TD SYNNEX Corporation (SNX) Earnings Call Transcript & Summary

Thanks for joining. I'm Ashish Sabadra. I cover information services companies here at RBC Capital Markets. I'm excited to have Marshall here, CFO of TD SYNNEX.

Marshall, I'll kick off with a question that we're asking all the companies at the conference about the macro. So from your perspective, macro, which I think about is more like IT spend, how is that trending? How do you see those trends? Are those stable, improving or softening a bit?

Yes. So thanks for having us. We appreciate the conference. So I think for us, when I think about IT spend, there's a number of factors that go into it in terms of thinking about what we've experienced in fiscal '23 and then what we think about for '24. So in our markets, we have 3 major regions. We have APJ. We have Europe, and we have Americas, and they've all behaved a little bit differently in terms of their IT spend and demand. If I think about Americas, and we called this out on our last 2 conference calls, the Americas has seen some stability in the Endpoint Solutions categories. I think in terms of the Advanced Solutions, we're seeing decent growth year-over-year. But given the strong 2022, we had -- some softening has been experienced there. If I think about Europe, we think some of what they're feeling today could have been felt by the Americas region in the first half of '23. So for both Endpoint and Advanced Solutions, I think there probably will still be some softening as we try to find the bottom related to those categories. And APJ, I think for us, in that geography, there still is quite a bit of expansion opportunities for us. So all 3 regions have a little bit different macro perspective. One of the other areas that we typically see as a correlation between the economies that we do business in, and we have about 100 countries that we do business in, and those economies typically will look at a GDP growth rate. And then IT tends to correlate to that positively by -- IT spend by 200 or 300 basis points. Close to around the pandemic is when that all got torn apart. And so for us, we're trying to find, when does that correlation reappear? We think it will. We don't see any reason why, at some point, it doesn't come back. But the question for us is, does that return in the first half of '24? Does it return in some slow pace of recovery? To us, that's what we're still trying to figure out. As we started '23, we really came in with a lot of concern just about what the second half of the year would look like. And I think as we started to play through this year, we at least felt like there was some bottoming out of certain spend patterns. Now it's a matter of getting behind what does that recovery look like for us.

That's great. Yes. And as you said, right, like the secular trends are a huge tailwind for IT spend and some of the new technologies that are coming through, and which we'll drill down further on Hyve and gen AI. But before we do that, I just wanted to address or drill down further on Europe. You talked -- you called out that Europe weakness last quarter as well. As you mentioned, softness both on ES and AS front. I was just wondering, is that mostly macro? Are there early signs that you're seeing of any potential recovery? Or is there going to be another like cold winter?

Yes. Our belief is that hopefully, it won't be too cold of a winter. We do think that most of what we're experiencing at TD SYNNEX is macro-based, not structural. Within distribution, quite often, we have an ability quickly to look behind what we just did. And so to some extent, in Europe, we saw that we lost a little bit of market share in the quarter, but it wasn't a structural-related matter. It was more just our decision to be more disciplined in certain opportunities that we had presented to us. We have seen that from time to time in the past. So our ability to kind of course correct and make sure that we're not missing opportunities or missing market share positions, we'd certainly be mindful of that going forward. If I step back and just think about where Europe has been post-merger in terms of its performance, it's either been at or better in terms of market share growth. In Americas, we've seen the same thing, at or better, which was important, and we'll probably touch on this in a little bit. A lot of our desire and thesis around the merger was, as we come together as an organization, can we grow our market share with our vendors? And can we do it in such a way that it's a value-add decision rather than just a pricing decision?

Yes. No, absolutely. Before we go there, maybe if you can talk about the Endpoint Solution. So we've seen some softness in the PC cycle. But if you look at all the industry forecast, including Gartner, they're talking about a big PC refresh cycle. So what are you seeing from the Endpoint perspective -- Endpoint Solution perspective, sorry?

