Good morning. My name is Rob, and I will be your conference operator today. I would like to welcome everyone to the TD Synnex Second Quarter Fiscal 2022 Earnings Call. Today's call is being recorded. 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 statements about integration progress, synergies, strategy, capital distribution investments and our expectations for fiscal year 2022. 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 the related Form 8-K available on our Investor Relations website. 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 Rich. Rich?

Thank you, Liz. And good morning everyone, and thank you for joining our call. Nearly 10 months ago, we closed the merger to form TD SYNNEX. Through our first three fiscal quarters together, we have successfully generated over $46 billion in revenue and $8.61 in non-GAAP earnings per share, all while making great strides on our merger integration. I'm incredibly proud of our more than 22,000 co-workers and their tremendous efforts to accomplish these very impressive results. In March at our Investor Day, we were able to share with you our vision of the evolving IT distribution landscape and the opportunities to grow and deliver enhanced financial performance over the coming years. We presented our 4-pillar strategic framework along with key medium- and long-term financial objectives focused on investing in high-growth technologies like hybrid cloud, security, data analytics, and hyperscale infrastructure while strengthening our portfolio, expanding our global footprint, and digitally transforming our business. This strategy is underpinned by our role in the center of the technology partner ecosystem as a leading solutions aggregator. From this vantage point, and with the strong support of our best-in-class network of over 1,500 vendor partners, we are well positioned to continue delivering unrivaled technology solutions to our more than 150,000 customers. Our performance in fiscal Q2 further demonstrates the success we are having in the market, given our strong value proposition and industry-leading portfolio. In Q2, we grew revenue by 4% year-over-year assuming the merger occurred in the prior year if adjusted for FX and revenue policy alignment. This strong result was driven by robust demand for technology products and solutions to enable hybrid work, faster collaboration, enhance security and advance multi-cloud adoption. This is an exciting time to serve the technology ecosystem as the pace of change intensifies and our vendors continue developing products and services that enable companies and individuals to improve their agility, productivity, security, and profitability. We continue to see healthy demand for both endpoint and advanced solutions with revenue increasing year-over-year. In PC, the double-digit growth rate seen during the pandemic continued to moderate as expected. The supply-constrained environment that we've spoken about the past several quarters continued and was in line with our expectations. From a regional perspective, our America's distribution business experienced strong year-over-year top line growth. On a year-over-year basis, our hyperscale infrastructure business declined given tough prior year comparisons, but grew on an LTM basis consistent with our expectations. Our European business also grew year-over-year in constant currency, albeit at a more measured pace given the current economic and geopolitical conditions in the region. Before I pass it over to Marshall to further elaborate on our Q2 results, I wanted to provide an update on our merger integration activities. We continue to make excellent progress on harmonizing processes, benefits, and systems across TD SYNNEX as well as our optimization programs and synergy attainment. From an ERP systems perspective, I shared with you last quarter that the April-May timeframe would be important as we migrated a large portion of our Canadian business to the new system. I'm happy to report that the migration went extremely well, and we are on track with our project plans to transition our U.S. business. As we enter the back half of this fiscal year, we are extremely pleased with the progress we've made and the momentum we are experiencing in the market. I will now pass it over to Marshall who will provide some further color on our Q2 financial performance. Marshall?

