Ingram Micro Holding Corp Q2 FY2025 Earnings Call

Greetings, and welcome to the Ingram Micro Second Quarter 2025 Earnings Call. Please note that this conference is being recorded. I will now turn the conference over to your host, Willa Mcmanmon, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. I'm here today with Paul Bay, Ingram Micro's CEO; and Mike Zilis, 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 future 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-K 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 today's call, which comes on the heels of the ransomware attack we experienced in early July. While no company wants to face the increasing reality of such an attack, our response reflects the way we do business as a platform company. Although some uncertainty remains regarding the potential impact on our business and future results, which Mike will address in more detail during the Q3 guidance discussion, I want to emphasize that the incident had no impact on our Q2 results. To recap, in early July, we identified ransomware on certain internal systems, and we quickly took our systems offline, launched an investigation with top cybersecurity experts and notified law enforcement. With respect to the incident, certain data was exfiltrated from our systems in conjunction with this incident. We have engaged a third-party data analysis firm to assist us in reviewing the relevant data. This process is ongoing and complex. Should we determine that personal information was affected, we will provide notification based on relevant regulations. In terms of our response, we approached the incident as a business challenge and the entire organization mobilized to address it. Due to our scalable and modular platform architecture and the tireless coordinated efforts of our team, we restored secure operations within days, minimizing disruption to our customers, partners, and the overall business. The investigation into the cyber incident remains ongoing, and we continue to monitor our systems closely. While this attack was unanticipated, our rapid response reinforces the critical importance of our Xvantage platform architecture and the strength of our overall teams and partnership. I'll talk more about Xvantage in a minute, but first, let me discuss some key highlights of the second quarter. We were pleased that we exceeded the high end of our net sales guidance and landed towards the top end of our gross profit and earnings per share guidance ranges. We had growth across all lines of business, particularly in client and endpoint solutions. We also saw incremental year-over-year improvement in advanced solutions and continued growth in cloud. Geographically, year-over-year, the lower cost to serve and lower margin Asia Pacific region demonstrated the highest net sales growth in the quarter. We also saw double-digit net sales growth in North America, single-digit net sales growth in EMEA, and returned to growth in Latin America. India performed as we had expected, with some continued impact on gross margins from the heightened competitive market and business improving as we progressed through Q2. From a customer perspective, we saw growth across all categories with enterprise again outperforming. We were also encouraged by the return to modest growth in SMB. Since our last call, we began the divestiture of two non-core pieces of the business. First is a divestiture of assets related to an underperforming operation in our North America region, which closed in late July. The second is CloudBlue, which is expected to close in Q3. Both of these divestitures were a result of our ongoing portfolio review as we focus on continually improving our operational effectiveness and amplifying our core strength. As a reminder, I've talked about the more than $600 million investment that Ingram Micro has made in cloud, which has been strategic to our long-term vision, enabled us to be the first to launch a comprehensive cloud marketplace and learned early on from our cloud business. CloudBlue is part of the initial foundation for the strategy, and we have retained the relevant IP from it. Instead of building fragmented marketplaces, we have unified our cloud marketplaces within our Xvantage platform ecosystem to provide a single pane of glass for hardware, software, cloud, and service solutions. This strategy is designed to provide our customers with speed, scale, and service and is core to our evolution into a platform company, which we are executing upon through our Xvantage platform. We think about this evolution for Ingram Micro and the subsequent transformation of our customers' journeys in three phases: the first phase, which we are already delivering upon, is to remove friction to streamline operations and drive OpEx efficiencies; the second phase, which we are in the process of rolling out, leverages AI to automate and optimize demand signals, enabling more proactive go-to-market strategies and accelerating top line growth; the third phase will unlock greater value for our customers and our vendor partners by matching supply and demand more intelligently, using data to drive growth and further enhance margins and operating leverage. It is during this phase that we expect to fully realize a flywheel network effect. Though this takes time, we continue to grow and remain profitable as we move through these phases. In July, Sanjib Sahoo, President of our Ingram Micro Global Platforms Group showcased the progression and discussed the way in which Xvantage is reshaping the IT distribution landscape. During the presentation, he walked through the platform's building blocks to underscore why its unique real-time data mesh architecture and custom AI factory are foundational in building a truly single pane of glass platform. He explained how Ingram Micro has more than 45 years of experience in IT distribution gives us not only deep expertise, but significant business data to power our AI factory, which uses AI to redefine the customer journey through intelligent automation. This automation is the basis for our Intelligent Digital Assistant, or as we call it, IDA, which helps our customers win more business and deploy their resources more effectively and efficiently. Sanjib showed real-time examples of how IDA uses advanced AI and machine learning models to analyze our data across more than 50 attributes and help our customers identify and prioritize the sales opportunities most aligned to them. This moves them from reactive inbound order-taking to proactive outbound order-making. As a proof point to this, in Q2, through IDA alone, we brought in tens of thousands of opportunities to our partners valued at hundreds of millions of dollars, up nearly 50% sequentially. Some other real-world examples of how Xvantage is delivering to our customers and partners include a leading solution provider in the public sector space, who is focused on expanding into higher value solutions offerings while maximizing operational efficiency. Using Xvantage capabilities, the solution provider was able to execute a multimillion-dollar solution with a fraction of the effort previously required and is now looking to create the same efficiencies with other vendor partners. Another illustration of the way customers are embracing Xvantage is a large new customer in France, whose CEO engaged directly with Xvantage and converted his company's entire go-to-market and customer relationship process onto the platform. The move to Xvantage enabled the company to generate and convert quotes into orders in under three minutes, a process that previously took up to half a day, leading to significant revenue and market share gains. Of course, our customer success is the best reflection of our success. And last quarter, we discussed a few of the many other platform metrics we use to gauge the way in which Xvantage is adding value. These include self-service orders, which in the second quarter grew nearly 200% year-over-year. During Q2, we also saw a near doubling in quotes created on the platform versus the prior year, driven by ongoing enhancements of advanced search, quoting, product data, and other capabilities. In the quarter, Xvantage also helped us to reactivate nearly 2,000 dormant customers who generated approximately 40% higher sales compared to their prior engagement. The second quarter brought with it solid business performance, and entering Q3, a unique set of challenges that demonstrated the strength of our platform. I'm incredibly grateful for the outpouring of support we received from our customers and our partners and proud of the resilience shown by our team. As we move into the back half of the year, I'm increasingly encouraged by the impact of our platform strategy and what it's having across our entire ecosystem. By delivering a holistic platform for B2B, we are not just modernizing distribution; we are reimagining how we can help our customers solve real business problems. Thank you for your continued support. And with that, I'll turn the call over to Mike.