Yes. So when we think about the demand environment or the overall macroeconomic environment around the PC ecosystem, we look at a number of different sources. We certainly listen to what our OEMs are telling us. We listen to what they're thinking and seeing within the market. We certainly look at their earnings reports and most recently, some of their thoughts about the guide in terms of where they're going to go. And generally said, I think most of them are saying, slow growth, but some growth. So that's helpful just to have that as a point of context. The second is that we also look at our overall market share for what we have within the space that we compete in. And so for us, it's important to look at that to get a sense of what does the PC ecosystem look like. What has it historically done and behaved? We have been in previous cycles of refresh. We've been in previous cycles of IT complexity. So that's not new to TD SYNNEX. But what is certainly in front of us as we think about '24 is there's probably more benefits in front of us than headwinds. But to quantify how much of that is the aged replenishment of technology, how much of that is a refresh due to Win 11, how much of that is just due to increased technology that companies must address in their own IT ecosystem, those may be hard to pull out as we see the markets recover. But we do think those are all going to be beneficial for us in '24.

No, that's great. Just moving on to the part A, Advanced Solutions. As you mentioned, that's been the high-growth business, high-margin, high-growth. We've seen some really strong momentum in the business. Backlog has come off a bit, tougher comps. But how do we think about the AS momentum going forward and sustainability of that growth?

Yes. So we had such a strong '22 in that you pick a quarter, we had strength, some countries in different parts of '24. But generally said, it was a very strong '22 for us. And I think a lot of that just had to do with, again, the constraints on supply chain, the concern that not all of us would have enough technology to survive. And so there was a significant backlog or pipeline of AS-type solutions. We did see that clear out substantially in fiscal '23. We saw quite a bit of a reduction in our overall inventory cycles and in our cash conversion days. So now as I think about next year, it's probably going to be the first time in a while where it's a clean demand. And what I mean, it's not aided by type. There could be some pipeline that builds again. But right now, my expectation is a lot of that should be behind us. And we still think that the AS portfolio, as an aggregate basket of products and solutions, still has a good opportunity in front of us. We'll have to see if we stay above water, meaning we're positively growing. We have seen over the course of the last 4 to 6 quarters the growth rates for AS come down, diminish. They're still positive, whereas we've seen Endpoint Solutions decline start to shrink. And so back to what we first said earlier on is, what does that recovery curve look like for Endpoint? And then for AS, how much is left in terms of demand? And with the standing on its own with no pipeline, that's going to be part of what does that look like. In the first half of '24, it could look a lot different than the second half.

Yes, yes. And just in terms of the first versus second half, can you just provide some more color on that dynamic, first versus second half?

Yes. So again, it's helpful for me to give it in current terms of ES and AS. And as I said, the bottom appears to have hit on ES, and we see some recovery. Although down year-over-year, sequentially, we are starting to experience some recovery. Is quarter 1 where we cross over or is it quarter 2? And to me, a lot of that has to just do with the sequential momentum that the economies that we serve in, how they behave. So I think that, that will be a difficult thing to call, but one in which we do think that there will be continued growth. It's just where do we cross over. And then on the AS side, a lot of that has to do with the strength of certain categories within AS, what we call high-growth technologies, which I can touch on whenever you're ready. But that strength of growth still is about a 2 to 3x factor of normal IT spend. We still see that today. It's still showing decent attributes of growth, good margin profile in terms of accretion. Balancing those 2 together in terms of that first half, second half, it will be interesting to see how those play out.

No, that's helpful color. And that's a good segue going -- moving into those high-growth areas. Hyve definitely stands out. You've had -- Hyve had really great success. So maybe if you can talk about the traction that you're getting for Hyve, which is based -- which is essentially based on the Open Compute platform.

