On a call to investors, Arrow's CEO and CFO Michael Long (pictured) and Chris Stansbury shed light on why it's looking to close down its global PC and mobility asset disposition activities and start a consultative process to cease operations in three European countries.
CPI breaks down the four key takeaways from the call.
Arrow's PC and mobility ITAD business 'is not sustainable'
Long told investors that the PC and mobility ITAD business "is not sustainable" and claimed "it is no longer aligned with our strategy".
"We believe this business is not sustainable over the long term and is no longer aligned with our strategy. We believe this will enable us to focus on our longer-term strategy to enable the next-generation technology such as AI, industrial automation, smart cities and vehicles," he said.
It posted a $17m loss in Q2
Arrow's CEO revealed the extent of the financial damage caused by its global ITAD business. The distributor's PC and asset disposition activities posted a pre-tax operating loss totalling $17m in Q2 and revenues of $78m.
But concerns over the business' profitability haven't been felt in earnest until this year, according to Long. He said that while it fell to a loss in Q1 and Q2, last year it was "close to breaking even".
"The disposition business rolls up in global components. As far as gross margin, the business has a higher gross margin [than components] but it has a higher cost and a loss," said Long.
"The business fell into a loss in Q1 and in Q2 it got worse. That was definitely a bigger loss than what we experienced last year. Last year it was closer to breaking even."
It's the first time Arrow hasn't met EPS targets in 10 years
Long expressed his disappointment that Arrow did not meet its earnings-per-share targets, claiming it's the first time the distributor has failed to meet expectations in 10 years, or 42 consecutive quarters.
The move has prompted a $130m operating expense reduction programme to be completed by the end of the year.
Around $55m has been set aside as staff reduction costs, comprising $45m for severance pay and $10m in contract termination. These costs will be made by the third quarter of 2019.
Long told investors that he believes Arrow's efficiency measures aren't too severe, and that Arrow could reinvest money into hiring personnel next year depending on market conditions.
"Most of the actions we have taken we believe will make us extremely efficient in every market. We don't believe we have taken an undue amount of cost out of the system but possibly going into next year if the growth accelerates at an extreme pace that wouldn't keep us from putting some salespeople in certain markets," he said.
Customers will continue to hold inventory 'for at least the next three months'
One investor referred to previous comments from Long that Arrow business is being negatively affected by customers holding on to their inventory, citing growing economic uncertainty.
"We are all in the heart of this right now with the initial slowing and I think we've already hit bottom," said Long.
The CEO said he expects this to continue for at least the next three months, but admitted that he doesn't know how customers will respond for the rest of this year and going into 2020.
I expect you will have an inventory correction going on for at least the next quarter and what you'd see is that correction start to slow over time," he said.
"We don't have very good visibility because we can't really see what customers are thinking in terms of their inventory before they pull the trigger on it. I think for the next 12 weeks we will see inventory correction around the globe."
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