Arrow's Q3 2025: Contradictions Emerge on Inventory Strategy, Supply Chain Delays, ECS Margins, CEO Transition, and Market Recovery Timelines

Date of Call: October 30, 2025

Financials Results

• Revenue: $7.7B, up $890M or 13% YOY (11% YOY on constant currency)
• EPS: $2.41 non-GAAP diluted EPS, above the high end of guidance; reduced by $0.31 due to a $21M ECS charge
• Gross Margin: 10.8% consolidated non-GAAP gross margin, down ~70 basis points YOY; $21M charge reduced margin by ~30 bps
• Operating Margin: 2.8% of sales non-GAAP operating margin, flat sequentially

Guidance:

• Q4 sales expected $7.8B to $8.4B (midpoint +11% YOY)
• Global components sales expected $5.1B to $5.5B
• ECS sales expected $2.7B to $2.9B (midpoint ~+13% YOY)
• Non-GAAP diluted EPS expected $3.44 to $3.64
• Tax rate assumed 23%–25%; interest expense ~ $60M
• Management expects a gradual cyclical recovery and will provide more color on the Q4 call

Business Commentary:

* Strong Financial Performance and Market Recovery: - Arrow Electronics reported revenue of $7.7 billion for Q3 2025, exceeding the midpoint of their guidance range and up 13% year-over-year. - The growth was driven by contributions from both the global components and ECS segments, indicating a market gradually recovering from a prolonged cyclical correction.

• Components Segment Performance:
• Global components sales increased $610 million year-over-year and $271 million sequentially to $5.6 billion.

• This was supported by strong demand in industrial and transportation markets, with healthy activity levels across semiconductor and IP&E components.

• ECS Segment Momentum:

• Global ECS sales rose $300 million year-over-year to $2.2 billion, above the midpoint of their guidance range and up 15% year-over-year.

• Growth was attributed to momentum in hybrid cloud infrastructure software, hardware, and services, with a significant increase in backlog and recurring revenue volumes.

• Value-Added Services and Strategic Outsourcing:

• Arrow's strategic outsourcing agreements are expected to contribute significantly to top-line growth and bottom-line margins.

• Despite a $21 million charge related to lower profit expectations on multiyear contracts, the long-term potential of these agreements is seen as margin accretive.

• Regional Dynamics and Recovery Outlook:

• Regional and customer mix dynamics presented headwinds, particularly in the Americas and EMEA, impacting profitability.
• However, the company anticipates a gradual recovery in the West and among mass-market customers, which should improve sales and margins in the coming year.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted execution and above‑guide results (Q3 sales $7.7B, +13% YOY; non‑GAAP EPS $2.41). ECS backlog grew >70% YOY to an all‑time high; management described early stages of a gradual recovery and confidence in long‑term margin accretion from strategic outsourcing and value‑added services.

Q&A:

• Question from William Stein (Truist Securities): Are you a candidate for the permanent CEO or are you limiting yourself to an interim role?
  Response: Austen: I am serving only as interim CEO, not a candidate for the permanent role; I will return to retirement and remain on the board.

• Question from William Stein (Truist Securities): Please clarify the $21M charge this quarter — what was the contract, is it still in force, and what economic conditions led to the charge?
  Response: Nowak/Raj: The charge relates to underperforming strategic outsourcing multiyear contracts (underabsorption of fixed fees); contracts remain active, are a growth vehicle (several hundred million in billings), and may cause short‑term margin variability but should be margin‑accretive in steady state.

• Question from Ruplu Bhattacharya (BofA Securities): How should we think about ECS mix (hardware vs software) and sequential margin changes given the Q3 charge — what is the ramp into December?
  Response: Raj: The $21M charge reduced Q3 ECS margin by ~100 bps; adjusting for it, we expect strong Q4 ECS billings, GP dollar growth and improved margins versus last year with no concerns about Q4 performance.

• Question from Ruplu Bhattacharya (BofA Securities): Which end markets or verticals are recovering slower and how does that affect regional outlooks and margin progression?
  Response: Marano/Raj: Transportation and industrial are leading the recovery; APAC is ahead of Americas and EMEA, mass‑market customers lag; expect a gradual West catch‑up into 2026 which tempers near‑term margin expansion.

• Question from Ruplu Bhattacharya (BofA Securities): How will the new strategic contracts and hardware recovery affect working capital, inventory needs and the cash conversion cycle?
  Response: Raj: Some new contracts may require incremental working capital, but ECS is generally light WC; we will manage WC prudently and accept modest WC deployment if accompanied by higher margins.

