Good morning, my name is Brianna, and I'll be your conference operator today. I would like to welcome everyone to the TD SYNNEX Second Quarter Fiscal 2024 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. Good morning, everyone, and thank you for joining us for today's call. With me today are Rich Hume, CEO; Patrick Zammit, COO; 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 demand, positioning, growth, cash flow, and shareholder return, 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, including gross billings. 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. Good morning, everyone, and thank you for joining us today. On today's call, I will provide some thoughts regarding the industry and the drivers of our performance in Q2, followed by comments on the planned CEO transition we announced last week. Then, Patrick will speak briefly and will close with commentary on our Q2 financial performance and Q3 outlook from Marshall, prior to the Q&A session. Starting with our Q2 performance. I will focus my comments on three areas. First, our markets have continued to stabilize, and we remain confident in our improving revenue and gross billings growth prospects for the back half of the fiscal year. Second, we delivered strong financial results and robust shareholder returns. And third, we believe AI is a meaningful opportunity for the company over the foreseeable future. The IT spending market continued to improve, and after a prolonged period of challenging market conditions and transformation, which we navigated well, we returned to positive year-on-year gross billings growth in the quarter. Gross billings were up 3%, coming in at the high end of our guidance range. This growth came through all areas of our business, including Endpoint Solutions, Advanced Solutions, and Strategic Technologies, which now represent 25% of our total business. As we enter the second half of the fiscal year, we continue to expect further acceleration in gross billings and revenue growth, fueled by the PC refresh cycle, customer investments in data center, and cloud deployments, increased hyperscale capital spending to meet the needs of both traditional and AI-enabled workloads, and continued expansion in software, security, and data analytics. Our fiscal results in 2Q were strong, with gross and operating margin expanding, double-digit growth in non-GAAP earnings per share and robust capital returns to shareholders. Our broad end-to-end technology portfolio enabled us to capture growth in both the core and strategic areas, and we remain disciplined on cost holding our expense to gross billings ratio flat sequentially. This strength, coupled with our confidence in an improving market environment, allowed us to return over $520 million to shareholders through the first two quarters of this fiscal year, already representing nearly 70% of the total return to shareholders in fiscal '23. As we go forward, we remain committed to our balanced capital return framework. Since our last earnings call in March, the technology industry has continued to unveil a multitude of AI-related products, services, and announcements. As I've mentioned previously, I believe AI will be the next great transformative era for the technology sector. During my career, I've witnessed the advent and evolution of several other groundbreaking advancements such as the Internet, mobility, and cloud computing. We are just at the beginning of the AI era, and by industry analyst accounts, the potential associated TAM expansion over time is significant. A portion of that spend will come through the business partner ecosystem, and we expect our business will benefit across components, devices, data center, cloud storage, networking as well as the related software applications and services. With our deep vendor partnerships, long-tenured customer relationships, and service capabilities, we are well positioned to participate in this growth as the market evolves and are already seeing momentum and investments from our vendors and increased interest from our customers. During the quarter, we launched the IBM watsonx Gold 100 program to accelerate AI opportunities for partners through enablement, training, business planning, sales acceleration, marketing, demand generation, expert services, and pre-sales support. As part of this collaboration, we will establish IBM watsonx Centers of Excellence in four locations around the globe, where partners will be able to experience watsonx proof-of-concept solutions. We are also honored to be named Microsoft's Global Copilot Seats Champion for the quarter, a testament to the successful launch we enabled earlier this year. Lastly, we were pleased to announce our high-growth technology Center of Excellence, where partners can learn how to become a partner of the future, integrating AI with cloud, cybersecurity, data analytics, and modern infrastructure. As I mentioned at the start of the call, I would like to make a few comments about the CEO transition we announced last week. First, let me take a moment to congratulate, Patrick Zammit, who will succeed me as CEO of TD SYNNEX upon my retirement in September. Patrick has a long track record of success in our industry, having joined Avnet more than three decades ago, and he has been an excellent partner to me since becoming part of the company in 2017. During his tenure, he has excelled at driving growth and operational excellence across the organization. His business acumen and deep industry expertise, coupled with his interest and dedication in building world-class cultures, make him the ideal candidate to lead TD SYNNEX into the future. Since becoming our Chief Operating Officer earlier this year, Patrick has already accelerated the progress on our strategic initiatives and has fostered an even greater focus on driving profitable growth, while continuing to deliver increased value to our customers, vendors, and coworkers. As I look back on my career and the many accomplishments and milestones along the way, I can safely say that it has been an absolute privilege to lead the company, and I look forward to continuing to work with the team as a member of the Board of Directors. I am incredibly proud of the company's achievements and the culture that we have built over the years. I will now pass it over to Patrick so he can make a few comments.

