TD SYNNEX Corporation (NYSE:SNX) Q4 2023 Earnings Call Transcript

TD SYNNEX Corporation (NYSE:SNX) Q4 2023 Earnings Call Transcript January 9, 2024

TD SYNNEX Corporation beats earnings expectations. Reported EPS is $3.13, expectations were $2.69. 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: 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 Fourth Quarter and Full Year Fiscal 2023 Earnings Call. [Operator Instructions] 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.

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. We delivered solid fourth quarter results, with the gross billings at the high end of our outlook range and a significant EPS beat enabled by the continued execution of our business plan despite dynamic market conditions. Our strategic emphasis on high-growth technology areas, coupled with our broad technology portfolio, allowed us to pivot to margin-accretive areas of growth, and we saw signs of stabilization with healthy sequential improvement in revenue and gross billings in the fourth quarter. For the full fiscal year, we successfully navigated the business environment, growing our market share in both Americas and Europe, increasing our business mix of high-growth technologies and expanding our non-GAAP operating margin to 2.85% through a combination of mix shift and full execution of merger synergies.

Our business model, improved working capital management and the healthier supply chain conditions enabled us to generate robust free cash flow of $1.3 billion, ahead of our original $1 billion target. From this, we returned over $750 million of capital to shareholders through dividends and share repurchases, representing approximately 60% of our free cash flow for the year. This exceeded our 50% target as we opportunistically increased our share repurchases. In total, we repurchased approximately 6.5 million shares, or 7% of shares outstanding. As Marshall will further discuss, we are also increasing our quarterly dividend in Q1 to $0.40 per share, or a 14% increase compared to the prior quarter. Balanced capital allocation and returning capital to shareholders continues to be a top priority for the company as we execute our strategy and drive value for our shareholders.

Moving on to our fiscal fourth quarter results. From a gross billings perspective, the quarter played out at the high end of our expectations, with improving year-over-year declines in Endpoint Solutions. As expected, Advanced Solutions declined slightly on a year-over-year basis given the strong performance in FY ’22 enabled by record backlog levels. From a regional perspective, the market environment in the Americas continued to show signs of stabilization, with improving year-over-year declines in Endpoint Solutions. Europe performed better than expected and improved sequentially despite a muted macroeconomic environment. In APJ, we continue to see traction in our portfolio build-out, helping to offset some of the softness in endpoint demand.

We made excellent progress on our strategic efforts to strengthen our end-to-end portfolio via new vendor additions, including Workday and Meta, where we are the exclusive North American distributor for their new suite of business products. We also expanded our security portfolio in Europe, one of our key priorities, with the addition of Palo Alto Networks’ full range of cyber security, hardware and software products to our offerings in the region. Our strong pipeline of new vendors is bolstering our best-in-class portfolio of over 2,500 vendors, something which is becoming even more important as IT solutions are increasingly comprised of bundled multivendor offerings. As part of our focus on solutions aggregation, during the quarter, we launched our ISV acceleration program in North America, which is designed to help independent software vendors of all sizes to grow their businesses by accessing our extensive ecosystem, technical expertise, marketing and sales resources.

We were also honored to be recognized by several vendors with a variety of awards spanning the globe, including being named the global and North American Distribution Partner of the Year by Palo Alto Networks. We are proud of these distinctions and strive to continue elevating our offerings to help our partners grow their businesses. Our ESG goals and initiatives remained front and center during the fiscal year, and we recently achieved our second consecutive top score in the Corporate Equality Index, a leading benchmark survey and report measuring corporate policies related to LGBTQ plus workplace equality. In addition, we formalized our commitment to disability inclusion at the company through my signing of Disability:IN CEO Letter. We’re looking forward to sharing additional insights regarding our ESG initiatives in progress in our second Corporate Citizenship Report, which we will plan to publish in the first half of the year.

As we begin our new fiscal year, I wanted to provide a bit more color regarding our recently announced executive changes for the organization. Last week, Patrick Zammit assumed the role of Chief Operating Officer for TD SYNNEX. As COO, Patrick continues to report to me and takes on the responsibility for leading our day-to-day distribution operations, executing our business strategy to further drive profitable growth across the company and accelerating our penetration in strategic technologies. This will also benefit us further by allowing me to focus on leading our strategic initiatives, identifying additional growth opportunities and focusing on relationships with key external stakeholders including vendors, partners and shareholders. I’d also like to take a moment to thank Michael Urban, President, Americas, who has decided to leave the company effective March 1 for his efforts in bringing TD SYNNEX together over the past two years.

