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Arrow Electronics Inc (ARW) Q3 2018 Earnings Conference Call Transcript

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Arrow Electronics Inc  (NYSE: ARW)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hey, very good day and welcome everyone to the Arrow Electronics Third Quarter 2018 Earnings Conference Call. During the presentation your lines will remain on listen-only. (Operator Instructions) I'd also like to advise all parties this conference is being recorded for replay purposes.

And now, I would like to hand over to your host for today, Steve O'Brien. Please proceed.

Steven O'Brien -- Vice President, Investor Relations

Thanks Mark. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Chris Stansbury, Senior Vice President and Chief Financial Officer; Andy King, President, Global Components; and Sean Kerins, President Global Enterprise Computing Solutions.

As a reminder some of the figures discussed on today's call are non-GAAP. You can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation and a webcast of this call. Please note prior period figures have been adjusted for the adoption of new accounting standards. We'll begin with a few minutes of prepared remarks which will then be followed by a question-and-answer period.

I'll now hand the call to our Chairman, President and CEO, Mike Long.

Michael Long -- President and Chief Executive Officer

Thanks Steve and thanks to all of you for taking the time to join us today. The third quarter was another great quarter. We again showed that our strategy to be the foremost lifecycle solutions provider is working and working well. Our position in the marketplace is stronger than ever. Our (inaudible) center price solutions have never contributed more to the bottom lines. Compared to two years ago we're generating 21% more sales and 33% more profit. That's not a cycle, that's differentiated scale. We achieved record third quarter sales, gross profits, operating income and earnings per share.

We said that our investments in engineers and working capital would bear fruit and the results are proof. The leverage was exceptional, operating income and earnings per share grew two times faster than sales. Returns on invested capital and return on working capital increased significantly and we also generated $0.5 billion in cash.

This quarter we reached several key milestones. We announced an expanded collaboration with wireless carriers to develop industry specific digital transformation solutions. This collaboration takes advantage of the emerging technologies like 5G, artificial intelligence, software-defined networking and the Internet of Things to drive successful outcomes for manufacturing, retail, finance, healthcare and the public sector.

We announced plans to open our Colorado open lab next year and we're working with 19 municipalities and agencies along with private businesses, universities and research institutions that make up the Colorado's smart cities alliance and we're going to use the lab as a place to showcase ideas such as data-driven smart free lighting, smart parking and connected automated vehicles.

The open lab will also be test edge for suppliers establishing standards on edge computing and artificial intelligence. We also announced some alliance with the world's largest infrastructure services firm. The firm is a leader in construction, civil engineering and smart city transformation.

The alliance will accelerate the digital transformation in smart cities on a global scale. We're collaborating to integrate IoT technology into the physical environment. This will drive improvements in asset management, worker safety, public safety and security. Arrow will provide a library of pre-integrated technologies that can be for price and to proposals and deployed as a part of contracts.

During the third quarter, our leadership in cloud, IoT and virtualization solutions gave us an opportunity to expand our virtual GPU offerings. These offerings will create new data centers business opportunities for VARs and MSPs.

Opportunities include infrastructure fulfillment, virtual desktop infrastructure, virtual graphic processing servers, supercomputer and storage. We can cross-sell all virtual GPUs with our existing infrastructure and solutions from global market leaders. Will include VARs and MSPs to address their customers use cases such as artificial intelligence, IoT, blockchain and other technologies that they drive data extensive data and volumes requiring high-speed computing.

What's exciting about the growing number of cross enterprise engagements. We see these engagements as one of our biggest sources for sustained long-term margin and returns improvements. We have triple win opportunities from these engagements. For example, we're working with an intelligent lighting company that is intersecting IoT and smart cities. First, we are helping design and supply components for their connected control units. Second, we're selling those control units through our network of system integrators and managed service providers to their enterprise and municipal customers.

Third, we are attaching the connectivity and end-of-life solutions for all those control units and we're the only company with the capability to capture these three-pronged opportunities.

Returning to the near-market condition. Leading indicators remain healthy. Design activity grew at the mid-teen rate year-over-year and grew double digits in all three regions. Backlogs remain significantly up year-over-year, but the rate of growth flow for the second straight quarter as we expected.

Customers are getting the parts they need, when they need them. They're feeling lack of an urgency, to put in longer-duration orders, lead times with stable across our portfolio and unchanged from last quarter. Book-to-bill was 1.03 for the third quarter still above parity, but down from 1.07 in the third quarter of last year as we were building our business. Cancellation rates remain within typical ranges, condition point to normal steady growth for the future.

As you know the list of tariffs products increased significantly since our last call. In the short term demand has been (inaudible) in the phase of these effective price increases. We have been helping customers and suppliers mitigate further nominal(ph) in their business. At their request, we are assisting customers who are moving manufacturing locations and rerouting supply chains.

