Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TD SYNNEX Second Quarter Fiscal 2023 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'd like to pass the call over to Liz Morali, Head of Investor Relations. Liz, you may begin.

Thank you. Good morning, everyone, and 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 you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, including statements about strategy, demand, plans and positioning as well as our expectations for future fiscal periods. 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.

Thank you, Liz. Good morning, everyone, and thank you for joining us today. The second quarter proved out the resilient business model we've been highlighting over the last several quarters as we saw a continuation of many of the trends from the February quarter. Our unparalleled line card and diversified portfolio allowed us to realize growth in advanced solutions and high-growth technologies, while year-over-year growth rates for End Point Solutions were impacted by short-term weakness in the demand for PC products post-pandemic. We expect this PC demand decline to abate over time as customers upgrade an aging install base of devices, allowing them to run the latest operating environments and leverage key security features. We're encouraged by the improving macroeconomic sentiment and stable supply chain conditions that are mostly back to historical profile levels. Although the pace of the recovery remains uncertain, we believe that gross billings and net revenue in fiscal Q2 and the outlook for Q3 represent the trough levels for End Point Solutions. The breadth of our technology offerings again proved to be a differentiator for us as we were able to offset deeper-than-anticipated declines in End Point Solutions technology demand with growth in Advanced Solutions and High Growth Technologies. Our teams delivered solid execution, shifting to pockets of growth. On a year-to-year basis, we believe we maintained our overall market share position in the Americas, while growing market share in Europe. The resilience of our business model along with strategic investments that we have made augment our capability in the fastest-growing areas of the market and helped us to expand margins in the quarter. Working capital improved with lower revenues, which is a reflection of the countercyclicality of our business model. From a regional perspective, the Americas experienced the largest impact from the post-pandemic decline in demand, with year-over-year declines for PC ecosystem products. America's Advanced Solutions saw continued growth, driven by demand for cloud and data center-related technologies. From a customer perspective, declines were primarily in the largest customer segment, while SMB and MSP customer segments have grown. Europe continued to show resilience with smaller declines in the End Point given our broad technology footprint and diverse product line, including mobile phones, and strong growth in advanced solutions offerings and specialized solutions. The Asia Pacific, Japan region also saw strength in high-growth technologies and specialized solutions, partially offset by smaller declines in endpoint solutions. At a company level, we continue to see solid momentum across the high-growth technology areas that we've chosen to focus on, which include cloud, security, data, AI, IoT, and Hyperscale Infrastructure. These areas continue to see growth in the low teens on a year-to-year basis. Our customers are prioritizing projects in these areas, given the critical nature of these IT investments and their strategic importance in minimizing cyber-attacks, enabling digital transformation, and driving cost optimization. Investing in these technologies is one of our four strategic pillars and foundational to our evolution from a traditional distribution partner to a solutions aggregation and orchestration partner. Let me take a moment to provide some perspective on the steps we've made towards our goals in this area. We are well into the solutions aggregation phase where we build, integrate, and facilitate edge-to-cloud IT solutions for our customers. Our role is to help our customers solve complex market challenges by aggregating multi-vendor solutions and delivering easily deployed business outcomes. We do this through our solutions factory methodology where we build comprehensive repeatable solutions that includes some combination of hardware, software, and cloud licenses. A recent example of this involved an IT solution provider and a consulting firm that wanted to provide a better backup solution for their clients. Maintaining warranty and software support on proprietary backup appliances can be costly for end users, and they wanted to begin recommending pure cloud backups where applicable. This provider was able to utilize the TD SYNNEX solution factory and our cloud-based click-to-run solutions along with provisioning a preconfigured cloud solution built by TD SYNNEX within minutes. This enabled the provider to deliver a solution to their end users more rapidly, while reducing configuration and deployment process times by 75%. We have many examples like this and currently have over 75,000 of these solutions deployed, including offerings for software-defined data centers, hybrid cloud, hyper-converged infrastructures, analytics, and security. We look forward to continuing to share updates with you on this important work. Now, moving on to our merger integration efforts. As we approach the two-year mark since we became TD SYNNEX, I'm pleased to report that we have realized our goal to achieve $200 million in merger-related cost synergies, ahead of schedule. This is an important milestone and it is a result of much hard work and effort by the teams across the company. As we move forward, we expect to realize an additional $50 million in cost optimization over the next several quarters. From an ERP systems perspective, we have made additional progress toward the completion of transitioning the Americas business to one system. Approximately 80% of our Americas business is now on CIS, and we remain on track with our transition goals. Importantly, this progress opens the door to realizing merger-related revenue synergies and to continually enhance our business. While we know that some revenue synergies have already begun to be realized, we believe this remains a more significant opportunity toward the end of 2023 and into 2024. This month, we were honored to receive our updated Fortune 500 rating, being named number 64 on the list for 2023. This is a testament to the strong relationships that we retain with our customers and vendors. During Q2, we were privileged to be recognized with several awards, including being named HP Partner of the Year, North America Distributor of the Year by Dell, HPE, and Veeam, in addition to other regional awards. We also had the distinction of having 19 of our leaders recognized by CRN as top women of the channel last month. A well-deserved achievement and recognition of their significant contributions to our company and industry. We are proud of their achievements and continue to be committed to gender diversity as part of our overall DE&I strategy with the goal of increasing the representation of female core workers to 40% of leadership roles by 2030. We also closed on several new vendor partnerships during the quarter, including Gong, an AI-driven revenue intelligence platform, and GitLab via an exclusive partnership to address DevSecOps and application modernization in Asia Pacific, Japan. These wins are indicative of our investment and commitment to grow in new technology areas, enabling us to continue offering our customers the most complete portfolio in the industry. Since the beginning of the fiscal year, we have added nearly 100 new vendors to our line card. In closing, as we contemplate fiscal Q3, while there remains some uncertainty in the macroeconomic environment, we are encouraged by the early signs of stabilization. With the resolution of the US debt ceiling, reduced banking sector concerns, and a serviceable supply chain. We expect PC ecosystem demand declines to reduce following the past couple of years of intense buying by our customers and driven by the factors I mentioned earlier. We remain well positioned to navigate the demand environment as highlighted by our performance this quarter, and we believe that the long-term drivers of IT spending remain intact.

