Ingram Micro Holding Corp Q4 FY2025 Earnings Call

Greetings, and welcome to the Ingram Micro Fourth Quarter and Fiscal Year 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Willa Mcmanmon, Vice President of Investor Relations. Please go ahead.

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 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, everyone, for joining today's call. I'm pleased with our strong execution and results in the quarter and for the full year. In the fourth quarter, we grew revenue by 11.5% with growth across all regions and delivered EPS of $0.96, both exceeding the high end of our guidance. We also delivered adjusted free cash flow of $1.6 billion in the quarter, the highest quarterly level in more than a decade, allowing us to well surpass our goal of generating adjusted free cash flow at a rate of 30% or more of adjusted EBITDA for the year. The top line strength in the quarter was driven by client and endpoint solutions business, and we again had significant sales of GPU and other AI-related products in our advanced solutions business, which we believe positions us well to further pursue AI attach opportunities as customers move from the compute to the application layer. From a customer category perspective, enterprise remained quite strong, while SMB continued to improve for a fourth straight quarter of sequential growth. Geographically, we had top line growth across all four regions. Over time, we expect mix to improve favorably from a margin perspective as client and endpoint solution sales moderate and we execute on our advanced solutions and cloud initiatives, driven by our Xvantage platform. We are also very pleased with our strong results for the full year 2025 with net revenue up 9.5% and non-GAAP net income up 8.6%. We were able to support the strong pipeline of growth while demonstrating solid operating leverage. Because of our Xvantage platform and our ongoing AI initiatives, we are able to redeploy many of our associates to high value-add go-to-market initiatives to better support our customers. We say that Ingram Micro has transformed to become aggressively digital while remaining amazingly human. And it is this combination of skills that is allowing us to deliver value to our customers in an increasingly complex market. Our Xvantage platform uniquely positions us to help our customers succeed by digitally connecting vendors and customers at scale across the ecosystem, where we play end-to-end across the demand and supply chains. As we have previously discussed, we are moving through the three phases of Xvantage value creation, with the first being OpEx efficiency; the second top line growth; and the third using data to drive growth and enhance margins and operating leverage. In 2025, we made great strides implementing the second phase of revenue growth and put in place the building blocks to capture the third phase, which will begin taking effect this year. During 2025, we delivered billions of dollars of revenue through the Xvantage platform as we meaningfully scaled critical enablement capabilities for our customers and increased the consistency and predictability of revenue and operating income. We have been building Xvantage for three years with proprietary data, a real-time global data mesh and over 400 embedded AI and machine learning models that power our AI differentiation. With AI, architecture matters and an ERP-agnostic digital platform can deliver capabilities that a portal simply cannot. Through our proprietary real-time AI Factory, which includes product ingestion, data enrichment, intelligent pricing, forecasting and agentic workflows, we are improving the sales productivity, pricing discipline, forecasting accuracy and cost to serve. While the high-growth AI infrastructure category may temporarily compress margins in the near term, our platform-led AI architecture is designed to convert revenue scale into structural operating leverage and sustainable profit expansion. With Xvantage capabilities, we are better serving our customers while empowering them to better serve the millions of end customers that rely on their competencies and capabilities. An example of how we are doing this is our intelligent digital assistant, which we call IDA, and I have discussed in prior quarters. During 2025, IDA enabled over 500,000 proactive engagements, assisting our customers in converting over 100,000 opportunities into orders worth billions of dollars. IDA had a multiplier effect on our partners' outcomes, enabling the conversion of opportunities to sales orders at almost three times normal conversion ratios. And those solutions contain higher-value advanced solutions and cloud products almost twice as often as our non-IDA transactions. IDA enables us to accelerate the sales cycles of our partners, increase their opportunity to sale conversion ratio and focus on higher-value segments. While revenue from IDA is still in mid-single digits as a percentage of our overall revenue, we see that a majority of IDA orders contain higher-margin advanced solution and cloud products, and we believe we will exit 2026 with IDA representing a double-digit percentage of the total revenue. While we continue to scale IDA across our operations, we also piloted our Agentic Assistant, which we call Sales Brief Agent. This interactive agent combines multiple internal and external data sources, enabling associates to identify new opportunities with our customers and convert them into value-added