Thanks, Rich, and thanks for joining us today for our call. In fiscal Q2, we delivered another strong performance with year-over-year revenue growth on a constant currency basis, gross margin expansion, healthy earnings per share, and strong cash flow from operations. This consistency in performance is a testament to the dedicated efforts of our global team and our agile, entrepreneurial, and resilient business model. Total worldwide revenue for fiscal Q2 was $15.3 billion, up 4% when adjusted for constant currency and the revenue policy alignment related to the merger. This is a stronger result than the 3% year-over-year adjusted growth rate at the midpoint of the Q2 outlook we provided last quarter. The growth was driven by strong performance in both core and high growth portions of the business. Euro devaluation accounted for approximately $500 million of headwind versus the prior year and an approximate $200 million incremental headwind versus our prior guidance. Our distribution business experienced growth across all regions excluding the impact of one large government project in APJ in the prior year. Gross profit was $956 million and gross margin was 6.3% compared to 5.8% for the prior year, reflecting a favorable product mix, a strong pricing environment, and solid execution. FX had a $31 million negative impact on gross profit compared to the prior year, primarily due to the devaluation of the Euro relative to the U.S. dollar. Total adjusted SG&A expense was $585 million, representing 3.8% of revenue and in line with our expectations. Non-GAAP operating income was $398 million up 18% versus the prior year, and non-GAAP operating margin was 2.6%, up from 2.2% in the prior year period. All three regions experienced improved profitability compared to the prior year. FX had a $10 million negative impact on non-GAAP operating income compared to the prior year, primarily due to the Euro devaluation versus the US dollar. Non-GAAP interest expense and finance charges were $46 million and non-GAAP effective tax rate was approximately 24%. Total non-GAAP net income was $262 million and non-GAAP diluted EPS was $2.72. Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of $522 million and debt of $4.1 billion. Our gross leverage ratio was 2.4 times and net leverage was 2.1 times. Accounts receivable totaled $7.9 billion and inventories totaled $8.4 billion. Our net working capital at the end of the second quarter was $3.6 billion, a decrease of $800 million from $4.4 billion in Q1. Our cash conversion cycle for the second quarter was 21 days, down three days from Q1 of '22. Cash from operations was approximately $1.04 billion in the quarter. This was partially due to some unwinding of the Q1 increase in net working capital to support revenue growth and strategic inventory purchases. From a shareholder return perspective for the current quarter, our Board of Directors has approved a cash dividend of $0.30 per common share. The dividend is expected to be paid on July 29, 2022 to stockholders of record as of the close of business on July 15, 2022. We also continue to repurchase shares and through the first two quarters of fiscal '22, we have repurchased approximately $53 million of our stock at a weighted average price of approximately $103. In line with our target of $100 million of share repurchases for the year, we have $347 million remaining on our three year stock repurchase authorization, which expires in July of 2023. Before I discuss our outlook for the third quarter, I wanted to take a moment to provide an update on our merger synergies. As Rich mentioned, our integration efforts are going well and we continue to make good progress on realizing our merger cost synergies. We are ahead of schedule and remain committed to achieving our targeted $200 million of merger cost synergies. As I've mentioned previously, these opportunities span a variety of areas, including optimization and efficiency improvements via the Legacy Tech Data GBO program, as well as traditional deal related synergies across the spectrum of IT systems, corporate costs, facilities rationalization, taxes and interest. Now moving to our outlook for fiscal Quarter 3, we expect total revenues to be in the range of $14.5 billion to $15.5 billion, which once adjusted for a currency impact of approximately $500 million and revenue policy alignment relating to the merger of approximately $300 million equates to a growth of around 10% at the midpoint on a year-over-year basis assuming the merger had occurred in the prior year. Non-GAAP net income is expected to be in the range of $241 million to $279 million. And non-GAAP diluted EPS is expected to be in the range of $2.50 to $2.90 per diluted share, based on a weighted average shares outstanding of approximately $95.5 million. Interest expense is expected to be approximately $45 million and we expect the tax rate to be approximately 24%. For the full fiscal year '22 we continue to expect non-GAAP diluted EPS of $11.15 to $11.65 per diluted. We are reaffirming this full year outlook despite an incremental $0.14 headwind from the devaluation of the euro since March. The total FX headwind for fiscal '22 versus the prior year is now approximately $0.32.

We will now take your question. Operator?

Yes. Thank you very much, and good morning, everyone. My first question, Rich, just regarding your commentary on the overall demand environment, you still sound fairly bullish. But could you give us a little bit more color on the PC moderation that you're seeing? Are you continuing to see that weaken, and it also sounds like supply is starting to open up there. And then relative to the comments you've made in previous quarters about expectation for on-prem infrastructure projects coming back and accelerating in the second half, are you still seeing that and hearing that from your customers?

