Earnings Call Transcript - INGM Q1 2026

Operator, Operator

Greetings, and welcome to the Ingram Micro First Quarter 2026 Earnings Results Conference Call. As a reminder, this conference is being recorded. I will now turn the call over to Willa McManmon, Vice President of Investor Relations, for opening remarks. Please go ahead.

Willa McManmon, Vice President, Investor Relations

Good afternoon. Before we begin, I would like to remind you that today's presentation may include forward-looking statements within the meaning of applicable securities laws. These statements reflect our current views and expectations regarding future events, including, but not limited to, financial performance, strategic initiatives, market conditions and regulatory developments. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Actual results may differ materially from those expressed or implied in these statements due to a variety of factors, including changes in economic conditions, interest rates, competitive pressures and other risks detailed in our most recent filings and public disclosures. We undertake no obligation to update or revise any forward-looking statements to reflect new information or future events, except as required by law. In addition, today's discussion may include certain non-GAAP financial measures; reconciliations to the most directly comparable GAAP measures can be found in our earnings materials, which are available on our Investor Relations website. With that, I will now turn the call over to Paul Bay, our CEO.

Paul Bay, Chief Executive Officer

Thank you, Willa, and everyone who joined today's call. We delivered another strong first quarter in which we grew net revenue nearly 14% on top of a strong prior-year comparable and delivered non-GAAP earnings per share of $0.75. Gross profit rose by nearly 12% from last year, and operating leverage remained strong, resulting in over 20% growth in non-GAAP net income. All of these results were at or above the high end of our guidance. Advanced Solutions and Cloud led the growth, driven in part by large GPU and AI infrastructure deals we captured in North America and Asia Pacific in the back half of the quarter. We also had another quarter of strong growth in networking and servers. Cloud again grew double digits with particular strength in Infrastructure as a Service, and Client and Endpoint Solutions also grew with continued strong sales of PCs. Regionally, Asia Pacific grew at double digits and was our second largest region by net revenue. As I mentioned in prior quarters, India continues to make progress and performed to plan in the first quarter, including healthy top-line and margin growth, while Latin America continued to deliver outsized margins, both powered by our Xvantage platform. North America's double-digit growth was driven by Cloud and Advanced Solutions, which included a large GPU and AI infrastructure sale. The growth across all four of our regions underscores our unique global reach where we have the ability to serve more than 90% of the world's population, underpinned by a unified platform strategy at global scale. I am encouraged by our performance this quarter and the momentum we see ahead. Our investment in our Xvantage digital B2B platform has increasingly become a competitive moat. We made this investment ahead of the curve because we anticipated the shift now taking place across the market, where B2B customers increasingly expect the same speed, simplicity and personalization they experience in a B2C environment. We began the Xvantage journey by bringing together talent from some of the world's largest platform companies and combining that expertise with our deep industry knowledge. We then built a real-time data mesh and deployed more than 400 AI and machine learning models across the end-to-end customer journey. We have progressed from building the foundation to automating workflows and reducing friction to now scaling intelligence through capabilities like Intelligent Digital Assistant, or IDA, to improve conversion, optimize pricing and enable more proactive selling. Over time, we see further opportunity for AI to enhance margin quality, life-cycle monetization and operating leverage. Xvantage is not a tool or a marketplace. It is the operating system for B2B. It's a global real-time intelligence layer, powering end-to-end B2B execution as we transform from a traditional IT distributor into a platform company. Xvantage's differentiation begins with this architecture and the proprietary technology underneath it. We are pleased that four of our 35-plus patent-pending applications have been granted, recognizing and protecting the innovation already delivering value across our platform today. Our IP strategy is centered on solving the fragmented sales and fulfillment processes that define B2B commerce. Let me recap what these granted patents encompass. First, our vendor-agnostic framework uses our AI-driven architecture to integrate with vendors at scale, regardless of the format or underlying systems. This helps solve one of the most persistent challenges in B2B commerce by enabling real-time integration around inventory, pricing and product data across a highly fragmented ecosystem. Second, our dynamic SKU generation capability simplifies historically complex solution configuration, pricing and transaction workflows. What once took days or weeks can now be completed in minutes or even seconds, improving the speed, accuracy, scalability and customer responsiveness. Third, we were granted a patent for our configured and quote-to-order. Configure-to-order expands funnel creation through automation of complex configurable solutions that were once manual, generating