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Presentation

Arrow Electronics, Inc. beats earnings expectations. Reported EPS is $3.98, expectations were $3.7. Arrow Electronics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to Arrow Electronics Fourth Quarter and Full Year 2023 Earnings Call. Today’s call is being recorded. And at this time, I would like to turn the conference over to Anthony Bencivenga, Vice President of Investor Relations. Please go ahead, sir.

Anthony Bencivenga: Thank you, operator. I’d like to welcome everyone to the Arrow Electronics fourth quarter and full year 2023 earnings conference call. Joining me on the call today is our President and Chief Executive Officer; Sean Kerins; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Morano, and our President of Global Enterprise Computing Solutions; Kristin Russell. During this call, we’ll make forward-looking statements, including statements about our business outlook, strategies and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk 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 or future events. As a reminder, some of the figures we will discuss on today’s call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We have reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter’s associated earnings release or Form 10-K. You can access our earnings release at investor.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 webcast. Following our prepared remarks today, we’ll be able to take your questions.

And I’ll now hand the call over to our President and CEO, Sean Kerins.

Sean Kerins : Thanks, Anthony, and thank you all for joining us. We appreciate your interest in Arrow Electronics. For some context, I’d like to first review our 2023 full-year financial results before commenting on our fourth quarter performance and the overall state of the market. I’ll then turn things over to Raj for more detail on our financials as well as our outlook for the first quarter. As I reflect on our performance over the past year, I want to start by thanking our global team for their persistence, resilience and dedication to our suppliers and customers. Through their efforts, we were able to deliver solid financial performance given the market backdrop. Despite excess inventory throughout the supply chain leading to softer demand in our components business, and a mixed IT spending environment for our enterprise computing solutions business, we executed well in a challenging environment.

Arrow posted $33.1 billion in full-year 2023 revenue, and achieved an operating margin of 4.8% on a non-GAAP basis. In addition, we generated healthy cash flow from operations, which enabled us to repurchase approximately $750 million in shares throughout the year. Now moving to our fourth quarter results. To close out the year, we delivered sales of $7.8 billion in the fourth quarter, just better than the midpoint of our guidance. Based on healthy operating margins in each of our segments, we generated non-GAAP earnings per share of $3.98, comfortably above the high end of our guided range. Taking a closer look at our components business, the industry-wide inventory correction appears to be taking longer than anticipated when compared to prior cycles.

This is likely due to the breadth and magnitude of the shortages that precipitated the inventory buildup along with continued softness for components in many industrial markets. However, we do believe markets will eventually improve and see gradual signs of normalizing trends. Our book-to-bill ratios have stabilized overall with our IP&E portfolio trending closer to parity. Pricing is generally holding up as reflected in our fourth quarter gross margins, which were sequentially better than in the prior quarter. Our demand creation pipeline is growing as customers continue to develop new products. And while order rescheduling activity persisted, we focused on backlog conversion during the quarter and reduced inventory by over $600 million sequentially.

From a regional perspective, in Europe and the Americas, customers continued to moderate their supply as reflected by their reluctance to place new orders. While we expect sub-seasonal performance in the near term and continued softness in industrial markets, we were encouraged by robust design activity and relative strength in verticals such as aerospace and defense and medical devices. And in Asia, we expect results to normalize somewhat with respect to typical seasonality when compared to the West. And while we can’t predict the timing of a broader macroeconomic recovery, we were pleased by sequential growth in segments such as data center compute, and to a lesser extent, transportation. Shifting to our global ECS business. During the quarter, we continued to execute on all things IT as a service, which led to a higher mix of infrastructure software, cloud solutions and related services when compared to the prior year.

Over time, this mix drives a growing portfolio of recurring revenue volumes as well as better contribution margins for the business overall. And given the annual nature of this business model, fourth quarter results were up sequentially as expected. From a regional perspective in Europe, we delivered year-over-year billings and gross profit dollar growth amidst the mixed IT spending environment. While storage and compute were down, they were more than offset by strength in infrastructure software and networking products. And in North America, our results for the fourth quarter reflect a muted IT spending environment with softness in storage, compute and cybersecurity, partially offset by strength in infrastructure software and networking. As we stated in the past, we’re in the process of optimizing our customer mix and supplier line card in the region to better serve the mid-market.