Yes, Matt, thank you for your question. So first, when we look back to Q2 on a constant currency basis, we talk about the Advanced Solutions and Endpoint segment, and we talked about growth in both of those segments. In addition to that, I think we had a separate schedule for everybody to have a look at PCs and how they fit within our portfolio and profile. And to kind of move on to your second point, what I would say is the story remains consistent in the PC realm as what we had articulated previously, at least from our crystal ball, and that is that commercial PCs have some pretty good demand associated with them. The weakness, I think, in the overall scheme of the PC category would be in the Chromebook as well as the consumer piece, at least for the foreseeable future. And as you would have noticed from that schedule that we had incorporated in there, we're heavily weighted to the commercial piece. When you get down to the consumer segment and think about it in the grand scheme of our entire portfolio, it's a single-digit number, a mid-single-digit number estimated. So I think that the sentiment of the market, the PC providers have articulated that point of view, and we would reaffirm that that's the way we see it. As it relates to Advanced Solutions, certainly, the growth rates there have been higher than the endpoint segment, and we do continue to see good demand in that segment. And I do believe, as we had talked for a while since the beginning of the year, that through the pandemic, you had PCs launching with high demand, the Advanced Solutions sort of deferring. And now you're coming around to the moderation of PC and pretty good demand strength, if you will, within the Advanced Solutions segment. So that's how we see it.

Okay. And then as my follow-up, just regarding the inventory build that you had again in the quarter, up about $700 million sequentially, but you're guiding essentially, well, down slightly sequentially for the August quarter. Could you just explain that? And is any of that related to your Hyperscale business where you typically stage inventory or products ahead of any ramps?

Matt, this is Marshall, and thanks for the question. It's an equal balance between distribution and Hyve. But yes, it's the same demand forecast that we build up. You saw and we experienced in Q2 some of the higher margins and solid returns of some of that buildup at the end of Q1 for Hyve. We expect that same thing for the second half.

The one comment that I would make is, as we look at quarter, quarter, quarter, the supply chains continue to be volatile. We usually accomplish what we need to in the quarter. So we'll see ebbs and flows in working capital, I think, for the tactical frame. And then we're pretty comfortable with what we articulated in our Investor Day financial model for working capital once we move to sort of stabler grounds, if you will. But we do see these bumps in the road here and there that are typically a bit unusual if we were to be in a stable environment.

Your next question comes from the line of Ruplu Bhattacharya from Bank of America.

It looks like FX is an incremental $850 million to $900 million negative impact on the top line and about $0.14 on the EPS. So can you give us your thoughts on that and what is giving you confidence to keep the EPS guide for fiscal '22 unchanged? And what drives the operating margin improvement in fiscal 4Q?

Good question, Ruplu, this is Marshall. So yes, we feel really confident. Clearly, the $0.14 is a headwind. As we think about our Investor Day profile and looking at what we thought overall adjusted net revenues would be, we gave a guidance of 6% to 8%. We still feel good about that. And then we also gave an operating margin profile range of 2.5% to 2.7%. Same thing there, we feel really good about that. So the execution of the business, our belief that the second half of the year will still have, we'll call it decent to good IT spend growth that we're going to benefit from. The synergies that we spoke to that are also in the investor presentation give us that confidence that we can offset those FX headwinds.

Okay. Could you talk about the pricing environment? Are you seeing vendors continue to raise prices? And can you also talk about wage inflation and impact to your margins from that?

Sure. So first, in the pricing environment, certainly, over the last year to 1.5 years, there has been consistent price changes basically across the board based on all of the factors that we're familiar with, right? And I would speculate that we're going to continue to see those price changes as we move forward until sort of the inflationary impact starts to calm down. And I think that they'll ultimately start to abate. But for the tactical frame, I would suggest that, that will continue. As it relates to labor and how it impacts our business, so first of all, labor inflation is part of the overall inflation that gets translated into price across the entire supply chain. We carefully manage our compensation to make sure that we maintain competitiveness within the market. At the same time, we'll pass through those increments. I would consider them sort of marginal, if you will, incremental impacts to our overall pricing to end users. But they are there and we move reasonably quickly to make sure we get them passed through.

