Q3 2024 Arrow Electronics Inc Earnings Call

Thomson Reuters StreetEvents11-01

Participants Brad Windbigler; Treasurer and Vice President, Investor Relations; Arrow Electronics Inc Sean Kerins; President, Chief Executive Officer, Director; Arrow Electronics Inc Rajesh Agrawal; ...

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Sean Kerins; President, Chief Executive Officer, Director; Arrow Electronics Inc. Rajesh Agrawal; Chief Financial Officer, Senior Vice President; Arrow Electronics Inc. Thanks, Brad, and thank you all for joining us today. I like to discuss our third quarter results, provide some commentary on the market environment overall and then close with some thoughts as to how we're lining up for the future. I'll then turn things over to Raj for more detail on our financials as well as our outlook for the fourth quarter. For the third quarter, we delivered both sales and earnings per share that exceeded the midpoint of our guidance, generating total sales of $6.8 billion and non-GAAP EPS, at least in line with our expectations, but did so through a different regional and customer mix than originally anticipated. We were also pleased to see better momentum in our ECS business, highli","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"ARW":"艾睿"},"translate_title":"2024年第三季度Arrow Electronics Inc收益看涨期权","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARW":1},"content_text":"Participants\nBrad Windbigler; Treasurer and Vice President, Investor Relations; Arrow Electronics Inc\nSean Kerins; President, Chief Executive Officer, Director; Arrow Electronics Inc\nRajesh Agrawal; Chief Financial Officer, Senior Vice President; Arrow Electronics Inc\nMatt Sheerin; Analyst; Stifel\nWilliam Stein; Analyst; Truist Securities\nJoe Quatrochi; Analyst; Wells Fargo Securities\nRuplu Bhattacharya; Analyst; BofA Merrill Lynch\nMelissa Fairbanks; Analyst; Raymond James\nToshiya Hari; Analyst; Goldman Sachs\nPresentation\nOperator\n So I mean for more, ladies and gentlemen, good day, and welcome to the Arrow Electronics Third Quarter 2024 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brad win, Bigler arrows, Treasurer and Vice President of Investor Relations. Please go ahead.\nBrad Windbigler\n Thank you, operator. Like to welcome everyone to the Arrow Electronics Third Quarter 2024 earnings conference call. And joining me on the call today is our President and Chief Executive Officer, Sean Collins, our Chief Financial Officer, Raj Agarwal, President of Global Components, Rick Verano, in our President of Global Enterprise Computing, Eric Noack. This call will make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results. Which are based on predictions and expectations. As of today, our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in our most recent filings with the SEC. We undertake no obligation to update publicly or revise any of the forward looking statements as a result of new information reminder on gas for our GAAP measures directly comparable GAAP financial measures in this quarter's associated earnings release, you can access our earnings release at investor dot arrow.com. Along with a replay of this call, we've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during the wet gas. Following our prepared remarks today, Sean and Raj will be available to take your questions. I'll now hand the call over to our President and CEO, Sean Karen's.\nSean Kerins\n Thanks, Brad, and thank you all for joining us today. I like to discuss our third quarter results, provide some commentary on the market environment overall and then close with some thoughts as to how we're lining up for the future. I'll then turn things over to Raj for more detail on our financials as well as our outlook for the fourth quarter. For the third quarter, we delivered both sales and earnings per share that exceeded the midpoint of our guidance, generating total sales of $6.8 billion and non-GAAP EPS, at least in line with our expectations, but did so through a different regional and customer mix than originally anticipated. We were also pleased to see better momentum in our ECS business, highlighted by steady market dynamics in Europe and an improving trajectory in North America. In addition, we continued to make positive strides related to the management of our working capital and the optimization of our cost structure necessary initiatives. In light of the current market environment, you'll hear more from Roche on both points shortly. Turning further to our global components business, the market correction appears to be more prolonged than previously estimated. We believe both excess inventory levels and macro headwinds are contributing to as persistence. Having said that, our leading indicators remained relatively stable in the quarter. Our book-to-bill ratios are still at or even above Q2 levels. On a global basis, they just not yet reached full parity. Overall, our backlogs for their stabilized and cancellation activity remains within normal ranges, and our forward bookings profile continues to trend positively. From a regional perspective and consistent with what we saw in Q2, market trends varied across regions and verticals, we think largely consistent with the later stages of any cycle. In Asia, we saw mixed patterns across the region, but stability. Overall, our IPTV business grew sequentially once again in the quarter. We saw modest growth with