TD SYNNEX Corporation

Good morning. My name is Devin and I will be your conference operator today. I would like to welcome everyone to the TD Cinex fourth quarter fiscal 2022 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Liz Morali, head of investor relations. Liz, you may begin.

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 strategy, plans, and positioning, 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 8K we filed today, and in the risk factors section of our Form 10K and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related form 8K available on our investor relations website, ir.tdsinex.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 thanks for joining us for our first earnings call of the new calendar year. We are pleased with our strong fiscal Q4 results, closing out what was truly a phenomenal year for TD Cinex. We began the year with a lot on our to-do list relative to the merger and integration activities and ended the year having met or exceeded our objectives. As I've mentioned along the way, this merger has gone very well. Today, TD Cynics is a $62 billion company with over 23,000 coworkers serving 150,000 customers across 100 countries. I judge the success of this merger from a few different perspectives. First, from the point of view of our customers and vendor partners. Our teams continue to provide consistent and uninterrupted service to our partners post-merger. And the financial results we've delivered are confirmation of the strong value proposition that we are delivering to the market. Next, from the perspective of our coworkers, we have largely completed our initiatives focused on harmonization of benefits and compensation, and recently undertook our first TD Cynics Global Coworker Survey, which indicated a high level of engagement, an accomplishment that can be hard to achieve in the first year of a large merger. Finally, looking at the merger through the lens of our shareholders, we exceeded the fiscal 22 financial targets we set. For fiscal 22, we achieved revenue of $62.3 billion, up 9% year over year, adjusting for FX impact and merger-related accounting policy alignment, which was above the 6% to 8% range we anticipated. Non-GAAP operating margin was 2.8%, also above the targeted range of 2.5% to 2.7%. And we delivered non-GAAP earnings per share of $11.94, $0.29 above the high end of our guidance range we provided for FY22 on our September earnings call and 74 cents above the high end of the original guidance range provided January of last year, despite higher than forecasted FX and interest expense headwinds. Finally, we returned $240 million to shareholders via dividends and share repurchases during the fiscal year. representing progress towards our medium-term capital allocation goals. With regard to the merger integration, we set the ambitious goal of achieving $100 million in cost synergies by the end of year one, and we overachieved on that goal by 45%, realizing $145 million in fiscal 22. One of the largest integration projects is the consolidation of Tech Data America's ERP systems into CIS, the legacy Cinex ERP platform. We have made excellent progress on the Canadian migration, which we transitioned first, and our U.S. transition is well underway, having recently completed another major milestone. I'm happy to report that more than 45% of the legacy tech data US SAP business has now moved over to CIS and is executing well. We will continue transitioning the remainder of the business throughout the fiscal year and are on track with our plan to largely be complete within two years of the merger close date. Let me now talk about the trends we saw in fiscal Q4 from a market perspective. In short, we experienced a continuation of many of the themes that have played out over the past several quarters. Advanced solutions continued to experience robust growth in the quarter above expectations with strength in servers, networking, and infrastructure. Endpoint solutions gross revenue was modestly down year over year as the PC market and related peripherals continued to see a normalization from last year's pandemic-related highs. Several areas of endpoint solutions saw solid growth, including printers and mobile phones. Our services and specialized solution businesses also experienced solid growth in the corridor. Rounding out our portfolio, our hyperscale infrastructure-focused business, Hive, delivered a record quarter with continued outsized robust revenue and profitability growth as we continue to fulfill strong demand from our CSP customers. We also experienced operating profits above expectation from the Hive business, which Marshall will provide additional color on in a few minutes. From a regional perspective, all three regions delivered strong revenue growth on a constant currency basis with operating margin expansion on a global basis. We continue to accelerate our revenue in high-growth technologies as the markets we are targeting grew faster than the market projections we provided at our March Investor Day. We achieved greater than a 20% year-over-year growth in gross billings for the quarter and for the full year 2022 in these areas, which include cloud, security, data analytics, and hyperscale infrastructure. This growth was in excess of our expectation, and high-growth technologies represented $16 billion of our total gross billings in fiscal 2022. up from $13 billion in fiscal 2021. We saw improvement in the supply chain during the quarter, with a meaningful reduction in our backlog. Despite decreases in both endpoint solutions and advanced solutions, our total backlog level remains elevated when compared to historical norms. Our customers are living the reality of a more uncertain and volatile macroeconomic environment with inflation, higher interest rates, and a competitive market for talent. This need for talent is particularly relevant in the IT sector, where the increasingly complex technology landscape and ongoing shift to cloud-based multi-vendor solutions requires an even greater level of knowledge and experience to serve the needs of the market. For these reasons and others, the value proposition that TD Cynics brings to the market resonates with our customers. On the vendor side, our utility as a variable cost route to market also becomes more valuable in times of economic uncertainty when vendors desire to lower their costs. During the quarter, we were privileged to receive further recognition from our partner community, including being named the 2022 North America Partner of the Year by CDW, the 2022 Global Distributor of the Year by Palo Alto Networks, the EMEA Distributor Partner of the Year by AWS and Lenovo, and the Americas Distributor of the Year by Nutanix. We also continue to progress on our ESG journey and expect to publish our first corporate citizenship report this quarter. In addition, we recently received a grade of awareness from the Carbon Disclosure Project, a strong achievement in our first year of combined reporting. We look forward to continuing to share updates on our continued progress in this space. As we think about fiscal 2023, the critical nature of technology as an enabler of customer experiences and coworker collaboration, keeper of cyber safety, and a tool to realize cost optimization and efficiency cannot be underestimated. And for these reasons, we believe IT spending will continue to outpace GDP growth in 2023. We are prepared and well equipped to continue executing on our growth strategy and are targeting above market growth rates as we leverage our industry leading portfolio products and services and broad global footprint to bring world class service and innovation to the market. We enter fiscal 23 even more confident in our strategy being capable of capitalizing on the trends shaping the IT industry and the opportunities ahead. Lastly, I want to thank our 23,000 plus coworkers around the world for their exceptional efforts in making TD Cinex's first fiscal year a great success. I'll now pass it over to Marshall, who will share more details about our performance and outlook.

