TD SYNNEX Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 9, 2024

Key Takeaways

  • TD SYNNEX delivered a Q4 EPS beat with gross billings at the high end of guidance, driving a non-GAAP operating margin of 2.85% for FY 2023 through mix shift and merger synergies.
  • The company generated $1.3 billion in free cash flow, exceeding its $1 billion target, and returned over $750 million (60% of free cash flow) to shareholders via dividends and repurchases, buying back 7% of its shares.
  • Fiscal Q1 guidance calls for $19–20 billion in gross billings (down 3% YoY) and non-GAAP EPS of $2.60–3.10, while FY 2024 is expected to see flat H1 billings and mid-to-high-single-digit growth in H2.
  • Strategically, TD SYNNEX is expanding in high-growth areas—adding Workday, Meta and Palo Alto Networks to its portfolio, launching an ISV acceleration program, and investing in AI and digital platform capabilities.
  • Corporate priorities include a 14% dividend increase to $0.40 per share, the appointment of Patrick Zammit as COO to streamline operations, and top ESG rankings including a perfect score on the Corporate Equality Index.
AI Generated. May Contain Errors.
Earnings Conference Call
TD SYNNEX Q4 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX 4th Quarter and Full Year Fiscal 2023 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

At this time, for opening remarks, I would like to pass the call over to Liz Morelli, Head of Investor Relations. Liz, you may begin.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for today's call. With me today are Rich Hume, CEO and Marshall Witt, CFO. Before we continue, let me remind you that today's discussion contains forward looking statements within the meaning of the federal securities laws, including predictions, estimates, projections or other statements about future events, including statements about demand, 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 ks we filed today and in the Risk Factors section of our Form 10 ks and our other reports and filings with the SEC.

Speaker 1

We do not intend to update any forward looking statements. Also during this call, we will reference certain non GAAP financial information. Reconciliations of GAAP to non GAAP results are included in our earnings press release and the related Form 8 ks available on our Investor Relations website, ir.tdsynex.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 Rich.

Speaker 1

Rich?

Speaker 2

Thank you, Liz. Good morning, everyone, and thank you for joining us today. We delivered solid 4th quarter results with the gross billings at the high end of our outlook range and a significant EPS beat enabled by the continued execution of our business plan despite dynamic market conditions. Our strategic emphasis on high growth technology areas coupled with our broad technology portfolio allowed us to pivot to margin accretive areas of growth and we saw signs of stabilization with healthy sequential improvement in revenue and gross billings in the Q4. For the full fiscal year, We successfully navigated the business environment, growing our market share in both Americas and Europe, increasing our business mix of high growth technologies and expanding our non GAAP operating margin to 2.85% through a combination of mix shift and full execution of merger synergies.

Speaker 2

Our business model improved working capital management and the healthier supply chain conditions enabled us to generate robust free cash flow of $1,300,000,000 ahead of our original $1,000,000,000 target. From this, we returned over $750,000,000 of capital to shareholders to dividends and share repurchases, representing approximately 60% of our free cash flow for the year. This exceeded our 50% target as we opportunistically increased our share repurchases. In total, we repurchased approximately 6,500,000 shares or 7% of shares outstanding. As Marshall will further discuss, we are also increasing our quarterly dividend in Q1 to $0.40 per share or a 14% increase compared to the prior quarter.

Speaker 2

Balanced capital allocation and returning capital to shareholders continues to be a top priority for the company as we execute our strategy and drive value for our shareholders. Moving on to our fiscal Q4 results. From a gross billings perspective, the quarter played out at the high end of our expectation with improving year over year declines in endpoint solutions. As expected, advanced solutions declined slightly on a year over year basis given the strong performance in FY 2022 enabled by record backlog levels. From a regional perspective, the market environment in the Americas continued to show signs of stabilization with improving year over year declines in endpoint solutions.

Speaker 2

Europe performed better than expected and improved sequentially despite a muted macroeconomic environment. In APJ, we continue to see traction in our portfolio build out, helping to offset some of the softness in endpoint demand. We made excellent progress on our strategic efforts to strengthen our end to end portfolio via new vendor additions, including Workday and Meta, where we are the exclusive North American distributor for their new suite of business products. We also expanded our security portfolio in Europe, one of our key priorities, with the addition of Palo Alto Networks full range of cybersecurity hardware and software products to our offerings in the region. Our strong pipeline of new vendors is bolstering our best in class portfolio of over 2,500 vendors, something which is becoming even more important as IT solutions are increasingly comprised of bundled multi vendor offerings.

Speaker 2

As part of our focus on solutions aggregation, during the quarter, we launched our ISV acceleration program in North America, which is designed to help independent software vendors of all sizes to grow their businesses by accessing our extensive ecosystem, technical expertise, marketing and sales resources. We were also honored to be recognized by several vendors with a variety of awards spanning the globe, including being named the Global and North American Distribution Partner of the Year by Palo Alto Networks. We are proud of these distinctions and strive to continue elevating our offerings to help our partners grow their businesses. Our ESG goals and initiatives remained front and center during the fiscal year and we recently achieved our 2nd consecutive top score in the Corporate Equality Index, a leading benchmark survey and report measuring corporate policies related to LGBTQ plus workplace equality. In addition, we formalized our commitment to disability inclusion at the company through my signing of Disability Inn's CEO letter.

