TD SYNNEX Corporation

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TD Cinex second quarter 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 speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I'd like to pass the call over to Liz Morelli, 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, demand, 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 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 8-K, available on our Investor Relations website, ir.tdsinex.com. This conference call is the property of TV Cinex 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 thank you for joining us today. The second quarter proved out the resilient business model we've been highlighting over the last several quarters as we saw a continuation of many of the trends from the February quarter. Our unparalleled line card and diversified portfolio allowed us to realize growth in advanced solutions and high-growth technologies, while year-over-year growth rates for endpoint solutions were impacted by short-term weakness in the demand for PC products post-pandemic. We expect this PC demand decline to abate over time as customers upgrade an aging install base of devices allowing them to run the latest operating environments and leverage key security features. And we're encouraged by the improving macroeconomic sentiment and stable supply chain conditions that are mostly back to historical profile levels. Although the pace of the recovery remains uncertain, we believe that gross billings and net revenue in fiscal Q2 and the outlook for Q3 represent the trough levels for endpoint solutions. The breadth of our technology offerings again proved to be a differentiator for us as we were able to offset deeper than anticipated declines in endpoint solutions technology demand with growth in advanced solutions and high growth technologies. Our teams delivered solid execution, shifting to pockets of growth And on a year-to-year basis, we believe we maintained our overall market share position in the Americas while growing market share in Europe. The resilience of our business model, along with strategic investments that we have made, augment our capability in the fastest growing areas of the market and helped us to expand margins in the quarter. Working capital improved with lower revenues, which is a reflection of the countercyclicality of our business model. From a regional perspective, the Americas experienced the largest impact from the post-pandemic decline in demand with year-over-year declines for PC ecosystem products. America's advanced solutions saw continued growth, driven by demand for cloud and data center-related technologies. From a customer perspective, the clients are primarily in the largest customer segment while SMB and MST customer segments have grown. Europe continued to show resilience with smaller declines in the endpoint given our broad technology footprint and diverse product line, including mobile phones and a very strong growth in advanced solutions offerings and specialized solutions. The Asia Pacific Japan region also saw strength in high growth technologies and specialized solutions, partially offset by smaller declines in endpoint solutions. At a company level, we continue to see solid momentum across the high growth technology areas that we've chosen to focus on, which include cloud, security, data, AI, IoT, and hyperscale infrastructure. These areas continue to see growth in the low teens on a year-to-year basis. Our customers are prioritizing projects in these areas given the critical nature of these IT investments and their strategic importance in minimizing cyber attacks, enabling digital transformation, and driving cost optimization. Investing in these technologies is one of our four strategic pillars and foundational to our evolution from a traditional distribution partner to a solutions aggregation and orchestration partner. Let me take a moment to provide some perspective on the steps we've made towards our goals in this area. We are well into the solutions aggregation phase where we build, integrate, and facilitate edge to cloud IT solutions for our customers. Our role is to help our customers solve complex market challenges by aggregating multi-vendor solutions and delivering easily deployed business outcomes. We do this through our solutions factory methodology, where we build comprehensive repeatable solutions that include some combination of hardware, software, and cloud licenses. A recent example of this involved an IT solution provider and a consulting firm that wanted to provide a better backup solution for their clients. Maintaining warranty and software support on proprietary backup appliances can be costly for end users, and they wanted to begin recommending pure cloud backups where applicable. This provider was able to utilize the TD Cinex Solution Factory and our cloud-based click-to-run solutions along with provisioning a pre-configured cloud solution built by TD Cynics within minutes. This enabled the provider to deliver a solution to their end users more rapidly while reducing configuration and deployment process times by 75%. We have many examples like this and currently have over 7,500 of these solutions deployed, including offerings for software-defined data centers, hybrid cloud, hyper-converged infrastructures, analytics, and security. We look forward to continuing to share updates with you on this important work. Now, moving on to our merger integration efforts. As we approach the two-year mark since we became TD Cytics, I'm pleased to report that we have realized our goal to achieve $200 million in merger-related cost synergies ahead of schedule. This is an important milestone, and it is a result of much hard work and effort by the teams across the company. As we move forward, we expect to realize an additional $50 million in cost optimization over the next several quarters. From an ERP systems perspective, we have made additional progress toward the completion of transitioning the Americas business to one system. Approximately 80% of our Americas business is now on CIS, and we remain on track with our transition goals. Importantly, this progress opens the door to realizing merger-related revenue synergies and to continually enhance our business. While we know that some revenue synergies have already begun to be realized, we believe this remains a more significant opportunity toward the end of 2023 and into 2024. This month, we were honored to receive our updated Fortune 500 rating, being named number 64 on the list for 2023. This is a testament to the strong relationships that we maintain with our customers and vendors. During Q2, we were privileged to be recognized with several awards, including being named HP Partner of the Year, North America Distributor of the Year by Dell, HPE, and Veeam, in addition to other regional awards. We also had the distinction of having 19 of our leaders recognized by CRN as top women of the channel last month. a well-deserved achievement and recognition of their significant contributions to our company and industry. We are proud of their achievements and continue to be committed to gender diversity as part of our overall DE&I strategy with the goal of increasing representation of female core workers to 40% of leadership roles by 2030. We also closed on several new vendor partnerships during the quarter, including Gong, an AI-driven revenue intelligence platform, and GitLab via an exclusive partnership to address DevSecOps and application monetization in Asia-Pacific Japan. These wins are indicative of our investment and commitment to grow in new technology areas, enabling us to continue offering our customers the most complete portfolio in the industry. Since the beginning of the fiscal year, we have added nearly 100 new vendors to our line cart. In closing, as we contemplate fiscal Q3, while there remains some uncertainty in the macroeconomic environment, we are encouraged by the early signs of stabilization. With the resolution of the U.S. debt ceiling, reduced banking sector concerns, and a serviceable supply chain. We expect TC ecosystem demand declines to reduce following the past couple of years of intense buying by our customers and driven by the factors I mentioned earlier. We remain well positioned to navigate the demand environment as highlighted by our performance this quarter, and we believe that the long-term drivers of IT spending remain intact. I'll now turn it over to Marshall for some additional comments about Q2 and our Q3 outlook. Marshall, over to you.

