TD SYNNEX Corporation (SNX) Earnings Call Transcript & Summary

So thank you, everyone, for joining the UBS conference today. I am David Vogt, the hardware and networking analyst here, and I'm excited to have with us TD SYNNEX, Marshall Witt, Chief Financial Officer; and in the room today is Liz Morali, IR. So as we've kind of been doing this all week, we're just going to have an informal conversation about the business. And so I thought it made sense maybe for Marshall to spend a couple of minutes kind of talking through the business to get people that are maybe a little bit less familiar with the story on kind of what TD SYNNEX does, and we'll jump off from at -- that point.

Sure. Thanks for having us. And by the way, we have technology to help replace that broken mic for you.

There you go.

Yes. So it's probably good just to lay the fundamentals down of what TD SYNNEX does. We are in the distribution ecosystem. And we play an important role between the OEMs and the reseller market. And historically, what that entails is that we provide an extension of a sales or go-to-market strategy for our OEMs, and that can be anywhere from 100% of their delivery capabilities to a percentage of what they deliver. And it all just depends on the reach that they themselves want to do direct. And whenever they choose not to do direct, we take that indirectly and then serve as a surrogate for that on a global basis. But fundamentally, then we turn and sell that to resellers. The resellers then have their own territories, expertise that then they sell to the end customer. So that's a simple way of thinking where we fit, and a little bit later, I can give you some history just on our site, scale and capability.

Great. No, I thought that was useful since I got a ton of questions in the last couple of days on what's the difference between the reseller community and the distribution community. So I think just to kind of level set everyone. So you mentioned on the history. So obviously, TD has undergone pretty dramatic changes over the last couple of years. Maybe we could start there and maybe talk about where we are today versus where we are before the transaction, a large transaction from a number of years ago? And how sort of each of the different assets bring complementary skill sets and reach effectively? And what does it mean for the business today going forward?

Sure. So tomorrow will be officially the ninth full quarter post merger. So we're still relatively young as a merged entity. So I think it's important just to refresh what we did at the merger, it was in September of 2021. And it brought SYNNEX Corporation and Tech Data together as a leading worldwide/global distributor. Both organizations had unique and complementary aspects and capabilities that brought together, has really produced a very meaningful and powerful business model and distribution provider to the end markets. Just to break that down somewhat in terms of our capabilities in the Americas, we're about 60% of the total revenues in the Americas. About 30%, 35% is in Europe, and then the rest is APJ. It's -- all in, it's about $60 billion of revenue. We have over 23,000 coworkers. And then if you think about the makeup of revenue and margin and cash flow, we can spend a little bit more time digging into that.

Right. So when you think about sort of we're 9 quarters in, what have you learned? Or what has surprised you following the transaction? So obviously, there was complementary geographical expansion, tighter, maybe deeper relationships with some of your partners. I know there's still a huge cost tailwind that we think we can get from this combination. But maybe what have you learned and kind of what do you think sort of the next, not -- maybe low-hanging fruit is not the right expression, but what can you accomplish over the next 1, 2, 3 years from this merger that you haven't achieved at this point?

The first 2 years was really focused on integrating the systems and the people and the platforms. Generally, the focus and the overlaps were in the Americas. Europe was somewhat stand-alone with Tech Data having that market. Asia was somewhat stand-alone with Tech Data having AP -- the APAC region, and then SYNNEX had Japan. So the focus was on the Americas and getting the systems and people aligned. So over the first 2 years, that was accomplished, did that quite well. We're able to identify about $250 million of cost savings that we're able to extract out of the business. And then as you mentioned, the complementary line card, what we call our OEM partnerships. We're also highly complementary and thinking through those go-to-market solutions that SYNNEX had that Tech Data didn't and vice versa. So now we're in a position where we are under one system primarily for the Americas region. We have one common team of product managers and sales solution experts that are confident in the systems that are now in place, are understandable of the products and the solutions that we're selling. And I really think '24 -- fiscal '24 for us, which starts December 1, we're well positioned to now polish that to be a little bit more efficient in our go-to-market strategy, and really benefit from typically what we see in a normal third year post integration.

