Ingram Micro Holding Corp Q1 FY2025 Earnings Call

Thank you, operator. I'm here today with Paul Bay, Ingram Micro's CEO and Mike Silas, 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-Ks 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 four and a half 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, and 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 four 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 AIDA. AIDA uses machine learning and AI models to proactively prioritize engagement with our customers and is consistently improving and automating our quote-to-order conversions. In Q1, AIDA 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. AIDA 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 AIDA, 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 team. 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, pricing, and quote platforms. During Q1 in the U.S. alone, more than 1,500 customers had 51 million interactions through the xVantage integration 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 in minutes. The seamless experience and effortless setup makes this a game changer for integrations.' End quote. 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 integration hub demonstrate the balance required between integrations and interactions to build a digitally enabled organization that prioritizes the customer experience.' End quote. 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 three IF design awards 2025 in the user experience category for our mobile, email to order, and insights and 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 roadmap as we have many times in more than our forty-five 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.

Thank you, Paul, and good afternoon, everyone. 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 details as to how we see the tariff environment and its impact. 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 by uncertainty around these policies. Modeling the impact is challenging. At least to some degree, for the latter part of the last five years. In the U.S., we are not the importer of record on the vast majority of products that we purchased, and therefore, we do not issue tariffs policies. We continue to monitor and assess the pricing behavior of our vendors while we drive our dynamic pricing model around them. The pass-through nature of our business still exists, even where tariffs are indirectly embedded, pricing is obviously purchased. To raise their own tariffs as well as the impact of potential inflation brought at SKU level for more precise decision-making. We believe our increased automation and AI capabilities enable us to be even more nimble responding to changes. Sorry for the confusion. At this time, we are going—we think there's audio. Presenters, you are live now. Hey, sorry, we understand there was some audio difficulties at once I picked up from Paul. So I'm just going to pick back up from the start on our prepared remarks, and we'll go from there, okay? So I'm gonna 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 details 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 persists. 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 nine 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 environments 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. 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 four lines of business, including our Advanced Solutions and Cloud categories. Driven by servers and cybersecurity, but also notably, networking 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 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 remain more muted as near to midterm macro uncertainty continues. As a result of these mixed factors and as expected, overall gross margins were down 62 basis points versus the prior year. Longer term, we expect that higher margin net sales from Advanced Solutions and Cloud products 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 and up 3% on an FX neutral basis, also driven by client and endpoint solutions as well as by very strong double-digit growth in cloud, which was partially offset by a 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, 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 employee solutions, advanced solutions and cloud, leading to 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 $808.3 million, down only 0.3% in constant currency. Somewhat consistent with what we saw in the fourth quarter, and reflected particularly 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, 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. Year over year improvement in OpEx leverage is driven largely by the significant cost actions we have taken over the last two 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 55%. We continue to invest in our xVantage platform; 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 twenty twenty-four, 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 twenty twenty-four, an increase of nearly 7% in U.S. dollars, 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 with Q1 working capital days at 29, compared to thirty-three days in the same period of 2024. 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, as in line with our seasonal expectations and indicative of some pre-buying and we did in anticipation of tariffs, as well as the overall growth in the business. The counter-cyclicality 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 finance. 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, multi-year subscription arrangements, and 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 in the past four years, 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. This brought our net debt-to-adjusted EBITDA ratio down to 2.0 times to close Q1, improving notably from 2.3 times 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. 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 buying 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 pre-buying and the ninety-day respite on tariffs on many countries. We continue to see healthy activity and remain particularly enthusiastic about a continued demand environment in advanced solutions. While 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?

Hi. Thanks for taking my question. Maybe if I can start off with sort of the macro loaded comments that you had here. Interested to hear. I know you mentioned SMB is a bit weaker and the larger enterprises. If I understood you correctly, you're expecting to see maybe a bit more sort of longer cycles, but still more moderate 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 even follow directionally where 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. Thank you.

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're exiting 2024 in our last call with 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 green shoots relative to some pockets where we're seeing improvement on that. With large enterprise business and conversation with customers, when we look at our pipeline, the demand continues to be strong. And we think that that's gonna continue based off the conversations we've had thus far, both with our and with our vendor partners also.

Got it. Got it. And then maybe for the quarter and related to both Q1 and Q2, if you can start by helping us think about the mix between client solutions, data to advanced solutions. How was the mix track between those ready for Q1, and what are you embedding in terms of mix for Q2 in terms of your expectations? And much of that client solution strength, are you treating as a pull forward from the second half? Thank you.