improving trends in China, especially in the automotive sector. That was alongside some softness in parts of the industrial market and in our Xeon in the Americas, we grew sequentially and with better than normal seasonality based on relative strength across a handful of verticals led by aerospace and defense, offsetting a decline across our industrial markets. And in Amea, the sequential decline was broad-based in nature, reflecting its later entry into correction territory. Our operating margins came under modest pressure in the quarter. This was due mainly to regional mix, specifically more Asia, unless it via on a relative basis and customer mix as our overall sales volumes skewed somewhat to the larger end of our customer base. Recall that the mass market where pricing and margins tend to be more attractive has been a significant go to market priority for this business over time. As the market normalizes. We believe that these conditions are transitory in nature and not indicative of any structural changes to our business model. Our Q4 outlook reflects continuation of ongoing market trends, especially those relevant to the markets in which we choose to compete. As such, we think we're still bouncing along the bottom. Given trends we're seeing across regions and verticals. We can expect to see some ebb and flow from one quarter to the next. We expect our Asia Pacific business to perform closer to seasonal trends in the fourth quarter, with sub-seasonal activity levels in the West, driven by softness across the industrial and automotive market segments. Based predominantly on lower sales volume. We do expect operating margins will decline as has been this throughout this piece of the cycle. The specific timing and shape of an eventual recovery remains difficult to predict. Turning to Global ECS, we delivered year-over-year revenue growth well in excess of our expectations. That was a function of both continued strength in Amea, along with improving execution in North America. Once again, on a global basis, we saw healthy demand for infrastructure software related to hybrid cloud and AI related solutions. As a result, we delivered year over year gross profit dollar growth in the quarter and increasingly important proof point implied by our transition to the market for IT as a service. We believe our steady pivot for the market for hybrid cloud solutions as well as the realignment of our North American business to better reflect the strategy we've successfully deployed in Amea is leading us to better outcomes. Overall, these include a growing backlog, more recurring revenue streams and accretive contribution margins. Our Q4 outlook reflects consistent performance anemia and continued progress in North America. As a result, we expect year over year operating income growth and margin expansion. In closing, while we continue to manage through the cyclical correction in our components business, we also remain focused on our strategic priorities and global components. Our supply chain management and design services offerings continue to grow through customer base expansion. We've now established centers of excellence for automotive, robotics and high-power, all aimed to scaling our go-to market model in a solution-centric fashion. And we continue to make progress in the IPTV market. Deploying a motion in Asia, similar to what we've established in the West in Global ECS are ArrowSphere platform is becoming central to our go-to-market model, enabling the expansion of our customer base and growth in our recurring revenue streams. And in both businesses, we're expanding our line card to position us for the future. Lastly, I'd like to recognize and thank all of our employees around the world for their hard work during the quarter and throughout the year. They represented probably in the market each and every day. With that, I'll turn things over to Raj.\nRajesh Agrawal\n Thanks, Sean. Consolidated sales for the third quarter were $6.8 billion or above the midpoint of our guidance range and down 15% versus prior year. Global component sales were $4.9 billion, down 2% versus prior quarter, ahead of the midpoint of our expectations. Enterprise computing solutions sales were $1.9 billion or 7% higher versus prior year due to favorable product mix and above the high end of our outlook. Moving to other financial metrics for the quarter. Third quarter. Consolidated gross margin of 11.5% was down approximately 80 basis points sequentially, driven primarily by regional and customer mix impacts within our global components business. Non-gaap operating expenses declined $18 million sequentially to 506 $2 million in the third quarter. Recall that the second quarter also included a bad debt recoveries of $20 million, implying an even greater step-down in expenses. We have been actively managing our expense base since the market turn with initiative we've implemented over the past five quarters, producing savings of approximately $200 million on an annualized basis. In line with our continued focus on reducing costs, we are simplifying our operations and beginning in the fourth quarter are exiting a plan to further reduce our annual operating expenses by approximately 90 to 100 million by 2026, while achieving approximately one-third of the savings next year. These efforts will focus on geographic realignment and consolidation of resources. We estimate total restructuring expenses