TD SYNNEX Corporation (NYSE:SNX) Q3 2023 Earnings Call Transcript

TD SYNNEX Corporation (NYSE:SNX) Q3 2023 Earnings Call Transcript September 26, 2023

TD SYNNEX Corporation beats earnings expectations. Reported EPS is $2.78, expectations were $2.47.

Operator: Good morning. My name is Jael and I will be your conference operator today. I would like to welcome everyone to the TD Synnex third 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 demand, cash flow 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.

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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 will now turn the call over to Rich. Rich?

Rich Hume: Thank you Liz. Good morning everyone and thank you for joining us today. The strength of our business model and our relentless focus on execution were evident in our fiscal third quarter results. Our strategy is working and our expansive portfolio of products, services and solutions have enabled us to navigate the fluctuations in the post-pandemic IT spending environment. For another consecutive quarter, a greater portion of our business was generated from high growth technology categories, and we saw improving performance in endpoint solutions. The business mix helped us to expand margins, deliver earnings per share above our guidance, generate strong free cash flow, and increase capital return to our shareholders in the quarter.

We were encouraged to see signs of stability in our endpoint business as the Americas experienced reduced year-on-year declines and grew quarter-over-quarter. In advanced solutions, the Americas saw decelerating growth but also grew quarter-over-quarter. In Europe, however, we began to see the impacts from the macroeconomic backdrop, which led to a more challenging quarter. Asia-Pacific/Japan grew in the quarter driven by strength in advanced solutions, high growth technologies, and momentum in India and the Australia-New Zealand region. In addition, the industry supply chain continues to be healthy with backlogs back to normal historical levels. This has allowed us to strategically reduce our inventory position, leading to significantly improved working capital and strong free cash flow generation for the quarter.

Last quarter, we announced our goal to pursue an additional $50 million in cost optimization over the next few quarters. We achieved our target for fiscal Q3 and are on track to capture the remainder by fiscal Q1 of ’24. Our ERP systems migration efforts have proceeded well and we are now largely complete with significant milestones successfully achieved. There remain a few pieces to migrate, primarily within our advanced solutions business, and we anticipate that this will be concluded in the first half of fiscal ’24. We remain focused on ensuring a seamless customer and vendor experience and will proceed accordingly. As a company, we remain focused on partnering with our customers to maximize the value of their end users’ IT investments by demonstrating business outcomes and unlocking growth opportunities through low cost and efficient delivery capabilities.

This quarter, we launched two new solutions aimed at doing just that. One is partner health and fitness tool, which utilizes a custom algorithm to analyze a reseller’s offerings across advanced solution and high growth technologies, enabling partners to understand where they stand in comparison to the broader TD Synnex partner landscape. Using the data to provide this type of actionable insight is one way we are providing distinctive value for our customers, helping to guide their decision making regarding portfolio diversification to capture growth. The second solution we launched is destination AI, a comprehensive aggregation of resources to equip resellers with knowledge and connections to capture opportunities across AI, machine learning, and advanced analytics.

As this marketplace rapidly evolves, TD Synnex is working with more than 40 vendors across the AI space, including AI-enabled independent software vendors, AI accelerators, core AI software platform providers, and AI infrastructure firms. Our catalog of pre-validated ready-to-deploy solutions combined with our ability to provide multi-vendor offerings aggregating best-of-breed services, software and hardware and edge devices places us in a unique position with the business partner ecosystem to add value to our customers. Next week, we will be hosting two of our marquee ecosystem events, bringing together thousands of our customers and vendor partners to network and collaborate, gaining critical knowledge and insights to further grow their businesses.

Ahead of those events, we recently completed an extensive survey of our B2B channel partners from over 60 countries, asking them about their expectations over the next year and beyond. Channel partners told us that they are remaining agile in this environment, adapting their business models to focus on emerging technologies and rebalancing their priorities and offerings to meet the evolving needs of their end users. There were many interesting findings in the survey, but most clear was the continued importance of the channel in helping partners to navigate the rapidly changing technology landscape, providing technical expertise and helping to fill gaps in the talent pipeline. During the quarter, we were honored to be recognized with a silver medal by EcoVadis, a leading provider of business sustainability ratings, and an improvement from our prior year score of a bronze medal.