high quote volume, allowing us to touchlessly convert orders through our automated quote-to-order capabilities. This powerful integration of AI throughout the sales lifecycle is helping drive materially stronger quote-to-conversion performance. Last, our email-to-order patent uses generative AI to convert unstructured customer emails and attachments into structured transactions. In the first quarter alone, it processed approximately 230,000 emails into orders, up 78% year-over-year, enabling more than $1 billion in sales with significantly lower manual touch. We are now leveraging this patent IP to enable other functionality for automating end-to-end workflow, like email-to-quote, further improving speed, responsiveness and overall customer experience. Taken together, the technology behind these patents is helping improve customer experience while lowering processing costs and increasing operating leverage across the channel. These innovations extend beyond individual capabilities and reflect how we are digitizing the whole transaction lifecycle, from automating vendor catalog injection, configuration and pricing to quoting and order execution through a unified AI-driven platform. With the rapid evolution of the AI market, we believe these investments position us well to navigate change and respond more quickly to capitalize on market dynamics. We are increasingly applying intelligence across core business processes as our AI models continue to learn, improve and scale. As an example, IDA and other AI capabilities delivered more than 153,000 proactive engagements in the quarter, helping customers convert more than $800 million in AI-led net sales during the quarter. Importantly, quote-to-conversion performance continues to accelerate with IDA-driven opportunities, converting at nearly four times our standard baseline. Xvantage is driving stronger engagement, improving the customer and associate experience and supporting better financial outcomes. And we are already seeing that translate into measurable results. We continue to see strong adoption of our self-service capabilities with more than 2 million self-service orders in the quarter, contributing to over 20% growth in average revenue per customer versus the prior year. We are also realizing meaningful productivity gains with both revenue and margin per go-to-market resource increasing as automation enables associates to redirect time for higher-value activities. We believe this is a strong indicator that digital adoption, automation and AI-enabled selling are driving greater efficiency and increasing operating leverage across the platform. Geographically, we continue to see proof points across markets. These examples reinforce that Xvantage is not limited to one region. It is a global operating model. We have moved from proving the model to scaling the model with further future expansion opportunities. In the first quarter, India and Latin America provided clear evidence that we are moving from adoption to performance. Through Xvantage-enabled capabilities, LATAM delivered the highest gross margin across our regions, up 69 basis points year-over-year. By shifting high-velocity SMB demand to self-service and automated quoting and embedding intelligence, our business in the region is scaling efficiently with improved outcomes. In India, Xvantage is providing more pipeline, increased proactive customer engagement, stronger revenue generation, higher quote-to-order conversion and more predictable performance, utilizing the platform. In India, IDA revenue grew more than 200% quarter-over-quarter. We are innovating across the company in other ways as we invest in our partners and build advanced AI competencies. On the vendor side, I am proud to say that we just achieved a specialization for AI apps with Microsoft. Using Azure AI services, we built AI-powered capabilities that help partners close customer yield through increased automation, including streamlining the statement of work generation and accelerating sales productivity. The specialization recognizes our professional services expertise in designing and developing AI solutions using Microsoft AI app and data platforms, which we can leverage on behalf of our partners to deliver more AI projects at scale. One of our key partners, Hans Mize, President of Data41, said about the designation and I quote, "Ingram Micro feels like an extension of our AI practice. Their specialized and validated expertise helps us guide our customers through the full journey from initial assessment to working proof of value and production deployment." This specialization speaks strongly to how we are extending our advanced services capabilities, including our ability to leverage AI with our partners to deliver technology outcomes to the millions of end businesses they serve each and every day. With this quarter's results and the continued momentum I just spoke about, as I look at the remainder of the year, I am confident that Ingram Micro will continue executing both our short- and long-term strategy by further differentiating as a platform company, regardless of the uncertainties. Our customers are at the center of everything we do, and we are grateful for them. And as always, I'm impressed by the talent and drive of our team who continue to deliver. With Xvantage enabling faster innovation, our path to securing our technology edge and AI delivering measurable outcomes, we are moving from proving the platform model to scaling it. It's an exciting time for technology and Ingram Micro's role in the ecosystem continues to expand as we embrace the opportunities ahead in this unprecedented era. And with that, I'll turn the call over to Mike. Mike?

