Good morning. My name is Audra, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Third 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 David Jordan, CFO of the Americas and Head of Investor Relations at TD SYNNEX. David, you may begin.

Thank you. Good morning, everyone, and thank you for joining us for today's call. With me today is Patrick Zammit, 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 our strategy, demand, plans and positioning, growth, cash flow, capital allocation and stockholder 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, in the Risk Factors section of our Form 10-K and 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, ir.tdsynnex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick. Patrick?

Thank you, David. Good morning, everyone, and thank you for joining us today to discuss our third quarter operating results. I'm honored and very excited to address you today for the first time as the CEO of TD SYNNEX. Before I begin, I would like to thank our TD SYNNEX coworkers for their dedication and passion for our business, our partners and vendors for their trust and confidence in us and for the collaboration we fostered together to take advantage of the business opportunities ahead. I'll start the call today by providing a few thoughts on the role we play in the broader IT ecosystem, key priorities for our business as we move forward along with a brief update on our Q3 business performance. We remain a vital link in the IT ecosystem, helping vendors across the world access 150,000 IT solution providers who service everyone from the Fortune 100 to small- and medium-sized businesses. What differentiates us is our global reach, end-to-end portfolio and our specialized go-to-market approach. We have customized value propositions by technology that enable our vendors to increase their reach and provide a full suite of go-to-market services to accelerate growth. All of this is driven by an exceptional team of passionate people who are grounded in a customer-centric culture. Additionally, we are fortunate to have high-quality and trusted relationships across the IT ecosystem and are committed to continuing to be a partner of choice around the globe. Moving on to our business priorities. We have a long track record of delivering profitable growth and sustainable free cash flow, and we expect that to continue. As we move forward, our teams are focused on four major business priorities. The first area of focus is revenue growth, which will be delivered through geographical expansion, ensuring we cover both endpoint and advanced solution technologies, expanding existing vendor franchises as well as emerging vendors to meet the needs of our customers. The second priority is being focused on pricing and margin management. We expect to achieve this by enhancing our value proposition, improving our portfolio of services and remaining disciplined in our execution to enable returns to meet or exceed our expectations. The third area of focus is managing our cost to gross profit percentage, which is a comparison of non-GAAP SG&A to gross profit. This is a key metric and helps to ensure we drive profitable growth. We expect to improve our gross profit percentage through operational discipline, embracing technology and automation, and investing in our people who ultimately make the decisions on opportunities we choose to pursue. The fourth priority is capital allocation. It is critical we remain disciplined around working capital management and free cash flow generation. We are committed to creating value for stockholders by focusing on investments with accretive returns and returning excess cash to stockholders. Moving on to our Q3 performance, we continue to be optimistic regarding the IT market recovery. Q3 was a strong quarter, reinforcing our optimism regarding IT market recovery. In particular, we saw significant growth across geographic segments and in both our Endpoint and Advanced Solutions businesses. Additionally, gross billings in Q3 grew 9%, coming in above the high end of our range. These results underscore that our broad global reach, extensive line card and effective execution of our strategy are helping us grow slightly ahead of the market. Within the quarter, we experienced year-over-year margin decline driven by product mix and tough comparisons in Hyve. Our cost to gross profit percentage remained consistent, demonstrating our ability to control our costs while focusing on profitable growth. Looking ahead, I'm excited about the trajectory of TD SYNNEX. Based on our Q3 results and Q4 expectations, we believe the market is returning to growth. And we are uniquely positioned to expand our coverage and services and deliver value-added solutions to our customers. Lastly, I want to reiterate my gratitude to our team for everything you do to make us the partner of choice in IT distribution. Our people and our culture are what differentiates us in the industry. I will now pass it over to Marshall so that he can provide additional details on our financial performance and outlook. Marshall?