We've been using our information advantage that helps suppliers manage tariff impacts to customers. Our proprietary real-time database of electronics components is the world's largest. We're providing tremendously valuable information to help guide customers decisions to mitigate tariff impacts. Tariffs are not reason we develop the database, however, thus the value its providing confirms Arrow's beliefs in the power of data.

As we discussed in the past, change in enterprise computing solutions, competitive landscape resulted in the on-boarding of the significant number of value-added resellers over the past year.

These VARs were hardware oriented and have contributed meaningfully to our hardware growth. VARs one of the part of the software-led solution approach, but this requires some heavy lifting in -- and are -- and their parts contribute their business. We except that we are able to ship their business to more value-added software solutions in the coming quarters. This motion is like that can be seen on our global components business where we brought in a large amount of (inaudible) business last year and are just now seeing that mix of business change.

In the meantime, our enterprise computing solutions investments are in place ahead of that mixed shift. As I mentioned last quarter, we're starting to see a meaningful amount of business shift to as a service and consumption-based model. We're very pleased by this trend as it creates a growing backlog of ratable revenue that will be recognized in the future quarters.

However, as you've seen in the software industry our expense stays to support this business is in place. The sales that we formally recognized upfront are now being recognized over time.

We fully expect the business mix of our VARs to improve in the next few quarters. We're already seeing signs of this. In addition, as ratable revenues has reached critical math, we expect them to contribute to improving margins. To be clear we expect improving profits and margins from this. In closing, we're ahead of pace to deliver a record year in 2018. We delivered a record third quarter results and expect a strong close to the year.

I'll look forward to updating you on our performance and the progress in the coming quarters. I'll now hand the call over to Chris to provide more details on third quarter sales and our expectations for the fourth quarter.

Chris Stansbury -- Senior Vice President and Chief Financial Officer

Thanks Mike. Third quarter sales of $7.49 billion were high-end of our prior guidance range. Sales increased 9% year-over-year and 10% adjusted for changes in foreign currencies. Acquisitions and divestitures not meaningfully impact the consolidated sales growth rate. The actual exchange rate for the quarter was $1.16 to EUR1 slightly below the $1.17 rate we previously used for our forecast. This had a very small negative impact on growth rates.

Third quarter global components sales of $5.38 billion increased 11% year-over-year. Sales were above the midpoint of our prior expectation. We had record third quarter sales in all three regions. In Europe, sales increased 13% year-over-year adjusted for changes in foreign currencies and increased 11% as reported.

Europe sales have increased year-over-year for 22 straight quarters adjusted for acquisitions and changes in foreign currencies as we continue to gain share in the marketplace. In the Americas, sales increased 13% year-over-year and increased 12% adjusted for acquisitions.

Demand continues to be strong across our base of industrial and manufacturing customers. Asia again produced strong growth this quarter. Asia sales increased 8% year-over-year. Transportation and IoT continued to be growth drivers for the region. While we're not immune to economic conditions we believe our large geographically diverse customer base with no significant industry vertical concentration helps insulate our performance.

Global components operating income increased 28% year-over-year and increased 2. 5 times faster than sales growth. Operating margin increased 70 basis points year-over-year to 5.2% and increased in all three regions. Record third quarter enterprise computing solutions sales of $2.11 billion increased 9% year-over-year adjusted for changes in foreign currencies, the divestiture of the unified communications business in the Americas and both a small acquisition and a small divestiture in Europe.

Sales increased 6% year-over-year as reported. Billings increased at a high single-digit rate year-over-year adjusted for changes in foreign currencies. Growth was driven by storage infrastructure software industry-standard servers and security. Enterprise computing solutions, Americas sales growth remained strong.

Sales in the Americas increased 13% year-over-year as adjusted and 7% as reported. Record third quarter Europe sales increased 3% year-over-year. Europe sales increased 2% as adjusted. Our product mix in Europe is more skewed toward software so net sales growth tends to be dampened by agency accounting.

Enterprise computing solutions operating income decreased 15% year-over-year. Operating income decreased 7% adjusted for an acquisition, divestitures changes in foreign currencies and a $6 million sales tax adjustment which was entirely recognized during the third quarter. As we stated in the past this business is best judged by operating profit of our growth on a multi-quarter basis.

Over the last 12-months, operating income dollars are approximately flat adjusted for the divestiture of the unified communications business and for the $6 million sales tax adjustment. Returning to consolidated results for the quarter, total company operating expenses increased 5% year-over-year.

Operating expenses decreased 30 basis points as a percentage of sales on a year-over-year basis. Consolidated operating income increased 19% year-over-year and operating margin increased 30 basis points. During the third quarter, corporate expense was lower than the recently -- recent quarterly run rate. This was partially due to lower expenses related to our ERP implementation that we completed earlier this year.

Interest expense was $54 million approximately in line with our prior expectations. We expect interest expense to be slightly higher in the fourth quarter due to higher interest rates on floating rate debt. The effective tax rate for the third quarter was 24.4% in line with our 23.5% to 25.5% target range.