Michael Zilis, Chief Financial Officer

Thank you, Paul, and good afternoon, everyone. I want to start by reiterating how pleased we are with our first quarter results, which met or beat the top end of each of our guidance ranges. The strong performance was widespread geographically with each of our core regions seeing double-digit year-over-year top-line growth in U.S. dollars, and with solid global growth in our three primary lines of business. Looking at the quarter in more detail, net sales of $13.96 billion were up 13.7% year-over-year in U.S. dollars and up 10% on an FX-neutral basis. We saw strong double-digit growth in both Cloud and Advanced Solutions. Cloud grew 25% year-over-year on an FX-neutral basis and that growth was actually 34% adjusting for the CloudBlue divestiture that closed in Q3 of last year. Advanced Solutions grew 14% year-over-year on an FX-neutral basis, driven by strength in server and networking. This also included continued large-scale enterprise deals in GPU and AI infrastructure product sets, some of which came in late in the quarter. As we discussed in past quarters, these deals come at a low margin but are low cost to serve. We don't typically stock for these deals, which provides for a strong return on working capital. Turning to Client and Endpoint Solutions, or CES, we saw nearly 8% growth on an FX-neutral basis, with strong demand for notebooks and desktops as the refresh cycle continues and AI PC penetration grows. As a note, this 8% growth is on top of what has been solid double-digit growth for CES in Q1 and all other quarters last year. Geographically, we had FX-neutral growth across all four of our regions led by just over 12% growth in both APAC and North America. North America net sales came in at $5.0 billion and APAC was our second largest region with net sales of $4.1 billion for the quarter. Both North America and APAC sales were driven by strength in Cloud, and both regions also benefited from large enterprise GPU and AI infrastructure projects I just mentioned. EMEA net sales of $3.9 billion were up 3.8% on an FX-neutral basis with growth across both Client and Endpoint Solutions and Advanced Solutions, and EMEA generated its strongest growth in cloud-based solutions. This was achieved while navigating around the challenges of the Middle Eastern conflict that started in the final month of the quarter. Finally, net sales in Latin America were up 10.1% on an FX-neutral basis, driven by growth in Client and Endpoint Solutions, notably notebooks and desktops, as well as strength in Advanced Solutions and cloud-based solutions. Before I get into more details on our results, I'd like to touch on memory supply constraints and their impact, which is a key ongoing factor in the IT industry. We are seeing increases in average selling prices, or ASPs, on certain products ranging from single-digit percentage points well into double-digit percentage points. Also, while it is understandably more difficult for us to quantify with precision, we see some instances of pull-forward of demand to get ahead of pricing. But there are other factors to consider as well. First, supply constraints are creating more extended lead times and backlog in said products. While more limited in frequency, we saw a few instances where projects are being indefinitely deferred simply because the product is not available. Second, in some limited cases for end users that have greater price sensitivity, decisions are being made to alter project scope or delay spending. Combined, we estimate the net positive impact of all of these factors on our year-over-year net sales comparison for Q1 to be approximately 2% to 3%. Back to my earlier point regarding pull-forward of demand, we have ongoing discussions with many of our vendors affected by supply constraints about potentially using our balance sheet for opportunistic inventory buy-in deals. While we have done some such deals, and we'll continue to evaluate such opportunities going forward, the impact of volumes in our first quarter results have not been material. Now getting into some further specifics on our first quarter results: gross profit came in at $926 million, up 12% year-over-year, and gross margin came in at 6.63% of net sales, down 12 basis points year-over-year. The mix shift towards lower-margin GPU and AI infrastructure projects drove an impact on margins of roughly 35 basis points compared to only about 5 basis points in the first quarter of 2025. Thus, excluding these deals, our Q1 2026 gross margins would have been roughly 7%. This margin performance was a function of growth in our higher-margin Cloud and Advanced Solutions offerings, which surpassed the growth of Client and Endpoint Solutions in this comparison. Q1 operating expenses were $703 million, or 5.04% of net sales, compared to 5.11% in the same period last year. Looking more specifically at our ongoing selling, general and administrative, or SG&A, expenses, our leverage improved year-over-year by 12 basis points. This year-over-year improvement in SG&A leverage was driven by operating efficiencies from cost reductions over the past year, the continued impact of Xvantage in driving leverage and productivity gains, as well as mix factors associated with lower cost-to-serve categories. And while we continue to invest in Xvantage and in the business, particularly in areas like Cloud and Advanced Solutions, we expect our continued optimization efforts will allow us to keep our SG&A expenses below 5% of net sales for fiscal 2026. Adjusted income from operations was $262 million, up 14% year-over-year, driven by our strong top-line performance and continued operating leverage