related to these initiatives to be approximately $135 million. The Company also intends to exit certain underperforming non-core business lines, which we estimate will generate approximately $50 million in additional costs based on current market conditions and given expectations for future recovery, we believe these initiatives in the third quarter, we generated non-GAAP operating income of $215 million, which represented 3.2% of sales with Global components operating margin at 3.9% and enterprise computing solutions at 4.1%, both on a non-GAAP basis. Interest and other expense was $63 million in the third quarter as we benefited from lower average debt levels linked to our efforts to drive working capital efficiencies. Our non-GAAP effective tax rate was 15.9%, which benefited from successful resolution of recent audits. And finally, non-GAAP diluted EPS for the third quarter was $2.32 exceeded the high end of our guided range, benefiting favorable interest and tax expense. Moving over to working capital. Net working capital grew modestly at the end of the third quarter by approximately $94 million compared to second quarter ending the quarter at $6.9 billion. Inventory at the end of the third quarter was $4.5 billion, decreasing $125 million from Q2. Our cash conversion cycle finished the quarter at 80 days for cash flow from operations was $81 million in the third quarter or $804 million year to date. This is the fifth consecutive quarter of positive cash flow generation. Net debt at the end of the third quarter was lower compared to Q2 at $3 billion. We repurchased $50 million shares in the third quarter and our remaining repurchase authorization stands at approximately $375 million. Due to date, we have repurchased $200 million of our stock in the short term. We are continuing to balance our capital priorities with managing our debt ratios. Now turning to Q4 guidance. We expect sales for the fourth quarter to be between $6.67 billion and $7.27 billion. We expect global component sales to be between $4.5 billion and $4.9 billion, which at the midpoint is down approximately 5% from prior quarter. Enterprise computing solutions should benefit from typical Q4 seasonality. We expect sales to be between $2.17 billion and $2.37 billion, which is up 3% at the midpoint midyear. Consolidated non-GAAP operating margins are expected to benefit quarter-on-quarter from Q4 seasonality and ECS more than offsetting the anticipated decline in Global components operating margins resulting primarily from negative operating leverage due to lower sales volume. We're assuming attach rate in the range of approximately 23% to 25% and interest expense of approximately $60 million to $65 million. And our non-GAAP diluted earnings per share is expected to be between $2.48 or $2.68. And finally, we estimate changes in foreign currencies to have an immaterial effect on our Q4 guide. That details our foreign currency impact can be found in our press releases. With that, Sean and I are now ready to take your questions. Operator, please open the line.\nQuestion and Answer Session\nOperator\n Thank you. And we will now begin our question and answer session. If you have dialed in and I would like to ask a question, please press star one on your telephone key pad can raise your hand and join the queue. If you would like to withdraw your question, press star one a second time. If you are called upon to ask your question and are listening via a speaker phone on your device, please pickup your handset and ensure that your phone is not on new when asking your question again, press star one to join the queue. And your first question comes from the line of Matt Sheerin with Stifel. Your line is open.\nMatt Sheerin\n Yes, and thank you and good afternoon, everyone. Just first a question that relative to the year guidance on for components guiding down around five, 4% sequentially, I think, Sean, you said that you expect Asia to be seasonal in the Western markets to be down. Could you just clarify what that means and should remain that Asia should be certain the flat in Europe and North America downtime high single digits? And I have a follow-up question.\nSean Kerins\n Sure, Matt. So I think the question is about the seasonality, right? So if you're looking for how that compares to Q3, we see a modest step downs in the West and we see something that looks flattish in Asia if that helps you out.\nMatt Sheerin\n Got it. In terms of your book to bill, you said it's a little bit better, but below one is it below one in all regions and basically Asia, the best followed by the two other markets?\nSean Kerins\n Yes, you got it is below one overall, still advancing just more slowly than we like. And Asia is leading the way.\nMatt Sheerin\n Okay, great. And then on the gross margin, which is that you said has been weak and I think that's the lowest number in a few years. You talked about mix and I've talked about a large deals with Europe expected to be down, as you said, lagging the other markets by at least two record quarters. And when would you expect gross margin to be back to kind of 12% plus? Because it sounds like you're you're guiding gross margin to be flattish, give or take out for next quarter?