Sure. Yes. So I'll first start to say that Hyve is part of our high-growth technology basket, and we'll speak to what that is. So it's a piece of highly performing, high-growth area that we continue to make investments in. So specific to Hyve, just like AS, felt great strength in the second half of '22. We also call that great strength in Hyve for a lot of the same reasons. There are just a lot of folks that were trying to grab as much CPU and technology equipment to ensure that their servers were built on time without any disruption. But as I think about the Hyve portfolio, there's a few things that are playing out well for us, and they're not accidental. They've been very strategic, and they've been kind of long-standing in terms of the investments we've made. We started out Hyve a few years ago, ensuring that the customers we served had high quality, great service, low claims, all the things that you need in a hyperscale designer like us. And we've been able to perform that. The second thing we've done is we've been able to expand our service capabilities to the hyperscaler customers who design, and our assembly is kind of one broad category. The other is our design, our assembly, which is a growing -- small, but growing piece of our capability. And the last is much more closer to fulfillment, where data centers for our hyperscale customers also are in need of repair or they're in need of upgrade. And to have the #1 -- world's largest distributor sitting in front of them, they can deploy our distribution capabilities to help service their data farms around the world. So it's a piece that initially, 5 years ago, I wouldn't have thought as being a meaningful piece, but we're always looking for ways to have stickiness with our customers however we get it. And to be able to extend that distribution strength into those hyperscale customers that are -- through the Hyve portfolio has kind of rounded up that third piece. So it's -- they continue to be all very important to our go-to-market strategy within Hyve. It's a small customer set. And as we continue to prove success for the customers we serve, we should start to see that expansion of diversified customers and also more services within existing customers. We did mention in last quarter's earnings call that we did land another large customer. Typically, what happens within the hyperscale space is that it takes quite some time to build that out. And what that means is, you're first given the opportunity to build out a design that is set by the customer. You prove that out. You certainly want to be the one who wins that opportunity. We're able to win that opportunity. And then, typically, what happens is then that starts to build exponentially over time. And at that point, you just hope that you've gotten into the right space, the right design and the right market. But we do have 4 locations where we do manufacture within Hyve across the world. Within the Americas, we built out an end-to-end capability solution, which is extremely important as customers continue to look at, we've all gone through the supply chain constraint. We have all had to sit in front of our Boards answering the question, what are you doing about supply chain risk diversification? So we really felt it was important for us to play that strategy, have that being an enablement category, and we are getting a lot of interest in it. And we think that over time, that will start to be goodness for the Hyve team.

No, that's fantastic. That's great. And so just on the cloud, right, or like cloud in general, there has been conversations. So companies have talked about rationalizing their cloud spend and moving sometimes some of that back in-house, on-prem on their private cloud. And so as you think about Hyve or other high-growth businesses, what does it mean for your businesses?

Yes. So I've been around long enough to see the pendulum swing at least 3 times. But nevertheless, our desire is to ensure that, strategically, no matter what category of cloud, we have some solution for it. Ideally, we want to maintain and grow that dollar. And initially, when cloud was coming out, there was this threat against distribution about, "Oh my gosh, this is going to be an exodus of dollars." So we had to build out cloud solutions and capabilities and practices, which are quite meaningful and strategic and value added to our hyperscale customers on the distribution side. And in essence, what that represents is that there is a marketplace for us to be able to facilitate the hyperscalers to use distribution as another go-to-market channel for their revenue and their solutions. Flipping over to the hyperscale side of things. If you think about cloud and that concept about retaining or growing the dollar, we just were at the right place at the right time with the right strategy to lean into creating our own white box servers primarily around compute and network such that we could then create machines that could be developed and customized, that met all the parameters required that go into white box solutions and then develop that, build that and then sell that into the global marketplace. So we feel very fortunate to be in a position of having both a distribution strength and power on cloud and also hyperscale strength for those that are building out the practice in their data centers. And yes, we have seen that rationalization of, okay, if we need to be a little bit more thoughtful on productivity and cost efficiency, we can enable that in our distribution space. And if it's around hyperscale and being more competitive, that is also part of just making sure that we always come with the most efficient, price-sensitive solution, but the stickiness that I mentioned earlier about the other types of services that we provide in Hyve.