Net income was up $193 million up 20% year-over-year. Earnings per share were $2.18 on diluted basis toward the high end of our prior guidance range of $2.09 to $2.21. Earnings per share increased 21% year-over-year. We estimate the strengthening of the dollar negatively impact earnings per share by approximately $0.02 and negatively impacted earnings-per-share growth by approximately 140 basis points compared to the third quarter of 2017.

Operating cash flow was $494 million as the slowing growth environment allowed cash flow to normalize. As a reminder, third quarter cash flow benefited by approximately $200 million at the expense of second quarter cash flow due to timing of a new large customer engagement. We expect the working capital requirements for this engagement to be mostly cash-flow neutral going forward. Return on invested capital increased 80 basis points year-over-year. The fourth quarter in a row of nearly one percentage point increases.

We are capturing higher returns on our organic investments in the business. We repurchased approximately $20 million of our stock approximately $105 million over the last 12-months and approximately $1.1 billion over the last five years. Entering the fourth quarter authorization remaining under our share repurchase program is approximately $279 million. This is a high-level summary of our financial results. For more detail regarding the business segment results please refer to the CFO commentary published this morning.

Now, turning to guidance. We believe that total fourth quarter sales will be between $7.7 billion and $8.1 billion with global components sales between $5.175 billion and $5.375 billion and global enterprise computing solutions sales between $2.525 billion and $2.725 billion. We expect interest expense to be approximately $57 million in the fourth quarter. As a result, we expect earnings per share on a diluted basis excluding any charges to be in the range of $2.46 to $2.62.

Our guidance assumes an average non-GAAP tax rate of 23.5% to 25.5%. We expect the average diluted shares outstanding of $88 million -- 88 million and the average U.S. dollar to euro exchange rate we're using for forecasting purposes is $1.16 to EUR1.

Steven O'Brien -- Vice President, Investor Relations

Thank you, Chris, Mark. Would you please provide the instructions and open up the call to questions at this time.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Steven Fox, Cross Research. Please go ahead. You're live in the call.

Steven Fox -- Cross Research LLC -- Analyst

Thanks. Good afternoon. Mike, I was wondering, just if we could step back a little bit and talk about how you guys determine when to make investments like you highlighted in the ECS business today? It seems over the last few years you have taken the opportunities to reinvest some of the -- your profits in terms of the building up scale and services.

And I'm curious how we can think about that over the long term going forward? Do we expect to see every few quarters that we have a dip down for further reinvestments? Where did you think you are in that path? And then if you could just direct -- directly talk more about when margin headwinds from some of the models that you just laid out start to abate?

Michael Long -- President and Chief Executive Officer

Thanks Steven. I'll really separate the businesses. First off, on the ECS side from a high-level. If you remember, we went out into the market and brought in several VARs over the course of the last year after there were some changes in the marketplace. Those VARs came in and largely were in as of the third quarter. And so what we saw was a faster mix in hardware sales versus software. And as you know the software sales is the more profitable piece, software and services is a more profitable piece of our business on a go-forward basis.

So, we put in investment to help bring those VARs bridge the gap into software sales and we're now starting to see some benefit from that but it does take those businesses time to get up to speed, get their infrastructure in place, get the technical knowledge they need to have the software their portfolio. And we've seen that, we believe that the ECS business will actually bottom in the next quarter and we believe that from there we will see some sustained growth out of those investments.

On the components side, if you remember we spent the last couple of years bringing in volume that was primarily supply chain type business. And we have been improving that. So really, the ECS story, is the same story as the components in many ways. And from what you can see this time, the components business just gave another record by the way at 5.2%, I believe it was for the quarter surpassing where we even thought it would go over the course of this year and largely that because the design went year-over-year activity has helped tremendously and adds up 15% year-over-year and I think we're going to continue to see that because the demand and the engineering business is continuing on, into the fourth quarter with growth which is another reason we expect a soft landing.

Largely the investments are in. We don't expect any more investments around things that we talked about today. And we do expect it to improve from here. Albeit the guidance for the fourth quarter is a yet one more record for the company.

So, I might want to point out that with the investments that we've given, Arrow Electronics is going to deliver one more record next quarter which puts us well past the two-year mark of continuing to develop record profits in earnings and sales records. So, hopefully, Steve, that answers your question.

Steven Fox -- Cross Research LLC -- Analyst

Yes, it does. And sorry for varying(ph) the lead on your record profits. And just -- just has a follow-up. Maybe given what's going on, in terms of some of the capabilities you are adding at this VARs. Does that mean that when we look at your ECS business right now, its not a true reflection of what you're seeing in terms of end-markets or maybe, you can just comment on where you are lining up to end demand versus maybe things are little skewed? Thanks.

Michael Long -- President and Chief Executive Officer

Yes. Well, first of all, I think what we're seeing is really record levels of hardware growth because most of VARs that we brought in -- we are selling hardware and we are also seeing record levels of hardware growth in what I would say our industry standard servers, services, networking and software. The software is growing at a less rate than the hardware. What we said is that that creates a mix issue for us and while software is growing in market right now and starting to grow above the market giving some of these VARs coming on we need all of the VARs to be selling the software which will help increase the profitability of that business. And again, it's just like when we brought in the fulfillment business on the component side and then started to do the design activity you saw that business grow up. We think it's going to be exactly the same and I'm not expecting any big changes in that business coming into next year.

