TD SYNNEX Corporation (NYSE:SNX) Q1 2024 Earnings Call Transcript

TD SYNNEX Corporation (NYSE:SNX) Q1 2024 Earnings Call Transcript March 26, 2024

TD SYNNEX Corporation misses on earnings expectations. Reported EPS is $1.95 EPS, expectations were $2.86. SNX 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 morning. My name is Mandeep, and I’ll be your conference operator today. I would like to welcome everyone to the TD SYNNEX First Quarter Fiscal 2024 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, our CEO, and Marshall Witt, our 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 demand, cash flow, our debt structure, and shareholder return, 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 website ir.tdsynnex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I’ll now turn the call over to Rich. Rich?

Rich Hume: Thank you, Liz. Good morning, everyone, and thank you for joining us today. We had a strong start to the fiscal year with an improving IT spending environment, generating record margins, EPS at the upper end of our expectations, healthy free cash flow and continued strong capital returns to shareholders. Across the organization, we are poised to capitalize on a stabilizing demand environment for our core business while continuing to advance our strategy to expand our capabilities in strategic technology areas. Importantly, we believe that the IT spending environment will continue to improve throughout the year and believe we will return to positive year-over-year gross billings growth next quarter, bolstered in part by the introduction and growth of infrastructure, components and services to support escalating AI-enabled workloads and applications.

We remain committed to returning excess free cash flow beyond dividends and M&A to shareholders via share repurchases, while also managing our leverage ratio. And today, we announced that our Board of Directors has approved a new additional $2 billion share repurchase authorization. For our first fiscal quarter, revenue and gross billings were largely in line with our guidance ranges with the backdrop of a recovering market and continued progress on our strategic portfolio diversification and global line card expansion efforts. From a regional perspective, trends in our markets played out as we had expected. In the Americas, we saw improving year-over-year trends in PCs and a record quarter in Latin America. Europe similarly experienced positive momentum in the PC market but faced challenging year-over-year comparisons in advanced solutions given last year’s record performance.

Asia-Pacific, Japan continued to experience year-over-year growth in constant currency fueled by strength in Advanced Solutions across multiple countries, including emerging markets. Looking at our results by technology. Within Endpoint Solutions, as anticipated, we saw slight growth on a year-over-year basis in PCs. We anticipate seeing continued improvement in the PC market as 2024 progresses, aligned with what several OEMs and industry participants have described as a second-half weighted spending pattern. We believe this will be driven by several factors, including the new mid-year launches of AI-enabled PCs, more customary refresh cycles associated with aged devices and operating system upgrades. This should also drive increased demand for some of our other PC adjacent categories like peripherals and endpoint software.

Strength in the PC market was offset by softness in demand for mobile devices and some components which weighted down our results overall in Endpoint Solutions. Consistent with expectations, Advanced Solutions’ year-over-year comparisons were challenged given the elevated demand and backlog drawdown dynamics we saw in the first half of 2023. Regardless, we had a solid quarter in Advanced Solutions. In addition, we see the beginnings of AI offerings emerging in the portfolio. As an example, we had a very successful launch of Microsoft Copilot, where we enabled more than 2,000 partners with our launch campaign. Overall, we are well-positioned to take advantage of the fast-growing AI market. Our strategic vendor partnerships and enablement programs are helping us to create industry-leading aggregated solutions and serve as a destination for AI solutions in the channel.

Momentum is clearly evident in building in this area. Last month, we announced an expanded collaboration with NVIDIA in North America where we are distributing their full line of products, including GPUs, helping users and partners to access AI-augmented applications, model training and development, professional graphics, engineering and digital twin applications. We were also honored to be recognized last week by the NVIDIA Partner Network as the Distribution Partner of the Year in the Americas and look forward to our continued partnership. Additionally, we showcased our next generation AI lifecycle solutions from Hyve at NVIDIA’s GTC AI Conference in San Jose last week. These products are tailored to the demands of AI datacenters, hybrid cloud and edge deployments and include the design of liquid-cooled servers and racks.