Yeah. So this is Paul again, and I'll let Mike jump in. Relative to the mix of our client endpoint solutions, the business performed very well as we talked about. The refresh happening in the desktop and notebook. So that was very strong. Our smartphones were also strong within that category. Advanced solutions, 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 twenty twenty, 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 gonna start making a turn. And I know the likes of, like, IDC, so there's gonna be growth in the networking business. So we did see low single-digit growth in Q1. And our server business continues to perform well in cybersecurity, remains healthy also. That said, 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 any other topics I just mentioned. Mike, I don't know if you have any other thoughts on that.

Yeah. Samik, I think the only thing I would just add, yeah, I think the big factor is we're assuming a slightly lower client and endpoint piece, you know, not the solid double digit we just closed with almost 15% growth in Q1 in our Q2 guide, but we're considering still some growth in advanced solutions, certainly growth in cloud. Then I think as Paul touched on, on the client—I'm sorry, on the customer side of the spectrum, it has been the case for the last two quarters. You know, we see the large enterprise customers where we're just continuing to take a conservative view on where SMB goes, because as I said in my prepared remarks, we still see quite a bit more mutedness there since that is a group of end-user customer base that's gonna be more susceptible to an inflationary or, God help—a recessionary environment. And therefore, we take a closer look at 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.

Super. Thank you for taking my questions, guys and congrats on the quarter. I just wanted to follow up on question there. Just if you could maybe Mike help us kinda size the pull forward that you saw in Q1. Like, if we were to think about the upside relative to the midpoint of your Q1 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 Q2 guide? If I look at it, it looks like you're guiding down about two percentage points sequentially. Shows you're kind of flat to up. And so just if you could help us understand that dynamic and how it influences your Q2 guide, that would be super helpful. And then a quick follow-up, please.

Yeah. Eric, I'll start. It's Paul. So the Q1 pull forwards was regarded with we did see slight, but I would call it not material. And it was really, I want to be clear about this too, 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 kinda inbound kinda 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 it's still they're still relevant. And with the pricing uncertainty, it's kind of those longer terms 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. Terms of what we're looking at from a growth rate perspective that we built into the two Q2 guide. Yeah. So, Eric, you know, you pointed out about a 2% roughly decline sequentially. That's that's right. And I think it is. Know, that I I don't wanna quantify as Paul just said that that's 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, you know, potentially a little bit more overhang as we see especially in that SMB space in Q1 is really leading to that Q1 guide, and and that growth factor.

Okay. That's really helpful. Thank you for all that context. And then maybe the second question is just, you know, can you help us understand what you're seeing from a pricing perspective? As we're here and kind of thinking about February more so, but you know, are you seeing vendors raising prices? If so, you know, 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 five or six weeks, please. Thanks so much.

Yeah. Eric, this is Paul. I'll start. So as it relates to pricing, there's been minimal pricing impact. If there have been some changes, it's been more around the peripherals and accessories depending on 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 not especially in Q1. 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 are gonna look like. I would also say, you know, today's announcement with The UK 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, 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.

Hi, thank you. I wanted to ask about your comments on OpEx. I heard you say that OpEx as a percentage of revenue would stay above five 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 sequentially, most of the costs that we announced in our most recent actions in December have already taken place, and we're out largely in the first quarter. There's a little bit of rollover impact into Q2, but not not substantially. So, you know, I would this is what 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. It's 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. Obviously, that's why our costs were as good as they were from a leverage perspective in Q1. We 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. Know, 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. Thanks Ruplu. Good questions. Guess so yes, I think we're as we've said, we're really thinking about margin in terms of mix, but 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, you know, more muted as a whole. And therefore, we tend to be lower margin mix. We're still also seeing more growth geographically towards our Asia Pacific region, 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, you know, 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 can come back if there's anything I can clarify. But the working capital front, yes, both in Q1, as well as in Q2, we are doing some pre-buys. With a number of different vendors where we see opportunistic, you know, 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. 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 pre-buys. It's 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 pre-buys is we're gonna continue to try and manage that as best we can and be opportunistic where the opportunities exist. But, 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 you know, a few hundred million dollars that rise in interest costs and interest carrying costs. So you just need to think about the interest expense model that that drives, but it's what a very positive return overall. Only other thing I would say, this is Paul. And Mike mentioned it in our his comments, we did do pre-buys, and you just mentioned, but we also improved our working capital year over year by four days. So we think we're making the smart right strategic buys, and it's the right return.