\nSean Kerins\n Matt, I'd love to be able to say when that occurs. Obviously, you know, when the market improves, again, I think you'll see the mass market return. Remember that the mass market typically follows the larger OEMs and a recovery. And right now, it's a little bit more about the larger OEMs and our customer base, and it is about the mass market. When that happens, you won't see the impact from that piece of our gross margin hit that we experienced in in Q three tough to call. I think part of the part of the challenge related to the recovery is that, look, there's still excess margin wins or I should say, excess inventories throughout the industry. Not just that distribution levels, but at a customer levels as well. And if you look at excess inventory is a long time shorter lead times than these were not quite getting the visibility that we would need to to lead us to be more certain about the timing of a broader recovery. We do believe it's coming, but really tough to call it beyond more than, say, 90 days at a time.\nMatt Sheerin\n Yes, fair enough. Okay.\nOperator\n Thanks, Elisha. And your next question comes from the line of William Stein with Truist Securities. Your line is open.\nWilliam Stein\n Great. Thank you for taking my questions. When you're discussing the results, I think perhaps even more so in the guidance on that was a bit below expectations. You and you cited customer mix and geo mix. I think the GMX we would get that, um, but on the customer side, I'm hoping you can linger on that for a minute. Maybe I'm not sure exactly how to ask, but maybe you can tell us more the a little bit more specific about end markets or what's driving that? And sort of in particular by can you tell us if there was any change of policy or a change generally among any of your larger suppliers that could be influencing your performance in the outlook? Thank you.\nSean Kerins\n Yes, sure thing. Well, let's start there because there are certainly wasn't any programmatic changes that impacted us in Q3 or is that we see impacting us in a material way in in Q4? So I wouldn't cite steps, if you will. If you go back to what I tried to answer with Matt's question, I think remember the way the market typically, yes, exits a recovery. It tends to be Asia first. And then the West follows typically North America and that eventually Europe. And I think that's what we're seeing play out now and then by customer type, and you're right, it does vary a little bit across verticals. But by customer type, we typically see recovery unit before we see it come. We see it in the large end of the market before we see it in the mass market. And that's playing out now. And so it's a little bit tough to predict exactly what our mix will look like the start of each quarter. We do a pretty good job of it. Last quarter. We think we saw a little more rotation to the larger end of our demand profile, which impacted us on the gross margin line. We think we've got at Red fairly accurately for Q4, which is why we talk about the main headwind to operating margin being strictly about the downturn in volume versus other factors. I'd say if you look at our traditional mix were very strong in the automotive sector, especially across a whole variety of industrial markets. And the industrial markets themselves tend to involve not just the big names that we all understand, but lots of smaller companies to. And so we're not seeing all the all the small companies come back at the same rate. We are the large ones. Aerospace and defense in the West has been more steady for us, but that tends to times involve larger programmatic deals as well. So a little bit more color. We think we've got at Red well for us at least the fourth quarter.\nWilliam Stein\n I appreciate that clarification. Maybe if I can just ask one more. I don't want to make sure I understand it. I think you answered it, but we just got a different way several years. It may be quite a number of years ago. one of the very big analog companies on sort of change the way to deal with distribution and debt that has sort of continue to play out over the years. But there's another one a competitor to them in that space where I think there's this idea circulating that that company is sort of following suit and for example, not paying for design wins and just going for fulfillment only. Is that a dynamic that you're seeing or is that not happening in either that Key has not happened recently or in the outlook?\nSean Kerins\n Well, as you as you probably my guess, you know, we never talk about our suppliers other than in very general terms, but I'm actually glad you asked the question because it does allow me to talk a little bit about how we see our role in the broader industry as we look to the future. But maybe first, just for a little bit of context of our supply, our portfolio is fairly diverse. There's no say no, no, not any one supplier accounts for more than 10% of our total revenue. And the fact is that over time, suppliers do make program changes has been true in this business as long as I can remember. But we feel like, by and large, we're kind of too big at this point for any single change to alter our thinking as to the potential for growth and margin that we see in this market, especially as we look longer term, Tom, and then I would also say, look, we're not running away from opportunities related to things like channel consolidation. We've got proven supply chain assets and processes across the globe. They're far reaching their scalable, resilient, they're compliant. And frankly, we're delighted to exercise them even further on behalf of our suppliers and large customers around the world. And I think over time, we're certainly well positioned to benefit from the economies of scale that would come with doing that. So I Yum. I took the high road to your question because again, we don't talk about specific suppliers, but we don't see anything altering our view of the potential in the landscape and in the market over time.