Thanks, Rich, and thanks to everyone for joining us today. Our earnings and cash flow profile remained strong this quarter. We delivered non-GAAP EPS of $2.43 per share within our previously guided range and generated over $700 million in cash flow from operations for the quarter. demonstrating the counter-cyclical nature of our business model. Our Q2 revenue performance was at the low end of the outlook range we provided in March and is the result of a demand environment that varied greatly between endpoint and advanced solutions technologies. As customers prepared for the rapid shift to hybrid work over the past few years, growth for PC ecosystem products was well above historical trends. As Rich mentioned, demand for endpoint solutions is now declining, with customers digesting the increased investments made over the past couple of years. At the same time, advanced solution technologies continue to see solid demand as customers focused on projects for data centers and continue to prioritize their cloud migrations. Given our broad portfolio and progress in high-growth technologies, we were able to leverage the areas of growth in Q2. increasing our market share for these technologies in North America and Europe. Worldwide gross billings were $18.7 billion, down 4% in constant currency, while net revenue was $14.1 billion, down 7% year over year in constant currency. Given that a greater percentage of our sales came from advanced solutions in the quarter, more of the revenues were shown on a net basis in the quarter. If normalized for these additional growth to net adjustments, which primarily occur in advanced solutions, the year-over-year net revenue decline in constant currency was 4%. We continue to see solid growth in the high-growth technologies of cloud, security, data, AI, IoT, and hyperscale infrastructure. And collectively, these areas grew in the low teens on a year-over-year basis and represented greater than 20% of our gross billings in the quarter. Non-GAAP gross profit was $969 million, and non-GAAP gross margin was 6.9%, up 45 basis points year-over-year. The improvement in gross margin was driven by a mixed shift to advanced solutions and high-growth technologies. Total adjusted SG&A expense was $593 million, representing 4.2% of revenue, up $8 million year-over-year. As we continue to make investments to enhance our capabilities in the strategic growth areas of the market. We expect SG&A expenses as a percentage of net revenue will return to the 3.5 to 4% range in the second half of fiscal 23 as we begin to realize the cost optimizations that Rich mentioned earlier. Non-GAAP operating income was 376 million, down 5.6% year-over-year, and non-GAAP operating margin was 2.7%, up six basis points year-over-year. On a constant currency basis, non-GAAP operating income decreased 5% year over year. Q2 non-GAAP interest expense and finance charges were $72 million, $4 million better than our outlook, and the non-GAAP effective tax rate was approximately 24%. Total non-GAAP net income was $229 million, and non-GAAP diluted EPS was $2.43 within our guidance range. Non-GAAP EPS for the quarter was down 11% year-over-year, and excluding the impact of higher interest expense and FX translation, it would have been down 2% year-over-year. Now, turning to the balance sheet, we ended the quarter with cash and cash equivalents of $852 million and debt of $4.1 billion. Our gross leverage ratio was 2.3 times, and net leverage was 1.8 times. In line with our investment grade credit rating, and approaching our previously communicated target of two times gross leverage ratio. Accounts receivable totaled $8.4 billion down from $9.4 billion in the prior quarter and inventories totaled $7.8 billion down from the $8.4 billion in the prior quarter. Networking capital at the end of the second quarter was $3.8 billion down from $4.2 billion in Q1 due to declines in AR and inventory