We’ve made progress in this area and are optimistic about improving our results in the region this year. Before I hand things over to Raj, I do want to reflect a little bit on the future. Despite the ongoing cyclical correction and a weaker macro demand environment, we remain optimistic regarding the overall industry backdrop and believe longer-term technology trends will benefit Arrow. We’re at the center of large and growing markets, driven by the electrification of everything: renewable energy, autonomous vehicles and artificial intelligence, just to name a few. Given a longer horizon, we remain committed to the growth initiatives we’ve previously shared with you, where our differentiation provides value to both our suppliers and customers.

First, in demand creation, we added engineering resources throughout 2023, which helped demand creation revenue outpace the rest of the portfolio. Second, our engineering services have been gaining traction across attractive verticals such as renewable energy, automotive and medical devices. As a result, full-year engineering services revenue grew meaningfully. Third, in supply chain services, we expanded our customer base in 2023 with further penetration in the data center and automotive verticals. And looking ahead, we see additional opportunities to extend this offering to other verticals and OEMs. Next, we’ve maintained our differentiated focus on interconnects, passives and electromechanical components, a margin-accretive growth area within our components business.

Finally, in our ECS business, over the course of the year, we enhanced our digital distribution platform, ArrowSphere, while onboarding new channel partners and supplier lines, demonstrating our commitment to the market’s transition to IT as-a-service. In the meantime, as we navigate a challenging near term, we will continue to prudently manage our cost structure and working capital portfolio with an eye towards emerging even stronger as market conditions improve. And with that, I’ll hand things over to Raj.

Raj Agrawal : Thanks, Sean. I’ll be speaking to our financials on an as-reported and GAAP basis, unless otherwise specified. Consolidated revenue for the full year 2023 was $33.1 billion, which was down 11% versus prior year. Global components sales were $25.4 billion, which was down 12% from the prior year, driven primarily by softness in the Asia market and reduced shortage market activity in the Americas, partially offset by growth in our European market. Enterprise computing solutions sales were $7.7 billion, which was down 8% versus prior year. Importantly, our full-year global ECS earnings were flat from prior year, reflecting growth in Europe, offset by a decline in North America due to a softer IT spending market in that region.

Moving to other financial metrics for the full year. Consolidated gross margin of 12.5% for the full year was down 50 basis points from prior year. Non-GAAP operating expenses were down $157 million from prior year to $2.6 billion. The OpEx decline came from a favorable legal settlement in the third quarter, reduced variable expenses and our continued efforts to control spending. Non-GAAP operating income was $1.6 billion or 4.8% of sales, with global components operating margin coming in at 5.8% and enterprise computing solutions coming in at 4.8%. Non-GAAP diluted EPS for the full year was $17.12, based on an average outstanding share count of 57 million shares. Now turning to our fourth quarter results. Consolidated revenue for the fourth quarter was $7.8 billion, within our guidance range and down 16% versus prior year.

Global component sales were $5.6 billion, meeting the midpoint of our guidance and down 10% versus prior quarter or 17% versus prior year due to the ongoing semiconductor inventory correction. Enterprise computing solutions sales were $2.2 billion, also in line with guidance and down 11% versus prior year. This was partly a function of product mix and probably a function of lower discretionary IT spending in North America. Moving to other financial metrics for the quarter. Fourth quarter consolidated gross margin of 12.6% was down 30 basis points versus prior year, driven primarily by overall mix in global components. Sequentially, our gross margin was higher by 40 basis points due to the typical seasonality within the ECS business as well as favorable mix in components business in the West.

Our fourth quarter non-GAAP operating expenses declined sequentially when normalized for certain previously announced third quarter items. Our Q4 GAAP operating expenses included restructuring, integration and other charges of $40 million related to facility consolidation and other operating expense reductions. We generated non-GAAP operating income of $364 million in Q4, which was 4.6% of sales, with global components operating margin coming in at 5.1%, and Enterprise Computing Solutions coming in at 6.6%. Interest and other expense was $82 million in the fourth quarter, which was flat quarter-over-quarter and better than guided due to lower-than-expected average daily borrowings. Our non-GAAP effective tax rate was also favorable to our guide at 21.8%, resulting from certain domestic and foreign tax credits.

