Ingram Micro Holding Corporation (INGM) Earnings Call Transcript & Summary

I'm here today with Paul Bay, Ingram Micro's CEO; and Mike Zilis, our CFO. Before I turn the call over to Paul, 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, statements about our strategy, demand plans and positioning, growth, cash flow, capital allocation and stockholder return, as well as our expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements because of risks and uncertainties discussed in today's earnings release and in our filings with the SEC. We do not intend to update any forward-looking statements. During this call, we will reference certain non-GAAP financial information. Reconciliations of non-GAAP results to GAAP results are included in our earnings press release and the related Form 8-K available on the SEC website or on our Investor Relations website. With that, I'll turn the call over to Paul.

Thank you, Willa. Good afternoon, and thank you for joining the call today. We are very pleased with our first quarter performance. Net revenue of $12.3 billion was up 11% year-over-year on an FX-neutral basis and 4% above the high end of the guidance we provided on our Q4 call. Gross profit of $829 million came in more than 2% above the midpoint of our guidance. And non-GAAP EPS of $0.61 was at the high end of our guidance. North America and Asia Pacific both saw double-digit net sales growth. EMEA grew 3% and Latin America was essentially flat year-over-year on an FX-neutral basis. As expected, the top line growth was driven by strength in the Client and Endpoint Solutions, but we also saw solid growth in our Advanced Solutions and Cloud businesses. While the second quarter and back half of 2025 are harder to forecast given the volatility resulting from the macroeconomic and trade environment, which Mike will discuss, we are optimistic about the future. We believe that Ingram Micro's 4.5 decades of experience and global reach in tandem with our investments in our cloud and Xvantage platform capabilities position us to manage this cycle with greater resilience, further competitive differentiation and positive shareholder return. Just as importantly, we remain deeply committed to supporting our customers, our vendor partners, as they navigate the same challenges. Much of our long-term optimism lies in the evolution towards becoming a platform company. During this time, we have invested over $600 million in cloud, the foundation of our Xvantage digital platform, which has been implemented in 20 of the 57 countries we operate in. This will allow us to continue to remove silos and friction across thousands of hardware, software, cloud and service offerings. Xvantage connects our team members, our vendor partners and our customers through its real-time data mesh powered by 4 petabytes of data, 32 million lines of code and more than 300 AI and machine learning models. This patent-pending technology framework harmonizes disparate data sources into a unified platform, unlocking real-time insights, AI analytics and rich data visualizations. Xvantage is a truly global end-to-end digital platform that connects each player in the ecosystem, removing friction, improving go-to-market efficiencies and translating data into actionable insights through AI. Importantly, Xvantage is not about replacing people. Instead, the platform automates repetitive tasks, like billing and order tracking, to free up time for our sales teams to move from inbound tactical work to the proactive outbound business-led conversations that bolster customer success. One example of how Ingram Micro is providing go-to-market scale and leverage within our ecosystem is our Intelligent Digital Assistant. We call this IDA. IDA uses machine learning and AI models to proactively prioritize engagement with our customers and are consistently improving and automating our quote-to-order conversions. In Q1, IDA enabled tens of thousands of proactive customer engagements per month on behalf of our top vendor partners, driving hundreds of millions in year-over-year incremental revenue. IDA is another example of how our real-time data mesh and AI models are helping to evolve our sales approach from high-touch order taking to insightful consultative order generation, thus transforming the end-to-end buying experience for our customers. Let me share some data to illustrate what this transformation looks like. In the first quarter alone, our customers used Xvantage Advanced Search over 12 million times to find hardware, software, cloud and services they needed to build end customer solutions. Xvantage also enabled more than triple the self-service orders versus the prior year, allowing customers to quickly and seamlessly place orders directly into the platform. In the first quarter through Xvantage, we also reactivated thousands of dormant customers with average net sales above their prior levels of engagement. Xvantage's AI capabilities, including IDA, contributed in a meaningful way to our revenue. And one standout internal measure of Xvantage's ROI is the improved productivity we're seeing across our go-to-market teams. In the U.S., where Xvantage is most mature and fully embedded into our go-to-market playbook, we are seeing meaningful gains in both revenue generation and cost leverage, both of which were up double digit per head. Another example of how we help our partners scale is our Xvantage Integrations Hub, or what we call XI. It simplifies software integrations by enabling instant access to prebuilt applications and more secure modern workflows. XI's customers and vendors quickly deploy integrations with key cloud-based software applications, including large-scale CRM platforms like Salesforce. It also integrates remote monitoring and management and configuration price and quote platforms. During Q1, in the U.S. alone, more than 1,500 customers had 51 million interactions through the Xvantage Integrations Hub. One key customer said, and I quote, " XI is modern, intuitive and incredibly easy to navigate. We were amazed at how quickly we installed an app. What normally takes months, we completed it in minutes. The seamless experience and effortless setup makes this a game changer for integrations." Industry analysts are also taking note of the platform advantages. A research VP at IDC noted, and I quote, "Ingram Micro's Xvantage platform and new Xvantage Integrations Hub demonstrate the balance required between integrations and interactions to build a digitally enabled organization that prioritizes the customer experience." All of the technology I have discussed was created to enhance our customers' experience. So I'm glad to report that the platform is also being validated for its innovative architecture and design. In April, Ingram Micro was recognized with 3 IF Design Awards 2025 in the user experience category for our Mobile, Email to Order and Insights & Recommendation solutions within Xvantage. This is among the most prestigious global design competitions for user experience, recognizing excellence in UX/UI, product design, and innovation. Past winners include the best-of-breed tech innovators like Google and Meta. We were honored to have such a strong showing there against approximately 11,000 submissions from 66 countries. As we look forward to the remainder of 2025, despite the macro uncertainties, our strategic path remains unchanged with our customers at its core. We are focused on innovation and execution, and we believe we are in a stronger position than ever to realize our strategic vision of becoming a platform company. Our goal of delivering speed, scale and service is paying off in demonstrated efficiencies, top line lift and the reason for it all, a differentiated customer experience. Together with our customers, our vendor partners and Ingram Micro team members, we are well positioned to navigate the volatility in the short term while continuing to focus on our long-term road map as we have many times in more than our 45 years as a market leader. Our ability to remain nimble and responsive to the needs of our ecosystem has allowed us to perform better than the overall market. We are confident that through the strength of our dedicated Ingram Micro team members, our symbiotic relationships in the channel and the depth of our innovation, we will continue to provide a differentiated customer experience. And with that, I'll turn the call over to Mike. Mike?