Thank you, Paul, and good afternoon. Our second quarter results demonstrated solid performance with strong top line growth across our primary lines of business. We are encouraged by the continued momentum in our client and endpoint solutions, but also by mid-single-digit growth in both Advanced Solutions and Cloud. As we look ahead to the third quarter, we expect continued year-over-year top line growth enabled by strong execution across our core businesses, which I'll cover more in our guidance discussion shortly. Now to discuss the quarter in more detail. Net sales of $12.79 billion were up 10.9% year-over-year in U.S. dollars and 10.2% on an FX-neutral basis. We saw sales of client and endpoint solutions grow most robustly at nearly 14% on an FX-neutral basis, which continues to be driven primarily by strength in desktop, notebook, and smartphone categories. Our mid-single-digit growth in Advanced Solutions was driven by servers, storage, and cybersecurity, along with strength in sales of GPUs used in emerging AI solutions, particularly in Asia Pacific markets. Geographically, net sales grew across each of our regional segments. Our mix was similar to what we saw in the first quarter, with continued strength in Asia Pacific, followed closely by North America, both of which grew in the mid-teens year-over-year. We also saw a return to growth in Latin America, which increased by more than 6% year-over-year on an FX-neutral basis. From the perspective of our customer categories, large corporate and enterprise sales again outpaced higher-margin SMB sales. While we are seeing some growth in SMB in some of our markets, overall, this higher-margin customer category remains more muted than large enterprise, as near-term macro uncertainty and inflationary trends continue to bear more on this type of customer. Overall, these mix factors coupled with an improving but still very competitive India market continue to put pressure on margins. All of these factors, including an 8 basis point onetime impact that I will elaborate on shortly, contributed to our gross margin decline year-over-year. While we have a generally heightened competitive environment in many markets in which we operate, when we look at like-for-like sales across our products or customer categories, we are not seeing any notable deterioration in margin profile. Furthermore, these concentrations of mix also favor lower-cost-to-serve business, which, coupled with efficiencies and automation from our Xvantage platform and our cost reduction actions taken over the last 1.5 years, yield solid leverage on operating expenses and flows through to our bottom line. Turning to our regional segments. North America net sales were $4.98 billion, up 13.8% year-over-year on an FX-neutral basis, driven by strong growth in servers, storage, and cybersecurity, but also continued robust demand in the desktop and notebook product categories with the pending Windows end of life continuing to spur the refresh cycle. As a result, client and endpoint solutions grew nearly 13% in the region. Sales were also more concentrated in large corporate and enterprise customers, but we also saw some positive momentum in SMB, which is quite encouraging going forward. EMEA net sales of $3.48 billion were up 4.8% year-over-year on a U.S. dollar basis and were essentially flat on an FX-neutral basis. We saw continued strong double-digit growth in cloud, which was offset by flat client and endpoint solutions and a low single-digit decline in Advanced Solutions. Asia Pacific once again had strong growth with net sales of $3.48 billion, up 16.2% year-over-year in U.S. dollars and up 17.3% on an FX-neutral basis. Net sales were driven by very strong double-digit growth in Client and Endpoint Solutions, primarily from lower-margin mobility device sales, particularly in China. Advanced Solutions sales were down approximately 8% as strength in networking was more than offset by declines in server and storage. Latin America net sales of $853 million returned to growth this quarter, increasing 0.8% in U.S. dollars and up 6.4% in constant currency. The increase in net sales was primarily driven by growth in Client and Endpoint Solutions, particularly in smartphones and tablets. This sales growth was partially offset by a decrease in Advanced Solutions, primarily in servers, specialty products, and networking. Second quarter gross profit came in at $839 million or 6.56% of net sales. Included in this result is a onetime impact of $10.5 million or 8 basis points of net sales associated with the held-for-sale accounting for the planned sale of assets of the underperforming non-core operation in North America that Paul touched on a few minutes ago. This divestiture closed in late July. The remaining year-over-year decline in gross margin was driven by a mix shift towards lower-margin but generally