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TD SYNNEX Corporation
1/11/2022
Thank you and good morning everyone. 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 everyone 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 integration progress, strategy, free cash flow, capital distribution, leverage, supply, and investments. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 8-K we filed today, and in the risk factors section of our Form 10-K and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also during this call, we will reference certain non-GAAP financial information. 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.sinex.com. This conference call is the property of TD Sinex and may not be recorded or rebroadcast without our permission. I will now turn the call over to Rich. Rich?
Thank you, Liz. Good morning, everyone, and Happy New Year. It's exciting to be with you this morning, reporting our first quarterly results as TD Cynics. Today's results represent only our very first 90 days together, and I'm delighted with what the team has already been able to accomplish in just that short amount of time. Let me share a bit more about what we've accomplished relative to our strategy and integration. having made excellent progress in both areas. First, we defined our go-forward strategy with the overarching goal of keeping our customers and vendors at the center of everything we do. We are making significant investments which will solidify our position for the future and continue to accelerate our participation in the high-growth next-generation technology areas like cloud, security, analytics iot and everything as a service and we are committed to continuing our journey to digitally transform the company allowing us to create an enhanced engagement with our customers and vendor partners with improved efficiency to provide further details on these topics we'll be having our first investor day as td cynics to be held virtually after we report our first quarter results. At that event, we'll share with you our multi-year strategy, growth opportunities, and financial performance. From an integration perspective, we are on track and the team is executing very well on our plans. We rolled out our complete organizational structure, ensuring that all coworkers are clear on their roles and responsibilities. We've also been spending a lot of time with our customers and vendor partners who continue to be very supportive of our company and the plans that we've outlined. Another critical area that we've been focused on is our IT systems infrastructure. We completed our assessment of our current ERP systems and, after a deep and thorough analysis, made the decision to consolidate our Americas business onto CIS, the ERP system custom-built for the IT distribution business. CIS has a great track record, is highly responsive and flexible, and provides us with the ability to move quickly with an attractive cost basis. All other geographic regions will remain on their existing ERP systems. Lastly, we are on track with our cost optimization and synergy attainment goals. And though there is much work ahead, we are well on schedule relative to our ambitious integration plans. Moving forward to our fiscal fourth quarter, We had a good performance despite the anticipated challenging supply chain environment. The change that came with our merger and the new fiscal year end for much of the company. Overall, our core distribution business performed in line with what we communicated last quarter, and the supply that we received was consistent with our expectations. Strong operational execution by the teams allowed us to optimize our results to the higher end of our guided revenue range. Our advanced solutions products and service business saw continued improvement in the quarter and grew year over year, assuming the merger had occurred in the prior year. Endpoint solutions, though slightly down year over year, performed well and in line with our expectations, despite the challenging industry supply conditions and a tough prior year comparison. All three geographic regions performed well. In the Americas, demand was solid, and the enterprise space did well as corporations prioritized infrastructure and security projects. In the government segment, there was a bit of a slowdown in spending, which is not unusual in the first year of a new administration. And the education segment was flat year over year. In Europe, demand for next generation solutions was healthy, and we outgrew the market. In the Asia-Pacific region, we had a very strong end to the year and made positive traction across multiple countries and product segments. both from the core legacy tech data business as well as from the Inovix business, which was acquired more than a year ago. Additionally, for many of our vendors, combining Japan and Asia Pacific provides the opportunity for expansion and incremental value creation. From an integration perspective, we continue to do well in identifying and capturing cost optimization opportunities and are tracking ahead of expectations. As Marshall will discuss in a moment, we are now tracking to a 30% non-GAAP EPS accretion, which is above the 25% that we previously targeted. As we begin 2022, I'm encouraged by the solid demand drivers across the technology landscape and