No, that's great. And then as we think about gen AI, again, the expectation there is with -- as gen AI gets implemented, that will also drive increased demand for compute, particularly GPUs. How -- what are you seeing from gen AI adoption perspective from your customer base? And how do you think about that spend going into next year, but over the next several years?

Yes. Remember, we were talking about some of the tailwinds, that it was hard to quantify it. I think AI for us is one of those. We think it's a natural benefit or maybe a broader benefit to '24, hard to quantify. I think as we get closer to AI becoming monetized, we can actually start to see real examples of what that means within our business that we serve. We certainly know that there's capabilities being built out by our OEMs that if you think about what we do and the SKUs that we actually sell on their behalf, if there's a whole another set of SKUs, by all means, we're going to benefit in being the distributor for those OEMs that have to build out those AI capabilities. If you think about the hyperscale side and the customers that are designing, I'll call it, more powerful and AI equipped, that's about the extent of my technology knowledge, but those also serve us well as we can help build those for us. And then if I think about the growth rates beyond '24, I don't know that kind of trajectory of what it looks like. But I do know that as I hear and think and see about what our customers and our vendors are asking us to be ready for, they tend to be more positive momentum rather than flat or any type of cannibalism. We're not sensing that at all. We think it's going to be a plus one for us.

That's great. And then as you mentioned, Hyve is just one component of the high-growth businesses. High growth also includes cloud, security, software. Can you just talk about the trends that you're seeing on all those other fronts?

Sure.

And as your -- like the conversations with CIO at your customers, like how are those trending?

Yes. So we -- back in April of '22, right after we merged the organizations, we felt it was important to come out and articulate our strategy of where we wanted to be as a company, where we want to make investments. And typically, within distribution, there's always some form of high-growth technology that has a high revenue attribute in terms of growth rates, a high profit pool and also value that attracts customers and vendors to want to use us. That's the key. So for us, we identified exactly what you said. Those areas of high growth had meaningful CAGR opportunities in front of us, 2 to 3x the normal IT spend rate. The margin profile, although we haven't articulated what it is, is above the corporate average. And then one that we felt over the medium term would become a much more meaningful piece of our overall revenue and our operating profit dollars. So it's one that we still think will differentiate us. We always have to be mindful of competition. There's going to be that next high-growth technology sector that we're going to find that we're going to invest in and that we're going to put in the portfolio. But it's important to recognize that to us, that still becomes one of the reasons why we think we can kind of talk about the GDP and the IT spend, and then we're going to get something better than that. Part of that is because of these investments we're making in the high-growth technology areas.

Yes, yes. That's very important. And going back to -- as you talked about the integration of TD with SYNNEX, one of the key tenet there was also the ERP integration. Can you just talk about how that's progressing, where you are? And how should we think about the benefit not just on the cost side, but also the revenue synergies as you go through that...

So that was one thing that was very important to us is to create one platform that we can all commonize around for the Americas region, and we did. And we created -- we made the decision to leverage our CIS system, which is an internally grown system that came from the SYNNEX side of the house that has been in place for a number of years, all insourced in terms of program support, no third-party assistance needed. So extremely valuable in terms of our ability to be a low-cost provider. One of the key things that goes within the integration and a merger of companies our size is you want to get as quickly onto one platform as possible. And then what comes from that is then a learning and a knowledge and a confidence by our commercial teams to then understand it, then the connection points that come from both the vendors and the customers because they interface with our system, and then create a platform that's easy to consume, easy to buy, easy to sell and then the confidence of our team just to continue to expand the value around that. So one ERP system, done. We can look forward now, kind of look at our broad portfolio that we have, take advantage of our market position, look at what our vendors are trying to continue to sell through to us, what our customers can now more easily purchase through one system through us. Hopefully, that creates the synergy we were talking about in terms of, I call it, TAM opportunity, which is another way of saying cross-sell. If I have a relationship with you and I can now bring you more services, hopefully, over time, as your business grows, you're going to think about using me for more of your services and create that stickiness. So it really comes around cross-sell creates and is manifested out of my ability to grow market share with you.