Thanks, Rich, and thanks to everyone for joining us today. our financial accomplishments in fiscal 2022 were significant, with adjusted year-over-year revenue growth of 9%, surpassing the high end of the 6% to 8% target we provided earlier this year. Our operating margin performance also came in above the high end of our expectations at 2.8% for the fiscal year, representing a 14% improvement over the prior year and above our 2.5 to 2.7% target. These results demonstrate the power and reach of our business model and the strong value proposition that TD Cinex is bringing to the market. Please note that comparisons versus the prior year full fiscal year are on an as combined basis, which assumes the merger occurred at the beginning of the period. Moving now to our fiscal fourth quarter results. Worldwide revenue for fiscal Q4 was a record 16.2 billion, up 4% year-over-year, and up 11% in constant currency. When normalized for the revenue recognition policy alignment relating to the merger of 500 million, the year-over-year growth was 14%. Currency impacts, primarily driven by the Euro devaluation, accounted for approximately 1 billion headwind year-over-year in fiscal Q4. Revenue was at or above expectations across all regions and in both endpoint solutions and advanced solutions in fiscal Q4. Additionally, Hive delivered strong results in Q4, driven by better than expected demand and timing-related margin recoveries related to services performed in prior quarters. Non-GAAP growth profit had a record quarter of $1.08 billion. Our first quarter, greater than a billion, and non-GAAP gross margin is 6.63%, up 44 basis points year over year. The improvement in gross margin was driven by mix shift to high growth technologies, as well as the high margin recoveries, which approximated 25 basis points. Total adjusted SG&A expense was $582 million, representing 3.6% of revenue. Non-GAAP operating income was $496 million, up $88 million, or 21.5% year-over-year. And non-GAAP operating margin was 3.05%, up 44 basis points year-over-year, driven by revenue growth, high VAT performance, the aforementioned margin recovery, cost discipline, and merger synergy execution. On a constant currency basis, non-GAAP operating income increased 26% year-over-year, excluding margin, recovery, and HIVE, the year-over-year increase was 16%. Q4 non-GAAP interest expense and finance charges were $78 million, $18 million above our outlook due to higher borrowings and interest rates. For fiscal Q4, the non-GAAP effective tax rate was approximately 21%. below the forecasted 24% rate due to the mix of locations where earnings were achieved. Total non-GAAP net income was 330 million, and non-GAAP diluted EPS was $3.44, above our prior guidance of $2.70 to $3.10. Note that the previously mentioned high margin recoveries contributed approximately 33 cents per share of non-GAAP diluted EPS for the quarter. Removing these non-GAAP VPS would have been $3.11, slightly above the high end of our prior guidance range, despite headwinds from elevated interest expense. Now, turning to the balance sheet. We ended the quarter with cash and cash equivalents of $523 million and debt of $4.1 billion. Our gross leverage ratio was 2.3 times, and net leverage was two times. in line with our investment grade profile, and approaching our previously communicated target of two times gross leverage ratio. Accounts receivable totaled $9.4 billion, up from $8.1 billion in the prior quarter, and inventories totaled $9.1 billion, down $689 million, or 7% from the prior quarter. Networking capital at the end of the fourth quarter was $3.8 billion, a decrease of approximately $35 million from Q3, The cash conversion cycle for the fourth quarter was 23 days, flat from Q3, and cash from operations in the quarter was $302 million. From a shareholder return perspective for the current quarter, our board of directors has approved a cash dividend of $0.35 per common share, which represents a 17% increase from the prior quarter. The dividend is payable on January 27, 2023, to stockholders of record