the opportunities in front of us as we bring our expanded set of products and services to the market. Our enhanced breadth and scale provide us with an even greater ability to bring value and choice to our customers. As an example, post-merger, we have more than doubled the number of vendor partners in the security space available to legacy tech data customers. Similarly, we have also significantly broadened the data center offerings available to legacy Cinex customers. Customers and vendors continue to increase their levels of investment in digital transformation, enabling and equipping users everywhere to connect, collaborate, and work more effectively and securely. Specific to the PC ecosystem, we remain cautiously optimistic given the opportunities in the commercial space with the Windows 11 refresh cycles and upgrade for advanced security features, offset by some moderation in the consumer segment. Taken together, we believe this results in an opportunity to grow our top line in fiscal 2022. This view considers current industry supply constraints that we expect to continue through fiscal year. Before I hand it over to Marshall, let me pause to express my gratitude to all TD Cinex coworkers for their hard work and contributions during fiscal 2021. Because of your efforts, we had an excellent year and i'm thankful for your continued dedication and expertise as we strive to deliver superior service to our customers and vendor partners i couldn't be more excited to see all that we'll accomplish in 2022 i'll now pass it over to marshall who will provide additional details on our financial performance marshall
Thanks, Rich, and thank you to everyone joining us for today's call. We performed well in our first quarter together, with results at or better than our expectations across the board, and despite a continued difficult supply chain environment, I am proud of our teams who collaborated well, executed flawlessly, and adjusted to many changes in our first 90 days together. In particular, I'd like to express my gratitude to the Global Finance Organization for their dedication and hard work in reporting combined company results for the first time. Now, turning to our results for the fiscal fourth quarter. Total worldwide revenue came in at $15.6 billion, down 2% from the prior year. This comparison assumes the merger with TechData occurred on September 1st of 2020. We are pleased with this result, given the tough comparison to prior year, supply chain constraints, a newness of operating as one company, as well as an approximate 1% FX headwind due to the Euro weakening against the dollar. Gross profit was 943 million and gross margin was 6%, reflecting solid execution by the teams and a continued favorable mix of products and services. Total adjusted SG&A expense was $559 million, representing 3.6% of revenue and in line with our expectations. Non-GAAP operating income was $408 million, and non-GAAP operating margin was 2.6%. Non-GAAP interest expense and finance charges were $42 million, and the non-GAAP effective tax rate was 24%. Total non-GAAP income from continuing operations was $276 million, and non-GAAP diluted EPS from continuing operations was $2.86. Now, turning to the balance sheet. We ended the quarter with cash and cash equivalents of $994 million and debt of $4.1 billion.
Our gross leverage ratio was 2.6 times, and net leverage was 2 times.
This ratio assumes the merger with TechData occurred on September 1st of 2020. Repositories totaled $6.6 billion. Our net working capital at the end of the fourth quarter was $2.7 billion. And our cash conversion cycle for the fourth quarter was 14 days, which was in line with our expectations. Cash provided from operations was approximately $561 million in the quarter. As we begin fiscal 2022, I'd like to share some thoughts on capital allocation. Given the numerous positive drivers for the company, we remain on course of delivering approximately $1 billion of free cash flow by the end of fiscal 2023. Our long-term capital allocation strategy over the next two to three years is to distribute approximately 50% of our free cash flows to our shareholders in the form of dividends and share repurchases. Remaining investment grade, optimizing our cost of capital, and balancing organic investments with M&A opportunities are some of the key priorities we are focusing on as we enter fiscal 22 and beyond. For the current quarter, our Board of Directors has approved a quarterly cash dividend of $0.30 per common share. The dividend is expected to be paid on January 28, 2022 to stockholders of record as of the close of business on January 21, 2022. Let me now provide you with some modeling thoughts about fiscal 2022 and Q1. As Rich had mentioned, we remain confident about the variety of growth drivers for IT spending this year, driven by both traditional and next-generation technologies. Like most others in the industry, we also believe that we will remain in a supply-constrained environment through fiscal 2022. Against that backdrop, we expect to grow revenue in the mid-single digits in fiscal 2022. Negatively impacting these growth expectations are FX, which is expected to impact us by approximately $1.1 billion, and gross versus net revenue adjustments of $1.2 billion, which is the result of aligning policies between the two companies.
