[Management View]
Arrow Electronics reported double-digit consolidated sales growth in Q2 2025, with both Global Components and Enterprise Computing Solutions (ECS) divisions surpassing guidance. Key metrics include a 10% YoY increase in consolidated sales to $7.6 billion and a non-GAAP diluted EPS of $2.43. Strategic priorities focus on mid-market expansion through the ArrowSphere digital platform and as-a-service offerings.

[Outlook]
The company expects Q3 2025 revenue between $7.3 billion and $7.9 billion, with Global Components sales projected at $5.3 billion to $5.7 billion and ECS sales at $2.0 billion to $2.2 billion. Non-GAAP diluted EPS guidance is between $2.16 and $2.36. Management anticipates stable operating margins and a currency tailwind due to a weak U.S. dollar versus the euro.

[Financial Performance]
Arrow Electronics saw a 10% YoY increase in consolidated sales to $7.6 billion, with Global Components sales up 11% QoQ and ECS sales up 23% YoY. Non-GAAP gross margin was 11.2%, impacted by regional and customer mix. Non-GAAP operating income was $215 million, and the non-GAAP effective tax rate was 17.6%.

[Q&A Highlights]
Question 1: Maybe just kind of trying to understand the demand dynamics relative to your inventory? How do you think about having the right inventory for maybe signs of a recovery here?
Answer: Our inventories are down well more than $1 billion from the peak in late '23, with Q2 seeing a reduction of roughly $50 million. We believe we've managed inventory well throughout this prolonged correction, with some pockets of excess still being addressed. We pay close attention to our customers' needs and intend to invest in working capital to support growth as the market recovers.

Question 2: Just trying to kind of like the puts and takes of the margin -- implied margin guidance for the September quarter and then also kind of balancing that with the cost efforts that you guys have been undertaking over the last few quarters. Like I guess, is it right to think that the margins are slightly down I think sequentially in the September quarter?
Answer: We see margins being relatively stable, both at an Arrow Inc. level and in components. ECS has its own cyclicality, but gross margin is likely to see continued mix shift due to APAC growth and large customer mix. We are offsetting this with productivity and cost savings initiatives, maintaining stable margins quarter-over-quarter.

Question 3: 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?
Answer: Customer level inventories are normalizing, especially in the larger OEM piece of the market, driving replenishment activity and normal booking patterns. The mass market customer base still has some destocking playing out, which will improve visibility as lead times extend or end market demand improves. This destocking will play out over time, benefiting our gross margin line as the market returns to our mix at more scale.

Question 4: 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 that would lead to extended lead times, but are we still seeing many of your suppliers quote stock in terms of their lead times or has that begun to reach a more normalized level?
Answer: Lead times are stable, roughly at pre-pandemic rates, and have not moved much over the past 2 to 3 quarters.

Question 5: 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 margin for fiscal 3Q and beyond?
Answer: On a billings basis, ECS operating margins were stable year-on-year in Q2. The sales number can vary significantly based on mix and agency accounting rules. We are comfortable with the margin profile and expect it to improve as transactional volume scales. The Q2 billings grew by 15% YoY, with operating income growing by almost 18% YoY, indicating leverage improvement.

Question 6: Can I ask you on component sales, it looks like EMEA sales were down year-on-year. How do you see that region progressing? And Sean, overall, your 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 prebuys. So I mean, can you -- is ArrowSphere, I think, is another thing you highlighted, is that -- does that come in, in Europe? And just your overall confidence in the guidance for components.
Answer: ArrowSphere is relevant to the ECS business, not components. Our components business saw better than seasonal growth in Q2 and expects the same in Q3 across all regions. Backlog grew substantially in Q2, extending into Q4 and Q1. Vertical trends are improving globally, with aerospace and defense, transportation, and industrial markets showing strength in the West, and broad-based growth in Asia.

[Sentiment Analysis]
Analysts and management maintained a positive tone, highlighting strong sales growth, stable margins, and positive demand trends. Management expressed confidence in the ongoing recovery and future growth prospects.

[Quarterly Comparison]
| Metric | Q2 2025 | Q1 2025 | Q2 2024 |
|-------------------------------|---------------|---------------|---------------|
| Consolidated Sales | $7.6 billion | $7.2 billion | $6.9 billion |
| Global Components Sales | $5.3 billion | $4.8 billion | $4.8 billion |
| ECS Sales | $2.3 billion | $2.1 billion | $1.9 billion |
| Non-GAAP Gross Margin | 11.2% | 11.3% | 12.3% |
| Non-GAAP Operating Income | $215 million | $200 million | $190 million |
| Non-GAAP Diluted EPS | $2.43 | $2.30 | $2.10 |

[Risks and Concerns]
- Regional and customer mix impacting gross margins.
- Potential headwinds from evolving trade policies and tariffs.
- Increased interest expense and return to historical tax rates may constrain future EPS.

[Final Takeaway]
Arrow Electronics delivered strong Q2 2025 results, with both Global Components and ECS divisions surpassing guidance. The company is optimistic about continued growth, supported by positive demand trends, stable margins, and strategic initiatives like ArrowSphere. However, potential risks from regional and customer mix, trade policies, and increased interest expenses need to be monitored. Overall, Arrow Electronics is well-positioned for ongoing recovery and future growth.