lower-cost-to-serve businesses, as I've already discussed from a customer, product, and geographic perspective. Q2 operating expenses were $696 million or 5.44% of net sales compared to 5.61% in the same period last year. Q2 2025 operating expenses included a write-down of $32.8 million or 26 basis points of net sales related to the held-for-sale accounting on the two divestitures we've discussed. Incurred to write down the carrying amount of the assets of the disposal group to their estimated fair value less the cost to sell. From a regional perspective, both the $10.5 million gross profit charge and the $32.8 million operating expense charge related to held-for-sale accounting appear in our North America region. The year-over-year improvement in OpEx leverage reflects the cost actions we have taken over the last 1.5 years. The impact of the Xvantage platform in driving leverage and productivity gains, and the mix factors associated with a higher concentration of lower-cost-to-serve sales in Client and Endpoint Solutions and in the APAC region, as I have just covered. Adjusted EBITDA in the quarter was $294 million, up nearly 6% in U.S. dollars and 5% in constant currency. And non-GAAP net income in the quarter was $142 million compared to $120 million in Q2 of 2024, an increase of over 18% in U.S. dollars and more than 17% in constant currency. The non-GAAP net income measure benefited from a decrease of $14 million or 16% in net interest expense resulting from more than $600 million in debt repayments we have made since the beginning of 2024. Our non-GAAP diluted EPS was $0.61, up 12% from the prior year and at the higher end of our guidance for Q2. Our current year EPS also includes the impact of approximately $0.02 from a higher tax rate in the quarter, resulting from heightened U.S. withholding taxes on sales from our Latin America export business. Turning to our balance sheet, we ended the quarter with net working capital of $4.6 billion compared to $3.9 billion to close the same period last year. The higher investment in working capital this year is driven by the increase in net sales and investment needed to capture these opportunities. On a days basis, our net working capital in Q2 2025 was 30 days versus 31 days in the same period of 2024. On a similar note, adjusted free cash flow was an outflow of $263 million, again reflective of investments to grow the business, including some strategic buy-ins of inventory again this quarter to get ahead of potential tariffs. We returned $23.5 million to stockholders through dividends paid during Q2, and we announced a 2.6% increase to our quarterly dividend to be paid in Q3. We ended the quarter with $857 million in cash and cash equivalents and debt of $3.7 billion. Our gross leverage ratio was 2.8x, and our net leverage ratio was 2.2x. Shifting now to our guidance for Q3. I want to start by framing our current view in light of the ransomware incident we experienced in early July. The timing of the incident over a long U.S. holiday weekend and in the early days of a new month and quarter, coupled with the speed of our response to get the majority of our go-to-market systems back up and running in a matter of days, may have limited the impact on our financial results. But even if minimized, there is still an impact from the days we were unable to transact, which we are still working to quantify. Thus, our guidance reflects some conservatism, which we think is prudent to account for any potential loss of business, which would include, for instance, potential bids or quotes we were unable to participate in when our systems were down. I can say quite positively that we've seen good indicators of business returning to more expected levels since bringing our systems back online. With this in mind, we are guiding net sales of $11.88 billion to $12.38 billion, which represents year-over-year growth of more than 3% at the midpoint. We expect third quarter gross profit of $815 million to $875 million, which would represent gross margins just below 7% at the midpoint. Due to the expectation of more tempered growth than we experienced in the first half of this year in Client and Endpoint Solutions, paired with improving growth rates and more profitable Advanced Solutions and Cloud businesses, as well as continued improvement in the SMB customer category. We expect non-GAAP diluted EPS to be in the range of $0.61 to $0.73 per diluted share. This guidance assumes a potential $0.02 to $0.04 impact related to the ransomware incident. Our EPS guidance assumes approximately 235.5 million weighted average shares outstanding and a non-GAAP tax rate returning to a more expected rate of 30%. So in closing, we expect continued year-over-year top line growth enabled by strong execution across our core businesses and the progress we are making in our platform transformation.

