Good morning. My name is Misty and I'll be your conference operator today. I would like to welcome everyone to the TD SYNNEX Third Quarter Fiscal 2021 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time for opening remarks, I would like to pass the call over to Liz Morali, Head of Investor Relations. Liz, you may begin.

Thank you and good morning to everyone. Thank you for joining us for today's call. With me today are Rich Hume, CEO; and Marshall Witt, CFO. Before we continue, let me remind everyone 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, including the benefits of the merger to our various stakeholders, IT spending, demand, supply, expenses and growth. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 8-K we filed today and in the Risk Factors section of our Form 10-K and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and related Form 8-K available on our Investor Relations website, ir.synnex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Marshall. Marshall?

Thanks Liz and thanks to everyone who's joined us today for the call. I will begin today by reviewing the legacy SYNNEX results and drivers for the fiscal third quarter ended August 31st. Given our merger close date of September 1st, all discussion and outlook for fiscal Q4 reflects a full quarter of combined TD SYNNEX, and we'll continue to use the SYNNEX fiscal year-end on November 30th going forward. Moving to the legacy SYNNEX fiscal Q3 results, I'd like to point out that year-over-year comparisons I will reference today are impacted by both the unusually strong performance we experienced a year ago given the rapid adoption of work and learn from home trends during the pandemic and the supply constraints currently impacting our industry. Revenue came in at $5.2 billion reflecting a slight decline from the prior year due to ongoing industry supply chain constraints. As we indicated during our June earnings call, we expected the impact from these constraints to fiscal Q3 revenue would be $150 million to $200 million. While demand in the quarter continued to be very strong, the impact from the industry supply chain shortages were higher than anticipated. While it's difficult to quantify with precision, we believe the impact to our Q3 revenue most likely came in between $200 million and $300 million. Demand in the quarter continued to be robust and fairly broad based, and we saw particular strength in commercial software, networking, security, and notebooks. Our manufacturing business results were consistent with expectations. Gross profit of $313 million increased $15 million or 5% compared to the prior year, and gross margin was 6% up from 5.6% in the prior year. Total adjusted SG&A expense was $144 million, down 3% year-over-year and represented 2.8% of revenue. Non-GAAP operating income was $168 million and improved by $20 million or 13% versus the prior year, and non-GAAP operating margin was 3.23%, up 43 basis points year-over-year. Q3 interest expense and finance charges were $26 million and effective tax rate was 25%. Interest expense was higher due to the pre-funding of $2.5 billion of bonds on August 9th. Total non-GAAP income from continuing operations was $112 million, up $15 million and improved by 15% over the prior year, and non-GAAP diluted EPS from continuing operations were $2.14, up from $1.88 in the prior year. Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of $4.05 billion and debt of $4.03 billion, which also reflects $2.5 billion of bonds related to merger, which I spoke to previously. Accounts receivable totaled approximately $2.2 billion, down 20% year-over-year and inventories totaled approximately $2.9 billion, up 7% from the prior year. Our cash conversion cycle for the third quarter was 32 days and improving by one day from the prior year. Cash used in operations was approximately $56 million in the quarter. We are pleased to report that our Board of Directors has approved a quarterly cash dividend of $0.20 per common share for the current quarter. The dividend is expected to be paid on October 29, 2021 to stockholders of record as of the close of business on October 15, 2021. Now moving to our outlook for fiscal Q4, which is reflective of the combined TD SYNNEX Company. Total revenue is expected to be in the range of $15 billion to $16 billion. Distribution revenue is expected to grow low-to-mid single digits year-over-year and in line with historical seasonal trends quarter-over-quarter, despite a supply chain headwind of approximately 4%. Our manufacturing business is expected to decline year-over-year due to a strong performance in Q4 of fiscal 2020. This business is lumpy and it's also experiencing supply chain constraints. Our guidance remains consistent with prior guidance, which is that we guide towards the lower end of expected outcomes for the manufacturing business. Non-GAAP net income is expected to be in the range of $242 million to $272 million, and non-GAAP diluted EPS is expected to be in the range of $2.50 to $2.80 per diluted share on a weighted average shares outstanding basis of approximately 96.2 million. Non-GAAP interest expense is expected to be approximately $40 million and we expect non-GAAP tax rates to be approximately 25%. Please note that these statements regarding our expectations for our fiscal fourth quarter 2021 are forward-looking and that our results may differ materially. I will now turn the call over to Rich.

