TD SYNNEX Corporation (NYSE:SNX) Q2 2023 Earnings Call Transcript - InvestingChannel

TD SYNNEX Corporation (NYSE:SNX) Q2 2023 Earnings Call Transcript

TD SYNNEX Corporation (NYSE:SNX) Q2 2023 Earnings Call Transcript June 27, 2023

TD SYNNEX Corporation beats earnings expectations. Reported EPS is $2.66, expectations were $2.55.

Operator: Good morning. My name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the TD SYNNEX Second 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’d 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, demand, 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.tdcinex.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. Second quarter proved out the resilient business model we’ve been highlighting over the last several quarters as we saw a continuation of many of the trends from the February quarter. Our unparalleled line card and diversified portfolio allowed us to realize growth in advanced solutions and high growth technologies, while year-over-year growth rates for End Point Solutions were impacted by short term weakness in the demand for PC products post pandemic. We expect this PC demand decline to abate over time as customers upgrade an aging install base of devices, allowing them to run the latest operating environments and leverage key security features.

And we’re encouraged by the improving macroeconomic sentiment and stable supply chain conditions that are mostly back to historical profile levels. Although the pace of the recovery remains uncertain, we believe that gross billings and net revenue in fiscal Q2 and the outlook for Q3 represent the trough levels for End Point Solutions. The breadth of our technology offerings, again, proved to be a differentiator for us as we were able to offset deeper than anticipated declines in End Point Solutions technology demand with growth in Advanced Solutions and High Growth Technologies. Our teams delivered solid execution, shifting to pockets of growth. And on a year-to-year basis, we believe we maintained our overall market share position in the Americas, while growing market share in Europe.

The resilience of our business model along with strategic investments that we have made augment our capability in the fastest growing areas of the market and helped us to expand margins in the quarter. Working capital improved with lower revenues, which is a reflection of the countercyclicality of our business model. From a regional perspective, the Americas experienced the largest impact from the post pandemic decline in demand, with year-over-year declines for PC ecosystem products. America’s Advanced Solutions saw continued growth, driven by demand for cloud and data center related technologies. From a customer perspective, declines were primarily in the largest customer segment, while SMB and MSP customer segments have grown. Europe continued to show resilience with smaller declines in the End Point given our broad technology footprint and diverse product line, including mobile phones, and a very strong growth in advanced solutions offerings and specialized solutions.

The Asia Pacific, Japan region also saw strength in high growth technologies and specialized solutions, partially offset by smaller declines in endpoint solutions. At a company level, we continue to see solid momentum across the high growth technology areas that we’ve chosen to focus on, which include cloud, security, data, AI, IoT, and Hyperscale Infrastructure. These areas continue to see growth in the low teens on a year-to-year basis. Our customers are prioritizing projects in these areas, given the critical nature of these IT investments and their strategic importance in minimizing cyber-attacks, enabling digital transformation and driving cost optimization. Investing in these technologies is one of our four strategic pillars and foundational to our evolution from a traditional distribution partner to a solutions aggregation and orchestration partner.

Let me take a moment to provide some perspective on the steps we’ve made towards our goals in this area. We are well into the solutions aggregation phase where we build, integrate, and facilitate edge to cloud IT solutions for our customers. Our role is to help our customers solve complex market challenges by aggregating multi-vendor solutions and delivering easily deployed business outcomes. We do this through our solutions factory methodology where we build comprehensive repeatable solutions that includes some combination of hardware, software, and cloud licenses. A recent example of this involved an IT solution provider and a consulting firm that wanted to provide a better backup solution for their clients. Maintaining warranty and software support on proprietary backup appliances can be costly for end users, and they wanted to begin recommending pure cloud backups where applicable.

This provider was able to utilize the TD SYNNEX solution factory and our cloud based click to run solutions along with provisioning a preconfigured cloud solution built by TD SYNNEX within minutes. This enabled the provider to deliver a solution to their end users more rapidly, while reducing configuration and deployment process times by 75%. We have many examples like this and currently have over 75,000 of these solutions deployed, including offerings for software defined data centers, hybrid cloud, hyperconverged infrastructures, analytics, and security. We look forward to continuing to share updates with you on this important work. Now, moving on to our merger integration efforts. As we approach the two year mark since we became TD SYNNEX, I’m pleased to report that we have realized our goal to achieve $200 million in merger related cost synergies, ahead of schedule.

