Earnings call transcript: Arrow Electronics Q2 2025 beats EPS expectations

Arrow Electronics Inc. (ARW) reported robust financial results for the second quarter of 2025, surpassing analyst expectations with an earnings per share (EPS) of $2.43, compared to the forecasted $2.06. This 17.96% earnings surprise was complemented by a revenue increase to $7.58 billion, exceeding the anticipated $7.15 billion. According to InvestingPro analysis, the company maintains a strong financial health score of 2.59 (rated as GOOD) and appears undervalued based on its Fair Value metrics. Despite these positive results, Arrow Electronics’ stock fell by 10.62% to $129.78 in aftermarket trading, reflecting investor concerns over future market conditions and other underlying factors.

Key Takeaways

• Arrow Electronics’ EPS exceeded forecasts by nearly 18%.
• Revenue grew by 10% year-over-year to $7.6 billion.
• Stock price dropped by over 10% post-earnings announcement.
• Inventory levels improved, with a reduction in the cash conversion cycle.
• Strong performance in Asia and resilience in aerospace and defense sectors.

Company Performance

Arrow Electronics demonstrated strong financial performance in Q2 2025, with consolidated sales reaching $7.6 billion, marking a 10% increase from the previous year. Trading at attractive revenue multiples and maintaining a healthy free cash flow yield of 16%, the company shows robust fundamentals. This growth was driven by the first year-over-year increase in Global Components since 2022 and double-digit growth in Enterprise Computing Solutions (ECS). The company also highlighted the success of its digital platform, Aerosphere, which is pivotal for mid-market expansion. InvestingPro subscribers can access 8 additional exclusive insights about Arrow Electronics’ growth potential and market position.

Financial Highlights

• Revenue: $7.6 billion, up 10% year-over-year
• Non-GAAP Gross Margin: 11.2%, a decrease of 110 basis points YoY
• Non-GAAP Operating Income: $215 million, representing 2.8% of sales
• Non-GAAP Diluted EPS: $2.43, above guidance
• Inventory: $4.7 billion, decreased modestly from the previous quarter

Earnings vs. Forecast

Arrow Electronics posted an EPS of $2.43, significantly higher than the forecasted $2.06, resulting in a 17.96% earnings surprise. Revenue also exceeded expectations, coming in at $7.58 billion against the forecast of $7.15 billion, a 6.01% surprise. This performance highlights the company’s ability to outperform market predictions, continuing a trend of positive earnings surprises in recent quarters.

Market Reaction

Despite the positive earnings report, Arrow Electronics’ stock price fell by 10.62% to $129.78 in aftermarket trading. With a moderate beta of 1.1 and historically low price volatility, this sharp decline stands out. This drop occurred even as the stock reached a pre-earnings price of $130 in premarket trading. The stock’s movement contrasts with its 52-week high of $137.8, indicating investor caution despite strong quarterly results and management’s aggressive share buyback program. For detailed analysis of Arrow Electronics’ valuation and growth prospects, access the comprehensive Pro Research Report available on InvestingPro.

Outlook & Guidance

Looking ahead, Arrow Electronics projects Q3 sales between $7.3 billion and $7.9 billion, with Global Components and ECS segments expected to contribute significantly. The company provided a non-GAAP EPS guidance range of $2.16 to $2.36, reflecting a cautious yet optimistic outlook for the upcoming quarter. CEO Sean Carans expressed confidence in a modest market recovery and better-than-seasonal sales patterns for the remainder of the year.

Executive Commentary

CEO Sean Carans emphasized the company’s positive outlook, stating, "We are optimistic as we look to the near future." He also highlighted the potential for a cyclical recovery, suggesting that Arrow Electronics is well-positioned to capitalize on improving market conditions. Carans added, "We want to be leaning in as the market recovers, we can best support them."

