Arrow Tech Sales Stumble As Customers Delay Hardware Decisions

North American technology sales dipped slightly at Arrow Electronics as end users paused to evaluate hardware options due to a multitude of new architecture options.

However, overall global sales for the Centennial, Colo.-based distributor in the quarter ended June 27 climbed 2.7 percent, to $5.83 billion, fueled by strong demand in the software and security segments. This beat Seeking Alpha projections of $5.71 billion.

Non-GAAP profits for Arrow climbed 3.2 percent in the most recent quarter, to $148.9 million, or $1.54 per diluted share, besting Seeking Alpha estimates of $1.50 per share.

[Related: CRN Exclusive: Networking Startup Plexxi to Sell Solely Through Arrow]

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Wall Street responded favorably to the news, with Arrow's stock climbing 6.9 percent Tuesday afternoon to $56.47 per share. Earnings were released before the market opened Tuesday.

The picture was more mixed, however, on the Enterprise Computing Solutions (ECS) side of Arrow's business, where sales climbed 1.6 percent, to $2.13 billion, after adjusting for the impact of acquisitions and changes in foreign currencies.

Europe really carried the water for Arrow's ECS business, with sales soaring 7.7 percent, to $678.3 million, after adjusting for acquisitions and foreign currency changes. It was a different story in the Americas, though, where revenue fell 1 percent in the most recent quarter, to $1.45 billion, after adjusting for acquisitions.

As technology options multiply, many customers are needing to decide whether they want to stick with a traditional, on-premise infrastructure or upgrade to a converged, hyper-converged or flash storage option, said Michael Long, Arrow's chairman, president and CEO.

But customers are taking longer than Arrow anticipated to evaluate all of the new technology options, resulting in hardware closure rates falling below anticipated levels, according to Sean Kerins, president of Arrow's ECS business.

"There's a lot happening in that hardware segment," Kerins said.

Arrow is not a distribution partner of Microsoft's, and therefore didn't receive a sales bump from end users who upgraded from Server 2003 to Server 2012 R2 or Microsoft Azure.

For this reason, Arrow's year-over-year industry-standard and proprietary server sales actually declined in the Americas, resulting in software and services making up a larger-than-anticipated portion of the sales mix.

Kerins said he thought the hardware purchasing paralysis was more of an issue in North America than Europe as customers in the United States and Canada have had more exposure to the new technologies.

Additionally, Long said that Arrow has lower market share in Europe, making it easier for the distributor to offset delayed hardware decisions by bringing on new customers. Arrow has less room to grow in the United States given that it already has very strong market share, he said.

Long said he doesn't anticipate that this problem will persist, and said sales next quarter for the ECS business in the Americas should be in line with seasonality.

The rest of the sales picture in the Americas was rosier, with security and virtualization driving double-digit growth in software revenue. Arrow's cloud initiatives -- which are oriented around hybrid cloud orchestration and migrations to cloud-based managed services -- also fared well in the most recent quarter, Long said.

Evolving data center requirements in Europe contributed to Arrow's strong ECS performance in the region, Long said, with proprietary servers, storage, software, services and networking all experiencing strong growth in the second quarter.

Arrow is projecting total sales of $5.55 billion and $5.95 billion in its next quarter, with ECS contributing revenue of between $1.9 billion and $2.1 billion. Diluted earnings per share are expected to come in at between $1.40 and $1.52 per share, the company said.

Thomson Reuters had projected overall sales of $5.65 billion in the next quarter on earnings of $1.42 per share.