Thanks, Patrick, and good morning to everyone on today's call. We had good performance in fiscal Q3 with gross billings ahead of expectations and backlog increasing year-over-year. Total gross billings were $20.3 billion, up 9% year-over-year, which is above the high end of our guidance range. We were pleased to see growth across both Endpoint and Advanced Solutions in the quarter, which supports our thesis that the IT market has returned to growth. We grew at a slight premium to the market. In Q3, there was a 27.6% reduction from gross billings to net revenue, which was consistent with expectations and a slightly higher difference between the two measures year-over-year driven by the mix of software and as-a-service offerings, which are recorded on a net basis. From a technology perspective, Endpoint Solutions grew 5% driven by PCs, components, mobile, and services. Advanced Solutions grew 12% driven by Hyve, Hybrid Cloud, Software, and Services. Non-GAAP gross profit was $961 million or 4.7% of gross billings, down 1% year-over-year or 50 basis points primarily driven by tough year-over-year comparisons in Hyve and business mix. As we commented in the prior quarter, Hyve, which sits within Advanced Solutions, experienced elevated margins in the prior year due to cost recoveries and incremental recognition of inventory carrying costs as we sold through aged inventory in 2023. Non-GAAP SG&A expense was $568 million or 2.8% of non-GAAP gross billings, which represented a 30 basis point improvement from the prior year. As Patrick discussed, we are introducing a new metric comparing non-GAAP SG&A expense to gross profit as we believe gross profit is a better metric to compare than reported revenue as more of our business is being netted down. The cost to gross profit percentage in Q3 was 59.1%, representing a slight improvement year-over-year driven by disciplined cost management while continuing to balance investments in strategic growth areas. Our cost to gross profit percentage will be an important metric and focus as we grow our business. Non-GAAP operating income was $393 million, down 1% year-over-year. Non-GAAP operating margin was 1.9% of gross billings, down 20 basis points year-over-year, which was consistent with expectations. The decline was primarily due to the Hyve headwinds, which we previously discussed, and the mix within our distribution business. On a reported revenue basis, non-GAAP operating margin was 2.68%, down 16 basis points from the prior year and consistent with expectations. Interest expense and finance charges were $80 million, and the non-GAAP effective tax rate was approximately 21%. Our effective tax rate was lower than expected due to favorable discrete items and mix. Total non-GAAP net income was $245 million, and non-GAAP diluted EPS was $2.86, which was slightly above the midpoint of our guidance range. Now turning to the balance sheet. For Q3, net working capital was $3.5 billion, down $39 million from Q2. And the cash conversion cycle based on net revenue was 21 days. This represented an improvement of two days year-over-year and quarter-over-quarter. As a result of our strong working capital management, free cash flow was approximately $339 million for the quarter. We returned $91 million to stockholders in quarter three with $57 million of share repurchases and $34 million of dividend payments. Year-to-date, we have generated $530 million of free cash flow and returned $614 million to stockholders in the form of buybacks and dividends. Similarly, since fiscal '22, we have repurchased 1.25 billion shares and paid $315 million of dividends totaling $1.6 billion or 100% of our free cash flow. For quarter four, on a sequential basis, we expect to slightly increase our capital allocation towards share repurchases. For the current quarter, our Board of Directors has approved a dividend of $0.40 per common share, which will be payable on October 25, 2024, to stockholders of record as of the close of business on October 11, 2024. We ended the quarter with $854 million of cash and cash equivalents and debt of $4.1 billion. Our gross leverage ratio was 2.3x. And net leverage was 1.8x, which is within our target range. In Q3, we also paid off $700 million of senior notes that matured in August at 1.25%. Now moving to our outlook for the fiscal fourth quarter. For Q4, we expect non-GAAP gross billings to be in the range of $20.5 billion to $21.5 billion, representing growth of 6% at the midpoint. We expect our gross net percentage adjustment to be approximately 27.2%, which translates to $14.9 billion to $15.7 billion of reported revenue. Our guidance is based on a euro to dollar exchange rate of 1.1. Non-GAAP net income is expected to be in the range of $239 million to $282 million. And non-GAAP diluted EPS is expected to be in a range of $2.80 per diluted share to $3.30 per diluted share, which is based on weighted average shares outstanding of approximately 84.5 million. Our non-GAAP tax rate is expected to be approximately 22%, and interest expense is expected to be $80 million. As we close out Q4, we expect to generate approximately $1 billion in free cash flow for the fiscal year and are committed to returning excess free cash flow to stockholders, keeping in mind investments needed to strategically grow our business. We expect IT spend demand will continue to expand in Q4 and into fiscal '25, which will result in increased working capital and also an increase in cash days, but is expected to result in accretive returns as these investments filter through in fiscal '25. In closing, we believe we remain well positioned to benefit from the IT market recovery and have a strong balance sheet to fund our unique capabilities, allowing us to be the global partner of choice in IT distribution.

