TD SYNNEX Corporation (SNX) Earnings Call Transcript & Summary

Well, good morning, everybody. We're here with TD Synnex. We've got the CFO here, Marshall Witt. For those who are not knowing of TD Synnex, it's the largest distributor and aggregation platform, I think, globally, 150,000 customers, $60 billion in revenue, basically serving and connecting the global IT infrastructure systems. I'm very excited to talk to this gentleman, basically in terms of his insights. So thank you for joining us, Marshall, and just maybe jumping right in there. We'll start off with where we're talking to everybody about macro, but your view is, I think, relatively unique versus our other folks that are here. Maybe a state of the union on global IT spending, and we'll get into some of the specifics that you mentioned in the most recent call.

Sure, thanks for having us. Really appreciate it. Yes. When I think about the overall IT landscape on a global basis, I'll start first with how we see it from a TD Synnex perspective. So we just had done reporting our Q2 earnings and gave our look at Q3. And on an adjusted basis, we expect revenue to grow around 10%. So pretty healthy backdrop for Q3. Two perspectives of that. One is, year-over-year, it's a little bit easier to compare for us. So that does help. But sequentially, we're still seeing good stable growth in 2 pockets or 2 aspects of IT spend. We categorize our advanced solution portfolio and then our endpoint solutions portfolio. Advanced solutions is what you think it's solution-based, hybrid converged, network, server type solutions to the end market. Endpoint, technology based, PC peripherals, printers, but both of them equally contributing to how we're seeing the outcome for Q3 stepping back just for education around distribution for those that are still coming up to speed on what we do. Not only do we look at what IT spend is projected to be. But with our OEMs, in many cases, whatever their growth rates are, our market share can be much different with them than what they're saying for the overall results for their organization. So if a company comes out and says, hey, we're up 2% we may be at 5% with them because we're growing market share within the channel and what they're giving us. I think the other important aspect is IT spend as a percentage of CapEx and as a percentage of OpEx continues to increase year-over-year. So subtle but still meaningful for us when we think about how are we seeing that sustained growth rate? How are we confident that the 10% adjusted revenue growth for Q3 makes sense to us. It's kind of bringing all those together and thinking about it. The last thing I'd add on that is, historically, GDP is a surrogate for IT spend. So we serve over 100 countries and in many respects, there is a strong correlation. We traditionally grow faster than IT. Over the last couple of years, we've seen somewhat of a separation between GDP growth and IT spend. And really, what we're seeing through the pandemic is that IT has exploded at a much faster rate than GDP.

Great overview. And I just wanted to focus on this IT infrastructure. I think that's part of your Advanced Solutions Group?

That's right.

And you made a, I think, maybe a multi-quarter call out here, certainly in the last quarter, call that this remains strong. We've seen a lot of discussions about maybe the public cloud ticking down. I'd love to hear, just given your broad perspective, let's just start with which pockets or what areas of strength are you seeing in IT infrastructure spend to get...

So in network and server continues to be strong and healthy. In our hyperscale infrastructure category, that growth as an industry is 15% to 20%. So that is the backdrop to our ability to feel confident in our growth rates and our projections as well. There has been some conversations around hyperscale infrastructure and what does that look like? And is it declining? It is declining, but it's declining from 30% and 40% growth rates. So it's still quite healthy and what we're seeing in that network and server space is that capacity remains constrained. So demand is exceeding supply, and we see that of course, taking place. I know we'll have a conversation about supply chain in a bit. But that does give us that confidence that demand remains healthy. Part of it is because they're waiting for supply, but the actual industry itself is growing quite well.

Yes. Why don't we just cover that so we can move on before we talk about some more interesting stuff where is -- what you're seeing in terms of supply chain. We've heard from a couple of folks that I've talked to in the last 40 hours that there's some improvement. I don't want to lead you in any way, but even more temporarily in the last 30 to 60 days. If you could just comment on the state of the union supply chain.