And our first question comes from Michael Ng with Goldman Sachs.

I just have two. First, just as you think about the third quarter, I was wondering if you could provide some color on your expectations related to endpoint and advanced as you think about the revenue growth for the third quarter? And then secondly, just on the strength in mobility in China, how much of that was primarily driven by the subsidies given by the government and is that a key driver of the kind of deceleration in top line growth as we head into next quarter?

Yes. So this is Mike. Michael, thanks for the question. I'll answer the first one first. I think, on the guide, where our midpoint is at about 3% growth. Our top end is about 5% growth year-over-year. And I'll talk about more of the top end because that's really where if we didn't have a little bit of an impact to the cyber incident, which is probably about 1% to 2% maybe on the top line, that's where we probably would have landed, I guess, as more of a midpoint. So if you think about that, what we baked in there is certainly, as I said in my prepared remarks, a little bit more tempered growth in the Client and Endpoint. We grew double digits, as we said, but we're assuming something more like mid-single digits. And honestly, where the bigger drop is, we're still seeing strength and should see strength on refresh of desktops and notebooks as we look towards the end of life of Windows and so forth, carrying out into even the early part of Q4. So we still see that as being fairly strong, but it's really more of the smartphone growth that we see less of as we look into Q3. So call it roughly mid-single digits at the high end of our guide on client and endpoint, probably low to mid on advanced solutions, which continues to be probably stronger servers and storage. Networking is rebounding to growth, but a little bit more modest, and it depends on the market you're in. And then higher single digits on cloud, which we're excited about that returning. We had a harder compare in Q2 of last year. That, and a little bit of that in Q1 of this year as well compared to last year. So we're excited about that returning to a little bit more robust growth. So that's sort of the mix story. And then on your second question on China, it's hard to gauge. I think there probably is a little bit that's pulled forward by some of those stimulus plans as well as some of the potential for tariffs and retaliatory tariffs playing across that market. I think our growth there certainly was more geared towards that smartphone category as well as a little bit in some of the high-end GPUs, which we have across other parts of APAC as well. So that's what I would say on that. It's hard to gauge exactly.

This is Paul. I want to add that we have experienced significant growth in mobility throughout last year in the Asia Pacific region and continuing into the first half of this year. The demand in the smartphone market has been strong, consistent with our expectations.

And your next question comes from Samik Chatterjee with JPMorgan Chase & Co.

This is actually Joe Cardoso on for Samik. I guess maybe my first one is more of a clarification point. Obviously, you guys talked about the mobility and maybe that not continuing through the second half. But maybe if we focus on North America, strong sequential growth this quarter there. Just curious, I don't think you guys necessarily talked about it at all, but are you seeing any demand pull forward across any of the hardware products that you guys are shipping. And specifically, can you bifurcate that between devices and infrastructure, whether you've seen any of the pull forward on that in the first half and some good news going through and some of the conservatism going into the back half? And then I have a quick follow-up.

We don't provide a breakdown by the Americas, so I'll focus on North America. We didn't notice a significant pull forward in any categories. If there was any, it was minor, primarily related to the desktop notebook refresh, but nothing substantial that we incorporated into our Q2 results or our guidance for Q3.

Got it. Very clear. And then maybe second question. Sorry for the second question, and maybe more of a big picture one. But obviously, the big beautiful bill was passed like almost a month ago. I was just curious if that's coming up in any of the customer discussions you're having here in the states. And if so, if you could provide any insights on how customers are thinking about any of the implications there, positive or negative.