Steven Fox -- Cross Research LLC -- Analyst

Great. That's all. Very helpful. Thank you so much.

Michael Long -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Matt Sheerin, Stifel. Please go ahead. You are live in the call.

Matthew Sheerin -- Stifel, Nicolaus & Company -- Analyst

Yes. Thanks. Good afternoon. Just regarding the strong margins in the components business. Mike, you talked about design activity being a contributor so more value-add. Are you getting any lift at all in just in terms of gross margin because of the as you said as lead times are normal, but there has been tight supply certainly in a lot of areas and we've seen mostly from suppliers that there has been less ASP pressure than normal. Are you benefiting at all from that now given where we are in the cycle?

Michael Long -- President and Chief Executive Officer

Yes, Matt there is still -- on the margin side, fulfillment business is fulfillment business. There is sort of bit add-on pricing there. While it is elastic, it's not overly elastic. If you remember when we went into sort of what we would all call allocation mode. Our contracts throughout is such you don't have the price elasticity that you used to have in the business because you guaranteed that you're going to supply that part over a certain period of time which is one reason you see the inventories go up.

Then when you do more design work that design work is much more profitable than is the fulfillment work. And what we're seeing now is the margins increased largely because of the design activity in those customers just like we said that would happen in the beginning. And if we can continue to grow our mix on the design side there's no reason that it shouldn't continue and you wouldn't continue seeing that type of leverage.

And if you look at the number of engineers we have out there which is a lot. We made a -- we made big investments over the last few years in engineering. We expect that piece to keep going and I guess you saw some evidence of that this quarter and it'll keep going through next quarter from what we can see. And all indications are for a soft landing. The design win activity shows for a soft landing, the backlog is still up, cancellation rates remain normal.

So we're not seeing a quick drop-off. I might also note we're not hugely big in wireless and the wireless activity is one of the big reasons that you've seen some changes in the marketplace. We're more demand is driven industrial type of accounts and that type of things. So anything we would see would come from more of a -- what I would say an economic downturn than we would see from a cycle in wireless or a refresh or anything like that. So hopefully that helps?

Matthew Sheerin -- Stifel, Nicolaus & Company -- Analyst

Yes, that's helpful. And two other quick questions, if I may. Just one on the inventory you're still about to turn higher in terms of inventory turns than you where a year or so ago. And given at least slower growth as you talked about if not a full-blown correction. Do you think you can get that down and see accelerated cash flow next year? And then the second question on related. Your commentary, Mike about seeing a lot of activity from customers -- potentially moving manufacturing and you helping with them with that are you actually seeing that now or is it, it just seems like companies are talking about if we are actually not seeing full-blown manufacturing move out of China into other areas yet?

Michael Long -- President and Chief Executive Officer

Yes, so the tariff piece. We are seeing companies that have already set up in other locations to increase their production in locations that are non-tariff locations. So, if a company has a factory in the US, in Mexico and in Asia they may decide that their mix of the production is going to be in Asia and in Mexico and they're going to drop down the amount of what their manufacturing in the US.

So we are seeing those supply chains. There is about 1/3 of the business that came in here shipped out of here but 1/3 of that has gone down and then rerouted at this point. So the answer to your question there is Matt, yes I mean manufacturing is smarter than you think.

They got to make a buck too and these type of tariffs makes the difference. And so everybody is going to do what they have to do to improve their situation profitable wise and you guys would be all over them if they didn't so they are doing it. As far as the, I guess on (inaudible) on the inventory. Yes, the inventory is in there because we're largely seeing the same lead times. That we said, we were saying before. As those lead times bate(ph) yes, that will convert to cash.

The second reason, we convert to cash is that business slows. We would find ourselves as you suggest and to what we might consider our an inventory position. I hope we believe -- we are there (Technical Difficulty) although at this rate the inventory will follow it down. Probably one quarter behind just like if you remember the last downturns we have been through with you than our strategy is pretty much not changed. It will be about a quarter behind and then you would see accelerated cash flow from that just like Q3. The cash flow model is intact. And it's the business while you'll see a lot more cash flow.

Matthew Sheerin -- Stifel, Nicolaus & Company -- Analyst

Yes. Okay, that was quite helpful. Thanks a lot.

Michael Long -- President and Chief Executive Officer

Great.

Operator

Thank you. Your next question comes from the line of Param Singh, Bank of America. Please go ahead. You are live in the call.

Param Singh -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. Just was looking at operating income in ECS this quarter if I -- exclude the divestitures and the $6 million expense you talked about. You're still down a lot year-over-year. How much of that is you're investing piece versus other revenue segments being down? I mean are you generating less profitable revenue from the individual segments itself not just mix? And what most of -- go ahead.