Risks and Challenges

• Potential supply chain disruptions could impact inventory management and delivery timelines.
• Market saturation in key segments may limit growth opportunities.
• Macroeconomic pressures, including inflation and interest rate fluctuations, could affect profitability.
• Competitive pressures in the technology and electronics sectors remain a concern.
• Geopolitical tensions could disrupt operations in key regions.

Q&A

During the earnings call, analysts inquired about the company’s inventory management strategies and the dynamics of market recovery. Management addressed concerns regarding margin stability and provided insights into regional performance variations. Additionally, discussions on customer inventory destocking trends were highlighted, reflecting a broader industry movement toward inventory normalization.

Full transcript - Arrow Electronics (ARW) Q2 2025:

Conference Operator: Good day, and welcome to Arrow Electronics Second Quarter twenty twenty five Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Rick Seidlitz, Arrow’s Vice President of Investor Relations. Please go ahead.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: Thank you. I’d like to welcome everyone to the Arrow Electronics second quarter twenty twenty five earnings conference call. Joining me on the call today is our President and Chief Executive Officer, Sean Carans and our Chief Financial Officer, Raj Agarwal 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 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 and our most recent annual report on Form 10 ks 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. You can access our earnings release at investor.aero.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, Sean and Raj will be available to take your questions. I’ll now hand the call over to our President and CEO, Sean Carranz.

Sean Carans, President and Chief Executive Officer, Arrow Electronics: Thank you, Rick, and thank you all for joining us. Today, I’d like to discuss our second quarter results, provide some commentary on the broader market environment and then close with some thoughts as we look to the balance of the year. I’ll then turn things over to Raj for more detail on our financials as well as our outlook for the third quarter. For the second quarter, we delivered sales as well as earnings per share that exceeded the high end of our guidance ranges with solid contributions from both of our operating segments. In Global Components, our momentum was punctuated by year over year growth for the first time since 2022 with strength in Asia and improving trends across our Industrial and Transportation market segments.

And in Enterprise Computing Solutions, we delivered year over year billings and gross profit dollar growth based on strength both on premise and in the cloud as well as in both of our operating regions. Taking a closer look at our Global Components business, the prolonged cyclical correction is yielding to early signs of a market recovery. All three of our operating regions again delivered sales in excess of typical seasonality. Demand trends were highlighted by broad strength in Asia, improving activity levels in our industrial and transportation markets on a global basis and healthy aerospace and defense patterns in Western markets. Additionally, our sales for IP and E components once again grew sequentially, but now also year over year underscoring our continued commitment to specialization in this accretive and resilient market segment.

Lastly, our value added offerings, namely supply chain management, engineering and design and integration services contributed nicely to our operating margin stability. And for some color commentary on a regional basis, in The Americas, the industrial and aerospace and defense markets drove our results supported by resilience in transportation. In Asia, our sequential growth was broad based in nature, highlighted by strength in industrial, compute and consumer along with continued EV momentum in the transportation sector. And finally, our sales in EMEA grew sequentially despite macroeconomic and geopolitical headwinds. Results were marked by strength in industrial, transportation and aerospace and defense markets.

Now as we look at the market more broadly, our book to bill ratios are above parity in all three regions. While lead times still approximate pre pandemic norms, our backlog further improved, growing for a second consecutive quarter. Throughout our large OEM customer base, inventory levels are normalizing, illustrated through more sustainable order patterns providing us with visibility into the real demand. We also believe our mass market customers are still in the later stages of destocking, suggesting there’s still runway for a broader market recovery, particularly in the West. And finally, as in prior cycles, we expect to follow the suppliers that we represent, many of whom are now calling for growth through the balance of the year and beyond.

The shape and slope of this recovery remain difficult to predict, but we believe these leading indicators point to a modest recovery taking flight. Our Q3 guidance reflects the continuation of these trends highlighted by mid single digit sales growth and operating margin stability, while still navigating headwinds related to regional and customer mix. In regard to tariffs, due to uncertainty around future trade policy, we saw modest order acceleration in Asia alongside less tariff uplift than anticipated in The U. S. These dynamics did not materially impact our second quarter results nor have we contemplated any material impact in our third quarter guidance.