Thanks, Rich, and thanks to everyone for joining us today. Our earnings and cash flow profile remained strong this quarter. We delivered non-GAAP EPS of $2.43 per share within our previously guided range and generated over $700 million of cash flow from operations for the quarter, demonstrating the countercyclical nature of our business model. Our Q2 revenue performance was at the low end of the outlook range we provided in March and is the result of a demand environment that varied greatly between Endpoint and Advanced Solutions Technologies. As customers prepared for the rapid shift to hybrid work over the past few years, growth for PC ecosystem products was well above historical trends. As Rich mentioned, demand for Endpoint Solutions is now declining, but customers are digesting the increased investments made over the past couple of years. At the same time, advanced solution technologies continue to see strong demand as customers focus on projects for data centers and continue to prioritize their cloud migrations. Given our broad portfolio and progress in high-growth technologies, we were able to leverage the areas of growth in Q2, increasing our market share for these technologies in North America and Europe. Worldwide gross billings were $18.7 billion, down 4% in constant currency, while net revenue was $14.1 billion, down 7% year-over-year in constant currency. Given that a greater percentage of our sales came from Advanced Solutions in the quarter, more of the revenues were shown on a net basis in the quarter. If normalized for these additional gross-to-net adjustments, which primarily occur in Advanced Solutions, the year-over-year net revenue decline in constant currency was 4%. We continue to see solid growth in the high-growth technologies of cloud, security, data, AI, IoT, and hyperscale infrastructure. Collectively, these areas grew in the low teens on a year-over-year basis and represented greater than 20% of our gross billings in the quarter. Non-GAAP gross profit was $969 million and non-GAAP gross margin was 6.9%, up 45 basis points year-over-year. The improvement in gross margin was driven by a mixed shift to Advanced Solutions and high-growth technologies. Total adjusted SG&A expense was $593 million, representing 4.2% of revenue, up $8 million year-over-year as we continue to make investments to enhance our capabilities in the strategic growth areas of the market. We expect SG&A expenses as a percentage of net revenue will return to the 3.5% to 4% range in the second half of fiscal 2023 as we began to realize the cost optimizations that Rich mentioned earlier. Non-GAAP operating income was $376 million, down 5.6% year-over-year, and non-GAAP operating margin was 2.7%, up 6 basis points year-over-year. On a constant currency basis, non-GAAP operating income decreased 5% year-over-year. Q2 non-GAAP interest expense and finance charges were $72 million, $4 million better than our outlook, and the non-GAAP effective tax rate was approximately 24%. Total non-GAAP net income was $229 million, and non-GAAP diluted EPS was $2.43, within our guidance range. Non-GAAP EPS for the quarter was down 11% year-over-year, and excluding the impact of higher interest expense and FX translation, it would have been down 2% year-over-year. Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $852 million and debt of $4.1 billion. Our gross leverage ratio was 2.3 times, and net leverage was 1.8 times, in line with our investment grade credit rating and approaching our previously communicated target of 2 times gross leverage ratio. Accounts receivable totaled $8.4 billion, down from $9.4 billion in the prior quarter, and inventories totaled $7.8 billion, down from the $8.4 billion in the prior quarter. Net working capital at the end of the second quarter was $3.8 billion, down from $4.2 billion in Q1 due to declines in AR and inventory and partially offset by a decline in AP. The