That's great. Also, if there are any questions, please raise your hands, and someone with the mic will come around. But shifting to margins, you talked about high-growth areas being even higher margin businesses. Last quarter, you had 2.8% margins. Your guidance is 2.9% to 3.1%. Can you just talk about what are the drivers for margin expansion going forward? And how should we think about the trajectory for the margin expansion as well?

Yes. We're still quite confident in our medium-term thoughts in which we provided that 2.9% to 3.1%. Think of that about 2 to 3 years out. And so how do we get there? Well, we get there through continuing to lean in and invest in high-growth technology solutions. Also to be mindful that, out of the core, which is kind of everything else, it's extremely valuable because within the core is where new and fresh ideas get fostered. They get developed. They get invested in. And so that margin mix really does come out of creating value-accretive solutions that keep us relevant in the space we compete in, that enables us to expand margins. So I do believe that over time, you get that growth through absolute gross profit dollars. And then the other thing that's happening within our portfolio is that much more of what we do becomes agent relationship, which means in the accounting world, no longer gross revenue. Your profit is your revenue. And so what we'll see over time is we'll see a slow migration of margin accretion just in terms of percentages as our mix of services shifts between Endpoint, which is more gross revenue, and Advanced Solutions, which is more agency, which is gross profit, which equals revenue. So small technicality, but both ways achieve that ability and our confidence that we can get to that 2.9% to 3.1% margin.

No, that's great. And then just in terms of SG&A, as a percentage of gross billing, it's been in that 2.75% to 3.25% historical range. How should we think about SG&A going forward?

Yes. So we believe that within any given year, there's always going to be cycles and ebbs and flows of volume in that relationship with SG&A to gross billings. But we also believe that having one platform per region, so a platform for Americas, a platform for Europe and a platform for Asia, enables us to be the-low-cost provider in the markets we serve. And that's extremely important because if you think about good times and bad times, and some of the bad times that we're just coming out of, our ability to be a more efficient extension of our OEMs to help them sell and maintain their margins and maybe even grow their revenue in soft patches and environments, the only way you do that is if you're just -- you have a very efficient go-to-market strategy. So it's extremely important that we maintain that. So part of that is always being ready to adjust and adapt to the next thing we have to change within our environment, and our system is all self-contained. It's all owned by us. We can make program changes on the fly. That's extremely critical because most of what we do is making sure that on a per transaction basis down to the SKU that we're thoughtful about the margin we're going to make. And in many cases, that margin may be 3 or 4 different decisions that ultimately lead to the right outcome, but you may have to make 2 decisions with low margin, one decision with a medium and one with a high. But the bundle for that OEM or that customer ends up being the outcome you need. So we still think we're going to be able to maintain that leading kind of low-cost, highly efficient go-to-market strategy for distribution and then be able to play that well across the regions we serve.

Yes. Maybe just switching gear a bit and talking about free cash flow or capital allocation, more importantly. You've -- can you just talk about your capital allocation? You've targeted returning 50% back to shareholders, the remaining 50% towards more tuck-in M&A. So how should we think about the pipeline for tuck-in M&As going forward?

Sure. So the capital allocation itself, we just felt that coming together as a combined company, it was important to articulate our strategy. Neither company had done that previously to a consistent basis. So we felt it was really important to say, for every cash flow dollar that we generate -- free cash flow dollar that we generate, here's our desire, invest half of it back in the business and half, we want to return to shareholders. We know that there's going to be periods of time where it gets tilted one to the other. But generally said, that's been our thesis. The other thing that's been incredibly just a great benefit is the consistent production of free cash flow, and the ability to generate that and be reliant on that happening again and again has been very important to us. So then if I think about the M&A side, there are pockets of products and capabilities and services that we're going to continue to pursue. Given our market size, there's no large deal out there that will lever up the balance sheet. But there's enough opportunities out there in a regional and on a product and solution basis that we still have quite a bit in front of us that can make us more efficient, more expansive, more scalable. So there's plenty of opportunities. We just, of course, want to play at the right price and at the right pace and the right solution for us.