Michael Long -- President and Chief Executive Officer

Yes. I would say that -- what you're looking at, I think is about an additional $3 million roughly that are talking about and I'm going to say 2/3 of that is mix and about 1/3 of that was investment.

Param Singh -- Bank of America Merrill Lynch -- Analyst

And then Mike, at what revenue level within ECS would you get to year-over-year operating income growth within that segment?

Michael Long -- President and Chief Executive Officer

The expectations for us is to start improving in the January and the March quarters and we expect that mix. We're seeing it now. The question becomes how fast will the resellers implement it? How will their business change as a result of it? And as I said, we expect the December mix -- the reason the December mix is going to continue like it is. Is it -- don't forget about the year-end flushes that happened in this business and it had happen for the last 30 years. They're less than what they used to be. But they're still there. So as we brought in more hardware guys the December flush is going cause hardware sales to run off faster than our software. And then the market will return to more normal mix in the January and March quarters. And that's what we're expecting. Hopefully that gets you where you want to be.

Param Singh -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks. And then as my follow-up on the component side, obviously you're seeing better end market demand and so your competitors versus say what (inaudible) have openly reported. So, what do you attribute that disconnect to? And then the other concern, I've heard from investors is how much channel inventory do you think is above normal levels given the current demand environment i.e. looking at prior cycles do you think there's some compression factor that might play out over the next few Qs?

Michael Long -- President and Chief Executive Officer

Well. If you take one of the worst downturn which I think was back in 2009, right around (inaudible) the inventory came down nicely and it followed the sales one quarter. So, that is the difference you saw in the inventory. That's about where you are right now. We're not expecting that downturn. So, we wouldn't expect the same type of decline, but if you take one of the words that unfortunately, yes, I was -- doing that one too. So, I guess shows my age a little bit, but the truth is the inventory is acting normal. I'm not worried about the inventory because the inventor is basically cash that's convertible cash. And as it goes down the more it goes down the more cash it droves off. So, I like the fact that the market looks like it's going to grow single digits in the next year. That's where we will produce cash flow. And that's where the business will have its best balance and it looks like the year is shaping up for that thing to happen.

Param Singh -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you so much, Mike.

Michael Long -- President and Chief Executive Officer

All right.

Operator

Thank you. Your next question comes from the line of Adam Tindle, Raymond James. Please go ahead. You are live in the call.

Adam Tindle -- Raymond James & Associates, Inc -- Analyst

Okay. Thanks. Good afternoon. I hate to be the dead horse, but I want to start on ECS. I know, it always a ton of moving parts here, but profit dollar growth has been the metric that you rightfully conditioned us to focus on. You got a year-over-year mix issue on hardware, but if you look at the two-year basis profit dollar growth has been elusive for this time period. There's been some divestitures along the way, but you did this based on returns framework and pre-tax ROI is also tracking down about 100 basis points during this time. So along with it question, but how do you measure success over the next two years? What changes over that time frame to enable profit dollar growth and better returns in that business? Is there a time line you put on thinking about strategic optionality, if it doesn't -- current trends continue?

Michael Long -- President and Chief Executive Officer

Well, first-off to that last quarter that's all you can take. That's never been off the table whether there's strategic things that we do or whatever that is. So that's a given, if we don't see a balance there. Let's also remember what happened in the overall marketplace over the last few years. You have the HP flip(ph). You had IBM with their struggles and purchases and products coming in. You had the Dell going private. You got the EMC being purchased by Dell. You had the solid-state storage piece go from rotating -- their has a been a ton of technical changes in the computer business over the last couple of years that most people would think that's pretty good performance compared to what you've seen with others in the same space.

So, I think the question is if you believe the IT space is here for a long haul then that last couple of years shouldn't be something as you are overly worried about but you should actually be saying wow, they converted their business. They fitted business business where the business was heading not where it was. So, that's the question you're free to ask. That's the question you are free to ask, that's the question you are free to put pressure on us, but right now we believe that we're getting a place of normal growth in the computer business to where we think that can come back sometime during the first half of next year. So, we're still bullish on the business. That doesn't mean we don't ask those questions every quarter ourselves. That doesn't mean that I don't put internal pressure on my management team to deliver growth. But right now, I think we have a plan that will be good for the IT business. So we're sticking with it right now. Does that answer your question?

Adam Tindle -- Raymond James & Associates, Inc -- Analyst

It does. And I think the frustration comes from the valuation and maybe lack of recognition of what you've done over that time frame that's baked into the stock right now. But I.

Michael Long -- President and Chief Executive Officer

And we got to say, the frustration is already (inaudible) because you come off of two years quarter-on-quarter record every single quarter and earnings per share sales gross margin. And so I got it. But my job is to put profits on the Board which we have done. Your job is to report on my -- I guess is best -- streets job to buy the stock, right.

Adam Tindle -- Raymond James & Associates, Inc -- Analyst

Fair enough. If I could ask a follow-up for Chris real quick on capital allocation.