conversations. The agent also assists with value proposition development and the creation of appointments and follow-up tasks. It also helps customers convert these opportunities into sales orders with their end customers. An example of the power of Sales Brief Agent comes from our Canadian operation. Using the agent, our team identified opportunities with the customer to provide a solution for a large multi-quarter implementation with one of their end customers and highlighted an additional opportunity to migrate the software solution of another customer to high-value cloud-based alternatives. We are in the early stage of unleashing the full potential of our agentic roadmap, and we plan on expanding Sales Brief Agent globally during the first half of this year. In addition to IDA and Sales Brief Agent, we are seeing tangible impacts across the platform. For example, in 2025, on the Xvantage platform, self-service orders were up over 100% versus a year ago, improving productivity and enhancing customer experience. Average revenue per customer on Xvantage increased by 14% sequentially from Q3 to Q4 and over 30% year-over-year. In the largest country where we have rolled out Xvantage, overall headcount has decreased and the revenue and gross profit per go-to-market head have increased. These points are representative of how Xvantage is driving efficiency while freeing up time for high-value personal customer engagement. Underscoring how differentiated our technology is, we were recently granted two patents. And as we have mentioned, we have over 35 patents pending to further automate and accelerate our customers' go-to-market. A recently approved patent is for email to order or what we call ETO. This patent recognizes our automated solution that converts email orders into touchless order entries using generative AI technology. We received millions of emails annually that we can now process through ETO. This patent is a significant milestone for our team, and there are more to come. Proprietary capabilities like ETO further illustrate how the Xvantage platform is driving optimizations from days to minutes in many areas of the business. For the last three years, we have been building Xvantage on a modern data foundation. This has enabled us to incorporate AI quickly and organically into our own platform and transform the way in which we operate. We wanted to bring the lessons we have learned during this process to our partners and customers. So in 2025, we launched Enable AI to help them accelerate their own AI journeys. This program is already delivering tangible results, and we are seeing more partners join every quarter. Through our digital journey with Xvantage, we can help our customers to first understand, then sell and deliver AI to their end customers. Although it's early days, we are encouraged as more customers move from awareness to delivering outcomes to their customers. One example of how customers are using Enable AI is a U.S.-based managed service provider, or MSP, serving the regulated and industrial verticals. After the MSP took the Enable AI assessment, our team facilitated a structured workshop to educate them on growth tracks for data, AI platform and cloud. We provided targeted training sessions with our respective technical experts along the way. The customer went from chasing custom one-off AI projects to delivering consistent, repeatable solutions for their strategic vendors. Across their customer base, they are now deploying agentic automation for customer support, rolling out AI-enabled inventory, supplier workflow automation, intelligent document processing and AI governance solutions. What was unstructured AI ambition is now a repeatable revenue motion they are deploying across multiple industries with initial six-figure engagements. Looking back on 2025 and all that we have accomplished with the initiatives I just discussed, I am incredibly proud of our team members. Together, we have navigated through complex issues, including tariffs, interest rates and geopolitical uncertainty as well as the cybersecurity incident in July, which we effectively remediated within days. Our associates' ability to deliver to over 165,000 customers and 1,500 vendor partners in 57 countries during this time is truly a testament to their talent, determination and resilience. In 2025, thanks to our team members' global reach, decades of customer relationships and our Xvantage platform, we grew better than the market. Our full year results highlight our focus on working capital management and profitable growth, while in tandem transforming the way distribution operates. For over four decades, we have stayed nimble in responding to the ever-changing IT spend environment and the speed of change is faster today than it's ever been. As we look forward to the full year 2026, we are confident that we will continue to successfully navigate the inevitable challenges in the market as we have done in past cycles. And considering the data points and initiatives I have shared, we are poised to further leverage the power of our platform while maintaining the core customer-centric foundation that has made us successful. We have the people, the platform and the programs to empower our customers in a new era of technology. Thank you, as always, to our team members, our customers and our vendors who have worked beside us as we transform. We look forward to another year of relentless execution and innovation. And with that, I'll turn the call over to Mike.