Net of these headwinds, revenue is expected to grow low single digits.
We made very good progress in Cisco Q4 on productivity initiatives, as well as deal-related synergies. Given this progress and the view regarding fiscal 2022, we now expect to realize a 30% accretion to non-GAAP ETS in fiscal 2022 compared to fiscal 21 legacy CINEX standalone results. This represents an improvement from our initial target of 25% accretion. For fiscal 22, we expect non-GAAP EPS to be between $10.80 and $11.20 per diluted share. This also assumes a negative $22 million headwind to non-GAAP net income, or $0.18 per share, primarily associated with the weakening of the Euro since the date we first performed our merger accretion assessment. Now let me share some thoughts for fiscal Q1. We expect total revenue to be in the range of $14.75 billion to $15.75 billion. which when adjusted for FX of approximately $450 million, and gross versus net adjustments of approximately $300 million, represents an expected year-over-year growth rate in the mid-single digits. This comparison assumes the merger with TechData occurred on September 1st of 2020. Our backlog level continues to be elevated, and we estimate the impact of fiscal Q1 revenue to be approximately 5%. Non-GAAP net income is expected to be in the range of $245 million to $275 million, and non-GAAP diluted EPS is expected to be in the range of $2.55 to $2.85 per diluted share, based on weighted average shares outstanding of approximately $96 million. Interest expense is expected to be approximately $38 million, and we expect non-GAAP tax rate to be approximately 24%. Year of 2022 are forward-looking, and that our actual results may differ materially.
We will now take your questions. Operator?
Great. Thank you so much. We will now start our Q&A session. If you would like to ask a question, please press Start followed by 1 on your telephone key. Jim, please go ahead. Your line is open.
Thank you so much. And for the details, I have two questions. The first one is on the versus 25% previously. Can you maybe just help us bridge the difference about what was the major upside there? ERP, this industry has had some struggles when entities have switched over to one ERP. Can you let us know kind of the timeline, and are you going to run dual ERPs for a little bit of while, and are there associated costs with that that will eventually go away? Thank you.
Well, thank you, Jim. This is Rich. I'm going to handle your second question first, and then we'll go back to Marcel. You know, the way we're thinking about our ERP implementation is, you know, I'll use the words rolling thunder, where we'll be transitioning customers and vendors over a timeline. So it's certainly a way of de-risking, you know, what might be characterized as a light switch flip. We've got it well planned. The overwhelming majority of those transitions will happen over approximately an 18-month time frame, plus minus. But we have confidence based on the way we built the schedule, and we have confidence based on the fact that both legacy companies have done large transitions in their previous history. So we feel really good about where we're headed. I'll hand it to Marshall on the accretion question.
Hi, Jim. Nice hearing from you again. On the accretion increase from 25% to 30%, it really represents an improvement from expectations from both the GBO2 initiative and the deal synergies, of which both we committed to a $50 million increase. synergy run rate in the first year, the first full 12 months post-close. In both of those areas, we are running better than expected. So because of that and what we've captured today gives us that confidence of achieving the 30% accretion target.
Thank you so much for the details. It's greatly appreciated. Thank you, Jim. Thank you, Jim.
Thank you, Jim, for your question. And our next question comes from from the North Coast Research Group. Please go ahead.
Good morning, guys, and good to talk to you again, Rich. Thanks for the results, and congratulations. Rich, at TechData, one of the things that you were really pushing hard the last few years was really optimizing the profitability and kind of deselecting some business in order to help drive up operating margins. Can you talk about are you taking a similar path here with the combined companies, or what's your strategy for operating margins going forward?
Yeah, so great question, Keith. Thanks, and welcome back into the coverage. We're really happy to have a relationship with you again moving forward. I would leave you with two thoughts, Keith. First one is that, largely speaking, the legacy tech data entity had completed, largely speaking, what it wanted to as it related to optimization in the past. And then maybe a little bit unique, but when you're in a supply-constrained environment, it gives you the opportunity to decide where you're placing your offerings, obviously with making sure that you're focused on customer stat as well. So, you know, that allowed us to have a natural sort of realignment and cleanup, if you will, of sort of lower margin areas there. as we have all come through this supply-constrained evolution. So the portfolio is in really good shape. I feel great about it. And, you know, we're really looking forward to, you know, working with customers and vendors to accelerate growth moving forward.
