TD SYNNEX Corporation (NYSE:SNX) Q1 2023 Earnings Call Transcript

TD SYNNEX Corporation (NYSE:SNX) Q1 2023 Earnings Call Transcript March 28, 2023

Operator: Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX First 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. At this time, for opening remarks, I would like to pass the call over to Liz Morali, Head of Investor Relations. Liz, you may begin.

Liz Morali: 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, 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-K we filed today and in the Risk Factors section of our Form 10-K and our other reports and filings with the SEC.

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-K available on our Investor Relations Web site, ir.tdsynnex.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. Rich?

Rich Hume: Thank you, Liz. Good morning, everyone, and thanks for joining us today. Our flexible business model and broad industry-leading portfolio allowed us to capture growth in Q1 across advanced solutions and high growth technologies, despite a rapidly changing market environment. Our team showed the ability to execute well, remaining flexible to market conditions and pivoting to areas of growth. This allowed us to grow revenue for the quarter on a constant currency basis, expand margins, deliver non-GAAP EPS growth towards the high end of our previously guided range and return meaningful cash to our shareholders. Relative to our expectations, the macroeconomic environment impacted demand for PCs and related products during the quarter, and the market declined in North America more sharply than we had forecasted.

From a regional perspective, the demand declines in both Europe and Asia-Pacific, Japan were less pronounced. Looking forward, many of our top vendors indicate that we could anticipate a more stable endpoint solutions portfolio in the second half of the year, with drivers such as the post pandemic refresh cycle and the government and education spending season dueling PC demand. Nevertheless, this quarter highlighted the strength of our strategy to invest in diversifying our portfolio. Our investments across data center and networking infrastructure, along with the build out of a robust set of offerings for hybrid cloud, cybersecurity, data analytics, and hyperscale infrastructure are paying off and we are pleased with the momentum we continue to see in those categories in Q1.

In total, our basket of high growth technologies, including Hyve, grew in the mid teens for the quarter. This growth highlights the strategic importance of these projects to our customers and their end users and is aligned with our longer term growth rates we’ve discussed previously for this category. Overall strength in advanced solutions and high growth technologies helped to offset the declines in endpoint solutions, and the overall business saw 4% constant currency growth in gross billings in the first quarter. It is worth noting that IDC and context reports for North America and Europe that we use to track our distribution market participation indicate the overall market share in those regions grew in fiscal Q1. From a supply chain perspective, we continue to see improvement in the quarter, and we experienced decline in our backlog across the board quarter-over-quarter.

While there remain a few isolated areas of constraint, our overall backlog levels are approaching historical levels. The normalization is a positive sign as a more balanced supply chain environment allows us to serve the demand for our customers in a more timely fashion. We continue to make excellent progress on our ERP systems migration. And as I’ve mentioned previously, we deliberately have taken a measured and steady approach to reduce the risk of disruption to our customers and vendors. I’m pleased to report that more than 75% of our North America distribution business is now transacting in CIS. Customer and vendor sentiment around the transition has been positive, and we will continue to migrate the remaining portions of our business throughout the year.

Also during the quarter, we are very proud to publish our first Corporate Citizenship Report demonstrating our commitment to being a responsible corporation. We have set clear environmental and social goals as described in the report, and we look forward to continuing to update you on our progress in these important areas. As we enter the second quarter, which is our seventh post merger quarter, we are confident in our ability to navigate the rapidly changing market dynamics in our industry. We believe our variable cost structure, diversified portfolio, and commitment to investing in high growth technologies allows us to succeed in any market condition. In closing, we expect to see a continuation of the trends we saw in the first quarter play out in our fiscal Q2, with demand for endpoint solutions likely seeing continued pressure and opportunities for continued growth in advanced solutions and high growth technologies.

We are confident in our ability to navigate the dynamic environment by leveraging our broad portfolio to pivot towards pockets of growth and margin expansion. I’ll now turn it over to Marshall for some additional comments about Q1 and our Q2 outlook. Marshall, over to you.

Marshall Witt: Thanks, Rich, and thanks to everyone for joining us today. Before I review our quarterly performance, I wanted to highlight a new measure that we introduced in our filings today. Beginning this quarter, we have added gross billings as one of our disclosures. We believe gross billings is an important metric to consider when evaluating our business, as it represents our total book of business, including the sales that get netted down in the reported revenue line. As a reminder, for many of our virtual offerings across software, cloud and security, the net revenue we report represents only the gross profit we earn for the services we have performed. Thus, the totality of growth across those businesses is not captured in the reported net revenue line.