While the current trade environment continues to evolve, I’d like to reiterate Arrow’s focus on helping our customers navigate the associated complexity. We will continue to lean on our global footprint of supply chain assets as well as our portfolio of services to help them do so. Now turning to our global ECS business. In the second quarter, we delivered year over year double digit growth in billings and gross profit as well as operating income when normalized. The results were highlighted by solid contributions from both of our operating regions.

Our performance in EMEA was broad based with year over year billings growth in cloud, infrastructure software and cybersecurity. And in North America, we saw continued acceleration in our cloud portfolio alongside strength in infrastructure software and data storage. Our efforts to align our go to market strategy in North America in a way that mirrors our success in EMEA is starting to pay dividends. Looking to the future, we again enjoyed backlog growth in excess of 50% year over year. We believe this reflects our alignment to some very promising demand trends, many of which are now served on an as a service basis.

Examples include hybrid cloud solutions, the deployment of infrastructure software in areas such as virtualization and data protection, and the early innings of AI in the traditional data center. In addition, our focus on the mid market enabled by the continued adoption of our digital platform Aerosphere positions us nicely for ongoing customer base expansion. With all of that in mind, our third quarter outlook again suggests healthy performance in both operating regions poised for year over year growth in billings, gross profit and operating income. In closing, despite various market and geopolitical uncertainties, we are optimistic as we look to the near future. In Global Components, the evidence of cyclical recovery suggests we’ll enjoy better than seasonal sales patterns for the balance of the year.

In Enterprise Computing Solutions, it’s clear to us that our momentum will continue to build across the full second half. And for the company overall, our ongoing productivity initiatives will benefit us at more scale. As always, the credit for our progress belongs to all of the Aero teams and employees throughout the world. I’m thankful for their dedication to our suppliers, our customers and each other. And with that, I’ll hand the mic over to Raj.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: Thanks, Sean. Consolidated sales for the second quarter were $7,600,000,000 exceeding our guidance range and up 10% versus prior year or up 8% year over year on a constant currency basis. Global Components sales were $5,300,000,000 above our guidance range and up 11% versus prior quarter or up 8% sequentially in constant currency terms. You will recall that in our Q2 outlook that we provided last quarter, we highlighted a potential 2% to 4% incremental lift to global component sales from tariff billing impacts. In our second quarter results, we attribute around 1% of sales to these impacts.

Additionally, as Sean mentioned, we saw modest order acceleration related to tariff expectations, particularly in Asia, and we believe the impact could be 1% to 2% on second quarter sales. Enterprise computing solutions sales were $2,300,000,000 above our guidance range and 23% higher than prior year or 20% higher year over year in constant currency. ECS billings grew 15% in the second quarter compared to the same period last year. Moving to other financial metrics for the quarter. Second quarter consolidated non GAAP gross margin of 11.2% was down approximately 110 basis points versus prior year driven primarily by regional and customer mix in Global Components and by product mix in ECS.

Global Components non GAAP gross margin was 11.2% down 40 basis points sequentially due to regional and customer mix and Enterprise Computing Solutions was 11.2% on a non GAAP basis. Our second quarter non GAAP operating expenses grew $38,000,000 sequentially to $631,000,000 due largely to variable costs to support top line sales growth as well as the impact of currency exchange rates. Also, although we have returned to growth, we remain committed to executing against our productivity initiatives, which will provide increasing benefits in the second half of this year. The second quarter, we generated non GAAP operating income of $215,000,000 which was 2.8% of sales with Global Components operating margin at 3.6% and Enterprise Computing Solutions at 4.3% both on a non GAAP basis. As a reminder, ECS operating income in the 2024 included a $20,000,000 benefit for the collection of certain aged receivables related to one customer.

