Td Synnex Corp (SNX) Q2 2026 Earnings Call Transcript

Good morning. My name is Tracy and I will be your conference operator today. I'd like to welcome everyone to the TD Cinex second quarter fiscal 2026 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Nate Friedel, head of investor relations at TD Cinex. Nate, you may begin.

Good morning, everyone, and welcome to TD Synex's Fiscal 2026 Second Quarter Earnings Call. Joining me on today's call are Chief Executive Officer Patrick Zammett and Chief Financial Officer David Jordan. 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 financial 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 8K we filed today, in the risk factors section of our form 10K, 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 8K available on our investor relations website, ir.tdcynex.com. This conference call is the property of TDCynex and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick.

Thank you, Nate, and good morning, everyone. We delivered a record quarter with broad-based strength across distribution and Vive, building on the momentum we have carried out of recent quarters. Our results reflect consistent execution against our strategy and deepening relationships within a macro environment that is becoming increasingly complex. Rising component costs, supply constraints, geopolitical uncertainty, and a once-in-a-generation AI build-out are challenging businesses to move faster and with more precision. That complexity is exactly where TDCnext adds the most value, and you can see it in the demand across our business. AI is becoming a growing portion of our mix and is driving demand across both businesses, from hyperscale infrastructure build-outs to enterprise data center modernization to AI-capable devices in our endpoint mix. And we are capturing that growth across technologies, regions, and customers. With that context, I start with our distribution performance. Distribution had an excellent quarter. Non-GAAP gross billings of $23.4 billion, up 22% year over year. Strength was broad-based across every region and the portfolio. with international growth and operating margin expansion as a real bright spot. We believe the combination of our global reach, end-to-end portfolio, and specialized go-to-market is very difficult to replicate. This differentiated value proposition, coupled with strong execution against our strategy, has driven new customer wins, new expanded vendor partnerships, and a large share of wallet with our most strategic relationships, all of which have proven to be incremental growth drivers. Three pillars of our strategy are driving our growth. First, we meet our customers however they want to engage in a true omni-channel motion. Digital, when they want self-serve speed, human when they want expertise and enablement, and we move seamlessly between the two in real time. Our digital capabilities are enabled by PartnerFirst, which we've built for depth and speed at scale to deliver a connected experience for our partners. As one of the world's largest distributors, we have the data and intelligence to support our partners in identifying demand opportunities we're applying machine learning generative and agentic ai to the data we gather across our ecosystem to personalize each partner's experience their navigation their dashboards and customized recommendations and opportunities we surface this reduces friction and drives higher conversion stronger attachment and faster cycle types Second, we segment our commercial teams in groups of specialists. We break our customer base into strategic tiers, and in some cases, we reallocate resources monthly based on what each tier needs. We use the same discipline on the technology and vendor side. The impact shows up in the data. SMB customers are growing well above market, and some of our most strategic accounts have surfaced billions of dollars of untapped opportunity. Third, we invest in enablement. We accelerate our customers' time to market by equipping them with advanced training, certifications and technical expertise tailored to each customer's technologies and segment. We provide labs to test the solutions. We believe that our partnership sharpens their capabilities and drives faster adoption of solutions when we can help customers become more successful they stay with us and grow with us europe is a clear proof point our emilia team competes head to head against pure play specialists runs digital and high touch motions in parallel and is weighted toward high growth technologies and segments the share gains there are structural control, as the same model we've extended across our entire distribution business globally. These are the reasons why earlier this quarter HP selected TDCnex as one of just two global distribution partners across its full networking cloud and AI portfolio, including the assets from the Juniper acquisition. It unifies our reach and meaningfully expands our relationship with one of the most strategic vendors in the industry. These are the kinds of outcomes our model produces. Hive also had an excellent quarter. Non-GAAP gross billings of $5.5 billion, up 117% year-over-year, driven by new programs with existing customers. We have built a suite of services to support hyperscalers' digital infrastructure deployments, which is key to our success. Coupled with strong execution against core pillars of our strategy, we've earned expanded program opportunities with some of our most strategic relationships, which has driven the triple-digit growth we have experienced year to date. Hive Northstar is simple, to be the partner of choice that hyperscalers trust to design, build and deploy their data center infrastructure globally. That starts with design and co-design, from board manufacturing to full rack integration and other key components, helping customers accelerate time to deployment. Beyond the build, we offer supply chain services that are designed to support our customers across the full data center lifecycle. Ahead of demand, we aim to secure key components to give our customers supply assurance in a complex environment. And throughout the lifecycle, we manage the spare parts and final components to help ensure our customers have what they need when they need it. As we mentioned last quarter, we have secured at least one program with each of the top five U.S.-based hyperscalers. We have begun the early stages of the ramp with our third, and the programs with the additional two hyperscalers are on track. with ramp expected in late fiscal year 26 or early fiscal year 27. We also issued an equity warrant to Amazon, a long-standing customer of ours, structured to grow in value as our programs together expand. Across these partnerships, we are being selected as a manufacturing and supply chain partner for multiple aspects of our customers' digital infrastructure build-outs. To support the future growth and needs of our customers, we are in the process of expanding our manufacturing facilities by more than 1 million square feet in several locations throughout the U.S., with current plans to add more. Hive is quickly becoming the go-to partner for U.S. hyperscalers seeking a consolidated approach to the design and build of their digital infrastructure that is paired with full lifecycle supply chain services. This full set of capabilities is key to winning new programs and onboarding new customers, ultimately enabling Hive to grow at a premium to market. In closing, there are three key things I'm focused on as we move through the year. First, partnering with vendors and our customers through the current demand environment. The macro backdrop creates complexity and challenges that we aim to solve. But the underlying demand signals currently remain solid. We believe the shift to AI-capable devices is just beginning. enterprises are prioritizing the modernization of their data centers and ai is driving incremental investment across the stack we are watching unit elasticity carefully but the net revenue impact from higher asps has been positive second our execution at hive we are bringing new capacity online investing in engineering capabilities ahead of the ramp and standing up new programs alongside expansion at existing customers. The bar I'm holding the team to is best-in-class service. That's what's gotten us here, and it's what wins the next program. Third, growing operating profit faster than billings. David will cover the details, but this is the metric that matters most to me. We aim to convert top-line growth into margin expansion and shareholder value. I now pass it to David to go over the financial performance and outlook.