Speaker 2

We are looking forward to sharing additional insights regarding our ESG key initiatives in progress in our 2nd corporate citizenship report, which we will plan to publish in the first half of the year. As we begin our new fiscal year, I wanted to provide a bit more color regarding our recently announced executive changes for the organization. Last week, Patrick Zammit assumed the role of Chief Operating Officer for TD SYNNEX. As COO, Patrick continues to report to me and takes on the responsibility for leading our day to day distribution operations, executing our business strategy to further drive profitable growth across the company and accelerating our penetration in strategic technologies. This will also benefit us further by allowing me to focus on leading our strategic initiatives, identifying additional growth opportunities and focusing on relationships with key external stakeholders, including vendors, partners and shareholders.

Speaker 2

I'd also like to take a moment to thank Michael Urban, President of Americas, who has decided to leave the company effective March 1st for his efforts in bringing TD SYNNEX together over the past 2 years. He and his team delivered a very successful merger integration in the Americas and we wish him well in his next career chapter. From a regional perspective, we are in strong position with the continued leadership of Peter Lorac in North America, Ottavio Lozzarini in Latin America and Jaydeep Malhotra in APJ, all long time industry veterans. And we look forward to announcing our next European leader in the very near future. With this highly skilled and experienced team, We entered 2024 well positioned to capitalize on the gradually improving IT spending market dynamics.

Speaker 2

Looking forward on our outlook for fiscal 2024, we are optimistic that the market headwinds we have experienced over the past several quarters will continue to abate as the year progresses. Early indications are that the gradual recovery in endpoint solutions will build throughout the year fueled by the resumption of more normalized PC buying patterns. This will be balanced by tougher year on year compares for Advanced Solutions given the strong growth in the first half of twenty twenty three, which should position us well for returning to overall growth as we move through the year. Marshall will elaborate on this later. As we think about our strategic priorities for FY 2024, a couple of areas of importance I want to touch on are our digital platform capability and advancements in AI.

Speaker 2

As software and services continue to represent a greater portion of the overall IT spending for the industry, we remain focused on augmenting our capabilities in these areas to help customers assemble the critical solutions that their end users require. To do this, We will continue investing in and building out our digital platform capabilities with the aim to provide customers with a one stop shop where they can easily access unified multi vendor offerings. AI is another clear growth vector as we continue to look ahead in our industry. We have invested for several years in this space via our data analytics practice. This created the foundation for our AI strategy and our decade plus of experience in data analytics puts us in a leadership position relative to this new exciting market opportunity.

Speaker 2

We have built a state of the art vendor portfolio starting with leading providers in the on prem and off prem infrastructure area required to run and train AI models. Many of our leading software vendors have announced or released embedded AI capabilities in their product lines and we are working with industry leaders for AI foundational models to accelerate the development of use cases across our ecosystem. In addition, we will leverage our strong relationships with PC OEMs to support and enable the introduction and growth of AI enabled PCs over time, as well as our relationships with key component suppliers and customers. In addition to our previously announced Destination AI program, We are partnering with others in the ecosystem such as our collaboration with Microsoft where we launched a global AI enabled journey for Microsoft 365 Copilot last month. We are also working with several other strategic vendors to capitalize on our destination AI framework to accelerate the adoption and use of new AI product sets.

Speaker 2

In closing, We believe we have the right strategy and are well equipped to continue navigating the ever changing IT landscape, while positioning ourselves to capitalize on new and emerging growth opportunities. We are committed to continuing to create shareholder value with a keen focus on execution and healthy capital returns. Lastly, I want to take a moment to extend my sincere thanks to our customers and vendors who we are privileged to help achieve great outcomes with technology every day and to our 23,000 co workers around the world who enable this important work. I will now turn the call over to Marshall so that he can provide additional details on our financial performance and outlook. Marshall?

Speaker 3

Thanks, Rich, and good morning to everyone on today's call. Our fiscal 'twenty three full year results illustrate the power of our business model, broad technology portfolio and the progress we've made in positioning ourselves as a leader in the high growth technologies of cloud, Security, Data Analytics and AI. Despite a challenging market environment due to industry wide reductions in demand for PC ecosystem products, we demonstrated continued strength across advanced solutions and High Growth Technologies and grew both our gross and operating margins for the full year. The resiliency of our business model helped offset some of the pressure from the reduced revenue and our businesses responded appropriately by acting to align our cost to the changes in volume and mix. This enables significant free cash flow generation and capital return to shareholders.

Speaker 3

Moving to our fiscal Q4 performance. As Rich mentioned, we had strong gross billings in Q4 and importantly saw early signs of stabilization in IT spending with lesser year on year declines in endpoint solutions. Advanced Solutions faced tougher compares given the strong performance last year when backlog levels were still elevated. Fiscal Q4 total gross billings were $19,700,000,000 down 6% year over year and at the high end of our outlook range, driven by stabilization in the Americas and outperformance in Europe. Net revenue was $14,400,000,000 down 11% year over year and near the midpoint of our outlook range.