Got it. And so I know your next fiscal year starts very shortly. But can we talk a little bit about maybe the different dynamics from a revenue perspective in the business? So we get a lot of questions in the very short period of time that we've picked up coverage about sort of the dynamic between product hardware revenue, software netted down, et cetera, and the different kind of growth dynamics to get different profiles of those businesses. So maybe we could start there in terms of how we should think about the different growth vectors, the different margin profiles of each of these businesses and how that plays into how we think about the business over the intermediate term.

Sure. When we came out post merger, we decided it would be important to lay out a foundation of strategy. So about 6 months after the merger, we went ahead and laid out what we thought would be a medium-term perspective that did identify what are our solutions, what do we call them, how do we equip them, how do we highlight them. And so in essence, we've defined, call it, 2 major categories. One is Edge or Endpoint Solutions, the PC ecosystem environment, significant amount of portfolio that's underneath that by region, and then Advanced Solutions, which is more of the network, the server, the hyperconverged, the software, the solution, cloud capabilities, and identified that as being another product that was pretty important to us. And then underneath that, we identified what we call high-growth technology products and solutions. And simply said, those are product and growth attributes that are exceeding the normal run rate of IT spend. It has a margin profile characteristic that is above, what we call it, the corporate average, but also does require a significant investment on our side to continue to enable that. I will say that the identification of that portfolio, and we can speak to it, it's fluid to some extent. It doesn't change every day. But over time, we're always looking at what are those profit pools, what are those high-growth categories that we want to pursue, we want to invest in. So thinking through that, you have the ES portfolio, you have the AS portfolio, you have the subset of high growth underneath that. And then there's a few other unique things we do globally around the world.

So maybe if we could just start with edge point -- Endpoint Solutions. Obviously, that's more of the traditional product legacy businesses, PC ecosystem, has a much more modest growth dynamic. When you think about that business today and over the intermediate term, how do you think about the business versus what we just sort of experienced through COVID, supply chain? Obviously, there's been some peaks and valleys here. I think we've talked about kind of a low single-digit, maybe medium single-digit growth business over the medium term. Is that the right way to frame it today as you see it, given the portfolio that's constructed under the hood?

Yes, I believe so. If you think back to what we provided in spring of '22 during our Analyst Day, we did -- we called that kind of the core. In essence, that low single-digit growth rate that it's predictable, it's certainly reflective of the markets that we serve. We did see a spike and a peak in the early parts of COVID and the pandemic, then we saw the tailwind of the tough compares and then the declines in the market. But looking forward, I would say that that's probably a fair assessment of the Endpoint Solutions growth rate. If I pivot now and go to Advanced Solutions...

Yes, quickly. Thank you.

Is probably where we're going to go. That certainly has higher growth attributes. Again, going into the pandemic, a lot slower just because most organizations were still primarily working from home. As that began to open up, we started to see a lot more corporate enterprise-related investments, then we saw the AS category start to take off. Now that, that lapped into '23, those have become tough compares. But then if I think about what the Americas is feeling in terms of what the Europe is feeling, it's a little bit different dynamic. In Americas for fiscal '23, in Q2 and Q3, we expected that to be the bottom of the Endpoint Solutions, kind of like hitting the bottom of the trough and bouncing along the bottom, and that's in essence what we're experiencing in that Endpoint Solutions category or the edge point solution. So from quarter 1 to quarter 2 to quarter 3 in Americas, that is -- we feel is bottoming out. So now it's a matter of what does the return look like? And I think a lot of the conversations you've had over the last couple of days is exactly trying to figure that out, what does that return for Endpoint look like. On the AF side, tough compares. We really did see some decent growth rates in the first half of '23, now as we get into the second half, we're starting to see some of that tough compare playing into the Americas. Just a little bit different profile in Europe, where there was quite a bit of resiliency in the first half of '23, much more than we expected. In the second half, we're seeing a little bit of slowdown in the AS side of the business for Europe. We think that there could be some just normal correlations between the Americas feels. Whatever they feel first, good or bad, Europe feels that on maybe a 2- or 3-quarter lag. So if that were the case, give Europe a little more time to get through this patch of softness. And then it's a matter of looking at those 2 together for both Americas and Europe. And then how does that behave as we enter into fiscal '24.