• Question from Joseph Quatrochi (Wells Fargo Securities): How large is supply chain services today and what investments are required to capture AI‑related opportunities?
  Response: Raj: Supply chain, engineering/design and integration are not huge revenue contributors today but are higher‑margin, fee‑based businesses; investments are expected to be covered by service fees and yield margin accretion.

Contradiction Point 1

Inventory Management and Strategy

It involves the company's approach to inventory levels and management, which is crucial for operational efficiency and financial performance.

How should we assess customer replenishment trends relative to Arrow's inventory and the expected trends? - Joseph Quatrochi (Wells Fargo)

2025Q3: Our inventory levels are good, with turns roughly in line with sales. Some excess remains in certain components, but the aging profile is improving. - William Austen(Interim President, CEO & Independent Director)

Can you clarify the 2% to 4% increase in component sales outside the guidance? - Joseph Quatrochi (Wells Fargo)

2025Q1: We're seeing a slight improvement. It's not quite where we want it to be. But we are clearly down from the peak, and we feel like our inventory is in a much better place than it was back in the first quarter. - Sean J. Kerins(President, CEO & Director)

Contradiction Point 2

Supply Chain and Lead Times

Discrepancies in the description of supply chain dynamics and lead times may influence expectations for operational efficiency and product delivery.

Are there areas with slower growth in end markets or regions affecting margin progression? - Ruplu Bhattacharya (BofA Securities, Research Division)

2025Q3: Lead times in certain instances have extended. You are likely familiar with the issues that continue to plague the broader industry like congestion in the transportation infrastructure, including congestion at the ports and rail ports. - Rajesh Agrawal(Senior VP & CFO)

Can you update on current lead times, including whether they've returned to pre-pandemic levels and if further improvement is expected? - Steve O'Loughlin(Stifel, Nicolaus & Company, Incorporated, Research Division)

2024Q4: Lead times have remained stable at pre-pandemic levels for the past 2-3 quarters, with no significant improvement or deterioration. - Sean J. Kerins(President, CEO & Director)

Contradiction Point 3

ECS Segment Margins

Variations in the outlook for ECS segment margins can affect investor confidence in the company's financial performance and growth prospects.

Can you provide ECS margins, hardware/software mix, and sequential margin changes due to this quarter's charge? - Ruplu Bhattacharya (BofA Securities, Research Division)

2025Q3: The charge reduced margins by 100 basis points, but excluding this, ECS margins are expected to be strong. The outlook for Q4 remains positive, with strong billings, GP dollar growth, and operating profit growth anticipated. - Rajesh Agrawal(Senior VP & CFO)

Has there been any significant change in ECS's operating margin? - Ruplu Bhattacharya (Bank of America)

2024Q4: ECS operating margins were stable on a billings basis in Q2. The business is positioned for improved operating leverage as transactional volume continues to scale. Margins are expected to improve in the future. - Sean J. Kerins(President, CEO & Director)

Contradiction Point 4

CEO Interim Status and Succession Planning

It involves clarification on the interim CEO's status and the company's succession planning process, which are crucial for understanding leadership and strategic vision.

Are you a candidate for the permanent CEO position or limited to an interim role? - William Stein (Truist Securities, Inc., Research Division)

2025Q3: I am not on the candidate list for the full-time CEO role. The Board has formed a search committee led by Steve Gunby, and we have selected a search firm to find a suitable candidate. - William Austen(Interim President, CEO & Independent Director)

Can you clarify what the CEO transition entails? Is there a specific individual or group targeted for this transition? - William Stein (Truist Securities)

2024Q4: You mentioned transitioning CEO, I'd love for you to elaborate on what that means. It's a very provocative statement. Is there a specific individual or group of individuals you're trying to transition to? - Michael Turpin(Truist Securities)

Contradiction Point 5

Inventory Correction and Market Recovery

It involves the company's perspective on the inventory correction and market recovery timeline, which impacts financial performance and operational decisions.

Are there slower growth areas in markets or regions, and how do they impact your margins? - Ruplu Bhattacharya (BofA Securities, Research Division)

2024Q4: So, really, we're not focused on succession or any kind of retirement right now. We made this change because we need operational independence from the CEO's role. - Sean Kerins(CEO, President)

What indicators suggest the inventory correction is near completion, and which components remain overstocked? - Ruplu Bhattacharya (Bank of America)

2025Q3: We see a gradual recovery, with leading indicators positive. APAC is leading the recovery, but we expect the West and mass market recovery to follow, impacting margins positively. - William Austen(Interim President, CEO & Independent Director), Rajesh Agrawal(Senior VP & CFO)