Beyond these accomplishments, we continue to execute on our goals to expand in the strategic technology areas and increase the value we bring to our partners. In our strategic technology areas, we experienced solid year-over-year growth in data, AI, IoT, cloud and security. Including Hyve, these technologies represented 23% of our total gross billings in Q1. Underpinning these strong results are a multitude of programs and offerings designed to help our partners. To highlight a couple. First, we launched TD SYNNEX Cloud Labs as a solution aimed at accelerating the go-to-market process for our vendors. This virtualized environment facilitates proof-of-concept demonstrations that are flexible, scalable and cost-efficient. This helps our vendors to bring solutions to market faster and more effectively.

Second, we continue to invest in our StreamOne platform, adding several new application programming interfaces or APIs, and launched new Professional Services Automation or PSA connectors, particularly used by managed service providers and which provide an increased ease and synchronization of products, customers and order changes. We believe now more than ever that our organization is well positioned across both our core and strategic technology portfolios. The challenge market environment over the past year has provided us an opportunity to showcase the strength and resilience of our business model, portfolio and capabilities. Despite the headwinds in the market, we’ve pivoted to areas of growth and improved our business and margin mix towards strategic technologies, and have also generated significant free cash flow, the majority of which we have returned to shareholders.

We believe we have emerged even stronger from this period of market volatility and look forward to capitalizing on an improving IT spending environment, which we believe will allow us to deliver revenue growth, increased earnings per share and significant free cash flow generation, driving strong returns for our shareholders. I will now pass it over to Marshall so that he can provide additional details on our financial performance and outlook. Marshall?

Marshall Witt: Thanks, Rich, and good morning to everyone on today’s call. As Rich mentioned, we were encouraged to see an improving market environment with revenue and gross billings in line with our guided ranges. Additionally, our broad portfolio and progress on expanding in strategic technologies allowed us to further improve our profitability with strong margins, healthy free cash flow, EPS growth at the upper end of our expectations and robust returns to shareholders. Moving to our fiscal first quarter performance. Fiscal Q1 total gross billings were $19.3 billion, down 5% year-over-year and in line with expectations, driven by a 7% decline in Endpoint Solutions and a 3% decline in Advanced Solutions. Net revenue was $14 billion, down 7.6% year-over-year.

Gross to net revenue adjustments increased year-over-year due to the ongoing shift in our business mix and migration of a portion of Hyve’s business to a consignment model. This negatively impacted our net revenue by 3% on a year-over-year basis, but improved our gross margins by 23 basis points. As we previously announced, starting this quarter, we are providing some enhanced data disclosures in our investor presentation. First, we are providing gross billings, net revenue and gross profit for the technology categories of endpoint solutions, which includes PCs, mobile devices, printers and peripherals, and Advanced Solutions, which includes cloud, servers, networking, storage, software and hyperscale infrastructure via our Hyve business. In addition, we are providing gross billings for our strategic technologies which are cloud, security, data, AI, IoT and hyperscale infrastructure.

Strategic technologies are primarily found in Advanced Solutions, but some categories are split into both Endpoint and Advanced Solutions. For Q1, from a technology perspective, approximately 72% of Q1 gross billings were from hardware, 21% from software and 7% from services. As Rich mentioned, we were encouraged to see year-over-year growth in PCs as the market continues to stabilize. Non-GAAP gross profit was $1 billion and non-GAAP gross margin was 7.2%, up 52 basis points year-over-year due to a more profitable product mix and continued expansion in strategic technology areas, which also have higher growth to net adjustments. Total adjusted SG&A expense was $581 million, up $13 million year-over-year as we continue to make balanced strategic investments supporting expected growth for the rest of fiscal ’24.