Speaker 3

Gross to net revenue adjustments were larger than expected due to a shift in business mix and the migration of a Hyve customer to a consignment model. As a reminder, this migration is due to certain components transitioning to a customer owned procurement model. While this has a negative impact to our net revenue, it does not materially impact operating profit. For the fiscal 4th quarter, This change impacted net revenue negatively by $270,000,000 Non GAAP gross profit was $1,020,000,000 and non GAAP gross margin was 7.07%, up 44 basis points year over year, as we continue to see the positive effects of a richer product mix and our progress in expanding high growth technologies, which continued to represent more than 20% of total gross billings for both the quarter and the full year. Total adjusted SG and A expense was $592,000,000 up $10,000,000 year over year and up $15,000,000 quarter over quarter, which was expected given the sequential growth in gross billings of 1,000,000,000 income was $427,000,000 and non GAAP operating margin was approximately 3%.

Speaker 3

Non GAAP interest expense and finance charges were $66,000,000 $4,000,000 better than our outlook and approximately flat quarter over quarter. The non GAAP effective tax rate was approximately 22%, better than our forecast of 24%, primarily due to the mix of our business within certain regions. Total non GAAP net income was $286,000,000 and non GAAP diluted EPS was $3.13 $0.23 above the high end of our guidance range due to a combination of better than expected performance on gross billings, profitability, interest expense and taxes, as well as higher share repurchases. As a reminder, non GAAP diluted EPS for the Q4 of fiscal year 'twenty two was $3.44 but the year over year comparison for EPS is impacted by $0.33 of high margin recoveries in fiscal Q4 of 2022. Now turning to the balance sheet.

Speaker 3

We ended the quarter with cash and cash equivalents of 1,000,000,000 and debt of $4,100,000,000 Our gross leverage ratio was 2.3 times and net leverage was 1.7 times, in line with our investment grade credit rating and approaching our target of 2x gross leverage ratio. Accounts receivable totaled $10,300,000,000 up from $8,900,000,000 in the prior quarter and inventories totaled $7,100,000,000 down from $7,500,000,000 in the prior quarter. For the Q4, net working capital was $3,300,000,000 and the cash conversion cycle was 23 days, both flat from Q3. Cash from operations in the quarter was $211,000,000 and free cash flow was $168,000,000 In total, we generated approximately $1,300,000,000 in free cash flow in fiscal 'twenty three, ahead of the $1,000,000,000 target we guided to at the beginning of fiscal 'twenty three. We returned $374,000,000 to shareholders in the quarter, including $343,000,000 via share repurchases and $31,000,000 through dividend payments.

Speaker 3

For the full fiscal year, we returned $751,000,000 to shareholders, of which $621,000,000 was through share repurchases compared to $125,000,000 in fiscal 'twenty two. We currently have approximately $396,000,000 remaining under our share repurchase authorization. For the current quarter, our Board of Directors has approved a 14% increase to our cash dividend and $0.40 per common share, which will be payable on January 26, 2024 to stockholders of record as of the close of business on January 19, 2024. Moving now to our outlook for fiscal Q1. We expect gross billings of $19,000,000,000 to $20,000,000,000 representing a decline of 3% on a year over year basis at the midpoint.

Speaker 3

We expect total revenue to be in the range of $14,000,000,000 to $14,700,000,000 representing a decline of 5% on a year over year basis at the midpoint. Our guidance is based on a euro to dollar exchange rate of 1.09. Non GAAP net income is expected to be in the range of $232,000,000 to $277,000,000 and non GAAP diluted EPS is expected to be in the range of $2.60 to $3.10 per diluted share based on weighted average shares outstanding of approximately 88,400,000. Interest expense is expected to be approximately 66,000,000 and we expect non GAAP tax rate to be approximately 23%. Additionally, I wanted to highlight that effective next quarter, we will begin providing some additional disclosures to enhance our reporting to investors and other stakeholders.

Speaker 3

Starting in fiscal Q1, we will provide more clarity regarding our gross billings, net revenue and gross profit for Edge Solutions and Advanced Solutions. Edge Solutions, which we previously referred to as endpoint solutions, will include PCs, peripherals, mobile, print and other devices including ARVR. Advanced solutions will include hyperscale infrastructure, cloud, servers, Networking, Storage and Software. Our reportable segments will continue to be based on geographies of Americas, Europe and APJ. As we think about the full fiscal year for 2024, we currently expect non GAAP gross billings to be approximately flat year over year in the first half of the fiscal year with expected growth of mid to high single digits in the second half of the fiscal year.

Speaker 3

We expect to generate approximately $1,200,000,000 in free cash flow for the fiscal year and remain committed to our medium term capital allocation target returning 50% of free cash flow to shareholders via both dividends and share repurchases, while remaining opportunistic depending on market conditions. In closing, we successfully navigated the volatile market conditions in fiscal 'twenty three and are well positioned to capitalize on a return to growth in fiscal 'twenty four with a focus on margin expansion, robust free cash flow generation and a commitment to continued healthy shareholder returns. With that, we are now ready to take your questions. Operator?

Operator

Thank you. To allow time for other participants to ask their questions. If there is remaining time, you are welcome to re queue with additional questions. And we will take our first question from David Vogt with UBS. Your line is open.

Speaker 4

Great. Thanks guys for taking the question. So maybe it's a question for both of you. In terms of How are you thinking about fiscal 'twenty four? We appreciate the color on sort of the gross billings commentary for the first half and the second half.