cash conversion cycle for the second quarter was 24 days, down two days from quarter one, which was consistent with expectations and typical seasonal patterns. Cash from operations in the quarter was $708 million, and free cash flow was $677 million as the business demonstrated the benefits of its countercyclical balance sheet. During Q2, we returned $93 million to shareholders via dividends of $33 million and share repurchases of $60 million. For the quarter, our board of directors has approved a cash dividend of $0.35 per common share, which equates to a dividend yield of approximately 1.5% payable on July 28, 2023, to stockholders of record as of the close of business on July 14, 2023. As Rich had mentioned, we are happy to report that we met our merger-related cost synergy target ahead of schedule, realizing $30 million of incremental savings and over $200 million cumulatively. Despite our success in achieving merger synergies, there's more work to do to optimize our cost structure, especially given the unprecedented swing from strong market momentum exiting fiscal 2022 to the year-over-year declines in revenue for the first half of fiscal 2023. Over the next three quarters, we will be pursuing cost optimizations that will drive SG&A costs lower by approximately $50 million on a run rate basis. The cost savings will, in part, be enabled by the integration of our two ERP systems into one enterprise platform in the Americas. This opens up our full capabilities to dynamically manage and respond to where the market is going and provides us with confidence in realigning our cost structure to market conditions, and to fully leverage cross-sell revenue opportunities. So with this as the backdrop, let me now share our outlook for fiscal Q3 and high-level thoughts regarding Q4. We believe we will continue to see demand for PC ecosystem products improve and believe that fiscal Q2 and Q3 represent the trough levels for Endpoint Solutions, gross billings, and net revenue. For fiscal Q3, we expect gross billings of $18 billion to $19.3 billion, representing a 7% decline on a year-over-year basis in constant currency at the midpoint. We expect total revenue to be in the range of $13.5 billion to $14.5 billion, which equates to a 10% decline year-over-year on a constant currency basis at the midpoint. Our guidance is based on a euro to dollar exchange rate of 1.09. Non-GAAP net income is expected to be in the range of $206 million to $253 million, and non-GAAP diluted EPS is expected to be in the range of $2.20 to $2.70 per diluted share based on weighted average shares outstanding of approximately $93 million. Non-GAAP interest expense is expected to be approximately $72 million, and we expect the tax rate to be approximately 24%. We believe market sentiment reflects a modest recovery beginning towards the latter part of Q3 and continuing into Q4 and would expect to see a seasonal sequential improvement in revenue of approximately 8% in Q4, as well as easier compares as we enter fiscal 2024. As a reminder, in Q4 of fiscal 2022, we had a benefit of approximately $0.33 to non-GAAP EPS due to high margin recoveries, which we do not expect to repeat. In closing, I'd like to provide some comments regarding capital allocation. Given strong free cash flow generation in Q2, and our continued confidence in generating over $1 billion in free cash flow for fiscal 2023, we are focused on deploying cash opportunistically. We returned $241 million of capital to shareholders in the first half of the year and expect to increase that pace for the back half of the year by approximately $100 million, bringing our expected capital return for the back half of the year to approximately $340 million. And the total for fiscal 2023 to $580 million. We will continue to be opportunistic with regards to capital allocation while adhering to the general framework we have previously communicated to the market.