Importantly, this places TD Synnex in the top 25% of companies assessed by EcoVadis. Our European business was also awarded an environmental sustainability specialization by Cisco, providing a framework for technology recycling and circular economy initiatives. We are proud of these achievements and of the progress that we have made on our environmental, social and governance goals. As we begin the final quarter of the fiscal year, we believe that we have seen the trough of our endpoint solutions business and that we will continue to see smaller declines moving forward. It is an exciting time to be in the IT industry, and we believe that in the long term, IT spending will continue to outpace GDP growth. We see a variety of drivers on the horizon, including AI-enablement, which we believe we will see across the majority of our offering set as vendors bring these features and functionality to their products and services over time.

I will now turn the call over to Marshall for some additional comments about Q3 and our Q4 outlook. Marshall, over to you.

Marshall Witt: Thanks Rich, and good morning to everyone on today’s call. As Rich mentioned, our Q3 results illustrate the progress we have made on our business strategy. Revenue in the strategic focus areas of cloud, security and data analytics grew in the low double digits on a year-over-year basis, and we saw smaller declines in endpoint solutions. As a result, we expanded margins and grew non-GAAP earnings per share while our counter-cyclical model enabled us to generate significant free cash flow, leading us to increase our share repurchases in the quarter. For fiscal Q3, total gross billings were $18.6 billion and net revenue was $14 billion, both consistent with expectations. As Rich highlighted, although revenue declined year-over-year in the Americas, we saw signs of stabilization.

Europe saw a decline during the quarter as we began to see impacts related to the challenging macroeconomic environment, and Asia-Pacific/Japan grew revenue by 10% year-over-year driven by high growth technologies and strength in some emerging markets. Hyve performed better than expected in the quarter despite a tough year-over-year comparison due to the record revenue realized in Q3 of fiscal ’22. Non-GAAP gross profit was $974 million, up 3% year-over-year, and non-GAAP gross margin was a record 7%, up 84 basis points year-over-year. The significant improvement in gross margin was driven by the continued mix shift to advanced solutions and high growth technologies, as well as margin expansion in high growth technologies. Total adjusted SG&A expense was $577 million, down $16 million from the prior quarter and representing 4.1% of net revenue and 3.1% of gross billings.

As Rich discussed, we are proceeding well on the $50 million cost savings program we announced last quarter and exceeded the $10 million target for fiscal Q3. We are well positioned to achieve our full target by early next year and expect SG&A as a percentage of gross billings to remain in the 2.75% to 3.25% range that we have seen historically. Going forward, we will be citing SG&A as a percentage of gross billings given increased impact from gross-to-net adjustments as a greater proportion of our portfolio is in advanced solutions and high growth technologies. Non-GAAP operating income was $379 million, approximately flat year-over-year, and non-GAAP operating margin was 2.8%, up 25 basis points year-over-year. Q3 non-GAAP interest expense and finance charges were $65 million, $7 million better than our outlook due to working capital efficiencies which resulted in less borrowing.

The non-GAAP effective tax rate was approximately 21%, better than our forecasted 24%, primarily due to our ability to utilize tax credits earned in certain jurisdictions. Total non-GAAP net income was $260 million and non-GAAP diluted EPS was $2.78, $0.08 above the high end of our guidance range and up 1.5% year-over-year. Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $1.25 billion and debt of $4.1 billion. Our gross leverage ratio was 2.2 times and net leverage was 1.6 times, in line with our investment-grade credit rating and approaching our target of 2 times gross leverage ratio. Accounts receivable totaled $8.9 billion, up from $8.4 billion in the prior quarter, and inventories totaled $7.5 billion, down from $7.8 billion in the prior quarter.

Net working capital at the end of the third quarter was $3.3 billion, down from $3.8 billion in quarter two, primarily due to declines in inventory and increased accounts payable. The cash conversion cycle for the third quarter was 23 days, a one-day improvement from quarter two primarily due to improvements in our inventory profile given the healthier supply chain environment. Cash from operations in the quarter was $592 million and free cash flow was $552 million. We have generated approximately $1.1 billion in free cash flow year-to-date. We continued to prioritize shareholder returns during the quarter, returning $103 million via share repurchases and $33 million through dividend payments. Year to date, we now have repurchased $278 million and have approximately $740 million remaining under our current share repurchase authorization.

