Non-Traditional Channel Partners Flock To Arrow Thanks To Highly Differentiated Cloud, IoT Practices

Managed services providers and non-traditional VARs are forging new relationships with Arrow Electronics to take advantage of the company's holistic IoT practice and hybrid cloud capabilities.

The Centennial, Colo.-based distributor said its cloud business is on track to have a $1 billion run rate in 2017. That's due, in part, to the robust onboarding of MSPs and other types of non-traditional channel partners that have recurring revenue business models, according to Sean Kerins, president of Arrow's Enterprise Computing Solutions (ECS) business.

If the projections hold, Arrow will have quintupled the size of its cloud business since May 2016, when Chairman, President and CEO Mike Long said the distributor's cloud business was operating at a $200 million annual run rate.

[Related: Arrow Snags $350M of Channel Business From Competitors, Lands Dell Enterprise Portfolio]

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"We are in an unprecedented and very good position, one that we've never been in as a company before," Long told Wall Street analysts Thursday. "There are four viable, very large markets [digital, cloud, sustainable technology, and IoT] that could produce years and years of operating income for Arrow."

Arrow's computing roots are in server and storage technology, and the distributor has therefore historically worked with hardware VARs, many of which focused on the enterprise or upper midmarket. MSPs have therefore not been Arrow's traditional type of channel partner.

"We're continuing to invest in areas that bring new customers in," Long said. "You're going to continue to see this go for quite some time, certainly through 2018."

In addition to attracting non-traditional channel partners, Kerins said Arrow has added more cloud offerings and suppliers to its line card and continues to work on completing API integrations to make the offerings more accessible to solution providers. Arrow has also worked with channel partners to create opportunities to attach cloud offerings to products that are already being sold on premises, Kerins said.

Arrow has benefitted from developing its cloud market and ArrowSphere enablement tool internally, Long said, as this has facilitated the seamless integration of cloud solutions into its selling motion. The market has also increasingly validated Arrow's approach to the cloud, which Long said fuses together on-premise, data center, private and public cloud into a hybrid infrastructure and architecture.

From an Internet of Things perspective, Long said Arrow had been the one-stop shop industry players looking to buy components, access supply chain and manufacturing services, procure compute, storage and cognitive tools, and have sustainable options when their products reach the end of life.

Arrow invested in IoT several years ago, Long said, and now has engineering centers operating around-the-clock all over the world to answer any design-related questions that an engineer might have.

"The majority of the new opportunities coming in here are around IoT," Long said. "We've got engineering capabilities out there that no one else has, and hasn't been close to."

Revenue for Arrow in the quarter ended July 1 was $6.47 billion, up 8.3 percent from $5.97 billion a year ago, which handily beat Seeking Alpha's projection of $6.23 billion.

Net income plummeted to $99.7 million, or $1.11 per diluted share, down 25.8 percent from $134.3 million last year. On a non-GAAP basis, though, net income climbed to $160 million, or $1.78 per share, up 4.7 percent from $152.7 million, or $1.65 per share, last year. That edged out Seeking Alpha's projection of $1.77 per share.

Arrow shares fell $1.25 (-1.53%) to $80.33 per share in trading Thursday. Earnings were released before the market opened.

Second quarter sales for Arrow's global Electronic Computer Systems business fell to $2 billion, down 6.4 percent from $2.14 billion last year due to continued declines in server and storage sales.

The rate of sales decline around Arrow's server business has slowed, Kerins said, while the rate of decline in the distributor's storage business is no longer accelerating.

"When you dig into storage, we're still in the midst of a multi-quarter transition from old tech to new tech," Kerins said. "The crossover is still out in front of us, but I'm pleased with the progress we're making towards it, especially with the newer technologies."

Arrow's converged, hyper-converged and solid state storage sales are each experiencing double-digit sales growth, Kerins said, and now compromise as much as 60 percent of the distributor's total storage business. That's up from comprising just 40 percent of Arrow's overall storage business a year ago, according to Kerins.

Arrow's Americas ECS business sales fell to $1.36 billion, down 4.1 percent from $1.42 billion the year prior as growth in virtualization, security and networking were more than offset by data center declines. The situation was worse in Europe, where sales tumbled to $642 million, down 10.8 percent from $720 million as servers, storage and networking woes outpaced growth in virtualization, security and services.

Arrow is projecting total sales of between $6.33 billion and $6.73 billion in its next quarter, with ECS contributing revenue of between $1.93 billion and $2.13 billion. Diluted earnings per share excluding any charges are expected to come in at between $1.74 per share and $1.86 per share, the company said.

The projection compares favorably to what investors were expecting. Thomson Reuters predicted Arrow would earn $1.75 per share on overall sales of $6.29 billion.