And finally, non-GAAP diluted EPS for the fourth quarter was $3.98, which is above the high end of our guidance range and based on a 55 million share count. Turning our attention to working capital. Net working capital for Q4 was flat from Q3 at $7.4 billion. Accounts receivable and accounts payable both increased in the fourth quarter due to normal seasonality in the ECS business, along with activity in our supply chain services offering. Inventory at the end of the fourth quarter was $5.2 billion, decreasing more than $600 million from Q3 with inventory days declining to 69. The combination of ECS seasonality, along with the decline in inventory, drove a reduction in our cash conversion cycle. Our cash flow from operations was $287 million in the fourth quarter and $705 million for the full year.

Net debt at the end of the fourth quarter were lower compared to Q3 at $3.6 billion. Arrow’s total liquidity at the end of the fourth quarter stands at $2.4 billion, including our cash balance of $218 million. We remain confident in the strength of our balance sheet, which gives us the financial flexibility to effectively manage our working capital needs. We repurchased shares in the amount of approximately $50 million in the fourth quarter and approximately $750 million for the full year. At the end of the fourth quarter, our remaining stock repurchase authorization stands at approximately $580 million. Please keep in mind that the information I’ve shared during this call is a high-level summary of our financial results. For more details regarding the business segment results, please refer to the press release and earnings presentation published on our website this morning.

Now turning to Q1 guidance. We expect sales for the first quarter to be between $6.7 billion and $7.3 billion. We expect global components sales to be between $5 billion and $5.4 billion, which at the midpoint is down 8% from prior quarter. We expect Enterprise Computing Solutions sales to be between $1.7 billion and $1.9 billion, which at the midpoint represents a 4% decrease year-on-year. We’re assuming a tax rate in the range of approximately 23% to 25% and interest expense of approximately $80 million. And our non-GAAP diluted earnings per share is expected to be between $2.20 and $2.40, which reflects unfavorable leverage in the business due to current market dynamics. And finally, we estimate changes in foreign currencies to have an immaterial effect on our Q1 guide.

The details of the foreign currency impact can be found in our press release. With that, Sean and I are now ready to take your questions. Operator, please open the line.

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Operator: [Operator Instructions]. Your first question comes from the line of Matt Sheerin from Stifel. Please go ahead.

Matt Sheerin : The first question is just regarding the inventory reduction in the quarter, which was nice to see. But on a day’s basis, particularly year-over-year, you’re still up. So, the question is, a, looking at your customers’ inventory, how long do you think this is going to take to wash out? And b, in terms of your own inventory target over the next couple of quarters, what should we be thinking about?

Sean Kerins : Sure, Matt. Welcome. So, you’re right. We focused pretty intently on backlog conversion in the quarter, and that helped us drive the reduction that you saw. I think part of this comes from our focus on the mass market, which is really a sweet spot for us, where we’re seeing a little better sell-through velocity than we are in the higher end of the market. The other thing to point out about inventories is that our units were down in the quarter, both sequentially and year-over-year. So, part of the excess you’re still seeing is really a function of price versus a lot of inbound volumes. The rate of inbound has certainly slowed for us as lead times have normalized. The other thing I would tell you is that if you look at its region by region, we exited the quarter within a turn or less as compared to our historical norms.

So, we think the right things are happening by way of normalization. There is still a piece of the excess inventory, that’s really a function of some of the long-term supply agreements that were in play. Most of those have wound down or are winding down, and the impact of that is abating for us over time. So hard to say exactly when things fully normalize. Suppliers are now behaving much like they would have been in pre-pandemic days. With lead times much more normal, they are certainly flexible with regard to reschedule and cancellation activity for us. That’s been a little more rescheduled and cancellation for sure, but it does mean the time it takes to work your way through the backlog is extending. But the right things are happening. And as we said in our prepared remarks, book-to-bill’s stabilizing and improving slightly, inventories coming down.

We feel good about where we are. Probably still need this quarter and next, just from an inventory perspective, to see things fully normalized yet again.