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This is an important milestone, and it is a result of much hard work and effort by the teams across the company. As we move forward, we expect to realize an additional $50 million in cost optimization over the next several quarters. From an ERP systems perspective, we have made additional progress toward the completion of transitioning the Americas business to one system. Approximately 80% of our America’s business is now on CIS, and we remain on track with our transition goals. Importantly, this progress opens the door to realizing merger related revenue synergies and to continually enhance our business. While we know that some revenue synergies have already begun to be realized, we believe this remains a more significant opportunity toward the end of 2023 and into 2024.

This month, we were honored to receive our updated Fortune 500 rating being named number 64 on the list for 2023. This is a testament to the strong relationships that we retain with our customers and vendors. During Q2, we were privileged to be recognized with several awards including being named HP Partner of the Year, North America Distributor of the Year by Dell, HPE, and Veeam, in addition to other regional awards. We also had the distinction of having 19 of our leaders recognized by CRN as top women of the channel last month. A well-deserved achievement and recognition of their significant contributions to our company and industry. We are proud of their achievements and continue to be committed to gender diversity as part of our overall DE&I strategy with the goal of increasing representation of female core workers to 40% of leadership roles by 2030.

We also closed on several new vendor partnerships during the quarter, including Gong, an AI driven revenue intelligence platform, and GitLab via an exclusive partnership to address DevSecOps and application modernization in Asia Pacific, Japan. These wins are indicative of our investment and commitment to grow in new technology areas, enabling us to continue offering our customers the most complete portfolio in the industry. Since the beginning of the fiscal year, we have added nearly 100 new vendors to our line card. In closing, as we contemplate fiscal Q3, while there remains some uncertainty in the macroeconomic environment, we are encouraged by the early signs of stabilization. With the resolution of the US debt ceiling, reduced banking sector concerns, and a serviceable supply chain.

We expect PC ecosystem demand declines to reduce following the past couple of years of intense buying by our customers and driven by the factors I mentioned earlier. We remain well positioned to navigate the demand environment as highlighted by our performance this quarter, and we believe that the long term drivers of IT spending remain intact. I’ll now turn it over to Marshall for some additional comments about Q2 and our Q3 outlook. Marshall, over to you.

Marshall Witt: Thanks, Rich, and thanks to everyone for joining us today. Our earnings and cash flow profile remained strong this quarter. We delivered non-GAAP EPS of $2.43 per share within our previously guided range and generated over $700 million of cash flow from operations for the quarter, demonstrating the countercyclical nature of our business model. Our Q2 revenue performance was at the low end of outlook range we provided in March and is the result of a demand environment that vary greatly between Endpoint, Advanced Solutions Technologies. As customers prepared for the rapid shift to hybrid work over the past few years, growth for PC ecosystem products was well above historical trends. As Rich mentioned, demand for Endpoint Solutions is now declining, but customers digesting the increased investments made over the past couple of years.

At the same time, advanced solution technologies continue to see solid demand as customers focused on projects for data centers and continue to prioritize their cloud migrations. Given our broad portfolio and progress in high growth technologies, we were able to leverage the areas of growth in Q2, increasing our market share for these technologies in North America and Europe. Worldwide gross billings were $18.7 billion, down 4% in constant currency, while net revenue was $14.1 billion, down 7% year-over-year in constant currency. Given that a greater percentage of our sales came from Advanced Solutions in the quarter, more of the revenues were shown on a net basis in the quarter. If normalized for these additional gross to net adjustments, which primarily occur in Advanced Solutions, the year-over-year net revenue decline in constant currency was 4%.

We continue to see solid growth in the high growth technologies of cloud, security, data, AI, IoT, and hyperscale infrastructure. And collectively, these areas grew in the low teens on a year-over-year basis and represented greater than 20% of our gross billings in the quarter. Non-GAAP gross profit was $969 million and non GAAP gross margin was 6.9%, up 45 basis points year-over-year. The improvement in gross margin was driven by a mixed shift to Advanced Solutions and high growth technologies. Total adjusted SG&A expense was $593 million, representing 4.2% of revenue, up $8 million year-over-year as we continue to make investments to enhance our capabilities in the strategic growth areas of the market. We expect SG&A expenses as a percentage of net revenue will return to the 3.5% to 4% range in the second half of fiscal 2023 as we began to realize the cost optimizations that Rich mentioned earlier.

