TD SYNNEX Q2 2023 Earnings Call Transcript

There are 11 speakers on the call.

Operator

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TD SYNNEX Second Quarter Fiscal 2023 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

At this time, for opening remarks, I'd like to pass the call over to Liz Morelli, Head of Investor Relations. Liz, you may begin.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for today's call. With me today are Rich Hume, CEO and Marshall Witt, CFO. Before we continue, let me remind you that today's discussion contains forward looking Statements within the meaning of the federal securities laws, including predictions, estimates, projections or other statements about future events, including statements about strategy, demand, plans and positioning, as well as our expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward looking statements as a result of risks and uncertainties discussed in today's earnings release, In the Form 8 ks we filed today and in the Risk Factors section of our Form 10 ks and our other reports and filings with the SEC.

Speaker 1

We do not intend to update any forward looking statements. Also, during this call, we will reference certain non GAAP financial information. Reconciliations of GAAP to non GAAP results are included in our earnings press release and the related Form 8 ks available on our Investor Relations website, ir.tdsynex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Rich.

Speaker 1

Rich?

Speaker 2

Thank you, Liz. Good morning, everyone, and thank you for joining us today. 2nd quarter proved out the resilient business model we've been highlighting over the last several quarters, as we saw of many of the trends from the February quarter. Our unparalleled line card and diversified portfolio allowed us to realize growth in Advanced Solutions and High Growth Technologies, while year over year growth rates for endpoint solutions were impacted by short term weakness in the demand for PC products post pandemic. We expect this PC demand decline to abate over time as customers upgrade an aging installed base of devices, allowing them to run the latest operating environments and leverage key security features.

Speaker 2

And we're encouraged by the improving Macroeconomic sentiment and stable supply chain conditions that are mostly back to historical profile levels. Although the pace of the recovery remains uncertain, we believe that gross billings and net revenue in fiscal Q2 And the outlook for Q3 represent the trough levels for Endpoint Solutions. The breadth of our technology offerings again proved to be a differentiator for us as we were able to offset deeper than anticipated declines In endpoint solutions technology demand with growth in advanced solutions and high growth technologies. Our teams delivered solid execution, shifting to pockets of growth. And on a year to year basis, We believe we maintained our overall market share position in the Americas, while growing market share in Europe.

Speaker 2

The resilience of our business model, along with strategic investments that we have made, augment our capability in the fastest growing areas of the market and helped us to expand margins in the quarter. Working capital improved with lower revenues, which is a reflection of the counter cyclicality of our business model. From a regional perspective, the Americas experienced the largest impact from the post pandemic decline in demand With year over year declines for PC Ecosystem Products, America's Advanced Solutions saw continued growth, driven by demand for cloud and data center related technologies. From a customer perspective, Declines were primarily in the largest customer segment, while SMB and MST customer segments have grown. Europe continued to show resilience with smaller declines in the endpoint given our broad technology footprint and diverse product line, including mobile phones and a very strong growth in advanced solutions offerings and specialized solutions.

Speaker 2

The Asia Pacific Japan region also saw strength in high growth technologies and specialized solutions, partially offset by smaller declines in endpoint solutions. At a company level, we continue to see solid momentum across the Data, AI, IoT and hyperscale infrastructure. These areas continue to see growth in the low teens on a year Year basis. Our customers are prioritizing projects in these areas given the critical nature of these IT investments and their strategic importance in minimizing cyber attacks, enabling digital transformation and driving cost optimization. Investing in these technologies is one of our 4 strategic pillars And foundational to our evolution from a traditional distribution partner to solutions aggregation and orchestration partner.

Speaker 2

Let me take a moment to provide some perspective on the steps we've made towards our goals in this area. We are well into the solutions aggregation phase where we build, integrate and facilitate edge to cloud IT solutions for our customers. Our role is to help our customers solve complex market challenges by aggregating multi vendor solutions and delivering easily deployed business outcomes. We do this through our solutions factory methodology, where we build comprehensive repeatable solutions that include some combination of hardware, software and cloud licenses. A recent example of this involved in IT solution provider and a consulting firm that wanted to provide a better backup solution for their clients.

Speaker 2

Maintaining warranty and software support on proprietary backup appliances can be costly for end users, And they wanted to begin recommending pure cloud backups where applicable. This provider was able to utilize the TD SYNNEX Solution Factory And our cloud based click to run solutions, along with provisioning a preconfigured cloud solution built by TD SYNNEX within minutes. This enabled the provider to deliver a solution to their end users More rapidly, while reducing configuration and deployment process times by 75%. We have many examples like this and currently have over 7,500 of these solutions deployed, Including offerings for software defined data centers, hybrid cloud, hyperconverged infrastructures, analytics and security. We look forward to continuing to share updates with you on this important work.