Thanks, Patrick, and good morning, everyone. This was a record quarter for TD Cinex. What's encouraging is that both of our businesses continue to perform extremely well, extending the growth trajectory that we've been on. Starting with the top line, our non-GAAP gross billings for the second quarter was $28.9 billion, increasing 33% year-over-year or 32% year-over-year in constant currency and exceeding the high end of our guidance range. Non-GAAP operating income was $615 million, an increase of 49% year-over-year or 48% year-over-year in constant currency. Non-GAAP earnings per share was $4.85, an increase of 62% year-over-year and above the high end of our guidance range. GAAP operating income was $519 million, an increase of 58% year-over-year. GAAP earnings per share was $4.15, an increase of 88% year-over-year and above the high end of our guidance range. As we grow, we're focused on creating operating leverage so that earnings consistently grows faster than the top line. Driving that conversion is central to our strategy, how we allocate resources, and manage costs, turning to quarterly performance for each business. Distribution delivered non-GAAP gross fillings of $23.4 billion, increasing 22% year-over-year and well ahead of plan. Our end-to-end portfolio is indexed toward faster-growing technologies, which is positioning us to grow at a premium to market. Endpoint solutions gross billings increase 13% year-over-year, supported by strong growth in PCs, driven by higher ASPs coupled with mid-single-digit growth in units. Advanced solutions gross billings increase 31% year-over-year, driven by continued strength in infrastructure and security. Distribution non-GAAP operating income was $434 million, increasing 36% year-over-year, and non-GAAP operating margin as a percentage of gross billings was 1.9%, an improvement of 19 basis points year-over-year. We estimate the distribution gross margins benefited by approximately 5 to 10 basis points during the quarter, driven by incremental profit from strategic inventory and purchasing. Turning to Hive. Hive generated non-GAAP gross billings of $5.5 billion, increasing 117% year-over-year and ahead of expectations, with both manufacturing and supply chain services contributing. Manufacturing represented approximately two-thirds of Hive in the quarter, and gross billings growth increased more than the total business, primarily driven by increased volumes with our existing customer base. Supply chain services represented approximately one-third of Hive in the quarter, and growth was driven by component demand, supporting our customers' infrastructure deployments. Margins and overall mix of supply chain services can vary quarter to quarter. High of non-GAAP operating income was $181 million, increasing 89% year-over-year, and non-GAAP operating margin as a percentage of gross billings was 3.3%, decreasing 50 basis points year-over-year, primarily driven by NICs. We're laser-focused on continuing to make investments in both businesses that will position them to continue to grow at a premium-to-market over time. Shifting to cash flow and capital allocation, free cash flow consumption for the quarter was approximately $330 million. Given the accelerated growth in Hive, we're continuing to invest in working capital to support the growth of both new customers and new programs with existing customers. We're prioritizing making incremental investments where we can generate the healthiest returns, and this is showing up directly in our improving return on equity. Networking capital closed at $4.9 billion with a gross cash conversion cycle of 17 days, an increase of one day sequentially and flat year-over-year, reflecting an increased mix of Hive. Both businesses improved their cash days year-over-year, but we do expect additional efficiencies from Hive as new programs mature. We ended with $1.1 billion of cash and cash equivalents and net leverage of 1.6 times, modestly below our medium-term framework, which gives us ample capacity to continue to invest in the business while returning capital to shareholders. During the second quarter, we returned $112 million to shareholders through repurchases and an additional $39 million through dividends. Our board of directors approved a cash dividend of $0.48 per common share, payable on July 31, 2026, to shareholders of record as of the close of business on July 17, 2026. Turning to our outlook for the third quarter of fiscal 2026, we expect non-GAAP gross billings of approximately $27.7 billion, plus or minus $500 million, up approximately 22% at the midpoint, a gross to net adjustment of approximately 33%. Revenue of approximately $18.6 billion, plus or minus $400 million. Non-GAAP net income of approximately $361 million, plus or minus $20 million. Non-GAAP diluted earnings per share of approximately $4.50, plus or minus $0.25, up approximately 26% at the midpoint, based on approximately 79.4 million diluted shares outstanding. Our Q3 guidance assumes no material contribution from Hive's newly onboarded customers, which we are still expecting to ramp in late fiscal 2026 or early fiscal 2027. To close, we're extremely proud of our teams for the results they continue to deliver. We're entering the second half with forward momentum in both distribution and hive with our global reach differentiated capabilities and broadening portfolio we believe we're positioning ourselves to grow at a premium to market through time with that we'll open the call for questions operator we will now begin the question and answer session we request that you limit yourself to one question and one short follow-up to allow time for the other participants to ask their questions if there is remaining time you are welcome to requeue with additional questions.

To ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Please pick up your handset when you're asking a question to allow for optimum sound quality. And if you are muted locally, remember to unmute your device. Please stand by now while we compile the Q&A roster. Your first question comes from Ruplu Bhattacharya with Bank of America. Your line is open. Please go ahead.

Hi, thanks for taking my questions. Patrick, you've seen strong revenue growth and billings growth across all of your segments this quarter. The question I have is, have you seen any evidence of demand destruction or any weakening of demand given component cost increases?

Are customers showing any hesitancy to purchase either endpoint solutions and or advanced solutions and and likewise if units are going to be down year on year have you seen any change in channel incentives from the vendors and i will follow up for david okay so hopefully good morning thanks a lot for the question yeah so i mean focusing on q2 i mean very strong quota both on both on distribution and the hive and and very transparently we haven't seen for the moment any destruction of demand because of the price increases. The price increases are really starting to kick in, and it's probably going to accelerate in Q3. On the other hand, we see underlying demand, which continues to be healthier across the portfolio. I'm anticipating a question on maybe what happened on PCs. I mean, even on PCs, we saw a unique growth. So for the moment, we don't see that phenomenon. I just add, and that has been one of our assumptions for the guidance, that on most of the categories, companies need to continue to invest, especially infrastructure, and combined with the ASP increase, I think the demand will continue to remain healthy, at least for what we can see for Q3.

And any change in channel incentives from the vendors?

No, not yet. Okay. A quick follow-up for David. Sorry, just to add. So, no, we don't see changes or material changes from our vendors.

I add that our margin quality for distribution stayed very healthy in the quarter, as you can see. so no okay great uh david just quickly inventory was up uh 30 percent almost sequentially uh can you talk about working capital and free cash flow and and what is driving that inventory and are you using the strength of your balance sheet to buy any components uh thanks thanks for all the details thanks rupalu so we'll we've got a couple of pieces to cover here so when you think about cash flow and cash days so cash days were flat year over year i think the important point to make, though, is both of our businesses improve their cash days year over year.