Matt Sheerin: Okay. And then just a question regarding margins in the March quarter. It looks like your operating margin is going to shake out in the mid 3% range or so, so down year-over-year on the volumes, obviously. But can you give us a sense what the gross margin might look like sequentially? Is that expected to be down? And then also on OpEx, I know you have some restructuring programs. So, are you expecting to get OpEx dollars down quarter-on-quarter or year-on-year?

Sean Kerins: Sure, Matt. So, let me start with global components because that represents the lion’s share of our volume. What you’re seeing from an operating margin perspective is really more a function of regional mix than anything to do with pricing pressure. We’ve got a little bit less EMEA on a relative basis in this outlook than what normal seasonality might imply. But if you look at all of our forecasts across the business, we kind of see gross margins holding up pretty well sequentially. So really, what we’ve got here is just a loss of operating leverage at these sales levels. We know that as demand improves, the leverage piece of the equation is going to take care of itself. We’re pretty comfortable that the structural contributors to our margin strength are holding up.

From an OpEx perspective, you’re right. We’ve always been pretty vigilant when it comes to our cost structure. That’s not changing, especially in this market environment, we are taking appropriate actions in the near term. I can pretty confidently tell you that you’ll see our absolute operating expense dollars to trend downward over the course of the year. At the same time, even though this correction is taking a little bit longer to play out, I would say, we ultimately see this as short-term in nature. So, we do intend to protect our growth priorities and the associated selling and engineering capacity for the long haul.

Raj Agrawal : And Matt, maybe I could just add. We also see in first quarter typical seasonality for ECS, where they had their largest quarter in the fourth quarter, they also have their softest quarter in the first quarter. And so, you’re going to get a natural step down in margins just in the ECS business. So that’s why you’re sort of seeing the margin step down that you’re seeing.

Operator: Your next question comes from the line of Melissa Fairbanks from Raymond James.

Melissa Fairbanks : I just had a quick one. Maybe to go back on the inventory from a little different perspective. As we’ve heard from a number of your suppliers this quarter, some have managed their channel inventory better than others. Pretty much all are seeing the same demand dynamics, as the supply has eased as what you’re seeing. Are you starting to see any suppliers trying to push more inventory through to you as they were to manage their own working capital? Or is it still pretty much a fair balance?

Sean Kerins: Melissa, I’m glad you asked the question because I wanted to clarify my last remark. The short answer is no. We’re not seeing that really at all. In fact, as lead times have normalized for the most part completely, suppliers again have returned to a more flexible posture with regard to the backlog that we’re still managing through. So that means that we’re able to reschedule as necessary, cancel on occasion. That takes a little bit longer to convert the backlog and our backlog still remains at significant levels beyond pre-pandemic days but we’re not seeing any pressure from our suppliers in this environment. I think we’re getting to the other side of what we typically expect in that regard.

Melissa Fairbanks: Okay. Great. That’s great to hear. Maybe as a follow-up, just kind of dig in on, Sean, what you mentioned on the transport in Asia. You were actually starting to see a little bit of growth there on a sequential basis. What we’ve heard from a lot of your suppliers and maybe some of your own customers is that the demand that has been outside of a few pockets has actually been fairly resilient. It’s just been a matter of up and down the supply chain, people now have enough buffer inventory. Are you starting to see good sell-through? Or is it demand improvement or maybe a balance of both?

Sean Kerins: I’d say, in general, Melissa, it’s a balance of both. And again, my comments were more on a relative basis. I think we all know the Chinese market remains down, certainly soft, and the period for recovery is a little unclear, but transportation and specifically EV has been a little bit healthier for us as compared to most other verticals. But demand hasn’t probably ticked up dramatically. At the same time, we’ve been able to sell through pretty consistently some of the inventory we do carry for that space. And I think that will be kind of the same posture for us in this quarter as well.

Operator: Your next question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.

Joe Quatrochi : I just wanted to kind of understand, you talked about your IP and book-to-bill approaching parity. In that context, can you help us just understand it? When we think about that, relative to other cycles and the rest of your components business, has that been like a leading indicator of a recovery? Just kind of help us maybe understand the importance of that comment.