And if you look at like maybe -- I know the business is different today because of the transaction has kind of changed the geographic dynamic, the complementary relationship dynamic as well. Is there a historical analog where you could point to and say, these 2 different regions or different geographies maybe were asynchronous? Or maybe they are more synchronous or to your point, maybe with just a 1- or 2-quarter lag. Was 2001 or 2008, more analogous to what we're seeing today? Or is it just completely different given the dynamics from COVID?

I think it is completely different. At least in my experience, the last, call it, 3 to 4 years has been the most -- the biggest separation from normal correlation. Historically, the economies that we serve in and we're in over 100 countries, you look at the GDP and the correlation of IT spend relative to GDP. Usually, we'll see a 100, 200 basis point above the GDP growth rate. So that tends to be where we start from. And I think over these last 3 years or 3 or 4 years, it's really just separated and caused us to sit back and go, how best do we predict this relationship going forward? We think longer term, kind of pivot and think about the guidance we gave for the medium term back in the Analyst Day is we do still believe that revenue, IT spend will be around that 5% to 6%. I think our revenue growth rates will be in that 6% to 7%. That's a medium-term comment. I think our margin profile will continue to grow based on the AS highlight, the high-growth investments, but then the predictability of the core and Endpoint continuing to grow in that low single digit. So we think there's margin expansion as well.

Got it. And then we didn't touch on high growth. So maybe can you kind of talk to the criteria, how you think about it? Like what you said, it's dynamic, it's fluid. Not everything flows in and out of it, but when you look at the portfolio of products and offerings, like what's the definitional reason for that to be high growth effectively?

Let me tell you what's in that category and then we could talk about the definition. So what's in that category are a cloud solutions, security, IoT, data analytics, hyperscale infrastructure, the majority of that basket. And as we looked at the growth rates of those IT spend categories, they were growing 2% to 3% above normal IT spend. So for us, I felt that was a meaningful area for us to continue to invest in. They weren't new areas of investment. They were the areas of investment that continued to show kind of outsized growth potential and margin accretion potential. So then as we looked at that, we looked at our capabilities of coming together as two entities into one, and felt that, that was also a very strong portfolio of solutions that we could offer and provide. So back to my comment about it being a basket and that, that can interchange from time to time. As we see more high-growth capabilities come into it, and it tends to be maybe a consolidated product set, we'll speak to that. My sense is, every year, we'll have a conversation around what does it mean. But we truly believe that if you look at the direct trajectory of revenue relationship of high growth versus the rest of the portfolio and operating profit growth over the rest of the portfolio, you're going to see a shift in both revenue attributes leaning more towards high growth as well as the overall profit from operating income.

And then along the lines, when you think about sort of the contribution of revenue, the mix, obviously, netted down is a big component of your revenue streams coming forward. So maybe can you kind of walk through what you're seeing in that dynamic from a software perspective, the impact on margins and how maybe we should think about it as we go into next year and beyond?

Yes. I think there's a few things we've tried to do a little bit more transparently in fiscal '23. One is we realized that this netting down of revenue, which is a good thing because it means we're selling more services that have kind of agency or netting down capabilities that tend to have a higher margin profile. But we decided, let's go ahead and disclose what we call gross revenue, gross billings. It's the -- take accounting out of it, what are we billing every day. It's how our commercial organization, our incentive is up gross billing. So we thought let's show a gross billings number, let's show a net revenue numbers, still speak to both, and the characteristics around that. But that way, that gives us a sense of what we're doing both at a top line and on a netted line. The other thing that we're trying to highlight, too, is that gross profit, of course, is significantly important to us not only in terms of the margin profile, but the actual absolute gross profit dollars. And so for us, we look at gross profit as being somewhat of a surrogate to revenue. And so as we go forward, we're going to continue to highlight what that gross profit growth is. And to us, it's certainly meaningful. And clearly, we want to continue to grow gross profit dollars. And then also look at that concept of the Rule of 40 to look at what our operating income is as a relation to GP and see how that's playing out over time, and it's predictably or at least consistently been above 40%.