Thank you, Paul, and good afternoon. I'd like to reiterate how pleased we are with how we closed out the year, exceeding the high end of our guidance range for both net sales and earnings per share and generating $1.6 billion of adjusted free cash flow in the quarter. I'd like to start my comments today by touching on a few fiscal 2025 highlights. As with prior quarters, I will be focusing primarily on our non-GAAP numbers. Net sales for the full year 2025 were $52.6 billion, representing an increase of 9.5% from 2024 and up 9.0% on an FX-neutral basis. We saw year-over-year increases in net sales across each of our geographic segments, punctuated by our Asia Pacific region, which drove solid double-digit growth throughout the year. As Paul touched on, and as we have noted before, we saw a significant sales mix shift towards our lower-margin client and endpoint solutions across all of our geographic segments. We also saw strength in large enterprise customers, servers and GPU and AI infrastructure projects and geographically towards our Asia Pacific region. All of these trends yield lower average margins, but also lower cost to serve. Full year operating expenses were $2.63 billion or 5.0% of net sales, representing a 47 basis point improvement in OpEx leverage from 2024. While a portion of this leverage is a result of the sales mix I just noted, it is also reflective of the benefits of the cost reductions we have taken over the last two years. We also continue to see increased operational efficiencies play out as part of the Xvantage roadmap we have been discussing now for some time. Non-GAAP net income for the year was $681.9 million, up 8.6% over the prior year, and non-GAAP diluted EPS was $2.90. Adjusted EBITDA for the year was $1.36 billion, up from $1.32 billion in 2024. Moving now to the fourth quarter. Net sales were $14.88 billion, up 11.5% year-over-year in U.S. dollars and up 9.1% on an FX-neutral basis. I'm pleased to report that advanced solutions returned to growth with net sales up 11.3% on an FX-neutral basis. This was driven by server, storage and cybersecurity, but also includes continued large-scale enterprise deals in GPU and AI infrastructure product sets. Client and endpoint solutions grew 8.8% with strong demand for notebooks and desktops as the refresh cycle has continued through 2025 and now into 2026. From a geographical perspective, we had FX-neutral growth across all four of our regions, led by 14.6% year-over-year growth in APAC. And with North America not far behind, generating net sales of $5.10 billion, up 9.3% over prior year. Both Asia Pacific and North America sales benefited from the large enterprise, GPU and AI infrastructure projects I just mentioned. North America also saw strong growth in server and storage categories, and both regions saw strength in client and endpoint solutions driven by PCs. EMEA net sales of $4.63 billion were up 13.9% year-over-year in U.S. dollars and up 5.9% on an FX-neutral basis, with growth across all lines of business, including strong double-digit growth in cloud. Finally, net sales in Latin America were $1.08 billion, up 6.6% in U.S. dollars and up 1.2% in constant currency, driven by strength in sales of client and endpoint solutions, offset partially by softer results in advanced solutions and cloud. Turning to our customer categories. We saw the fourth consecutive quarter of sequential growth in SMB. We remain encouraged by this trend and the role Xvantage is playing in helping us serve this and all of our customer categories. Fourth quarter gross profit came in at $966.4 million or 6.50% of net sales, down 51 basis points from the same period last year. The year-over-year decrease in gross margin was driven primarily by a continued heavy sales mix in our lower-margin client and endpoint solutions as well as higher business growth coming from our Asia Pacific region. To elaborate on this geographic impact, as an example, our Asia Pacific gross margin averaged roughly 250 basis points less than the overall average margins of the company. But it's also worth pointing out that our cost to serve across Asia Pacific is also much better than the rest of the world. In addition to these factors, gross margin was also impacted by continued strength in large enterprise customers and significant project-based business in GPU and AI infrastructure product sets. These AI-related project sales alone drove an impact in Q4 of more than 15 basis points on gross margins as these projects continue to be large enterprise deals that are sold on more of a fulfillment basis, which also makes them lower cost to serve and very working capital efficient. But as we've talked about in the past, this investment into GPU and AI infrastructure is also strategically important in the long term as AI becomes more accessible and we move across our broader customer base from enterprise, where our complementary services capabilities also yield greater profit. Q4 operating expenses were $656.7 million or 4.41% of net sales compared to 5.15% in the same period last year. The year-over-year improvement in operating leverage of 74 basis points reflects the continued benefits of optimization and automation from Xvantage as well as a positive recovery via insurance proceeds that we expect to receive related to a previously disclosed matter. While these proceeds drove a net benefit in Q4, most of which we had baked into our guidance for the quarter, it is offset to a decent extent by reserves and expenses in this quarter for final settlements associated with this matter, as well as the loss of business impacts incurred earlier in the year. During the quarter, adjusted income from operations totaled $350.0 million and adjusted income from operations margin came in at 2.35% compared to 2.29% in the same period last year. Our non-GAAP net income for the quarter was $226.7 million compared to $213.1 million in the comparable period last year. Fourth quarter non-GAAP diluted EPS was $0.96 compared to $0.92 in the same period last year and above the high end of our guidance range for the quarter. Fourth quarter adjusted EBITDA grew to $430.9 million compared to $418.1 million in the comparable period last year. Turning now to our balance sheet. At the end of Q4, net working capital was $3.6 billion compared to $4.1 billion at the same point last year, reflecting significant reductions in working capital investment to close out the year. Fourth quarter working capital days improved to 24 days from 26 in the same period last year. Our continued focus on return on working capital, including the expanded use of channel financing solutions to accelerate cash conversion allowed us to end the quarter with $1.86 billion of cash and cash equivalents and debt of $3.2 billion. This resulted in our net debt to adjusted EBITDA leverage ratio improving sequentially from 2.2x to 1.0x. As a result of these factors, our fourth quarter adjusted free cash flow was $1.63 billion compared to $337.2 million in the prior fiscal fourth quarter, representing our highest quarterly result in more than a decade. This landed our adjusted free cash flow for the full year at $1.10 billion compared to $443.3 million in the prior fiscal year. I've previously discussed the seasonality of our free cash flow, and I'm pleased to have well exceeded our goal of realizing 30% or more of our full year adjusted EBITDA to free cash flow in 2025. During 2025, we also paid down $125 million of our term loan balance, and we repaid an incremental $200 million in February of this year. This brings our total repayments on term loans to $1.89 billion since the beginning of 2022. During 2025, our interest expense was lower by $35.8 million year-over-year, primarily as a result of these debt paydowns. Shifting now to our guidance for Q1 of 2026. We are guiding net sales of $12.45 billion to $12.80 billion, which represents year-over-year growth of approximately 2.8% at the midpoint. This is comprised of flat to low single-digit growth in client and endpoint solutions, low to mid-single-digit growth in advanced solutions and double-digit growth in cloud. We expect first quarter gross profit of $840 million to $895 million, which would represent gross margins of roughly 6.87% at the midpoint. We see mix improving in the new year, so this represents a very solid 38 basis point sequential improvement over Q4 2025 and a 12 basis point improvement versus Q1 of 2025 at the midpoint of this guidance. We expect non-GAAP diluted EPS to be in the range of $0.67 to $0.75 per diluted share, which is based on weighted average shares outstanding of approximately 236 million and a non-GAAP tax rate of 27% for the quarter. Finally, while we don't guide on free cash flow, it is likely that we will see a higher-than-seasonal normal use of cash in the first quarter of 2026 as we came out of 2025 with a very low level of working capital, as I touched on earlier. But our commitment to generating free cash flows remains, and we still expect to realize well over 30% of our adjusted EBITDA generation to free cash flow over 2025 and '26 combined, while we continue to manage our balance sheet with a focus on investing in the business, profitable growth and quality of sales over time. In closing, I am very happy with how our team continued to execute on overall operating efficiency. We continue to optimize, setting us up very well to capitalize on a curve of upward profitability as we see higher margin growth opportunities present themselves going forward.