Thank you. Our first question is from Adam Tindle with Raymond James. Your line is open.

Good morning, Rich. I wanted to begin with a macro question. Reflecting on the unexpected end to your largest customer's March quarter and their significant forecast reduction, investors are curious about whether the revenue weakness you've observed is linked to that March data since it falls within your reporting period. Have trends continued to decline, or can you provide insights on April, May, and how June is looking? I would appreciate any information on that. I also have a follow-up regarding cash flow for Marshall.

Sure. So first of all, obviously, we were to the low end of our revenue guide for the second quarter. The demand in primarily the PC ecosystem or Endpoint Solutions were a little softer than we had anticipated. We did have some offsets from the Advanced Solutions business and high-growth technology business, as it was stated in our prepared comments. We do see a little bit more volatility month-on-month as we moved through Q2. I would say that it was bumpier lows and highs relative to what we might see. So it felt as if it was a little bit more volatile. I think Adam, that this continuation of realigning, if you will, the PC ecosystem inventory across the entirety of the supply chain was perhaps a contributor to those Endpoint Solutions volumes being a little lower than anticipated. As we have stated, our view for the remainder of the year is that we'll see lesser declines in Q3 and Q4 moving forward, but we do believe that that digestion continues. As you know, as we move through time, there still are some reasonably tough comparisons; they get easier as we move into next year. So we think that clearly, there is improvement on a year-over-year basis moving through time, it's still sort of a declining environment with lesser and lesser declines as we move forward in time. So that's kind of the summary.

Okay. That's helpful, Rich. And maybe, Marshall, as a follow-up, acknowledging cash flow very impressive in the quarter. And your decision to talk about deploying cash opportunistically, if I recall, it's been a little bit more programmatic on share repurchases and smaller in the past. So first part of that question would be maybe just taking us into the discussion and what's changing here from a qualitative perspective to move to this opportunistic stance. And then secondly, if you could touch on the timing of cash flow over the next few quarters and for fiscal 2024, there's been times in these models where we have the strong cash flow quarters that are followed by reversals. So I'm just wondering on the sustainability of cash flow from here. Thank you.

Yes. Thanks for the question, Adam. So programmatically, we will have in place the 10b5-1 program. And what that allows us to do is just have in place during all periods quiet and open to buy at various pricing levels based on what we believe to be the appropriate intrinsic value of the stock. The opportunistic aspect of that, Adam, will be when we see price changes in our stock, and our ability to take advantage of that, we will. So that will be more of a case-by-case and day-by-day decision in the second half. And thinking about the cash flow and timing, in quarter one, we were at 26 days. In quarter two, we improved that to 24 days, so good improvement. That was expected seasonally, but at the same time, we did see some structural improvement that we think will hold. So now as we look for Q3, our expectation is for us to come down an improvement of probably about one cash day. In Q4, based on our comments about the seasonal recovery of 8% sequentially, sometimes that does consume working capital. It's difficult to tell today, but still allows us to have confidence to achieve the $1 billion plus cash flow for 2023 and thus, the increase in the second half of share repurchases by $100 million. Your question about going into 2024, we have said in our Investor Day and along the last couple of quarters that we still feel that that medium-term target of being able to generate free cash flow of $1.5 billion is still reachable and attainable. I do think that coming out of 2022, we were quite elevated on inventory, and I think we acknowledge that we would expect some of that inventory to unwind. We have experienced that to date for the first half. We do expect that to continue to improve in the second half of 2023.

Okay. As we look towards 2024, I notice that you're operating with less than 2 times net leverage and have over $5 billion in liquidity. If cash flow remains strong, I assume the capital return strategy will continue, but I don't want to presume too much.