and partially offset by a decline in AP. The cash conversion cycle for the second quarter was 24 days, down two days from quarter one, which was consistent with expectations and typical seasonal patterns. Cash from operations in the quarter was $708 million, and free cash flow was $677 million, as the business demonstrated the benefits of its countercyclical balance sheet. During Q2, we returned $93 million to shareholders via dividends of $33 million and share repurchases of $60 million. For the quarter, our board of directors has approved a cash dividend of $0.35 per common share, which equates to a dividend yield of approximately 1.5%, payable on July 28, 2023, to stockholders of record as of the close of business on July 14, 2023. As Richard mentioned, we are happy to report that we met our merger-related cost synergy target ahead of schedule, realizing $30 million of incremental savings and over $200 million Despite our success in achieving merger synergies, there's more work to do to optimize our cost structure, especially given the unprecedented swing from strong market momentum exiting fiscal 22 to the year-over-year declines in revenue for the first half of fiscal 23. Over the next three quarters, we will be pursuing cost optimizations that will drive SG&A costs lower by approximately $50 million on a run rate basis. The cost savings will in part be enabled by the integration of our two ERP systems into one enterprise platform in the Americas. This opens up our full capabilities to dynamically manage and respond to where the market is going and provides us with confidence in realigning our cost structure to market conditions and to fully leverage cross-sell revenue opportunities. So with this as the backdrop, let me now share our outlook for fiscal Q3 and high-level thoughts regarding Q4. We believe we will continue to see demand for PC ecosystem products improve and believe that fiscal Q2 and Q3 represent the trough levels for endpoint solutions, gross billings, and net revenue. For fiscal Q3, we expect gross billings of $18 billion to $19.3 billion, representing a 7% decline on a year-over-year basis in constant currency at the midpoint. We expect total revenue to be in the range of 13.5 billion to 14.5 billion, which equates to a 10% decline year over year on a constant currency 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 206 million to 253 million, and non-GAAP diluted EPS is expected to be in the range of $2.20 to $2.70 per diluted share. based on weighted average shares outstanding of approximately $93 million. Non-GAAP interest expense is expected to be approximately $72 million, and we expect the tax rate to be approximately 24%. We believe market sentiment reflects a modest recovery beginning towards the latter part of Q3 and continuing into Q4, and would expect to see a seasonal sequential improvement in revenue of approximately 8% in Q4, as well as easier compares as we enter fiscal 24. As a reminder, in Q4 of fiscal 22, we had a benefit of approximately 33 cents to non-GAAP EPS due to high margin recoveries, which we do not expect to repeat. In closing, I'd like to provide some comments regarding capital allocation. Given strong free cash flow generation in Q2 and our continued confidence in generating over $1 billion in free cash flow for fiscal 23, We are focused on deploying cash opportunistically. We return 241 million of capital to shareholders in the first half of the year and expect to increase that pace for the back half of the year by approximately 100 million, bringing our expected capital return for the back half of the year to approximately 340 million and the all-in total for fiscal 23 to 580 million. We will continue to be opportunistic with regards to capital allocation while adhering to the general framework we have previously communicated to the market. With that, we are now ready to take your questions. Operator?

Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. We request that you limit yourself to one question to allow time for other participants to ask their questions. And if there's remaining time, you're welcome to re-queue with additional questions. Our first question is from Adam Tindall with Raymond James. Your line is open.

Okay, thanks. Good morning. Rich, I just wanted to start with maybe a macro question. And as we think back, one of your largest customers had a surprising end to their March quarter and a sizable cut to their forecast. The question that investors are wondering this morning is the weakness that you've seen here on revenue, is that reflected in the data point from March because your quarter includes that month of March or have trends continued to weaken? And if you could Maybe touch on what's going on in the month of April, May, and how June is shaping up. It'd be very helpful. And then I've got a follow-up on cash flow from Marshall.

Sure. So first of all, obviously we were to the low end of our revenue guide for the second quarter. So the demand in primarily the PC ecosystem or endpoint solutions were a little bit softer than we had anticipated. We did have some offsets from the advanced solutions business and high growth technology business as it was stated in our prepared comments. We do see a little bit more volatility month on month as we had moved through Q2. I would say that it was bumpier, you know, lows and highs relative to, you know, what we might see. So it felt as if it was a little bit more volatile. And I think, Adam, that, you know, this continuation of realigning, if you will, the PC ecosystem inventory across the entirety of the supply chain was perhaps a contributor to, you know, those endpoint solutions volumes being a little bit lower than anticipated. As we had stated, our view for the remainder of the year is that we'll see lesser declines in Q3 and Q4 moving forward. But we do believe that, you know, that digestion continues. And as you know, that as we move through time, there still are some reasonably tough compares and they get easier as we move into next year. So, you know, we think that clearly there is improvement on a year-over-year basis moving through time. It's still sort of a declining environment with lesser and lesser declines as we move through time. So that's kind of the summary.

Okay, that's helpful, Rich. And maybe Marshall has a follow-up. Acknowledging cash flow, very impressive in the quarter. And your decision to talk about deploying cash opportunistically, if I recall, it's been a little bit more programmatic on share repurchases and smaller in the past. So You know, first part of that question would be maybe just taking us into the discussion and what's changing here from a qualitative perspective to move to this opportunistic stance. And then secondly, if you could touch on the timing of cash flow over the next few quarters and for fiscal 24, there's been times in these models where we have these strong cash flow quarters that are followed by reversals. So I'm just wondering on the sustainability of cash flow from here. Thank you. Yep.

Thanks for the question, Adam. So programmatically, we will have in place the 10B51 program. And what that allows us to do is just have in place during all periods, quiet and open, to buy at various pricing levels based on what we believe to be the appropriate intrinsic value of the stock. The opportunistic aspect of that, Adam, will be when we see price changes in our stock and our ability to take advantage of that, we will. So that will be more of a case-by-case and day-by-day decision in the second half. In thinking of the cash flow and timing, quarter one, we were at 26 days. Quarter two, we improved that to 24 days, so good improvement. That was expected seasonally, but also at the same time, we did see some structural improvement that we think will hold. So as now we look for Q3, our expectation is for us to come down in improvement of probably about one cash day. And then Q4... Based on our comments about the seasonality recovery of 8% sequentially, sometimes that does consume working capital. It's difficult to tell today, but still allows us to have confidence to achieve the $1 billion plus cash flow for 23, and thus the increase in the second half of share repurchases by $100 million. And then your question about going into 24, we have said in our investor day and along the last couple of quarters that We still feel that that medium-term target of being able to generate free cash flow of $1.5 billion is still reachable and attainable. I do think that coming out of 22, we were quite elevated on inventory. I think we acknowledged that and that we would expect some of that inventory to unwind. We have experienced that to date for the first half. We do expect that to continue to improve in the second half of 23.

Okay, and then into 24, no reverse. I'm just saying, seeing that you're under two times net leverage, you've got over $5 billion of liquidity, and if cash flow is going to continue like this, I'd imagine the capital return story doesn't end here, but I don't want to put words in your mouth.

That's correct, and as you know, it's not always linear. The indication of us increasing our share repurchase is not indicative of anything we're doing on the M&A front, so we're always going to take that with a balanced approach.

Thank you.

Thank you, Adam. The next question is from Michael Ng with Goldman Sachs. Your line is open.

Hey, good morning. Thank you for the question. I just have one on SG&A. You know, given that OPEX is 65% variable, I was surprised to see it up year over year. I know you mentioned the investments in strategic growth areas that drove the elevated SG&A in the quarter. I was just wondering if you could talk a little bit more about that, you know, what areas of growth were most impactful. And then could you talk a little bit about the glide path towards coming back to that 3.5% to 4% range in the back half? Is it evenly split, more back-weighted towards the fiscal fourth quarter? How are you thinking about that? Thank you.

Yeah, thanks for the question. So first, I'll handle the first part, and Marshall can assist on the glide path at the back half here. So first... When you think about areas investment, we point towards the high growth technologies. This would be cloud, analytics, cybersecurity, and then our hyperscale infrastructure business. And you've been noting that those have been performing quite well for us over time. So that's sort of the first data point. The second data point is you know, when we think about our SG&A structure, there clearly has been an impact with inflationary measures across, you know, most of the SG&A category, you know, whether it be labor and logistics centers or whether it be some of the, you know, logistics and supplies-like activities which exist within that framework as well. You know, that being said, we've done a pretty good piece of work to think about where we're headed for the back half of the year and then FY24 and have realigned, if you will, the trajectory of our spend to be consistent with getting us back to an overall business profile. And I'll let Marshall comment a little bit on that.