Our first question is from Erik Woodring with Morgan Stanley.

I would love if you could maybe unpack the exact drivers underlying the revenue guidance in the first quarter. I see the really strong gross margin improvement sequentially and modest year-over-year. I understand the kind of segment level guidance that you've given. But can you just maybe give us a little bit better flavor on, for example, PC refresh or AI and GPU-enabled sales, Asia Pac? Just want to understand maybe a little bit more detail what you're kind of seeing or what you expect to see in 1Q? And then a quick follow-up, please.

Sure, Erik. This is Mike. I'll begin, and Paul will add some insights. As mentioned in our prepared remarks, we are anticipating flat to low single-digit growth on the CES side. One of the main factors contributing to this is that we still expect continued demand for PC refresh over the next few quarters, which remains quite strong. However, the comparison to Q1 of last year is significant, as we saw robust performance in that category during that time. Additionally, we had substantial mobility sales in Q1 of last year. The mobility subcategory, which is our second largest, is projected to decline year-over-year. Therefore, we expect to see flattish to low single-digit growth in client and endpoint areas. On a positive note, we are seeing solid growth in advanced solutions, particularly in server, storage, and cybersecurity, which are still performing well in the low to mid-single digits. We are not counting on notable GPU deals for this quarter. While we are involved in GPU and AI infrastructure opportunities, these deals are large and sporadic, appearing in only a few of our markets, and we do not expect any significant ones in Q1. Lastly, cloud services are growing at double digits, driven by strength in Infrastructure as a Service, modern workplace solutions, and other areas. I’d also like to briefly address supply constraints. I believe our revenue estimates are conservative, as we are starting to see an increase in average selling prices in Q1 that we did not observe in Q4, and there were no significant pull-forwards in that quarter. However, as the price increases begin to take effect, they may drive revenue growth alongside the cost of sales. The uncertainty lies in how the demand cycle will adjust, especially given the longer lead times in obtaining products due to current constraints, which may offset some of the revenue growth from rising prices. Hopefully, this provides a clearer picture.

