TD SYNNEX Corporation (NYSE:SNX) Q4 2022 Earnings Call Transcript

TD SYNNEX Corporation (NYSE:SNX) Q4 2022 Earnings Call Transcript January 10, 2023

TD SYNNEX Corporation beats earnings expectations. Reported EPS is $3.44, expectations were $2.91.

Operator: Good morning, my name is Devin and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Fourth Quarter Fiscal 2022 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 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 thanks for joining us for our first earnings call of the new calendar year. We are pleased with our strong fiscal Q4 results, closing out what was truly a phenomenal year for TD SYNNEX. We began the year with a lot on our to-do-list relative to the merger and integration activities and ended the year having met or exceeded our objectives. As I’ve mentioned along the way, this merger has gone very well. Today, TD SYNNEX is a $62 billion company with over 23,000 co-workers, serving 150,000 customers across 100 countries. I judge the success of this merger from a few different perspectives. First, from the point-of-view of our customers and vendor partners, our teams continued to provide consistent and uninterrupted service to our partners post-merger.

And the financial results we delivered are confirmation of the strong value proposition that we are delivering to the market. Next, from the perspective of our co-workers, we have largely completed our initiatives focused on harmonization of benefits and compensation and recently undertook our first TD SYNNEX global co-workers survey, which indicated a high-level of engagement, an accomplishment that can be hard to achieve in the first year of a large merger. Finally, looking at the merger through the lens of our shareholders, we exceeded the fiscal ’22 financial targets we set. For fiscal ’22, we achieved revenue of $62.3 billion, up 9% year-over-year, adjusting for FX impacts and merger-related accounting policy alignment, which was above the 6% to 8% range we anticipated.

Non-GAAP operating margin was 2.8%, also above the targeted range of 2.5% to 2.7%. And we delivered non-GAAP earnings per share of $11.94. $0.29 above the high-end of our guidance range we provided for FY’22 on our September earnings call and $0.74 above the high-end of the original guidance range provided January of last year, despite higher-than-forecasted FX and interest expense headwinds. Finally, we returned $240 million to shareholders via dividends and share repurchases during the fiscal year, representing progress towards our medium-term capital allocation goals. With regard to the merger integration, we set the ambitious goal of achieving $100 million in cost synergies by the end of year one and we overachieved on that goal by 45%, realizing $145 million in fiscal ’22.

One of the largest integration project is the consolidation of Tech Data’s Americas ERP systems into CIS, the legacy SYNNEX ERP platform. We have made excellent progress on the Canadian migration which we transitioned first and our U.S. transition is well underway having recently completed another major milestone. I’m happy to report that more than 45% of the legacy Tech Data U.S. SAP business has now moved over to CIS and is executing well. We will continue transitioning the remainder of the business throughout the fiscal year and are on track with our plan to largely be complete within two years of the merger close date. Let me now talk about the trends we saw in fiscal Q4 from a market perspective. In short, we experienced a continuation of many of the themes that have played out over the past several quarters.

Advanced Solutions continued to experience robust growth in the quarter above expectations, with strength in servers, networking and infrastructure. Endpoint Solutions gross revenue was modestly down year-over-year as the PC market and related peripherals, continued to see a normalization from last year’s pandemic-related highs. Several areas of Endpoint Solutions saw solid growth including printers and mobile phones. Our services in specialized solution businesses also experienced solid growth in the quarter. Rounding out our portfolio, our hyperscale infrastructure-focused business Hyve delivered a record quarter with continued outsized robust revenue and profitability growth as we continue to fulfill strong demand from our CSP customers.

We also experienced operating profit above expectation from the Hyve business, which Marshall will provide additional color on in a few minutes. From a regional perspective, all three regions delivered strong revenue growth on a constant currency basis, with operating margin expansion on a global basis. We continue to accelerate our revenue in high-growth technologies as the markets we are targeting grew faster than the market projections we provided at our March Investor Day. We achieved greater than a 20% year-over-year growth in gross billings for the quarter and for the full-year 2022 in these areas which include cloud, security, data analytics and hyperscale infrastructure. This growth was in excess of our expectation and high growth technologies represented $16 billion of our total gross billings in fiscal 2022, up from $13 billion in fiscal 2021.