Great. And if I could just do my follow-up question. Marshall, how did the Hive business do this quarter for the company?
Keith, thanks for the question. Just to remind you, we guided in Q4 to the lower end of outcomes, and we ended up exceeding those expectations. So it did well, and Hive did well in three areas. One, just the normal manufacturing aspects of our data center customers. The second is the assembly part of our business. And where we really saw an uptick is in what we call distribution-like services, Those typically represent a strategic part, fair part, loose for our data center customers around the world where they have a need to continue to keep their data centers up and running. And our ability to have a global network to fulfill those needs is where we saw a lot of demand in Q4. Great. Thanks. Good luck, guys. Thank you. Thank you, Keith. Thanks.
Thank you, Keith, for your question. And our next question comes from Adam Tindall from Raymond James. Please go ahead.
Okay, thanks. Good morning. Marshall, I just wanted to start by clarifying. In an earlier answer, I think you said $50 million on synergies. I thought the number was $100 million for synergies. Are we still at $100 million expected synergies for this coming fiscal year and the timing for that?
Yeah, Adam, thanks for the clarifying question. It is $50 million for synergies. deal synergies and $50 million for GBO2 in the first year for a total of 100. And then in the second year post-close is an incremental 100.
So we will exit. That leads me into the second question.
If I look at your fiscal 22 guidance, and you'll have to correct me if I'm wrong. I did some quick math trying to back into the operating profit dollars that you're implying on a year-over-year basis. incremental operating profit dollars implied in the full year guidance. But if you've got $100 million in synergies coming through, why would we only have an incremental $50 million in an operating profit?
Is there assumptions embedded for pie or vendor changes or macro? Just help me with thinking that through.
Yeah, Adam, thanks for the question. When we give our overall guidance for any conservative perspective on that, not only with Hive and on the distribution business, but we do expect that all-in operating income dollars, and that reflects not only scale in the business for which we're doing collections, but the incremental synergies related to the deal synergies as well. It could be just the way that your model is rolling up that we can address offline, but we should see accretion and growth both in operating profit dollars and in operating margins in 2022.
Got it. Okay.
Maybe just one on cash flow and capital allocation. The 50% return, you know, maybe, Marshall, you could touch on the decision to go to that level, which I think is higher.
than Core Cinex in the past.
And Rich, if you wanted to maybe dovetail onto this question, because the other 50% is for investments and debt optimization, but they're pretty close to an optimal capital structure.
Adam, I'll go first and then hand it over to Rich.
So as you saw and heard in my prepared remarks,
We feel that the right capital allocation strategy is to achieve and to reach a 50% payout ratio in the form of repurchases, share repurchases, and dividends. We also look for share, and you annualize that. That's about $120 million.
We're also expecting to do about $100 million of share buybacks.
If you look at where we exited, fiscal 21 at about 750 million of free cash. That's around a 29, 30% payout rate ratio. So we think that's the right starting point. And then as we exit and go towards two years from today, which we think we're going to be at that.
So we think that's the right case. Yeah. Adam, a couple of. So first, uh, in the business to drive what we always call the next generation technologies.
And there is investments in platforms and investments in new skill groups, et cetera, et cetera, in order to support that. In addition to that, we are in a segment that acquisition is always considered and and certainly will consider acquisition moving forward. I would say that certainly really nothing on the radar to the extent of bringing these two companies together. But, you know, we have the opportunity to look at expansion some of the markets, namely Asia Pacific, Japan, where we might have a bit of a lower market position. And then in addition to that, we're always looking to strategically build stronger capabilities moving into the future. So we'll consider that. You know, we are really comfortable with the capital allocation model that we have articulated today. And as all of you know, this is something that is stated on a continuum, meaning that if you're doing a large acquisition at a point in time, you know, you might be heavier up towards the investment in the company, a little bit lighter on the other side, or the reverse is true as well.