as of the close of business on January 20, 2023. For the full fiscal year 2022, we returned $115 million to shareholders via dividends, reflecting a 1.2% dividend yield. We also continued executing on our share repurchase program in the quarter, repurchasing $42 million of our stock and approximately $125 million in total during fiscal 22. which exceeded our $100 million target for the year. Earlier today, we announced that our board of directors approved a new $1 billion share repurchase authorization, which expires in January 2026 and replaces our prior authorization. We expect to increase our share repurchases year-over-year in fiscal 23 as we progress towards our medium-term capital allocation target. Before I move to discussing our financial outlook for Q1, I wanted to provide an update on our merger-related cost synergies. As Richard mentioned, the teams did a phenomenal job of identifying, tracking, and realizing synergy opportunities in 2022, allowing us to achieve our year one targets more quickly than anticipated. We achieved $145 million in cost synergies through fiscal Q4 and continue to expect to achieve an additional $55 million in fiscal 2023, with much of the savings coming from the completion of our ERP system migration, which is on track for the second half of 2023. Once we are fully integrated on one ERP system for the Americas, we expect to continue to find optimization opportunities and generate revenue synergies. Now, moving to our outlook for fiscal Q1. We expect total revenue to be in the range of 15.2 billion to 16.2 billion, which equates to year-over-year growth of around 5% on a constant currency basis at the midpoint. This outlook reflects the impact of year-over-year foreign exchange headwinds of approximately 500 million and interest rate movements of 33 million. Our guidance is based on a euro to dollar exchange of 1.05. Non-GAAP net income is expected to be in the range of $248 million to $287 million, and non-GAAP diluted EPS is expected to be in the range of $2.60 to $3 per diluted share, based on weighted average shares outstanding of approximately $94.8 million. Interest expense for Q1 is expected to be approximately $73 million, and we expect the tax rate to be approximately 24%. As we enter 2023, I wanted to provide a few modeling points to assist you. As Rich mentioned, we believe IT spending will continue to outpace GDP growth in 2023 and estimate our revenue growth to be 3 to 5% on a reported basis. From an operating margin perspective for the year, we expect a range of 2.6 to 2.8% with improvements in distribution margins offset by lower year-over-year contribution from HIVE. HIVE working capital is expected to improve throughout the year, which is expected to reduce the recovery of carrying costs associated with these programs. While it is a challenge to forecast interest expense with precision in the current rain environment, we would anticipate trending toward our guidance for fiscal Q1 of $73 million per quarter at least through the first half of fiscal year and then slightly declining in the second half. We expect our non-GAAP corporate tax rate to be approximately 24%. From a cash flow perspective, we continue to expect to generate in excess of $1 billion in free cash flow in fiscal 23, and anticipate working capital to be a source of cash this year, despite top-line growth, as supply chain constraints continue to ease throughout the year and our inventory position improves. We are committed to progressing towards a medium-term capital allocation framework targeting approximately 50% of free cash flow returned to shareholders via dividends and share repurchases, as best demonstrated by today's announcement, with the other 50% targeted to reinvestment in our business and M&A. In closing, I'd like to thank all our coworkers for their focus and hard work in fiscal 2022, helping to build a cohesive company dedicated to providing best-in-class support and partnership to our customers and vendors. I will now turn the call back over to the operator to begin the Q&A session. Operator?