SG&A expense was down $11 million quarter-over-quarter. Non-GAAP operating income was $425 million and non-GAAP operating margin was 3.04%, representing a year-over-year improvement of 11 basis points. Interest expense and finance charges were $76 million, $10 million worse than our outlook due to higher-than-expected borrowings. The non-GAAP effective tax rate was approximately 23% and in line with our forecast. Total non-GAAP net income was $266 million and non-GAAP diluted EPS was $2.99, at the upper end of our guidance range, driven primarily by outperformance on margins due to improved mix. Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of approximately $1 billion and debt of $4 billion. Our gross leverage ratio was 2.3 times and net leverage was 1.7 times, in line with our investment grade credit rating.

We are currently assessing our debt structure ahead of our upcoming $700 million senior note maturity in August of this year and our current intention is to refinance some or all of that debt prior to its maturity. Accounts receivable totaled $8.9 billion, down from $10.3 billion in the prior quarter, and inventories totaled $7.1 billion, down slightly from the prior quarter. For the first quarter, net working capital was $3.2 billion, down from $3.3 billion in quarter four, and the cash conversion cycle was 21 days, down two days from quarter four. Cash from operations in the quarter was $385 million and free cash flow was $344 million. We returned approximately 68% of free cash flow to shareholders in the quarter through $199 million of share repurchases and $36 million in dividend payments.

As Rich mentioned, with our newly announced share repurchase authorization of $2 billion, we now have $2.2 billion authorized for further share repurchases. For the current quarter, our Board of Directors has approved a dividend of $0.40 per common share, representing a 14% increase on a year-over-year basis, which will be payable on April 26, 2024, to stockholders of record as of the close of business on April 12, 2024. Now moving to our outlook for fiscal second quarter. We expect non-GAAP gross billings of $18.4 billion to $19.6 billion, representing a growth of 1.5% on a year-over-year basis at the midpoint. We expect total revenue to be in the range of $13.3 billion to $14.9 billion, flat on a year-over-year 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 $219 million to $263 million and non-GAAP diluted EPS is expected to be in the range of $2.50 to $3.00 per diluted share based on weighted average shares outstanding of approximately 86.8 million. Our non-GAAP tax rate is expected to be approximately 23%. Interest expense is expected to be approximately $75 million and includes approximately $3 million of one-time interest expense and accelerated deferred cost associated with our anticipated debt refinancing. Looking forward to the third and fourth quarters of fiscal 2024, we would expect interest expense of $70 million in quarter three and $75 million in quarter four. These estimates include the impact of our anticipated debt refinancing and expected working capital requirements.

From a gross billings perspective, we continue to expect mid-to-high single digit growth in the second half of the fiscal year, driven by further improvement in the market environment. We expect to generate approximately $1.2 billion of free cash flow for the fiscal year and remain committed to our medium-term capital allocation target of returning 50% of free cash flow to shareholders via both dividends and share repurchases while remaining opportunistic on buybacks depending on market conditions. In closing, our financial profile is strong and our resilient business model has enabled us to weather the volatile market conditions over the past several quarters while continuing to generate strong free cash flow and robust returns to shareholders.

We are working closely with our OEMs and vendors across both traditional and emerging technology growth areas and are seeing the benefits of our efforts to deliver enhanced solutions to our customers, positioning us well to capitalize on improving market demand over the next several quarters. We are now ready to begin the Q&A portion of the call. Operator?

See also 14 Best Climate Change Stocks To Buy According to Hedge Funds and 12 Best Biotech Penny Stocks to Invest In.

Q&A Session

Operator: The floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Adam Tindle with Raymond James. Please go ahead.

Adam Tindle: Okay, thanks. Good morning. I wanted to start on the comments on PC optimism for the back half of the year, and maybe the question would be how that might manifest itself in results. I think if I was to look at the past couple years, the earnings weighting from the first half to the second half tend to be like 48% first half, 52% second half. Wondering if this year might be a little bit north of that 52% in the back half, given that commentary in PCs. And then secondly, just an update on the cost optimization, I think you had identified $50 million a couple of quarters ago. Just update on the timing and what’s reflected in results now. Thanks.