For the current quarter, our board of directors has approved a cash dividend of $0.35 per common share payable on October 27, 2023 to stockholders of record as of the close of business on October 13, 2023. Moving now to our outlook for our fiscal fourth quarter, we expect gross billings of $18.5 billion to $19.7 billion, representing a 3% sequential improvement from quarter three and a decline of 9% on a year-over-year basis at the midpoint. We expect total revenue to be in the range of $14 billion to $15 billion, which equates to a 4% sequential improvement from quarter three and a decline of 11% on a year-over-year basis at the midpoint. The expected sequential improvement from quarter three is slightly below our historical compares and is primarily driven by the market challenges in Europe, partially offset by improvements in the Americas.

For the PC segment, as we discussed in June, we believe we have seen the low point for year-over-year declines and expect the recovery to continue in Q4 with smaller year-over-year declines. Our guidance is based on a euro-to-dollar exchange of 1.08. Non-GAAP net income is expected to be in the range of $223 million to $269 million, and non-GAAP diluted EPS is expected to be in the range of $2.40 to $2.90 per diluted share, based on weighted average shares outstanding of approximately 91.9 million. Non-GAAP interest expense is expected to be approximately $70 million and we expect the non-GAAP tax rate to be approximately 24%. Lastly on shareholder returns, we have generated $1.1 billion of free cash flow year-to-date and have returned $377 million to shareholders through share repurchases and dividends, putting us on track to reach the full-year target discussed in June of $580 million.

We are now expecting to generate approximately $1.3 billion of free cash flow for the year, outperforming our original target of $1 billion for fiscal ’23. We will continue to be opportunistic regarding share repurchases while adhering to the general framework we have previously communicated to the market. In closing, we remain confident in our ability to successfully navigate fluctuations in the demand environment as customers react to rapidly changing technology needs, and we’ll continue to lean on our strategic priorities to expand in high growth technologies while also optimizing our core business as we return to a more normalized spending environment. With that, we are now ready to take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator instructions] Your first question comes from the line of Ananda Baruah of Loop Capital. Your line is open.

Ananda Baruah: Hey, thanks guys. Good morning. Appreciate you taking the questions and all the detail. I guess–let me make my question the following. Do you guys have any view on the likelihood that you could now be at the bottom in rev dollar run rate, and I guess I’d love any context – I’m sure I’m not the only one, just sort of how you’re viewing the European softness in the context of rev dollar run rate going forward. Thanks a lot, appreciate it.

Rich Hume: Good morning, Ananda. I hope you’re doing well. Thanks for the question. Let’s take it by region first and then we’ll talk about the major product areas and the dynamics that we’re seeing. First, you all might recall that as we came through the first half of the year, we had talked about Europe being stronger than anticipated. We all knew the headwinds that they faced in Europe, and Europe was performing better on the top line than the Americas. We have seen a change in that cycle, if you will, in the third quarter where Europe began to look a lot like the Americas looked like in the first half, and from memory here, their overall top line performance was reasonably consistent between the two in Q3, so that was something that had emerged as new.

At the same time, the Americas, as we were talking about in our prior call, had seen a declining dynamic in the endpoint business and had strength in advanced solutions, so as we move through time here and as we continue forward, our anticipation is we continue to see the trend of declining endpoint–you know, lesser declines, if you will, over time and then a moderation of the growth within advanced solutions, based on the fact that those backlogs have been pretty well run down and the prior quarters for the industry, as well as ourselves, had benefited from the advanced solutions backlog runoff, sort of a late pre-COVID emergence of strength in that advanced solutions business. As it relates to looking forward, we’ll address next year when we get to it.

The trends are consistent with what we were stating for the last couple of quarters in terms of the PC dynamics and the AS dynamics, but we’ll reserve our view as to whether or not we’re at the bottom for the next call when we get into our Q1 guidance.

Ananda Baruah: All right, sounds great. Really appreciate it. Thanks for the context.