Sean Kerins: You know, Joe, I would really — I probably wouldn’t link IP&E to the broader correction cycle in that way necessarily. Remember that IP&E, as compared to semiconductor, never really had the same shortage and capacity challenges as we saw in the semiconductor space. So, lead times never went out as long, shortage has never got to be that severe. And so, we’re really not in the same kind of correction in that piece of the market as we are in the semiconductor piece of the market. And it’s been more resilient, more predictable for us, hence, the reason book-to-bill is closer to parity. And as you know, we like the space. It’s margin accretive and our new leader for our global components business is doing a nice job of really standing up a differentiated go-to-market model for that piece of the market. And we think, over time and long term, it’s really going to be quite attractive for us.

Joe Quatrochi: Got it. And then just, I guess, as we’re looking beyond the March quarter, I’m trying to think about the regional mix and impact to margins on the business. As we think about seasonality into the June quarter, is it fair to assume that, that’s a bit of a negative headwind, just given that it sounds like Asia is maybe working through inventory a little bit faster than the Western regions?

Sean Kerins: You know, probably too early to call Q2 from a seasonality perspective, Joe, I can tell you when we look at Q1, we are guiding below normal seasonality overall. That’s really a function of some more macro pressure in the West, with evidence of some softness in industrial and parts of automotive. I think in Asia, we’re not necessarily assuming the typical uptick that you’d see post the Chinese New Year. But as we work through backlog and as inventories start to normalize, we’re going to get better visibility to near-term demand, and that’s going to be a good signal for the business and the market overall.

Operator: Your next question comes from the line of William Stein from Truist Securities. Please go ahead.

William Stein : Thanks for taking my question. Congratulations on the good results this quarter. I’m hoping you can linger a little bit on the legal settlement. If you can maybe remind us what that’s related to? How big was it in which segment?

Sean Kerins: Sure, Will, and thank you. I’ll let Raj speak to the number. But just for context, the settlement was related to a commercial dispute with a subset of our supplier base that dates back well more than a decade ago. Many of us weren’t even on the scene when this played out, but we are very pleased this resolved, and we anticipate no ongoing consequences. Raj, maybe you can speak to the numbers?

Raj Agrawal: And Will, this was all in the third quarter. As, the settlement that we took into our OpEx, there was $62 million, the legal benefit settlement that we got the benefit of that. That was in the components business, and that was worth about 100 basis points in to the components margins in that quarter.

William Stein : Great. And then share count. I know you’re — I know you have — well, maybe you can just update us on what your expectation is for the share count in the current quarter.

Raj Agrawal: Yes. We didn’t give a guide to share count because we don’t typically guide the amount of share repurchase because that’s going to vary from quarter-to-quarter, as you can see, based on what we did in the fourth quarter. So, we felt that giving an actual share count wouldn’t be appropriate either. Maybe the most important piece, though, well, we gave you the EPS number that we’re targeting and some of the other components to — in the P&L that you can sort of back into some of those key assumptions. So, nothing unusual there. Just — we don’t really guide the number of shares repurchase so we didn’t give the share count either.

Sean Kerins: Will, I would also add, just to reconfirm, our capital allocation priorities have not changed. Number one is organic investment or investment for organic growth. Number two being appropriate M&A. And then number three, of course, returning cash to shareholders. As you can imagine, in this environment, we’re going to be pretty surgical when it comes to organic investments. So in lieu of an appropriate M&A target, we’re still very prone to buybacks as it makes sense relative to our debt capacity.

Operator: [Operator Instructions]. Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead.

Ruplu Bhattacharya: I have one for Sean and one for Raj. Sean, you were talking about investing organically. So, in this weaker environment, can you talk about what areas you’re going to be investing in? And in the prepared remarks, you talked a lot about — several times about IT as-a-service. So how relevant is this to revenues? How should we think about that progressing over the next couple of years? And in terms of your growing portfolio of recurring revenue, how should we think about that?