Thank you, Marshall and good morning everyone. And thank you for joining us today. We've certainly accomplished a lot in the last six months. I am privileged to join you today on behalf of the new TD SYNNEX and our more than 22,000 coworkers around the world. Since our official day one earlier this month, we've been hard at work, rolling out our new organizational structure and laying the groundwork for our future combined company. We've announced our executive leadership team comprised of seasoned leaders from both legacy companies. And thanks to our robust planning and integration efforts, we have hit the ground running on post day one goals and objectives. However, we have much to do, and I look forward to sharing updates with you as we progress. We are energized by the positive feedback from our customers and vendors, and are well positioned to raise the bar on the value we provide to our partners. Those opportunities are reflected in our new name and logo. Our new name TD SYNNEX reflects and preserves the longstanding legacies of our two great companies. Our logo, the Nautilus, is a symbol of growth, expansion, and renewal. For us, we expect growth and expansion will occur in many dimensions, including the growth of our business and our partner relationships. We also announced our new shared purpose, mission, vision, and values for our coworkers, many of whom I have gotten the opportunity to get to know better in this past month. With each meeting, I come away even more impressed with their collective talent, motivation and commitment to excellence. Although still largely working remotely, we are united behind our vision of connecting the global IT ecosystem and unlocking this potential for all. As we enter our fiscal Q4, we have much to be optimistic about. Our role in the IT industry continues to increase in importance, our product and services portfolio is tied to some of the highest growth technology markets such as cloud, security, Big Data and Analytics, Internet of Things, mobility, and everything as a service. At TD SYNNEX, we have an incremental opportunity to offer our expanded portfolio to our more than 150,000 customers and expand globally as we bring our enhanced portfolio to the markets that we serve. From a macroeconomic perspective, we are maintaining the sense of cautious optimism as the recovery from our global pandemic continues to be uneven by geography and industry. For our industry in particular, we believe in the long-term drivers for IT spending, but continue to see a supply constraint environment for at least the next few quarters. For Q4, as Marshall noted, the distribution business is robust and on track for a normal seasonality from a sequential perspective and low to mid single digit growth year-over-year. We see strong demand across PC ecosystem products, advanced solutions, and next-generation technologies. We continue to see a significant backlog level on a combined basis. We estimate this impact to represent an approximate 4% headwind to revenue, though we still believe in a robust demand picture based on discussions with our vendor partners and customers. From a merger perspective, we are on track and committed to achieving $100 million of cost synergies and a 25% non-GAAP EPS accretion over the next 12 months. We are optimistic that we can exceed our year one accretion targets. As I mentioned at the beginning of my remarks today, now the real work begins. We are primed and ready for the task of integrating our two great companies and we'll leverage our wealth of experience in this area. As we contemplate changes and come to decisions on our integration journey, our focus is on establishing and maintaining a superior experience for our customers and vendor partners. Among our top objectives is the harmonization of various IT systems, applications and tools in the Americas. In closing, I'd like to thank all my TD SYNNEX coworkers for their dedication and focus during the lead up to our merger close and for their spirit of collaboration and participation as we move forward together. The opportunities ahead of us are boundless. I look forward to meeting with our investors and analysts in the coming month, sharing our vision of the future of the IT ecosystem and keeping you updated on our integration progress. We will now take questions. Operator?