Non GAAP operating income was $376 million, down 5.6% year-over-year, and non-GAAP operating margin was 2.7%, up 6 basis points year-over-year. On a constant currency basis, non-GAAP operating income decreased 5% year-over-year. Q2 non-GAAP interest expense and finance charges were $72 million, $4 million better than our outlook, and the non-GAAP effective tax rate was approximately 24%. Total non-GAAP net income was $229 million, and non-GAAP diluted EPS was $2.43, within our guidance range. Non-GAAP EPS for the quarter was down 11% year-over-year, and excluding the impact of higher interest expense and FX translation, it would have been down 2% year-over-year. Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $852 million and debt of $4.1 billion.

Our gross leverage ratio was 2.3 times, and net leverage was 1.8 times, in line with our investment grade credit rating and approaching our previously communicated target of 2 times gross leverage ratio. Accounts receivable totaled 8$.4 billion, down from $9.4 billion in the prior quarter, and inventories totaled $7.8 billion, down from the $8.4 billion in the prior quarter. Net working capital at the end of the second quarter was $3.8 billion down from $4.2 billion in Q1 due to declines in AR and inventory and partially offset by a decline in AP. The cash conversion cycle for the second quarter was 24 days, down two days from quarter one, which was consistent with expectations and typical seasonal patterns. Cash from operations in the quarter was $708 million, and free cash flow was $677 million as the business demonstrated the benefits of its countercyclical balance sheet.

During Q2, we returned $93 million to shareholders via dividends of $33 million and share repurchases of $60 million. For the quarter, our board of directors has approved a cash dividend of $0.35 per common share, which equates to a dividend yield of approximately 1.5% payable on July 28, 2023 to stockholders of record as of the close of business on July 14, 2023. As Rich had mentioned, we are happy to report that we met our merger related cost synergy target ahead of schedule, realizing $30 million of incremental savings and over $200 million cumulatively. Despite our success in achieving merger synergies, there’s more work to do to optimize our cost structure, especially given the unprecedented swing from strong market momentum exiting fiscal 2022 to the year-over-year declines in revenue for the first half of fiscal 2023.

Over the next three quarters, we will be pursuing cost optimizations that will drive SG&A costs lower by approximately $50 million on a run rate basis. The cost savings will, in part, be enabled by the integration of our two ERP systems into one enterprise platform in the Americas. This opens up our full capabilities to dynamically manage and respond to where the market is going and provides us with confidence in realigning our cost structure to market conditions, and to fully leverage cross sell revenue opportunities. So with this as the backdrop, let me now share our outlook for fiscal Q3 and high level thoughts regarding Q4. We believe we will continue to see demand for PC ecosystem products improve and believe that fiscal Q2 and Q3 represent the trough levels for Endpoint Solutions, gross billings, and net revenue.

For fiscal Q3, we expect gross billings of $18 billion to $19.3 billion, representing a 7% decline on a year-over-year basis in constant currency at the midpoint. We expect total revenue to be in the range of $13.5 billion to $14.5 billion, which equates to a 10% decline year-over-year on a constant currency 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 $206 million to $253 million and non-GAAP diluted EPS is expected to be in the range of $2.20 to $2.70 per diluted share based on weighted average shares outstanding of approximately $93 million. Non GAAP interest expense is expected to be approximately $72 million, and we expect the tax rate to be approximately 24%.

We believe market sentiment reflects a modest recovery beginning towards the latter part of Q3 and continuing into Q4 and would expect to see a seasonal sequential improvement in revenue of approximately 8% in Q4. As well as easier compares as we enter fiscal 2024. As a reminder, in Q4 of fiscal 2022, we had a benefit of approximately $0.33 to non-GAAP EPS due to high margin recoveries, which we do not expect to repeat. In closing, I’d like to provide some comments regarding capital allocation. Given strong free cash flow generation in Q2, and our continued confidence in generating over $1 billion in free cash flow for fiscal 2023, we are focused on deploying cash opportunistically. We returned $241 million of capital to shareholders in the first half of the year and expect to increase that pace for the back half of the year by approximately $100 million, bringing our expected capital return for the back half of the year to approximately $340 million.

And the all in total for fiscal 2023 to $580 million. We will continue to be opportunistic with regards to capital allocation, while adhering to the general framework we have previously communicated to the market. With that, we are now ready to take your questions. Operator?

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