And you've got the mix of Hive that caused the totality to be flat. Hive continues to experience a period of accelerated growth in that business, given the cash conversion cycle, takes capital to run. And so we continue to make those investments. When you start looking at inventory, I think ballpark, you know, the days are up, call it eight days or so year over year. And it's largely driven by some additional inventory that we've taken in Hive to help fund new programs, existing programs, and help make sure that our customers have adequate supply, given the broader macro.

Yeah, I just want to add one thing, which is, I mean, we've been for the last quarter a little bit more aggressive on inventory levels because we've anticipated on the price increases i mean that gave us several advantages one it helped us move the impact of the price increase for our customers and that's very important it also helped our vendors um by having by having inventory and again it positions us well in the market demand is strong um we are probably the one of the best inventory profile in the industry and again that that has helped us grow faster than the market overall.

Your next question comes from the line of David Vogt with UBS. Your line is open.

Great, guys. Thanks. Great. Thanks for taking my questions. So, Patrick, one for you and one for David. So, Patrick, can you help us unpack how the incremental manufacturing facility square footage plays out this year and next? And is it basically designed to support the incremental programs that you laid out with your current and future programs with your hyperscalers? And is there kind of a rule of thumb to think about what that incremental capacity could mean for whether it's billings or revenue? And then I have one for David as well.

Yes, good morning. Thanks a lot for the question. So, I mean, as we mentioned, so we have now one programs with all five U.S. based hyperscalers. We have now three hyperscalers where we have won more than one program. So what we see is a very nice pipeline of opportunities, which are going to ramp up probably end of Q4, beginning of Q1, fiscal year 27. And basically, we have to invest. We have to invest in footprint. We are going to invest in additional equipment and liquid cooling to be able to support the various programs we have won. We haven't yet established a correlation between investment and revenue. What I can tell you is that we are very comfortable with that expansion of capabilities and capacity that we are going to meet the demands we are seeing and be in a position to deliver the products with the right quality, which is the most important for us at the moment.

Okay, great. That's helpful. And David, I know this might be a tough question to answer, and I know there's some confidential kind of data here, but can you help us understand sort of the gross margin differentials within Hive, whether it's by – is it better to think about it relative to like ODM-CM margins versus supply chain margins or is there a lot of variability between programs with existing hyperscalers or between actual hyperscalers themselves? Can you help us understand how to think about the margin profile of these programs, particularly as you start to ramp obviously new programs later this fiscal year into fiscal 27? Thanks.

That's a good question. So when you take a huge step back, Hive has two businesses, manufacturing and assembly and supply chain. On average, historically, the margin profiles have been relatively similar. I will tell you, as you start looking at things by program, there can be differences. So I'll give you a couple of examples. If you're building AI servers, that tends to have a slightly lower margin profile. If you are building complex networking racks, that tends to have a slightly higher margin profile, so on and so forth. Same thing on the supply chain side, depending on what we're buying, how long we're holding it, and how complex it is, it does dictate the margin profile. But all in all, here's what I would anchor you to. We feel very good about the performance that Hive's been able to generate. We continue to make investments in new capabilities, new programs, new products that will allow Hive to continue to maintain, if not improve, its margin profile through time. And we're super excited with what the team's been able to produce thus far.

I just would like to add to that. So two more things. The first one is, I mean, similar to distribution, gross margin quality is very important. And I can tell you that the team is very focused on that. So that's number one. Point number two is, obviously, as you ramp up a program, you have some inefficiencies, which will disappear over time as, I mean, based on the learnings and the optimization. So again, hyper growth as we speak, lots of programs being launched, some impact on the GM quality because of that. But again, looking forward, it's a priority for us to optimize also the GM quality. Great.

Thanks, guys.

Your next question comes from the line of Keith Hosom with North Coast Research. Your line is over.

Good morning, gentlemen. Congratulations on a great quarter. If we think about the evolving businesses out there with memory, and we're hearing more and more about supply constraints coming into place here. Are you guys seeing the supply constraints come into place right now, or is there concerns that you'll see some perhaps limiting the amount of growth you can have for the rest of the year or maybe into FY27? But how are you thinking about the supply availability right now?

So, Keith, so good morning. Thanks for the question. So for Q2, we haven't felt it really. But you're right. In our Q3 guidance, we took into account some risk with component availability. It's memory, obviously, is one of the category. Some CPUs could come also. Some challenges on delivery of CPUs could come also. So we factored it into a guidance, and we will see. But again, so far, it has been good. I would just add that when you look at Hive, it's our customers primarily who secure the supply, and they have, I would say, some good arguments with the vendors. On the distribution side, so far, our key vendors have done a very good job with their supply chain. But, yes, for Q3, we've been a little bit more cautious because of that in our guidance.