Operator Instructions. The first question comes from the line of Adam Tindle with Raymond James.

Okay. Thanks. Good morning and congrats on closing the deal. I just wanted to start with some of the guidance that we're getting here, first on revenue in Q4. So I looked at the 8-K and thanks for giving that historical Tech Data information. I think Tech Data was about $11 billion of revenue in Q4 of last year. We know SYNNEX core was $6 billion, so combined $17 billion. But if we look at the guidance, it's $15.5 billion at the midpoint. Just wondering what I'm missing here. I know you've talked about some of the changes in Hyve and tough comps, but it's hard to explain the full delta based on that. Maybe you can touch on any dis-synergies that you're learning about at the vendor or customer level, if any?

Hey Adam, this is Marshall. I'll start and then Rich can chime in. Yeah, we're happy to provide it, keep in mind that those quarters legacy Tech Data are not our quarters in regards to November year-end measurement. So, depending on which quarter you pick, you will get a different outcome. I'd focus on Rich's comments around Q4 and the seasonal discussion and year-over-year discussions on growth rates, I think that's where you should focus on. As in my prepared remarks I did discuss, Hyve and its impact on Q3 and Q4. It's down year-over-year, and that's probably one of the elements that's skewing the overall relationship, but fundamentally from a distribution standpoint, the relationships are sound and pretty typical to what we've seen in the past.

Yeah. It's Rich, Adam. Good morning. I hope you're doing well. A couple of things: in the prepared remarks you heard that I stated low-to-mid single-digit for the distribution business, so you should take that as fact. Second, we are facing a 4% headwind due to supply challenges year over year or sequentially; the backlog is getting bigger for sure. Third, at the tail end of your question, we are not anticipating nor have we seen negative revenue synergies associated with our merger. In fact, as we commented at the time of the announcement, from day one and beyond we've seen actual use of complementary line cards by both sales teams, so we see those opportunities beginning to emerge.

Got it. That's helpful clarification. Thanks Rich. And Marshall, maybe just as a follow-up. You went over cash and debt levels. I just want to make sure I'm getting true current leverage levels on a pro forma basis. And if you could also touch on how you think about normalized free cash flow for the combined entity and capital allocation priorities, that would be helpful. Thank you.

Sure. That's a mouthful, but I'll try to cover all three. From a leverage standpoint, we still expect to be in the 2.5 to 3.0 times range. We are still completing the opening balance sheet review and will have better visibility after the quarter, but this is consistent with what we said when we announced the merger in March. From a cash perspective, you should expect pro forma free cash flow approaching $1 billion. Much of that is driven by the combined momentum of both organizations and the synergies we expect to realize, about $100 million in the first year and $200 million in the second. On capital allocation, we are building the organization from the ground up. We are only 28 days into the merger, but as we finish the quarter we will have a clearer picture for fiscal 2022 and will address it on our post-close Q4 call.

Yeah. Sounds like you have a lot of options. Thank you.

Your next question is from Shannon Cross with Cross Research.

Thank you very much. Rich, could you talk more about Tech Data’s growth and what you’re seeing in terms of sustainability over the last quarter, and could you give us some background, even going back a bit further, on the major trends you’re focused on for Tech Data as opposed to SYNNEX?

Yeah. So, my reflection would be fairly consistent with what we had seen on the legacy SYNNEX side. So, our industry and distribution and the business partner ecosystem have all benefited from the work from home scenario over the past year, and a year to year and a half in total. So, there's been some very positive trends there. While at the same time in the early phases of COVID, the datacenter category was slower for obvious reasons. There's a lot of project-based work that takes place there. And then, the next generation technologies as a service category, was very robust over the last year and a half timeframe. As we look forward, I believe that although demand is still exceedingly strong in the PC ecosystem, through time that will begin to moderate a bit based on that whole cycle, but we would anticipate seeing the data center category being more robust. In fact, we see it already moving forward as some of that pent-up demand begins to emerge and has to be dispositioned by the market. And of course, we'll continue to see accelerated growth in the next-generation cloud-as-a-service technology moving forward. So that's how I would summarize it, Shannon.