That's correct. As you know, it's not always linear. The indication of us increasing our share repurchase is not indicative of anything we're doing on the M&A front. So we're always going to take that with a balanced approach.

Thank you, Adam.

Hi, good morning. Thank you for the question. I just have one on SG&A. Given that OpEx is 65% variable, I was surprised to see it up year-over-year. I know you mentioned the investments in the strategic growth areas that drove the elevated SG&A in the quarter. I was just wondering if you could talk a little bit more about that, what areas of growth were most impactful? And then could you talk a little bit about the glide path towards coming back to that 3.5% to 4% range in the back half? Is it evenly split, more back weighted towards the fiscal fourth quarter? How are you thinking about that? Thank you.

Yes. Thanks for the question. So first, I'll handle the first part, and Marshall can assist with the glide path for the back half here. So first, when you think about Areas investment, we point towards the high-growth technologies. This would be cloud, analytics, cybersecurity and then our hyperscale infrastructure business, and you've been noting that those have been performing quite well for us over time. So that's sort of the first data point. The second data point is, when we think about our SG&A structure, there clearly has been an impact with inflationary measures across most of the SG&A category, whether it be labor and logistics centers or whether it be some of the logistics and supplies like activities, which exist within that framework as well. That being said, we've done a pretty good piece of work to think about where we're headed for the back half of the year and in FY 2024 and have realigned, if you will, the trajectory of our spend to be consistent with getting us back to an overall business profile. I'll let Marshall comment a little bit on that.

Thank you, Rich. I just want to add a few points. As mentioned in our prepared remarks, we are nearing the completion of our ERP system in North America, which will allow us to create significant efficiencies across various areas. This includes not just SG&A but also margin optimization, pricing, and scale, among others. We are confident that transitioning to a single system will help us reduce costs. Regarding the $50 million in cost optimization, we anticipate starting to see those benefits in Q3, with approximately $10 million in additional SG&A reductions. In Q4, we expect another $15 million. In total, that amounts to around $25 million for the remainder of 2023. For the first quarter of fiscal 2024, we project an additional $25 million. This is how we foresee the progress unfolding. For Q3, we estimate SG&A to be about 4% of revenue, and we expect that to decrease to between 3.6% and 3.8% as we move into Q4.

Thanks, Rich. Thanks, Marshall. It’s very helpful. I’ll hop back into the queue.

Hi. Good morning and thank you for the question. I have one as well regarding your AS and high-growth technologies business. I'm interested in understanding the trends you are observing there. Specifically, there have been some broader concerns from the investment community about a potential pullback as you manage the backlog in that business. Could you share whether the trends are aligning with your expectations from 90 days ago? Are you noticing any decline in current demand or order trends? I am eager to know how that business is performing compared to your expectations from 90 days ago. Thank you.

Yes, a couple of things. Thanks for the question, Joe. So first, AS has been growing at a reasonably robust pace. Its growth rate has certainly benefited from some backlog runoff, and we are approaching more typical levels of backlog overall, although there are some very isolated pockets. To provide a trend, I believe the AS growth rate will decrease, but there will still be growth in the latter half of the year, albeit at a somewhat lower rate. Considering the dynamics of our business, we've discussed lesser declines in the PC ecosystem moving forward, which suggests that we will see lower growth rates in the AS business as well. Additionally, compared to the back half of last year, we had a very strong Hyve business, and we've noted the lumpiness of Hyve on an annual basis. We anticipate that Hyve may experience less growth or possibly a decline in the latter half of the year. There are changing dynamics within the portfolio, but I want to emphasize that I believe all of these factors are influenced by broader macroeconomic conditions. As we progress and the macro environment improves, I am confident that the overall business will benefit collectively.

Appreciate the color Rich. I’ll jump back in the queue. Thank you.

Thank you very much. I wanted to ask about the revenue guidance. If PCs are getting a bit better, and yet at the low end, revenue would be lower. Like what went into, I guess, the range that you provided in terms of your thinking? And then I have a follow-up. Thank you.