Speaker 4

Can you kind of help us understand a little bit more how you're thinking about maybe at a higher level sort of what's underpinning that spending pattern from an IT spending backdrop, Whether

Speaker 5

you want to

Speaker 4

talk about it from an edge solutions perspective, the new category or advanced solutions, can you kind of help us think about how you're thinking about the broader market and your position and your ability to kind of grow faster than the market, I would assume is kind of embedded in your outlook. So maybe we'll just start there, if that's okay. Thanks.

Speaker 2

David, good morning and thanks for the question. This is Rich. If you think about The evolution throughout and then the back end of COVID, obviously, last year at about this time, the PC ecosystem set of products really went into a pretty significant decline. At the same time back end of COVID there was pent up demand and backlog for Advanced Solutions Products. So as we come into this fiscal, You have an easier compare within the PC ecosystem.

Speaker 2

You have a more difficult compare in the advanced solutions because of the cycles that that transpired in the past. So, our point of view is when we think about the first half that there will be Some level of growth in PC Ecosystems, but the advanced solutions will face a bit of a more challenging compare. Then when we get to the back half of the year, we believe that most of the wraps, if you will, Have concluded and that both of those major segments will have growth attributes. And That's what has led us to the guide of kind of flattish in the first half with mid high single digit in the second half. And yes, of course, it's always our intention to do better than the market.

Speaker 2

In fact, in the prepared remarks, we talked about in the Americas theater as well as I'm sorry the North America theater as well as the European theater that we had gained some market share. So Marshall, I don't know if

Speaker 3

you have anything to add. Yes, David, just some more color. When we do our assessment for quarter 1 and for the full fiscal 'twenty four, we come at it from a bottoms up perspective. So Think about it for all the countries that we do business in, each one of those leaders looks at what that is for their territory. So there country assessment and within that there's certainly a vendor and a customer comparison as well as third party industry Data, just to triangulate where we should land.

Speaker 3

And then with that, as Richard said, we certainly look at the GDP, The overall trajectory of what that looks like by market, what IT spend correlation is expected to be relative to GDP and then our ability to outgrow that.

Operator

And can

Speaker 6

I just ask a follow-up?

Speaker 4

In the prepared remarks, you talked extensively about AI and obviously that being a contributor to the business. How should we think about AI across the business, let's say, over the next year or 2? And how is that factored into your outlook this year, I guess? I mean, I would imagine there's a lot of discussion by chipmakers, OEMs, etcetera, that, let's say on the endpoint or edge solution market. You'll see stuff at the latter half of it, I guess, 2024, calendar 2024, I should say.

Speaker 6

I just would love to kind of

Speaker 4

get your thoughts on how you think that kind of shapes through the year from an AI perspective.

Speaker 2

Yes. So David, I would use cloud as a parallel or an analogy here. So obviously there is a lot of Marketing and fanfare, we call it the hype curve or I think IDC calls it the hype curve at the front end, Clearly this is a real technology that's going to bring a lot of benefit, but the plans are defined And there is a bit of a gap until the reality starts to flow through the market. From an AI perspective, there will be a lot of AI embedded in existing offerings. So I'm sure there's going to be a fairly comprehensive discussion on how to count AI as there was cloud back in the day.

Speaker 2

Certainly, there will be the emergence of new AI capabilities. What comes to mind is AI servers, Etcetera. So right now certainly there are products in market that are AI enabled. As we move through time, there will be more, more, more. We had incorporated the thoughts of AI into our forecast for the full year.

Speaker 2

But as you had indicated, it's more of An early ramp with the expectation that there will be more robust demand as we move through time. Now the only other thing that I would Tell you that I believe is the reality is that this isn't just an incremental on top on whatever IT spending might have been planned prior to AI. Every company sort of lives within an envelope. They decide what that budgeted envelope is and there might be some expansion, but This won't be just a new market segment that provides a complete on top increment, but rather there will be some reprioritization that happened relative to how customers spend their IT dollars moving forward. So, yes, I think it will have a positive effect on IT growth, but again, it won't be a complete increment.

Speaker 4

Great. That's helpful, Rich. Thanks, guys.

Operator

And we will take our next question from Vince Colicchio with Barrington Research. Your line is open.

Speaker 7

Yes, Rich, curious how you think your share position performed in all your geographies this quarter?

Speaker 2

Yes. As we had reported in the past, when we think about share, we have really good insight relative to North America and Europe, but really don't have visibility yet. There is a service that is emerging in Europe. As it relates to the quarter, our information would say we lost a couple of tenths of market share, 10ths of 1%, if you will, on the aggregated basis while having grown share for the full

Speaker 7

year. And then could you provide a bit more color on what gives you confidence in The improvement of endpoint solutions throughout the year.

Speaker 2

Yes. So as Marshall talked about the very comprehensive process that we go through. Our indicators in talking to customers, vendors, working with our own teams Or that we will see growth moving forward in Endpoint. And in fact within our Q1 guide. We anticipate some growth within the endpoint.

Speaker 2

So we feel good about that. Well, we have a moderating situation at Advanced Solutions based on the commentary that I provided earlier.

Speaker 7

When you talk about growth in endpoint, you talk about sequential, I suppose.

Speaker 2

No, year on year.

Speaker 7

Oh, really? That's good to hear. Thank you.

Speaker 3

Yes, Ben.

Speaker 4

We will take

Operator

our next question from Ruplu Bhattacharya with Bank of America. Your line is open.