Operator: Your next question comes from the line of Mike Ng of Goldman Sachs. Your line is open.

Michael Ng: Hey, good morning. Thank you for the question. I just had one on PC. It was encouraging to hear about the trough in endpoint solutions, smaller declines going forward. I was just wondering if you could just give a little bit more commentary to support that view – you know, what are you seeing in terms of channel inventory, green shoots and demand levels on PCs and handsets, and anything that you would call out this quarter as it relates to performance by vertical? I know it’s a big education quarter. Thank you.

Rich Hume: Yes, so a couple of thoughts. First of all, in our prior quarter we had said that 2Q and 3Q should be the trough for the PC business on a global basis. In fact, we saw that trend of, if you will, lesser declines moving through time. We would anticipate that Q4 would provide sort of the same dynamic of lesser declines moving through time. But I would also comment that globally, although there were lesser declines, PC as a category was a little bit weaker than we had thought, and the advanced solutions was a little bit stronger. As you know, the overall revenue came in at the midpoint of the guide, so there was some mix shift happening there; but the trend held, lesser declines in PCs, but again PC softer relative to some of our forecast detail, offset by advanced solutions.

From a vertical perspective, the only one that I’d point out that had shown some strength is federal, and in addition to that you had the education piece had a bit of a boost because the Chrome category last year was very weak and we started to see Chrome emerge a bit within the education domain in the prior quarter here–actually, our reported quarter, sorry about that.

Michael Ng: Excellent, thank you very much. I appreciate the thoughts.

Operator: Your next question comes from the line of Adam Tindle of Raymond James. Your line is open.

Adam Tindle: Okay, thanks. Good morning. I just wanted to start on guidance for Q4, particularly on an EPS basis. Understand last year had that $0.33 benefit from the Hyve recovery, but you still grew sequentially from Q3 to Q4 last year ex-that; and this year if I look at the guidance, you are calling for sequential revenue growth from Q3 to Q4, but earnings appear to be down at the midpoint. You’re accelerating share repurchase based on the commentary, so it just implies a lot of margin erosion, and I’m hoping for a little bit more color. I understand EMEA as a region, but what is driving the sequential margin erosion and why would EPS be down, despite typically seasonally up?

Marshall Witt: Hey Adam, this is Marshall. Thanks for the question. You’re right – sequentially between Q3 and Q4, we typically see about an 8% growth, plus or minus 2% on either side. As you saw and heard from our prepared remarks, it’s now about 3% to 4%, but the majority of the margin decline is primarily attributable to the reduction in revenue, and typically the fall-through in normal quarter four is we do see quite a bit of fall-through on the incremental revenue that takes place between the two quarters. That’s the majority of the overall margin decline from what we have seen historically. You’re right – we had that one-time call-out for Hyve last year that we wanted to make sure people were aware of, and then you commented about Europe.

Because of the softening we’re seeing there in the portfolio, their direct costs are still a little bit out of line in regards to where we need it to be, but expect that that will correct itself over time and then maybe a little bit more softer underneath that. In Asia and Americas, although good progress is being made on the optimization that we called out last quarter, that plays out over Q3, Q4 and in Q1, there still is a little bit of direct cost in relation to gross revenue that will continue to correct itself in the coming quarters.

Rich Hume: Yes, the only thing that I would add, Adam, and it’s a bit repetitive, last quarter we talked about a sequential at 8%, and as Marshall says, it’s now 3% to 4%. If you go to do the math and look at the flow-through of, if you will, that sequential being lower than anticipated, you’d find out that it’s sort of most of the historic fall relative to our comments in the prior call.

Adam Tindle: Is there any way for us to kind of understand where that shortfall is coming from? It sounds like troughing endpoint solutions, that things are getting better there. What is the product category or vertical that’s causing that shortfall?

Rich Hume: Always lots of moving parts, Adam, but if I were to give you the big headlight, it would be a softer Europe relative to 90 days earlier.

Adam Tindle: Okay, because all that we think about the debt business is being a little bit unique from the mobility piece, is that maybe fair to characterize?

Rich Hume: What I would tell you is I would think about it as more broad-based than just one segment. It’s across the majority of the portfolio right now.