Thank you, Paul, and good afternoon, everyone. So I want to start by reiterating Paul's comment that we are very pleased with our performance in the first quarter, driving notable growth in both top line and profitability. As I will cover shortly, for the second quarter, we also expect a similar trend in mix as we saw in Q1, but with continued overall growth as we navigate the uncertainties of the macro and trade environment. Before I turn to the specifics of our results and guidance, let me touch on some detail as to how we see the tariff environment and its impacts. As most of you know, we pass through price increases related to tariffs, but like the rest of our ecosystem, we expect that overall demand may be impacted as uncertainty around these policies persist. Modeling this impact is challenging, but it's worth pointing out that we have successfully operated in an elevated tariff environment, at least to some degree, for the better part of the last 9 years. In the U.S., we are not the importer of record on the vast majority of our products that we purchase. And therefore, we bear very few tariffs directly. We continue to monitor closely and discuss the pricing behaviors of our vendors while we drive our own dynamic pricing models around this. But the pass-through nature of our business still exists even where tariffs are indirectly embedded into the pricing of products we purchase. Outside of the U.S., the impact of tariffs will depend on whether other countries choose to raise their own tariffs as well as the impact of potential inflation brought on by this environment. We are collaborating closely with our vendors to understand tariff impacts at a SKU level for more precise decision-making. We believe our increased automation and AI capabilities enable us to be even more nimble in response to changes in the pricing and demand environment than we have in the past. That said, our Q2 guidance reflects the potential impact of tariffs and the macro environment as a prudent reflection of what we see today. Now turning to the first quarter results. Net sales of $12.28 billion were up 8.3% year-over-year in U.S. dollars and up nearly 11% on an FX-neutral basis. Net revenue mix was similar to the fourth quarter from a line of business, geographical and customer category perspective. We saw sales of Client and Endpoint Solutions growing most robustly at nearly 15% on an FX-neutral basis. However, we also saw year-over-year growth in Q1 in each of our 4 lines of business, including our Advanced Solutions and Cloud categories driven by servers and cybersecurity, but also notably networking, which returned to low single-digit growth after multiple quarters of year-over-year top line pressure as we've discussed in prior quarters. Geographically, we saw continued strength in lower cost to serve and lower-margin geographies, particularly in Asia Pacific. However, North America amplified its return to a growth trajectory from the fourth quarter, driving double-digit growth in the first quarter. From the perspective of our customer categories, large corporate and enterprise sales again outpaced higher-margin SMB sales, which remained more muted as near to midterm macro uncertainty continues. As a result of these mix factors and as expected, overall gross margins were down 62 basis points versus prior year. Longer term, we expect that higher-margin net sales from Advanced Solutions and Cloud products will become a greater percentage of the overall top line, driving gross margin improvement. As an example, our Cloud business, while only about 1% of our net sales, contributed nearly 15% of total gross profit in the first quarter of this year, up from 13% a year ago. Turning to our regional segments. North America net sales were $4.43 billion, up 10.4% year-over-year on an FX-neutral basis, driven by double-digit growth in Client and Endpoint Solutions, but also by more than 7% growth in Advanced Solutions. Consistent with my earlier global comment, our sales in North America were more concentrated in large corporate and enterprise customers. EMEA net sales of $3.42 billion were up 0.6% year-over-year on a U.S. dollar basis, but up 3.0% on an FX-neutral basis, also driven by Client and Endpoint Solutions as well as by very strong double-digit growth in Cloud. This was partially offset by softer Advanced Solutions demand environment, particularly in Western Europe markets as we expected. Asia Pacific had our strongest growth in Q1 with net sales of $3.62 billion, up 20.1% year-over-year in U.S. dollars and up 23.2% on an FX-neutral basis. India, which we discussed in depth last quarter, is trending as expected as we rebuild the go-to-market team and refocus the organization with the expectation of improvements in margin and continued top line growth in the back half. As we sit here now in early May, we are seeing the hypercompetitive market in India that we discussed in early March starting to stabilize a bit. Even in this more challenging market, we drove mid-single-digit FX-neutral growth in our India business in Q1. From a line of business perspective, Asia Pacific saw double-digit growth across Client and Endpoint Solutions, Advanced Solutions and Cloud, leading to the strong overall top line growth I just noted. The Client and Endpoint Solutions growth is particularly accentuated by very strong double-digit growth in lower-margin mobility device sales in a few markets within the region. Latin America net sales were down 8.5% in U.S. dollars at $803 million, but down only 0.3% in constant currency, somewhat consistent with what we saw in the fourth quarter and reflective particularly of strength in Cloud, offset by a more neutral performance in Client and Endpoint Solutions and a slight decline in Advanced Solutions. First quarter gross profit came in at $829 million or 6.75% of net sales. While this is down year-over-year on the mix and India market factors that I've already discussed, we are generally seeing margin rate hold fairly steady to slightly down on like-for-like categories of products and customers in a generally heightened competitive environment. Q1 operating expenses were $628 million or 5.11% of net sales compared to 5.87% in the same period last year. This year-over-year improvement in OpEx leverage is driven largely by the significant cost actions we have taken over the last 2 years, including