to create growth opportunities. Second, Arrow has differentiated capabilities driving profitable growth. We are benefiting from a richer mix of higher-value service offerings including supply chain services, engineering and design services and integration services. Notably, these offerings build upon our long-standing strengths in our core distribution franchise and represent a natural extension of the capabilities that have long differentiated Arrow in the marketplace.

We continue to expand our suite of differentiated capabilities that deepen customer engagement and further differentiate Arrow. We recently introduced Digital Test Drive, a new remote AI-driven engineering platform that allows customers to evaluate hardware, benchmark performance and accelerate product development without the logistics and delays associated with physical evaluation of equipment. This expands our ability to support customers globally while increasing the efficiency and scalability of our engineering services. Additionally, our eInfochips business continues to strengthen its position as a leader in engineering services.

Its differentiated silicon-to-cloud capabilities help customers navigate increasingly complex product life cycles. During the quarter, eInfochips was recognized in Gartner's Emerging Market quadrant for physical AI services, reinforcing the strength of our technical capabilities in this rapidly evolving market. We also recently expanded our ECS Experience Centers, providing partners access to more than 100 prebuilt hybrid infrastructure, cybersecurity and AI solutions alongside our engineering expertise to accelerate solution development and deployment. Historically, these engagements have resulted in a proposal close rate of approximately 90%.

I'm proud to share that Arrow recently earned three key Microsoft distinctions for our ECS business: Frontier Distributor Status, specializations in Copilot and Azure Virtual Desktop. Together they validate our scale and expertise across AI, cloud and the modern workplace, strengthening our ability to help channel partners deploy scalable solutions through ArrowSphere and supporting continued growth in recurring cloud consumption. Third, Arrow has a diversified business model that provides financial flexibility supported by a strong balance sheet and consistent free cash flow generation.

The combination of our Global Components and ECS businesses is a strategic advantage, allowing us to participate across the full technology lifecycle. And fourth, our focused capital allocation strategy is designed to maximize shareholder value by deploying capital where we expect the highest long-term risk-adjusted returns. We will continue to reinvest in the business to drive organic growth, evaluate disciplined M&A opportunities and return excess capital to shareholders while maintaining an investment grade credit rating.

Turning to slide five, we are very pleased with the strong results we delivered during the second quarter, which reflect our team's disciplined execution and the progress we have made over the past several years. We continue to build on our traditional distribution DNA, while expanding our higher-margin value-added services across both Global Components and ECS, creating a broader portfolio of solutions that strengthen customer relationships and improve the quality of our earnings.

We believe Arrow is uniquely positioned across both the hardware and software technology ecosystems, giving us the opportunity to participate broadly as our customers continue investing across the full technology lifecycle. As we enter the second half of the year, our focus remains on improving the quality of our growth, and through strong execution and disciplined financial management, we continue to make targeted investments in opportunities supported by customer demand and attractive long-term returns while maintaining a highly efficient business model, which we expect will drive additional positive operating leverage.

We are confident in the direction of the business, encouraged by the opportunities ahead and remain focused on creating sustainable long-term shareholder value. With that, I'll turn it over to Raj to discuss our financial performance in more detail. Raj Agrawal, Chief Financial Officer Thanks, Bill. 4 billion year over year to $10 billion, exceeding our guidance range and up 32% versus the prior year, or up 30% versus the prior year on a constant currency basis.

2% was flat versus the prior year. Our second quarter non-GAAP operating expenses increased $88 million year over year to $719 million, primarily driven by variable costs and FX. 1%. We continue to focus on disciplined, profitable growth, and our efforts around operational efficiency are driving substantial operating leverage in the business.

In the second quarter, non-GAAP operating income increased $188 million year over year to $403 million. Non-GAAP operating margin rate expanded 120 basis points year over year to 4% of sales. Interest and other expenses was $37 million in the second quarter as we benefited from lower average debt levels throughout the quarter, and our non-GAAP effective tax rate was 23%. 45, which was above our guidance range, driven by a number of factors including favorable sales volume, continued strength of our value-added services, operational leverage from productivity initiatives, and lower interest expense.

Turning to Slide 7, let's take a closer look at our Global Components business. 4 billion in the second quarter, above our guidance range and up 11% versus the prior quarter. Global Components non-GAAP operating income increased $32 million sequentially to $397 million, up 9% from the prior quarter. 4% and were up 180 basis points versus the prior year and well ahead of expectations.

The growth that we experienced in the second quarter was once again broad-based across geographies, industry verticals, and customer segments, underpinned by healthy trends in our leading indicators. Book-to-bill ratios continued to increase and remain well above one in all three regions. Overall lead times continue to extend for certain technologies, but they remain lower than a pervasive shortage environment. Customer order patterns broadly are normal in size and pace, reflecting a rational market environment.

Our backlog construct continues to grow and is building out into the first half of 2027, giving us visibility and confidence in the sustainability of the business's momentum. Encouragingly, the growth that we are seeing continues to be led by customer unit demand, with some incremental lift from price inflation. Price inflation contributed roughly one third of the sequential revenue growth in our Global Components business. Memory now represents a low double-digit percentage of total segment revenue.

Our strategy remains focused on profitable growth, and our execution is driving a healthier business mix. First, while we continue to benefit from secular growth trends related to AI and data center, we are experiencing broad-based demand across our portfolio rather than concentrated in a single market. Strength in aerospace and defense, industrial, and the reemergence of transportation, particularly in the West, are presenting tailwinds to our Global Components business. These are our three largest verticals globally.

Second, book-to-bill ratios and backlog across our mass market segment continue to improve, and we believe there is still healthy runway. Third, interconnect, passive and electromechanical components, or IP&E, continue to grow, surpassing $1 billion in sales for the second consecutive quarter. Fourth, our value-added services, primarily supply chain services, made another meaningful contribution to our overall second quarter operating income. These capabilities expand our addressable market, deepen customer engagement, and increase the durability of our earnings.

Lastly, we have remained disciplined with our cost structure and have added positive operating leverage to our model. This discipline is expected to drive continued flow-through as the broader market grows and expands. Taking a closer look at each of the regions: in the Americas, sales growth was broad-based, highlighted by strength in aerospace and defense, industrial, and transportation. In EMEA, the market was underpinned by strength in transportation and aerospace and defense.

And finally, in Asia, sequential growth was driven by industrial, transportation, and demand for data center computing power. 6 billion, above our guidance range and up 14% versus the prior year, or up 13% year over year on a constant currency basis. 9 billion, up 14% year over year. Our Global ECS business is strategically positioned at the complex end of the IT stack, where hybrid cloud and AI demand is driving healthy backlog growth of over 75% year over year, finishing the second quarter at another all-time high.

We are experiencing strength across our portfolio of cloud, cybersecurity, data protection, data intelligence, and infrastructure software. Today, hardware solutions for on-premise storage and compute remain constrained by thin supply, mostly due to memory and SSD shortages. However, our role in the middle of technology makers and channel partners allows us to source, provision, manage, and scale alternatives that lean more on the software and public cloud solutions that we offer, and our single integrated ArrowSphere platform continues to help drive these efforts, unlocking deeper engagement and recurring revenue volumes.

In the second quarter, we took a charge on certain underperforming multiyear contracts with one of our partners. As a result, second quarter ECS non-GAAP operating margins declined 100 basis points year over year due to the charge.