No, that's great. And then just a quick follow-up was, and you touched on it, was just commentary or thoughts around pull forward. It was an above seasonal quarter. We've heard that from some of your peers, but I would just love to kind of understand what exactly you saw and more importantly, how you protect yourself from that as we look into this period of higher prices and the potential for that to happen.

Yes, I can address that. As I mentioned, we did not notice anything significant in terms of pull forward in Q4. We'll have to see how it develops in Q1. I've shared some insights on how we’re considering this from a revenue standpoint. To safeguard against this, we maintain ongoing discussions with our OEM partners. We have a reasonably good idea of when potential price increases may occur, which gives us the chance to plan strategic buy-ins. This is also why we expect a larger than usual seasonal outflow of free cash in Q1 as we collaborate with vendors to seize these opportunities when they emerge.

So this is Paul, and I want to provide some additional insight into the demand and the discussions we've been having with our customers and vendors. We assess demand from two perspectives: price elasticity and actual demand. Currently, we are evaluating the elasticity of demand, especially within the SMB markets we serve, but it's too early to determine the impact of that. On the supply side, I have spoken with several of our major vendor partner CEOs in recent weeks, mostly regarding advanced solutions and, to some degree, PCs, specifically server storage and how allocation will look for mid-market and SMB channels depending on demand. They have all indicated that there will be allocation based on demand. The critical consideration will be price elasticity and its potential effect on demand, as well as how prices are absorbed across different product categories. Additionally, we are collaborating with our vendors on alternative solutions, such as transitioning from configure to order to build-to-order at the enterprise level. This strategy will help minimize pricing impacts and utilize current inventory to deliver effective solutions. These are a few initiatives we are actively pursuing with our vendor partners and customers.

Our next question is from Katherine Murphy with Goldman Sachs.

I was wondering if you could talk more about the momentum you're seeing in the AI infrastructure enablement side. If you could talk more about the role that Ingram and distributors more broadly play in addressing enterprise needs for AI and the infrastructure that you may be selling beyond GPUs. And if there's anything you could share to help us quantify how big this opportunity was in the quarter and where the opportunity could go for the full year?

Yes. So I'll start, and Mike, you can jump in. Mike called it out in his prepared remarks about a 15 basis point impact that those products that we define as both GPU and AI-enabled infrastructure is what we're looking at. So it did have an impact. We don't call out the revenue necessarily, Katherine. But if I take a step back, this is all about how do we monetize GPU and the related product set. So as I mentioned, the AI-enabled program that we've had. So there's really three growth tracks that we have there. It's about preparation and awareness; execution and training; and then third, which is most important, which is monetizing and driving outcomes. So if we look at kind of the people that were coming through the funnel and the prep and awareness versus actually working through the outcomes, we've seen significant increases in the percent of partners that are not just coming into that first step, but getting to the second and the third step. And I called some of that out, one example or use case that we had in this last quarter in my prepared remarks. So we are definitely seeing that opportunity for us to play a role in that. I think it's similar to if you go back, but even at a much quicker pace, if we go back a dozen years ago around cloud, there was a lot of education before it kind of came to the monetization, we're seeing that happen at a much quicker pace now with GPU and/or these AI-enabled infrastructure products. So we'll continue to monitor that and see as people continue to move through that pipeline and getting really to working on those outcomes. As I mentioned, we played a pivotal role in that most recent use case that I mentioned in the prepared remarks.

And just as a quick follow-up, I noted that these deals are dilutive from a gross margin perspective, but how should we think about the cost to serve and overall EBIT margin profile for some of these AI deals?

Yes. They are quite low cost to serve because most of these are sold on a fulfillment basis. There's not a lot of costs associated with that, and it is also very efficient in terms of working capital. We aren't stocking these deals in advance; they are customized and processed very quickly through our balance sheet.