Okay. And then, on the financing business you recently added, can you talk a bit about the magnitude of what you see that growing to, or was this something that some customers were asking for and so, you decided it was a good use of capital. Thank you.

Shannon, this is Marshall. You broke up at the very beginning. Did you say financing business? For TD Capital?

Yes, I did.

Okay. Yeah. I'll start and then Rich can chime in. Certainly that's a growing aspect of both organizations coming together. We believe we have to be prepared to address the way the demand in the market is going to go. And we clearly know that we can take a portion of that risk on our balance sheet. We also know that we need to partner with others as we see that economic solution continue to be a meaningful part of what we need to do to satisfy our customers' needs.

So …

So, this is okay. Go ahead. Sorry.

No. Go ahead, please.

I was just saying, is this a response to the shift more and more to cloud and as a service and subscription and all of that, or was it something, I mean, the number of the hardware companies and your partners might've had financing businesses for years. So, I'm just wondering thought process. Thank you.

Yeah. So Shannon, I would comment both. Obviously, this is something that provides advantage to the core, but as we look forward to cloud and as a service, it becomes a meaningful part of the entire value proposition that customers are looking for. So they're looking for sort of an end-to-end solution, kind of think of it as almost a lifecycle type of thing. So, we do believe that the financing is a critical element to our go forward strategy.

And Shannon, I just add one more thing to that. Talking about early days in the merger, legacy Tech Data has a very robust solution that we're planning to deploy globally. So, there's a lot of momentum potential behind this offering.

Great. Thank you very much.

Your next question is from Jim Suva with Citigroup.

Thank you. In your prepared comments, you mentioned a 4% headwind. I just want to make sure that's solely due to component constraints and shortages, and that's a year-over-year number as opposed to quarter-over-quarter. Just help me clarify and understand if I'm off on that.

Yes. Jim, this is Rich. Good morning to you. A couple of things. So, first, it is a year-over-year number. Second, when we take a look at the backlog of the business, it continues to grow. Third, it's fairly pervasive. It's not limited to one technology or another. We have backlog in what I would call the PC ecosystem segment, the advanced solution segment as well, as well as our components business. So, I think, it's our best portrayal right now of how we are experiencing the supply constraints and backlog across the business. We're working to manage it with our vendors and customers as best as possible.

Your next question is from the line of Matt Sheerin with Stifel.

Yes. Thank you and good morning. Just again, regarding the constraints you're seeing, Rich, it sounds like they are across the board. Have you seen them get worse, and as you get into fiscal 2022, are you anticipating they will remain the same? Are you seeing any signs of easing there?

Yeah. So, Matt, our intelligence is as good as it is as we work with our vendor partners to get that insight. I would say that anecdotally the statements range from yes, there will be an impact to the first half of the year and it could continue to have some level of impact in the back half of the year. I believe they are improving the situation and my view is that they will continue to improve over time, but this will not be a light-switch flip; rather it will be a gradual, hopefully shrinking, reduction in the backlog as we move forward. Again, we're working very closely with each of the vendors to make sure we are providing clarity about our demands and where we are short, and working with them to help alleviate that over time.

Okay. Thank you. And a couple of modeling questions, Marshall, looking forward, one is just on gross margin. It looks like just from the Tech Data, financials that you provided, it looks like gross margin is similar, but I know there's a lot of mix shifts as seasonally for both companies. So, how should we be thinking about gross margin and SG&A? And as you proceed into fiscal 2022, can we get an idea of the cadence of that $100 million in synergies cuts, when we expect to see that?