Speaker 2

Now Moving on to our merger integration efforts. As we approach the 2 year mark since we became TD CITEX, I'm pleased to report that we have realized our goal to achieve $200,000,000 in merger related cost synergies, ahead of schedule. This is an important milestone and is a result of much hard work and effort by the teams across the company. As we move forward, we expect to realize an additional $50,000,000 in cost optimization Over the next several quarters. From an ERP Systems perspective, we have made additional progress Toward the completion of transitioning the Americas business to one system.

Speaker 2

Approximately 80% of our Americas business is now on CIS and we remain on track with our transition goals. Importantly, This progress opens the door to realizing merger related revenue synergies and to continually enhance our business. While we know that some revenue synergies have already begun to be realized, we believe this remains a more significant opportunity Toward the end of 2023 and into 2024. This month, we were honored to receive our updated Fortune 500 rating being named number 64 on the list for 2023. This is a testament to the Strong relationships that we maintain with our customers and vendors.

Speaker 2

During Q2, we were privileged to be recognized with several awards, Including being named HP Partner of the Year, North America Distributor of the Year by Dell, HPE and Veeam, in addition to other regional awards. We also had Thanks, Shneur, of having 19 of our leaders recognized by CRN as top women of the channel last month, A well deserved achievement and recognition of their significant contributions to our company and industry. We are proud of their achievements and continue to be committed to gender diversity as part of our overall DE and I strategy with the goal of increasing representation of female core workers to 40% of leadership roles by 2,030. We also closed on several new vendor partnerships during the quarter, including Gong, an AI driven revenue intelligence platform And GitLab, via an exclusive partnership to address DevSecOps and application modernization In Asia Pacific, Japan. These wins are indicative of our investment and commitment to grow in new technology areas, Enabling us to continue offering our customers the most complete portfolio in the industry.

Speaker 2

Since the beginning of the fiscal year, we have added nearly 100 new vendors to our line card. In closing, As we contemplate fiscal Q3, while there remains some uncertainty in the macroeconomic environment, We are encouraged by the early signs of stabilization with the resolution of the U. S. Debt ceiling, reduced banking sector concerns And a serviceable supply chain. We expect PC ecosystem demand declines to reduce Following the past couple of years of intense buying by our customers and driven by the factors I mentioned earlier, We remain well positioned to navigate the demand environment as highlighted by our performance this quarter, and we believe That the long term drivers of IT spending remain intact.

Speaker 2

I'll now turn it over to Marshall for some additional comments about Q2 and our Q3 outlook. Marshall, over

Speaker 3

to you. Thanks, Rich, and thanks to everyone for joining us today. Our earnings and cash flow profile remained strong this quarter. We delivered non GAAP EPS of $2.43 per share within our previously guided range and generated over $700,000,000 of cash flow from operations for the quarter, Demonstrating the countercyclical nature of our business model, our Q2 revenue performance was at the low end of the outlook range we provided in March and is the result of a demand environment that vary greatly between endpoint and advanced solutions technologies. As customers prepared for the rapid shift To hybrid work, over the past few years, growth for PC Ecosystem products was well above historical trends.

Speaker 3

As Rich mentioned, demand for endpoint solutions is now declining, with customers digesting the increased investments made over As customers focused on projects for data centers and continue to prioritize their cloud migrations. Given our broad portfolio and progress in high growth technologies, We were able to leverage the areas of growth in Q2, increasing our market share for these technologies in North America and Europe. Worldwide gross billings were $18,700,000,000 down 4% in constant currency, While net revenue was $14,100,000,000 down 7% year over year in constant currency. Given that a greater percentage of our sales Came from Avance Solutions in the quarter, more of the revenues were shown on a net basis in the quarter. If normalized for these additional gross to net adjustments, which primarily occur in Advanced Solutions, the year over year net revenue decline in constant currency was 4%.

Speaker 3

We continue to see solid growth in the high growth technologies of cloud, security, data, AI, IoT and hyperscale infrastructure. And collectively, these areas grew in the low teens on a year over year basis and represented Greater than 20% of our gross billings in the quarter. Non GAAP gross profit was $969,000,000 and non GAAP gross margin was 6.9%, up 45 basis points year over year. The improvement in gross margin was driven by a mix shift to Advanced Solutions and High Growth Technologies. Total adjusted SG and A expense was $593,000,000 representing 4.2 percent of revenue, up $8,000,000 year over year as we continue to make investments to enhance our capabilities in the strategic growth areas of the market.

Speaker 3

We expect SG and A expenses as a percentage of net revenue will return to the 3.5% to 4% range in the second half of fiscal twenty twenty three As we begin to realize the cost optimizations that Rich mentioned earlier, non GAAP operating income was $376,000,000 down 5.6% year over year and non GAAP operating margin was 2.7%, up 6 basis points year over year. On a constant currency basis, non GAAP operating income decreased 5% year over year. Q2 non GAAP interest expense and finance charges were $72,000,000 $4,000,000 better than our outlook and the non GAAP effective tax rate was approximately 24%. Total non GAAP net income was $229,000,000 and non GAAP diluted EPS was $2.43 within our guidance range. Non GAAP EPS for the quarter was down 11% year over year and excluding the impact of higher interest expense and FX translation, It would have been down 2% year over year.