Thank you, Rich, and thank you for your leadership and guidance as CEO. I am honored to have been selected to lead TD SYNNEX and look forward to continuing the legacy of success and partnership across the channel that Rich has established, along with cultivating the vibrant and servant leadership-based culture that we are known for. I am fortunate to inherit a best-in-class team, who deeply understands our purpose, mission, vision, and values. TD SYNNEX has an industry-leading set of capabilities and an unmatched ability to deliver value to our most critical stakeholders. We excel at helping to accelerate broad adoption of technology with our efficient go-to-market motion and we constantly look to innovate, challenging the status quo and increasing our value proposition. I look forward to building on the foundation we have established and continuing to accelerate our strategy and digitalization efforts to ensure we are constantly delivering the greatest value to our coworkers, partners, vendors, and shareholders.

Thanks, Patrick. In closing, the pace of change across the IT industry continues to accelerate, necessitating partnerships across the channel, and we are solidly positioned with the industry's leading and emerging vendors and over 150,000 customers. This rapid pace of change requires us to stay agile and nimble, anticipating the needs of our partners and constantly increasing the value we deliver to them. We continue to see opportunities for growth across our business and geographic regions and have made solid progress in transforming our portfolio and margin profile with greater focus on accretive strategic technologies. Our capital structure is healthy and we are committed to maintaining a balanced approach to capital allocation going forward. Since this will be my last earnings call, I want to personally thank all of you for your support, ideas, and interest in our great company. I wish all of you a healthy and prosperous future. I will now turn it over to Marshall for additional commentary on Q2 and our Q3 outlook.

