Arrow Winding Down PC And Mobility Asset Disposition Business, Takes Other Cost-Cutting Measures

‘We believe this will enable us to fully focus on longer-term strategy to enable the next-generation technologies such as artificial intelligence, industrial automation, [and] smart cities and vehicles,’ says Arrow CEO Mike Long in addressing the closing of that portion of its business.

Arrow Electronics Monday said it plans to wind down its PC and mobility asset disposition business as part of an overall set of actions to reduce costs as it expects second fiscal quarter 2019 sales and earnings to not meet expectations.

The Centennial, Colo.-based distributor Monday told financial analysts in a late-in-the-day conference call that its PC and mobility asset disposal business is not performing as well as expected, and that it has been banned from doing business with a large electronics customer that it did not name.

Arrow Electronics has a long business relationship with Huawei, including distributing a wide range of Huawei products.

[Related: Huawei Executive: ‘We Seem To Be Caught In The Middle’ Of U.S.-China Trade War]

Arrow, citing its quiet period, was unable to provide further information other than to point reporters to a transcript of the call.

However, the U.S. is currently engaged in a trade war with China, and the U.S. government has banned U.S. technology companies from doing business with Huawei.

As a result of the cost-cutting moves, Arrow now expects second fiscal quarter 2019 sales to be about $7.3 billion, which includes global components sales of about $4.25 billion and global enterprise computing solutions sales of about $2.05 billion.

The company in May said during its first fiscal quarter 2019 conference call that it was expecting total second-quarter revenue of between $7.53 billion and $7.93 billion. That included between $5.5 billion and $5.7 billion in global component sales and between $2.03 billion and $2.23 billion in global enterprise computing sales.

Arrow now also expects a loss of $6.23 to $6.35 per share versus expectations of earnings of $1.94 to $2.06 per share.

The planned closing of Arrow Electronics' PC and mobility asset disposition, which is part of the distributor's global components business, will result in charges of about $115 million, which will be recorded primarily in its second fiscal quarter of 2019.

Arrow is also starting separate actions to reduce operating expenses, which are expected lead to about $130 million in annual cost savings. Those actions are expected to be nearly all done by the end of the fiscal year.

Arrow declined to discuss the actual revenue of the PC and mobility asset disposition business.

Several macroeconomic issues are creating a lower demand industrywide for components, said Arrow Electronics CEO Mike Long.

Speaking to financial analysts during the conference call, Long said in his prepared statement that tariffs caused by the U.S.-China trade dispute are also causing sales to fall, as is a ban on selling to one large customer in particular.

While Long did not mention that customer by name, it is likely to be China-based Huawei, which was placed on a list of companies that U.S.-based suppliers are not allowed to sell components to.

"Since we provided second-quarter guidance on May 2, escalating trade wars have resulted in expanded tariffs and a ban on doing business with a large customer of electronics components," Long said. "Arrow's exposure to any one of these developments in isolation is not material. However, we believe long-term stress to free trade and cross-border business are creating broad-based dampening effects on electronic component demand."

Even so, Long said, Arrow's business model remains sound, and its success is not reliant on any one industry.

Long specifically addressed the winding down of Arrow’s PC and mobile asset disposition business.

"We believe this business is not sustainable over the long term and is no longer aligned with our strategy," he said. "We believe this will enable us to fully focus on longer-term strategy to enable the next-generation technologies such as artificial intelligence, industrial automation, [and] smart cities and vehicles."

During the question-and-answer portion of the conference call, Long said that while Arrow has seen the slowdown in the components business, it is still too early to see a recovery. The distributor is not expected to provide further information on the recovery question until it reports its third fiscal quarter results on Aug. 1, he said.

"[We want to] make sure that, [first], there's not a bounce-back so that we overforecast gloom and doom, secondly, that things could settle down after these initial announcements, and I want to make sure this wasn't [specific to] any region because of the increased tariffs and the ability not to do business with a single large customer," he said. "I would say I don't see anything that is going to change between now and the end of the year as far as the slowdown for electronics components."

Long said that, despite tariff issues between the U.S. and China, there was no material impact from issues related to mergers and acquisitions in its suppliers or from Chinese suppliers.

"We have a good relationship with our supplier base. And the only thing that I know of is that Infineon [Technologies] is purchasing Cypress [Semiconductor], and what happens with that channel, I don't know what will happen with that channel longer term," he said. "But again, not a material fact to [Asia-Pacific] or to our business in Asia-Pac. And remember, we had expected Asia-Pac to grow faster, and growth didn't come."

Arrow first alerted investors of its cost-cutting plans at the close of the trading day. The company's share prices hovered just below $69 during the entire trading day, but then fell to under $64 per share after it unveiled its cost-cutting plans and recovered slightly to over $65 per share a couple of hours into after-hours trade.