And Ruplu, just to remind you, our merit cycle falls into Q2. So you'll probably see a little bit higher SG&A relative to revenue. But the range for us is still in that 3.5% to 4% range on SG&A. And back to what Rich said, over time, we do find ways of offsetting that.

Maybe for the last one, Rich, if I can ask you a higher level question. So investors are concerned about the possibility of a recession in the U.S. or a slowdown in Europe. Have you seen any slowdown anywhere in any region? And can you talk about your visibility? Has it improved any since 90 days ago? And if you can also talk about the backlog, how that is trending and your expectations for that for the rest of the year?

Yes. Here's what we see. We take information from the global channel guide, which is the latest data available. The Americas market appears to be more robust than the European market, showing higher single-digit growth recently. In contrast, Europe has been relatively flat. This could be attributed to some geopolitical issues affecting the region. Meanwhile, we don't have current data for Asia Pacific, but we estimate a mid-single-digit growth rate there. Overall, this gives us a backdrop of the growth rates in our operational segment. Looking ahead, we believe there is strong demand, and we feel confident about our backlog, which is slightly down from the previous quarter as we anticipated. My expectation is that it will continue to decrease marginally each quarter. We gather our commitments from a bottoms-up perspective, focusing on feedback from each region, especially for the upcoming quarter and the rest of the year, which helps inform our guidance.

Your next question comes from the line of Jim Suva from Citigroup.

You mentioned hyperscaler was down due to difficult comps, and I think you said as expected. Can you remind us since we're now approaching the time period of kind of starting to lap the integration that you had with TD and SYNNEX, as we look ahead for the next quarter or 2, are those difficult year-over-year comps for Hyperscaler behind us? And what are you kind of seeing for the demand in your Hyve business?

Jim, you might recall in previous broadcasts, we always talk about Hyve being a lumpy business. We stage, we then release and stage and release, we find ourselves into cycles like that. And we are bullish and confident with the hyperscale sort of segment over time. The market data would state that, that category has double-digit growth rates, and we firmly believe that that's the case in sort of the sustaining time. I would tell you that when you think about Q2 and then going into Q3 and then potentially Q4, the business in total has the benefit of some easier comparisons. And then I would say that, that segment as well sort of falls into that category. So we have 1H for the entire business in that category that was pretty robust in FY '21. And then it sort of slowed in the back half of the second half of FY '21. And so yes, the comparisons get easier for both the total and that segment.

And then my follow-up question is on the inventory. Of course, you had to build this quarter than you mentioned that you're going to be working it down some for the August quarter. How do we bridge that versus the comments of supply chain challenges still existing today? Because if the supply chain challenges still exist today, you'd think inventory would be flattish or maybe it's seasonal because otherwise, people will say there's some weakening of demand to accrue your backlog there.

Yes, I will begin and then hand it over to Marshall. First, I want to highlight the significant improvements we've seen in working capital this quarter. From my perspective, these improvements are substantial. Recalling a previous point, as we navigate the supply-constrained environment, we remain confident in our working capital model shared during Investor Day. However, until we achieve stability in the supply chain, we will continue to experience some fluctuations. This situation is especially relevant in our Advanced Solutions segment, where inventory is held longer than usual. Regarding the hyperscale business, the challenges of falling behind on scheduled deployments due to various pandemic-related factors led to some continuity issues. Nevertheless, I believe that once we overcome these supply challenges, everything will stabilize, resulting in a strong working capital profile. Marshall, do you have anything to add?

No, well said.

Your next question comes from the line of Adam Tindle from Raymond James.

Rich, you knew I would ask about working capital if you got to me, but maybe I'll save that for my second question. On synergies, you talked about tracking ahead, would you characterize that as moving faster on your existing roadmap? Or are you finding new areas of synergy where the total synergy number may end up being higher? And I'm asking because you have that track record of overachieving on your slide. I'm just wondering if the total synergy number is maybe even tracking higher. And if you could talk about the composition of the remaining synergy, that would be helpful.