At this time, I would like to remind everyone to ask a question, press star and then the number one on your telephone keypad. Our first question comes from Roblu Patapura with Bank of America.

Hi, thanks for taking my questions and congrats on the strong quarter. Rich, the PC OEMs have talked about elevated channel inventory levels. Can you talk about how you see PC channel inventory trending both commercial as well as consumer? And when do you think that gets worked off? Are you seeing additional promotional activity and rebates from vendors? And specifically, what have you factored in for TD Cinex PC revenue growth in fiscal 23?

Oh, good morning, Rupalu, and thank you for your question. and Happy New Year to all of you. So first, I'll comment that when we think about our inventory, that it might be marginally ahead of our profile, but nothing out of the bandwidth of what I would call the norm. When we look at the backlog for the PC ecosystem category, I would say that it's generally at profile, so sort of consistent with the serviceability requirements that we had seen in the pre sort of COVID time. Yes, there is some, I'll say, traditional activity, pre-COVID activity in terms of promotions and rebates, et cetera, that are underway. But I kind of think about it as, as I said earlier, as returning to sort of the pre-COVID, if you will, sort of ebb and flow of the business.

Okay, thanks for that. For my next question, maybe I'll ask a question on regional performance. Looks like in 4Q on a constant currency basis, you saw the strongest growth in Asia, followed by Europe and then Americas. As we look to fiscal 1Q, should we expect a different relative performance by region given we have the Chinese New Year holidays coming up? And when I look at Europe margins, they're the lowest amongst the three regions. Is there something structural that causes Europe margins to be lower? And what can you do to improve margins there?

Hi, Bruce Blue. This is Marshall. So your question in regards to Q1, even though we're not forecasting on a regional basis, We still expect to see, on a constant currency basis, modest growth in Q1. And then in terms of Europe, in the question in regards to being structural, we still believe that we're going to have a good quarter for Europe in Q1.

Yeah, and as it relates to Europe margin profile, if I could, there are two call-outs. First is that traditionally the margin profile in Europe has been lower. There's more costs of doing business in Europe related to country complexity. And then the second thing is the profile of the business, you know, where we, for example, have mobile phone distribution tends to have a bit of a lower margin profile. However, those areas with lower margins have great working capital attributes. So the ROIC on those businesses that have sort of the lower margin profile are attractive.

Okay, thanks for all the details there. If I can just squeeze one more in. I think for fiscal 23, you suggested a 3 to 5% reported revenue growth. As we look at your high growth technologies and specifically cloud, how levered is that to overall cloud capex spend? So if cloud capex is still strong but lower in fiscal 23 versus 22, do you think that TD Cinex cloud revenues can still grow mid-teens as you've done in the past? So any thoughts on cloud revenues would be great. Thank you so much.

Yeah, I'll start. Rupu and then Rich can chime in. We still feel that the high growth technology, cloud space, industry growth will be mid-teens, and that's an industry comment. I think the various services and products within that segment will reflect that. As I said in my prepared remarks in the Hive area, we'll see more modest growth in fiscal 23, but in terms of our overall longer-term thoughts on high-growth technology in cloud, we think it's going to be meaningfully above the, we'll call it the the average growth rate for the business. Just speaking about your question in regards to CapEx, just as a reminder, CapEx is one correlation, but it's not the only correlation to the services that we provide to our hyperscale customers. Thanks for all the details.

Thank you. Thank you.

Our next question comes from Joseph Cardoso with JP Morgan.

Hi, good morning, guys, and thanks for the questions. First one for me, you know, some of your partner OEMs have highlighted longer decision-making, tightening of purse strings, among other things from end customers. They, you know, appear to seem to be cautioning around the IT environment, spending environment. I guess, you know, are you guys seeing a similar environment from your end customers? And if so, what is driving you guys to be more optimistic around the IT spending environment and more specifically your growth outlook for fiscal 23? And then I have a follow-up. Thank you.

Sure. Joe, this is Rich. Let me handle that first. So if we think about the back half of last year, you know, I think our reported growth rates in both the third quarter and the fourth quarter at constant currency and then, you know, adjusted for the accounting difference during the merge were double digit, mid double digit teens, if you will. And when you take a look at Marshall's comment relative to our preliminary thoughts around the year, he's talking about 3% to 5%. So from my point of view, there's a pretty material, if you will, change in that trajectory overall. The way we kind of think about it, we obviously looked at many, many different sources as we look to plan our business. The one that we most have the best correlations or had seen the best correlations to our GDP. You know, without getting into all of the details, our business is very concentrated in the Americas and Europe. And if you take a look at the GDP for, you know, those two regions, it nears flat. I think, you know, the Americas are up a couple of tenths and Europe is down a couple of tenths. And over the 15-year average, IT has outpaced GDP by about three points. So this is based on the theory that we use when we think about the likely outcomes for our business in the coming year. And every quarter, we take a look at what are we hearing in market as it relates to GDP. I would say that it has been somewhat volatile. So we continue to look at that metric as the greater macroeconomic theme sort of plays out in front of us.

Got it. I appreciate the color there. And then my second question, you know, if I look at your revenue guidance for the February quarter, it's actually in line with what you were expecting for the November quarter. However, their earnings guide is a bit softer. You know, it sounds like from your commentary that it's largely driven by interest rate headwinds and some effects. You know, however, just want to confirm there that you're not seeing any other material pressures to like areas of the P&L like gross margins? And maybe even more specifically, are you expecting gross margins to improve going into next quarter as you continue to benefit from the mixed shift that you saw this quarter?

Hey, Joe. So, as you think about or as we think about 22, there was some benefit to the pricing environment. We called it out 5 to 10 basis points on gross margin. I would expect that to abate or normalize in 23. And I think the other influencing factor about Q1 is just the mix shift, as we talked about earlier. Distribution, we expect to continue to grow well. Hygro technology specific to the hyperscale hive business will decline slightly. So the mix itself is probably the last piece of trying to triangulate the margin profile for Q1.