He and his team delivered a very successful merger integration in the Americas, and we wish him well in his next career chapter. From a regional perspective, we are in a strong position with the continued leadership of Peter Larocque in North America, Otavio Lazarini in Latin America and Jaideep Malhotra in APJ, all long-time industry veterans, and we look forward to announcing our next European leader in the very near future. With this highly skilled and experienced team, we entered 2024 well positioned to capitalize on the gradually improving IT spending market dynamics. Looking forward on our outlook for fiscal 2024, we are optimistic that the market headwinds we have experienced over the past several quarters will continue to abate as the year progresses.

Early indications are that the gradual recovery in Endpoint Solutions will build throughout the year, fueled by the resumption of more normalized PC buying patterns. This will be balanced by tougher year-on-year compares for Advanced Solutions given the strong growth in the first half of 2023, but should position us well for returning to overall growth as we move through the year. Marshall will elaborate on this later. As we think about our strategic priorities for FY ’24, a couple of areas of importance I want to touch on are our digital platform capability and advancements in AI. As software and services continue to represent a greater portion of the overall IT spending for the industry, we remain focused on augmenting our capabilities in these areas to help customers assemble the critical solutions that their end users require.

To do this, we will continue investing in and building out our digital platform capabilities with the aim to provide customers with a one-stop-shop where they can easily access unified multi-vendor offerings. AI is another clear growth vector as we continue to look ahead in our industry. We have invested for several years in this space via our data analytics practice. This created the foundation for our AI strategy, and our decade-plus of experience in data analytics puts us in a leadership position relative to this new exciting market opportunity. We have built a state-of-the-art vendor portfolio, starting with leading providers in the on-prem and off-prem infrastructure area required to run and train AI models. Many of our leading software vendors have announced or released embedded AI capabilities in their product lines, and we are working with industry leaders for AI foundational models to accelerate the development of use cases across our ecosystem.

In addition, we will leverage our strong relationships with PC OEMs to support and enable the introduction and growth of AI-enabled PCs over time as well as our relationships with key component suppliers and customers. In addition to our previously announced Destination AI program, we are partnering with others in the ecosystem, such as our collaboration with Microsoft, where we launched a global AI-enabled journey for Microsoft 365 copilot last month. We are also working with several other strategic vendors to capitalize on our Destination AI framework to accelerate the adoption and use of new AI product set. In closing, we believe we have the right strategy and are well equipped to continue navigating the ever-changing IT landscape while positioning ourselves to capitalize on new and emerging growth opportunities.

We are committed to continuing to create shareholder value with a keen focus on execution and healthy capital returns. Lastly, I want to take a moment to extend my sincere thanks to our customers and vendors who we are privileged to help achieve great outcomes with technology every day and to our 23,000 coworkers around the world who enable this important work. I will now turn the call 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. Our fiscal ’23 full year results illustrate the power of our business model, broad technology portfolio and the progress we’ve made in positioning ourselves as a leader in the high-growth technologies of cloud, security, data analytics and AI. Despite a challenging market environment due to industry-wide reductions in demand for PC ecosystem products, we demonstrated continued strength across Advanced Solutions and high-growth technologies and grew both our gross and operating margins for the full year. The resiliency of our business model helped offset some of the pressure from the reduced revenue, and our businesses responded appropriately by acting to align our cost to the changes in volume and mix.

This enabled significant free cash flow generation and capital return to shareholders. Moving to our fiscal fourth quarter performance. As Rich mentioned, we had strong gross billings in Q4, and importantly, saw early signs of stabilization in IT spending with lesser year-on-year declines in Endpoint Solutions. Advanced Solutions faced tougher compares given the strong performance last year, when backlog levels were still elevated. Fiscal Q4 total gross billings were $19.7 billion, down 6% year-over-year, and at the high end of our outlook range, driven by stabilization in the Americas and outperformance in Europe. Net revenue was $14.4 billion, down 11% year-over-year and near the midpoint of our outlook range. Gross to net revenue adjustments were larger than expected due to a shift in business mix and the migration of a Hyve customer to a consignment model.