the actions we announced in December 2024. However, this leverage is also a result of a higher concentration of sales in Client and Endpoint Solutions where our cost to serve has historically been lower and where the automation we have brought to the table with Xvantage is creating even better leverage today. For the full fiscal year 2025, we expect OpEx as a percentage of net revenue to remain above 5% as we continue to invest in our Xvantage platform, but also in personnel around our strategic priorities, including technical go-to-market skills to address our higher-margin Advanced Solutions and Cloud businesses. As discussed in our March earnings call, on a longer-term basis, we expect our annual run rate of OpEx as a percentage of net sales will fall below 5% as we realize efficiencies and hit more steady state with Xvantage. Adjusted income from operations was $229 million and adjusted income from operations margin was 1.87% compared to 1.96% in the first quarter of 2024 as our strong OpEx leverage offset a majority of the mix-driven decline in gross margins year-over-year. Non-GAAP net income in the quarter was $144 million compared to $135 million in Q1 of 2024, an increase of nearly 7% in U.S. dollars and more than 11% in constant currency as we also benefited year-over-year from a $13 million decrease in net interest expense on debt repayments, which I will cover in more detail shortly. Our non-GAAP diluted EPS was $0.61 per share, at the high end of our guidance for Q1. We continue to drive strong working capital management with Q1 working capital days at 29 compared to 33 days in the same period of 2024. The improvement reflects our focus on cash conversion driven by disciplined management of our terms with and payments to vendors as well as strong receivable collection efforts more than offsetting some targeted investment in inventory to capture market opportunities, all while navigating tariff uncertainties and keeping working capital optimization front and center. Adjusted free cash flow was an outflow of $159 million in the first quarter, which is in line with our seasonal expectations and indicative of some prebuying that we did in anticipation of tariffs as well as the overall growth in the business. The countercyclicality of our business may drive some continued working capital investment as we grow. However, this is always with return on investment in mind, and we remain committed over time to get to a mark of 30% or more of our adjusted EBITDA dropping down to free cash flow on an annual basis. The seasonality of investment in working capital will make this metric more volatile on a quarter-to-quarter basis. As we think about our use of the balance sheet to support the market, I'd like to take a few moments to highlight our strategy around channel financing. In addition to our traditional trade credit, we also offer a number of dedicated channel financing solutions to help our partners manage through rising technology costs, multiyear subscription arrangements and a higher focus on cash flow optimization. What sets our channel financing model apart is that it is not burdening our balance sheet. We leverage a global network of specialized funding partners to deliver flexible financing solutions tailored to our customers' and partners' cash flow needs. This allows customers to invest in IT without large upfront outlays and helps vendors secure longer-term commitments. Revenue volume supported by our channel financing model has more than doubled over the past 4 years, now driving hundreds of millions in annual revenue and accretive margin while preserving working capital discipline and a seamless channel experience. Back to cash flows and balance sheet. In late March, we paid down an incremental $125 million of our term loan balance, bringing our total repayment on term loans to $1.69 billion since 2022 and bringing our net debt to adjusted EBITDA ratio to 2.0x to close Q1, improved notably from 2.3x in the first quarter of last year. We also paid our first quarterly dividend in Q1, returning $17.4 million to stockholders during the quarter. And we are proud to have announced today a 2.7% increase to that quarterly dividend to be paid in Q2. Now shifting to our guidance for Q2. Let me preface this by saying our guidance is based on how we see the market today. But as we all see, this is changing almost daily in some regards. With this in mind, we are guiding to net sales of $11.77 billion to $12.17 billion, which represents year-over-year growth of nearly 4% at the midpoint. We expect second quarter gross profit of $800 million to $850 million, which would represent gross margins a bit under 7% as some of the similar geographic product and customer category mix factors continue into Q2. We expect non-GAAP diluted EPS to be in the range of $0.53 to $0.63 per diluted share, which would be an increase of $0.04 per share or more than 7% growth at the midpoint. This guidance is also reflective of some heightened inventory investment in the interim months of Q2 as a result of buy-in opportunities ahead of potential tariffs, which in turn drives slightly higher interest expense. Our EPS guidance assumes weighted average shares outstanding of approximately 235.2 million and a non-GAAP tax rate of 29.1%. Our Q2 guidance considers our current views on the macro and tariff environment, including trends in prebuying and the 90-day respite on tariffs on many countries. We continue today to see healthy activity and we remain particularly enthusiastic about a continued demand environment in Advanced Solutions. But we are weighing this with the potential for price increases related to tariffs and some extension in the sales cycle where some customers wait to see how the environment evolves as they consider their overall capital spend decisions. Such extensions are particularly true in the higher profit SMB space, which is generally more sensitive to potential inflationary factors. This is where we are confident, however, that our investments in innovation are bearing fruit in terms of leverage, efficiency and top line acceleration through this market. We will continue to engage with our vendor partners and customers to quickly navigate changes in the demand and pricing environments as we focus on the success of our partners and our team. With that, we can now open the call to questions. Operator?