Yeah, if I could just add on to the comments. you know, the fundamentals of the execution of our businesses are quite good. And so I kind of think of three buckets relating to, as you, I think you're called the softer guide from an earnings perspective. You know, three points. Number one is interest by far the biggest year to year. Then second is, you know, there's some currency overhang. Presuming a more stable euro, that's sort of a base as we move into the future. you know, the FX discussions. And then the third is the mix, you know, in particular, lesser growth in hive in that overall three to five guide. And it's those three factors. But we're very, very pleased with the fundamentals and the profiles of our businesses.

Got it. Thanks for the question, guys. And congrats on the results.

Thank you.

Our next question comes from Sameer Kalucha with RBC.

Hi, this is Sameer Kalucha calling in for Ashish Tabata. Thanks for taking my question. I was wondering if you can provide some more color on the inventory normalization. Do you think there is any pull forward of demand over here or this is just supply chain normalization happening as I've heard from partners? And when do you expect the supply chain on the advanced solution side to normalize.

Yes, Samir, thank you for your question. So a couple of things. Number one is, hopefully I'm going to answer your questions here, but number one is certainly, you know, the reduction of the backlog benefited our overall sales growth at 14% when normalized for constant currency as well as the accounting 606. When we think about the backlog, to give you a little bit more insight, as I said earlier, the backlog for the PC ecosystem businesses generally are at profile and serviceability levels that we had seen pre-COVID. We're still elevated in advanced solutions, and my crystal ball says with maybe some minor exceptions, by the time we get to the mid-year point that we should probably make our way near profile and have sort of pre-COVID serviceability for the majority of the advanced solutions categories. So I do see, you know, in Q1 and Q2 a bit more of a backlog runoff in that advanced solutions category, and hopefully by the mid of the year we'll be at profile.

Got it. Thank you. And just a quick follow-up. We all hear from partners and industry players saying cloud spending is being more rationalized and companies are looking at their spends more carefully than they have been in earlier times. How do you see that slowdown and highs playing out? Do you think it's a very short-term, any one or two quarters kind of a thing? Or do you think there's a little bit something more structural to look in the, say, midterm when companies try to re-architect their applications, which will likely take longer? So any thoughts you can provide on that?

Sure, Samir. I'll start first. We're used to pencil sharpening. I mean, it's part of the business of always trying to create and invent ways of providing more value. So whether it's distribution, whether it's high-growth products, Those areas over time will feel pressure from just a competitive environment and from a pricing environment. But I think the majority of what we're seeing in fiscal 23 as it relates to cloud service providers and their thoughts is how can we continue to provide more end-to-end solutions beyond just data center fulfillment? So we're seeing that breadth of portfolio play out. And it's upon us to continue to kind of create new value that creates more premium and ultimately more margin for us than original. Anything else you want to add to that?

Yeah, just two thoughts. And I want to break this between core distribution and high. First on core distribution, remember that our client base is more towards small, medium-sized clients overall. And when new technology gets deployed, like cloud, it's very much enterprise first and it makes its way down through the rest of the customer sets as offerings become more efficiently packaged. So, you know, my guess is that if we look at the customer segmentation around cloud, you'll see that the growth rates are more robust in the SMB space because of the evolution of technology maybe versus the enterprise. So, you know, that sort of relative to the total picture should be beneficial for us. As it relates to Hive and that business, as you know, it services the CSPs. You know, I'd share two thoughts with you. Number one is I do believe that the long-term view for hyperscale will grow at mid-teens, if you will. And then just recall within our portfolio, we have the opportunity of customer expansion. And, you know, we're feeling good about our customer prospects, if you will, as we move through time and, you know, really taking advantage, if you will, of expanding our customer portfolio.

Got it. Thank you.

Our next question comes from Jim Suva with Citigroup.

Thank you. Can you go over a little more details a little bit about the Hive profitability changes and, you know, was it purchasing, timing, true up, and why isn't it sustainable or just why the volatility there and the profitability? Thank you.

Hi, Jim. It's Marshall. Yeah, as we disclosed or discussed in our prepared comments, quite often within Hive, and we do this in distribution as well, we have programs that we perform throughout any given cycle or year. for which once we perform the service, the cost plus margin gets recovered and when we close those out or do the refinement review, we tend to get some final settlements or final margin associated with those programs. So we wanted to call that out because it was meaningful in Q4. It happens in distribution as well as we're working with partners and customers and refining and making sure that the margins that we agreed to receive are achieved and recognized. So it just isn't as visible. We wanted to demonstrate that that was part of the strength in Q4. It wasn't the only reason why we outperformed, but it was one of those. And then, Jim, as I think about 23, you know, hives we expect will continue to perform well. The strong 22 is just a tough compare. And the margin profile itself was very, very exceptional for 22.