\nWilliam Stein\n Appreciate that. Thank you.\nSean Kerins\n Thanks Will.\nOperator\n And your next question comes from the line of Joe Quatrochi with Wells Fargo. Your line is open.\nJoe Quatrochi\n Thanks for taking the questions. Equivalent to ask about the Asia demand you're seeing, I think your competitor that reported yesterday saw quite a bit stronger kind of recovery in Asia as I just kind of wanted to understand what you're seeing from an end market there than maybe what kind of different.\nSean Kerins\n Yes, sure. No, fair enough. You know, if you look at a two three or as we look at it, we think our Asian business approached typical seasonality and that included some modest growth in China. We saw that as an improving sign. And a good part of that came from really healthy growth in automotive, specifically the the EV market in China, um, in our Q4 outlook, suggests something in line with normal seasonality, as I said earlier. So I think in general, things are moving in a better direction than they were in that market this time last year. Yes, I guess I would say without speaking to any of our competition, we play in a number of verticals in this region. But our go-to-market priorities have always largely centered on the broader industrial mass market, especially in Mainland China. We're frankly, things have been slower to recover. And so we've got our eye on the ball relative to our strategy and where we play. And that's that's what I tried to keep the team focused on.\nJoe Quatrochi\n That's very helpful. And then you made as a follow-up arise at any help on just how to think about modeling the OpEx, given that the cost reduction plans that you outlined today and then fit this to be clear, the 90 to 100 million, is that a net savings or should we think about some of that being reinvested? And then is it mostly in and plus our the spread across that entire organization?\nRajesh Agrawal\n Yes, Joe, let me just give you some background. I mean, as I mentioned in my comments, we've done a pretty good job of taking OpEx out in the last few quarters. You can see that the run rate of our OpEx is down materially from where it was just a year ago. And with the new actually today, we do expect to get an incremental 90 to $100 million. And I would say that's not we're always looking for investment opportunities that may come along that we do see that as a real savings to us, it is going to be across the organization. So we are very consolidating certain functions and operations and focusing on more of the cost efficient regions around the world and really go into more of a shared services delivery model. And so I think you'll see that across the board. Tom in on it. Thank you. So it's real structural savings in the business fee as we are consolidating and putting certain functions and other things that other other locations around the world. So we do expect to see that obviously that are taken into account the trajectory of that business and how that moves along next year. But in isolation will certainly see that.\nSean Kerins\n Joe, I would just add that these are no regrets actions that we already chosen to undertake. We think they make a lot of sense for the Company over the long haul, regardless of our near-term outlook. And in fact, this kind of structural stuff actually creates reinvestment capacity and reinvestment potential for us. And we're looking to put some of that to work right away.\nJoe Quatrochi\n Perfect. Thank you.\nOperator\n Thanks, Jeff. And your next question comes from the line of Ruplu Bhattacharya with Bank of America.\nRuplu Bhattacharya\n Hi, and thanks for taking my questions. Can you talk to what product lines were strong and which ones were weak? And as you look into the next quarter, are you expecting the same seasonal uptick in operating margin that you get in a typical year going from 3Q to 4Q?\nSean Kerins\n Sure, Ruplu, welcome, Bill. I'll start with your second question first. The answer is yes, for sure. We'll see the the normal seasonal uptick that we see in that business. And we're grateful for it, given the consolidated portfolio will also see margin uplift year on year. And part of that is coming to your first question, because if you look at the the mix shift that we've been driving over time, consistent with our strategy, we're getting, I think, better aligned to the pieces of the market where we're seeing really good growth. And specifically, we talk in terms of hybrid cloud and infrastructure software. And when we talk about infrastructure software, you can think virtualization, you can think about data protection and cybersecurity. You can think about business and data intelligence. Certainly that also leads to the role we're playing with a high in the indirect channel. Many of those offerings have the the the added feature of being potentially recurring in nature, therefore, accretive for us on the contribution line. But more importantly, they're growing while it may not be about billings as they do, which is why we talk a little bit about GP dollar growth, we think it bodes well for our future.