Thanks, Rich, and good morning to everyone on today's call. Let me also offer my thanks to Rich for his leadership as CEO and specifically his guidance through the merger, and congratulations to Patrick as he succeeds Rich. Now turning to our results, we had a strong performance in fiscal Q2 with results in line with our expectations, aided by an improving IT spending environment with gross billings growth in Endpoint Solutions, Advanced Solutions, and Strategic Technologies. We were pleased with our continued expansion in both gross and operating margins and strong EPS growth. Importantly, as Rich mentioned, we believe we are well-positioned to benefit from accelerated growth in the back half of the fiscal year as the IT spending market has continued to rebound. Total gross billings were $19.3 billion, up 3% year-over-year and toward the upper end of our guidance range, driven by a 1% increase in Endpoint Solutions and a 5% increase in Advanced Solutions. Importantly, as Rich mentioned, we returned to positive gross billings growth following a prolonged period of challenging market conditions. An encouraging proof point supporting our thesis that the IT spending market is rebounding, we have made investments that we believe will position us well to meet the new opportunities that this dynamic market is creating. Net revenue was $13.9 billion, down less than 1% year-over-year. Gross-to-net revenue adjustments again increased year-over-year as Software-as-a-Service offerings continue to represent a greater portion of our overall business. This dynamic alone negatively impacted our net revenue by 4% on a year-over-year basis, but improved our gross margins by 27 basis points. Given this continued trend in the industry and in our business, we believe the best measure of our top-line growth is gross billings, which is not subject to these apples-to-oranges comparisons. For quarter two, from a technology perspective, approximately 75% of gross billings were from hardware, 19% from software, and 6% from services. This was aligned with our expectations as Endpoint Solutions, which is primarily represented in hardware, returned to growth, and comprised a greater proportion of our total business. Strategic Technologies experienced year-on-year growth in the mid-teens with strength across cloud, data center, AI, and security, with robust hyperscale infrastructure growth driven by the accelerated ramping of new business at Hyve. Strategic technologies now represent 25% of total gross billings, up from 22% in the year-ago period. Non-GAAP gross profit was $974 million, and non-GAAP gross margin was 7%, up 9 basis points year-over-year. As expected, our gross margin came down from Q1 level as Endpoint Solutions represented a greater portion of the overall business mix. Total non-GAAP SG&A expense was $586 million, down $7 million year-over-year or 3% of gross billings as we exhibited good cost discipline while balancing investments in strategic growth areas. Another metric we utilize internally to assess our SG&A investments is SG&A as a percent of gross profit. For quarter two, we came in at 60.1%, an improvement from 61.2% in the prior year period. Non-GAAP operating income was $388 million, and non-GAAP operating margin was 2.78%, representing a year-over-year improvement of 11 basis points. Interest expense and finance charges were $77 million, and the non-GAAP effective tax rate was approximately 23%. Total non-GAAP net income was $237 million, and non-GAAP diluted EPS was $2.73, approaching the midpoint of our guidance range. Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of approximately $1.2 billion and debt of $4.6 billion. Our gross leverage ratio was 2.6 times and net leverage was 2 times, elevated from the prior quarter due to the timing of our recent debt issuance. We expect to pay off the $700 million of senior notes maturing in August with cash on hand, and would expect our gross leverage ratio to be around 2.3 times by the end of the fiscal year. Accounts receivable totaled $8.9 billion and inventories totaled $7.1 billion, both consistent with the prior quarter. For the second quarter, net working capital was $3.6 billion, up from $3.2 billion in quarter one, and the cash conversion cycle was 23 days, up two days from quarter one. Cash used in operations in the quarter was $115 million, as Hyve, which is part of our strategic technologies, experienced strong growth due to new business ramping. Excluding these additional working capital requirements, our free cash flow generation was approximately $190 million. We returned $288 million to shareholders in quarter two with $254 million of share repurchases and $34 million in dividend payments. For the current quarter, our Board of Directors has approved a dividend of $0.40 per common share, representing a 14% increase on a year-over-year basis, which will be payable on July 26, 2024, to stockholders of record as of the close of business on July 12, 2024. Thus far this fiscal year, we have returned over $0.5 billion to shareholders. Moving now to our outlook for the fiscal third quarter. We expect non-GAAP gross billings of $18.9 billion to $20.1 billion, representing growth of 5% on a year-over-year basis at the midpoint. We expect total revenue to be in the range of $13.3 billion to $14.9 billion, up 1% on a year-over-year basis at the midpoint. Our guidance is based on a euro to dollar exchange rate of $1.08. Non-GAAP net income is expected to be in the range of $219 million to $261 million, and non-GAAP diluted EPS is expected to be in the range of $2.55 to $3.05 per diluted share, based on weighted-average shares outstanding of approximately 85 million. Our non-GAAP tax rate is expected to be approximately 23%. Interest expense is expected to be approximately $75 million. As we look to the second half of the fiscal year, we continue to expect gross billings to grow in the mid-to-high single-digit range, driven by continued improvement in the market environment. We still expect to generate approximately $1.2 billion of free cash flow for the fiscal year and remain committed to our capital allocation target to return 50% of free cash flow to shareholders, both with dividends and share repurchases. In closing, we believe we are in a strong financial position as we head into the second half of our fiscal year. With ample liquidity and an optimized balance sheet to fund the expected growth and investments in strategic technologies, while capturing opportunities in our core business. We are now ready to begin the Q&A portion of the call.

Our first question comes from Michael Ng with Goldman Sachs. Please go ahead.

Hey, good morning. Thank you very much for the question. I just have one on AI devices and AI PCs. I was wondering if you could expand a little bit more around some of your comments regarding increased customer interest. When do you expect that to flow through? Do you have any views on AI PCs as a share of total PCs? And any high-level commentary that you may have on AI PC pricing relative to your general PC? Thank you.