As a reminder, this migration is due to certain components transitioning to a customer-owned procurement model. While this has a negative impact to our net revenue, it does not materially impact operating profit. For the fiscal fourth quarter, this change impacted net revenue negatively by $270 million. Non-GAAP gross profit was $1.02 billion, and non-GAAP gross margin was 7.07%, up 44 basis points year-over-year, as we continue to see the positive effects of a richer product mix and our progress in expanding high-growth technologies, which continue to represent more than 20% of total gross billings for both the quarter and the full year. Total adjusted SG&A expense was $592 million, up $10 million year-over-year and up $15 million quarter-over-quarter, which was expected given the sequential growth in gross billings of $1 billion.

Non-GAAP operating income was $427 million, and non-GAAP operating margin was approximately 3%. Non-GAAP interest expense and finance charges were $66 million, $4 million better than our outlook and approximately flat quarter-over-quarter. The non-GAAP effective tax rate was approximately 22%, better than our forecasted 24%, primarily due to the mix of our business within certain regions. Total non-GAAP net income was $286 million, and non-GAAP diluted EPS was $3.13, $0.23 above the high end of our guidance range, due to a combination of better-than-expected performance on gross billings, profitability, interest expense and taxes, as well as higher share repurchases. As a reminder, non-GAAP diluted EPS for the fourth quarter of fiscal year ’22 was $3.44, but the year-over-year comparison for EPS is impacted by $0.33 of high-margin recoveries in fiscal fourth quarter of ’22.

Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of $1 billion and debt of $4.1 billion. Our gross leverage ratio was 2.3x, and net leverage was 1.7x, in line with our investment-grade credit rating and approaching our target of 2x gross leverage ratio. Accounts receivable totaled $10.3 billion, up from $8.9 billion in the prior quarter. And inventories totaled $7.1 billion, down from $7.5 billion in the prior quarter. For the fourth quarter, net working capital was $3.3 billion, and the cash conversion cycle was 23 days, both flat from Q3. Cash from operations in the quarter was $211 million, and free cash flow was $168 million. In total, we generated approximately $1.3 billion in free cash flow in fiscal ’23, ahead of the $1 billion target we guided to at the beginning of fiscal ’23.

We returned $374 million to shareholders in the quarter, including $343 million via share repurchases and $31 million through dividend payments. For the full fiscal year, we returned $751 million to shareholders, of which $621 million was through share repurchases, compared to $125 million in fiscal ’22. We currently have approximately $396 million remaining under our share repurchase authorization. For the current quarter, our Board of Directors has approved a 14% increase to our cash dividend and $0.40 per common share, which will be payable on January 26, 2024 to stockholders of record as of the close of business on January 19, 2024. Moving now to our outlook for fiscal first quarter. We expect gross billings of $19 billion to $20 billion, representing a decline of 3% on a year-over-year basis at the midpoint.

We expect total revenue to be in the range of $14 billion to $14.7 billion, representing a decline of 5% 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 $232 million to $277 million. And non-GAAP diluted EPS is expected to be in the range of $2.60 to $3.10 per diluted share, based on weighted average shares outstanding of approximately 88.4 million. Interest expense is expected to be approximately $66 million, and we expect non-GAAP tax rate to be approximately 23%. Additionally, I wanted to highlight that effective next quarter, we will begin providing some additional disclosures to enhance our reporting to investors and other stakeholders.

Starting in fiscal Q1, we will provide more clarity regarding our gross billings, net revenue and gross profit for Edge Solutions and Advance Solutions. Edge Solutions, which we previously referred to as Endpoint Solutions, will include PCs, peripherals, mobile, print, and other devices, including AR/VR. Advanced Solutions will include hyperscale infrastructure, cloud, servers, networking, storage and software. Our reportable segments will continue to be based on geographies of Americas, Europe and APJ. As we think about the full fiscal year for 2024, we currently expect non-GAAP gross billings to be approximately flat year-over-year in the first half of the fiscal year, with expected growth of mid- to high-single-digits in the second half of the fiscal year.

We expect to generate approximately $1.2 billion in free cash flow for the fiscal year and remain committed to our medium-term capital allocation target returning 50% of free cash flow to shareholders via both dividends and share repurchases while remaining opportunistic depending on market conditions. In closing, we successfully navigated the volatile market conditions in fiscal ’23 and are well positioned to capitalize on a return to growth in fiscal ’24 with a focus on margin expansion, robust free cash flow generation and a commitment to continued healthy shareholder returns. With that, we are now ready to take your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] And we will take our first question from David Vogt with UBS. Your line is open.