But in the steady state, you know, we're really comfortable with the thought of, 50% return to shareholders and 50% invested back into the business. That's definitely the right direction. Thank you. Thank you, Adam.
Great. Thank you for your question. And our next question comes from Amanda Bao from Leap Capital. Please go ahead.
Hey, good morning, guys. Happy New Year. And, yeah, thanks for taking the question. Happy New Year. Congrats on the results. Yeah, two for me if I could. The first one is you guys had mentioned in the prepared remarks that looking to – and this may be more paraphrasing – but looking to visually transform the company or at least sort of to put on video initiatives to align the company –
i think you said with with the marketplace or with customers and so i was just wondering uh you know what all you're looking at doing there and i may have a quick follow-up yeah so let me take that one uh first happy new year to you and thanks for joining um you know obviously digital transformation has been something that's been discussed you know for five plus years now so i i want to first clarify that both companies have been sort of on that transformation and transition to better capability. And if I were to prioritize to you our focus, it first is to make sure that we are making the investments both to continually improve customer and vendor experience. You know, this industry, as you know, Ananda has a particular distribution. We live on a bit of a thinner margin profile, but it always requires more and more productivity, which lends well to you know automation and process redesign so a lot of that has been done but a lot more to come in this whole transition you know to a new standard of ERP and revisit our entire edge tool inventory to make sure that we have state-of-the-art capabilities then of course You know, it makes its way through the entire Oregon, you know, from our logistics centers all the way through our financial and accounting processes to legal processes to HR processes.
So it's sort of an end-to-end. I want to be clear that, you know, the top priority is excellent experiences for our primary stakeholders.
Okay, that's great. Super helpful. Appreciate that. And then the quick follow-up is just with all the digital initiatives that have been sort of amplified over the last year, I was just wondering if you guys think that there is any opportunity. Is there any opportunity for the digitization last year and a half?
structural growth rate could change in coming years.
What's the right way to think about that potential? Thanks, and that's it for me.
Ananda, good question. This is Marshall.
Yeah, I think that Hive has continued to transform its overall delivery and capability and hyperscale provider and solution to its customers. So, as I said earlier, design, manufacturing, assembly is important. You know, in essence, a full-stop, one-stop solution that Hive can fulfill for the end
markets and our customers is where we're progressing. So I think the market itself, are we there yet on our journey? No, but we do feel good about where we're heading over the next two to three years. Okay, great. I appreciate that, Mark.
Thank you for your question. Next question comes from Ripley Bhattacharya from Bank of America. Please go ahead.
Rich, I was wondering if you can talk about your combined how are cloud billings trending?
If I'm not mistaken, a couple of years ago had a $1 billion-plus cloud business. And can you also update us on Stream 1? I think TechData invested a lot in that. where you can handle the entire line card for both companies?
Thanks for that question. So first of all, let me start at the top.
The growth rates are substantially higher than the core of the business.
and actually running higher than the average of the growth rates of cloud over the continuum. So we're really pleased with the progress we're making overall. That next generation category, which includes cloud as well as business analytics, IoT, security, is becoming a meaningful part of the overall portfolio now. As you know, there's netting that goes on with a lot of a new, you know, we're starting to the size of the portfolio. To our platforms going forward, I had commented earlier that we've sorted the – the ERP.
And, you know, we have two very good platforms right now in market with Stream 1 as well as Stellar.
And, you know, we're close in, you know, kind of think about this as a best of both is the approach that we're taking.
Both have really strong capabilities that are suited for different means, actually. So we have, once again, the opportunity to take advantage of of both of those capabilities moving forward.
And, you know, I think that when we get to the end, it'll be something of a mix of both would be my judgment. But we'll be updating you probably in our next call relative to, you know, how all that has shaken up.
Got it. Now, the thing you mentioned in your prepared remarks with respect to endpoint solutions, I think you said that you're expecting a continued strong demand I just wanted to ask a conceptual question. I mean, I know endpoint solutions and PCs have been a strong point for tech data, but as you look at the combined company, how dependent do you think TDC is?