Hi, Shannon. I'll go first. Typically, what we do every quarter is do a bottoms-up review, and that's by product, by region, by leader. No different than what we've done in the past. As we pull that together, we have a range of outcomes that typically we then take, and Rich and I will look at that just to get a sense of the range of guidance. It’s no different. We did articulate last quarter that it was a little bit more difficult, given just the uncertainty that we saw in the second half of the year. So it very much is an informed perspective and you can appreciate the Americas dynamics are different than Europe, and those are different than high growth and those impacts. For us, clearly, the high growth continues to be the leader, and End Point now it's a matter of trying to determine how that recovers. Rich, I don't know if you want to add anything?

Yes, Shannon, if I think sequentially here for a second. First of all, just a reminder that we had a very strong back half of the year from memory, we had a 13% and 15% growth respectively. But if you think about it sequentially, I think the dynamics are lesser of a decline in PC than lesser of a growth rate in AS as sort of the backlog piece that fueled a little extra revenue growth is coming down a little bit. Clearly, Hyve had a back half of last year that had some really big numbers. It's really a remixing across the portfolio of those revenue dynamics that lead to the range of the guidance that Marshall had provided.

Okay. Thank you. And then probably remiss not to ask about AI. I'm curious, can you talk about what you're thinking internally as well as what you're hearing from your customers and how maybe that can grow as part of some of your more solutions-oriented sales? Thank you.

Yes, sure. I read this morning a piece on AI and one of our vendors that was released by Union team. So thanks for those sites. Three buckets here. First, in core distribution and I'm thinking now in terms of offerings. We fundamentally believe that we're going to see many offerings now AI-infused. Obviously, there will be applications out there that might sell sort of AI-as-a-Service, but we kind of see the embedded AI as being something that will lift the entire offerings portfolio almost end-to-end, and you had the piece talking about how AI might influence the PC ecosystem. As we move through time, I think offerings become more intelligent, more robust and likely will have an influence on some of the ASPs as we move through time. Second, from a Hyve perspective, we all know that the hyperscalers are going to be building out a pretty big tranche over time of, I'll call it, AI-tuned or AI-optimized servers and storage and networking and the entire sort of data center category. That will be an opportunity for us to continue to win business within that category. Lastly, from an operations perspective and productivity, we've been on a journey around machine learning and automation. We now get a little bit supercharged with what I'll call more advanced AI capabilities. We're really learning to determine where the best pursuits are for our operation in terms of using that new technology within our franchise overall. Those are the three categories that we think about AI.

Great. Thank you very much.

Hi, thank you for taking my questions. My first question is about the pricing environment. Are you noticing suppliers reducing prices as commodity costs have declined? Are your customers opting for leaner configurations due to the uncertain macro environment? Could you share your insights on your average selling prices?

Yes. To be clear, I'm going to address the ASPs predominantly within the PC ecosystem space. When you get into data centers, following the configurations and the ebbs and flows, it makes it a bit more difficult. But actually, ASPs were up in the quarter, which might be a bit of a surprise. This is for our business, but we see ASPs actually increasing. Therefore, I think we see inflationary impacts priced in and/or richer configurations. At the same time, the volume declines were a little bit larger to get us to sort of the average unit revenue. ASPs are holding up. However, within that higher ASP sort of band, there clearly is a continued level of price competition that's healthy. That's how I would describe it; there is definitely very healthy price competition out there. But at the same time, the ASPs have gotten up a little bit on a year-to-year basis.

Yes. Just some color sequentially, Ruplu. Rich is right in terms of the ASP holding and improving year-over-year, clearly down in the PC ecosystem. But sequentially, we saw overall revenue improve, and that was one of the reasons we felt like there was some form of recovery underway. Just wanted to highlight that from a quarter-to-quarter perspective we are starting to see the Endpoint Solution grow for Americas and Europe.

Okay. Thanks for the details there. For my follow-up, let me ask you a question on revenues and specific to the Americas region. This quarter, you had revenues decline 10% year-over-year in constant currency. Can you give us your view on North America IT spending growth this year in 2023? I think you said Endpoint Solutions, you expect a trough in fiscal 3Q. So let me ask you a little bit more detail on that. I mean, why do you think 3Q is the trough? Why not 4Q? I mean, what is giving you confidence in that 3Q will be the trough. Lastly, Advanced Solutions, I think you said would be slower in the second half. Is there any way to quantify that? Is that just because of tough year-on-year comparison, or how much lower versus the first half year-on-year growth versus the second half? Any color you can give? Thanks.