[Operator Instructions] Your first question comes from Samik Chatterjee with JPMorgan.

Maybe if I can start off with sort of the macro-related comments that you had here. And interested to hear -- I know you mentioned SMB is a bit weaker. And for the larger enterprises, if I understood you correctly, you're expecting to see maybe a bit more sort of longer sales cycles, but still more moderate sort of reaction to the macro. But maybe if you can just flesh that out a bit more? And why shouldn't we expect maybe larger enterprises to eventually follow directionally where the SMB weakness is? What are you seeing in terms of maybe large projects and intent from large enterprises to continue with the large projects related to IT infrastructure and what's giving you confidence on that front? And I have a follow-up.

Yes. So I can jump in. This is Paul. Thank you for the question. If we look at it, you may have heard us talk, as we are exiting 2024 in our last call, was SMB had some headwinds. And so there was still -- it was down for the quarter. But if you look at it, it was actually improving year-over-year. So we are seeing some green shoots relative to some pockets where we're seeing improvement on that. And in our large enterprise business and in conversation with customers, when we look at our pipeline, the demand continues to be strong. And we think that that's going to continue based off the conversations we've had thus far, both with our customers and with our vendor partners also.

Got it. And then maybe for the quarter and related to both 1Q and 2Q, if you can start with maybe helping us with, when you think about the mix between Client Solutions related to Advanced Solutions, how did the mix track between those relative to your expectations for 1Q? And what are you embedding in there, embedding in terms of mix for 2Q, in terms of your expectations? And how much of that Client Solutions strength are you treating as a pull forward from the second half?

Yes. So this is Paul again, and I'll let Mike jump in. Relative to kind of the mix, our Client and Endpoint Solutions business performed very well as we talked about the refresh happening in the desktop and notebooks, so that was very strong. Our smartphones was also strong within that category. Advanced Solutions, I'm proud to say, and we were pretty accurate coming out of the last call on networking because we had talked about that we had double digits for fiscal 2020 -- exiting 2024 and the expectation, both that we saw in our pipelines and the key indicators we were seeing in our business, that we thought that it was going to start making a turn. And I know the likes of IDC said there's going to be growth on the networking business. So we did see low single-digit growth in Q1 and our server business continues to perform well and cybersecurity remains healthy also. That said, with regard to what we're putting in our guide for Q2, we don't see a dramatic shift in terms of the product mix. We do think, from a system standpoint, it may not be as heightened as it was in Q1, but we definitely see strong growth in that category and not a dramatic mix relative to the other topics I just mentioned. Mike, I don't know if you have any other comments on that.

Yes. Samik, I think the only thing I would just add, yes, I think the big factor is we're assuming a slightly lower Client and Endpoint piece, not the solid double digit we disclosed with an almost 15% growth in Q1 in our Q2 guide. But we're considering still some growth in Advanced Solutions, certainly growth in Cloud. And then I think as Paul touched on, on the client -- sorry, on the customer side of the spectrum, as has been the case for the last few quarters, we see the large enterprise customers. And we're just taking a -- we're continuing to take a conservative view on where SMB goes because, as I said in my prepared remarks, we still see quite a bit of more muteness there since that is a group of end user customer base that's going to be more susceptible to an inflationary or, God forbid, a recessionary environment. And therefore, we take a closer look on that as to how we see the customer end of the spectrum growing, and we believe that we will still be more concentrated in the lower-margin large enterprise customers.

Your next question comes from Erik Woodring with Morgan Stanley.

Congrats on the quarter. I just want to follow up on Samik's question there. Just if you could maybe, Mike, help us kind of size the pull forward that you saw in 1Q? Like, if we were to think about the upside relative to the midpoint of your 1Q guidance, is that how we should gauge the pull forward? Or what's the right way to think about that? And how are you then taking that into account in your 2Q guide? If I just look at it, it looks like you're guiding down about 2 percentage points sequentially. History shows you're kind of flat to up. And so just if you could help us understand that dynamic and how it influences your 2Q guide, that would be super helpful. And then a quick follow-up, please.