discipline. Adjusted income from operations margin was 1.88% compared to 1.87% in the first quarter of 2025 as the lower gross margin from mix of sales was offset by the OpEx leverage improvements I just discussed. Non-GAAP net income in the quarter was $175.5 million compared to $144.2 million in Q1 of 2025, an increase of 22%, reflective of not only the strong growth I just noted in adjusted income from operations, but also reflective of reduced interest expense from our paydown of debt and more favorable foreign exchange impacts. First quarter non-GAAP diluted EPS came in at the high end of our guidance range at $0.75, an increase of 23% from our prior-year quarter. Moving on to our balance sheet, we ended the first quarter with net working capital of $4.4 billion compared to $4.3 billion to close the same period last year. This increase of only a bit over 2% is far less than the 13.7% increase in net sales year-over-year as our Q1 net working capital days came in at 23 compared to 29 days in the same period in 2025. This improvement in cash cycle reflects disciplined management of our terms with and payments to vendors, our efforts to optimize inventory levels and leveraging the capabilities of the Xvantage platform, which together more than offset a slight increase in collection days. As we mentioned in our earnings call in early March, we finished year-end 2025 with an extraordinarily low level of net working capital and therefore expected a higher-than-normal seasonal outflow of cash in Q1 of this year. So adjusted free cash flow was an outflow of $962 million, which reflects the factors I just noted, including the natural investment in working capital to fund double-digit net sales growth. While we don't formally guide on free cash flow, we expect free cash flow trends over the next one to two quarters to be more in line with seasonal norms. I'm also very pleased to note that in early March, we successfully completed a secondary offering of our stock, which further moved the ownership stake of our majority owner into public flow and included us repurchasing $75 million of stock directly from our majority owner. And today, we announced we are further expanding the repurchase program for future use. We also returned $19 million to stockholders through dividends paid during the quarter and today announced an increase in the next quarterly dividend of 2.4% sequentially and 10.5% over the prior year. We ended the quarter with $916 million in cash and cash equivalents and debt of $3.3 billion, bringing our net debt to adjusted EBITDA ratio to 1.7x to close the quarter, which has improved notably from 2.0x in the first quarter of last year and is reflective of our continued reduction of debt, including the $200 million of term loan we repaid during Q1. Going forward, we will continue to balance our overall capital allocation to ensure we are making necessary investments in the business and providing return to our stockholders. And to the extent we see opportunities to also continue improving our debt leverage, we will evaluate accordingly. Now shifting to our guidance for Q2 2026: we are guiding net sales of $13.6 billion to $14.0 billion, which represents year-over-year growth of 8% at the midpoint and is notable given the strong Q2 we had last year, in which we saw more than 10% year-over-year growth. From a category perspective, we expect Cloud to continue to lead the way with healthy double-digit year-over-year growth with particular strength in Infrastructure as a Service offerings, while we expect Advanced Solutions to also grow higher single digits with ongoing strength in servers, storage and cybersecurity. While we are not necessarily projecting outsized GPU and AI infrastructure projects in our guide, we will continue to participate in these projects. Client and Endpoint Solutions is also still in growth mode with notebook and desktop refresh continuing. But overall, we see year-over-year growth for CES at a more moderate lower single-digit pace. Finally, we have assumed the impact of broader memory supply constraints to have a similar impact in Q2 to what I noted earlier for Q1. We expect these growth trends to yield second-quarter gross profit of $905 million to $950 million, which represents year-over-year growth in gross profit dollars of 8% to 13% and also represents gross margin growth, both sequentially and year-over-year. We expect non-GAAP diluted EPS to be in the range of $0.68 to $0.78 per diluted share. Included in this guide is a potential negative impact of $0.01 to $0.03 per diluted share on our overall results from the volatile situation in the Middle East, where we have a relatively small but nicely profitable business. Even with this impact incorporated, our guidance calls for growth in non-GAAP diluted EPS between 11% to 28%, reflecting solid profit leverage and a continuing growth environment. Our EPS guidance assumes 232.7 million weighted average shares outstanding and a non-GAAP tax rate of 27% for the quarter. In closing, I'm very pleased with our execution in Q1, and we expect to continue our trend of strong year-over-year net sales growth in Q2. While memory shortages, rising ASPs, the supply-demand dynamics and the geopolitical environment are all fluid, we have a track record of navigating through uncertainty. Our broad geographic reach and breadth and scale of offerings, combined with our long-term partner relationships, uniquely position us to perform during such times. We've proven this in the past, and we are even better positioned today with real-time insights and capabilities provided by our Xvantage platform. With that, operator, we can now open up the call to take questions.