Chris Stansbury -- Senior Vice President and Chief Financial Officer

Sure.

Adam Tindle -- Raymond James & Associates, Inc -- Analyst

Cash flow was obviously strong and I know you talked about wanting to buy back stock given valuation that we just talk about it. Maybe, it was a little bit too late to accelerate buybacks in the quarter, but there was no additional authorization and maybe hoping you can touch on that point or are there perhaps things in the ECS business where you'd be better off making acquisitions there to four to five trends?

Chris Stansbury -- Senior Vice President and Chief Financial Officer

Yes. I mean on the latter part again we're always looking at that landscape. But I would just reiterate again what our capital allocation strategy is. And it is we will do organic investment first which we have done a lot of over the last couple of years and that's obviously bear fruit. We will do accretive M&A where it make sense. And I think we have said there's not much of that available right now than everything else goes back to shareholders through buyback. A lot of our cash flow was late in the quarter. There's been a lot of focus on driving positive working capital metrics which we did, but it did come a little late in terms of our ability to buybacks, but the capital allocation remains the same. So, you know what our next move is. And he will talk more about it with our board in December about authorizations and where we are at that point.

Adam Tindle -- Raymond James & Associates, Inc -- Analyst

Got it. Thank you.

Operator

Thank you. Your next question comes from the line of Shawn Harrison, Longbow Research. Please go ahead. You are live in the call.

Shawn Harrison -- Longbow Research LLC -- Analyst

Hi, good morning everybody. Were there any regions where the book-to-bill dipped below parity for the September quarter and not to be extremely shortsighted, but have you seen a continued moderation of the book-to-bill through the month of October. Is it been more than just a stabilization dynamic?

Michael Long -- President and Chief Executive Officer

Actually. It's been more of a stabilization dynamic. It was Asia that had the negative book-to-bill coming off, of just huge growth year-over-year that we saw. And I'm not even going to speculate whether it's tariffs or anything else, but we do we see continued growth there, but the growth did abate and moderate from a bookings point of view. I'll tell you though that the design win activity went up. So we're expecting it to be sort of a blip right now and we'll see were that goes. But all-in-all the other two regions were still very strong and very strong in design. And that been North America and Europe which we view as positive.

Shawn Harrison -- Longbow Research LLC -- Analyst

Got it. It's kind of following on and tied together. Mike, on demand creation of the supplier share gains that you had picked up last year. Where you add on that curve and then Chris, I think you said the EBIT leverage in the components business is about 2.5 times for this quarter. Is that the peak of the EBIT leverage and we should start to see that normalize a bit for the next couple of quarters. Can continue to see that type of leverage going forward?

Michael Long -- President and Chief Executive Officer

I think as you see increases in volume and an increase in design-win mix which is what we are driving for -- you'll continue to see increased profits and that's the same story we've been saying all along. We don't see anything to change that. We also believe that as the market goes the other way that will provides a little more of a soft landing for us to, if there was a downturn because having a better balance in your business and increasing -- this is just economic more on -- you increase the higher margin portion of your business as your mix, you make more money. And that's really our goal.

Chris Stansbury -- Senior Vice President and Chief Financial Officer

Yes and I would just add, Shawn to your question. I want to predict a high point again our focus is on continuing to drive value-added for customers and differentiated growth for suppliers. And we're doing that. I think when you look at the implied guidance for components in Q4, we're showing significant margin improvement year-over-year again. So, that's our focus and we're going to push it every quarter.

Shawn Harrison -- Longbow Research LLC -- Analyst

All right. That's it. Thanks. And congrats on the results.

Michael Long -- President and Chief Executive Officer

Thank you. I think just an interesting comment as we do look at returns are very important to the business and so our investments that we make are always toward the high-margin business to try to improve the high-margin business mix of the business.

Operator

Thank you. Your next question comes from the line of Joe Quatrochi. Please go ahead -- from Wells Fargo. Please go ahead. You are live in the call.

Joe Quatrochi -- Wells Fargo Securities LLC -- Analyst

Great. Thanks for taking the question. First, on the component side, if I could. I was wondering if you can talk about customer inventory levels and how you think about that relative to the tariffs going up to 25% at the first quarter next year? Have you seen any of your conversation with the customers indicated that they're looking to kind of hold higher levels of inventories in anticipation of that?

Michael Long -- President and Chief Executive Officer

Well, first-off we're not seeing a change in customers saying that if they don't have enough inventory which is good. We do have some customers that don't have enough of certain types of inventory so there's still a push there. We like where they are right now because we've seen vary in inventory sort of mitigate as far as -- are also. Which shows for more appropriate supply demand which we all -- we'd rather have because you have a less shortages the businesses has become more efficient they make more money because they don't ever have a slowed down of products they're trying to get up the door.

I'll tell you right now that these tariffs have not substantially hurt our business because most people are reacting to them as they should. And anything that is artificially created we're against we believe that tariffs are a bad thing in general. But if one government anywhere in the world decides they're going to increase tariffs don't be surprised worldwide manufacturers don't move their manufacturing around.