Speaker 8

Good morning. Thanks for taking my questions. My congrats to Patrick on the new role. And thanks for giving guidance on billings. I was wondering if you can talk a little bit more about the impact of this mix shift to more netted down items.

Speaker 8

Specifically, what year on year impact to revenues and margins is embedded in your fiscal 1Q guidance? And if you can talk about how we should think about this for fiscal year 2024. So as this shift happens, should we expect this difference between gross billings and revenue to continue to expand throughout the year.

Speaker 3

Thanks for the question, Ruplu. So for Q1, we gave a guidance of gross billings, I think around 3% down on net around 5%. So, Ruplu, if you think about overall gross versus net momentum, if you want to call it that, we were around 22% to 23% of Medadam revenue in fiscal 2022 that has gone now to 25% to 26% in 2023. I would anticipate that will probably continue into 24. It's hard to call that beyond the Q1 in terms of relationships.

Speaker 3

But for us the mix shift is a reflection of how AS is played against ES. I would say that as We think about next year and the increased expected performance of AF, There may be a shift or stabilization of that gross versus net, maybe it sticks around 26%. Quite possible just given what we're seeing behavior wise. Our thoughts in terms of forecast is as we get into the year, there could be a more balanced growth rates for both ES and AS, whereas in the past there's been kind of a predominant ES growth and then that takes a back seat and AS comes in and takes the So I would use a 25% to 26% adjustment for 2024. And then as we plot along, we'll inform you as The behavior of what that looks like.

Speaker 3

One thing just to call out that was in the prepared remarks was the consignment program for Hyve. That had about a $270,000,000 impact on net revenue, no impact on profit. We're expecting that to be about $250,000,000 per quarter And I'll expect to continue in volume related to this consignment program with this type customer.

Speaker 8

Okay. Marshall, thanks for all the details there. Just for my follow-up, if I can ask, you guided free cash flow to 1,200,000,000 And you maintained the shareholder return of 50% returns and 50% reinvestment in the business. So when we think about that reinvestment 50%, how are you thinking about organic investments versus M and A now that your integration with of the 2 large companies is now more or less complete in North America. So is it now time for further M and A?

Speaker 8

So any thoughts there? Thank you.

Speaker 2

Ruplu, good morning. Thank you for the question. This is Rich. So we talk about our capital allocation strategy. As you know it's 50% 50% over the continuum.

Speaker 2

There could be periods where we're heavier weight one way or the other. Obviously, Marshall talked about FY2023 in his prepared remarks and we were I think at 60% -ish for return to shareholder in total. So as we kind of plot through the year, certainly we have a pipeline of acquisition targets that we continue to look at and work. Those deals have We have a willing recipient on the other end and they have got to work for us and usually we take a look at Those acquisition targets and really want to make sure that they complement our strategy. So going forward, I would tell you that the fifty-fifty is sort of a good way to think about it.

Speaker 2

And again things don't always go exactly as planned. Yes. We adjust course as required based on the circumstance. So Marshall anything you have to add?

Speaker 3

Yes, Ruplu, just one other thing to call out. If you think about our quarter one thoughts, there is a little bit incremental SG and A related to it, I Call it reinvestment for continued investment, specifically in AF. As AF softens, we're not going to soften our investment. So there could be a little bit of heavier SG and A in the front half of 'twenty four. So I just wanted to let you know that it may appear as if there's an imbalance in that relationship of of E to R on a gross billing basis, but it's very well thought out as we believe as we get into the second half, AS as an opportunity, forecasted opportunity to recover.

Speaker 8

Okay. Thanks for all the details. Appreciate it.

Speaker 6

Thank you, Rupalu.

Operator

And we will take our next question from Michael Ng with Goldman Sachs. Your line is open.

Speaker 9

Hi, good morning. Thank you very much for the questions. Marshall, maybe just to follow-up on the SG and A point that you just made. Is the 2.75% to 3.25% of billings still the right way to think about that? And Maybe you could just help us think about how SGA evolves throughout the year and then I just have a quick follow-up.

Speaker 3

Sure. Yes, you're right, Mike. It's that range of $2.75 to $3.25 in relation to gross billings. We'll start right around 3% in quarter 1 and the expectation has been that structure should help build out the growth in the portfolio and should, we'll call it ratably or incrementally come down, to something below 3%. If I think about a couple of relationships, one is the year over year on SG and A for quarter 1.

Speaker 3

There's 2 things. 1 was the AS investment. The other thing, although it's somewhat subtle, this time last year, we had already started to see the decline in the performance and started to step down some of our provisions around variable pay. This year, the good news is we're assuming we're going to hit our number and grow it. So there's a little bit heavier bonus and variable pay associated with quarter 1.

Speaker 3

The other thing is the actual FX itself from a euro perspective is up. So that's about $10,000,000 to $15,000,000 of headwind on that. And then finally the SG and A investment that we've stated on AS is another investment that we believe is important to be made. So we feel that we're in a strong position. We think that the 3% is probably going to be the top end for fiscal 'twenty four and we should see that improve as we play it out quarter by quarter.

Speaker 9

Great. Thank you. That's very clear, Marshall. And it was encouraging to hear about the new segment disclosures by product around billings revenue and I think you said gross profit as well. I was just wondering if you could give us a little bit of a preview of Some of the potential revelations that we may have as you give out those new disclosures.