Yes, Jim, I just would maybe provide a little bit more clarity. When I think about the, you know, the overperformance to the midpoint of the guide, I would share with you a couple of thoughts. So first of all, there's two pieces to Hive. One is, as Marshall talked about, the margin catch-up, and we tried to provide the clarity on that. Second is just the incredible performance overall in sort of the base business. We always talk about, you know, the lumpiness of our hive business. Then we actually overperformed our expectation within core distribution. And then kind of a take back was an interest expense. So it would be those four elements, core distribution, you know, overperformance, significant overperformance in hive, the high margin recovery, and then the interest expense giveback.

Okay. And then earlier in the Q&A, you talked about the PC market and things like that. I'm just curious, on the mobile phone market, you know, there were some supply disruptions. How does mobile phone demand and kind of channel supply from what you see, but most importantly, demand from what you're seeing for mobile phones?

Yeah, so to make sure everybody understands, we have mobile phone distribution in Europe only. You know, the channel dynamics of Europe are different than they are within, you know, North America. So it's sort of in that theater. You know, we saw very good demand for mobile phone. I would say that, yes, we tactically have seen some issue relative to the volatility out of some of the Asian markets, but we fully anticipate that supply to touch up really rapidly.

Thank you so much for the additional details and clarifications, and congratulations to you and your teams.

Thank you, Tim. Our next question comes from Shannon Cross with Credit Suisse.

Thank you very much. I was wondering, as you look at 2023, can you talk about what you see are the biggest pockets of growth? And I'm wondering if you can talk both from, you know, end demand as well as, because there's just so many questions out there about what's happening, right? So end demand and then also backlog fulfillment. So, you know, if you go through some of your product lines, like you mentioned, I think on the call, strength in printers, I assume some of that is is basically catch up from backlog during the pandemic. But if you can just go through maybe categories that you would point to that we can watch as we look at 23 things.

Yeah, thank you, Shannon. So, you know, I'm going to embellish a little bit more here. When we were on this call last year, we had informed that we had a point of view that said that the first half of the year, for actually the entire year we would see a moderating PC, but in the second half of the year we would see a robust sort of data center market. And in fact, you know, we were talking about it yesterday. The year played out exactly as we had envisioned it from a category perspective. Obviously, if we take a look at the first half of this year, We believe that, you know, PCs will be, you know, a challenging category as most of the market had, most of the vendors had projected with the expectation that there'll be a recovery in the back half of the year. And I know that you're well informed in the PC ecosystem market, but it's things like operating systems transition as well as, you know, more premium devices given You know, the worker profile is different than it previously had been. And then there was even comments around, you know, that useful life of a laptop, which is more prevailing these days, is shorter than sort of a desktop. All of those things, you know, I think are anecdotally feel right to me. So I do believe it's going to be, you know, a bit of a slow PC category in the first half with that opportunity in the back half. And then I think that will continue to run off backlog in advanced solutions, you know, in the first half and then see a more moderating advanced solutions in the back half. So, you know, those are sort of the big themes that we think will play out. You know, obviously things will ebb and flow based on the economic circumstance or the reality as the move or the year moves forward as well. You know, those are the big thoughts for this year for us.

Thank you. And then can you talk about what, you know, this, I don't know if it's a transition, but at least it's somewhat of a shift from transactional to devices as service, infrastructure as a service. You know, pretty soon nobody will own anything. But, you know, the shift of purchasing from CapEx to OpEx, How are you seeing that play out, and do you feel like it's still a push from a company perspective versus a pull from a customer perspective, and how should we think about it running through your P&L over time? Thank you.

Sure. Let me start with the infrastructure as a service thought. We see that as material and meaningful in building, and a lot of the Obviously, we have the traditional infrastructure as a service, platform as a service that is virtually delivered today. And those are very, very meaningful business. But we also see the on-prem as a service and infrastructure. And we're engaged with many contracts relative to that space. So I see that one sort of developing and ramping. Candidly speaking, although we provide devices of service offerings as well, you know, those discussions had, you know, begun arguably as many as five years ago. We haven't necessarily seen the ramp or that monetized the way it has been envisioned. We do participate in, I'll call it more niche sort of activities. around that space right now we continue to work with vendors to see if that promise will play out but i would have to say of the two the infrastructure one has more momentum right now than the device as a service one great and then just my last question is on cash flow um is there any work or maybe marshall are there any marketing capital levers that you can pull for 2023 beyond

you know, getting the inventory levels down to drive incremental cash flow?