That's great. And then as you think about the M&A strategy, is that also an opportunity to consolidate some of the emerging markets? Like as you -- as we started off, APJ is a high-growth market. So it's still very early stages in terms of those secular tailwinds. How do we think about M&A not so much particularly APJ, but just in general, in consolidating the market?

Sure. I think for us, given our size, there's not a lot of scale play or consolidation play. But certainly, to the extent we can take overlapping markets where there is incremental capabilities, it is a benefit. But for us, it's more about technology to build our cloud platform, being able to take advantage of areas where we need to build out capabilities. We mentioned in the past, in Europe, we're trying to build a stronger security practice. You can do that either through a build or a buy. We're open to both. We've certainly been vocal about that's a pursuit of ours. And then in APJ, I think we've touched on this. It's a geo opportunity, and it's a capability opportunity.

That's great. And then in terms of leverage, can you just remind us where your leverage is and what's your leverage target? How high can you take it for the right acquisition?

Yes. So our leverage right now at the end of quarter 3, it was 2.2x on a gross basis. It was below 2 on a net basis. We're comfortable with that range. Ultimately, the desire is to find ourselves somewhere around 2x gross. There's not a heavy mandate that says we have to get there by X. We feel like the right behavior of EBITDA growth as well as maintaining the right discipline on debt is the way to go forward. We historically have levered up on the right deals that have the right accretion. In the last 3 or 4 acquisitions we've done, within 12 to 18 months, we've been able to get the leverage back to the pre-acquisition period.

No, that's great. And just given the strong free cash flow profile of the company, I think it's -- the deleveraging story has been pretty intact in that sense.

Yes. Yes. I mean, if you look back over the course of 10 years, you see the collective TD SYNNEX lever up, get it back down, lever up, get it back down. I think given our size, the levering up, it won't be like historical levels where we were up at 3.9 to 4.1, but for the right deal, certainly willing to lever up. We have to be mindful of the cost of debt, for sure. But nevertheless, we've done it well in the past. It shouldn't change going forward.

That's great. Two questions that we've been asking all the companies presenting at the conference. First one is, what's the biggest decision the management team has to make over the next 3 years?

So for us, I think that decision, if I can go back, was made at the merger. And for us, it was a collective decision to take 2 extremely well-run organizations, bringing them together as the #1 worldwide distributor and then really put us in a position now, as we mentioned, to have one common system, one set of coworkers aligned around products and services and solutions, a vendor community that continues to be at or growing with us, customer profile of over 150,000 customers. I think we're positioned well to enter our third year post-merger of what I call a polished phase, where we really are fine-tuning what we just built the last 2 years. And so if a few things economically break our way, and then we find ourselves to be able to kind of outachieve that, I think that decision we made 2 years ago will pay off in spades in '24.

No, that's great. And then the last question would be, what is the single best -- single, yes, item that you're most excited about for the company in the future?

Yes. For me, I'm going to go back to our high-growth technology strategy. And if I think about what's under the coverage there, if you think about cloud, IoT, data analytics, security, hyperscale, those continue to be really important. And then if I step back and look at the strategic initiative we laid out back in 2022, it was this thing called solutions orchestration. And really, what that does is it takes a lot of what we do from an aggregation standpoint. We bring vendors together. We bring solutions together, products, solutions and services, but we do it in a very high-touch way because it's the way you show value and create it. We want to be able to extend the marketplace we do today and make that more of a technology solution, where we can bring MSPs, ISVs, CSPs, OEMs together collectively around the digital table if you want a marketplace and allow some of those transactions to be done with that human intervention. We think that's probably a 2- to 3-year road map and journey. But in the past, we've built solutions similar to this for other reasons and other value and believing that the market ultimately will feel that is a very important aspect of choosing us.

Yes, that's great. Thank you. Thanks, everyone, for joining. And thank you, Marshall.

Thank you, Ashish.