Operator, Operator

Our first question is from Katherine Murphy with Goldman Sachs.

Katherine Murphy, Analyst, Goldman Sachs

You highlighted some headwinds related to projects either being deferred or some more price-sensitive customers altering the scope as it relates to the current cost environment. I was wondering if you could provide some more color on either the types of products or the types of projects that are being most impacted here? And then I have a quick follow-up.

Michael Zilis, Chief Financial Officer

Yes. Katherine, this is Mike. I can start and Paul will add. I think if we're seeing this it's probably across a mix of products, but it tends to be more project-based, a little bit more on the Advanced Solutions area, and probably a little bit more geared towards smaller customers where there is a bit more price sensitivity. Large enterprise generally continues to invest. So it's across a spread of different projects. As we talked about where we're seeing ranges of price increases, the price increases from an ASP perspective have certainly been elevated on the PC space, but we also see that happening across server and storage and some of the components to a lesser degree. You see that less in networking and some other categories. So that gives you a little bit of a flavor where there would be more of that sensitivity.

Paul Bay, Chief Executive Officer

Yes. Katherine, this is Paul. I'd say we've seen it in pockets. There was one instance in a smaller country in Europe where they needed a specific configuration around PCs and the supply is not there for that specific rollout. It will eventually come; the question is when. We thought it was going to happen in Q1; it looks like it may be a quarter or two out.

Katherine Murphy, Analyst, Goldman Sachs

That's very helpful. And knowing that you only guide one quarter out, is there anything you can share based on these customer conversations given the demand backdrop about what the back half of the year may look like from an overall enterprise IT demand environment?

Paul Bay, Chief Executive Officer

Yes. So again, as you know, we only guide one quarter at a time. We're optimistic where we sit today and based off of our guidance that we've given for Q2 to reiterate our expectations: our Client and Endpoint Solutions business will grow at market, with Advanced Solutions and Cloud above market, and we saw that in Q1. We built that into our guide in Q2. Some potential tailwinds or opportunities with AI use cases are driving growth and some of the benefits we're getting. If you look from a customer perspective, we did see some pull-forward as Mike mentioned. It's more about enterprise and mid-market companies. SMB is still responding more to the near term. But we haven't seen a significant amount of pull-forward at SMB specifically, and we're still seeing resiliency in the business as we sit here today. For the back half of the year, we are seeing continued growth and refresh around PCs and AI PCs. So we feel pretty good about where we are and hope that continues into the back half of the year.

Operator, Operator

Our next question is from Maggie Nolan with William Blair.

Matt Dezort, Analyst, William Blair (on behalf of Maggie Nolan)

This is Matt on for Maggie at William Blair. Given the current environment, I'm wondering if you can provide some more color on what you're seeing change in terms of lead times and order dynamics that you alluded to with clients. How are they evolving budgets, if at all, are they shifting midyear given the rise in memory prices and inflation?