Shannon, if we think about 23 and the comments we made around cash flow being at $1 billion plus, we certainly understand that earnings itself will be a big component of that. We certainly expect that the inventory declines due to supply chain constraints will be a benefit. And then the last piece is we do also expect us to become more efficient in our work in capital management. One of the things just to remind everyone is that in many parts of the U.S., we still have duplicative warehouse systems. And so with that comes some inefficiencies that as we integrate into 1ERP, some of that goodness will be felt in these working capital efficiency comments I made.

Yes, Shannon. The way I think about it is the inventory is, if you want to use the 80-20 or the 90-10 rule, kind of think of it in the context of that. You know, there are some other working capital efficiencies to be gained, but by far and away, the inventory is the big one.

Great. Thank you very much.

No, thank you. Our next question comes from Keith Housem with North Coast Research.

Good morning, guys. Just circling back to high, I just want to make sure I understand the margin benefit you guys had in the fourth quarter. Is this really just more of a timing difference, that recovery from The third quarter, which had probably a lower margin on the high business than we expected, just kind of offsetting. But for the full year, you're exactly where you'd expect it to be.

Yeah, Keith, it's more timing within the year. But the first piece was the strong outperformance on highs in Q4. So revenue was better than expected. And from that came better expected margins. Great.

So it's two pieces, Keith, both pieces.

Got it. Got it. And in Marshall, interest rates, I believe, obviously, are still continuing to go up, especially if you listen to this. How are you thinking in terms of the interest rate for the entire year? I'm assuming your guidance here is based on where interest rates are today. But assuming they go up, does that change, I guess, your target for your leverage and how you think about prioritizing the payment down of debt?

Yeah, Keith, near end, we are modeling another 50 bits in Q1. So we'll see if that, hopefully that's inaccurate and it's lower than that. But we modeled that in to get to our guide of of $73 million for Q1. And then I think that'll stay around that range for Q2. And then given the cash flow benefits, working capital efficiencies we spoke to, I think it starts to come down a little bit in the second half of the year. But it will be elevated, and it will be ahead when year on year. Okay. I appreciate that.

And if I can speak one more in here. Obviously, working down the backlog has been a benefit. As you're thinking about the first quarter, it sounds like order flow is exactly where you'd expect it to be for where we're at today, and that gives you about a confidence you have in your guidance?

Yeah, there's nothing that's materially different in the order flow than what we were anticipating with the guide. Obviously, it's early in the quarter, but that's sort of our view.

Great. Thanks. Good luck.

Thank you. Our next question comes from Adam Tindall with Raymond James.

Adam, you there? Can you hear me? Yep, can hear you now.

Okay. Yeah, first one I wanted to just clarify with Marshall on the fiscal 23 revenue guidance. You said 3% to 5% reported. What is that in FX and accounting adjustments of the adjusted growth?

Yeah, Adam, at least for Q1, you know, it's as adjusted, constant currency about 5%. It's difficult to figure out where we think FX will go. Right now, it's probably going to end up being somewhat of a push because we're lapping a declining euro year on year. So as we progress through this year at 105, I think it will end up being somewhat flat, plus or minus 200 or 300 million, quarter, two, three, and four.

Yeah, and then the 606 adjustments are completely behind us now.

All right. Good to know, Rich. On that Q1 outlook, that 5% growth in constant currency, I looked at the last year. I think that like-for-like comparison was about 6%. So looking at a similar growth rate as this time last year, but the environment seems a lot worse from a PC perspective in particular. Maybe you could just give us any confidence that you have, especially, you know, talk about how you're feeling here relative to that plan based on what you're seeing here on January 10th.

Okay, so a couple things. First, when we look at or think about Q4, our endpoint solution segment was marginally down year on year. You know, as we think about the first quarter, you know, I would... I'll tell you the following. First, we talked before, our forecast process builds bottoms up. So we go to country, to region, to global. And so we have that visibility. And usually, the teams have a pretty good feel as to what's going on on the ground. It is certainly a more volatile environment now than usual. So obviously, we pay attention to that. You know, as of January 10th, you know, I would say that, you know, the theme of, you know, marginally declining PC segment or endpoint solution segment and sort of a growing advanced solution segment and, you know, the specialized businesses, you know, contributing growth as well is the way we think about it.

Got it. And just the last one, Rich, you mentioned revenue synergy upon completion of America's ERP. Just an early look at any sort of timing, bulk art quantification of this. Do you think that's going to come from vendors or customers? And what do we have to look forward to in terms of revenue synergy when that materializes?