David Vogt: Great. Thanks guys for taking the question. So maybe just a question for both of you. In terms of how you’re thinking about fiscal ’24, we appreciate the color on sort of the gross billings commentary for the first half and the second half. Can you kind of help us understand a little bit more how you’re thinking about maybe at a higher level, sort of what’s underpinning that spending pattern from an IT spending backdrop? Whether you want to talk about it from an Edge Solutions perspective, a new category or Advanced Solutions, can you kind of help us think about how you’re thinking about the broader market and your position and your ability to kind of grow faster than the market? I would assume it’s kind of embedded in your outlook. So maybe we’ll just start there, if that’s okay. Thanks.

Rich Hume: David, good morning, and thanks for the question. This is Rich. Yes. If you think about the evolution on — throughout — and then the back end of COVID, obviously, last year at about this time, the PC ecosystem set of products really went into a pretty significant decline. At the same time, back into COVID, there was pent-up demand and backlog for Advanced Solutions products. So as we come into this fiscal, you have an easier compare within the PC ecosystem. You have a more difficult compare in the Advanced Solutions because of the cycles that had transpired in the past. So our point of view is when we think about the first half, that there will be some level of growth in PC ecosystem, but the Advanced Solutions will face a bit of a more challenging compare.

Then when we get to the back half of the year, we believe that most of the wraps, if you will, have concluded and that both of those major segments will have growth attributes. And that’s what has led us to the guide of kind of flattish in the first half with mid-, high-single-digit in the second half. And yes, of course, it’s always our intention to do better than the market. In fact, in the prepared remarks, we talked about in the Americas theater as well as — I’m sorry, the North America theater as well as the European theater that we had gained some market share. So Marshall, I don’t know if you have anything to add.

Marshall Witt: Yes, David, just some more color. When we do our assessment for quarter one and for the full fiscal ’24, we come at it from a bottoms-up perspective. So think about it for all the countries that we do business in, each one of those leaders looked at what that is for their territory. So there’s a country assessment. And within that, there’s certainly a vendor and a customer comparison as well as, call it third-party industry data, just to triangulate where we should land. And then with that, as Richard said, we certainly look at the GDP, the overall trajectory of what that looks like by market what IT spend correlation is expected to be relative to GDP and then our ability to outgrow that.

David Vogt: And can I just ask a follow-up? In the prepared remarks, you talked extensively about AI and obviously, that being a contributor to the business. How should we think about AI across the business, let’s say, over the next year or 2? And how is that factored into your outlook this year, I guess? I mean, I would imagine — there’s a lot of discussion by chip makers, OEMs, et cetera, that, let’s say, on the endpoint or edge solution market. You’ll see stuff at the latter half of, I guess, 2024, calendar ’24, I should say. I just would love to kind of get your thoughts on how you think that kind of shapes through the year from an AI perspective.

Rich Hume: Yes. So David, I would use cloud as a parallel or an analogy here. So obviously, there was a lot of marketing and fanfare, call it the Hyve — or I think the IDC calls at the Hyve curve at the front end, where clearly, this is a real technology that’s going to bring a lot of benefits, but the plans are defined and there’s a bit of a gap until the reality starts to flow through the market. From an AI perspective, there will be a lot of AI embedded in existing offerings. So I’m sure there’s going to be a fairly comprehensive discussion on how to count AI as there was cloud back in the day. Certainly, there will be the emergence of new AI capabilities. What comes to mind is AI servers, et cetera. So right now, certainly, there are products in market that are AI-enabled.

As we move through time, there’ll be more and more and more. We have incorporated the thoughts of AI into our forecast for the full year. But as you had indicated, it’s more of an early ramp, with the expectation that there will be more robust demand as we move through time. Now the only other thing that I would tell you is that I believe is the reality is that this isn’t just an incremental on top on whatever IT spending might have been planned prior to AI. Every company sort of lives within an envelope. They decide with that budgeted envelope bid, and there might be some expansion, but this won’t be just a new market segment that provides a complete on-top increment, but rather, there will be some reprioritization that happens relative to how customers spend their IT dollars moving forward.