We saw improvement in the supply-chain during the quarter with a meaningful reduction in our backlog. Despite decreases in both Endpoint Solutions and Advanced Solutions, our total backlog level remains elevated when compared to historical norms. Our customers are living the reality of a more uncertain and volatile macroeconomic environment with inflation, higher interest-rate and a competitive market for talent. This need for talent is particularly relevant in the IT sector, where the increasingly complex technology landscape and ongoing shift to cloud-based multi-vendor solutions requires an even greater level of knowledge and experience to serve the needs of the market. For these reasons and others, the value proposition that TD SYNNEX brings to the market resonates with our customers.

On the vendor side, our utility has a variable-cost route-to-market also becomes more valuable in times of economic uncertainty when vendors desire to lower their cost. During the quarter, we were privileged to receive further recognition from our partner community, including being named the 2022 North America Partner of the Year by CDW; the 2022 Global Distributor of the Year by Palo Alto Networks; the EMEA Distributor Partner of the Year by AWS and Lenovo; and the Americas Distributor of the Year by Nutanix. We also continued to progress on our ESG journey and expect to publish our first corporate citizenship report this quarter. In addition, we recently received a grade of awareness from the Carbon Disclosure Project, a strong achievement in our first year of combined reporting.

We look forward to continuing to share updates on our continued progress in this space. As we think about fiscal 2023, the critical nature of technology as an enabler of customer experiences and co-worker collaboration, keeper of cyber safety and a tool to realize cost optimization and efficiency cannot be underestimated. And for these reasons, we believe IT spending will continue to outpace GDP growth in 2023. We are prepared and well equipped to continue executing on our growth strategy and are targeting above-market growth rates as we leverage our industry-leading portfolio of products and services and broad global footprint to bring world-class service and innovation to the market. We enter fiscal ’23 even more confident in our strategy being capable of capitalizing on the trends shaping the IT industry and the opportunities ahead.

Lastly, I want to thank our 23,000 plus coworkers around the world for their exceptional efforts in making TD SYNNEX’s first fiscal year a great success. I’ll now pass it over to Marshall, who will share more details about our performance and outlook.

Marshall Witt: Thanks, Rich, and thanks to everyone for joining us today. Our financial accomplishments in fiscal 2022 were significant, with adjusted year-over-year revenue growth of 9%, surpassing the high-end of 6% to 8% target we provided earlier this year. Our operating margin performance also came in above the high end of our expectations at 2.8% for the fiscal year, representing a 14% improvement over the prior year and above our 2.5% to 2.7% target. These results demonstrate the power and reach of our business model and the strong value proposition that TD SYNNEX is bringing to the market. Please note that comparisons versus the prior year full-fiscal year are on an as combined basis, which assumes the merger occurred at the beginning of the period.

Moving now to our fiscal fourth-quarter results. Worldwide revenue for fiscal Q4 was a record $16.2 billion, up 4% year-over-year and up a 11% in constant currency. When normalized for the revenue recognition policy alignment relating to the merger of $500 million, the year-over-year growth was 14%. Currency impacts, primarily driven by the Euro devaluation, accounted for approximately $1 billion headwind year-over-year in fiscal Q4. Revenue was at or above expectations across all regions and in both End Point Solutions and Advanced Solutions in fiscal Q4. Additionally, Hyve delivered strong results in Q4 driven by better-than-expected demand and timing-related margin recoveries related to services performed in prior quarters. Non-GAAP gross profit had record quarter of $1.08 billion, our first quarter greater than $1 billion and non-GAAP gross margin at 6.63%, up 44 basis points year over year.

The improvement in gross margin was driven by mix shift to high growth technologies as well as the Hyve margin recoveries which approximated 25 basis points. Total adjusted SG&A expense was $582 million, representing 3.6% of revenue. Non-GAAP operating income was $496 million, up $88 million or 21.5% year-over-year, and non-GAAP operating margin was 3.05%, up 44 basis points year-over-year, driven by revenue growth, Hyve performance, the aforementioned of margin recovery, cost discipline and merger synergy execution. On a constant currency basis, non-GAAP operating income increased 26% year-over-year. Excluding margin recovery in Hyve, the year-over-year increase was 16%. Q4 non-GAAP interest expense and finance charges were $78 million, $18 million above our outlook due to higher borrowings and interest rates.