Speaker 9

Does the narrative kind of tighten up around the growth and margin outlook for Those segments in the near midterm?

Speaker 10

Thank you.

Speaker 3

Yes, Mike, I think As a general response to that, Rich and I have spoken to the margin attributes of AS and ES. We've spoken about the growth attributes, But it just allows us to be more specific. So I do think that the revelations and the clarity that we can speak to the actual performance within the portfolios, I think just helps drive better understanding of the mix, the profit margins or the gross margins business. We believe it is an enhancer. We think it is a value contributor, and we do think it will help inform the actual performance for the quarter and what our thoughts are for the upcoming quarter.

Speaker 2

Yes, just to add to that, I think generally my point of view is The narrative that we provide in the call is fairly directionally correct relative to what I think you'll see in The segmentation going forward, we always talk about the segments and you all ask for insights around the segment, but You know this will put sort of the definitive clarity out there in print. Then the second point that I would make Michael is that You guys are pretty good at modeling. Every time we get an insight relative to models, We are impressed relative to how you guys think about the business and how you laid out.

Speaker 9

Great.

Speaker 6

Well, thank

Speaker 9

you for the incremental transparency. Appreciate it, Rich

Operator

and Marshall. And we will take our next question from Alex Valera with Loop Capital. Your line is open.

Speaker 10

Hey, guys. I'm Sabine Fernandez today. Thank you for taking my question. So my question is, do you guys believe that HIVE can become involved in Gen AI server builds? We've heard from her work that they may be?

Speaker 2

I'm sorry, can you repeat that? You broke up a little bit.

Speaker 10

For sure. My question was do you guys believe that Hyatt can become involved in Geni server builds.

Speaker 2

Yes. If the question is do we believe Hive will participate in AI server build absolutely. Remember that the big segment of Hyve is an ODM type of business. And so we end up building what our customers have interest in And certainly we have full expectation that we will be participating in the AI builds moving forward.

Speaker 10

Awesome, awesome. So as a quick follow-up, what are what key spending areas were softer than You may have anticipated or softer than typical seasonality. And maybe if you can touch on what you expect for PC seasonality in February May quarters.

Speaker 2

Yes, if I may, as it relates to Q4 In the prepared remarks and this is, I guess the pleasant surprise is For the most part, the sales were consistent with our expectations. I think Marshall talked a little bit about maybe some A little bit better strength in Europe versus our expectation, but it wasn't overwhelmingly different. And then for each of the segments, they sort of Came in fairly consistent with our expectation. As we move ahead, as we had talked about, Because of the backlog runoff last year in AS, we would anticipate a more challenging compare year on year. And then as we sort of move through the year that compare sort of through time gets a little bit easier as the backlog had dissipated, if you will, through the year.

Speaker 2

And so that would be our expectation. But again our crystal ball would say that both Of those segments are growing in the second half of next year, both the endpoint as well as the advanced segment.

Speaker 10

Awesome. Thank you, guys. Really appreciate it.

Speaker 2

Thank you.

Operator

And we will take our next question from Adam Tindle with Raymond James. Your line is open.

Speaker 5

Okay, thanks. Good morning. I want to ask on trends in profit dollars for the business overall. And just observing that you finished fiscal 'twenty three with non GAAP net income just down, I think over 8%. You executed on synergies during the year, so ex that I would think non GAAP net income down double digits.

Speaker 5

And if I look at the midpoint for Q1 based on your guidance, it looks like net income is going to be down close to 10%, and it looks like you've got some cost optimization that may be helping a little bit in the first half of the year, so probably About the 10% ex that. So for investors that are seeing these double digit net income declines, Maybe you could touch on the drivers that are causing that trend and whether you think that's just kind of a structural aspect of the business at this point and we're working on Just optimization on that or is there a stake in the ground that you want to put on timing to return that to growth? Thanks.

Speaker 3

Hey, Adam, this is Marshall. I'll start. So I'll take it first and just the overall revenue attribute and the comment we made about Our expectations on ES showing positive growth attributes in quarter 1. So with that comes margin profile gross margin profile that is somewhat lower than the AS margin profile. We think that's probably about 20 bps, just in terms of the mix.

Speaker 3

We think that that plays out for quarter 1. And then just if I touch on some of the cost attributes that I commented on earlier in thinking about quarter 1. Quarter 1 last year was kind of the beginning point where we started See the volumes of our business fall. We had identified that we had seen some mismatch, inefficient mismatches in quarter 2 and 3. So we took some additional cost reduction opportunities.

Speaker 3

We were able to kind of recoup that inflated cost back in by the time we got towards the end of this year. Now in terms of these net headwinds going into quarter 1, as I said earlier, there is some overall expectation that we're going to be growing into a better performance throughout the year. So with that, we're kind of filling our variable expectations per pay versus last year. We had already started to take down those variable attributes given where we thought the business was going. And then again, as I said earlier, the AS investments, we're leaning into those.

Speaker 3

So there's a little bit higher cost associated with that, which Driving maybe some of the margin headwinds on that. So I think inflationary might be the last one where we are seeing a little bit of a longer tail on some of the inflationary areas around healthcare. But as you probably have seen in the past, we figure out ways to create productivities to offset that. It may take a couple quarters to get there. So I do think the compare itself is a little bit more difficult in quarter 1 from a margin profile perspective.