Interest and other expense was $60,000,000 in the second quarter and our non GAAP effective tax rate was 17.6%, which is well below our typical range of 23% to 25% due to certain benefits which we are not expecting to recur in the third quarter. We expect both interest expense and taxes to be a drag on third quarter EPS when compared to the second quarter. And finally, non GAAP diluted EPS for the second quarter was $2.43 which was above our guided range mainly due to favorable sales results and a lower tax rate. Turning to working capital. Net working capital grew sequentially in the second quarter by $456,000,000 ending the quarter at $6,800,000,000 However, our cash conversion cycle improved by ten days in the second quarter to sixty eight days.

Inventory at the end of the second quarter was $4,700,000,000 down modestly quarter over quarter and our inventory turns improved to our highest rate in over two years. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues. Cash flow used for operating activities in the second quarter was two zero six million dollars In conjunction with cash generated in the first quarter, on a year to date basis, cash flow from operations was $146,000,000 Gross balance sheet debt at the end of the second quarter was $2,800,000,000 or flat quarter over quarter. We repurchased $50,000,000 of shares in the second quarter and our remaining repurchase authorization stands at approximately $225,000,000 In the short term, we are continuing to balance our capital priorities with managing our debt ratios. Now turning to Q3 guidance.

We expect sales for the third quarter to be between 7,300,000,000.0 and $7,900,000,000 We expect global component sales to be between 5,300,000,000.0 and $5,700,000,000 which at the midpoint is up 4% from prior quarter. In Enterprise Computing Solutions, we expect sales to be between $2,000,000,000 and $2,200,000,000 which is up approximately 12% at the midpoint year on year. In our outlook, we have factored in the direct billing impact from tariffs. Based on tariffs already in place, we estimate that this impact on global component sales will be similar in magnitude when compared to the second quarter. We have not factored in our guidance any assumptions around evolving trade policies nor does our outlook assume any order acceleration from customers.

We’re assuming our tax rate to return to our typical range of approximately 23% to 25% and interest expense to increase to approximately $65,000,000 as compared to $60,000,000 in the second quarter. And our non GAAP diluted earnings per share is expected to be between $2.16 and $2.36 And finally, given weakness in the U. S. Dollar, particularly relative to the euro, we estimate changes in foreign currencies to be a tailwind in the third quarter. The details of foreign currency impact can be found in our earnings release.

With that, Sean and I are now ready to take your questions. Operator, please open the line.

Conference Operator: Thank you. Your first question comes from the line of Joe Quatrochi with Wells Fargo. Your line is open.

Joe Quatrochi, Analyst, Wells Fargo: Yes. Thanks for taking the question. Maybe just kind of trying to understand the demand dynamics relative to your inventory and how do you think about having the right inventory for maybe signs of a recovery here?

Sean Carans, President and Chief Executive Officer, Arrow Electronics: Sure, Joe. Well, as you know, because you’ve been following us for some time, our inventories are down well more than, maybe $1,000,000,000 from the peak that we saw in late twenty twenty three. And I think in Q2, they came down roughly $50,000,000 or more, something in that range. And we know our turns definitely improved as well. So I would say, in the aggregate, we feel like we’ve done a pretty good job managing inventory throughout this prolonged correction.

There are still some pockets of excess, but we continue to eat away at them. We’re not concerned about the aging profile of the inventory. We believe we’ll sell through it over time and certainly we’re adequately reserved for any risk that we would contemplate. But I think the bigger picture to your question is really all about the market. We pay real close attention to our customers and what they tell us and what they see going forward.

We want to be leaning in as the market recovers, we can best support them. And I think with some of the improving leading indicators we continue to see, we don’t intend to be caught flat footed. So we can expect we will invest in working capital to support growth where and when it makes sense. And I think we’re at that inflection point where we need to best support our customers.