Michael Zilis, Chief Financial Officer

I can start on that. I think we answered that a little bit earlier. If you have a budget going into the year, there's a certain amount of spend, so as prices go up, we're seeing some reallocation where perhaps it's just a shift in scope to something a little bit less or a shift into a lesser product category. That's a demand dynamic. Some of that depends on how long it takes to get product. The situation in the Middle East is exacerbating shipping delays for those impacted regions. On top of that, OEMs are allocating product sets into higher-potential products that serve AI demand, which is driving constraints. So it is very dynamic depending on the product category and the customer. That gives you a bit more flavor of what we're seeing.

Matt Dezort, Analyst, William Blair (on behalf of Maggie Nolan)

Got it. And as a follow-up, congrats on the progress with Xvantage. I know you've alluded to the three phases—OpEx, demand generation, and now into profitable organic growth. Can you update us on progress in Phase 3 and how that's progressing so far in 2026? What is the true margin delta for a deal that is sourced and completed in Xvantage versus one of your traditional deals?

Paul Bay, Chief Executive Officer

Thanks, Matt. We continue to talk about the three phases and now it's about applying intelligence across the business. We have been training our 400-plus models for over a year now, and they're improving every single day as they continue to learn. We point back to IDA, our Intelligent Digital Assistant, and the active engagements we had, which were up 50% year-over-year. We're fine-tuning opportunities to be more margin-driven. Much of the growth we see in Cloud and Advanced Solutions is being fed through IDA, which is part of moving into that third phase of what we can offer. One of the questions we get is how much revenue is going through IDA: for the countries on Xvantage, which is 21 countries, revenue attributable to IDA is mid-single digits today. We have a lot of headroom and our expectation and commitment is to have that be double digits by the end of the year for the revenue in those Xvantage countries. We feel comfortable with the investments we've made and the proof points we're seeing from the quarter and into the current quarter.

Operator, Operator

Our next question is Erik Woodring with Morgan Stanley.

Maya Neuman, Analyst, Morgan Stanley (on behalf of Erik Woodring)

This is Maya on for Erik today. Two questions. First, given the degree of pricing increases we're seeing in the market today, is there any risk to your historical cost-plus pricing model? Could we see like-for-like margin compression given inflation throughout the device ecosystem, especially on the compute side? I have a follow-up.

Michael Zilis, Chief Financial Officer

This is Mike. Just as a general dynamic, price increases—similar to what we've seen with tariffs and other factors—are usually a pass-through for us. There is rapid elasticity of demand in the market. From our perspective, as we continue to distribute products and services, we're going to price according to market prices. We're not necessarily going to concede margin to capture sales; it's about our return-on-working-capital equation and driving the right returns and profit metrics for each sale.

Paul Bay, Chief Executive Officer

Maya, I'll add color. We've been through cycles of shortages and macroeconomic headwinds. Because of our broad vendor and product portfolio, we're able to offer alternatives and help mitigate price increases. We're working with vendors to provide bundles and better margin profiles when products are constrained, and we can automate recommendations on substitute configurations and alternative suppliers with Xvantage intelligence. Also, we're seeing some movement from on-prem to cloud, which we expect to continue into Q2. Our goal is to help customers solve business needs regardless of product availability—whether hardware, software, cloud or services—and that's where Ingram Micro's global scale and platform approach is an advantage.

Maya Neuman, Analyst, Morgan Stanley (on behalf of Erik Woodring)

Great. And that partially answers my second question: given the persistence of pricing inflation and the strength in generative AI, how do you think about the shift from on-prem to cloud as a long-term risk to Ingram's business model?

Paul Bay, Chief Executive Officer

I actually think it's a benefit to Ingram's business model. Our Xvantage platform and the investments we've made put us in a position to sell hardware, software, cloud and services in a single transaction. Excluding the CloudBlue divestiture, our cloud business is up 34% and we are guiding toward very strong cloud in Q2 as well. Solutions that were originally scoped on-prem are moving to cloud, and we still deliver multi-product and multi-service solutions. It's an opportunity because we've invested in these capabilities and we have strong hyperscaler partnerships to provide the services our customers and their end businesses want.