Speaker 3

Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of $852,000,000 And debt of $4,100,000,000 Our gross leverage ratio was 2.3 times and net leverage was 1.8 times, In line with our investment grade credit rating and approaching our previously communicated target of 2x gross leverage ratio, Accounts receivable totaled $8,400,000,000 down from $9,400,000,000 in the prior quarter and inventories totaled $7,800,000,000 down from $8,400,000,000 in the prior quarter. Net working capital at the end of the second quarter was $3,800,000,000 down from $4,200,000,000 in Q1 due to declines in AR and inventory and partially offset by a decline in AP. The cash conversion cycle for the Q2 was 24 days, down 2 days from quarter 1, which was consistent with expectations and typical seasonal patterns. Cash from operations in the quarter was $708,000,000 and free cash flow was 677,000,000 as the business demonstrated the benefits of its countercyclical balance sheet.

Speaker 3

During Q2, we returned $93,000,000 to shareholders via dividends of $33,000,000 and share repurchases of $60,000,000 For the quarter, our Board of Directors has approved a cash dividend of $0.35 per common share, which equates to a dividend yield of approximately 1.5 percent payable on July 28, 2023 to stockholders of record as of the close of business on July 14, 2023. As Richard mentioned, we are happy to report That we met our merger related cost synergy target ahead of schedule, realizing $30,000,000 of incremental savings and over $200,000,000 cumulatively. Despite our success in achieving merger synergies, there's more work to do to optimize our cost structure, especially given the unprecedented swing From strong market momentum exiting fiscal 2022 to the year over year declines in revenue for the first half of fiscal twenty twenty three, Over the next three quarters, we will be pursuing cost optimizations that will drive SG and A costs lower by approximately $50,000,000 on a run rate basis. The cost savings will in part be enabled by the integration of our 2 ERP systems into 1 enterprise platform in the Americas. This opens up our full capabilities to dynamically manage and respond to where the market is going and provides us with confidence in realigning our cost structure to market conditions and to fully leverage cross sell revenue opportunities.

Speaker 3

So with this as the backdrop, let me now share our outlook for fiscal Q3 And high level thoughts regarding Q4. We believe we will continue to see demand for PC ecosystem products improve and believe that fiscal Q2 and Q3 represent the trough levels for endpoint solutions, gross billings and net revenue. For fiscal Q3, we expect gross billings of $18,000,000,000 to $19,300,000,000 representing a 7% decline on a year over year basis In constant currency at the midpoint, we expect total revenue to be in the range of $13,500,000,000 to $14,500,000,000 which equates to a 10% decline year over year on a constant currency basis at the midpoint. Our guidance is based on a euro to dollar exchange rate of 1.09. Non GAAP net income is expected to be in the range of $206,000,000 to $253,000,000 and non GAAP diluted EPS is expected to be in the range of $2.20 to $2.70 per diluted share based on weighted average shares outstanding of approximately 93,000,000.

Speaker 3

Non GAAP interest expense is expected to be approximately $72,000,000 and we expect the tax rate to be approximately 24%. We believe market sentiment reflects a modest recovery beginning towards the latter part of Q3 and continuing into Q4 and would expect to see a seasonal sequential improvement in revenue of approximately 8% in Q4 as well as easier compares as we enter fiscal 2024. As a reminder, in Q4 of fiscal 2022, We had a benefit of approximately $0.33 to non GAAP EPS due to high margin recoveries, which we do not expect to repeat. In closing, I'd like to provide some comments regarding capital allocation. Given strong free cash flow generation in Q2 and our continued confidence in generating over $1,000,000,000 in free cash flow for fiscal 2023, we are focused on deploying cash opportunistically.

Speaker 3

We returned $241,000,000 of capital to shareholders in the first half of the year and expect to increase that pace For the back half of the year by approximately $100,000,000 bringing our expected capital return for the back half of the year to approximately 340,000,000 And the all in total for fiscal 2023 to $580,000,000 We will continue to be opportunistic with regards to capital allocation, while adhering to the general framework we have previously communicated to the market. With that, we are now ready to take your questions. Operator?

Operator

We request that you limit yourself to one question to allow time for other participants to ask their questions. And if there is remaining time, You're welcome to re queue with additional questions. Our first question is from Adam Tindle with Raymond James. Your line is open.

Speaker 4

Okay, thanks. Good morning. Rich, I just wanted to start with maybe a macro question. And as we think back, one of your largest customers had a surprising end to their March Quarter and a sizable cut to their forecast. The question that investors are wondering this morning is the weakness that you've seen here on revenue, Is that reflected in the data point from March because your quarter includes that month of March or have trends continued to weaken?

Speaker 4

And if you could Maybe touch on what's going on in the month of April, May and how June is shaping up, it would be very helpful. Then I've got a follow-up on cash flow for Marshall.