Okay. And if I could follow up on that, in terms of the HPE win, in terms of being one of two global distributors, have you seen that benefit completely in the quarter, or is it still going to ramp up over time?

No, no. So, we are going to see the ramp up over time. So, what's happening, just to put things in context, So HPE has decided to rationalize its go-to market. They are going to focus on two global distributors in certain areas. And the benefit takes some time. So we are going to probably see the benefit, I would say, first half of next year. We want some new countries. We're going to see the rationalization of the distribution network in some other countries. So it takes a little bit of time but just to comment from a more strategic standpoint on the hp win it's very interesting that the fact that we we are global has been one of the reason for the win what we see more and more from the vendors is that being global is becoming the differentiator when they rationalize their go-to markets. And so we think that probably there's more to come. Other vendors are now looking at their global distribution landscape. And our strategy to expand in APGA, in Latin America, potentially one day in the Middle East, is clearly positioning us well to benefit from that market trends.

Great. Thank you.

Your next question is from the line of Catherine Murphy with Goldman Sachs. Your line is open.

Thank you very much. Maybe switching gears here a little bit. The margin profile of the endpoint solution segment seems like a record high from what I can see at 5%. Can you talk about what drove the strength in the quarter and if there were any one-time benefits like the strategic inventory purchase, as you mentioned, that benefited results in the quarter. And then to just quickly ask my follow-up now, are there any expectations for continued benefits from this strategic inventory build as we look into the back half of the year and into 27, so long as we continue to see an increasing ASP environment? Thank you very much.

Good morning, Kat. A couple of comments. One, we put in the prepared remarks that on the distribution side, we had five to 10 basis points of additional margin from strategically purchasing inventory. A lot of that, you know, manifests itself in the endpoint business. Here's the way I would think about it. Our goal is to secure the right amount of supply. And as Patrick said, to help our vendors smooth supply constraints, make sure there's proper availability. It is true when in a rising price world, we can benefit from that. But what I would tell you is, yes, if prices continues to rise, there will be a benefit. But we're also not greedy as it relates to this, right? We want to be paid for the additional capital that we've got deployed, but we also share some of these benefits with our customers as well so we can build better long-term partnerships. And so I would anticipate as we move forward, these types of benefits will be more one-time in nature and slowly dissipate, and that's why we tried to call them out in the scripts.

Your next question comes from the line of Eric Woodring with Morgan Stanley. Your line is open.

Awesome. Thank you. Thank you for taking my questions, guys. Congrats on the results. Patrick, I guess I'll combine my two questions because it's a three-part question, so sorry, sorry, but they're all related, and I'd love if you could just take a big step back and help us understand three things. So first, just again, help us understand the sustainability of hardware spending as we look through the second half and into next year, just given what you know today and the pipeline that you see. Second, just what products are showing to have greater inelasticity than others as you as you face these record price hikes and then third are there any products or segments as you look forward where you don't believe you can fully pass through the higher device costs and potentially see some margin pressure just if there is any customer pushback i'll combine those and make those my my two questions even though it's a three-parter so thank you guys thank you eric good morning um let me start with the last one on on the margin so again and it's true for both businesses distribution and hive