So, good morning. Patrick Zammit, I'm going to take that question, Mike. At the moment, what we see is a ramp-up of AI PCs. When you refer to the market data, we have market data for distribution for both North America and Europe, and you see that it's in the low single-digit share of the total PC market. Currently, AI PCs are primarily arm-based PCs, so more high-end PCs. From a pricing standpoint, and again, I want to emphasize that these are high-end PCs, I would say that the price delta is between 5% and 10% for the high-end PCs. But the expectation going forward is that this will accelerate; we are waiting for the PC manufacturers to accelerate the launch of the AI PCs, and so the adoption rate will increase. Therefore, we continue to be very confident about the prospects of that segment of the market.

Great. Thank you so much for the color and congratulations on the new role.

Thanks a lot.

Our next question comes from Ruplu Bhattacharya with Bank of America. Please go ahead.

Hi, thanks for taking my questions. I'd like to congratulate both Rich and Patrick, Rich for his long successful career, and Patrick, congrats on the new assignment. Maybe I'll start with you Patrick for a question. Since you're going to take on the new role, can you talk about your top focus areas for the next 12 months? For you, is it more important for SYNNEX to have revenue growth or focus on profitable growth, which is focused on margins?

Yeah. The focus, of course, is on growth. When you look at the mix of our business, growth will also generate more profits. Looking at the coming quarters, I believe that the technologies driving growth will have a positive margin. Therefore, the mix should be more favorable going forward because of that. Hyve, of course, will continue to contribute to that growth. From a top-line and margin quality standpoint, I think we have very nice opportunities. Regarding cost management, I would like to note that we have just achieved two major milestones in both North America and Europe by upgrading our IT platform, which means we can now focus on process and system efficiency. This gives us the opportunity to redeploy resources to fuel growth in the high-growth categories while continuing to reduce our cost to Gross Profit, as we did in Q2. In summary, I see solid prospects for not only growth but profitable growth, with the GP increase positively impacting operating income.

Okay. Patrick, you mentioned a couple of things. Maybe for my follow-up, if I can ask you, you mentioned Hyve, so how should we think about Hyve revenue growth since you are ramping a new customer? How should we think about revenues as well as the inventory requirements for that business and potential free cash flow?

Yeah, Ruplu, maybe I'll step in and help with the Hyve question. As we commented in our remarks, we had very robust growth in Hyve in the quarter. Looking at the tactical frame, we believe that growth will continue. There is good demand within the hyperscaler space, but we've talked before about customer number two, who is now in a very healthy ramp and doing quite well. We are really pleased with the performance of our Hyve business overall. You bring a good point; as we achieve outsized growth within Hyve, there will be working capital needs that will arise, manifesting in Accounts Receivable as well as inventory. But it's important to note that this is a positive sign, as we're positioning ourselves for future growth when we see that working capital increment occur. So, that summarizes our position. I think that from a cash flow perspective, we're still balancing our aims for the year and remain committed to reaching $1.2 billion; to the extent we achieve outsized growth, it may be impacted a bit. But again, I want to emphasize that this would be healthy growth.

Great. Thank you for all the details. Yeah, sorry, go ahead.

Ruplu, sorry, this is Marshall, and I apologize, I'm recovering from a cold. Just to follow up on Rich's comment about Hyve and the growing business from the new ramp. We did see that this impacted free cash flow in quarter two. We expect that to reverse in quarter three. Also, when Hyve is onboarding new customers, there's quite a bit of investment that we do upfront, which can serve as a headwind to margin. Over the coming quarters and into the second year of the programs, that's typically when we see the margins recover and realize the returns for the programs established with our customers. With Hyve, as we grow the business, we tend to develop a more sticky relationship with our customer, which is a strong attribute of the Hyve teams. We expect the same thing with this customer that we're ramping today.

Got it. Thanks for all the details. So Rich, congrats to you and look forward to keeping in touch, and Patrick, look forward to working with you.

Thanks a lot.

Thank you, Ruplu, for your kind words.

Our next question comes from Joseph Cardoso with JPMorgan. Please go ahead.

Hi, thank you for taking my question. This is MP filling in for Joe Cardoso. I just wanted to ask your thoughts on the extent of the PC recovery in the second half and how significant they will be moving forward. Thank you.