Sure. Matt, as you know, we don't guide to gross margin, but I will say that the results from legacy SYNNEX for Q3 was positive. So, we were happy to see the results. We think that there is some confidence that that could continue going forward. And as you can see from the 8-K we filed with Tech Data, quarterly data that the margin profile between the two company from a gross margin perspective historically is pretty consistent. In regards to SG&A, it's a good question. A lot of our investments that both companies have been done historically have increased SG&A. But for the purpose of having good outcomes and returns going forward in the subsequent quarters, I would use a 3.5% to 4% range if you're just thinking about what that might look like for the rest of 2021 and then 2022. And then in regards to the cadence and how the $100 million plays out, we'll work to build that out. We do expect some lumpiness throughout the year. There could be some backend synergy momentum, and some lighter synergies earlier on in the year, but we'll figure that out. And when we talk to you at the end of our Q4 and part of our discussion on earnings, we'll give a little more sense of what that looks like for fiscal 2022 by quarter.

Okay. Great. And just lastly, Rich, if I could just ask: can you talk about what you're seeing by region? You said earlier there were uneven demand trends by region, and obviously you're much more global now that you're combined. Going forward, will we be able to see results by region and perhaps operating results by region as well?

Yeah. So, we will be publishing the results by region as we move forward, Matt. What I would tell you is this global picture of our work from home and it's fueling a pretty good opportunity that continues, is a global theme. And this idea of the data center having a bit of a pent-up view is also a global piece. I mean, obviously, COVID took the world home and now a lot of that data center capability is requiring more capacity or is requiring a refresh. And arguably there is a big pause in that for the first year of COVID, albeit that it is now recovering, as I had said earlier. What I would tell you where you see a little bit of uneven is when you run into pockets of pandemic concentrated issues. I guess a great example of that might be like India where not now, but in previous months, you see a big pause, or in some of the other Asian countries. So, I would say that the overall global picture is fairly consistent, but the short or long might be dictated by where a specific country is within the evolution of the pandemic.

Okay. Great. Thanks a lot.

It's clear Matt, that we have growth in backlog everywhere.

The next question is from the line of Ananda Baruah with Loop Capital.

Hey, guys. Yeah, congrats on everything and thanks for taking the questions. I have two quick ones. First, Rich, you mentioned, I think during the February/March Q&A, that the sales team is already starting to get value out of the combined line cards. Do you also expect that you could gain supplier share from key suppliers, and what might that dynamic look like? I have a quick follow-up for Marshall.

I hope I understand your question correctly. What we've seen very early on is that customers of legacy SYNNEX and customers of legacy Tech Data are interested in us supporting line cards that we historically haven't carried. It showed up on day one, when we had requests for items legacy SYNNEX carried that we did not, and vice versa. I think that's an early indicator that extending the line card will allow us to provide better service to our customers, which in turn should create sales and revenue opportunities over time. Right now these requests are coming while we aren't yet fully system-capable with each other's line cards, but we'll get there in a short period of time. Customer awareness is already pretty good about what the other side has, so I would expect this to be a good opportunity for us moving forward.

That sounds exciting. And I guess just to clarify my question was, because I remember at one point in time, in two tier, to some extent what's the dynamic where suppliers may apportion certain amounts of supply across the board in various proportions. And that if two tier distributors good over performers show that they consistently over performed to start and say, we get a portion more supply. And so that was really the question in that regard, is that a dynamic that still exists or was I misinterpreting it sort of from the time that I was aware of it. Thanks.

So, my view is, when vendors are constrained, allocation can occur and usually you try to be fair to all customers. In a constrained environment, suppliers will have to make allocation decisions. I would anticipate that if we have real demand in a steady-state environment, we'll get strong support from our vendors to fulfill that requirement. I'm pretty confident in that.

That's really helpful. Thanks for clearing that up. And Marshall, just real quick. Anything with regards to the debt paydown, cadence that we should calibrate our expectations to?