I don't see why that would be a surprise to anybody. And unfortunately that sneaks up later in terms of jobs and things like that, but the bottom line is everybody needs to make money, manufacturers need to make their money. They're all smart enough to manufacture anywhere in the world. Most of them are manufacturing in more than one place as you know and I being the manufacturing in most places is pretty easy declining in others are pretty easy. So I don't see it as an activity, but frankly doesn't happen all the time anyway.

Joe Quatrochi -- Wells Fargo Securities LLC -- Analyst

That's perfect. And then as a follow-up. Kind of bigger picture, Mike. You talked about in your prepared remarks you're moving into fulfilling virtual GPUs, data center fulfillment. I was wondering if you can talk about your opportunity there and how that opened up maybe a different type of customer base and maybe your ability to leverage your ECS business as it exists today?

Andy King -- Vice President Global Business Operations

Yes. Joe, it's Andy. First of all, the opportunity around GPUs basically comes from a couple of areas actually. Firstly, the whole drive of autonomous machines into the industrial segment which probably fits most side of the house. And then of course the increasing data center penetration that we're seeing from high-performance compute which firmly fits shown inside the house. One of the reasons we're able to pursue these opportunities is we have this kind of unique go-to-market model that enables us to get those technologies deployed into multiple end-market and that's really been the uniqueness of our capabilities and why those people want to partner with us.

Michael Long -- President and Chief Executive Officer

Yes. I just want to add that Joe from a traditional IT perspective that this is no different than other next-gen technologies that we brought to our channel partners both our existing partners as well as the new ones that we're on boarding. We're very familiar that help them ramp-up into our new demand trend and a new technology and as things like machine learning go mainstream in traditional corporate environments. This is going to be great opportunity for those partners to build their businesses going forward.

Joe Quatrochi -- Wells Fargo Securities LLC -- Analyst

Prefect. Thank you.

Operator

Your next question comes from the line of Jim Suva, Citi. Please go ahead. You are live in the call.

Jim Suva -- Citigroup Global Markets, Inc -- Analyst

Thanks very much. And I have one question for Mike and one for Chris? And I'll just ask them both now and you can answer them however you want in order. But Mike in your prepared comments you mentioned efforts for operating margins and things like that again in your prepared comments. Can you give us a little more details about the kind of timing and magnitude and investing those efforts are just to be better understand those?

And then for Chris, regarding cash flow, your year-over-year revenue growth projections very likely moderate like you mentioned many times about the soft landing and things like that. In doing so I would assume that in -- as in past cycles you generate a lot more cash flow. And given the stock price performance of the stock here today -- is that going to put stock buyback up their a little bit higher than maybe it would have in past cycles. We're just trying to get grasp on that allocation? Thank you.

Michael Long -- President and Chief Executive Officer

I'll answer the last one first and just say yes.

Chris Stansbury -- Senior Vice President and Chief Financial Officer

Yes, I think Jim, the truth is that things change. I would think you would see us react, just like you did the last time. The play book hasn't changed here. We have been very clear on what we do with our cash. And I would expect that you're going to see buybacks increase. I wouldn't suspect -- I'll just tell you they are going to increase from where they there. A whole lot more just given the marketplace and how the market is growing. That's where we use it. Remember the last few years have been what I would consider pretty explosive growth around here, has taken every dime of cash that we have to support that growth plus try to build the engineering and try to build a bigger technical-type business which right now what I think were the world's largest engineering company for electronics that's out there.

You just build that without putting some cash forward. I already excepted that you're going to see as they -- a bigger improvement of what I would say is computing type activities here whether that's building those products, designing those products, supplying the parts for those products. The stuff has been done now -- I'm expecting some of the early things I talk you about start having impact on the second half of the year. And that's why I'm fairly confident in the year itself that I believe the year is probably going to carry itself through the first half and then some of the activities that we have done will increase than just carry us through the second half. That's pretty much how we have been running the place for a long time, but we try to consider that and think of it, in that point of view.

As always the newer stuff coming later, the more efficiency on the stuff that's coming in today. And hopefully that answers that question for you.

Jim Suva -- Citigroup Global Markets, Inc -- Analyst

Thank you so much for the details and clarification. It's great. We appreciate it.

Michael Long -- President and Chief Executive Officer

Okay.

Operator

Thank you. Your next question comes from the line of Mark Delaney, Goldman Sachs. Please go ahead. You are live in the call.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Yes, Good afternoon. Thanks for taking the questions. I have two. First on component margins. So EBIT in that segment above 5% for a couple of quarters now. I'm hoping you can deconstruct some of the original dynamics behind that? Because I know Arrow had invested for quite a while on engineering resources specifically for Asia and hoping to better understand to what extent some of the margin gains are coming in from Asia to greater-than-average extent or is it more broad-based across geographies?