Speaker 2

Sure. So first of all, obviously, we were to the low end of our revenue guide for the Quarter. So the demand in primarily the PC ecosystem or endpoint solutions were A little bit softer than we had anticipated. We did have some offsets from the Advanced Solutions Business and High Growth Technology Business as it was stated in our prepared comments. We do see a little bit more volatility Month on month, as we had moved through Q2, I would say that it was Bumpier lows and highs relative to what we might see.

Speaker 2

So it felt as if it was a little bit more volatile. And I think, Adam, that this continuation of Realigning, if you will, the PC ecosystem inventory across the entirety of the supply chain was perhaps a contributor To those Endpoint Solutions volumes being a little bit lower than anticipated. As we have stated, our view for the remainder of the year is that we'll see lesser declines In Q3 and Q4 moving forward, but we do believe that digestion Continues and as you know that as we move through time, there still are some reasonably tough comparison. They get easier as we move into Next year. So, we think that clearly there is improvement on a year over year basis moving through time.

Speaker 2

It's still sort of a declining environment with lesser and lesser declines as we move through time. So that's kind of the summary.

Speaker 4

Okay. That's helpful, Rich. And maybe Marshall as a follow-up, acknowledging cash flow very impressive in the quarter. And your decision to talk about deploying cash opportunistically, if I recall, it's been a little bit more programmatic on share repurchases and smaller in the past. So, first part of that question would be maybe just taking us into the discussion and what's changing here from a qualitative perspective to move to this opportunistic stance.

Speaker 4

And then secondly, if you could touch on the timing of cash flow over the next few quarters and for fiscal 2024, there's been times in these models where we have these strong cash flow quarters that Followed by reversals. So I'm just wondering on the sustainability of cash flow from here. Thank you.

Speaker 3

Yes. Thanks for the question, Adam. So programmatically, we will have in place the 10b5-1 program and what that allows us to do is just have in place during all periods Quiet and open to buy at various pricing levels based on what we believe to be the appropriate intrinsic value of the stock. The opportunistic aspect of that, Adam, will be when we see price changes in our stock and our ability to take advantage of that, we will. So that will be more of a case by case and day by day decision in the second half.

Speaker 3

And thinking of the cash flow and timing, Quarter 1, we were at 26 days. Quarter 2, we improved that to 24 days, so good improvement. That was expected Seasonally, but also at the same time, we did see some structural improvement that we think will hold. So as now we look for Q3, our expectation is for us It come down in improvement of probably about 1 cash day. And then Q4, based on our comments about the seasonality recovery of 8% Sequentially, sometimes that does consume working capital.

Speaker 3

It's difficult to tell today, but still allows us to have confidence to achieve the one Billing plus cash flow for 2023 and thus the increase in the second half of share repurchases by 100,000,000 And then your question about going into 2024, we have said in our Investor Day and along the last couple of quarters that we still feel that That medium term target of being able to generate free cash flow of $1,500,000,000 is still reachable and attainable. I do think that coming out of 2022, we were quite elevated on inventory. I think we acknowledge that and that we would Some of that inventory to unwind. We have experienced that today for the first half. We do expect that to continue to improve in the second half of twenty twenty three.

Speaker 4

Okay. And then into 2024, no over risk. I'm just seeing that you're under 2 times net leverage, you've got over $5,000,000,000 of liquidity. And if cash flow is going to continue like this, I'd imagine the capital return story doesn't end here, but don't want to put words in your mouth?

Speaker 3

That's correct. And as you know, It's not always linear. The indication of us increasing our share repurchase is not indicative of anything we're doing on the M and A front. So we're always going to take that with a balanced approach.

Speaker 5

Thank you.

Speaker 3

Thank you, Adam.

Operator

The next question is from Michael Ng with Goldman Sachs. Your line is open.

Speaker 5

Hey, good morning. Thank you for the question. I just have one on SG and A. Given that OpEx is 65% variable, I was Surprised to see it up year over year. I know you mentioned the investments in strategic growth areas that drove the elevated SG and A in the quarter.

Speaker 5

I was just wondering if you could talk a little bit more about that. What areas of growth were most impactful? And then could you talk a little bit about the glide path Towards coming back to that 3.5% to 4% range in the back half, is it evenly split, more back weighted towards the fiscal 4th quarter? How are you thinking about that? Thank you.

Speaker 2

Yes. Thanks for the question. So first, I'll handle the first part and Marshall can assist on the glide path at the back half here. So first, When you think about Ares investment, we point towards the high growth technologies. This would be Cloud, analytics, cybersecurity and then our hyperscale infrastructure business.

Speaker 2

And you've been noting that Those have been performing quite well for us over time. So that's sort of the first data point. The second data point is When we think about our SG and A structure, there clearly has been an impact with inflationary measures across Most of the SG and A category, whether it be labor and logistics centers or whether it be some of the Logistics and supplies like activities which exist within that framework as well. That being said, we've done a pretty good piece of work to think about Where we're headed for the back half of the year and in FY 2024 and have realigned, if you will, The trajectory of our spend to be consistent with getting us back to an overall business profile and I'll let Marshall comment a little bit on that.