So can I ask a question about the dynamic between gross billings, netted down revenue versus your historical growth rate. It has been -- on a pro forma basis, has been 6%, 7%, roughly. And you've done a really good job of outpacing U.S. IT spending. So I would imagine, just intuitively just the mathematics behind it, netted-down revenue has a dampening effect on your top line. So does that suggest to you that the rest of the business is growing fast enough to kind of offset that dynamic over the medium term, to kind of hit that 100 basis points plus better growth dynamic relative to IT spend?

Yes. I think there is some of that that's taking place. But for us, again, I think over time, as we speak to the 6% to 7% growth rate, to me, that's almost a reset gross billings target that makes sense.

So more of a billings focus.

Exactly. Even though we haven't kind of gone back and reset what that looks like. But to me, if IT spend is going to be at that 5%, I certainly think our gross billings should be able to outpace that over the longer term.

And gross profit dollars as well...

And gross profit dollars.

Which is critically more important.

That's right.

Got it. Okay. So when you think about -- without getting into specifics, we've heard a lot from investors, a ton of companies this week. We were talking about this before that you've had some negative prereleases fairly recently. And I think you talked about maybe a little bit of a sub-seasonal trend going forward. When you think about the demand signals that you're getting, do you have a sense for just generally what you've disclosed, from an inventory perspective? Because I think that surprised people pretty dramatically over the last 6 to 9 months, this kind of bullwhip, whiplash effect that there's a lot of inventory out there in a lot of different places, whether it's at the end customer, whether it's a distributor. What's your sense or what's your thoughts on sort of the inventory position of the -- of the industry broadly defined, maybe not just at SYNNEX, but generally from the industry?

Yes. So of course, we do try to stay as close as we can to what our OEM partners are saying in their results and also the reseller community and what they're saying and understanding, then where does that inventory sit amongst that supply chain ecosystem. Clearly, we have a piece of that inventory as well. At the highest level, I'll speak to us first, and then maybe that's a correlation to the broader market, is that we believe we're back to profiling just in terms of inventory and how much we need to have on the shelf in order to fulfill demand. And that typically represents 1 to 2 months' worth of revenue or just billings itself. We had put much more on the balance sheet, not from a strategic standpoint, but just the way the constraints on the supply chain environment was operating and behaving. So I would say, broadly speaking, there still have been some pockets in the industry around both AS and ES inventory imbalances or maybe some excess in certain parts of the market. But for us, if I just think about our broad portfolio, we have over 200,000 products, over 1,500 vendors and looking at the purchases that we have with them and what we have on our shelves, it's fairly back to profile again.

Maybe this is a naive question, but to -- it sounds like when we talk to certain companies, they feel like the inventory position is in a relatively healthy place. But to your point, there are pockets of whether it's product or parts of the ecosystem, supply chain ecosystem where inventory is still a little bit high. How do you get confidence or gain confidence that, to your point, inventory is in a good position for a month, maybe 2 months' worth of revenue where there's not some sort of looming potential risk. And the reason why I wouldn't have asked this other than what [ Jabil ] had told me last night, not to call them out, but they negatively prereleased. And they talk up until 4 or 5 weeks ago that they felt like the underlying demand trends matched kind of what they had expected and then things slowed because of excess inventory that they didn't see coming. So I know that's a difficult question, but I just want to get your perspective on how you guys think about that? How you manage that part of your business from a risk perspective, just out of curiosity?

