Td Synnex Corp Q4 FY2024 Earnings Call

Good morning. My name is Julianne, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Fourth Quarter and Full Year 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 Jack Huddleston, Head of Investor Relations at TD SYNNEX. Jack, you may begin.

Thank you. Morning, everyone. Thank you for joining us for today's call. With me today are 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, and 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, 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-Ks 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.

Thank you, Jack. Good morning, everyone, and thank you for joining us. I am pleased to share our fourth quarter results and how we are well positioned for the year ahead. Revenue grew by 10% year over year, and gross billings grew by 7%. We generated free cash flow of $513 million in Q4, meeting our target of $1 billion for the full year, demonstrating our commitment to delivering. We returned 72% of our free cash flow in buybacks and dividends during fiscal year 2024. Let me share three factors behind our Q4 performance. First, we saw good momentum in distribution. Gross billings in endpoint solutions grew by 3% year over year, led by strength in PCs. Advanced solutions, excluding Hive, showed broad strength across our geographic segments. Our cloud, cybersecurity, and data and analytics portfolios all grew by double digits in Q4 across all of our geographic segments. Gross profit within endpoint and advanced solutions showed solid growth year over year as we continue to focus on profitable growth. Second, we particularly saw strong top-line performance in Hive. In Q4, Hive revenue grew by double digits, reflecting its improved end-to-end capabilities. And third, our Q4 results reflect the strength and resilience of our business model in an evolving macro environment. Our diversified product portfolio and our global scale allow us to capture a wide range of IT spend. We remain intensely committed to profitable growth, delivering sustainable free cash flow, and continued disciplined capital allocation. Now I will pass it to Marshall for our financial performance and outlook.

Thanks, Patrick, and good morning to everyone. We had a good performance in the fourth quarter with gross billings and net revenue exceeding expectations. Total gross billings were $21.2 billion, up 7.4% year over year, and above the midpoint of our guidance range. In Q4, there was an approximate 25% reduction from gross billings to net revenue, which was lower than expected and down from Q3, primarily due to a higher mix of endpoint solutions and high business mix. Net revenue was $15.8 billion, up 10% year over year and exceeding the high end of our guidance range. Our endpoint solutions portfolio grew 3% year over year, driven by PCs and peripherals. Our advanced solutions portfolio grew 11% year over year, driven by Hive, hybrid cloud, and software. 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. Our balance sheet remains strong, with $1.06 billion of cash and cash equivalents and debt of $3.9 billion.

Thank you. Good morning. Patrick, I just wanted to start. We've got two quarters under your tenure and a Q1 guide here. And understand the qualitative narrative around profitable growth, but it's not as evident in the current results that we're seeing, strong growth, but margins are declining, and Q1 implies more of the same. Wonder if you might just double-click and revisit that philosophy growth versus profitability balance, and how you plan to manage the business over the medium and long term going forward.

Thanks. Yes. Good morning. Thanks a lot for the question. Again, so when you look at the quarter, we are very pleased with the growth both in distribution and Hive. If you exclude the one-off of last year, Hive had a very nice growth too. Again, not only from a top line, but also from gross profit and operating income. So it's this tough comparison which is skewing the pictures. I can promise you we are committed to profitable growth. And indeed, we are seeing the drop-through if you exclude one-off. Hive is having in the market a series of differentiators which justify the high double-digit growth. Their margins are accretive to our overall portfolio.

In Q1 of the prior year, we had some strong profit around selling through inventory that did not repeat this year. We do expect and anticipate to further increase our investments in Hive, not only in terms of skill sets and engineering capabilities, but in terms of manufacturing footprint, primarily to address liquid cooling and power needs.

Great. Thank you. And thank you, Patrick and Marshall. Patrick, I don't think I heard you reference kind of the macro impact of what's going on in Europe out there, whether it's from the environment or from maybe the swings in the US currency.

What we saw in Q4 is that the market grew 2% in the last quarter. We continue to grow ahead of the market, and while there is some uncertainty in Europe, it is not materially impacting the market dynamics. Our metrics indicate a strong demand in distribution from our customer base.

As Patrick mentioned, once we get past Q1, in that mid-single-digit growth rate is expected to play out fairly consistently for Q2, 3, and 4. We typically see a slight improvement in revenue in quarters 2 and 3.

I just had for Patrick and just a quick follow-up for Marshall. Patrick, I was just wondering if you could talk about the PC recovery. Are you seeing any kind of reseller stocking ahead of any potential tariffs next year?

In Q4, we grew high single digits in the PC category. The demand recovery is primarily due to the need to prepare for the Windows 10 refresh and the fact that we have an aged PC base coming from the pandemic. We made the decision to focus on the commercial segment for PCs across the world.

Seeing a lot of investments from your peers in the high space in areas like liquid cooling power. Just curious if you could provide more color around your footprint here, and how you view it stacks up against some of the peers in the space.

We expect to continue to make investments in manufacturing capacity and capabilities. We feel like we're doing quite well in the markets we serve and are continuing to expand our customer base.

I think you said mid-single digits for every quarter from Q2 to Q4. Can you give us your thoughts on the relative growth in billings between endpoint solutions and advanced solutions?

Our expectations is that both segments should grow. The macro uncertainties will require us to balance our outlook with the positive drivers we see in the market.

If you look at advanced solutions, networking has been suffering last year. The tough compare is behind us, so we should see recovery in networking also. Overall, we are comfortable with our guidance despite the uncertain environment.

It does sound like you guys had some strategic wins with some vendors, can you perhaps unpack the growth in terms of how much your growth was more end market driven versus expansion of relationships?

We see twofold dynamics, leveraging global relationships and market dynamics enabling us to grow faster than the market demand.

Can you kind of unpack on the peripherals? It seems like poised for growth as well.

On peripherals, we see demand coming back, with our strategy to bundle peripherals with the sale of PCs. The storage segment is poised for growth, but we expect recovery in compute to precede it.

What should we think about gross margins moving forward?

We don't guide on gross margin but expect some improvement in growth and operating margin in quarter four.

On Hive and AI demand, what do you guys view as the greatest lever this year?

Hive is active in both compute and networking projects. We will see some opportunities on AI compute, and networking is also seeing good demand.

Can you clarify whether there's any headwind from ramping of the second customer?

We're close to where we hope those margins should be, but expect normalization and maturity as we continue our investment in the business.

We see software and services as an opportunity for growth. Most of our growth is set to happen organically, but acquisitions will be considered if they meet our requirements.

Can you provide any color on current networking inventory in the system and demand?

We are expecting growth in networking this year. Wi-Fi seven will bring increased demand, and we believe the tough comparisons are behind us.

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