Speaker 3

Yes. Thanks, Rich. So just a few things to add. As we said in our prepared remarks, the near completion of our ERP in North America Certainly enables us to drive a lot more opportunity for efficiencies across all areas and that's not only just within SG and A, but that's Margin optimization, pricing, scale, etcetera. So I think that gives us additional confidence to know that deployed onto one system, we've got an opportunity to drive it down.

Speaker 3

Specifically to the $50,000,000 in cost optimization, the way we see that play out in general terms is we'll start to feel that benefit in Q3, Roughly around $10,000,000 of incremental SG and A takeout. We think there'll be another $15,000,000 or so in Q4 incremental. So call that $25,000,000 for the rest of 2023. And then for fiscal 2024 Q1, we expect the an incremental $25,000,000 in Q1. So that's how we expect it to play out.

Speaker 3

I think just as Richard said, there's lots of things we need to consider that will be continued investments Going forward, higher SG and A as it relates to our high growth technologies will continue to be important to us. You probably experienced and seen in the past when we have some heavier SG and A, typically that bears fruit 2 to 3 quarters down the road in terms of better returns, higher margin and cash flow coming back Into the door. So that's how we expect it. In terms of the glide path for Q3, we'll probably be right around 4% In Q3 for SG and A as a percentage of revenue and then we'd expect to be between, call it, 3.6 to 3.8 As we enter Q4.

Speaker 5

Great. Thanks, Rich. Thanks, Marshall. That's very helpful. I'll hop back into the queue.

Speaker 2

Thank you. Thank you.

Operator

The next question is from Joseph Cardoso with JPMorgan. Your line is open.

Speaker 6

Hey, good morning and thanks for the question. Just one for me as well. As it relates to your AS business or your AS and High Growth Technologies business. Just curious to get some more granularity around the trends that you're seeing there. Specifically, is that I guess there is some broader concerns from the investment Around maybe seeing a pullback as you kind of digest some of the backlog in that business.

Speaker 6

I guess, can you just touch on whether you're seeing trends ahead of your expectations 90 days ago. Are you seeing any pullback in terms of current demand trends or order trends? Just curious to see how that business is tracking relative to your expectations 90 days ago? Thanks.

Speaker 2

Yes. A couple of things. Thanks for the question, Joe. So first, AS has been growing at a reasonably robust pace. There is for sure It's benefit growth rate has benefited from some backlog runoff.

Speaker 2

We are starting to reach sort of profile levels Of backlog, generally speaking, there are some very isolated pockets. So the way I kind of see it just To give you a trend here is I think that the AS growth rates will be coming down, But there will still be growth for the back half of the year, but at a bit of a lower growth rate. So if you think of the dynamics of our business, We talked about lesser declines in the PC ecosystem moving forward. I think we then have Lower growth rates moving forward in the AS business. And then as well the back half of last year we had a very strong Hive business, we talked about the lumpiness of Hive over the annual periods.

Speaker 2

And we think that Hyve will have less growth or perhaps decline as well in the back half of the year. So there's Changing dynamics going on within the portfolio. I want to be clear that I think all of these are within the dynamic of The macro. And as we move forward and the macro gets healthier, I believe that the overall business, All boats rise, so to speak, when we find ourselves at that point. And as we stated in the commentary, the trends here recently have been, I think, quite positive relative to The macro, but they could ebb and flow as well.

Speaker 2

So we talked about a clarity on the debt ceiling. We talked about The concern around the banking crisis or the banking issues kind of reducing quite significantly. And then there's the continued narrative around unemployment being low and GDP continuing to chug along. We'll see how all of that plays out. But longer term, we absolutely are confident that IT We'll realign with its sort of normal growth attributes once we clear through this macro.

Speaker 6

No. Appreciate the color, Rich. I'll jump back

Speaker 5

in the queue. Thank you.

Operator

The next question is from Shannon Cross with Credit Suisse. Your line is open.

Speaker 7

Thank you very much. I wanted to ask about the revenue guidance. If PCs are getting a bit better And yet at the low end revenue would be lower like what went into I guess the range that you provided in terms of your thinking? And then I have A follow-up. Thank you.

Speaker 3

Hi, Shannon. I'll go first. So typically what we do every quarter is do a bottoms up Review and that's by product, by region, by leader. No different than what we've done in the past. So as we Pull that together, we have a range of outcomes that typically we then take and Rich and I will look at that to get a sense of the range of guide And that's really how we formulated.

Speaker 3

It's no different. We did articulate last quarter that it was a little bit more difficult given just the uncertainty that we saw in the second half of the year. So it very much is an informed perspective and you can appreciate the Americas dynamics are different than Europe And those are different than high growth in those impacts. For us, clearly, the high growth continues to be the leader. And endpoint, now it's a matter of trying to determine how that recovers.