Okay. Thanks for that, Mike and Paul. 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 stable to cash flow in June? And then beyond June, any thoughts with regard to working capital dynamics? Thank you.

What I the way I would think about working capital, and realizing we don't, you know, specifically guide on that, but I'll just give you sort of a thought process. We're gonna continue to manage our business or our working capital days. So if we're in a more consistent growth mode as we were in Q1, you're gonna have that investment. But as we said, you know, working capital days came down on a net basis by four days year over year. So you just have to think about that growth factor and maintaining, you know, some equivalency in how we invest on a days basis, and we're gonna continue to invest for growth where we can capture the market opportunities in this environment. And that could put a little strain on free cash flow, while we're in a higher growth mode, and that's gonna 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.

Hi, thanks for taking my questions. Mike, if we look at the guide for 2Q at 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. 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 pre-buys. How should we think about inventory and free cash flow as we go through the rest of this year?

Okay. Thanks Ruplu. Good questions. I guess so yes, I think we're, as we've said, we're really thinking about margin in terms of mix, but 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, you know, more muted as a whole. And therefore, we tend 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, you know, more of the gross margin line stay roughly equivalent to where we were, in Q1 from a historical perspective. As we think about the optimal levels of the capital structure and leverage here, obviously saw the dividend move, but maybe lump in share repurchase repurchases, M and A, kind of just revisit that whole concept for us. Thanks. 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 three 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. I think, you know, certainly, we think about investment grade as an opportunity and, you know, in the future and that's challenging with the ownership structure right now. But I believe we're at already in that ballpark as far as leverage goes. So we're really focused now on where is the best area for us to invest going forward. And if, you know, if we're more tempered in certain— including organic investment in Xvantage, as an example, you know, then we'll continue to repay down debt with cash flow. And then, you know, as far as return to shareholders, you know, we do do we pay our first quarterly dividend in Q1. We did a, you know, 2.7% increase to that dividend just announced for Q2. We wanna make sure we're also balancing that with some continued return to shareholders. The share buybacks at some point down the road may be another arrow in that quiver, but obviously that's not a viable option right now. So it's really about balancing that. M and A continues to also be a big factor. As you know, most of our historical M and 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 they're not really breaking bank, so to speak, on that front. But that doesn't mean we couldn't opportunistically look at something bigger, and then we got a different look as to how we would delever the business after that if we were to do something larger and opportunistic.

Yes, thank you. Hi, 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 recovery in server storage and networking applications that are higher margin for you.

Yeah. So I'll touch on that, and Paul can elaborate. I think you know, I think the biggest differential between Q1 and Q2 is really, you know, a bit of a breakdown from a client and endpoint, not assuming we're growing at 15%, but as Paul said, growing, you know, 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, five quarters. You know, it's modest at 2%, but that's certainly a vast improvement from where we were most of last year where we had the 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 F and D perspective, which I mentioned is proving year over year, but it was still down—not to the same extent that it was in the prior quarter. That could actually, you know, provide a little bit of uplift also.

Okay. Thanks for all the details. Really appreciate it. Very helpful.

Your next question comes from Adam Tindle with Raymond James. Your line is open.

Okay, thanks. Good afternoon. Paul, I just wanted to start, you know, 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, you know, for you, if you could maybe walk us through the cadence of the quarter and any early observations from closing the month of April, and differences in month-to-month growth, you know, kind of lay out what it looks like 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.

Yeah. Paul. Thanks, Adam. The what I—so from a geographic perspective, there were 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 with the headwinds of Western Europe. But we’re pleased with the way they finished the quarter. I would say it was a little bit, you know, more accelerated versus the other regions, which were 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 in Q2 also.

Maybe a follow-up for Mike. Net debt to EBITDA is, I think, down to two times 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, saw the dividend move, but maybe lump in share repurchase, 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 three 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. I think, you know, 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 we’re really focused now on where is the best area for us to invest going forward. And if, you know, if we're more tempered in certain—including organic investment in Xvantage, as an example, you know, then we’ll continue to repay down debt with cash flow. And then, you know, as far as return to shareholders, you know, we do pay our first quarterly dividend in Q1. We did a, you know, 2.7% increase to that dividend just announced for Q2. 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 may 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 they’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 got a different look as to how we would delever the business after that if we were to do something larger and opportunistic.

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