Maybe a question for Marshall. When discussing the capital return policy of the business and this year's cash flow generation, how should we consider the mix for next year and the recovery in IT? I assume this has peaked in your preliminary expectations. What are your thoughts on cash flow, working capital, and the cash conversion cycle over the intermediate term? You've mentioned a target of reaching $1.5 billion in the long term. Given the weakened backdrop we've experienced over the last few quarters, we would appreciate your insights on how we should approach cash flow for next year.

Yes. Thanks for the question, David. So, our medium-term outlook of $1.5 billion in free cash flow, we still believe that we can achieve that. But you're right, given the recovery out of '23 and into '24 and what we expect to be continued growth, that will continue to increase our need for working capital. You bring up a good point about the blend and the mix of the business. As you know, the model on Hyve had a requirement for longer carrying costs or longer carrying days regarding their working capital needs. So, if that continues to expand, we do think that it will increase our overall working capital. Stepping back and looking at our cash conversion cycle for quarter three and beyond, we're right around that 20 days. We still think that's probably the right target as we go into next year. And then, if we do see exponential growth beyond, we'll call it the typical 5%-ish growth range, and I'm not giving that as a target, just more as a proxy. We still think that 20 to 21, maybe 22 days is appropriate. We haven't yet modeled out our fiscal '25 expectations. But given the comments we said about where we expect to finish for '24 around $1 billion, our expectation is that we'll be north of that for fiscal '25.

In terms of the Hyve business, perhaps can you provide a little bit more color on that? And I think if I look back to the last quarter, you guys had spent a little bit of extra money building up the working capital and investing in training and whatnot for the large customers you're adding. Can you perhaps also speak to the impact that has on gross margins this quarter?

Yes. Thanks for the question, Keith. You're right. The customer we spoke to that ramped in quarter two continued to show good strength in quarter three. Our expectation is that will continue in quarter four and beyond. The good news is that customer base continues to grow. As we mentioned, that has some margin headwinds that we saw in the quarter, but it is also expected to be a headwind going into Q4 and into next year. You're correct; there are investments we continue to make in building out the capabilities and the end-to-end solutions for Hyve and ensuring that we've got the right resources, capital, and footprint to address and meet the needs of the business. More specifically, just on the Hyve impact on the quarter, as you remember, in the prior year for Q3 and Q4, Hyve experienced two benefits to gross profit. One is we carry quite a bit of inventory coming out of fiscal '22. And as that aged out and we sold it through, our customers pay us to carry that and also give us a margin markup. So, that had a significant benefit to us in Q3 of last year and Q4. We also had some cost recovery programs. They're one-off in nature. They came through in the second half of last year. So, if you step back and think about where the majority of the decline in overall profitability comes from in terms of our performance in Q3 year-on-year, it was due to those strong profit last year and then the investments we're making this year to grow the business.

And I just would like to add one thing. I mean, Hyve enjoyed higher margins. So, as we grow with Hyve, it will have a positive impact on our mix and will be accretive to our results.

This is David Paige on for Ashish. I just had a quick one regarding the strength in Strategic Technologies, which seems to be continually growing very strongly. Maybe you could just provide a little bit more color on what was driving the growth in Strategic Technologies during the quarter. And then if you can, maybe an early read into fiscal '25.

Yes. So, Strategic Technologies specifically include cloud, security, and AI. It includes also Hyve. Clearly, those markets continue to enjoy nice growth. And as you know, the AI market, in particular, the hyperscalers have announced that they will continue to invest massively. This year, they will roughly invest $250 billion. I mean, thanks to Hyve to participate also in that market. So, that means that besides the growth we see in distribution regarding Hybrid Cloud, Security, and AI, the acceleration of the investments by the hyperscalers will continue to drive that growth rate up.

Okay, I just wanted to start on a philosophical question regarding running the business. Obviously, what we're seeing here is very strong growth in gross billings, but margins were down. Working capital intensity increased. I understand some of the explanation on Hyve, but that's going to continue into Q4. So, I'm just wondering if you look at Q3 and Q4, is this sort of a precursor for what investors should expect under your leadership, where we're going to focus a little bit more on growth and a little bit less on those other two areas or potentially sacrifice those two areas in order to grow? And if so, why would that be the right strategy? You've been in the industry a long time. We've seen this play out in component distribution, for example, which I know you lived through part of. And that didn't really help either of those two players or shareholders. So just kind of curious on the focus on revenue growth given that was the first priority that you mentioned.