Joe Quatrochi, Analyst, Wells Fargo: That’s helpful. And then maybe one for Raj, like just trying to kind of like the puts and takes of the margin, implied margin guidance for the September and then also kind of balancing that with cost efforts that you guys have been undertaking over the last few quarters? I guess, is it right to think that the margins are slightly down, I think sequentially in the September?

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: That’s probably not a right conclusion, Joe. We see margins being relatively stable certainly at an Aero Inc. Level and also in components. ECS has its own cyclicality that we have to deal with. But the gross margin is likely to see continued mix shift given the APAC growth in components as well as the large customer mix that we have.

But we are certainly offsetting that with some of our productivity and cost savings initiatives. So that is certainly going to mitigate that impact. But we see relatively stable margins quarter over quarter.

Sean Carans, President and Chief Executive Officer, Arrow Electronics: And Joe, I would just add in the Global Components business, gross margin pressure that Raj alluded to is strictly a function of regional and customer mix. As you know, Asia typically leads the globe into recovery and that’s been the case now for a good couple three quarters, and they’re performing well on the sales line. The West will come back, but it’s also a function of customer mix. The larger OEMs are driving our sequential sales growth. We know the mass market will return at more scale.

We’re starting to see evidence of that in our backlog as it builds out in time into Q4 and even a little bit into Q1. When that happens, you’ll see the gross margin line benefit and the operating leverage improve. So we feel good about the fact that the sales momentum has returned. We’ve always known that the operating leverage won’t come until the scale comes back. So we think this is an encouraging sign.

Joe Quatrochi, Analyst, Wells Fargo: Very clear. Thank you.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: Thanks, Joe.

Conference Operator: Your next question comes from the line of William Stein with Truist Securities. Your line is open.

William Stein, Analyst, Truist Securities: Great. Thanks for letting me ask question. I’m hoping you can talk about your customer inventory level to the best of your ability. You talked a moment ago about when the broad based end markets come back that that should be more beneficial to margins. And I think it suggests that perhaps they still have some excess inventory or maybe just demand in those broader end markets is not as robust.

Can you clarify and help us understand that a little bit?

Sean Carans, President and Chief Executive Officer, Arrow Electronics: Yes, sure thing, Will, and thanks for joining. I think we made mention of it in the prepared remarks, but as you know, we’re pretty disciplined about the leading indicators that we monitor. And I would say we definitely are seeing customer level inventories normalize, especially in the larger OEM piece of the market and that’s been driving a level of replenishment activity. And we’re seeing normal booking patterns reemerge if you will. We do think the mass market customer base lags the larger OEMs to your point, with still some destocking playing out.

Obviously, will improve as either lead times extend or end market demand improves more sharply, but I think there’s still some destocking going in, going on in broader piece of our customer base and that’ll play out over time. And as it does, we’ll see that piece of the market return to our mix at more scale and that’s where the gross margin line will benefit most. But there is a difference playing out. Inventory is normalizing in the high end, destocking still playing out in the lower end. And if you think about it, given the shortage market, the larger accounts got the inventory first and have certainly worked their way through good portions of it.

The mass market got it later on and they’re still digesting some of it as we speak.

William Stein, Analyst, Truist Securities: That’s very helpful for sort of more of a demand picture. So thank you for that. On the supply side, are you seeing still very short lead times as I would expect from the supply base? I think they haven’t seen a huge recovery would lead to extended lead times. But are we still seeing many of your suppliers stock from in terms of their lead times?

Or has that begun to reach a

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: more normalized level? Thank you.

Sean Carans, President and Chief Executive Officer, Arrow Electronics: Yeah. You’re right, Will. The lead times basically are stable. We have not seen lead times come in any further, but we also haven’t seen them go out. They’ve been quite level at roughly pre pandemic rates, if you go back to late ’nineteen, early ’twenty, and haven’t moved much over the past two to three quarters at all.

Ruplu Bhattacharya, Analyst: Thank you.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: Thanks, Arun.

Conference Operator: Your next question comes from Ruplu Bhattacharya. Your line is open.