Adam, this is Marshall. So we're still committed to the $200 million as we enter into fiscal '23. And as in our prepared remarks, we're at $130 forecasted for the first year. No new elements to that, just moving quicker than we had expected throughout it. And I would just say, if you think about the way that, that synergy of $130 breaks down, it's roughly 60% SG&A and the rest is below the line in taxes and interest.

And then as it relates to additional synergies, typically, you put a project plan together, you go and you get myopically focused on executing that project plan. We're keeping our head down to make sure we get that accomplished. And then subsequent to that, I'm sure other opportunities will present themselves. We just don't have a quantitative point of view as to what that might be.

And maybe just as a follow-up, Marshall, I'll take the working capital question all the way up to ROIC instead. I realize you've reported a trailing 4-quarter metric, but it's just under 13% and the year-ago period was just over 21%. Maybe if you could talk about your view of where pro forma ROIC should ultimately go, do you think you can get back into the 20s? The key drivers to that and timing to get there would be helpful.

Adam, in our pro forma premerger expectation, we thought that ROIC on an adjusted basis would land somewhere around 11%. As we continue to march through and integrate the companies and get the full digestion of debt and equity, you'll see that 12.5% lands somewhere around that 11%. Adam, again, that's a forecast for the full year. And then from there, we believe, given all the things we do in terms of capital allocation and reinvesting back in the business and acquisitions and other opportunities, we should see that step back up. And Adam, you've heard us say this in the past, we always achieve to have a 300 to 400 basis point ROIC above our weighted average cost of capital. That continues to be the goal that we have in front of us.

Your next question comes from the line of Vincent Colicchio from Barrington Research.

Nice quarter, guys. Rich, I'm curious. Are you seeing a general increase in turnover or stabilization? And what does turnover look like for your top 100 leadership executives?

Yes, so if I talk about turnover, it clearly is elevated. To be candid with you, I'm really surprised relative to how successful we've been in our recruiting efforts as well. So I would say that we're a little bit higher than normal, but very manageable. As it relates to our top 100, we've been very stable. There have been no surprises that I'm aware of. And we have managed the team closely and stayed close to them, especially through the sort of the merger phase. I mean there's an incremental workload that is quite substantial. So we're asking people to do a lot more than the norm. But I feel as if we've got really good stability in our top 100.

And 3 quarters into the integration, client losses tied to diversification. Is that sort of in line with your expectations? Is it a meaningful number?

Good question, Vince. This is Marshall. It's better than expected. As you know, we have a highly complementary vendor line card and same with the customer base. If we think about the integrations we've done so far and the commentary Rich has had about the Canadian CIS migration, it's gone very smoothly with very little disruption. We expect the same thing to be the case for the U.S. migration. So very pleased with the overall result and significant upside, as we've mentioned in previous conversations around cross-sell once we get onto one platform.

Your next question comes from the line of Keith Housum from Northcoast Research.

Rich, when you were at the Investor Day, you talked quite a bit about TD Synnex migrating towards more solutions for your customers and netted down revenue. Perhaps talk about the progress made over the quarter and the demand for that that you saw this quarter.

During the Investor Day, we discussed high-growth technologies, including hybrid cloud and security, analytics, IoT, and hyperscale infrastructure. We also included AR/VR in the endpoint space. We expect an elevated growth rate for that category. The core distribution aspect is on track to deliver this growth. While we noted that Hyve has been a bit inconsistent, we anticipate it will achieve an elevated annualized growth rate. We are optimistic about high-growth technologies and are planning further investments to ensure we continue to provide additional value to our customers. Regarding netting, particularly with cloud technologies, as this segment grows, it will influence the overall netting, which Marshall may want to address further.

Yes, you're right. So we always try to reference gross billings when we think about the high-growth technology sections, and we'll do that going forward. But early on, two quarters in, relative to our Investor Day profiles and what we thought, we're very much in line with that.

In terms of your guidance for some puts and takes on what would take for, I guess, to kind of at the lower end of your guidance in terms of revenue and what will it take to come to the higher end of your guidance? So the big swing item in your minds? And what would take to actually be at the top of your guidance?