Yes. So we gave an outlook for Q3 that the overall backlog, as we call it, has stabilized in Q3 to Q2. So we are seeing an overall stabilization as it pertains to TD Synnex. Now breaking that down into the endpoint solutions and advanced solutions. Endpoint solutions is starting to decline. The backlog itself was still elevated, but relatively speaking, sequentially, it has started to decline. On the Advanced Solutions side, it's still remaining quite high. It's not increasing, but we haven't seen Advanced Solutions supply constraints ease yet. We expect that they will in Q3 and Q4 as we move into 2023, but still very elevated.

What are the expectations based on? I mean is there any visibility? Or are we just still kind of in a hope kind of phase?

Yes, I do think the overall pandemic and the access and ability to get at supply and each OEM has a different story. And since we serve over 1,500 OEMs, it's difficult to have any 1 common theme. But definitely, each 1 has a case for what's causing constraint within their own delivery supply chain. But for us, we do see the easing on the endpoint solution side as there's just more supply coming in place. I think as companies are able to navigate and be more agile around supply chain disruptions, finding out sources in areas for which they can pull and for us, even within the distribution space, we have the same opportunity or challenges if we see pockets of constraint, we'll pivot and try to find an alternative solution to fulfill the end market.

Interesting. Any other questions from the audience in terms of macro or supply chain before I dive a little deeper here. No? Okay. I touched on public cloud spend maybe taking a downtick of late. Is there -- from a TD Synnex perspective, is there a bias that you care about 1 way or the other in terms of from your -- from your customers?

So for us, cloud, we look at it from 2 lenses. One is the distribution lens, significant, very high-growth area for us in terms of the future. And significant investments from cloud solution providers. So the Microsofts of the world, the Amazons of the world, they're investing and leaning in heavier to distribution. And the reason for that is that there's only so much reach they can do directly themselves. And then they can pivot to the channel to us in distribution and help leverage and expand their service capabilities, their growth or footprint. Our ability to have that on a global basis is why these cloud solution providers are coming to us and helping us sell their product through marketplaces. Pivoting over to Hive, same concept there, hyperscale infrastructure is extremely hot right now. The capacity is constrained. The ability for our hyperscale customers to open data centers fast enough is a position such that we're still trying to stay up with demand. So in both cases, cloud is a meaningful portion an aspect of our business and one that we think will continue to grow.

So just to summarize in -- public cloud spend is strategically important for TD Synnex.

Absolutely. Yes.

Well, maybe just talk about Hive. I mean I think it started in 2011 as a part of Synnex, work with Facebook, now Meta. I just maybe for myself and the audience, what exactly is Synnex, now TD Synnex doing specifically for the hyperscalers that's allowing you to add more value.

Yes. We -- just as a backdrop, a lot of the invest within TD Synnex creates these opportunities such as Hive and there's many examples like that where they are still in infancy and at some point down the road, they're going to grow and they're going to be great investments. Hive just is one of those and it's a fantastic reflection of just how we take something that starts with the core, and we grow and it's something that's specialized. Hive solutions is an ODM white box solution provider to serve the hyperscale market. And so in the hyperscale market, our customers are looking for us to either codesign their racks, assemble their racks or to own the design itself. All 3 we can do and all 3 determine or differ based on the needs of our customer. What we've also done is create end-to-end capabilities so that a hyperscale customer can come to us and we can take care of their needs. The 2 other benefits that we've seen being in the hyperscale space with Hive Solutions is that as our hyperscale customers grow, their data center requirements for supplies and spares also grows. So given our distribution global footprint, we have a very strong capability to fulfill those needs. It's distribution like services, but it's one that which they can turn to us and say, "All right, you help us design our racks for network and compute. " We also need you to help fulfill from a distribution standpoint when things break. We need you to come here and upgrade the memory. We've got spare parts and products that we also need help with. So it's helped kind of balance the portfolio from an overall perspective, and it's one that continues to grow today, and we expect it to continue to grow through '23...

Is this margin accretive to the overall model?

It has been. And based on the mix, like if it leans more towards distribution, that can be a little bit lower end. If it leans more to design and racks, it could lean more towards the upper end. But on average, it has been accretive to the portfolio market...