Yes. Erik, I'll start. It's Paul. So the Q1 pull forward with regard -- we did see slight, but I would call it not material, and it was really -- I want to be clear about this, too. It's really around the PC refresh and not the other products as we talked about growth in some of the other categories, that wasn't a pull forward. So if there was a pull forward that we'll see, it was in really that PC refresh. If you look at it from a customer's perspective, it was kind of a mixed bag. There were some pull forwards in Q1 in advance of the tariffs, kind of what we saw in our business. And the customers would also say there was from an RFP/RFQ kind of inbound, kind of longer term, those projects were delayed, but they weren't canceled and the expectation is budgets aren't moving. So all the feedback that we're getting is that they're still relevant. And with the pricing uncertainty, it's kind of those longer-term ones. I would say neither of those were enough in Q1 to constitute what I would define as a trend. And the question on Q2 guide, and I'll let Mike jump in, it assumes a continued PC refresh. Mike touched on it, more in the mid-single digits in terms of what we're looking at from a growth rate perspective that we built into the Q2 guide.

Yes. So Erik, you pointed out about a 2% roughly decline sequentially. That's right. And I think it is. I don't want to quantify it, as Paul just said, but that's pull forward because there's a lot of other factors, as Paul just hit on. But part of these factors, just coupled with potentially a little bit more overhang as we see, especially in that SMB space in Q1, is really leading to that Q1 guide and that growth factor.

Okay. That's really helpful. And then maybe the second question is just, can you help us understand what you're seeing from a pricing perspective? As we're here, and kind of thinking about 2Q more so, but are you seeing vendors raising prices? If so, what end markets is that most prevalent in? And how have customers responded to those prices? Could there be more to come? Again, all of that, just kind of putting the pricing environment in context really here as we think about the last maybe 5 or 6 weeks, please?

Yes, Erik, this is Paul. I'll start. So as it relates to pricing, there's been minimal pricing impact. If there has been some changes, it's been more around the peripherals and accessories depending on where the impact was and, keep in mind, from an overall working capital standpoint and inventory that we already had in our system working through that. So especially in Q1, and even as we sit here today in Q2, we haven't seen a lot of price raising and/or changes thus far as we kind of work through what the tariffs is going to look like. I would also say today's announcement with the U.K. here recently is encouraging. And just overall, from our perspective, as you would expect, certainty and predictability is good for our business, and we've proven to be flexible and able to adapt quickly. So we haven't seen -- just to summarize that we haven't seen an impact from a pricing perspective and a lack of tolerance from our customers out to the end users.

Your next question comes from Ananda Baruah with Loop Capital.

I got two, if I could as well. The first one, I guess, Paul and Mike, just on Xvantage. And what's a good -- look, you gave a lot of great metrics, so I appreciate that and acknowledge it. And I guess what I'm wondering is sort of big picture, is there a good way to think about what the progress -- I think, Paul, you said you're like in 27 to 50-something countries. Is there a useful way to for us to think about, number one, kind of like ongoing progression and propagation throughout sort of your target map? And then I don't know, number two, a way to think about transaction penetration over time. I guess anything useful there for us to see what you're shooting against? And like, I don't know, what the -- when I say shooting against, like maybe what the potential is. And I have a quick follow-up as well, though I know that's not a quick question, that first one.

So the way we look at it -- Ananda, thanks for the question. So there's 3 ways we look at the metrics, and there's multiple metrics, and our commitment was that we'll continue to give you visibility as we build out. So we're in 20 of our 57 countries, which we continue to deploy Xvantage on a global basis. And keep in mind, remember, when we do something, number one, it's global, and it's the same experience in all 20 countries that it's deployed in. So we look at that as a differentiator, a, from research and development and how we continue to build out and the investment we make, as we do something to the code base, it goes to all 20 countries right now, and the expectation is we'll continue to roll those to the rest of the world. From a user -- so the 3 metrics that we really talk about are 3 different ways. One is user engagement. I talked about 12 million searches, advanced searches. So we continue to see that increase. We look at it from a financial and operational perspective, triple the self-service orders versus the prior year. This just continues to demonstrate what we're focused on, which is the customer, ease of use, taking friction and OpEx out of the conversations, moving to more outbound versus inbound. And then the third one is we look at it from a customer perspective. So again, you heard us last time talk about we brought on over a couple of thousand, I think, was the number that I mentioned -- or it was, I believe, 8,000 from a full year 2024 is what I probably mentioned, I believe, last time in our earnings call, and now we're seeing a couple of thousand. So this is a great opportunity for us to go reengage with partners that haven't done business with us that are, what we call, dormant customers. We have thousands of those also. So those are just a couple of metrics that we look at. And then you heard me talk about intelligent digital assistant and what we've done to drive leverage, both from an OpEx perspective and a revenue standpoint. Both of those, which I mentioned in my prepared remarks, were up double digit per head. I think you had a follow-on question, too.