Marshall Witt: Hey, Adam, it’s Marshall. Thank you for the question. In regards to the historical relation of first half, second half, and your observation of being 48%, 52%, I think that’s still fairly reasonable for this year. It may be a little bit heavier in the second half based on how we’re forecasting acceleration and growth related to ES and AS in the second half of the year. On cost optimization, on the $50 million, that did translate and take care of itself through quarter one of ’24. So we’re able to capture that $50 million and it’s embedded in our run rates going forward.

Adam Tindle: Got it. Okay. Maybe just a follow-up on the share repurchase authorization. You knew I would ask one on that. And congratulations on it. I think that $2 billion, if I went through my notes, is about double the last authorization. So could you just speak to the discussion on the size of the repurchase and how to think about timing of deployment, realize the long-term framework, but wonder if that allows you to be a little bit more opportunistic. Thanks.

Marshall Witt: Yeah. Thinking about our medium-term cash flow objective of reaching $1.2 billion — $1.5 billion in free cash flow, and then looking at our capital strategy in terms of returns, about 50% of our free cash flow, we anticipate returning back to shareholders in the form of repurchases and dividends. So, Adam, if you think about what that looks like per year, it’s around $500 million to $525 million. So thinking about the $2 billion authorization or reauthorization gives us adequate coverage. For the next two years to three years, it does allow us to be opportunistic. And in Rich’s prepared remarks, we did — he did mention that in addition to our free cash flow and our M&A and our reinvestment back into business, our dividends and our mindfulness of leverage, if we find after that that we have discretionary free cash flow to put back into repurchases, we may choose to do so.

Operator: Our next question comes from the line of George Wang with Barclays. Please go ahead.

George Wang: Hey, how are you? Thanks for taking my question. I’d be remiss not to ask questions about AI. So two parts. Firstly, maybe you can double-click on the kind of AI datacenter-related build out with the hyperscaler, specifically the Hyve segment. Maybe you can talk a little bit more on how that’s progressing and what’s sort of outlook going forward for the next few quarters on the Hyve segment.

Rich Hume: Sure. This is Rich. Good morning. Thanks for the question. I’m going to go a little bit more broadly. So when we think about AI as an opportunity for our business, we would anticipate that it’s going to be a positive in every segment, from the AI PC to a traditional infrastructure with infused AI capabilities, obviously to the software portfolio, which we’re already seeing today with deployments of Microsoft Copilot as an example. And then certainly within our Hyve organization as well. As you know, we’ve had traditional datacenter deployments, but we do see a mighty shift, if you will, towards AI-oriented buildout. So we would anticipate that moving forward, a good part of the mix, and Hyve will shift into that AI sort of classification. So we’re confident with regards to our organizational capabilities and really see it as a great opportunity as we move through the next five-plus years.

George Wang: Okay, great. Just quick follow-up on the AI PC. You kind of alluded to shipment starting from mid-year. Just maybe you can give a little bit of color just in terms of your expectation for the ASP uplift associated with the AI PC also. How would you envision kind of the AI PC shipment to grow as a percentage of total kind of shipment within your portfolio? Maybe you can kind of give some color on those. Thank you.

Rich Hume: Yeah, sure. So as we understand in the marketplace, the PC vendors will be emerging with their AI offerings at the mid of this year into the back half of this year. Certainly we would think that that sort of element alone will be a net up as it relates to the ASPs for the PC segment. We anticipate AI-enabled offerings to be more expensive from an ASP perspective. And then in the last quarter, I had talked about AI PCs maybe being a single-digit percentage of the market of the total PC market in the back half of this year versus total PC, but then growing quite mightily as we move through ’25 and ’26.

George Wang: Okay, great. I would go back to the queue.

Rich Hume: Thank you.

Operator: Our next question comes from the line of Joseph Cardoso with JPMorgan. Please go ahead.