As a larger portion of our revenue moves to software and services that will be reported on a net basis, we believe providing gross billings and the associated growth rate will allow investors to fully appreciate underlying trends in the scope of our business. This new disclosure was also in response to requests from our investors who value this metric from a reporting perspective. As you heard from Rich, during the February quarter, we saw softer than expected demand across several endpoint solution technology categories, particularly in North America. Despite this additional pressure, our broad diversified portfolio, coupled with our focus on margin accretive high growth technologies, allowed us to grow gross billings and revenue on a constant currency basis and expand margins, despite the lower than expected revenue growth in the quarter.

Now moving to Q1 results. Worldwide, gross billings came in at 20.2 billion, up 1% year-over-year and up 4% in constant currency, while net revenue was 15.1 billion, down 2% year-over-year and up 1% in constant currency. From a regional perspective, America’s revenue declined 4% year-over-year, while Europe increased 5% and APJ increased 26%, all in constant currency. In the Americas, we saw significant deceleration in demand for endpoint solution products, partially offset by strength in advanced solutions and high growth technologies, including Hyve. In Europe, the growth came from outperformance in advanced solutions, partially offset by less severe declines in endpoint solutions. In APJ, the region outperformed our forecast driven by growth in advanced solutions services and high growth technologies.

Non-GAAP gross profit was 1.01 billion, which is our second consecutive quarter greater than 1 billion and non-GAAP gross margin was 6.68%, up 26 basis points year-over-year. The improvement in gross margin was driven primarily by an increased mix shift to advanced solutions and high growth technologies. Total adjusted SG&A expense was 568 million, representing a 3.8% of revenue. Non-GAAP operating income was 443 million, up 11 million or 2.6% year-over-year, and non-GAAP operating margin was 2.93%, up 14 basis points year-over-year, primarily driven by increased mix shift to high growth technologies and cost synergy attainment. On a constant currency basis, non-GAAP operating income increased 5% year-over-year. Quarter one non-GAAP interest expense and finance charges were 78 million, 5 million above our outlook.

For Q1, the non-GAAP effective tax rate was approximately 23%. Total non-GAAP net income was 279 million and non-GAAP diluted EPS was $2.93, which was at the high end of our previously communicated guidance range for the quarter. Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of 539 million and debt of 4.4 billion. Our gross leverage ratio was 2.4x and net leverage was 2.1x which is in line with our investment grade profile and approaching our previously communicated target of 2x gross leverage ratio. Accounts receivable totaled 9.36 billion, down from 9.42 billion in the prior quarter and inventories totaled 8.37 billion, down 694 million or 8% from the prior quarter. Net working capital at the end of the first quarter was 4.2 billion, an increase of approximately 390 million from Q4 due to seasonal trends.

The cash conversion cycle for the first quarter was 26 days, up three days from quarter four, and cash used in operations in the quarter was 103 million. From a shareholder return perspective for the current quarter, our Board of Directors has approved a cash dividend of $0.35 per common share payable on April 28, 2023 to stockholders of record as of the close of business on April 14, 2023. During the quarter, we paid 33 million in dividends and continued executing on our share repurchase program by buying approximately 115 million of our stock. We have approximately 900 million remaining on our three-year share repurchase authorization, and expect to continue further share repurchases through the year aligned with our cash flow generation.

We continued to make good progress on the remaining merger-related cost synergies recognizing an additional 25 million in the quarter, and to date we have achieved over 170 million of our total 200 million target. Now moving to outlook for fiscal quarter two. As Rich had mentioned, we expect to see a continuation of the trends we saw in the first quarter with a stronger weighting towards advanced solutions and high growth technologies. We expect gross billings of 18.7 billion to 20 billion, approximately flat on a year-over-year basis in constant currency at the midpoint. We expect total revenue to be in the range of 14 billion to 15 billion, which equates to a year-over-year decline of approximately 4% on a constant currency basis at the midpoint.

The 4% decline in net revenue is driven by an incremental gross to net adjustment year-over-year, as we continue to grow in advanced solutions and high growth technologies. This outlook also reflects the impact of year-over-year foreign exchange headwinds of approximately 200 million to revenue and 250 million to gross billings. Our guidance is based on a euro to dollar exchange rate of 1.07. Non-GAAP net income is expected to be in the range of 214 million to 261 million and non-GAAP diluted EPS is expected to be in the range of $2.25 to $2.75 per diluted share based on weighted average shares outstanding of approximately 94.2 million. Non-GAAP interest expense for quarter two is expected to be approximately 76 million, and we expect the tax rate to be approximately 24%.

Our guidance is inclusive of headwinds year-over-year from interest expense and euro devaluation, which collectively represent a $0.27 per share headwind to non-GAAP EPS versus quarter two fiscal of 2022. Excluding these discrete items, our outlook implies non-GAAP EPS growth of approximately 2% at the midpoint as our underlying business continues to perform solidly. Regarding our thoughts for the full year of 2023, the market continues to be volatile, which may impact our business but we believe that our differentiation in the market and ability to pivot to pockets of growth is clear in our performance this quarter and on our guidance for Q2. We are seeing stable and consistent margins to the fiscal year outlook we provided last quarter and continue to feel confident we will deliver on our previously guided 1 billion plus in free cash flow, a large portion of which we expect to be returned to shareholders through continued share buybacks and dividends.

