Software Demand Surges As Arrow Helps Customers Build Data Center Of Future

Arrow's focus on supporting next-generation data center solutions has led to monster growth in the company’s cloud practice and virtualization and infrastructure software business, according to the company.

Revenue for the Centennial, Colo.-based distributor in the quarter ended April 2 increased 4 percent, to $5.47 billion, after adjusting for acquisitions and the impact of changes in foreign currencies, the company reported Tuesday. This was in line with Seeking Alpha's projection.

Earnings climbed 4 percent on a constant currency basis, to $132.2 million, or $1.43 per share, beating Seeking Alpha’s estimate of $1.40 per share.

[Related: Arrow CEO Long Eyes More Software Solutions Growth, Shares Rise After Record Q4 Results]

"We saw the trend moving from hardware to software, and I think we've successfully mitigated the risk everybody is talking about today," Mike Long, Arrow's chairman, president and CEO, said during the earnings call Tuesday.

Earnings were released before the market opened Tuesday. Arrow's stock climbed 0.6 percent, to $59.39 per share, Tuesday afternoon.

Software is now the largest component of Arrow's Enterprise Computing Solutions (ECS) business -- contributing 40 percent of the $1.8 billion in quarterly ECS sales -- after sales skyrocketed 36 percent over the past year, Long said. Increased software demand was most pronounced in the virtualization and infrastructure segments, where Long said sales soared by 48 percent on a year-over-year basis.

"We’ve pivoted to a market that's going to be increasingly dominated by software-based stuff," Sean Kerins, president of Arrow's ECS business, said during the earnings call.

The most eye-opening figures, though, came out of Arrow's cloud business, with sales climbing 90 percent over the past year. Long said the distributor's cloud business now has a $200 million annual run rate -- equivalent to the figures Ingram Micro and Tech Data quoted in late 2015 -- despite Arrow's being $20 billion and $3 billion smaller, respectively, than the two distribution giants.

Arrow's cloud investments have also been focused on the enterprise data center space, which Kerins believes is less likely to be disrupted given the sophistication and complexity of the applications and workloads, as well as their highly integrated nature.

"I don't fear disruption from the public cloud players," Kerins said.

Instead, Kerins said, he expects migration to the hybrid cloud business model to open up opportunities for upselling, such as attaching cloud-based backup and recovery tools to Arrow's on-premise storage infrastructure offerings and -as-a-Service threat-detection tools to the company’s existing firewall security bundles.

Arrow's off-premise success has also driven more recurring revenue, thanks to the growing popularity of subscription-based Software-as-a-Service offerings, Kerins said.

All the cloud and software activity has also had a beneficial pull-through effect on other segments, Long said, with services sales and industry-standard server sales increasing by 10 percent, networking sales climbing by 8 percent and proprietary server sales improving by 5 percent.

"Cloud activity creates hardware," Long said. "And it creates hardware sales."

Despite huge growth in Arrow's solid-state storage offerings, the distributor's storage practice as a whole declined because of continued challenges around legacy offerings.

Year-over-year sales for Arrow's ECS business climbed 3 percent, to $1.8 billion, after adjusting for acquisitions and foreign currency movements.

Arrow's Americas ECS business grew 1.5 percent, or $1.23 billion, after adjusting for acquisitions and currency changes. The picture was also bright in Europe, where Arrow's ECS business grew for the fifth consecutive quarter, with sales soaring 5.8 percent, to $607.4 million, on a constant currency basis.

Arrow is projecting total sales of $5.825 billion to $6.225 billion in its next quarter, with ECS contributing revenue of between $2.075 billion and $2.275 billion. Diluted earnings per share are expected to come in at between $1.59 and $1.71 per share, the company said.

Seeking Alpha was anticipating overall sales of $6.02 billion in the next quarter on earnings of $1.63 per share.