Ruplu Bhattacharya, Analyst: Hi. Thanks for taking my questions. Maybe I’d like to dig a little bit deeper into the ECS segment margins. I mean ECS sales were up 23% year on year, but margins were down about 90 bps. I think Sean, you said something had to be normalized for, so if you can just kind of explain that.

And then how are you thinking about ECS segment margins for fiscal 3Q and beyond?

Sean Carans, President and Chief Executive Officer, Arrow Electronics: Ruplu, let me just start with the basics on Q2 performance in ECS. On a sales basis, we show operating margins declining by maybe 20 basis points year on year. But as we’ve said on multiple occasions, the sales number will vary in some cases quite significantly from one quarter to the next based on mix and based on the rules of agency accounting and that the best way to look at both gross and operating margins is really on a billings basis And that’s partly why we now disclose our billings activity. And if you look at the billings based operating margins in ECS year on year in Q2, they were stable. So we’re very comfortable with the margin profile of the business.

And as the transactional volume continues to scale, we see the operating leverage improving further. In fact, I think if you look at it in Q2, billings were roughly in the neighborhood of 15% year on year, OI grew by almost 18% year on year. So they drove a little bit of leverage in Q2 and I think our guide reflects even better leverage in Q3. So we’re comfortable with the margin profile and we do believe it will improve in the future. The team is driving the right things from a mix perspective.

But again, try not to read too much into the sales based margin profile because it can mislead you from time to time.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: And Rupla, the adjustment you do have to make was from the second quarter of last year. We did receive a $20,000,000 release from a bad debt reserve that we’d previously taken. And so as Sean was explaining it, if you make that adjustment then you can see exactly what he was referring to.

Ruplu Bhattacharya, Analyst: Okay. Thanks for the details there. Can I ask you on component sales? Looks like EMEA sales were down year on year. How do you see that region progressing?

And Sean, overall, guidance for fiscal 3Q components is pretty strong. It’s like above seasonal growth. So what is giving you confidence that that growth continues? I think you said there’s no benefit from tariff related pre buys. So I mean can you is Aerosphere I think is another thing you highlighted.

Is that does that come in Europe and just your overall confidence in the guidance for components? Thanks.

Sean Carans, President and Chief Executive Officer, Arrow Electronics: Sure thing. Well Ruplu as you might recall Aerosphere is a function of our ECS business. It’s the digital go to market platform for that team. So it’s not relevant in the components realm. But if you look at our components business, you’re right.

We were better than seasonal in Q2 in all three regions. Our forecast means better than seasonal again in Q3 in all three regions. And our backlog grew again in Q2 and this time even more substantially than it did in Q1. And the important thing there, Ruplu, is when we look at our backlog is that it’s not just growing in magnitude, it’s growing out in time, meaning into Q4 and a little bit into Q1. But I also think we’re seeing better vertical trends throughout the world and those vertical trends vary a little bit.

So I thought I might have Rick Murano, who is the architect of our go to market motion and Global Components just give you a little more color on that front.

Rick Marano, President of Global Components, Arrow Electronics: Yes. Thanks Sean. And building off to what Sean had said is if you look at globally what we’re seeing is in the West in both aerospace and defense and transportation in aggregate and some industrial in the larger markets, we’re seeing market. And in Asia, where we are in the cycle and the recovery, we’re seeing growth as well. But to Sean’s point, the key is the fundamentals of backlog and backlog growth book to bill are giving us confidence in a recovery that’s starting to take place.

Ruplu Bhattacharya, Analyst: Okay. All right. Thank you. Thanks for the details.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: Thanks, Rupert.

Conference Operator: And there are no further questions at this time. I will turn the call back over to Rick Seidlitz for closing remarks.

Rick Seidlitz, Vice President of Investor Relations, Arrow Electronics: Thank you all again for joining today’s call and have a great day.

Conference Operator: This does conclude today’s conference. You may now disconnect.

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