So I think I'll start, then maybe Marshall can discuss it and maybe a statement of the obvious. But if, in fact, we see a sudden downturn of demand based on the recessionary pressures that would have us find ourselves probably at the low end of our guidance. To get to the high end of the guidance, what would it take? Just one thing comes to mind, right, is that a significant release of supply to be able to sell through a bigger portion of the backlog. And obviously, you think about demand, but if demand is constrained by adding to the incremental demand is constrained by adding to the backlog, then that would be a tougher put. But I think a bigger release of supply would be helpful to get us to the higher end.

And we don't see anything likely this quarter, do we?

It's difficult to make predictions. Earlier, I mentioned how the demand for PC products spiked at the beginning of the pandemic, while demand for advanced solutions has increased. Matt noted that our hope is for the PC segment to stabilize, and it seems to be heading in that direction. While anything is possible, we maintain a strong relationship with our suppliers. Once we receive updates from the regions, they coordinate with our vendors to ensure we have the necessary supply. Currently, our outlook reflects our best judgment, and any unexpected positive developments would be welcomed as pleasant surprises.

Your next question comes from the line of Ananda Baruah from Loop Capital.

I guess I have two, if I could. Rich, I don't think I heard you in any of your answers give what your consumer exposure is. So I'd love that. And if you did, I apologize for the repeat questions.

Yes. So if you take a look at the charts that we had included in the pack, we had a special emphasis or special insight, if you will. So if you think about the consumer piece, sort of stand-alone, you could think about it as being a sort of mid-single-digit percentage of our total overall portfolio.

So it's really small at this point.

Well, yes, I mean it's mid-single digits. So I think that the whole PC category, if it calibrates the pie, it's pretty well calibrated to the reality. So you can think of the whole PC category being 20 percent-ish. And then the consumer piece being a percent of that which gets us to 5% of growth.

What about the legacy businesses for each company? Legacy Tech Data had some exposure to handsets mainly in Europe, and legacy SYNNEX had significant consumer and retail exposure in North America. Are both of those minimal at this point? So, the consumer exposure is largely on the PC side right now?

Ananda, this is Marshall. Yes, we still have legacy SYNNEX, New Age Electronics, a great business performing well. And on the legacy Tech Data side, we've got, you call it, consumer-related mobility in Europe.

And that's performing consistent with expectation as well.

And any sense, Rich, if we see, or Marshall, if we stack those to the PC consumer, like where that would sort of land for the company, kind of what consumer exposure would be overall as a percentage of revenue?

So you're asking about the impact of including mobility in the PC category. I don’t have the exact figure at the moment, and I wouldn't comment on it, but I don’t believe it would be very significant.

Rich, regarding your comments about the strong IT spending environment in the second half of 2022, what are your thoughts? I would like to understand your perspective on the overall theme of customer behavior, considering the macro indicators that everyone is monitoring. It appears that commercial spending remains robust. Marshall, as the CFO of SYNNEX, you closely observe these macro indicators. What are your observations and experiences regarding the overarching theme from your customers? While commercial demand seems stable, the macro indicators present a different picture. You conclude that IT spending will be solid in the latter half of the year. Any insights you could provide would help clarify what your customers might be experiencing based on your interpretations.

Yes, I'll start. I don't mean to repeat myself, but we have a really strong infrastructure. The Advanced Solutions category is facing challenges related to supply and backlog, particularly with a noticeable weakness in the consumer segment. We highlighted this trend at the beginning of the year, noting that we expected good demand for PCs in the first half, with an anticipated acceleration in the Advanced Solutions segment. However, we also predicted that in the latter half, we would see a slowdown in PC demand, paired with strong demand for Advanced Solutions. That is what we are currently observing. Additionally, the high-growth technologies, such as cloud, analytics, IoT, security, and hyperscale, are showing strong growth rates and are becoming increasingly significant to our business over time. Therefore, from the perspective of end-user demand, we see robust activity in high-growth technologies, the project-based business within Advanced Solutions, and a moderation in PC demand.

At this time, there are no more questions. This concludes today's call. Have a nice day.