Speaker 3

So Rich, do you want to add anything?

Speaker 2

Yes. Shannon, if I think sequentially here for a second, First of all, just a reminder that we had a very strong back half of the year. From memory, we had a 14% 15% growth, Respectively. But if you think about it sequentially, I think the dynamic is lesser of a decline in PC Then lesser of a growth rate in AS as sort of the backlog piece that fueled a little bit extra revenue growth Is coming down a little bit. And then clearly, Hive had back half of last year had some really big numbers.

Speaker 2

It's really a remixing across the portfolio of those revenue dynamics that lead to the range of the guide that Marshall had provided.

Speaker 7

Okay. Thank you. And then I'll probably remiss not to ask about AI. Curious, can you talk about what you're thinking internally as well as you're hearing from your customers and how maybe that can grow as part of some of your more solutions oriented sales? Thank you.

Speaker 2

Yes, sure. I actually read this morning a piece on AI in one of our vendors that was released by you and your team. So thanks for those insights.

Speaker 7

Oh, I'll leave you up for a call on that soon.

Speaker 2

So, 3 buckets here. So, first in core distribution And I'm thinking now in terms of offerings, right? We fundamentally believe that we're going to see many Offerings now AI infused. So, there's not obviously, there will be applications out there that might So, sort of AI as a service, but we kind of see the embedded AI as being Yes, something that will lift the entire offerings portfolio almost end to end and you had the piece talking about how AI might influence PC Ecosystem. So as we move through time, I think offerings become more intelligent, more robust and Likely we'll have an influence on some of the ASPs as we move through time.

Speaker 2

2nd, from a Hyve perspective, We all know that the hyperscalers are going to be building out a pretty big tranche over time of, I'll call it AI tuned or AI optimized servers and Storage and networking and the entire sort of data center category. So that will be an opportunity for us To compete to continue to win business within that category. And lastly, from an operations perspective and productivity, obviously, we've been on a journey around machine learning and automation And now we get a little bit supercharged with what I'll call more advanced AI capabilities. And candidly, We're really learning to determine where the best pursuits are for our operation In terms of using that new technology within our franchise overall. So those are the 3 sort of categories that we think about AI in.

Speaker 7

Great. Thank you very much.

Speaker 2

Thank you.

Operator

The next question is from Ruplu Bhattacharya with Bank of America. Your line is open.

Speaker 8

Hi, thank you for taking my questions. My first question is regarding the pricing environment. Are you seeing suppliers lower prices as Commodity costs have come down. And are your own customers buying leaner configurations given the uncertain macro? So can you give us your thoughts on your ASPs?

Speaker 2

Yes. So, Rooplu, to be clear, I'm going to Address the ASPs predominantly within the PC ecosystem space. I mean, obviously, when you get into data center, Following the configurations and the ebbs and flows, it makes it a bit more difficult. But actually ASPs were Up in the quarter, which might be a bit of a surprise. This is for our business, but We see ASPs actually increasing.

Speaker 2

So therefore, I think we see inflationary impacts priced in And or richer configurations. And at the same time, the volume declines were A little bit larger to get us to sort of the average unit revenue, if you will. So ASPs are holding up. However, within that higher ASP sort of band, There clearly is a continued level of price competition that's healthy. So that's how I would describe it is there is definitely very healthy price competition out there, but at the same time the ASPs Have gotten up a little bit on a year to year basis.

Speaker 2

Marshall, I don't know if you have anything to add.

Speaker 3

Yes, just some color sequentially, Ruplu. Rich is right in terms of the ASP holding and approving. Year over year clearly down in the PC ecosystem, but sequentially We saw overall revenue improve. And so that was one of the reasons we also felt like there was some form of recovery underway. So just Wanted to highlight that from a quarter to quarter perspective, we are starting to see the endpoint solution grow for Americas and Europe.

Speaker 8

Okay. Thanks for the details there. For my follow-up, let me ask you a question on revenues and specific to the Americas region. This quarter, you had revenues decline 10% year over year in constant currency. Can you give us your view on North America IT spending growth this year end 2023.

Speaker 8

And I think you said endpoint solutions you expect to trough in fiscal 3Q. Let me ask you a little bit more detail on that. I mean, why do you think 3Q is the trough? Why not 4Q? I mean, what is giving you confidence in that 3Q will be the trough?

Speaker 8

And the last part of that question is, Advanced Solutions, I think you said would be slower in the second half. There any way to quantify that? Is that just because of tough year on year compares? Or how much lower versus the first half year on year growth versus the second half? Any color you can give?

Speaker 8

Thanks.

Speaker 2

Ruplu, thank you for the multipart question. Let me see if I can handle each one of those. Our experience in the Americas is that the challenge is clearly within the PC ecosystem. And for one reason or another, it has been more magnified than in the rest of the world. Now part of that is because In Europe, as an example, we have a broader endpoint segment, which is inclusive of Mobile phones, which we don't have within the Americas.