Our next question is from Samik Chatterjee with JPMorgan.

And maybe, Paul, if I can start on the first one, just in relation to what you're hearing from your customers about any visibility into the second half? And given their current sort of purchasing behavior, what are they telling you about any sort of demand drivers for the second half? And curious if you're seeing the same level of visibility that you see typically at this time of the year into the second half. Any thoughts around that? And I have a follow-up.

Yes, this is Paul. We haven't seen significant changes yet, and we typically provide guidance one quarter at a time. However, I can share some insights based on our discussions with customers. At the enterprise level, companies are preparing their budgets for the rest of the year. In contrast, the mid-market and especially small and medium businesses are currently more uncertain regarding opportunities, challenges, and price sensitivity. Enterprises are engaging in more thorough planning while SMBs are initiating discussions about their future needs. In uncertain environments, our company has a solid track record of navigating through challenges, and our global reach allows us to maintain good visibility on various activities. We are ensuring close communication with our vendor network and are actively engaging across our channels in different regions. Overall, things remain a bit fluid as we assess the situation, and we haven't observed any significant pull-forward in demand as we evaluate our current first quarter.

Got it. Got it. And maybe just a follow-up for Mike. Mike, you did mention for the 1Q guide that you're not assuming any GPU enablement deals as such for now. If you were to see some of those come through, would we expect the same sort of trade-off on gross margin that you had in 4Q, which is a slightly lower margin percentage on the gross margin side and then essentially being accretive to operating level. Is that sort of the way to think about the 1Q guide in terms of when you see those revenues come in?

Yes, that's exactly right, Samik. That would be the characteristics we would expect if we do capture some of those deals coming through.

But what I want to make sure in Mike's prepared remarks or what he spoke about, it was no material difference than what we've already seen. So we'll still be participating in that business in Q1. It's just that we're not seeing anything different than what we've seen and discussed over the last couple of quarters.

Our next question is from David Paige with RBC.

I know it's early, not sure if you'll be able to answer this, but there's been, I guess, a fluid situation with how tariffs are working and just geopolitics. I was wondering if that was baked into the 1Q guide and how you're thinking about 2026.

Yes. We definitely wouldn’t go through a quarter without hearing more about tariffs. This heightened tariff environment has been something we've been dealing with since the first Trump administration. I want to emphasize that we pass through these tariffs, so we’re not absorbing them. Additionally, in the U.S., we are the importer of record for only a small number of the products we purchase, which means the price is usually already included from the vendor. We keep a close eye on the situation because, as we've stated before, anything that could lead to increased inflation can affect demand, particularly in the more profitable SMB categories where sensitivity is higher compared to large enterprises, which seem less affected by tariff issues. We will continue to monitor it like everyone else.

Our next question is from Ruplu Katakaria with Bank of America.

Mike and Paul, you mentioned that the PC refresh cycle is ongoing. How long do you expect this to last? Additionally, how do you view the balance between client and endpoint solutions compared to advanced solutions in the first fiscal quarter and potentially throughout fiscal 2026? You've projected a gross margin of about 6.9% for the first quarter. What factors should we consider as this evolves throughout the year? I have a follow-up as well.

Yes, this is Paul. I'll begin by noting that we experienced double-digit growth in Q4. As we discussed in relation to 2025, the refresh was slightly delayed before accelerating. We achieved strong growth throughout the quarters, culminating in solid double-digit growth in Q4. I would characterize our position as being in the middle to the beginning of perhaps the latter half of the refresh cycle. There are still hundreds of millions of units that require replacement, suggesting that the refresh could extend well into 2026. According to our OEM partners, some have indicated that about 40% have not yet been upgraded. The market remains resilient, with a substantial portion still not refreshed in terms of Windows 11. Industry analysts estimate that there are still hundreds of millions of units in circulation. Regarding AI PCs and their refresh, we're observing that it remains in the middle teens. The key consideration revolves around price sensitivity, particularly as component prices increase, prompting us to explore other alternatives. We are examining potential variations in features offered in PCs, as not everyone may need a touchscreen or the same memory capacity. We have successfully navigated uncertain conditions, thanks in part to Ingram Micro's global reach, which allows us to address demand effectively across various regions. We have recently begun to see price increases impacting the market, but so far, this has not affected our demand.