Yeah, so first of all, in our prepared comments, we talked about moving over 45% of legacy tech data SAP onto CIS. You know, in the rounding, roughly two-thirds to 70% of our business now is on the strategic CIS platform in the Americas. So it's a good chunk that's now in there. We have begun, Adam, to see, you know, some of the vendors which were complementary to one side or the other start to take off in those sales lanes, if you will. You know, we think of it as sort of a build which will – grow and grow as we move throughout the year. But we aren't prepared to comment relative to what the quantification of that is. We're in a way to pass a couple of more metrics and or milestones before we provide that visibility. But right now, I kind of view it as the sales teams, as I said, we see real transactions occurring. are getting up to speed with regard to, you know, product details, you know, sales plans, et cetera. And, you know, we'll see how that goes moving forward.

Okay, thank you.

Our next question comes from Ananda Beruja with Loop Capital.

Hey, guys. Thanks for taking the question, and Happy New Year. Just a couple if I could. Is there just sort of mixed outlook on the year? And I guess super simplistically, the guidance for Q1, the revenue was sort of totally right in line and bracketing straight. The EPS guide is a little bit softer. And so Marshall sounds like a little bit of that is interest rate. What are the other components? Or do you think Street was just maybe sort of inappropriately set?

Yeah, Nanda, when you compare Q1 to Q1 for us, it's $33 million higher for interest expense, and then the FX impact is about $500 million, which is $0.10 to $0.12. So those two largely contribute to at least the compare and the discussion year on year. And then when we think about our thoughts on mixed outlooks, for 23 distribution, we expect will continue to show momentum. And we think that the majority of high growth technology will continue to show momentum with the commentary we had around the hyperscale infrastructure slash hive, just having a real tough compare to 22, but still we expect hive to grow. But when you take those into consideration, the mix plays out the way we guided for Q1. All right. That's super helpful.

And then are you guys thinking about getting active, uh, on M&A again? And I guess where, where in M&A kind of in the stack, would you get active like talking versus, you know, sort of medium size? I'm assuming you wouldn't do anything big, uh, because of the debt, uh, and where you are in the integration with each other. Um, but, but where in M&A would you get active this year?

Yeah. Um, Ananda, thanks for the question. As you had stated, a transaction that's the size of the merger of the company is not necessarily on the radar or something that I would forecast, but as is usually the case, we're always prospecting and have a pipeline around M&A and predominantly looking at targets that would allow us to accelerate our strategy. And so they come in sort of two categories, the first one being the traditional one, so I won't spend a lot of time explaining that. Then we also are very interested in accelerating the capabilities in our cloud platform. And if we find the right IP investment that would allow us to accomplish that, we would consider that along the way. And then as it relates to our interest strategically, obviously Europe is less consolidated. Asia-Pacific is even less consolidated. So if something were to appear in those theaters, they would be of interest. So that's how we think about the M&A, pretty consistent with what we talked about, you know, previously.

Awesome. That's really helpful. Thanks a lot, guys. Thank you.

Our next question comes from Matt Sheeran with Stifel.

Yes, thanks. Good morning, everyone. Just a couple questions for me. One, just on the pricing environment. Last year, we saw price increases across all your hardware product categories, including advanced solutions and PCs. We're hearing about pricing pressure on PCs, particularly as memory and other component costs come through. What's your take there, and how does that flow through in terms of your top line or any impact on your business?

Yeah, Matt, thanks for the question. You know, with the overall supply chain profile sort of returning to pre-COVID levels for the PC ecosystem, I would suggest that, you know, we're going to see, you know, those dynamics and pricing sort of return to pre-COVID levels. As someone had mentioned earlier, I believe that, you know, there's ample supply in PC and, you know, to the extent there's shorts and longs, that's going to dictate, you know, what will happen in the overall pricing environment for that PC ecosystem category, if you will, going forward. You know, my view is that there may be some but a bit more limited pricing activity within Advanced Solutions when compared to last year, but I would suspect that by the time we get to the mid of the year that those dynamics would return to normal. Just one last Point of note, in Q4 on a year-to-year basis, we had commented that the endpoint solution segment was marginally down. I would say that with the backdrop of that, actually ASPs were up in both the Americas as well as Europe, even in Q4. But I think there's a point in time where that lapsed, and then we're kind of over it. speculate that, you know, maybe there's still some stability in ASP in the first quarter, but we get back to traditional dynamics after that would be my crystal ball.

Okay. Thank you. And then regarding the cost synergies, you're ahead of plan. You've got $60 million left. How should we think about how that flows through your P&L this year? Is this more of back-end loaded because of the ERP implementation?

Hi, Matt. That's correct. The ERP is expected to complete in the second half, and then with that comes two elements. One is the system-related cost that should go away, and then two is the duplicative cost around supporting two systems, and that efficiency should also play through primarily in the second half of 23. Okay.

Thank you. Thank you. There are no further questions at this time, which concludes today's call. You may now disconnect.