Do you still think that you can make the revenue numbers?
So, I mean, would you say that the combined company is less dependent on the PC cycle, or is it still... you know, as dependent on the PC cycle as it was as standalone tick data.
Yeah, I'd like to share a couple of thoughts with you, you know, just based on my six years of experience. You know, we have the benefit of having a very wide and broad portfolio, you know, as TD Cinex. And what my experience has been, you know, COVID being a good example, as you know, we have had a – We have a pretty big advanced solutions business overall. The organization and the people within the organization seem to move towards where the demand is within the IT spend. And so, you know, if there are cycles that have to be overcome in data center or in CC ecosystem, You know, the agility of the model and the organization is very well-tuned to moving to where the demand is in the market. To answer your specific question, you know, depending on which side you're coming from, you know, either legacy Cinex or legacy TD, the dependency has not grown. I would say that it's fairly consistent with them. you know, our past profiles. And, you know, we do feel pretty good about some of the things going on in the commercial space.
I had also commented that we believe that there will be a moderation in the consumer space looking forward.
You know, there's plenty of backlog that needs to be worked down as we move through, at minimum, the first half of the year. So, you know, those are generally my thoughts.
Last one, if I can just sneak one more in.
Marshall, for the Hive business, do you still expect the large customer to transition to a consignment model at some point this year?
And if so, when and what would be the impact on a quarterly basis?
Yeah, thanks for the question, Rupaloo.
The dollars impacted right now, we don't have any reason to believe it's going to change from what we historically had said.
And then our commitment is as we learn more, we'll share more. But right now, nothing in terms of when that will start in fiscal 22, if at all.
Okay, thanks for all the details, and congrats on the strong execution. Thank you.
Thank you very much for your question. And our next question comes from Shannon Cross from Cross Research. Please go ahead.
Thank you very much. I was wondering, can you just give us some insight into what your customers are saying with regard to demand, how they're thinking about, well, demand for IT, just how they're looking at life, you know, in the theoretically post-pandemic world that we're kind of moving into? What areas are you seeing the most demand? Just, you know, given where you sit in the supply chain, it would be helpful. Thank you.
Yeah, Shannon, I'll share my personal thoughts. There's nothing more than that, but it is informed by, you know, reading about our industry, right? A couple of thoughts. If I were to represent the customers right now, they would say, we need more product. Clearly, the backlog continues to grow. I make that statement, but I also want to provide an insight with that statement. Years ago, when I started at IBM, I was in the procurement function. And then the procurement systems catch up to start placing orders based on lead times. And we clearly are now in that sort of range where the backlog represents certainly current needs and current demands, but it's also representing now customers putting up orders based on lead time. So there clearly is future orders, I would allege, in anyone's backlog as they talk about that right now. So I think that's an important point. Customers would say we need more now. My view is that, you know, three thoughts. Number one is The next generation technology areas will have strong growth, and that is kind of where the future is. Cloud, analytics, IoT, security, we know them well. In addition to that, you could add in everything as a service, new innovations around the edge that go into the PC ecosystem, et cetera. The second thing that I would tell you, my hypothesis, is that we clearly have two years of pent-up demand within what I would call the traditional infrastructure space. I think that that plays out as more and more and more people get back to work, more and more projects get deployed.
So I would say that there's a good growth attribute there.
And then, you know, we did talk about the backlog and the PC question earlier. I believe that, you know, the growth within PC over time will moderate. And, again, it will be more profound in the consumer side versus the commercial side. The commercial side does have some transitions going on where it will give it some growth, but not the level of growth that we had seen, call it, in the last two years. So, you know, next generation technologies, high growth, good growth within the infrastructure space, moderating growth within the BC ecosystem spaces, the way I would summarize it for you.
Okay, thank you. And then I'm wondering, you know, given the billion-dollar range that you provided for revenue for the current quarter, what would you say are the biggest swing factors as you looked at it? I mean, historically, the company's been pretty conservative. But I'm just wondering what puts and takes one into your thoughts.