For fiscal Q4, the non-GAAP effective tax rate was approximately 21%, below the forecasted 24% rate due to the mix of locations where earnings were achieved. Total non-GAAP net income was $330 million, and non-GAAP diluted EPS was $3.44, above our prior guidance of USD2.70 to USD3.10. Note that the previously mentioned Hyve margin recoveries contributed approximately $0.33 per share of non-GAAP diluted EPS for the quarter. Removing these, non-GAAP EPS would have been $3.11, slightly above the high end of our prior guidance range, despite headwinds from elevated interest expense. Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of $523 million and debt of $4.1 billion. Our gross leverage ratio was 2.3 times and net leverage was 2 times, in line with our investment-grade profile and approaching our previously communicated target of 2 times gross leverage ratio.

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Accounts receivable totaled $9.4 billion, up from $8.1 billion in the prior quarter and inventories totaled $9.1 billion, down $689 million or 7% from the prior quarter. Net working capital at the end of the fourth quarter was $3.8 billion, a decrease of approximately $35 million from Q3. The cash conversion cycle for the fourth quarter was 23 days, flat from Q3, and cash from operations in the quarter was $302 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, which represents a 70% increase from the prior quarter. The dividend is payable on January 27, 2023, to stockholders of record as of the close of business on January 20, 2023. For the full fiscal year 2022, we returned $115 million to shareholders via dividends, reflecting a 1.2% dividend yield.

We also continued executing on our share repurchase program in the quarter, repurchasing $42 million of our stock and approximately $125 million in total during fiscal ’22, which exceeded our $100 million target for the year. Earlier today, we announced that our Board of Directors approved a new $1 billion share repurchase authorization, which expires in January 2026 and replaces our prior authorization. We expect to increase our share repurchases year-over-year in fiscal ’23 as we progress towards our medium-term capital allocation target. Before I move to discussing our financial outlook for Q1, I wanted to provide an update on our merger-related cost synergies. As Rich had mentioned, the teams did a phenomenal job of identifying, tracking and realizing synergy opportunities in 2022, allowing us to achieve our year-one target more quickly than anticipated.

We achieved $145 million in cost synergies through fiscal Q4 and continue to expect to achieve an additional $35 million in fiscal ’23, with much of the savings coming from the completion of our ERP system migration, which is on track for the second half of 2023. Once we are fully integrated on one ERP system for the Americas, we expect to continue to find optimization opportunities and generate revenue synergies. Now moving to our outlook for fiscal Q1. We expect total revenue to be in the range of USD15.2 billion to USD16.2 billion, which equates to year-over-year growth of around 5% on a constant-currency basis at the midpoint. This outlook reflects the impact of year-over-year foreign exchange headwinds of approximately $500 million and interest rate movements of $33 million.

Our guidance is based on a Euro-to-Dollar exchange of 1.05. Non-GAAP net income is expected to be in the range of USD248 million to USD287 million and non-GAAP diluted EPS is expected to be in the range of USD2.60 to USD3.00 per diluted share. Based on weighted-average shares outstanding of approximately 94.8 million. Interest expense for Q1 is expected to be approximately $73 million and we expect the tax rate to be approximately 24%. As we enter 2023, I wanted to provide a few modeling points to assist you. As Rich mentioned, we believe IT spending will continue to outpace GDP growth in 2023 and estimate our revenue growth to be 3% to 5% on a reported basis. From an operating margin perspective for the year, we expect a range of 2.6% to 2.8%, with improvements in distribution margins, offset by lower year-over-year contribution from Hyve.

Hyve working capital is expected to improve throughout the year, which is expected to reduce the recovery of carrying costs associated with these programs. While it is a challenge to forecast interest expense with precision in the current rate environment, we would anticipate trending toward our guidance for fiscal Q1 at $73 million per quarter, at least through the first half of fiscal year, and then slightly declining in the second half. We expect our non-GAAP corporate tax rate to be approximately 24%. From a cash flow perspective, we continue to expect to generate in excess of $1 billion in free cash flow-in fiscal ’23 and anticipate working capital to be a source of cash this year despite topline growth and supply chain constraints continue to ease throughout the year and our inventory position improves.