Okay. Mike, as a follow-up, can you talk about your capital allocation priorities either in terms of debt paydown versus buybacks versus M&A? And also talk about areas of investment. I think you said average revenue per customer on Xvantage grew 14% sequentially. Does that factor out other factors like just the growth of the overall economy? Is that specifically related to the benefit of Xvantage? And if so, then is that an area that you continue to invest in?

Yes, this is Paul. I'll address the final question first, and then Mike will discuss the financials and capital allocation. To reiterate, self-service orders increased over 100% compared to a year ago, contributing to greater productivity across the ecosystem and an improved customer experience. Our average revenue per customer rose by 14% sequentially and 30% year-over-year. These statistics are specific to Xvantage and do not include overall company data for businesses not utilizing Xvantage. In the largest countries where Xvantage is operational, total headcount decreased, but both revenue and gross profit per go-to-market have increased. We are enhancing productivity, which is also linked to Xvantage. Lastly, the three phases of Xvantage involve creating frictionless and streamlined operations, driving operating expenses, focusing on demand generation and growth, and entering a phase in 2026 focused on profitable organic growth and more intelligent supply and demand matching. I’ll now let Mike discuss capital allocation.

Yes. Regarding capital allocation, we plan to stick to our current strategy, which I am quite pleased with. As mentioned in this earnings report, we repaid an additional $200 million of our term loan in February after the year-end, bringing our total debt paydowns to nearly $2 billion over the past few years. We have effectively reduced our debt while generating cash flow. While we are investing in Xvantage organically, we have not engaged in much mergers and acquisitions. We still have the financial capacity to pursue smaller acquisitions that have been our focus recently, as they don't require significant funds but add valuable skills or vendor alignment. This doesn't exclude the possibility of pursuing a larger deal if the right opportunity arises, but that hasn't been our primary strategy. From a shareholder return standpoint, we are proud to maintain our dividend payments since going public and have increased the dividend by about 2.5% each quarter, including for this quarter, which will be distributed in a few weeks. We are committed to enhancing returns to shareholders. In the longer term, if our ownership structure changes, we could also consider share buybacks. Additionally, we recently authorized a $100 million share buyback, primarily to repurchase shares from Platinum, which would occur alongside any future stock offerings.

Our next question is from Adam Tindle with Raymond James.

Paul, I wanted to start with the topic du jour on component and memory costs. Some of your vendors have been pretty explicit on their intention to revisit contract terms with channel partners. I think Cisco was pretty explicit in their prepared remarks and some of the others have followed with some of that. I wonder, based on the Q1 guidance here, it looks like gross margin is getting better. So I'm not seeing that guided in the numbers. But maybe you could talk qualitatively on what you're seeing in terms of the vendor OEMs and those contract terms with channel partners, any impact you're seeing or expecting from here?

Yes. Thanks, Adam. So as it relates to the terms, yes, there are multiple vendors, and it depends on what categories you're looking at, some are in terms of how long prices are good for. Some are end user dependent on a purchase order, pricing fluctuations. So yes, there are a number of different things, and we're used to managing that complexity and being able to do that. And again, I go back to my comments I made around one of the advantages of Ingram Micro is that our global reach. So as vendors are looking for a clean supply chain down to demand, meaning the end user, it comes back very quickly back into us and we can communicate to them. So we've got 'war rooms' right now going on to make sure we're looking at that demand. And back to my comments of the CEOs that I've been speaking with, which is we'll manage to what their contractual terms that they're trying to get out there because they're all trying to figure out what's their competitive advantage with regard to capturing share in this uncertain environment and kind of price increases. So we're sitting right in the middle of that. And again, the fact that we have 1,500 different vendors on a global basis and 165,000 customers globally, it allows us to look at what are the alternatives to other solutions at the same point.

Got it. Maybe just a follow-up. AI is the other topic and obviously driving upside in the quarter. I wonder, Paul, with the significant sales of GPU, your philosophy on capturing AI growth. And I mentioned that because it seems like you're participating in some of the fulfillment aspects. Some of the competitors out there go beyond that and do build and assembly and things like that in AI data centers. I'm wondering if you're inching your way in that direction or how you kind of think about investing in AI and where it makes sense to participate versus where it doesn't. And if I could sneak just one quick one in for Mike to clarify that free cash flow comment, the 30% combined of adjusted EBITDA for 2025 and 2026, I'm thinking that's implying that 2026 may be a cash use year, but I just wanted to clarify because there's a couple of different ways to do this.