I'm going to take that question. We see sequential improvement in the PC market quarter after quarter. This quarter, we were back to growth. We're expecting that growth to continue to improve in the second half. We believe the PC market should continue to benefit from three tailwinds: the refresh of the PC market during the pandemic, the rollout of Windows 11, and the ramping up of AI PCs. We will see an acceleration in the second half with the launch of new AI PCs, also at a lower price point, which should benefit the PC market in the second half.

Thank you.

Our next question comes from Adam Tindle with Raymond James. Please go ahead.

Okay. Thanks. Good morning and my congrats to both Rich and Patrick. Patrick, I wonder if we could maybe zoom out and see if you could share a few words on your overall vision for the company, particularly around your capital allocation philosophy? Do you think that there's more near-term opportunity for shareholder return or potential M&A? Speak to the trade-off between those, as I know you've been in the industry a long time and seen a lot of different capital allocation decisions. So, would love for you to share some of your philosophy.

In terms of overall prospects, one of our big differentiators is that we are positioned on all the critical technologies in the industry. For the coming years, especially thanks to AI, most of those technology sectors will benefit from AI. Our end-to-end portfolio is a big strategic advantage for the future. We are also a global company, and our position varies by country; we have countries where we have a low share. A great example would be India, where we plan to accelerate growth. We see opportunities in services as well, which we believe will be accretive. In terms of capital allocation, our plan is to return 50% of cash flow to shareholders for the moment, and I am comfortable with this approach. Regarding M&A, I view it as an opportunity to accelerate our growth plans. We've always been extremely diligent in our approach. We have financial metrics when looking at M&A, but I see some opportunities in geographies such as APJ or Latin America, and, to some extent, in Europe. If we can explore those opportunities, I would be favorable, but for now, returning 50% to shareholders is a good starting point.

Just to add a couple of things around our capital allocation framework. For the first half of the year, we had quite a bit of participation in the Apollo secondaries that elevated our first half share repurchases to about $450 million. When you add the dividend for the first half, it came in around $520 million in return to shareholders. We expect to match the overall expected cash flow for the year of $1.2 billion, so there will probably be about $50 million to $60 million between dividends and share repurchases by quarter in the second half, putting us around that $610 million to $630 million range for the full year.

Got it. That's helpful, Marshall. I hate to pick on you. I'm sorry that you're not feeling good right now. But, on the Hyve situation here, it was very helpful for you to outline the use of cash in the quarter. I think if I did the math here, it's about a $350 million swing factor related to Hyve. And if I compare that to your typical working capital to revenue ratio, it seems like that could be a pretty meaningful revenue driver going forward from that investment. It's not quite as evident to us based on the Q3 guide, but I wonder if you might speak to some of the future timing and magnitude of the financial benefit from the investment that you're making in Hyve right now or have made in the quarter?

Sure. Going back to my earlier comments, in many cases, when onboarding accounts, we do incur upfront investments that can lead to a headwind on margins. We expect that to expand as we progress into the second year. When we look at Hyve, I’m surprised in a positive way by what we initially thought for the quarter. We anticipated high revenue year-on-year being down, but it was up, referencing back to our strategic technology portfolio growth of 15%; Hyve was north of that. We see that momentum continuing as we enter the second half of the year. There are adjustments within the Hyve margins, often due to our design build attributes and supplies that are closely related to our customers' needs. These customer relationships are valuable, and we expect positive growth as we move forward.

Do you think that means earnings are going to be flat year-over-year in Q3 based on your guidance? Should we continue to expect that flat year-over-year trend into Q4 and Q1 based on this?

I think that's a fair assessment. When we exited fiscal '22, we had a large inventory position that unwound throughout '23. With Hyve, we can charge on behalf of our customers, and as we sell, there's an advantage to that margin. Therefore, Hyve may have a tough compare from an overall operating profit perspective in Q3 and Q4. However, I see very positive quality of margin and growth attributes as we move into fiscal '25.

Our next question comes from George Wang with Barclays. Please go ahead.

Hey, Patrick, congrats and looking forward to working with you. Also congrats to Rich as well. I just have a quick question on the margin. You guys talk about the impact from net down revenue and then also potentially Endpoint Solutions accounting for a bigger mix as PCs grow in the second half. So how should we model the gross margin and operating margin sequentially in the second half? Will gross margin come down sequentially from Q3 versus Q2? Just how to think about margin also in terms of expense versus gross billings overall for the second half?