Hi, Shannon. Good question. This is Marshall. I'll start, and then Rich can chime in as well. Certainly the assumption of a 5% constraint from supply chain is a factor to that. The overall assessment of what each region will do relative to those constraints, we build up our forecast based on what each one of the operators and and leaders of the business see within their own niche, whether that's product side or sales side. Outside of that, it also could just be a matter of the ebbs and flows of what's happening in regards to how fast markets open up, which open and close, I think it's now the new normal. but we still see probably a steady state of both, you know, as well as a lot of these AS opportunities that Rich mentioned continue to be opportunities. So I think those do serve as other potential upsides to that mid-single-digit growth rate target we discussed in Q1.
Yeah, Shannon, I'd just like to provide a thought and emphasize that I think the biggest difference is how much supply we'll get.
We had in our prepared comments talked about the fact that supply I was relatively consistent with our expectation.
And I'd say the life of our business leaders have changed a little bit. You know, if we were to go to higher COVID, you know, we were almost like, I'd say there was always some constraints, but we were almost in a unconstrained supply environment. And now we have to spend as much time as leaders to try to estimate our best judgments on what supply we're going to get in the quarter. And, you know, that becomes as big a factor as anything else in terms of trying to provide, you know, a view of the business performance. You know, I think that I'd answer your question more single-threaded to say, you know, if you can tell me what supply we're going to get, I can tell you where we'd be at within that range.
Okay, thank you. That's helpful. And just my last question, I apologize if you addressed it, but I'm wondering, as Omicron has spread, if you've seen any changes in behavior or availability just You know, you're kind of the first tech company we can talk to, as this is weird, it's ugly head. So I'm just wondering, you know, if you can point to anything. Thank you.
Yeah, so for me, I would say that there hasn't been anything profoundly different. I think it is fair to say, in fact, I know that, you know, every time we speak with you, the backlog is bigger, and that's the case now. But then I also, as I stated earlier, we have to begin to recognize that, you know, future orders are absolutely entering that backlog now based on, you know, a better understanding of lead times. But, you know, I don't think there's anything measurably different, you know, that has come to our attention with the Omicron strain.
Okay, great. Well, thank you so much for taking the questions.
Thank you, Shannon.
Yes, thanks, and good morning, everyone. I just wanted to just ask about your guidance.
Rich, you've been talking about some of the supply-demand issues, and it sounds like backlog is very strong, yet you did beat your revenue guide significantly.
So are you seeing any signs of sort of a pickup in terms of supply or were you just able to out execute competitors in terms of being able to meet the higher end of your forecast? And as you guided, I think you're guiding down two or three percent sequentially. for the February quarter. Could we get a sense of, and on kind of a pro forma basis, the typical seasonality for the combined business? And are you guiding more conservatively than is seasonal because of the constraints that you're seeing? Just a little bit more color there would be great.
Maybe I'll start and then hand it over to Marshall. I think it's going to be important for Marshall to talk about two things relative to the top line. The first one is we clearly have a Euro headwind, and the second one is there are some 606 adjustments for net accounting that he'll also describe to you and kind of give you a view as to what that means for the quarter. So, you know, when you take those two things into account at a constant currency and then not adjusted for 606, there's more, you know, revenue, if you will, than before. As a generalization, and we kind of talk about this, Matt, you're asking about the sequentials, but as a generalization, you might recall that, you know, our year ends were different. And so as we came together as a combined company, what's interesting is that, you know, 1Q starts to look a lot like 4Q now from a financial profile perspective because we were heavier up in the December, January time, and they were heavier up in their legacy as the October, November time. So, you know, I would tell you that that profile has shifted a little bit based on, you know, what I had just described. So I'll turn it over to Marshall for any other clarity.