Ruplu, thank you for the multipart question. Let me see if I can handle each one of those. Our experience in the Americas is that the challenge is clearly within the PC ecosystem. For one reason or another, it has been more magnified than in the rest of the world. Part of that is because in Europe, as an example, we have a broader End Point segment which is inclusive of mobile phones, which we don't have within the Americas. As it relates to Advanced Solutions and the slower growth as we move through, I see it as predominantly the backlog moving towards the profile and not having the increment on the revenue that we had in the last four quarters, with backlog assisting to provide an extra jolt to that growth. As it relates to PCs and why we see lesser of a decline and we think the trough would be in Q2/Q3, is truly because, number one, the inventory has clearly been digested across the supply chain. Number two is, we're beginning to see real stability in that backlog overall. Third, we all read within the industry about the aging profile of the installed base out there and some of the benefits of the new OSs which are available in the market. Those OSs have an expiration date sometime in calendar 2025, so generally speaking, the installed base starts to move when it gets aged and when there are productivity and mostly security benefits with some of the new offerings then that coupled with the expiration date. Finally, the comparisons begin to get easier. All those things together and discussions with vendors and customers would lead us to feelings if the trough is Q2, Q3.

Got it. Thanks for all the details.

Good morning, guys. Appreciate the opportunity here. Rich, maybe perhaps touch a little bit based on the sales cycle. We're hearing a lot from the resellers and competitors that the sales cycle has just been elongated across the board. But really, don't think we've heard too much of that here from this discussion here. What are you guys seeing for the quarter and for the rest of the year expectations?

I believe this is part of the decline we've observed in PCs, leading to smaller declines and the growth rates in AS that we've discussed. In our Hyve business, we are facing tough comparisons in the latter half of the year and anticipate overall sales challenges there. These factors are interconnected. It begins with the macroeconomic environment, which I've mentioned before, as has Marshall. A clear result of the macro situation is longer sales cycles, increased scrutiny of purchases, and a tendency to limit purchases to essentials while postponing non-urgent needs. I may not have explicitly stated that longer sales cycles are a direct result, but I do see it as connected to the macro environment.

Great. I appreciate it. Just as a follow-up, with the additional cash flow that's available as the reduction of the business in putting that capital use, how do you guys see the M&A environment today and your opportunities available to you?

M&A is something that we always have an active pipeline on, and we continue to engage on that pipeline. Things come in, and things fall off. I would tell you that our M&A interests are pretty consistent with what they have been over time. Within this industry, there's the ability to grow organically, predominantly driven in the new technology areas. There's the ability to grow inorganically, and over the continuum, I think that both of those tools will be utilized to continue to drive our enterprise.

Great. Thank you, guys.

Yes. Thank you and good morning. I had a question on the gross margin. Marshall, the implied gross margin guide is roughly 6.7%. So down 20 basis points sequentially. You talked at the end of your comments about Hyve having some, I guess, some catch-up and some pricing with customers in that it was sort of a one-time positive impact. Could you talk about the expectations for gross margin, particularly as you get into the back half of the year with Advanced Solutions slowing and client devices picking up and particularly your consumer business also picking up seasonally. Should we expect gross margin to be down again in Q4?

Yes. I'll address the second half, and then Rich certainly can chime in. We think the gross margins probably come down slightly. Most of that, I think, Matt is just due to seasonality. As you know, quarter four tends to be a little bit more PC weighted, and with that, it tends to have a little bit lower gross margin profile. But you're right; we had some one-time items that won't repeat themselves in Q4 for Hyve. That definitely benefited last year's quarter four margin, gross margin. But generally said the majority of the uplift, if you think about the year-over-year comparison on gross margin, is primarily due to the mix shift between AS and ES, Matt. Also, the increased amount of gross versus net is taking place within the enterprise. We roughly have about a 3% higher grossing of those revenues year-on-year. It does actually artificially or mathematically increase the margin profile while gross profit dollars stay relatively consistent relative to overall revenue volatility.