Yes. I guess the follow-up is -- I'm going to allude to Cloud into this also. So it sounds like -- I mean, these aren't your words, but I think it sounded to me like Xvantage was like maybe a couple of hundred million of incremental rev gen this quarter, and sort of correct me if that's like super off base; and then Cloud at 15% of gross profit dollars, 1% of net sales. Can you frame for us the opportunity for like Xvantage and Cloud to really repurpose the business model, right? Like, if Cloud is going to go to 2% of net sales at some point, like is that 15% to 30% of GP dollars, right? And so anyway, that's really the question. Like, are we sitting on the beginnings of a totally repurposed business model and it's just not fully evident yet. But as you guys just keep doing what you're doing, we're going to look in like 8 to 12 quarters and the business model is going to be really amplified. So just any thoughts there would be great.

Yes. And I think -- so I'll jump in, and we're not going to disclose the numbers necessarily. What I would think about in the future is that our company will be Xvantage. So we'll be talking about metrics of how we're driving share differentiation, better margin improvement, lower operating expense and overall bottom line return to the shareholder. And some of the things, if you look at Cloud, we spent $600 million in Cloud, both organically and inorganically, over the last 12 years, and that's the foundation for Xvantage. So we did start from the ground zero. And on top of those 30 patents pending, the 32 million lines of code that we put on top of that investment around Cloud that I talked about in my opening comments, that's about a single experience. So you're able to come to Ingram Micro and get a, as I call, a one-stop shop or a single pane of glass for your hardware, software services and cloud, all-in-one system. So this, in my opinion, is broader than just Cloud over time. This is about consumption and how technology is going to be delivered to end businesses and how do we enable our solution providers who generically, are our customers, 161,000 customers, to go provide a better experience at a lower operating expense and effectively drives more revenue and a shorter sales cycle.

Your next question comes from Ruplu Bhattacharya with Bank of America.

Mike, if we look at the guide for fiscal 2Q, at the midpoint, revenues will be up year-on-year, but gross margin will be down. It's an interesting year because you should have this year both growth in client devices as well as Advanced Solutions. So based on your current forecast and backlog, as you look into the second half, do you think gross margin can grow year-on-year? Or should we assume that it remains pressured from a year-on-year standpoint? And then I'll ask my follow-up now as well. Can you talk about working capital? You said that you might do some prebuys. So how should we think about inventory and the free cash flow as we go through the rest of this year?

Okay. Thanks, Ruplu. Good questions. So I think as we said, we're really thinking about margin in terms of mix. But it's beyond just the Client and Endpoint mix, which is maybe not assumed to grow as robustly as it did in Q4. We are still expecting in that model growth of Advanced Solutions and Cloud, which is higher profit business. But I think what we do see more consistency with is still some of the concentrations towards the large customers and SMB being more muted as a whole. And therefore, that tends to be lower margin mix. We're still also seeing more growth geographically towards our Asia Pacific region, which is lower cost to serve, but also lower margin on the whole. So there's multiple factors that go into that. Now clearly, when you think about maybe the high end of our range, if we see growth coming in, but it's more concentrated towards Advanced Solutions, we see SMB bouncing back, absolutely, there is the potential you could see accretion in gross profit. But we're seeing more of the gross margin line stay roughly equivalent to where we were in Q1 from a historical perspective. I'll answer your second question and then come back if there's anything I can clarify. But on the working capital front, yes, both in Q1 as well as in Q2, we are doing some prebuys with a number of different vendors where we see opportunistic opportunities to get ahead of potential price increases. Now the way we usually handle this is a lot of it is bought early in the quarter and it's sold during the quarter. And that was largely true, but you can see a bit of a heightened inventory balance to close the quarter. But we're pretty happy with the fact that working capital days and DIO in specifics would still improve year-over-year despite some of those prebuys still sitting on the balance sheet. And more importantly, we're working well with our vendors for support through the terms and conditions, and you can see that come through in the payables. So what I would think about prebuys is we're going to continue to try and manage that as best we can and be opportunistic where the opportunities exist. But it could cause, as I said in my prepared remarks, heightened inventory investment during the interim months of our quarters. And that's important only because, let's say, it's a few hundred million dollars, that drives interest costs and interest carrying costs. So you just need to think about the interest expense model that, that drives, but it's with a very positive return overall.

The only other thing I would say, this is Paul, and Mike mentioned it in his comments, we did do prebuys as he just mentioned, but we also improved our working capital year-over-year by 4 days. So we think we're making the smart, right strategic buys and it's the right return.

Your next question comes from Adam Tindle with Raymond James.

Paul, I just wanted to start. Obviously, we're all asking about this concept of pull-in and trying to understand some of your customers have been pretty adamant and open about the idea that there was maybe some pull-in in Q1. I guess the question might be, for you, if you could maybe walk us through the cadence of the quarter and any early observations from closing the month of April, differences in month-to-month growth, kind of lay out what it looks like kind of on a monthly basis so we can understand what you're seeing in the numbers and whether or not there might have been any aspect of pull-in. And then I have a follow-up.

