Release Date: September 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- TD Synnex Corp (SNX, Financial) reported a 9% year-over-year increase in gross billings, reaching $20.3 billion, which exceeded the high end of their guidance range.
- The company saw significant growth across both endpoint and advanced solutions, indicating a recovery in the IT market.
- Free cash flow for the quarter was approximately $339 million, demonstrating strong working capital management.
- TD Synnex Corp (SNX) returned $91 million to stockholders in Q3 through share repurchases and dividend payments.
- The company has a strong balance sheet with $854 million in cash and cash equivalents and a net leverage ratio of 1.8 times, within their target range.
Negative Points
- Non-GAAP gross profit margin declined by 1% year over year, primarily due to tough comparisons in Hyve and business mix.
- Non-GAAP operating income was down 1% year over year, reflecting margin pressures.
- The company experienced a 27.6% reduction from gross billings to net revenue, driven by the mix of software and as-a-service offerings.
- North American market growth was flat, which impacted overall performance as this region typically enjoys better operating margins.
- The pace of recovery in the PC market was slower than expected, with growth in low single digits rather than the anticipated mid- to high single digits.
Q & A Highlights
Q: When you talk about the capital return policy of the business and cash flow generation, how should we think about cash flow, working capital, and the cash conversion cycle over the intermediate term?
A: Our medium-term outlook of $1.5 billion in free cash flow is still attainable. Given the recovery out of '23 and into '24, we expect continued growth, which will increase our need for working capital. Hyve's model requires longer carrying costs, which will also increase our overall working capital. We expect the cash conversion cycle to remain around 20-21 days as we go into next year.
Q: Can you provide more color on the Hyve business and its impact on gross margins this quarter?
A: The customer we ramped in Q2 continued to show strength in Q3, and we expect this to continue into Q4 and beyond. Hyve experienced elevated margins last year due to cost recoveries and incremental recognition of inventory carrying costs, which were not present this year. This contributed to the year-over-year margin decline.
Q: What is driving the growth in strategic technologies, and what is your outlook for fiscal '25?
A: Strategic technologies, including cloud, security, and AI, continue to grow strongly. The AI market, in particular, is seeing massive investments from hyperscalers, which will drive growth. We expect this trend to continue into fiscal '25.
Q: With strong growth in gross billings but declining margins and increased working capital intensity, is this a precursor for what investors should expect under your leadership?
A: We are focused on profitable growth and cash flow generation. The margin decline this quarter was primarily due to Hyve and product mix. We expect an improvement in GM percent as North American market recovery accelerates and as we increase our mix of services.
Q: Can you talk about what you're seeing in the PC market and the impact of AI PCs?
A: The PC market is back to growth, though the pace of recovery is slightly below expectations. AI PCs are ramping up, but their weight in total PC sales is still relatively low. We expect an acceleration in AI PC adoption as more products come to market.
Q: What is driving your confidence in the recovery of the broader IT spending market?
A: We see recovery in the PC market and expect an acceleration next year. Networking is normalizing after tough compares last year. Europe and APJ are growing faster than North America, which is currently flat but expected to recover. Overall, we believe these factors will drive growth in the IT market.
Q: Where do you see your investments over the next year, particularly in technology and AI?
A: Investment in technology is key. We have completed ERP conversions in North America and Europe, so those investments will normalize. We will continue to invest in platforms, especially cloud platforms, to support as-a-service offerings. In AI, we are well-positioned with our current line card and will continue to enhance our value proposition.
Q: How are you prioritizing capital allocation between M&A, buybacks, and debt reduction?
A: M&A remains an opportunity to accelerate growth in specific geographies or acquire capabilities. We are disciplined in our M&A approach, ensuring returns meet financial expectations. We have a strong track record of successful integrations. We will continue share repurchases and dividends, maintaining our 50/50 allocation strategy.
Q: Are you seeing any impact from revenue changes at large customers in Q3 or Q4?
A: The large customer segment in North America remains muted, with no significant acceleration in demand. However, we did benefit from some large deals with lower margins but good returns in Q3.
Q: Are you seeing any pickup in non-GenAI server demand?
A: Enterprises are still exploring how to utilize GenAI, so the impact on server demand is not yet significant. We expect to see benefits from GenAI on the server market more in the second half of next year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