Yes, absolutely. And so if you look at, I think, most of the impacts on the Big Beautiful Bill is going to be more wrapped around kind of the Fed-led areas so public sector, call it, and public sector for us is not a material piece of our business. So I think you'll see, depending stuff moving from me from federal, that's going to local and/or state stuff shifting back and forth. So for us, I know there's conversations going on, but again, it's not a meaningful part of our business. And we do play in all those categories. So maybe there's defunding in one area and there's areas that are shifted more from Fed maybe to state, we'll be able to participate in that.

Yes. And the one thing I would just add, that favorability on the CapEx treatment is certainly going to benefit some companies and may benefit larger companies to a larger magnitude perhaps. So we're keeping an eye on it and to see, and we're certainly poised to capture that. If it does drive some demand pull forward for sure.

And your next question comes from Erik Woodring with Morgan Stanley.

I guess 2 as well. And maybe just to start, another kind of big picture question. Related to some of the end market comments that you guys made, and really, it's just when you speak to your customers or you look at the pipeline to the degree that you have visibility into it, you've been kind of being clear on smartphones and PCs. But big picture, kind of where do you see the market for some of these various major products? Where do you see us at in the cycle right now? If we think about storage and servers and net comm and PCs and smartphones, do you think big picture we're mid-cycle, are we late cycle, like I'm sure there's differences between each of those products. But I'm just trying to get a better understanding of where things could ultimately go again, if there wasn't disruption from the multitude of factors that are obviously impacting the macro. And then I just have a follow-up.

Yes, this is Paul. I'll join in. From an end-market perspective, it's interesting to observe the categories we've been discussing, particularly the networking category. This area has faced challenges, similar to what we are experiencing, particularly among our customers in the SMB markets. Since the first quarter of 2024, we've seen a continuous decline, with double-digit decreases through the first quarter of this year. However, we're beginning to see single-digit growth in the most recent earnings from Q2, which is encouraging. Historically, this market tends to recover slowly compared to mid-market and enterprise segments. Regarding our product offerings, we noticed some activity in the GPU space related to AI, which is a global trend rather than being limited to a specific region. Both networking and server areas reflect this growth. This quarter, we experienced significant double-digit growth in storage, server, and networking, with the server segment showing the most substantial increase. I would estimate that we are in the middle of this cycle as we observe these developments, with other services and solutions expected to follow as GPU products continue to be delivered as part of comprehensive solutions.

Awesome. Super helpful. And then Mike, maybe just turning to you. I know you referenced cost actions and mix factors that impacted OpEx. It was still up sequentially fairly strongly. And I know, obviously, you had a larger revenue base. And so maybe my question is the sequential growth that we saw this 2Q in OpEx, which was stronger than the 2Q of last year, is that really just the higher revenue base? Or were you able to pull forward any investments to take advantage of that top line outperformance and maybe just push a little bit of that through from a timing perspective?

Just to bear in mind, $32.7 million of that onetime charge was flowing through our OpEx, which was a onetime held-for-sale accounting. So I don't know if you're backing that out of the numbers you're looking at. Sequentially, there is a bit of an increase. And year-over-year, we continue to manage more to sales volumes and how we manage leverage on a percentage of OpEx because certainly with 10% growth year-over-year, from a revenue perspective, you have that degree of variable OpEx. We have timing as far as how sort of annual merits kick in and so forth that start in Q2 as well. And then lastly, there is a little bit of a pull forward where we saw opportunities, especially around some of the things we're doing on our investments in Xvantage that Sanjib talked about a couple of weeks ago in mid-July where we saw opportunities to expedite some of that work in Q2. So there's a little bit of timing there as well.

And your next question comes from Ruplu Bhattacharya with Bank of America.

I've got two, one for Mike and one for Paul. Mike, when we look at the guide for fiscal Q3, revenues are down 5% sequentially but gross margin is up 40 bps quarter-over-quarter. You talked about a lower mix of client devices that is helping. But can you also comment on the impact of the pricing environment? I think in prior quarters, you had talked about competitive pricing in some markets like India. How is that trending? And also, how are you seeing the mix of regions contributing to this? If Asia remains strong, how much of a headwind is this to gross margin?

Thank you, Ruplu, for your questions. The key factor is the normalization of the mix between Client, Endpoint, and Advanced Solutions, along with higher growth in Cloud. Additionally, there was an 8 basis point one-time impact on our margins in Q2 that won't carry over into Q3, which is something to consider. We're also observing a competitive environment across the board. In times of volatility in the macroeconomic landscape, competition tends to increase, and while we have seen some irrational behavior in India previously, it has lessened as predicted, returning to normal levels. However, India remains competitive due to its growth prospects. As for pricing and margins, there's been no significant deterioration when looking at customer and product categories; the changes are primarily due to mix. Regarding Asia Pacific, it remains a higher growth opportunity likely to continue, whereas EMEA shows challenges, particularly in Western markets. We're pleased to see a return to double-digit growth in North America, which is encouraging alongside the growth in APAC.