Speaker 2

So that would be number 1. Number 2 is, As it relates to Advanced Solution and the slower growth as we move through, I see it as predominantly The backlog moving towards the profile and not having The increment on the revenue that we had in, I'll call it, the last four quarters With backlog assisting to provide an extra jolt to that growth. And then as it relates to PCs and why we see lesser of a decline and we think the trough would be We say in Q2Q3 It's truly because number 1, the inventory clearly has been digested across the supply chain. Number 2 is we're beginning to see real stability in that backlog Overall. Then the third part is we all read within the industry About the aging profile of the installed base out there and some of the benefits Of the new OSs which are available in the market and then some of those OSs we know have an expiration date sometime in calendar 25.

Speaker 2

So generally speaking, the installed base starts to move when it gets aged and when there Our productivity and mostly security benefits with some of the new offerings and then that coupled with the expiration date. And by the way, the compares begin to get easier. So all of those things together are And then discussions clearly with vendors and customers, all those things together would lead us to Sort of feeling as if the trough is Q2, Q3.

Speaker 8

Got it. Thanks for all the details.

Speaker 2

Hopefully, I answered all your questions.

Speaker 8

Yes, you did. Thank you.

Speaker 2

Okay. Thank you.

Operator

The next question is from Keith Housum with Northcoast Research. Your line is open.

Speaker 9

Good morning, guys. Appreciate the afternoon here. Rich, maybe perhaps touch a little bit based on the sales cycle. We're hearing a lot from the resellers and competitors that the sales cycle has just been elongated across the board, but really don't think we've heard too much of that here from this discussion here. What are you guys seeing that in terms of for the quarter and for the rest of the year expectations?

Speaker 2

So I think as part of the decline that we've seen in PC and then moving forward the lesser declines and then the AS growth rates that we talked about. And then even within our Hyve business, we have Tough compares in the back half of the year and know that we'll be challenged from An overall sales perspective there. All of these things have multiple factors, Keith. I think it starts with the macro and I talk about the macro and Marshall has A couple of time. And what certainly one of the outcomes of the macro are elongated cell cycles, more Scrutiny, if you will, around the purchase more on absolutely limiting the purchase to what's needed now As opposed to what can be foregone for a period of time.

Speaker 2

So I didn't maybe I didn't directly State that the protracted sell cycle time is an outcome, but certainly I see it as tied to sort of the macro and a natural reaction given the macro.

Speaker 9

Great. I appreciate. And just as a follow-up, with the additional cash flow that's available as a reduction of the business Including that capital use, how do you guys see the M and A environment today and your opportunities available to

Speaker 2

you? So I think M and A is something that we always have an active pipeline on And we continue to engage on that pipeline. Things come in, things fall off. I would tell you that our M and A interests are pretty consistent with what they have been over time. As you well know, within this industry, there's the ability to grow Organically predominantly driven in the new technology areas and There's the ability to grow inorganically.

Speaker 2

And over the continuing continuum, sorry, I think that both of those tools will be utilized In order to continue to drive our enterprise.

Speaker 9

Great. Thank you, guys.

Speaker 2

Thank you.

Operator

The next question is from Matt Sheerin with Stifel. Your line is open.

Speaker 10

Yes. Thank you and good morning. I had a question on the gross margin. Marshall, the implied gross margin guide Roughly 6.7%, so down 20 basis points sequentially. You talked at the end of your comments, your opening comments about Hi, having some, I guess, some catch up and some pricing with customers in that, it was sort of a one time Positive impact.

Speaker 10

So could you talk about expectations for gross margin, particularly as you get into the back half of the year With Advanced Solutions slowing and client devices picking up and particularly your consumer business also Picking up seasonally. Should we expect gross margin to be down again in Q4?

Speaker 3

Yes. So I'll address the second half and then Rich certainly can chime in. So we think the gross margins probably come down slightly. Most of that, I think, Matt, it's just due to seasonality. As you know, quarter 4 tends to be a little bit more PC weighted.

Speaker 3

And with that, it tends to have a little bit Lower gross margin profile. But you're right, we had some one time items that won't repeat themselves In Q4 for Hyve and that definitely did benefit last year's quarter 4 margin gross margin. But generally said, the majority of the uplift if you think about Year over year compares on gross margin are primarily due to the mix shift between AS and ES, Matt, And also the increased amount of gross versus net that's taking place within the enterprise, we roughly have about a 3% Higher grossing of those revenues year on year. So it does actually artificially or mathematically increase the margin profile, While gross profit dollars stay relatively consistent or constant relative to overall revenue volatility.

Speaker 2

I have nothing to add. I think, Matt, as Marshall has said, Maybe marginally with the anticipation would be a sequential down a couple of basis points along the way. But fairly stable, I think, in Q4 then.

Speaker 10

Okay. Thank you. And then another question on macro and what you're seeing. You talked about, Rich, about The enterprise being the weakest end market segment and SMB holding up relatively well, Is that your expectation or SMB maybe lagging this cycle And they may get more cautious in terms of spending as you get into next year. Any insight or any visibility there?