um we are a cost plus business so if cost increase we pass it to to the customers we we have no other choice um we have a very good track record as an industry and as tdc next you look at what happened last year with the tariffs and you look at what has been happening the last two quarters. I mean we had already some categories where we saw the price increases and again we were able to pass it. We had inventory to smooth the impact for our customers but overall I mean no concerns there. In terms of product elasticity, the category I'm watching is PCs with some caveats. So consumer PCs I think the elasticity will be relatively high. But we focus on B2B. So I'm expecting some impact of the ASP increase on the PC consumption. If you look at our Q2 results, we were able to mitigate the impact by gaining share. And also because we are positioned on B2B and the refresh is not over and you still have many enterprises or companies who have to upgrade their PCs. But that's probably the category where I am the most cautious. We are the most cautious in our outlook. If you look at infrastructure, if you look at networking, for the moment, we see very solid demand. Networking very rapidly. The two last years were tough. So networking is back on the lower base. You have the refresh driven by Wi-Fi 7, and then you have the investments related to AI in that space. So I think that's sustainable. If you look at data centers, so server and storage, I mean, this quarter, I mentioned last quarter that storage was starting to come back. And I wanted the confirmation with a very strong storage quarter. and i think it's it's going to last um the ai i mean draw first the compute upgrade and i think now storage is is and then switches and now i think storage is next and then on compute we see very very solid demand and it's driven by um several things so obviously asp increase is driving the value up. But even in volume, what's happening is that you have still the refresh of the general compute servers happening. It's not over. So that's an opportunity. You have an acceleration of the purchase of general compute servers because they have become critical when you speak about agentic AI. and then the cost of tokens is going to become a big topic and if you want to mitigate the cost of tokens i mean running your workloads on premise is going to be a good solution so i think that's going to continue that's going to to drive demand and be and remain a tailwind and then an accelerated compute i mean companies are starting enterprises in particular but also you have the sovereign clouds especially in europe and apj and the neo clouds in north america they are investing heavily we are the source of of supply for them and i see the demand remaining healthy here so in summary um except on pcs where the units could be impacted by the esp increase i think on the other categories um i think it's sustainable software was also a very strong quota for us. So ASP increase is less of a topic. I think it's going to be sustainable. Security, especially now that you have to manage the risk related to agents, is going to drive additional demand. So I continue to be cautiously optimistic across most of the technologies.

Awesome. Thank you very much, Patrick, for all that detail.

Your next question comes from the line of Adam Tindall with Raymond James. And your line is open.

Hi, good morning. Patrick, I just wanted to start here taking a step back. If I look at the quarter, incredible growth and negative cash flow. I wonder if you might just talk about how to strike the right balance between pursuing growth versus generating cash. And more specifically, if I look at kind of where that cash is going, it's heavy investments into Hive in particular. And I think what we're learning on a forward basis is some of that's going to be incrementally fixed investment with this capacity build out how do you protect against downside there where customers are right now kind of rationalizing ai spend token spend like you like you said the fear that you might be building fixed investment into a peak ai market thanks so so thanks thanks adam for the question so um let me distinguish between distribution and a high very rapidly distribution continues to, I mean, cash days are down on both businesses, but cash days are really low on distribution.

So the growth on distribution is generating free cash flow, significant free cash flow, which is true today. We are investing in Hive to fuel the Hive growth, both working capital and of course fixed assets so one hive continues to have a very nice return okay so if you look at our key ratios and it's not that we are financing a growth business at the expense of our key financial metrics it's the other one it's a creative for margin it's a creative for our return on equity so from that standpoint we feel very comfortable in terms of building fixed costs in case the market is going to correct so it's true that so the working capital will adjust immediately if the market goes down so we we have no concern it's like distribution it's a if i can speak like that the elasticity is high so i mean as soon as the market goes down the working we are going to to see the working capital going down very rapidly and so it will generate free cash flow but from a fixed asset standpoint yes it's it's it's the business which requires significantly more investments than distribution or relatively speaking but again it's it's not either a fixed cost which we could not absorb if you look at this year we're going to invest okay for for high roughly 100 million um amortized over five six years the cost is is absolutely uh bearable in case that the market turns and the other costs for hive are mostly valuable so so again in case of downturn i think it's going to be something similar to what we see in distribution and you have a lot of cash flow generated because working capital goes down and then we are very good at reacting and adjusting our cost base to the new market reality. So I am not very concerned here. I can just finish with this continues to be top of mind for us. So we think about it all the time as we do the investments. But again, for the moment, I think we should be in a safe position.

The only other thing I'd add, Adam, if it helps is, one, we ladder leases. That obviously helps if there's a change in demand. Two, we don't speculate on demand, so we largely build and outfit facilities based on long-term programs once they're committed. And so, you know, I will tell you the team is incredibly prudent at how they manage Hive from a capacity perspective, and they've done a nice job. As Patrick said on the cash flow, you know, as you're ramping a new program, there is more working capital inefficiencies that ultimately unlock as things mature. We are aware of the cash consumption. We are pleased with the reduction in cash days year over year, but we do believe long-term there are additional efficiencies that we'll look to achieve as well.

Great. Just a quick follow-up. By the way, I know that question.

Your next question comes from the line of Joe Cardoso with JP Morgan. Your line is open.

Hi, thank you for taking my question. This is MP on behalf of Joe Cardoso from JP Morgan. Can you please double click on the mix of high business between supply chain versus contract manufacturing during the quarter and particularly like how did it track relatively to your expectations heading into the quarter and also how do you expect it to track into the second half and any potential gross margin impacts from that? Thank you and I have a funnel.