Operator, Operator

Our next question is from David Paige with RBC Capital.

David Paige Papadogonas, Analyst, RBC Capital Markets

I wanted to double-click on the Q2 net sales guide. Could you parse out what you're expecting by region? There was momentum sequentially across every region—how should we think about growth within regions?

Michael Zilis, Chief Financial Officer

David, we're pleased that all four regions grew double digits in U.S. dollars in Q1. As we look to Q2, we expect some of the same trends to continue. Asia Pacific has shown strength for quite some time and coupled with India returning to stable growth, APAC likely stands to lead the way. If we see additional GPU or AI infrastructure deals, those tend to be concentrated in North America or APAC and could create outsized growth in those regions. EMEA still shows growth, though we assume a potential small negative impact from the Middle East situation in our EPS guide, which creates some overhang on EMEA, but not enough to offset growth overall.

David Paige Papadogonas, Analyst, RBC Capital Markets

That's helpful. One more: you mentioned CES growing low single digits for Q2. Can you parse out networks, notebooks and mobile or smartphone?

Michael Zilis, Chief Financial Officer

We don't break out the CES subcomponents quantitatively, but qualitatively the two biggest sub-pieces are PCs and desktops, and mobility devices. We're still seeing runway in PC refresh and AI PCs, which contributed to the growth that Paul referenced. However, the compare on mobility is a bit harder since we saw quite a bit of mobility sales in the first half of last year, particularly in APAC. Smartphones are low margin and generally move quickly, so while the CES business is still growing, the mix and the compare drive the lower single-digit growth rate we guided.

David Paige Papadogonas, Analyst, RBC Capital Markets

Congrats on the great results.

Michael Zilis, Chief Financial Officer

Thank you.

Operator, Operator

Our next question is from Adam Tindle with Raymond James.

Adam Tindle, Analyst, Raymond James

I wanted to double-click on the Americas region and the AI infrastructure projects that are driving growth. This business has gotten a lot of attention from competitors. Maybe step back and talk about your capabilities around AI infrastructure. Remind us of this business and, to the extent you can provide any size, that would be helpful. Any aspiration over time to be more ODM-like or Hyve-like, or does it make more sense to stay in the supply chain lane?

Paul Bay, Chief Executive Officer

Thanks, Adam. To your last point, becoming an ODM is not in our plans today. We focus on enabling our partners and where the technology opportunities are. AI infrastructure often centers on GPUs and associated server, networking and storage product sets. Many of the large projects are for proof of concept or are bespoke builds for very large enterprises. We help facilitate those transactions. Over time, as everything becomes AI-enabled, it will touch many categories, but it's important to show participation in this space. It's a low cost-to-serve business for us and a good return-on-working-capital business. Our focus is on enabling our 165,000 solution providers globally through our Enable AI program, which has three growth tracks: awareness, execution and training, and driving outcomes. We're seeing partners progress through those phases, moving toward deployment and delivering outcomes.

Michael Zilis, Chief Financial Officer

To add, we don't break out the exact size of GPU and AI infrastructure sales, but the bulk of those projects fall in Advanced Solutions. There is some overlap into Client and Endpoint in the form of components, but the larger share is Advanced Solutions. As you may infer from the margin impact we described, it's been a meaningful growth factor and is growing faster than the average within Advanced Solutions. It's a profitable business even though it's dilutive from a gross margin standpoint because of the low cost to serve and low working capital associated with it.

Adam Tindle, Analyst, Raymond James

Got it. That's a good bridge into my follow-up. If Ingram Micro is growing top line 14%, historically EBIT grows faster than revenue. Yet here EBIT is growing more in line with revenue, and sequentially revenue is down mid-single digits while EBIT is down more. Given the positives around automation and Xvantage, shouldn't we be getting better contribution margin and operating leverage? What are the offsets and how do we get back to more operating leverage?