Okay, Mike, I appreciate all the details there. As a follow-up, Paul, can I ask you, are you seeing any AI-driven specifically AI-driven hardware purchases from customers, either AI PCs or AI servers? And if so, what percent of your revenues this year, would you say are AI driven? And kind of related to this, you talked about your prepared remarks, and Sanjib, the other day, also talked about Xvantage helping to drive sales. Is there a way to quantify how much revenue in the year you expect Xvantage to drive?

I’ll begin with Xvantage. Thank you for attending Sanjib's presentation. We are continuing to make progress with initiatives like IDA, as I mentioned in my prepared remarks, and we are navigating three phases with Xvantage across various countries. Some of the 20-plus countries we operate in are further along than others. We don’t disclose the complete figures for Xvantage yet, but as we look ahead, every country will eventually be using Xvantage as it will serve as the backbone of how we run the company. We will keep providing metrics that we believe are important for Xvantage, which include user engagement, financial and operational performance, and customer feedback. For user engagement this quarter, quotes created nearly doubled year-over-year due to enhancements in search, quoting, product offerings, and other capabilities. On the financial side, our self-service metrics indicate that customers are using the platform more frequently and placing more orders due to its ease of use, which increased over 200%. Additionally, we have re-engaged nearly 2,000 dormant customers, and their sales this quarter are 40% higher than before. This suggests that customers are effectively utilizing Xvantage to manage their businesses more efficiently. Regarding AI, to address your second question, most of our recent PC refreshes have not been AI-driven, and we believe we are still in the early stages of this development. Discussions with customers and partners indicate that most refresh activity is related to aging systems and Windows updates. However, we are beginning to see opportunities in North America and Asia Pacific, particularly around GPUs that enable AI capabilities. We are optimistic about the increase in AI-driven opportunities compared to a couple of quarters ago, and in the long term, the focus will be on how we support these emerging services.

And your next question comes from Adam Tindle with Raymond James.

Mike, I just wanted to start on guidance for Q3 on revenue. And I understand there's a lot of moving parts here. But if I look at the model, you're typically up sequentially in Q3, I know it's like a strong public sector quarter among other things. So if I look at the guidance that you provided here, it looks like it would be down a little over $0.5 billion in revenue dollars sequentially. So call it subseasonal relative to what we would typically expect. You've got some divestitures in there. You've got obviously the cyber incident that I think you're still trying to quantify. I guess any kind of framework you can provide for us as we kind of think about Q3 revenue guidance and the different buckets that are causing the below typical seasonality? And any comments that you can give on public sector in particular? I don't know if Paul wants to weigh in on that given Fed fiscal year-end.

Let's revisit this at the end, and Paul will add his thoughts. You’ve mentioned some key points, particularly the cyber incident, which is the most significant factor affecting our typical seasonality. The primary driver has been the remarkable growth we've experienced in Client and Endpoint, with strong double-digit growth in the first and second quarters. Normally, we see a peak in Q3 and certainly in Q4 during regular budgeting cycles. However, the renewal cycle that started in Q4 last year and continued through the first half of this year has likely resulted in an atypical seasonal effect. As we've noted, while our guidance suggests mid-single-digit growth for CES, it is expected to be slightly higher for the desktop notebook category and somewhat lower for smartphones. In recent quarters, if robust demand persists, we are well-positioned to take advantage of it. This may lead to some margin rate dilution due to the mix of business, but it would also provide greater leverage on operating expenses given the low cost to serve for these types of sales. That's the main point I want to highlight. Regarding the public sector, I want to emphasize that it represents a minor portion of our overall business, usually in single-digit percentages. The federal sector is currently weaker due to the prevailing environment, while the state and local education sector is performing a bit better, but the impact remains limited for us. Paul, do you have anything to add?

The education we expect. So we were down kind of mid-single digits in each of the categories to high single digits in Q2, and we expect to be better than that in Q3 that we built into our guide.