Yes. No, thanks for the question. Clearly, we are focused on profitable growth and cash flow generation. So, of course, when you look at the results of this quarter, you see that we had a very nice sales growth exceeding, by the way, our expectations and the margin being a little bit more muted. Again, as Marshall explained, the vast majority of the GM percent decline is related to Hyve and to the mix. Going forward, I mean, I think we are going to see an improvement in the GM percent for two reasons. The first one is when you look at what's driving the recovery of the sales increase, we see that Europe and APJ are growing faster than North America. In North America, we enjoy better operating margins. So, as the North American market accelerates its recovery, it will positively impact the mix. The second reason is, I mean, at the moment, we benefited from some large deals, which again were accretive. I mean we have the right return on those deals. But the margins are higher in the mid-segment. And so again, as the mid-segment recovers, we should again see an improvement in the margins. The last point I want to insist on is services. If we want to improve our GM percent and make it sustainable, we need to increase our mix of services, which is going to be at the core of the strategy. You are referring to the component business. If you look at my track record there, I always focused not only on growth but also on growth with the right margin quality. I intend to do the same here. If we go for large deals with lower margins, we will make sure that the return is right. But again, the target is really profitable growth and growing GP at least at the same pace as sales, if not faster.

I just have one on endpoint. I was just wondering if you could talk a little bit more specifically about what you're seeing on PCs. Are there any benefits from AI PCs showing up in the quarter? And if you could also just comment on endpoint margins. We've obviously talked a lot about Hyve, but Endpoint Solutions also saw a little bit of a gross margin decline at least sequentially.

Yes. Thanks a lot for the question, Mike. So, I will take the perspective on what we see in the PC market. The PC market is back to growth, and we see that in all the regions. Now the pace of recovery is slightly more muted than expected. We were expecting mid- to high single-digit growth, and we were more in low single-digit growth. Now I think that going forward, the tailwinds we've talked about, particularly AI PCs, but not only the refresh of the PCs both during the pandemic and the refresh required with Windows 10 being replaced by Windows 11. I think that story evolves, and we should see an acceleration of PC growth. AI PCs are moving very rapidly, so the weight of AI PCs in the total PC resell at the moment continues to be relatively low. One of the reasons being that the new AI PCs are just going into the market. Customers have been awaiting a bit, especially to see the midrange. This is coming. We had a series of launches at the beginning of the quarter. There will be more by the end of the quarter. I think that we will see an acceleration again in the first half of next year. And Marshall, you want to...

You covered it.

So just one for me. It sounds like you're feeling pretty confident about the recovery in the broader IT spending market heading into the second half of this year and into next, which is maybe a bit different than what we're hearing from some of your VAR partners, who are seeing more of a, let's say, a mixed environment. Just curious what is driving your confidence around the recovery here? And perhaps maybe you can flesh that out either by a product area or customer vertical where you're feeling the most confident versus other areas that are still sluggish?

Yes. So, thanks a lot. When you look at the markets, I talked about the PC market. The recovery is happening, but it is a little below expectations. We should see an acceleration next year. Regarding other technologies, I want to bring networking to attention. We had tough comparisons last year. Huge backlogs were shipped in the second half, explaining why the market year-on-year is down double digits. That again is normalizing. I believe in Q4, we should be at the end of the tough comparisons, and thus next year, we will have normal comparisons, and we should see positive growth. The geographical aspect matters as well. Europe is recovering faster; specifically, in Europe, the distribution serves both B2C and we see a recovery coming from the B2C market. The B2B market is a little more muted. Nevertheless, some acceleration is expected. APJ is performing well. In North America, for the moment, the market is flat; I would say slightly down, about 1%. We expect the market to come back driven by PCs and networking. Overall, I believe we should see positive growth acceleration next year.

I have two. The first one for Patrick. Patrick, where do you see your investments over the next year? Are you happy with the portal? Is that something you want to enhance? And as we think about the impact of AI, do you think you need to enhance your line card or make any investments in that area to take advantage of that? Just your thoughts on where you need to invest to drive further growth over the next year.