I have nothing to add. I think, Matt, as Marshall had said it, maybe marginally with the anticipation would be a sequential down a couple of basis points along the way, but fairly stable, I think, in Q4 then.

Thank you. I have another question about the macro situation and what you are observing. Rich mentioned that the enterprise segment is currently the weakest among market segments, while the SMB segment is doing relatively well. Do you anticipate that SMB might lag this cycle and potentially become more cautious with their spending as we move into next year? Any insights or visibility on this?

Yes. For the first half of the year, we've finished trends. We talk about the larger customer set being where we see the biggest challenges, but SMB and MSPs offer a better outcome as it relates to productivity. I think, Matt, it's a difficult question to ask or answer, and I'll tell you why. Part of this is because there's a disproportionate consumption of new technologies, predominantly cloud and as-a-service based solutions. If you follow technology cycles, they hit first in enterprise and then kind of make their way down. My speculation is that the growth rates of cloud-oriented initiatives are higher in SMB now than they are in enterprise because of a bit more saturation. There's a benefit relative to portfolio consumption in SMB kind of following the evolution of some of these newer technologies. You get into what happens with the macro, and we find ourselves in a situation where when SMBs might think that they'll be slowing, we have an improvement in the macro. Those might allow for a better transition within SMB and MSP as opposed to what we've seen in the larger end customers.

If I could ask a third question regarding your comments on Hyve and the expectation that it will be weaker in the second half, could you share your outlook for that business as we head into next year?

It's a tough compare. The second half of 2022 was exceptionally strong for Hyve and was contributed for three equal reasons: the racks themselves continue to show strong demand, our distribution network enabled us to perform those types of services for hyperscale customers, then spare parts, etc. It was just extremely healthy in the second half. It just makes it a really tough compare. Sequentially, if you think about the behavior of Hyve from Q1 to Q2, good quarters, strong, good margin profile. Those expect to come down a little bit in the second half. I think a lot of it is just connected to the overall thoughts of high-growth technology still having above-average compared to core growth rates. That will continue, but it should abate. I think to your question about when does the digestion period end, we think we exit 2023 and find ourselves in 2024 kind of back in a normal growth rate pattern. It's hard to determine if that's a 5% growth, 10% growth, but we do think it's positive. I will just reiterate, in the second half of this year, we expect Hyve to be down year-over-year, primarily just due to the tough compares.

My point of view is that the Hyve ebb and flow here is strictly related to the macro. We're executing quite well in that business. We are participating in a lot of new design opportunities for the future. The business is executing solidly. I think this is more of a macro situation than anything else, and the execution engine is quite strong.

The final thing I'll say, which we say quite often to you, Matt, is that if you look at the annualized trailing 12 performance of Hyve for the last three years, they continue to show growth in top line and bottom line.

This is Patrick Jackson on for Ashish. Thank you for taking the question. In Europe, it's great to hear about the continued share gains. Could you share a bit more how trends have developed across Advanced Solutions and End Point in that region? For your mobile distribution business in Europe that you mentioned earlier, could you talk about how demand has trended in the quarter and what you have seen from a supply chain perspective? Thank you.

Sure. Our business has consistently noted that the impacts of the PC ecosystem and End Point Solutions are more pronounced in the Americas compared to Europe. While Europe has faced declines in End Point Solutions, these declines have been relatively smaller than those in the Americas. Regarding mobile phones, performance has been fairly strong with two providers engaged in that market. Demand has remained steady, and we do not expect any significant changes moving forward. From the perspective of Advanced Solutions, we are seeing solid growth globally, with all regions displaying this positive trend. It’s worth mentioning that in the first half of the year, the significant declines in the PC ecosystem were particularly marked in the Americas. First, thanks to all of you for attending the call today. In closing, I want to thank our coworkers around the world for their persistence and can-do attitudes and staying focused and making sure that we keep at the forefront the success of our vendors and customers which we rely upon to drive our business moving forward. Thanks to all of you for joining, and I hope you have a great day.

This concludes today's conference call. You may now disconnect. Have a nice day.