Sean Kerins: So okay, you got a few different threads there. Let me try and take them one at a time. Again, my comments about investment in this environment, again, the keyword there is surgical. We’re taking the right steps and making the right moves to protect our cost structure and our profitability while we navigate this correction to the extent that we have the ability to invest. We just remain focused on the things that are core to our strategy, demand creation, value-added offerings and capabilities, certainly, our IP&E selling motion and then, of course, the transition to IT as-a-service in our ECS business. And so, we’re going to make sure that we’re careful with respect to what’s happening in the broader market in the meantime, but our investment priorities are fairly focused.

With regard to your question about IT as-a-service, it’s basically changing the shape of our sales number in that business. The more we drive infrastructure software, cloud-related solutions and services, the more you’ll see our mix shift to a model that’s more about GP dollars than it is reported sales. And really, the right way to look at that business over time is through the lens of GP dollar and OI dollar growth as a result. But a good consequence of that pivot, and as you know, we’ve been on that journey for a good couple plus years now, has been the growth in the recurring piece of our total ECS business. We think now, when you look at cloud, when you look at things like the transition for software from perpetual to subscription-based licensing models, yes, the recurring piece of our total mix is now approaching 1/3.

And so, we like that. It’s predictable, it’s sticky, and ultimately, brings about accretive contribution margins for that piece of our business. So, we’re staying the course there as well. And you’ll have to forgive me, but I think you had a third question in there, I want to make sure we don’t forget it.

Ruplu Bhattacharya: I didn’t, but I’m going to put one in. Just in terms of IT as-a-service. What are people buying? Are they buying hardware? Or is it just software at this point?

Sean Kerins: Ultimately, we think it’s about both. But in the near term and recently, it’s been more about software.

Ruplu Bhattacharya: Okay. Great. Raj, I just want to have a quick follow-up with you on margins. With respect to component margins, they were 5.1% this quarter. Is there a revenue level you need to keep the segment margin above 5%? And then the same question on the ECS side, I think Sean talked about optimizing customers and line cards in Americas. Does that impact how we should think about margin trends in ECS this year? Or is it the 1Q is the lowest and then we should see sequential margin improvement until 4Q? So just your thoughts on these, on the margins for both of these segments.

Raj Agrawal: Yes. Let me — there’s a few questions in there, Ruplu. Let me take the first one to start. On the Component side, I don’t think we have a set revenue level in mind for the higher margin target. We still are comfortable with the 5.5% to 6% in the components business in a normal environment. Right now, we’re going through the down cycle. And as you heard some of the commentary, the gross margins seem to be relatively steady and stable, and it’s really a function of negative leverage with the reduced revenue levels. So, given the structurally higher margins that we have today based on all the things that we did, we know that when revenue returns to a more normal environment, and that’s to be defined, we’re going to get that leverage back and margins will take care of themselves. So, we’re confident about the long-term target that we have. And I’m going to turn to Sean a little bit on the second question. Can you just repeat your question, Ruplu?

Ruplu Bhattacharya: Yes. I just referred to what Sean has said about in the ECS segment. I think in the Americas region, you’re trying to optimize customers and line cards. And so, like where are you with that? And how does that impact how we should think about margins? Like, I mean, does that impact your margins positively this year versus prior years? And how should we think about the trend in ECS margins?

Sean Kerins: So, I’m happy to take that, Ruplu. So again, for context, we’ve got kind of two different models in our ECS business. We’ve got a regional business in Europe that really suits our strategy nicely. It’s a mid-market region, and it’s one that lends itself nicely to a channel-based selling motion. The mix, as we grew up in that business, was more about software and now cloud as compared to the mix in the way that we grew up in North America, which was historically about hardware and larger enterprise accounts. So, we’re on the same path in North America to create the same model that we enjoy in Europe. And ultimately, there should be accretive on the margin line. But we’re not calling it out for the full year yet at this point.

We’re just guiding one quarter at a time for all the reasons that you’d expect. But we think that, that destination is a good one. We recognize, we still have some work to do relative to more mid-market scale in North America, and we expect to see better progress across the course of ’24.

Operator: We have no further questions in our queue at this time. I will now turn the conference back over to Anthony Bencivenga for closing remarks.

Anthony Bencivenga: Yes. Thank you, operator, and thank you, everyone, for joining us on today’s call. We look forward to meeting you in the near future at upcoming investor events. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.