I will now turn the call back over to the operator to begin the Q&A session. Operator?

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Q&A Session

Operator: Thank you. . And we will take our first question from Keith Housum with Northcoast Research. Your line is open.

Keith Housum: Good morning, guys. I appreciate the opportunity here. In terms of the strength that you saw in Europe and Asia-Pacific specifically, Marshall, can you please talk a little bit about ? Are you guys taking share there? Is there a feeling of that? Or is it just the market there is stronger than what you’re seeing here in North America?

Marshall Witt: Yes. So Keith, in the prepared remarks — well, first of all, good morning and thanks for the question. I’m ready to jump in right away. So first, in our prepared remarks, I had commented on market share in Europe and in North America absent APJ. And the reason for that is we don’t have a service in APJ that readily reports our market position. But clearly, as stated in the remarks, we feel as if we’ve grown our market participation in North America and Europe. And obviously the top line revenue strength in APJ was quite good. So that’s the first point. If I were to characterize the European performance, we have this theme for our company globally where we had said that we had declining endpoints and we had growing advanced solutions.

And in Europe, on the endpoint, let me just say that it declined less. And on the advanced solutions, it grew more. Part of the endpoint declining less is due to the mix of that endpoint segment. You might recall, we have mobility as part of the endpoint segment in Europe as an example. So therefore, some of those things in terms of the mix of the endpoint were why we had decline less. So that’s really the major overlying theme.

Keith Housum: Okay, I appreciate that.

Rich Hume: One thing that you’ll see in the press release on the regionals is that often comes for Europe the decline, that was more about high growth technology that compares year-on-year.

Keith Housum: Okay. I appreciate that. And just following up, Rich, on that endpoint device commentary there, you noted that the vendors expect a second half improvement in endpoint devices. I guess my question is, I guess do you and your customers agree with that assessment that you’ll see an improvement in the second half?

Rich Hume: I would say that generally, yes, Keith. There’s a couple of parameters here that I think are important. So first, if you think about the government buying season, what we had experienced is that in the prior year, there was a pretty tepid government spending season, because of the huge COVID purchase the year or two before that. So we believe there’ll be a rebound there. The second is, we all know about the post pandemic refresh cycle in Windows 11, so we’ll start to see some of that kick in. And the third is, candidly, the back half of the year is when the declines had begun so the compares are easier. They basically will begin to wrap starting in the third quarter, overall.

Keith Housum: All right, guys. Good luck. Thank you. I appreciate it.

Rich Hume: Thank you, Keith.

Operator: And we will take our next question from Sameer Kalucha with RBC. Your line is open.

Sameer Kalucha: Hi. Can you hear me okay?

Rich Hume: Yes.

Sameer Kalucha: Okay, great. Thanks for taking the questions. When you gave the guidance for the full year last quarter, the outlook was underpinned by a flattish GDP outlook. I was curious, what are the views on GDP from where we are right now, given the market conditions are a little bit different from what we saw in the beginning of the year? So that’s number one. And number two, given all the rage about new technologies, like generative AI, I’m curious how big are they as part of your portfolio in the high growth solutions in AI/ML part? And how do you expect them to drive growth going forward? Thanks.

Rich Hume: Yes. Well, thank you for your comments. First, as it relates to GDP, as you’re well aware, I think there’s been some real-time events that have played out in the last couple of weeks that probably aren’t yet reflected in the reports that exists for GDP, so we’ll have to wait and see when those things flow through and the economists do their job as to what that outcome might be. Last reported, we thought that GDP and the markets that we participate would be flattish. So we’ll see where things go from there. And then on your second question, when we think about our strategy, we talk about high growth technologies, which includes hyperscale infrastructure, cybersecurity, and then data and analytics. And data and analytics at its core becomes the foundation, if you will, for a lot of the AI work that’s going on.

I would say sort of looking backward, the predominance of our sale had been more around analytics, pure analytics, and we now see the emergence of artificial intelligence, although it really hasn’t become a material or meaningful part of our entire revenue stream or portfolio yet. My experience has been that when new technologies emerge to the market, they’ll manifest themselves in first of a kind offerings first. And then through time, they get packaged and make their way down through what I’ll call the medium or smaller customers, which is where most of our engagement with our customers is directed. As you well know, when you get into AI, it’s all about the data and the accuracy of the data. So my expectation is, we might go through the similar cycle of being deployed first as custom projects, and then making its way into package solutions.

But I believe that that whole development cycle will be greatly condensed given the emergence of a lot of the new artificial intelligence in the market.