Yes. So without getting in too much detail, the way we manage our actual demand and supply, if you will, is at the vendor level. So for every vendor, we have a dedicated team that's managing those relationships, the understanding of how much to carry, we call it the velocity of how things sell through. On average, we sell basically 11x a year. So it moves pretty quickly. And our ability to take inventory that's been sitting on the shelf longer than 30 days or 60 days, we've got a fairly healthy system in place that incents our decision-makers to move inventory out of the system. There's almost a self-policing process of penalizing folks for holding inventory past 30 days, 60 days, 90 days and same with accounts receivable. Sales folks that are doing deals, if they hold the term and the customers aren't paying within 30, 60 days, there is kind of this implied penalty that gets played out. It doesn't mean we're not immune to risk decisions. And certainly, we have seen those in the past. But generally said it almost corrects itself. The hang up in the inventory that we had put on our balance sheet, leaving '22, was primarily around just that delayed fulfillment of putting together solutions to the end markets where we had 80% of the SKUs ready to go. We needed a rest, and then that -- we basically were probably heavy by about $2 billion. That $2 billion has come down pretty consistently over this year. And as we exit this year, I think we're set well.

Got it. And I think we've talked about this from a metrics perspective, whether it's credit metrics or any of the metrics that you use internally, it feels like nothing has deteriorated to the point where it's flashing yellow. Is that a fair way to paraphrase it?

Yes. I mean if I think about like the 2 phases of the evolution post merger, coming together, we wanted to make sure that we provide a broad credit enough so that we weren't constraining our customers that are now part of one team. And the same with the vendors, we don't want to constrain their ability to lean on us to be their go-to-market solutions. So we haven't felt that. Now there have been times during the regional banking crisis where we certainly took a health check, and put the monitor on both our vendor relationships and customer relationships to assess if there is any risk, we felt really good about it. We generally said, tight credit standards, but accommodative to where we need to grow as a business.

Your scale and ability to offer solutions to your partners, your OEM partners and others, I think should be a competitive advantage going forward relative to much smaller players. Have you seen that in the marketplace, just given the stress you mentioned -- the Silicon Valley Bank crisis, there's been a lot of little mini crises over the last several quarters. Has that manifested itself in maybe deeper discussions or conversations that you might not have had in terms of expanding or deepening your relationship with your partners?

Yes, we certainly have seen the benefit of being a combined organization. And whether it's the relationships, the footprints, the capabilities, the reach, we're having more opportunities to be involved in decisions around what our OEMs are trying to do. Just anecdotally, there's been a lot of press releases over the last 3 or 4 months where we've come to the exclusive distributor of whatever the capability is, whatever the technology is, so there's what appears to be an increased trust and leaning on us to help fulfill whatever the new solution is. And so quite often, what we'll see is start-up vendors, vendors that are trying to get into new markets will lean on us to say, look, you've done it. You just did it for these 3 other companies. We have something very similar to that. Can you help us do what you did for them? And so what we are able to do is show evidence of success with other similar type solutions. Vendors and partners see that, will go with us. And clearly, to us, we think that's one of the benefits of being in the position we are today.

Got it. And maybe just -- I know just pivoting quickly to sort of the financial benefits of the transaction, and sort of the tailwind or the longer tail from a cost reduction perspective, can you kind of give us an update on kind of where we sit today? And kind of the benefits that you think can accrue over whether it's the next 12 months or the intermediate term? Kind of give us an update on where we are on the outside of the house?

Sure. I look at '24 as being a year of polish. It sounds somewhat simple, but there's -- in our business, every basis point matters so much. And you think about our margin profile of -- ultimately longer, medium term, we want to get to 2.9% to 3.1%. Part of that is the product mix. But part of it is our ability to be efficient go-to-market solution providers for our OEMs. So it's taking that seller, that PM, and enabling him or her to be even more confident in what they do and where they reach and how they lean. I think part of it is back to what we talked about. Our OEMs are looking at their distributor footprint and looking at who they use globally, and to some extent seeing some consolidation there. And so hopefully, that means we are the ones that are being consolidated into, and the decisions about us being a little bit more of a consistent provider of those services in the 100 countries that we serve. But I think a couple of things happening. One is our reach and depth enables us to get more attention. I think our team, our coworkers are even more expertly and more confidently ready to go to kind of pivot in terms of leaning on one system, which is huge instead of two, which is what we were just merging into or from. So I think those attributes plus the macro backdrop, which I know there's still some cautious optimism about how that does behave itself next year. But we certainly believe, if you're asking me, what does '24 look like, we hopefully will be back in growth mode. We don't know how quickly that becomes reality, but that growth mode is important. The margin expansion is important. Cash flow generation capabilities of our organization is significant. And then the TSR, which we've said from time to time is really important.