Marshall, why don't you take that first one?

Sure. First, we expect that in the second half of '24, we will see an increasing proportion of mix filter more towards Endpoint Solutions which has a lower gross margin profile. We expect that gross margins for gross billings or operating margins may decline around 20 basis points just given that mix shift. However, within the portfolios, we continue to see quite a bit of healthy structural optimism and normal outcomes. Our growing strategic technology portfolio is now at 25% of gross billings, which is an all-time high, and those components such as cloud, security, data analytics, IoT, or hyperscale tend to grow faster than the overall core business and have higher margin attributes.

Great. Thank you. I'll go back to the queue.

Our next question comes from David Vogt with UBS. Please go ahead.

Great. Thanks, guys. And, Rich, congratulations and Patrick, congratulations. Look forward to working with you. Two, if I may, since I know you've said one, but the first question is on Advanced Solutions. Can you kind of flush out some of the commentary around the demand drivers? I think you particularly called out networking being tough. I just want to get a sense of where do you think you are from a normalization perspective relative to what sounded like backlog flush last year? And any other comments on any of the categories like storage?

Sure. The two biggest drivers to the margin profile, as mentioned, are the ramping up of our new customer, created some margin pressure as we made significant investments in that partnership, but we believe in the second year, we will reap the benefits. The other driver has been the softness in networking which typically has a higher gross margin profile. However, we see flat or growth in just about every category across Advanced Solutions. The only exception has been Networking. From a supply-chain perspective, networking was the last area to recover, so their backlog run-off went further into last year than other categories.

Got it. And Rich, can you remind us again when that will conclude? Is it this next quarter regarding backlog?

Throwing the dart at the board, probably October-November.

Just to add, Q3 last year was very strong in Networking, as we continued to see the backlog convert into billings. Q4 is when we started having a more normalized situation, but overall, we see bookings coming back.

Great. Thank you very much, guys.

Our next question comes from Matt Sheerin with Stifel. Please go ahead.

Yes, thank you. Good morning. And I echo my congratulations to Rich and Patrick on your new roles. I'd like to ask a bigger picture question. I'm hearing relatively positive commentary about demand and outlook, yet you did come in below consensus by more than $100 million in top line and you're guiding below consensus just up 1% sequentially. Given that you're expecting high growth, it seems like demand overall is sluggish. I've heard similar from some peers and suppliers as well. How should we reconcile that with your commentary and expectations of a stronger second half? Given your guidance for flat or modest growth in August, how should we think about seasonality in the November quarter?

Thank you for the question. When we think about the performance of the business relative to sales performance, we encourage everybody to focus on gross billings. For Q2, the actual gross billings growth was about 3% overall, and we're guiding in Q3 at the midpoint at about 5%. We're seeing improvement quarter after quarter. To be candid, while we initially thought it could be a bit higher, we're solid on 5% growth as a solid building block for the upcoming quarter.

To add, in Q3, we see Endpoint Solutions slightly above that growth rate and Advanced Solutions a little below. Regarding Q3 to Q4 seasonality behavior on margin profile, we typically see anywhere from a 15 to 35 basis point improvement. We don't foresee any issues in meeting this expectation.

Okay. If I can just ask a quick follow-up and thank you for that. Just regarding Hyve, can you talk about your existing large customer there and the relationship? I know it seems like you haven't been growing much, could you talk about that?

We have a healthy relationship with customer number one, experiencing growth. We are considering design opportunities with new technology and expanding our services. We believe we will continue to capitalize on expanding our relationship and winning new business moving forward.

Okay. Thanks a lot.

Our next question comes from Keith Housum with Northcoast. Please go ahead.

Good morning, guys. And once again, I want to echo what everybody else said here. Rich, it’s been a pleasure working with you and congratulations on your retirement. Patrick, looking forward to working with you. Maybe just for clarification, Marshall, did I hear you say that gross margins were impacted by 14 basis points due to the investment in that Hyve customer number two this quarter?