\nRuplu Bhattacharya\n Okay. Thanks for the details there. Sean, can I ask a question on the component side? I cut them earlier this year. The thought was that the inventory correction would be done by the end of December and now it sounds like it's still extending out. So any sense just wondering like which product lines are which components are still in excess and where does that inventory you said? Is it sitting at distribution or is it that and the customers? And and just related to this, I think I heard correctly that in as part of the restructuring, you're also exiting some product lines or line cards. Do you think that the recovery is going to be less strong than what you had anticipated? Why why exit these lines in there? Yes. I mean, are you sure that they won't come back in terms of demand suggest is just the rationale for doing this right now? Yes, sure.\nSean Kerins\n We'll I'll start there because what we're exiting as we would call it, non-core and very immaterial from a revenue perspective, it would really have no bearing on our outlook for Q4 are much less next year. So don't read, don't read too much into that. As for the broader recovery. We look, as I said earlier, I wish I knew exactly how to call it. You're right, the the excess inventory challenge ultimately doesn't go away until the end of the demand environment improves enough for it to fully resolve itself. We are still sitting on inventory that we still like is still relevant based. All the verticals and use cases we serve is just taking longer to sell. But until the demand upticks more sharply, the excess inventory tends to be a little bit of a headwind. And as part of your question, it's yes, it's broad based, but it's at the supplier level in some cases is certainly in the channel at the distribution level minutes also at the customer level as well, both large OEM and certainly in the mass market. So it's gotten better. You're right about that. We thought the pace of recovery would be a little bit healthier from where we said earlier in the year. Things were taken longer to play out. It will resolve itself, but we're going to need a better demand environment before we see that cut it.\nRuplu Bhattacharya\n They can just sneak one more in as part of a previous question. You said that even though you're exiting some lines, you have areas of investment and you're going to quickly get into that. So can you talk about like what areas of investment you're going to focus on to that arrow is stronger as the recovery happens coming out of the downturn are going to be better positioned. So any if can you give us any details on what areas of focus you have in terms of investment?\nSean Kerins\n Well, I can talk broadly in terms of our strategic growth priorities in our components business were pretty clear eyed about the long-term potential we see in the mass market. That's always served us well, we think that's a yes, a great spot for demand creation. So we're going to continue to look at how we increased capacity for that piece of our strat city. We will continue to look to invest in our value added offerings related to supply chain management and design services. And we're making slow but steady progress as it pertains to the market for IP. and E., which is where a specialization is so important. So that we distinguish our motion in that segment of the market versus our motion for for semiconductor. So those priorities are really clear for us. And we've had to navigate a challenging market is the cloud infrastructure software. We like to talk about all things, IT as a service that we like the outcomes that that piece the market leads us to have. That doesn't involve just selling capacity. It also involves investment in will start as a result.\nRuplu Bhattacharya\n Okay. Thank you for all the details. Appreciate it.\nOperator\n Your next question comes from the line of Melissa Fairbanks with Raymond James. Your line is open.\nMelissa Fairbanks\n Hi, guys. Thanks so much for taking my question. Um, I was just a quick follow-up, probably beating a dead horse at this point, but trying to get some more visibility into some of the non-core business that you plan to exit. I assume that that is something that happens kind of on a continual basis. I'm wondering if you can give us some visibility into why this big chunk all at once. Is it limited to either certain geographies or certain product or what is kind of a catalyst behind a large-scale exit? Wasn't that large scale? I know it's not material to revenue, but but just to a little bit more color.\nSean Kerins\n Yes, sure. Maybe just a couple more words, Melissa, and then I'll let Brian talk a little bit about the financial aspects of it. But we're talking about a very isolated line of business in a remote geography that again isn't core to them. Our global components business overall, not material from a revenue perspective. And the time is right in this environment to just as you say, we're always looking at being smart about the portfolio, and this has happened to be the right time for that division.\nRajesh Agrawal\n Yes, Melissa. And just to add about that, the charge that we said to for 59, we expect most of that will be in the fourth quarter as it right now. And it is mostly a non-cash charge because the business that we're closing down has assets associated with it and there will be an asset impairment and some inventory reserves as well. So that's why you see the beginning, but it's mostly non-cash it at this stage.