Speaker 3

But if I actually think about the margin attributes of AS and ES, our intentions are that we still believe we can grow both of those portfolio margin attributes Over the course of the year, it's the mix itself and some of these SG and A elements that I think are causing some of the story to change a little bit.

Speaker 5

Got it. Okay. So maybe just to follow-up on that. You helped with the gross billings for the year. It's kind of flat in first half, mid to high Let's just call it mid single digit growth for the year in gross billings overall to keep it simple.

Speaker 5

Given everything that you just mentioned there, would growth in non GAAP net income be at a similar level of gross billings growth And why or

Speaker 3

why not? Yes. I mean roughly said, our expectations is that gross profit hopefully will be flat to up and non GAAP op income will be flat to up. So again, that's the expectation. We'll have to see how it plays out as we expect that second half growth profile to be in that mid to high single digit range.

Speaker 2

I think Adam just Maybe be a bit repetitive. The thing that we've got to work through is the mix shifts back now to more endpoint and as that happens as Marshall said, there's probably a 20 basis point headwind that we need to work on and Figure out how to improve upon. I

Speaker 5

would say

Speaker 2

that we're reasonably proud of the fact that When you take a look at the op income margin for FY2023, we've been able to hold that We held that despite the revenue declines that we had faced. So there was some work to do going forward, but We kind of have our eye on it and the execution engine will kind of focus on how do we drive improvement moving forward.

Speaker 5

Okay. And maybe just a quick follow-up, Rich. You talked a lot about Hyve and consignment, but I think on the last call it was you talked about a new customer ramp that you were expecting in fiscal 'twenty four. Could you give us maybe any update on that and visibility into the timing and magnitude of that? Thanks.

Speaker 2

Yes. So, the customer ramp was just a little bit delayed due to timing of things, but we fully anticipate that we're clear to go moving forward.

Speaker 5

Okay. And so do you have a sense of timing and magnitude on it yet?

Speaker 3

Timing, we think the ramp should begin in quarter 1 and probably show itself a little bit more in quarter 2. So At that point, hopefully it will be meaningful enough for us to speak to.

Speaker 4

Okay. Thank you very much.

Speaker 2

Thank you, Adam. Thanks, Adam.

Operator

We will take our next question from George Wang with Barclays. Your line is open.

Speaker 11

Hey, guys. Rich and Marshall. I just have a question just on the AI PC. I just want to double click, especially in terms of the timeline and the kind of cadence for the ramp. Just Curious if you have any more color to share just kind of from your perspective.

Speaker 11

And also we heard a bunch from the OEM and the kind of chipmakers. Just curious kind of what specification you can disclose to better sort of contribute to the sort of AIPC wave, if you will?

Speaker 2

Yes. Thanks for the question and good morning. Obviously, it's a new technology coming in. All indications that we have it will be sort of at the high end of the premium price band going forward as one would anticipate or in the fiscal year coming I should say. All of the intelligence that we have says that It will be sort of a single digit percent of total of the entire PC population and then I think becoming More meaningful in FY 2025 and then into FY2026.

Speaker 2

So great opportunity going forward. Kind of best crystal ball estimated sort of mid single digit back half of the year percent of total PC volume and then growing meaningfully after that.

Speaker 11

Okay, great. That's it from me. Thanks.

Speaker 2

Well, thank you.

Operator

We will take our next question from Joseph Cardoso with JPMorgan. Your line is open.

Speaker 12

Hi, good morning and thanks for the question. Yes, just one for me. Just wanted to piggyback on some of the AS questions. First, can you just Clarify if the year over year declines in AS were largely in line with your expectations 90 days ago? And then more Specifically, can you just elaborate on the trends you're seeing across some of the product categories there like servers, networking, as well as any others?

Speaker 12

And just curious if any of those are trending better or worse relative to your expectations. And then just the second part of that question, as you think about a recovery in the back half. Is that broad based across these product categories or are you thinking that it's more concentrated to a particular one? Thanks for the question guys.

Speaker 2

Joe, good morning and thank you for the question. So, The way I would talk about this is, I think that the underlying demand across all of these technologies is pretty good. And the lead with how to think about how these technologies emerge and have growth From my point of view is to think about when their backlogs recovered last year Because that's inevitably the increment of the compare year on year that I think sort of distorts the numbers a little bit. And when I come at it from that perspective, server and storage had recovered its backlog earlier and then networking had carried the backlog later into last year. And so when I think about the recovery on a year to year basis, I think server and storage emerge earlier and networking because of You know that backlog hanging around for a longer period of time will be later in the cycle.

Speaker 2

As we had stated earlier then when we get to the back half of the year, we think that each of these categories Should have growth attributes. That's at least our expectation.

Speaker 12

No, makes sense. Thanks, Rich. Appreciate all the color. Thanks, guys.

Speaker 2

Yeah. Thanks, Joe.

Operator

And we will take our next question from Keith Housum with Northcoast Research. Your line is open.

Speaker 13

Good morning, guys. A question for you on like the revenue synergies that were anticipated from the ERP integrations. I guess, are those proceeding as you guys expected? And How are you expecting those to ramp up throughout the rest of the year as it baked into your guidance?