Thanks, Adam. So from a geographic perspective, there was no major anomalies in terms of how a normal kind of quarter goes exiting Q4 and coming into Q1 with the one exception, if you look at the EMEA region, we saw the 3% FX-neutral growth, and we are very pleased with our Cloud growth that we have there. And they had continued growth in CES, even with the headwinds of Western Europe, but we were pleased with the way they finished the quarter. They had a very strong finish to the quarter that, I would say, was a little bit more accelerated versus the other regions, which was pretty consistent month after month after month. And as we sit here today, we're seeing very much very similar dynamics in the first part of this quarter and Q2 also.

Got it. Maybe a follow-up for Mike. Net debt to EBITDA is, I think, down to 2x after the debt repayment in the quarter. Just if you could remind us of how you think about optimal levels of the capital structure and leverage here? And then how you're thinking about capital allocation priorities from here? Obviously, some of the dividend moved, but maybe lump in share repurchases, M&A, kind of just revisit that whole concept for us.

Yes, absolutely, Adam. I think, yes, we're pretty happy with where we've continued to drive that leverage down with quite a bit of debt repayment, as I said, almost $1.7 billion in repayments over the last 3 years. So we're always going to be balancing that going forward. As far as optimal level of leverage, we're not far off, honestly, right now from where I would be happy for us to be. Certainly, we think about investment grade as an opportunity in the future, and that's challenging with the ownership structure right now. But I believe we're already in that ballpark as far as leverage goes. So where we're really focused now is where is the best area for us to invest going forward. And if we're more tempered in certain investments, including organic investment in Xvantage, as an example, then we'll continue to repay down debt with cash flow. And then as far as return to shareholders, we paid out our first quarterly dividend in Q1. We did a 2.7% increase to that dividend just announced for Q2. So we want to make sure we're also balancing that with some continued return to shareholders. The share buybacks at some point down the road could be another arrow in that quiver, but obviously, that's not a viable option right now. So it's really about balancing that. M&A continues to also be a big factor. And as you know, most of our historical M&A in the last handful of years has been smaller tuck-in acquisitions that might be tens of millions of dollars of purchase price. So we're not really breaking the bank, so to speak, on that front. But that doesn't mean we couldn't opportunistically look at something bigger. And then we'd have a different look as to how we would delever the business after that if we were to do something larger and opportunistic.

Your next question comes from Karl Ackerman with BNP Paribas.

I wanted to go back to the outlook for June. I believe you noted that product mix wouldn't change much despite the stronger growth in Client and Endpoint Solutions. However, I'm hoping to hear some commentary with regard to what you're seeing -- if you are seeing a recovery in server storage and networking applications that are higher margin for you.

Yes. So I'll touch on that, and Paul can elaborate. I think the biggest differential between Q1 and Q2 is really a bit of a bring down from Client and Endpoint, not assuming we're growing at 15%, but as Paul said, growing mid- to upper single digits in our Q2 guide. The mix on the other factors is somewhat consistent. But actually, I will say servers, in particular, have been quite strong. Cybersecurity remains strong. Cloud remains strong. And as we also said in our prepared remarks, we're now seeing growth in networking for the first time in, I believe, 5 quarters, modest at 2%, but that's certainly a vast improvement from where we were most of last year where we had a really challenging compare year-over-year on the backlog fulfillment. And Cloud continues to grow very nicely globally.

And I would just say from a customer mix standpoint, you layer on top of that, if we start to see momentum come back from an SMB perspective, which I mentioned is improving year-over-year, but it was still down, not to the same extent that it was in the prior quarter, that could actually provide a little bit of uplift also.

Got it. If I may, just one more, you indicated you are seeing healthy order activity by customers. And so while inventory rose this quarter, I just want to address, should we assume working capital or inventory becomes more favorable to cash flow in June? And then beyond June, any thoughts with regard to working capital dynamics?

Yes. The way I would think about working capital, and realizing we don't specifically guide on that, but I'll just give you sort of the thought process, we're going to continue to manage our business around working capital days. So if we're in a more consistent growth mode as we were in Q1, you're going to have that investment. But as we said, working capital days came down on a net basis by 4 days year-over-year. So you just have to think about that growth factor and maintaining some equivalency in how we invest on a daily basis. And we're going to continue to invest for growth where we can capture the market opportunities in this environment. And that can put a little strain on free cash flow while we're in higher growth mode, and that's going to even out over time, coupled with also the normal seasonality where we usually have a higher investment, for instance, in inventory when we get into Q3, a lot of that sold through in Q4, where we will close the year with receivables and then we collect that in the new year, and the cycle continues. So just think about that seasonality, but also the cyclicality.

Your next question comes from Matt Niknam with Deutsche Bank.

I guess first on Client and Endpoint, not to beat a dead horse, but I'm curious whether the strength in Client and Endpoint, you talked about 15-ish percent growth, was that mainly PC refresh related? And I guess what I'm trying to figure out is, is there a similar dynamic around PC strength in April? And is it mainly concentrated around larger enterprise relative to SMBs refreshing PCs? And then second question, just on India, if you can give us a little bit more color on the competitive dynamic there and how that's evolved year-to-date?