That was one of the drivers.

Okay.

It's not uncommon on the front end when you have a big ramp to have some inefficiencies because everything is new. In time, we are confident that margin will optimize, so it's not a systemic issue, but rather just a ramping consideration.

I guess, Patrick or Rich, or whoever wants to take the question, as we think about AI PCs, they're still relatively new coming out here. Is there a risk that perhaps customers will put off PC refresh until they start looking at AI PCs and deciding which way to go?

Patrick?

At the moment, there aren't enough products being launched for customers to successfully decide between replacing existing PCs or opting for the high-end AI PCs. However, as lower-end AI PCs become available, we anticipate a flood of purchases will occur, thus unlocking further demand for both segments. The AI PC consideration will be pressing for users today thinking about replacing the PCs purchased three or four years ago.

Okay. Thank you.

As a reminder, we believe this is a short-term trend where customers may hesitate until more OEM products are available. We expect a larger portfolio to be available later this calendar year.

Our next question comes from Vincent Colicchio with Barrington Research. Please go ahead.

Yes. Congrats, Rich and Patrick, and Marshall, feel better. In terms of PC demand in the quarter, how was the performance by vertical? And how should we think about demand by vertical in the second half?

From a vertical perspective, we noticed the public sector, particularly federal, was a bit slower as they navigate budget approvals. We believe that cleared up combinations present buy-in opportunities moving forward. The other verticals are uniform in digesting or purchasing PCs, with the only exception being the public sector where we see an opportunity to catch up as they process approvals. Patrick, do you want to add anything?

Yes, we see demand being driven by enterprise and SMBs, which are the two largest customer segments driving our demand.

Okay. Thank you, gentlemen.

Our next question comes from Ashish Sabadra with RBC Capital Markets. Please go ahead.

Thanks for taking my question. Congrats again to both Rich and Patrick. Just one quick clarifying question. Should we still expect the netted down to be 25% to 26% for the full year? On the trend, what are you seeing by geos, particularly in Americas, Europe, and APAC? Thanks.

We had forecasted for the quarter about 26.5% growth versus net, it came in at 27.5%. We continue to see the expansion of the netted down revenues. If I think about Q3, it should look like around 27.5%, with a slight drop in Q4. Seasonality typically leads us to a resurgence of endpoint solutions during Q4, expected between 27% to 27.5%. We see the trend continuing as SaaS offerings grow in our mix.

When we look at geographic performance, both North America and Europe performed similarly, with slight growth. Europe entered the correction phase later than North America, but currently mirrors trends seen in North America. APJ is experiencing double-digit growth, particularly driven by investments in data centers within Tier 2 CSPs, benefiting us significantly.

Thanks. Thanks a lot.

Our final question comes from Alek Valero with Loop Capital. Please go ahead.

Hey guys, thanks for taking my question. This is Alek on for Ananda. My question is; what is a good way to think about the GenAI impact to SYNNEX's revenue growth over the next few years from PCs, phones, and other offerings? Additionally, could you briefly address its impact on margins and the cash conversion cycle?

GenAI requires extensive compute and optimization of infrastructure. We expect benefits not only in software but also in necessary upgrades across servers, switches, and storage. Therefore, GenAI represents a significant opportunity for growth across most of our technology areas.

As we mentioned before, AI offers substantial growth potential, particularly for legacy products enhanced by AI. This enhancement will likely lead to more robust configurations across the board and could prompt an increase in ongoing demand. Regarding working capital conditions, we anticipate maintaining our current terms, though this could evolve as we progress. Historically, we've also observed a shift of legacy technologies to the channel with new technological advancements making these relationships fruitful for both parties.

Awesome. Very helpful, guys. Thank you very much.

This concludes the question-and-answer session. I will now turn the call back over to Rich for closing remarks.

I'd like to thank all of our TD SYNNEX coworkers around the world for all that they do in dedicating themselves to our customers, vendors, and shareholders. Obviously, they're the ones that make it happen day in and day out. Thank you all for being part of this journey with us; we appreciate your continued engagement and interest in TD SYNNEX. With that, I wish you all a great day. Thank you very much.

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