We are committed to progressing towards a medium-term capital allocation framework, targeting approximately 50% of free cash flow returned to shareholders via dividends and share repurchases, as best demonstrated by today’s announcement with the other 50% targeted to reinvestment in our business and M&A. In closing, I’d like to thank all our co-workers for their focus and hard work in fiscal 2022, helping to build a cohesive company dedicated to providing best-in-class support and partnership to our customers and vendors. I will now turn the call back over to the operator to begin the Q&A session. Operator?

Q – Ruplu Bhattacharya: Hi, thanks for taking my questions and congrats on the strong quarter. Rich, the PC OEMs have talked about elevated channel inventory levels. Can you talk about how you see PC channel inventory trending both commercial as well as consumer and when do you think that gets worked off? Are you seeing additional promotional activity and rebates from vendors? And specifically, what have you factored in for TD SYNNEX PC revenue growth in fiscal ’23?

Q&A Session

Rich Hume: Well, good morning, Ruplu, and thank you for your question and Happy New Year to all of you. So first I’ll comment that when we think about our inventory that it might be marginally ahead of our profile, but nothing out of the bandwidth of what I would call the norm. When we look at the backlog for the PC ecosystem category, I would say that it’s generally at profile. So sort of consistent with the serviceability requirements that we had seen in the presort of COVID time. Yes, there is some I’ll say traditional activity pre-COVID activity in terms of promotions and rebates et cetera, that are underway, but I kind of think about it as, as I said earlier, is returning to sort of the pre-COVID, if you will, sort of ebb and flow of the business.

Ruplu Bhattacharya: Okay, thanks for that. For my next question, maybe I’ll ask a question on regional performance. It looks like in 4Q on a constant currency basis you saw the strongest growth in Asia, followed by Europe and then Americas. As we look to fiscal 1Q, should we expect a different relative performance by region, given we have the Chinese New Year holidays coming up. And when I look at Europe margins, they are the lowest amongst the three regions. Is there something structural that causes Europe margins to be lower and what can you do to improve margins there?

Marshall Witt: Hi, Ruplu, this is Marshall. So your question in regards to Q1, even though we’re not forecasting on a regional basis, we still expect to see on a constant currency basis, modest growth in Q1. And then in terms of Europe and the question in regards to being structural, we still believe that we’re going to have a good quarter for Europe in Q1.

Rich Hume: Yes, as it relates to Europe margin profile, if I could, there are two callouts, first is that traditionally the margin profile in Europe has been lower, there is more cost of doing business in Europe related to the country complexity and then the second thing is the profile of the business, well, where we for example have mobile phone distribution tends to have a bit of a lower margin profile. However, those areas with lower margins have great working capital attributes. So the ROIC on those businesses that have sort of lower margin profile are attractive.

Ruplu Bhattacharya: Okay, thanks for all the details there, if I can just squeeze one more in. I think for fiscal ’23 you suggested a 3% to 5% reported revenue growth. As we look at your high-growth technologies and specifically cloud, how levered is that to overall cloud CapEx spend. So if cloud CapEx is still strong, but lower in fiscal ’23 versus ’22, do you think that TD SYNNEX cloud revenues can still grow mid-teens as you’ve done in the past? So any thoughts on cloud revenues would be great. Thank you so much.

Marshall Witt: Yes, I’ll start Ruplu and then Rich can chime in. We still feel that the high-growth technology, cloud space industry growth will be mid-teens. And that’s an industry comment. I think the various services and products within that segment. We will reflect that as I said in my prepared remarks in the Hyve area, we’ll see more modest growth in fiscal ’23, but in terms of our overall longer-term thoughts on hyper technologies in cloud, we think it’s going to be meaningfully above we’ll call it the average growth rate for the business. Just speaking about your question in regards to CapEx, just as a reminder, CapEx is one correlation, but it’s not the only correlations to the services that we provide to our hyperscale customers.

Ruplu Bhattacharya: Thanks for all the detail. Thank you.

Marshall Witt: Thank you.

Operator: Our next question comes from Joseph Cardoso with JPMorgan.