So, I want to start with technology investments being key for us. On the ERP front, the good news is that in both North America and Europe, we've completed our conversions. We are now on one system, so I expect investments to return to normal levels. Regarding platforms, particularly to support as a service, we will continue to invest. The market weight of Software as a Service is increasing in our total mix, and we need to enhance our value proposition there. So yes, more investments in our cloud platform too. Yes, sorry.

And Ruplu, just one thing to add on AI in regards to Hyve. We've mentioned this in discussions before. They continue to experience a growing partnership with NVIDIA. That business is expanding and has significant potential for us as we approach 2025. Sure. Sure, Ruplu. I'll have Patrick first speak to M&A and his thoughts there, and then I'll close it.

Yes. M&A continues to be an opportunity for us to accelerate growth in specific geographies or to acquire specific technologies and capabilities. Our M&A policy has always been very disciplined, so we will only pursue M&As where we know the return will meet our financial expectations. I want to add that we have a successful track record of M&A and integration. You can look at the acquisition of Avnet, the merger between Tech Data and SYNNEX. All those acquisitions or mergers have been accretive. We have true expertise integrating companies. M&A will continue to be part of the strategy.

Just to clarify on the share repurchase and dividends, we are maintaining our 50-50 allocation that we established a couple of years ago. Since fiscal '22, we have repurchased over $1.25 billion in shares and paid out $350 million in dividends, totaling approximately $1.6 billion, which represents 100% of our free cash flow. In light of the absence of M&A opportunities, we have focused on returning capital to our shareholders. As mentioned in the prepared remarks, we intend to continue share repurchases in Q4. From a leverage perspective, we are content with our position, currently at 2.3 times gross and 1.8 times net, which aligns with our target range.

I have just two quick questions. Firstly, I just want to kind of hone in on the Hyve business. And just curious when you are seeing expansion of new logos? Previously, there might be some customer concentration with a couple of hyperscalers. Just curious if you have new design wins in the assembly side, but also curious how is the utilization going for the assembly lines?

Yes. Thanks for the question. We had spoken about a newly landed customer in the prior quarter that continued to expand in Q3, and we expect that to grow in Q4 and into '25. We focus quite a bit on customer diversification. That's one of our key strategies, both at the hyperscalers and the next tier of customer opportunities. We have done a good job of building out our capabilities. Our onshore capabilities continue to gain attention and interest. One aspect of onboarding a customer is that it can take 12 to 18 months at a minimum. So that part tends to slow us down. Nevertheless, we have a strong pipeline of prospects and customers to onboard as we approach next year. Yes. We have enough capacity to handle the business today and where we expect it to go over the next couple of years.

So, the weight of AI PCs is ramping up. We see it happening a little bit slower than expected. As I mentioned, the first AI PCs were launched with Qualcomm. We have AI PCs coming now. Intel AI PCs are going to come. With the increase in the product offering, especially in the midrange, we should see an acceleration of the adoption of AI PCs.

I have a non-gen AI question. Are you guys seeing any sort of pickup in normal non-gen AI server demand?

So transparently, we don't have yet enough statistics on it. What we know is that enterprises are still looking at how to utilize gen AI and take advantage of the new technology. Our Destination AI initiative aims to help our resellers position gen AI with the end users and identify the right use cases. That's taking a little bit of time. We are confident that gen AI will positively impact the server market. But I think we're going to see the benefit probably more next year, particularly in the second half of next year, not in the short term.

Got it. Just a quick slightly different question. Are you guys seeing any impact in Q3 or Q4 from changes at large customers?

Alek, can you just repeat that again? I heard, have we seen an impact. Did you say from large customers in Q3 and Q4?

Yes, that's right. Yes, any revenue impact from large customers in Q3 or Q4?

So no, for the moment, I mean, that segment of the market, particularly in North America, is still a bit muted. So, we are seeing yet an acceleration of the demand. That's the status today.

Just to clarify, Alek, the question is whether we've seen any large corporate activity in the quarter. I think Patrick referenced a couple of larger deals with lower margin impacts but great returns considering the cash days. So those come and go. But outside of that, not much.

Yes. Thank you very much. Before we wrap the call, I just want to acknowledge our 23,000 coworkers across the globe for their dedication to serving our customers, vendors and the technology marketplace at large. Thank you to everyone for attending today's call, and we look forward to reconnecting next quarter. Have a good day.

And this concludes today's conference call. Again, thank you for your participation. You may now disconnect.