Yeah, so Matt Rich brings up a good point. Just to clarify, the gross-to-net adjustment, it's an apple versus an orange. It's a policy alignment that takes about $1.2 billion of revenue out of the full 22 and about $300 billion million out of q1 and and we can't go back and adjust prior year so it just stands on its own that's a headwind back to Richard's comment the seasonality they're different if you looked at legacy cynics seasonality coming out of q4 into q1 it typically is down in that 10 to 15 percent range and if you look at the legacy tech it could be up So when you blend those together, it does create kind of a new seasonal relationship. And then the final thing, which is important but we'll work through it this year, is in distribution, quarter ends matter. And so there's a lot of rhythm around that quarter end. And so aligning these fiscal to one common quarter, the comparisons could be a little bit out of sorts as we work our way through 22. But going into 23, we're going to have a decent rhythm and pattern that we can speak to.
Okay. And, Marshall, do you mean the quarter end also for some of your big OEM suppliers as well?
Yeah. A lot of that is dependent upon just the timing of when they fall versus when we fall. And on any given year, it settles to probably nothing. But within the quarters, it can behave a little bit different each quarter.
And then I think the other point is, you know, the legacy tech data folks and the – primarily in the sales organizations, are also adjusting to the new quarter ends. And they, you know, obviously have done, from our point of view, quite well in Q4, but very quickly have the opportunity to get, you know, an incentive realigned for the right quarter ends, et cetera, et cetera. So, you know, we've worked through some of that as part of our integration.
Okay. Thanks for that. And then I wanted to ask – just around the pricing environment. We're hearing from a number of OEMs about passing their own rising costs along or at least pricing less aggressively on big deals. Are you seeing that? Is that flowing through your income statement? And is that impacting in demand at all?
Yeah, so I'll comment and then ask Marshall too. So as a generalization over the continuum, I think pricing for most of the content is probably up somewhere between 5% and 10% overall. And as you know, Matt, we've talked about this many times in the past, If a price changes with a vendor, we pretty quickly apply it. So generally speaking, it's unusual for us to get hurt from incremental pricing changes. So that doesn't occur very much, if at all. Then what I would tell you is certainly we see our shipping costs going up. And as we see shipping costs going up, they get generally passed through to customers. You know, the overwhelming part of our cost of goods sold is product, and the dynamic that I first described is kind of the way it works. So, you know, we, from our model perspective, really have not historically had a lot of exposure to incremental prices.
Yeah, Rich, you know, it's going to play out well in Q1, and the preliminary thoughts for fiscal 22 also look strong.
Thank you, Matt, for your question. And our final question comes from Vince Colicchio from Barrington Research. Please go ahead.
Yeah, Rich, I was curious. Have you experienced – what are your updated thoughts on potential loss of revenue from client diversification?
Yeah, so I would tell you first that from where I sit, I have not been aware of any negative revenue synergy, to use that term. In fact, knock on wood, the customer experience feedback that I have received since day one has been really excellent and very, very supportive. My speculation is that we'll see more opportunity from revenue synergy as opposed to, you know, impact. And, you know, the way to think about this, if you go back to the script for one moment, you look at the security portfolio chart. You know, if you're sort of on the tech data sales side, you now have greater than 50% more security vendors in the portfolio that you can take to market to your customers. And then if you're on the legacy Cinex sales side, you have a much larger and robust infrastructure portfolio to take to your customer set. And right now, candidly, with the systems still being separated, we make that happen through some, I'll call it collaborative manual intervention. As we move through time and then, you know, align customers on a common ERP and vendors on a common ERP, the rolling thunder approach that I talked about earlier, then that becomes very highly automated and we should be able to, you know, actually get a better advantage. moving into the future.
And then I was curious about will they remain under other systems or will they eventually be consolidated onto the same system you have in the U.S.?
The plan right now is for the foreseeable future. They'll be maintained on their systems and And then the Americas will actually move to the CIS.
Okay.
Thanks for answering my question. Strong quarter. Congrats.
No, thank you very much. I appreciate it. Thank you, Ben.
Thank you very much for your question. At this time, there are no more questions. And I would like to thank everybody for joining in today's call. You may now disconnect your lines.
Thank you, everyone. Good day.