Michael Zilis, Chief Financial Officer

Good question. EBIT dynamics are a function of gross margin rate and OpEx leverage. We did see operating efficiencies—SG&A leverage improved by double-digit basis points, excluding restructuring—and Xvantage is driving productivity gains. If it were not for the GPU and AI infrastructure projects, we actually had a year-over-year uptick of nearly 20 basis points in gross margin. So the margin compression you observe is largely mix-driven from those lower-margin but low-cost-to-serve deals. From a net income and EPS perspective, we're seeing stronger-than-revenue growth—non-GAAP net income and EPS rose more than revenue percentage-wise—reflecting the benefit of lower interest expense and better FX. Our guide assumes continued OpEx leverage and improving mix trends, which should yield stronger profit leverage going forward.

Adam Tindle, Analyst, Raymond James

One last clarification on free cash flow seasonality. You noted an outflow in Q1. Do you expect to reach parity or positive free cash flow for the year? What does 'seasonal' mean here?

Michael Zilis, Chief Financial Officer

We see modest seasonality returning. We had an extraordinary low level of net working capital at year-end 2025, which created a higher-than-normal seasonal outflow in Q1. Historically, we have outflows in early quarters and stronger inflows later—Q3 often sees some inventory build for Q4 and Q4 typically generates significant cash. Last year was exceptional as a cash-in year. So while we expect modest outflows in early quarters, we expect cash flow trends over the year to be more normal. We would expect the ratio of free cash flow to adjusted EBITDA for the two-year period combined to remain north of 30%, which you can use as a directional guide.

Operator, Operator

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

Ruplu Bhattacharya, Analyst, Bank of America

Mike, Paul, as you look into the rest of fiscal '26, can you talk about the relative growth of Advanced Solutions versus endpoints? Specifically for endpoint solutions, what PC unit growth are you factoring in for the year? As you look at demand from SMB versus larger enterprises, is it trending as you had expected? Anything weaker or stronger than expected? And on the Advanced Solutions side, how are you seeing demand for server, storage and networking trending?

Paul Bay, Chief Executive Officer

We saw good growth in all the categories you mentioned in the quarter, and we built that into Q2 guidance. I'm pleased with continued momentum in PC refresh: PC growth was mid- to high-teens for the quarter, and desktop and notebook were high double digits last year. We continue to see networking, server and cybersecurity strength as well. We are building in solutions and bundle alternatives to mitigate availability constraints, and we see opportunities to shift some workloads to cloud where appropriate. Overall, those dynamics and the investments we are making informed our Q2 guide.

Michael Zilis, Chief Financial Officer

On CES, we're guiding to lower single-digit growth for Q2, but it's still solid. We don't break out unit guidance, but we see a mix of unit growth and ASP increases in PCs. AI PCs are growing but still represent roughly one-quarter of our PC base, so there's runway. Networking, server and cybersecurity in Advanced Solutions showed decent growth, and cloud continues to see healthy double-digit growth, particularly around Infrastructure as a Service.

Ruplu Bhattacharya, Analyst, Bank of America

Got it. Mike, can you talk a bit about OpEx and CapEx? You've had success with Xvantage—how do you see spending on Xvantage trending going forward? How should we think about overall CapEx and whether you have levers to drive OpEx lower over time?

Michael Zilis, Chief Financial Officer

Not much has changed on this front. We see another four to five quarters of elevated investment in Xvantage as we continue deployment and functionality rollouts, after which we expect a more steady-state level of spend. Much of the work now is deployment rather than design. We have deployed Xvantage in our largest countries so a majority of our revenue is now trading through Xvantage, but there is still a tail of additional countries where we can bring automation and efficiency. Those additional country rollouts and incremental functionality drive some near-term OpEx and CapEx, but over time, we expect those investments to produce operating leverage and productivity gains.

Operator, Operator

Thank you. This concludes our question-and-answer session. I would now like to turn the floor back over to Paul Bay for any closing remarks.

Paul Bay, Chief Executive Officer

Thank you for joining us today and for your continued support. We are proud of our Q1 performance and results. We are executing across the business to deliver continued growth and innovation. Our patented Xvantage platform is a clear differentiator and our investments ahead of the curve align with the rapidly scaling AI market. We are positioned well to change the IT distribution market, and we are energized about what's ahead. We look forward to updating you on progress next quarter. Have a great day.

Operator, Operator

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