Speaker 2

So, hey, Keith, good morning. I hope everything is well. Yes, they are proceeding consistent with our expectations. We would anticipate As we think about this year that we're going to start to see meaningful progress relative to Our cross sell opportunities with our customers, when we think about our guide, we fundamentally believe that We baked that opportunity into the guidance. It will really kind of ramp up and hopefully be a bit more meaningful in the back half of the year.

Speaker 2

Do Do you have anything to

Speaker 13

add, Marshall? Appreciate it. And if I could just touch on real quick the acquisition from, like you announced over the past week or 2, I believe it's Kokova, and Please correct me if I said the name wrong. But it appears more a lifecycle services company. I guess perhaps talk about the strategy in making that investment now Well, I think your largest competitor actually got out of that business recently.

Speaker 13

Perhaps there's a strategy diverging and is that an opportunistic or competitive advantage you have versus your competitors?

Speaker 2

So, first of all, let's talk about the primary capabilities that are offered With the acquisition, first is around repair, then test and refurbishment. We certainly participate in those businesses today And really we connect quite well relative to assisting our vendors in that regard. And we like the business and obviously it also offers a 220,000 square feet piece of real estate, which will allow us to do more integration for customers as well. But we see a good demand, a solid demand for those services with our vendors and they have been encouraging us to grow that footprint which we are doing. The other thing I'd like for you to think about is There is more focus on these types of things, especially the refurb segment moving forward as sustainability comes front and center.

Speaker 2

So we also see sort of If you will, a bit of a revival around refurb as the world tries to become more sustainable. So We think that there is going to be an extra kicker relative to these types of businesses moving forward based on that focus.

Speaker 13

Great. Thank you.

Operator

And we'll take our last question from Ashish Sabadra with RBC Capital Markets. Your line is open.

Speaker 6

Thanks for taking my question. There was a lot discussion around AS dynamics near term, both the first half and second half of twenty twenty four. But as we get through some of that near term volatility, I I was wondering if you can talk about how should we think about the mid term growth for the AS solution as well as margin profile for that business over the mid term? Thanks.

Speaker 3

Yes. So I'll start, Rich, and you can chime in. So for AS, as we had said in our prepared remarks, We still have some backlog from a comparative standpoint that will be make it a difficult comparison year on year as we're in quarter 1. We think as we play out the rest of fiscal 'twenty four, we expect to see a return to growth for both portfolios, ES and AS. We'll call it the sequential momentum of that or ratability of that is still somewhat to be determined.

Speaker 3

But I do think back to the comments we made about how we build up our forecast. We do rely quite a bit on our leaders at the country level to look at their AS relationships and to figure out and determine how best we think that's going to grow. But thinking about that low or mid single digit to high single digit growth rate. I would also think about AS is performing in that same range in the second half.

Speaker 6

Maybe to clarify like is that like the when you think about that exiting at mid to high single digit growth for AS in 'twenty four. Is that the right growth profile or could we see a further acceleration there over the next 3 years, let's say, midterm?

Speaker 3

Yes. So beyond the thoughts we gave, we don't provide guidance or thoughts around what it looks like in 2025 and 2026. Certainly, we go back to our strategic initiatives and how we position our investments and The commentary we made near term about what we're doing to lean into AF, SG and A and the skill sets and how important it is to retain those and grow those. So We're certainly confident in that market space, but beyond the commentary not much more we can provide in terms of what that looks like.

Speaker 2

Yes. I guess The only thing that I would add to Marshall's comments is we always have an aspiration to grow a bit faster than the market. I think history would say that we had been successful relative to that pursuit and We would kind of characterize 2526 with that type of expectation that whatever the market growth is that we would aspire to and execute a little bit above market expectations.

Speaker 6

That's very helpful color. And maybe if I can ask a clarifying question. PC decline obviously was a big headwind in fiscal year 'twenty three. Have you quantified or is there a way to think about the total revenue headwinds from the PC decline in the fiscal year 'twenty three last year? Thanks.

Speaker 3

So a specific number, no. It clearly was in the PC ecosystem, a negative contributor to the overall client in our revenue portfolio. So it did have a meaningful impact. If I sit back and think about ES and AF, I think ES had its moment in 'twenty one and halfway through 'twenty two and AF had its moment in 'twenty two and 'twenty three. So, we're happy that we've got such a broad and diverse portfolio.

Speaker 3

And yes, we have certain attributes that behave differently from time to time, but The benefit of our large portfolio allows us to have a balanced view when certain aspects of ES are down and certain The complementary line card I think is what really benefits us.

Speaker 2

Yes. Just a way of thinking about this is Last year we knew AS had grown and ES had declined. Those are the 2 major segments of our business. So if you take a look at the net change in revenue year on year it's Probably getting it close to the answer.

Speaker 6

That's very helpful color. Thank you. Thanks again.

Operator

And ladies and gentlemen, I will now turn the call back to Mr. Ryshoom for closing remarks.

Speaker 2

Well, thanks everyone and thanks for participating in the call today. FY2023 certainly played out different than we all had anticipated as we had sat around the table this time last year. That being said, I am very proud of what we have accomplished. I am very proud of our relationships with our vendors and our customers, they are our primary stakeholders and my congratulations to our 23,000 coworkers around the world for doing a great job executing in this more challenging environment than anticipated. With that, I wish you all a great day.

Operator

And ladies and gentlemen, that concludes today's call. We thank you for your participation. You may now disconnect.

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