So good morning and thanks for joining. So we, when you think about Hive, we put in the prepared remarks, two thirds of it, two thirds of the business was manufacturing this quarter and about a third of it was supply chain. When you think about performance versus expectations, both businesses exceeded expectations. We don't, it's a little tricky to try and figure out what's long-term guidance split at kind of a sub-segment level, but here's what I would tell you. Our teams have done an excellent job winning new programs. We're very focused on expanding our manufacturing business and expanding our manufacturing programs. But we also recognize that because we have an end-to-end offering, being able to tie it all together is hugely advantageous for both our customers and for TD Cinex.

And so they should grow together through time but our hope is that long term we continue to increase the manufacturing as a percentage of the total yeah i just want to add that um so always supply chain services is is a service so in today's environment where you have this big asp increase and shortages i mean our customers have more needs than in in environments which will normalize so again the team is first focused on winning programs to grow the manufacturing business that's really the core of the activity and the service part is a little bit more volatile because of the context i just explained thank you uh and for my follow-up i just wanted to talk uh ask about pricing uh can you please comment how is the pricing environment right and how do you how should we how how you think the pricing environment is right now versus 90 days ago and any particular product categories which you want to call out where the pricing pressures are more pronounced relative to others thank you yeah so so pricing is up um and you had this inventory in in in the channel and that inventory has been shipped so we're going to see the impact more and more um the the category where the price increase are the most significant are obviously storage and servers because they They are the most impacted by the memory price increases, but we see it also in PCs. By the way, we're expecting some new price increases in both categories in July, so the price increases are not over.

Your next question is from the line of Adam Tindall of Raymond James. Your line is open now.

Okay, I was just going to continue on that thread, Patrick. I know that question that I asked earlier about cash flow versus growth sounded challenging. I actually think you're doing the right strategy because your balance sheet is clean. You don't necessarily need to be generating cash right now. But on that thread, I wanted to ask the follow-up to David. The timing and magnitude to cash flow reversing, I think previously you had talked about 95% of non-GAAP net income for the combination of fiscal 25 and 26, but I think you'd need like two plus billion of free cash flow over the next two quarters to do that. And I wonder if we should sort of recalibrate our thinking. No, this is a tough question in a dynamic environment. Just any help for our models? Thanks.

No, it's a good question, Adam. And I think you're thinking about it the right way, which is Hive is in a period of accelerated growth. And so what we've reflected in the Q3 outlook is continued momentum in both businesses. And so the 95% net income to free cash flow conversion ratio is absolutely our North Star metric on a long-term basis. But in periods of accelerated growth, we will consume cash, but we believe it's a good use of capital and the incremental ROIC is good. So hopefully that helps give you a little bit of color around our optimism and hive and some of the short-term cash impacts of making investments in that business. But we think it's a great investment to make. Yeah, makes sense. You're welcome.

And your next question is from the line of Guy Hardwick with Barclays. Your line is open.

Hi, good morning. It's a follow-up question on the strategic inventory. Just wondering how much of the 13-day year-on-year increase related to strategic inventory purchases? And I assume in the Q3 guidance, you're also assuming further margin benefits from these purchases, maybe similar to what you had in the five to 10 basis points you had in just the recent quarter.

So this is a tough question to answer because it's very difficult to quantify. But what I would tell you is, our teams are able to increase their days of supply around specific categories if they believe that we need to hold additional stock to kind of smooth out supply chains. They don't go after this as a business. They're not trying to capitalize on price changes and speculate. But in situations where I'm just going to make it up, let's say lead times are going to extend by three or four weeks, they might hold an extra couple of weeks of stock and for certain categories and we'll get benefits from that if prices go up. So what we do as a matter of course, is we don't forecast a lot of these benefits. We call them out when they come. It tends to be, you know, fairly opportunistic in nature, not necessarily opportunistic, but I would tell you, we don't forecast and plan for a lot of these things. But when we do realize then we tend to call them out in the quarter. But it is part of the reason that inventory is up on a year-over-year basis. But I would tell you the predominance of that increase was largely driven by the investments we've made in Hive due to new programs and expanded programs with existing customers.

So just to be clear, so the guidance of Keith 3 does not include any margin benefits from strategic inventory?