Speaker 2

Yes. So clearly, I think for the first half of the year, we've seen this trend. We talk about the I'll say the larger customer set being where we see The biggest challenge is in the SMB and MSPs offering a better outcome as it relates to Productivity. I think, Matt, this is a very difficult question to ask or answer and I'll tell you why. Part of this is because I believe there is a disproportionate consumption of new technologies predominantly cloud and as a Service based solutions that follow technology cycles.

Speaker 2

They hit 1st in enterprise and then kind of make their way down. I think that my speculation is the growth rates of sort of cloud oriented things Are higher in SMB now than they are in enterprise because there's a bit more of a saturation. So I think There is a benefit relative to the portfolio consumption in SMB kind of Following the evolution, if you will, of some of these newer technologies being consumed there. And then You get into what happens with the macro and we find ourselves in a situation where when SMBs Might be thinking of slowing that we have sort of an improvement in the macro. So it's sort of those things that It might allow for a better transition within SMB and MSP as opposed to what we've seen in the, I'll call it, the larger End customers.

Speaker 10

Okay, great. And if I could squeeze in a third question, just regarding your comments On Hyve and the fact that that's going to be weaker in the second half. Could you just talk about I know that there's lumpiness in that business, But how you're positioned sort of as you get past this digestion period or this slow period, how you're looking going into next year?

Speaker 3

Hey, Matt. So yes, we it's a tough compare. The second half of twenty twenty two was exceptionally strong For Hyve and it was contributed for three equal reasons. The racks themselves continue to show strong Demand and then our distribution network enabled us to perform those types of services for our hyperscale customers and then Spare parts, etcetera. It was just extremely healthy in the second half.

Speaker 3

So it just makes it a really tough compare. Sequentially, if you think about the behavior of 5 from Q1 to Q2, good quarters, strong, good margin profile. Those expect to come down a little bit in the second half. I think a lot of it is just connected to the overall thoughts of High Growth Technology still having above average Compared to core growth rates that will continue, but it should abate. I think to your question about when does that digestion period end, We think we exit 2023 and find ourselves in 2024 kind of back in a normal growth rate pattern.

Speaker 3

It's hard to determine if that's A 5% growth, 10% growth, but we do think it's positive. And I will just reiterate the second half of this year, we expect 5 to be down year over year, Primarily just due to the tough compares.

Speaker 2

Yes. So and I would summarize Marshall's comment very simply by saying that my point of view is The high ebb and flow here is strictly related to the macro. We're executing quite well in that business. We are participating in a lot of new design opportunities for the future. The business is executing solidly.

Speaker 2

And I think that this is sort of more of a macro as opposed to anything else and the execution engine is quite strong.

Speaker 3

And then the final thing I'll say, which we say quite often to you, Matt, is that if you look at the annualized trailing 12 Performance of 5 for the last 3 years, they continue to show growth in top line and bottom line.

Speaker 10

Okay, very helpful. Thanks a lot.

Operator

Our final question today is from Ashish Subhadra with RBC Capital Markets, your line is open.

Speaker 6

This is Patrick Jackson on for Ashish. Thank you for taking the question. In Europe, it's great to hear about the continued share gains. Could you share a bit more how trends have developed across advanced solutions and endpoint in that region? And for your mobile distribution business in Europe that you mentioned earlier, could you talk about how demand has trended in the quarter and what you have seen from a supply chain perspective?

Speaker 2

Thank you. Sure. It's been an ongoing narrative for our business that The impacts of the PC ecosystem or endpoint solutions have been more significant in the Americas versus Europe. So although Europe has experienced declines in endpoint solutions, they have been Much lower declines than in the Americas. As it relates to The mobile phone piece, It has been performing reasonably well.

Speaker 2

We have 2 providers that we are engaged with over there. And I'd say that demand has been reasonably solid over time and we wouldn't anticipate any Major change in that trajectory moving forward. And then lastly, from an Advanced Solutions perspective, The benefit of good growth in Advanced Solutions is sort of consistent globally, Where each one of the regions are seeing that trend. So I wouldn't say that it's Out of the norm, Europe versus the rest of the world there. But I would say just being a little bit repetitive that In the last in the first half of the year, the outsized declines in PC ecosystem have been within the Americas.

Speaker 6

Thank you. Thank you.

Operator

That concludes our question and answer session. I'll turn it over to Rich Hume for any closing comments.

Speaker 2

So first, thanks to all of you for attending the call today. In closing, I want to thank our co workers around the world for their persistence and can do attitude in staying focused and making sure that We keep at the forefront the success of our vendors and customers, which we rely upon to drive our business moving forward. Thanks to all of you for joining, and I hope you have a great day.

Operator

This concludes today's conference call. You may now disconnect. Have a nice day.

Earnings Conference Call
TD SYNNEX Q2 2023
00:00 / 00:00