\nMelissa Fairbanks\n Okay, perfect. That's really helpful. And then as my follow-up, I was wondering about in ECS, how should we think about seasonality in the business over the long term? So moving more toward cloud based sales of IT as a service, does that change the complexion of seasonality? Or does it get smoothed out over time with more of the recurring revenue?\nSean Kerins\n I think we're learning more about this as the recurring revenue piece of our mix continues to grow from is now approaching something on the order of a third of our volume. So we'll see if that changes seasonality as this plays out further because it's still growing at better, really nice rates. I think in general, Melissa, the the IT spending cycle for most CEOs across the course of the year from tends to be fairly similar overall these years, and it may not ultimately change much. But I do think we're going to benefit from the recurring piece of our progress because that is generating a larger and larger backlogs as that piece of our business continues to grow. So we might see we might see a little more smoothing over time, but I think that's going to be slower to play out.\nMelissa Fairbanks\n Okay, perfect. Thanks very much. That's very helpful. That's all from me.\nToshiya Hari\n Thanks. Thanks, Melissa. And your next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open. Hi. Thank you so much for taking the question. I had one for Sean and then one for Roger as well. Sean, on a question on the pricing environment. I think most of your suppliers so far this quarter have said pricing remains pretty stable in the marketplace. There is a concern on the part of the investors that timing because pricing was some inflationary during the pandemic. That could reverse as this oversupply situation kind of process. What are you seeing in the market today and any concerns going into 2025?\nSean Kerins\n So I think I can make this pretty straightforward for you will, for us. We haven't seen too many if any of our suppliers actually reduce prices formally so that that hasn't done. That certainly hasn't leaked into the future. Can we get we happen to believe there's a lot of reason that it won't come. The second thing I would say, look, I would agree that if you look at our traditional mass market customer base, the pricing environment and therefore transactional margins were relatively stable. In Q3, we accept the same more. We expect them to be relatively stable in Q4, not necessarily assuming that, that would change much in 2025 that at the same time, I would say, as we mentioned, is our overall mix did skew somewhat towards the larger end of our customer base. That is where pricing tends to be more heavily negotiated. That could be a factor in the near term. But as the mass market returns, you'll see that piece of the growth mode engine dynamic normalized for us, at least that's how we're thinking about next year and beyond.\nToshiya Hari\n Yes, that's really helpful. Thank you. And then my follow-up for Josh, I'm curious how you're thinking about free cash flow going forward. You guys have done a really good job and bringing down inventory over the past year or so. How are you thinking about working capital needs as you hopefully go into an upturn in in 25? And more importantly, if you can speak to your capital allocation priorities, especially given where your stock sits today, that would be really helpful.\nSean Kerins\n Thank you. Yes, Tricia, I would say the business model hasn't changed. So you know, typically and times are decline in the business, we're going to generate cash. And over the last 12 months, we generated about $1.1 billion of operating cash flow. And in times of growth, we're going to want to make sure that we're well positioned to have the working capital that's needed to grow the business. And so where it is up more cash generated regenerate the cash on an ongoing basis. And it really is the working capital aspect of the business that there's some. I'd say that from a capital allocation standpoint, nothing has changed from our perspective. We've historically always focused on investing organically in the business and whether it capital CapEx or working capital. We've done some smaller M&A. We announced the small and also earlier this week and the engineering space. And so that's then gross margins and cash. And then we certainly have been very focused on buying back stock over the years. Last year in 2023, we bought back about $750 million of cash and done this year, we've been more focused on debt paydown just given the trajectory of the business. But at the right time, we'll get back into that. They are the same way that we've done historically. So our capital allocation priorities have not changed.\nToshiya Hari\n Got it. Thank you.\nOperator\n That concludes our question and answer session. I will now turn the conference back over to Mr. Brad when Bigler for closing remarks.\nBrad Windbigler\n Thanks, David, and thank you all for joining today's call. We look forward to meeting you at upcoming investor events. Kind of get that.\nOperator\n This concludes today's call. We thank you for your participation. You may now disconnect. 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