It's hard to say. We don't have the teams break it down to that level of detail. You know, what I would tell you is we do kind of a bottoms up role based on our guidance and the teams will factor a variety of risk and opportunities in there to quantify exactly whether it's in or out or what degree is a little difficult. To be candid with you, I would say there's probably a little, but as you've seen based on the Q2 results, you know, it's relatively small, five to 10 basis points. And so, you know, and it does tend to dwindle down through time.

Your next question is from the line of David Page with RBC Capital Markets.

And your line is open. Good morning, Patrick, David. Thanks for taking my question. I want to start on the Amazon warrant. I was curious what was the strategic rationale for that and how that warrant came to be, and is it something that we should expect maybe with some of the other hyperscalers that you're ramping up?

Good morning, David. So first thing, the warrant concerns Hive, and Hive has had a long-term relationship, historical strong relationship with AWS. So the relationship has been very successful historically um the the value proposition um we delivered to to amazon has been very much valued and so when they came to us to to discuss the opportunity we saw it as a big opportunity and i mean with the balance in place now we think we have an agreement which is going to be mutually beneficial. And yeah, let's see how it materializes in the future. But we are very pleased with that agreement.

Great.

That's helpful.

And just a quick follow-up. I think in the past you've spoken about traditional compute versus accelerated compute. So if you could, could you provide some color on the mix traditional versus accelerated that you had in the quarter or that you're expecting in late 4Q and early 2027?

And I guess your question is for Hive specifically?

Yes.

So this quarter, we had the ramp-up of an accelerated compute program at Hive. um generally speaking we think that um so the when you look at our mix of programs we believe that um we are going to see more of networking general compute and storage in going forward but we want to continue to maintain and develop our expertise in accelerated compute In terms of mix, so we have this nice ramp-up, but when I look at the profile of the wins we are having, we will continue to see more of the other programs than the accelerated compute programs, I think, going forward.

Your next question comes from the line of Vincent Colicchio with Barrington Research, and your line is open.

Yeah, Patrick, if hardware demand moderates, would you expect software, cloud, and recurring revenue streams to offset some of that pressure?

So thanks for the question. So software, cloud, security continue to grow at double digits. And for sure that when you look at the underlying reason for that success, I think they're going to, I'm quite positive and optimistic on those underlying trends to continue in the future. now i will tell you about when i look at hardware and when i look at the impact of ai on of the potential impact of ai on on-premise and even i should say on edge computing i think hardware is becoming a very interesting category again could be poised for very interesting growth and ai could be really a game changer yeah it's a little bit too early to call it out but there are some indicators um that i mean could could speak well as i said i mentioned it before the cost of the tokens is going to have an impact i think on some of the behaviors be beyond the issue of latency, the issue of security and privacy. I think the cost of the tokens could have a very positive impact on on-premise hardware and both in the data center, but also at the edge. Thank you.

Your next question comes from the line of Alec Valero with Loop Capital. Your line is open.

Hey, guys. Thank you for taking on my question.

My question to you is, I don't know if you mentioned this earlier, but on the 1 million square feet that you're adding, any color on when we can see this capacity start to contribute to revenue? yeah so so thank you for the question so again we i mean we have a strong pipeline strong backlog and what we so the we we see the ramp up of the programs we have want to start impacting our revenue in q4 fiscal year 26 and most probably in q1 fiscal year 27 so So the capacity we are adding will convert into additional revenue potentially in Q4 and most probably in Q1 next year.

Got it. Thank you for that. Just a quick follow up. On Hive, obviously you said manufacturing is now two thirds of that. What can we expect that mix to look like throughout the year?

So, Alec, we don't – it's hard to give you an exact answer on that. Here's the way I would tell you to think about it. Over a long period of time, we expect manufacturing to increase as a mix of the total. But as Patrick said, in certain types of environments, our supply chain business becomes very critical to helping support our customers. And so, it will ebb and flow. It's hard to tell you exactly quarter to quarter, year to year what that might look like. But over a longer period of time, we expect to increase the percentage of hive associated with manufacturing.

Got it. Super helpful. Thank you, guys. Appreciate it.

And we've reached the end of the Q&A session. I would now like to turn the call back over to Patrick for closing remarks.

So thank you all for joining us this morning. I want to close by thanking our co-workers across the globe, whose commitment and dedication drive everything we accomplish. and our partners for the continued confidence they place in us. To everyone on today's call, we appreciate your ongoing interest in TDCnex. Thank you and wishing you a great day.

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