Michael Long -- President and Chief Executive Officer

Yes. Actually it's -- Mark, every region has increased design wins and every region has increased profitability. So you can call it even. You can call it say one is a little better than the other. But Asia(ph) had a big profitable increase, North America has had a profitable increase and so as Europe and it's primarily done -- the design engineering strategy and suppliers continue to like that and suppliers and customers continue to pay for that. We expect that to continue.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Got it. My follow-up question is related to the cyclical outlook. I believe as I said in the past for its business can lag semi-suppliers in both the way up and the way down, but want the two quarters because better understanding if there is a timing dynamic in play and if lower guidance from semi-companies like TIs of the world if that's maybe -- we didn't indicate for whatever you may see next year? Or is that the investments in engineering, the business mix and do you think those are sufficient so that Arrow is not going to see it or if you do it's just going to be a much lesser extent?

Michael Long -- President and Chief Executive Officer

Yes. So as I said before our wireless percentage of our business and our automotive while growing are the two areas that we have been less impacted by or the channel has been less impacted by. So, I think the wireless is the biggest slowdown as the market we have seen right now. And so for whatever reason or another we're not seeing that because it's not a big piece of our mix. I think the question that everybody has to have are you're expecting general market downturn next year. You're expecting an economic downturn in which case we will feel it. I believe right now if you where to say its the three to six months that you have seen we could pretty much see out and things look pretty good going into next year.

I think the design activity we had is certainly going to help the second half of that year because that's usually the time frame you have on those. So we're actually feeling pretty good that if there's a downturn you could be minimized by the business that we have in-house and that's been we have thriving for. So if there is we're going to be in about the best shape that we've ever been in.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

That's helpful. Thank you very much.

Operator

Thank you. Your final question comes from the line of William Stein, SunTrust. Please go ahead. You are live in the call.

William Stein -- SunTrust Robinson Humphrey, Inc -- Analyst

Great. Thanks for taking my question and squeezing me in. I want to add my congratulations to the good half margin especially in the components business and look forward to getting even better there. But I did want to ask another question about this GPU commentary you had Mike. Very interesting because we know that, that's a great growth area in semis right now, but I have maybe three sort of little questions about it. First this long-standing relationships or new ones also are you dealing with sort of the big vendor that we all know in this space or they're potential multiple vendors that you are helping? And we know that you used to have a great relationship with one of the big FPGAs companies that are similarly linked to this dynamic, but they're under new ownership. Maybe you can update us as to whether they're part of this effort?Thank you.

Michael Long -- President and Chief Executive Officer

Yeah, I mean it will hard not to just say, yes. So, eventually everyone of your question. It is as you think if you take a look at out line hard -- you are well poised here. Obviously, the growth that is projected for this market is high. We're already in it with a lot of design activity and yes, we have some new relationships that only augment that. That's the interesting thing about this business you're constantly adding new suppliers you're adding new capabilities. What's also interesting is the software that goes around all of this which is been something that we have done very well on the ECS side of the house. So, we do see ECS is part of conversations and most of it is related to the edge and what's happened out there. So whether it's fully autonomous, whether it's artificial intelligence. Most of this programs, I'm going to say programs are new. The words in the (inaudible) and all of that is getting a couple of quarters old, but no we're poised very well.

That's where we focussed our engineers going into the second half of next year and you saw the smart city lab. You take a look at that to do some of the -- through the press releases as you can see which suppliers have joint in on that. And which ones are going to be a big part of those solutions. And all those questions getting answered pretty quick when you see Arrow as the person that's bringing them altogether through the lab work. And we think that's going to pay off in heavy dividends.

William Stein -- SunTrust Robinson Humphrey, Inc -- Analyst

Okay. Thank you.

Operator

Thank you. We have no final questions and I would like to hand the call back to Steve O'Brien.

Steven O'Brien -- Vice President, Investor Relations

Thanks Mark. In closing, I'll review Arrow's safe harbor statement. Some of the comments made on today's call may include forward-looking statements including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons and the company undertakes no obligation to update publicly or revise any of the forward-looking statements. Detailed information about these risks is included in Arrow's SEC filings. If you have any questions about the information presented today please feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day.

Operator

Thank you all presenters. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of the day.

Duration: 57 minutes

Call participants:

Steven O'Brien -- Vice President, Investor Relations

Michael Long -- President and Chief Executive Officer

Chris Stansbury -- Senior Vice President and Chief Financial Officer

Steven Fox -- Cross Research LLC -- Analyst

Matthew Sheerin -- Stifel, Nicolaus & Company -- Analyst

Param Singh -- Bank of America Merrill Lynch -- Analyst

Adam Tindle -- Raymond James & Associates, Inc -- Analyst

Shawn Harrison -- Longbow Research LLC -- Analyst

Joe Quatrochi -- Wells Fargo Securities LLC -- Analyst

Andy King -- Vice President Global Business Operations

Jim Suva -- Citigroup Global Markets, Inc -- Analyst

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

William Stein -- SunTrust Robinson Humphrey, Inc -- Analyst

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