Arrow Electronics, Inc. 2026 Q2 Earnings Call

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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, William Austen, 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 and 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. You can access our earnings release at investor.arrow.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, William Austen.

Thank you, Michael. 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 3, 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. The combination of broad-based demand, disciplined execution, and positive operating leverage resulted in non-GAAP EPS of $5.45, 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. 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 improve 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 re-emergence 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 longstanding 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 pre-built 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 rates 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 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 life cycle. 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, all 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 life cycle.

As we enter the second half of the year, our focus remains on improving the quality of our growth 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.

Thanks, Bill. On slide six, sales for the second quarter increased $2.4 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. Second quarter consolidated non-GAAP gross margin as a percent of sales of 11.2% 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. Importantly, non-GAAP OpEx as a percent of gross profit declined 10.5 percentage points year-over-year to 64.1%. We continue to focus on disciplined, profitable growth, and our efforts around operational efficiency are driving substantial operating leverage in the business model. In the second quarter, non-GAAP operating income increased $188 million year-over-year to $403 million.