Yes, I'll address that briefly before Paul discusses the AI aspect. We expect to exceed the 30% threshold for the next two years. We are working toward being cash flow positive, though not to the same extent as we did in the last quarter and fiscal year, considering our year-end results. The main factor to watch, Adam, is whether we receive buy-ins on a quarterly basis. However, we still anticipate being cash flow positive for the full year once everything is finalized.

We have expanded our focus. We've discussed GPU and its monetization, noting that it progresses from proof of concepts to high-end compute and moves downstream. Our Enable AI initiative plays a significant role here by helping partners not only understand but also sell and implement AI at scale, including aspects related to GPUs and monetization. We provide various services, and I shared some insights in my prepared remarks regarding specific use cases. Our approach is distinct from other markets as we consider how to capture both GPU monetization and GPU and AI infrastructure moving forward. Serving these needs costs less, providing a solid return on working capital and contributing profit. We are committed to supporting this initiative, leveraging our position within the ecosystem to seize opportunities. Moving ahead, we will enhance our services and capabilities to assist our customers in understanding, delivering, and servicing AI at scale.

Our next question is from Maggie Nolan with William Blair.

So there are a lot of companies and a lot of distributors talking about AI enablement and digital platforms. And I'd like you to maybe double-click on your competitive positioning and what, in particular, you think are the capabilities within Xvantage or elsewhere in the business that would be hardest for your competitors to replicate over the next couple of years?

Thank you for the question, Maggie. This is Paul. We have been on this journey for three years, focusing on three main areas. First, we developed a data mesh, which is distinct from a data lake, allowing us to utilize our infrastructure and information more effectively in terms of overall architecture. We believe that architecture is crucial. Initially, we ensured we had clean data in place. Secondly, we trained our 400 AI machine learning models over the past year, which enable us to engage in journey and process mapping, improving the delivery of AI agents moving forward. This is what we achieved with our Sales Brief Agents. We believe our architecture is fundamentally different; we are focused on building innovation rather than just integrating or connecting like traditional distribution has done. Ultimately, we envision intelligence and data as the foundation of a new business-to-business operating system. We will continue to innovate rather than merely integrate and connect our systems. Our approach is real-time and global, and we currently have 35 patents pending, with two already approved, highlighting our innovative efforts. We are committed to investing in the intelligence and data that will help drive our customers toward better, more efficient outcomes in their businesses.

Maggie, one other thing I would just add to that is also geographic presence. So these larger GPU deals that we're talking about are tending to happen probably more predominantly in North America and APAC regions and our presence across APAC and ability to serve that and actually have a global conversation with these OEMs that others would not be able to have as readily is another function of our footprint that is advantageous in this regard.

And the last thing I would say, Maggie, global but really a single pane of glass. So for me, a single pane of glass as we started this journey, you have hardware, you have software, you have services, and you have cloud, all in a single platform to be able to transact as opposed to having multiple different systems, multiple different people attached to it. So you can basically deliver an end-to-end experience through all things technology.

Okay. And then mix improvement in 2026, should we expect linear gross margin improvement quarter-over-quarter? Or are these large AI infrastructure projects going to introduce some lumpiness?

Yes, I can address that, Maggie. This is Mike. While we aren't providing guidance beyond Q1, our guidance suggests a significant sequential increase and also an improvement in gross margins on a year-over-year basis, which relates to how we anticipate the mix will develop, as I noted in my previous comments. If we were to encounter more large AI infrastructure and GPU deals that lean towards that, it might slightly dilute those margins; however, it would positively impact gross profit dollars and overall operating income dollars from those deals. That's the main factor I would point out concerning margin improvement in Q1. Looking ahead, we aim to drive the growth of advanced solutions and cloud faster than the market, while also growing client and endpoint segments in line with market trends across those categories. This is not a new objective, but we plan to continue on this path, which should also enhance margins over time.

There are no further questions at this time. I would like to hand the floor back over to Paul Bay for any closing comments.

Thank you for joining today's call. We're proud of the progress we are making and our Q4 performance and results. We exceeded the high end of our guidance in revenue and EPS, along with strong free cash flow generation at the highest quarterly level in more than a decade. As we look forward to full year 2026, we are confident that we will continue to successfully navigate the inevitable challenges in the market as we have done so in past cycles. To reiterate again, we have the people, the platform, and the programs to empower our customers in a new era of technology and look forward to continued execution and innovation into 2026. Have a great rest of your day.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.