But if you -- and that's all great. And I think that's strategically smart. But if hypothetically, if the macro is a little bit softer, just given the leverage that you have, operating leverage, I would imagine, and the cost synergies and the go-to-market synergies from the transaction, is there enough internal benefit from this transaction to maybe offset -- maybe a persistently softer macro environment from a margin perspective? Like is there a way to grow margin even if the U.S. IT spending or the global IT spending backdrop is notably worse next year? I know that would be a difficult bar. But just trying to get a sense for how much is under your control versus how much of it is market potentially driven?

Yes. I think looking at fiscal '23 is a good example. If you look at our margin profile, even though our revenue profile is down year-on-year, our margin profile stayed intact. And I think part of that is our strategy that we stuck to in '22 that we continue to fulfill and grow in '23. If there was softening and in patches there were economic uncertainties or even some declines, I think our ability to pivot and still maintain that strategy of the AS versus ES, the high growth enables us to still grow and maintain kind of margin profile and structure and times of uncertainty.

Got it. And then longer term, maybe just to tie that all together, you talked about the longer-term target from a margin perspective. In a more normalized economic backdrop, given the mix of business, given maybe a recovery in some of the more transactional-related products, what should we expect in terms of margin expansion on an annual basis? I know we're talking -- you mentioned we're talking about basis points here, but just maybe get a sense for how you're thinking about that in a more normalized environment? Is it 1, 2, 3, 4, 5 basis points a year kind of dynamic? Just would love to kind of get your updated thoughts.

Yes. Yes. So a couple of things. One is, and I think in some of the work you did in just researching our company, you saw over the last 15 years, a fairly steady and consistent growth rate in revenue and a fairly steady, consistent margin profile improvement through good and bad times. So I think if you just look back at the success of both organizations and now coming together, that ends up being, I'll call it, 5 to 10 basis points, give or take, with any given year. So to me, there's no reason why we shouldn't expect that again going forward. Now certainly, there are certain -- there are times where markets are soft and there could be product categories that have supply chain constraints. But generally said, over the longer term, 5 to 10 basis points is typically our aspiration.

Got it. I just want to give you an opportunity to maybe touch on anything that we didn't touch on. There's a lot of cross currents out there. You guys are very close to a lot of the end markets. Anything that we didn't touch on that you think maybe needs a little bit of a light shined on it or more deeper discussion? So I'll let you have some free rein to opine.

We've definitely covered a broad landscape. I would just say one of the questions we get quite a bit is, why is the market not fully appreciating the true value of -- at TD SYNNEX and...

I'd love to know because we can't figure it out, either.

And so I think part of it is, as I just said, tomorrow is going to be the ninth quarter anniversary of our organization. So to some extent, we're fairly young. So it's making sure that our strategy remains intact, which it is. It's making sure that, call it, the 4 things, which is return to growth, margin expansion, consistent cash flow generation, TSR capability, and being able to show those and demonstrate our ability to execute those consistently going forward. And then parts of this that I think will play out next year is what we spoke to earlier, which is year 3 of a combined organization typically is -- it's a multiplier, if you will. Like year 1, baby step. Year 2, maybe a little bit -- a few daddy steps. Year 3 from that capability is where you really start to see a lot of efficiencies play.

Got it. All right. So I don't think we have any other questions from the audience. I want to thank Marshall for your time, and thank you, everyone, for joining.

Thank you, David.

Thanks for coming to the UBS conference, and we'll talk again soon.

Appreciate it.

Thank you.