Got it. Super helpful. Maybe just a follow-up, Mike, on cash flow. If we were to kind of think about the environment that you're describing year-to-date, where Client and Endpoint is very strong, mobility has been very strong. We think about those businesses, we typically think of those as lower margin, but much better working capital dynamics, faster asset terms, et cetera. Yet if we look at cash flow year-to-date, it's more than $0.5 billion of cash use. So if you could maybe just parse out, I know you mentioned buy-ins in there, but talk about sort of that mixing towards these areas and faster growth in these areas, yet how sizable the cash use has been year-to-date. And then if you could also maybe touch on cash flow from here, do we reverse this out over the next couple of quarters and get to positive cash flow for the year? What does the cadence look like?

Sure. Our typical seasonality indicates that Q3 is a cash outflow period, primarily due to our need to procure inventory in anticipation of increased demand in Q4. This year has seen unique circumstances, as the substantial double-digit growth we've experienced year-to-date necessitates significant investment in inventory. In both Q1 and Q2, we took advantage of some early purchasing opportunities, which has left us with a higher inventory level as we exit Q2. This is due to several large deals closing in early Q3 that required us to start stocking up, resulting in some anomalies that could positively impact our Q3 results. Additionally, regarding our net working capital, we've improved by about four days year-over-year in Q1 and by about a day in Q2. We’re still actively managing this in terms of days with respect to our growth, which is contributing to the cash outflow we’re experiencing year-to-date. I anticipate that Q3 could be somewhat neutral regarding outflow, as we continue to invest in working capital, somewhat balanced by inventory processing. In Q4, as we observed last year, we expect to generate cash as inventory converts to receivables, much of which should be collected before year-end, coupled with our strategy for managing payables with our vendors.

And your next question comes from David Paige with RBC Capital Markets.

Mike, Paul, I wanted to follow up on Xvantage. Regarding the small business growth you've experienced this quarter, it appears to have returned to low single-digit growth, which is encouraging. Do you believe that Xvantage is contributing to this growth in the SMB market? Additionally, in terms of portfolio adjustments or other strategic moves, do you feel the portfolio is appropriately sized, or should we anticipate any potential bolt-on acquisitions or further divestitures moving forward?

Yes. Thank you, David, for the question. This is Paul. So as I walked through and I talked about the three phases, of where we're at, the U.S. and I would say North America, to some extent, too, is most mature on where we are and starting to get into that second phase, which is where we really start leveraging AI and automation to optimize demand signals, which allows us to be more proactive. And I talked about our Intelligent Digital Assistant, IDA, that is absolutely an area that the U.S. has taken advantage of, which is really shortening sales cycle. You can see it in the revenue growth that we said from a North America standpoint. And that's really the ability to go to that SMB market. This is about self-service. It's about helping them be more educated as they go to their end users and shortening those sales cycles using AI to say, this end user historically purchases within the x amount of days, you should go out of a conversation with them because we can see the data relative to all the end consumption. So it's a very good pickup on your point that yes, it is being driven, and we believe that's helping spur some of the growth in SMB, specifically around North America. On portfolio rationalization and Mike can jump in too. In the divestitures, we continue to look at what's best for the company and the best return from a shareholder perspective. And although there were two here, we're going to continue to manage the business. But nothing specifically as we continue to manage the business that we're looking at as we continue to invest in our core capabilities and really around being a platform company. Mike, I don't know if you have...

We are well-capitalized to pursue mergers and acquisitions if an opportunity arises. However, as you've noticed recently, our acquisitions have primarily been smaller, strategic tuck-ins that enhance our capabilities. We plan to maintain this approach unless a significant and advantageous opportunity presents itself.

And your next question comes from Ananda Baruah with Loop Capital Markets.

So, I have a couple of quick clarifications. Paul, you've referred to AI in various product contexts a few times. You also mentioned GPUs being sent to APAC. I believe you were discussing some of your products, specifically storage systems and server systems, potentially as part of solutions for customers. Could you clarify that for us and provide context on your exposure in that area? What avenues are you exploring in the marketplace for that? I have a quick follow-up as well.

Yes, thank you for your question. I mentioned that we have the GPUs we needed and our ability to service them in the Asia Pacific region. Additionally, we have secured new authorizations and opportunities, particularly in North America, where we successfully closed a significant deal. This situation presents more opportunity for us as we look to the future. In examining growth in networking, server storage, and their combination, we found that GPUs are being integrated into these sectors. We experienced strong growth, especially in the server category, followed closely by storage and networking, with double-digit growth recorded in all three categories. Moreover, GPUs are present in each of these areas.

That's helpful. Can you comment at all on what the customer segments are? Is it Neocloud? Is it Enterprise? Is it a large Neocloud complex in Malaysia? Is it Neocloud? Is it enterprise? Is it in another category? It seems like you’re making progress there in some way, which is exciting.