And I think you intimated when we're talking about Hive, but I think there's Hive specifically and these other initiatives that Hive is just one of where you are adding more value, trying to become more of a solutions provider, I don't want to say just a distributor, but is not the way to paraphrase it. Could you just, again, maybe just double-click there a little bit in terms of what exactly you're adding? And what could you add in the future to kind of expand those opportunities.

Yes. So just thinking back about distribution in of itself, we wake up every day paranoid and concerned if we don't create value today, then we're going to be left behind. So we always wake up with that in mind. So with that said, we encourage our PMs and our sales folks to figure out ways to be more creative in designing solutions that our vendors need and that our customers want. So kind of with that is the thesis and principle, then given the systems that we have, we're able to quickly adapt and look at how are things working and not working and respond quickly to that. So if you think just about the overall as a service or you think about the aggregation of various products and SKUs and selling that in a bundled solution to our customers and taking that from an aggregation to an orchestration, which was part of our Investor Day. So if you have a chance to go look at those slides, there's some really good concepts there that we're building towards that aren't ready today. But over time, what we in essence are trying to do is take this manual lift that brings organizations and products and services together and create an automated marketplace platform for which OEMs and customers can come together, and we just serve as a marketplace intermediary to enable that to transact against each other. We tend to build things and then wait for the volume to come. And this is another example of building something ahead so that when the demand comes, we're in a position to respond.

And is that the everything as a service kind of -- type of theme that you...

That's exactly right that fits really nicely into this orchestration concept. But there's a lot of things that we do from a traditional order fulfillment ship and sell that you can do, but if you can bundle that with orders ship, fulfill in multiple vendors to one customer, then that becomes a more value-accretive solution to that customer.

And what type of like -- who's your main competitors there? We know who the ODMs are, but if you can just maybe illuminate us the forest there. And what kind of investment still needs to be made by Synnex in a historically kind of lower operating margin business that would be needed to add that kind of -- those extra solutions and move up the stack in terms of a solution provider.

Yes. Good question. So for TD Synnex, we think about the future in kind of 2 aspects, the core and then high-growth technology. And high-growth technology are in areas such as security, AR/VR, hyperscale infrastructure, IoT, those areas that are growing double digits, 15%, 20%. So we want to continue to invest in those growth categories because they are accretive to margin, but they're also value driven in terms of drawing more attention from our OEMs and our customers. The core will continue to grow in that 4% to 5% range on a CAGR basis. So it's very important, but the growth, bringing that together puts us in that projected 6% to 7% growth rate over the medium term. So what we want to do is continue to enable and build out devices and platforms and aggregated solutions such that vendors want to lean more towards us in terms of who they choose as a distributor and customer pivot towards maybe 2 or 3 distributors and just coming to 1. Now to your first question about competition, it's good. It's healthy. We have great competitors, and we admire and respect them very much. Each region is a little different. If you think about the Americas, it's predominantly us and Ingram. If you think about Europe, it's us, Ingram and others. And then you think about APJ in Latin America, it's a myriad of distributors. But that does give us opportunity in those spaces where we're not #1 or that we have a close 2 or 3 to figure out ways to become #1. A lot of times, when you have that mind share, then organizations are going to think about us first, and that's what we want.

And there was -- but there wasn't a change in the competitive landscape with regard to the more ODM-focused kind of higher specialized services that you're trying to provide maybe some scale to Asian players or maybe Flextronics...

Yes. So pivoting through the Hive competition -- so I'll separate distribution from Hive.

I was talking more about the specialized services that would be driving margin and driving growth.

Sure. Yes. So on the Hive specifically, good competitors. Same thing there. We have ODMs and CMs, contract manufacturers and ODMs. We compete in both of those spaces. And we do get our fair share. One thing we intentionally try to do within Hive is that whatever we do, of course, we want to do it well with high quality, good delivery, good yield, good margin, and good return. So those are aspects that we want to continue to maintain. And we're not going to, we'll call it, reach for pricing to gain market share. We much rather stay in our lane and create the value that we have today and not hopefully, that will be enough, but that has served us well so far.

Right. And how specifically other -- again, for the fourth time, solutions that you're going to be able to provide of the stack, so to speak. Is there any leverage like so say something you worked on for Meta or you worked on for AWS. Can you leverage that experience and sell it to the enterprise, for example?