Yes. So the Client and Endpoint Solutions, Mike, that we've referenced, that 15%, that's for the Client and Endpoint Solutions business. Our desktop and notebook through the refresh actually grew faster than that complete line of business, the Client and Endpoint Solutions business. So that is part of the refresh that we're seeing. And if you look at kind of early into the quarter of Q2, we're seeing similar growth rates on the Client and Endpoint Solutions, but more importantly, on the desktop and notebook refresh. So we're seeing similar trends early here, as we sit here early in the quarter. So that's what we're seeing around the refresh. As it relates to the customer, when I refer to customers, I refer to our customers that historically serve those end markets. So a lot of those are going into what we would define as our enterprise and larger customers as opposed to our customers that historically service the small- to medium-sized businesses. On your question about India, the market continues to be competitive. I would say the market competitiveness in India, and as we continue to rebuild and hire out the right executives, it's still definitely competitive. But outside of more local large distributors, not as much as multinational that we may have pointed to last quarter, it's more of a local environment from a competitive nature. But it is still competitive. And I like to always remind the team, myself included, which is we're focused on quality of earnings and the right revenue growth that we want to make sure even in a competitive environment. So we're always keeping a keen eye on that as we move forward. Mike, I don't know if you have any other thoughts on either.

Just real quick on India, we talked in our call back in March about an impact that we were projecting into our guidance that was in cents, not percent, a high single-digit cents impact from EPS from India, from the competitive factors and uniqueness of that. And then we talked about how Q2 would probably be closer to half of that kind of impact. And that is where we are tracking. We're seeing -- that's how Q1 landed, and that's how we are seeing Q2 land. As I've said in my prepared remarks, we're seeing things start to improve on some of the competitive factors, but it is still highly competitive. And we're going to go after business that's the right kind of business. And we did a good job of still driving mid-single-digit growth in India on an FX-neutral basis in Q1. But we're not interested in going after negative margin business. So we're going to make the right decisions there and continue to drive that while we enhance the team, as Paul said, and we're pretty pleased with that progress where we expect things in the second half being a little bit more normal.

We have time for one last question, and that question comes from Maggie Nolan with William Blair.

I wanted to ask about your comments on OpEx. I heard you say that OpEx as a percentage of revenue would stay above 5% this year. Can you give us a little more insight, though, into how to think about this quarterly? Should we still be expecting a decrease in OpEx as a percentage of revenue in each coming quarter this year versus the prior year quarter because of the cost actions that you've recently undertaken?

Most of the costs, if you talk sequential, most of the costs that we announced in our most recent actions in December have already taken place and were out largely in the first quarter. There's a little bit of rollover impact into Q2, but not substantially. So this is the way I would think about this quarterly. We're probably floating a bit north of 5% on a fairly consistent basis. Where you may see a little bit more leverage is certainly in Q4 where we usually have the hockey stick of a higher seasonality for sales and therefore, you absorb costs in a more meaningful way. And honestly, that's why our costs -- that's a contributor to why our costs were as good as they were from a leverage perspective in Q1. We certainly have taken the cost actions to bring leverage to the table, and those are staying out. But you couple that with a Client and Endpoint Solutions business that grows nearly 15%, which is very low cost to serve and more automated than it's ever been, that becomes even far more efficient from an absorption perspective. So if we saw a more robust higher end of the growth spectrum in Q2 or quarters after that, you may see more of that cost absorbed, of course.

Okay. And then once we get past kind of this pull forward in buying, do you have an expectation for how many months it takes for tariffs to potentially suppress buyer behavior just based on how your business may have been impacted historically?

It's a really good one. I'll give some initial thoughts. I'll let Paul add. It's a hard one to answer, as you can imagine, because we don't know where tariffs are going to land. We believe there may be a deal between the U.K. and the U.S., but I heard the U.S. administration say 200 more to go or something along those lines. So we'll see where that goes, and we need to see where that lands. If it is not as pronounced an increase as we suspect, you may not see a real significant down cycle. But we're taking a tempered approach based on what we see today and the fact that come early July, there may be a number of tariffs coming into effect, depending on whether deals happen or not. And again, the fact that, that -- it's not the tariffs as much since they are pass-through for us as it is just the simple impact on the demand environment as a whole that we need to watch.

Yes. And so the last time we had this, it was absorbed and there was no impact. We've driven through inflationary situations, and we've been fine with that. So I think to Mike's point, it really comes down to where does the wheel stop and where is the manufacturing actually done and what is the impact, and what's the tolerance at that end business to absorb a price increase, whatever that's going to be. For us, one of the benefits are, again, we don't absorb that. We pass it along. And furthermore, we do business with 1,500 vendors in close to 60 countries on a global basis. So we're pretty diversified, and we have multiple different options for our customers to provide end-user solutions. So if there's winners and losers from a technology perspective, we sit right in the middle of that and get to help participate in that.

At this time, I'd like to turn the call back to Paul Bay for any further remarks.

Thank you, operator, and thank you all for your questions and continued interest in Ingram Micro and as always, to our team members, our customers and our vendor partners as we continue to deliver both short term and execute against the long-term vision of transforming IT distribution together. We look forward to talking with many of you in the coming months. So have a great day and a good evening. Bye for now.

This concludes today's call. Thank you for attending, and have a wonderful rest of your day.