Yes. Please note that I cannot represent the end markets or the specific ways our customers are utilizing their technologies. Our focus is on large mid-market and enterprise customers who serve those end markets. I won't detail where our customers are deploying these technologies, but those purchasing solutions from us primarily come from the mid-market and enterprise sectors.

I have one more question for you. Are these VARs you mentioned some of your larger VARs?

Yes, they are value-added resellers and national solution providers. We categorize them as large, followed by the next tier, and then mid-market down to small and medium-sized businesses.

Your next question comes from Amit Daryanani with Evercore ISI.

To begin with, you mentioned growth in the SMB markets in your prepared commentary. Can you elaborate on the extent of that growth across different products? Historically, the SME market has often been a leading indicator for the overall business. Should we expect to see a broader recovery based on what you're observing in the SMB segment?

Yes. I think the SMB market is still somewhat subdued, as we've mentioned, but we're optimistic about its growth, even if it's modest. This is definitely a positive sign. The product mix has been similar to what we've observed in other areas, with a focus on server, storage, and certainly desktop and notebook sales. There's not as strong a focus on smartphones. However, the desktop and notebook segments are where most of the sales are happening. In the SMB space, we typically see higher margins, especially when it involves more technical solutions and various products and services bundled together. Unfortunately, we are not seeing as much of that high-value sale that typically drives that increase.

Yes, I think they are finally participating in some of the refresh that's happening too. Because if you look at Q1 and prior, which we discussed being down double digits for us, we actually saw growth in both Advanced Solutions and Client and Endpoint Solutions within the SMB markets.

And then I guess, Paul and Mike, your inventory dollars are up like kind of $810 million since December, which you fully just reported in June. Of this uptick you're seeing in inventory very specifically, how much of this is strategic pre-buying, which is positioning for what you think demand will look like in the back half? And then how do you get confidence that you don't end up with obsolescence risk or write-offs given the spike in inventory versus this will just flow through the revenue channel over time?

Yes, I have no concerns about any significant write-offs. As I mentioned earlier, we do have slightly higher inventory than usual coming out of Q2, which was primarily driven by purchases for specific large deals that are expected to close in Q3, with no anticipated risks associated. Much of the inventory was bought in advance to address potential tariffs and other factors, and most of it was sold through during the quarter. From a days inventory outstanding perspective, we are essentially flat year-over-year. We are managing this growth effectively through increased sales, as you can see.

And our last question comes from Karl Ackerman with BNP Paribas Asset Management.

I have two, please. First, you mentioned growth in server and storage. Your comments have been limited on networking and cybersecurity. I guess, are order trends declining there? I guess, what are you seeing there in the SMB space specifically, given that tends to be a higher-margin solution sale?

Yes, this is Paul. Cybersecurity experienced good growth for us. Within our Advanced Solutions, the larger categories are primarily networking, followed by server and storage shortly after. Our server business performed strongly in the quarter, and we are pleased with the growth in that area. Cybersecurity also showed strength, although it represents a smaller portion of our overall Advanced Solutions business.

Got it. And then just based on the COGS and OpEx disclosure, it seems that CloudBlue couldn't sustain as a stand-alone entity. I guess why do you believe that is? And how does the sale of CloudBlue impact Xvantage system of records if at all, and your ability to shift more of your sales toward services?

Yes. So if I take a step back and remind so CloudBlue is the foundation for our cloud platform that we had, and I mentioned in my prepared remarks, in early days, the $600 million that we invested around cloud, and we use that as the underpinning for our Xvantage team to build really a single pane of glass where you can now buy cloud solutions, hardware, software, and services all in one platform as opposed to having multiple different systems. So as we look at our long-term strategy, the capabilities that were there, and we retained the relevant IP that we've had within CloudBlue and the important pieces of that $600 million investment. And so we believe it was right from a strategic perspective to continue to invest in our platform strategy and the capabilities of CloudBlue moving forward was best to look at as a divestiture.

And Karl, just one last point on that. CloudBlue has always been included in the overall Cloud results we've discussed, but it has been a relatively small component of those results. Therefore, it won't have a significant impact going forward when considering the financial perspective of that divestiture.

Thank you. And that concludes our question-and-answer session. I'll now turn the call over to Paul Bay for closing remarks.

Thank you all for your questions and continued interest in Ingram Micro. And as always, to our 23,000-plus team members, our customers, and vendor partners. As we continue to deliver on our short term and execute against our long-term vision of being a platform company and delivering a holistic platform for business to business. Thank you again for your interest, and have a great night.

This concludes today's conference. All parties may disconnect. Have a good day.