Yeah. Ananda, coming back to the question Adam had, same answer here. We are investment-grade rated, so we will be mindful of the balance and make sure leverage remains properly managed. We have committed to a target of 2 to 2.5 times leverage over the next 12 to 18 months. Depending on growth, free cash flow, working capital needs and other investments across the business, we will balance those factors, but our plan is to allocate the free cash flow we generate to debt reduction, reinvesting in the business and M&A opportunities, and the dividend we announced today, with our open repurchase program also part of that approach.

Awesome. Thanks a lot. Appreciate it.

You are welcome.

The next question is from the line of Ruplu Bhattacharya with Bank of America.

Hi. Thanks for taking my questions. Congrats on the quarter. I have two questions and I apologize if they've been asked; I just joined the call late. Rich, you've talked about cross-selling opportunities between SYNNEX and Tech Data, but I don't know if you've quantified any revenue synergy targets between the two companies. I think you've talked about $100 million in cost synergies, but with two large organizations I would expect there to be revenue synergies as well. Any thoughts on that?

Yeah. So, first, I agree with you that I believe we're going to have the opportunity to have positive revenue synergies as we move forward. Second, as a matter of form, when you create a business case as we had for our combined TD SYNNEX going forward, we didn't rely upon positive revenue synergies in that business case. I think that's a typical market paradigm because they're always hard to quantify. So we see them as a sort of an incremental opportunity as we move forward. And most important to us right now is to make sure that we're serving those needs. And as Marshall had indicated maybe we'll get closer to quantifying those as we look at our full year 2022 and moving forward. But as I said earlier, it's a great opportunity that we hadn't relied upon in the business case.

Got it, thanks. For my second question, can you talk about the Hyve business? It's a great business on the EMS manufacturing side. Under SYNNEX it was very significant, but given the size of revenues for the combined TD SYNNEX, it's probably less significant now, though still sizeable. What are your long-term thoughts on Hyve? Do you see it as an integral part of TD SYNNEX, or might it be a candidate for a spin-off or divestiture at some point? How integrated is it into the combined company, and what are your long-term plans for it?

Ruplu, this is Marshall. Yeah. It continues to be a meaningful part of our strategy today and going forward. As you know, we're still diversifying the customer base, building out and creating new solutions to help diversify our portfolio of what we provide to our customers. And then going forward, it's still going to be an important aspect of our go-to-market strategy and a very critical part of our success as an overall TD SYNNEX organization.

Okay, thanks. If I could just sneak one more in: Rich, before the merger, when you went private, you had laid out a digital transformation plan for Tech Data. Now that the two companies have merged, is that plan still in place regarding the spending and the steps in the process, or has it changed?

So first, we are fully committed to providing an outstanding customer and coworker experience by transforming our business digitally over time. That's a given. Second, relative to our TD legacy, we now have a whole new pool of assets to consider. The initiative will be maintained, and the solutions, tools, processes, IT, and capabilities we put forward will likely be combined differently as we leverage assets from both legacy companies. We are very excited about the customer experience going forward and believe we can unlock a lot of value by providing an industry-leading digital experience.

Okay. Thanks for all the details. And congrats again on the quarter.

Thank you.

There are no further questions at this time. I will turn the call back over to Rich for closing remarks.

Well, first, thanks to all of you for joining this morning. I'm very encouraged with our engagement. I would tell you that we're arguably now 28 days in, and as I look at our business moving forward, I could not be more excited about the opportunities that we have in front of us. The promise of being able to serve the business partner ecosystem with more value, the promise of being able to drive meaningful returns for our investors and shareholders are in sight and becoming clear to me. As we had stated in the prepared remarks, we had committed in the business case to 25% accretion. And as we kind of look at our crystal ball right now, we believe that we will overachieve that goal moving forward. So, our future from an overall customer, vendor, coworker and investor perspective is quite bright, and I'm very excited about the opportunities. So, thanks for your time and we'll be talking to you soon.

This concludes today's conference call. You may now disconnect.