Yeah, thanks, Rich. So just a few things to add. As we said in our prepared remarks, the The near completion of our ERP in North America certainly enables us to drive a lot more opportunity for efficiencies across all areas. And that's not only just within SG&A, but that's margin optimization, pricing, scale, et cetera. So I think that gives us additional confidence to know that deployed onto one system, we've got an opportunity to drive it down. Specifically to the $50 million in cost optimization, The way we see that play out in general terms is we'll start to feel that benefit in Q3. Roughly around 10 million of incremental SG&A take out. We think there'll be another 15 million or so in Q4 incremental. We'll call that 25 for the rest of 23. And then for fiscal 24 Q1, we expect an incremental 25 million in Q1. So that's how we expect it to play out. You know, I think just as Richard said, there's lots of things we need to consider that will be continued investments going forward. Higher SG&A as it relates to our high growth technologies will continue to be important to us. You've probably experienced and seen in the past when we have some heavier SG&A, typically that bears fruit two to three quarters down the road in terms of better returns, higher margin, and cash flow coming back in through the door. So that's how we expect it. In terms of the glide path, For Q3, we'll probably be right around 4% in Q3 for SG&A as a percentage of revenue, and then we'd expect to be between, we'll call it 3.6 to 3.8 as we enter Q4. Great.

Thanks, Rich. Thanks, Marshall. That's very helpful. I'll hop back in for Q. Thank you.

Thank you.

The next question is from Joseph Cardoso with JP Morgan. Your line is open.

Hey, good morning and thanks for the question. Just one for me as well. You know, as it relates to your AS business or your AS and high growth technologies business, just curious to get some more granularity around the trends that you're seeing there. You know, specifically is that, you know, I guess there was some broader concerns from the investment community around maybe seeing a pullback as you kind of digest some of the backlog in that business. I guess, can you just touch on whether you're seeing trends track ahead of your expectations 90 days ago? You know, are you seeing any, you know, pullback in terms of current demand trends or order trends? Just curious to see how that business is tracking relative to your expectations 90 days ago. Thanks.

Yeah, a couple of things. Thanks for the question, Joe. So first, you know, AS has been growing at a reasonably robust pace. There's For sure, that growth rate has benefited from some backlog runoff. We are starting to reach sort of profile levels of backlog, generally speaking. There are some very isolated pockets. So the way I kind of see it, just to give you a trend here, is I think that the AS growth rates will be coming down. but there'll still be growth for the back half of the year, but at a bit of a lower growth rate. So if you think of the dynamics of our business, we talked about lesser declines in the PC ecosystem moving forward. I think we then have lower growth rates moving forward in the AS business. And then as well, the back half of last year, we had a very strong hive business, and we talked about the lumpiness of hive you know, over the, you know, the annual periods. And we think that Hive will, you know, have less growth or perhaps decline as well in the back half of the year. So there's a changing dynamics going on within the portfolio. I want to be clear that, you know, I think all of these are within the dynamic of the macro. And as we move forward and the macro gets healthier, I believe that the overall business, you know, all boats rise, so to speak, when we find ourselves, you know, at that point. And as we stated in the commentary, you know, the trends here recently have been, I think, quite positive relative to the macro. But, you know, they could ebb and flow as well. We talked about clarity on the debt ceiling. We talked about the concern around the banking crisis or the banking issues kind of reducing quite significantly. And then there's the continued narrative around unemployment being low and GDP continuing to chug along. So we'll see how all of that plays out. But longer term, we absolutely are confident that IT will realign with its sort of normal growth attributes once we clear through this macro.

Nope.

Appreciate the call, Rich. I'll jump back in the queue. Thank you.

The next question is from Shannon Cross with Credit Suisse. Your line is open.

Thank you very much. I wanted to ask about the revenue guidance. If PCs are getting a bit better, And yet at the low end, revenue would be lower. What went into, I guess, the range that you provided in terms of your thinking? And then I have a follow-up. Thank you.

Hey, Shannon. I'll go first. So typically what we do every quarter is do a bottoms-up review, and that's by product, by region, by leader. No different than what we've done in the past. So as we pull that together, we have a range of outcomes that Typically, we then take, and Rich and I will look at that to just get a sense of the range of guide, and that's really how we formulated it. It's no different. We did articulate last quarter that it was a little bit more difficult, given just the uncertainty that we saw in the second half of the year. So it very much is an informed perspective, and you can appreciate America's dynamics are different than Europe, and those are different than high growth and those those impacts. For us, clearly, the high growth continues to be the leader. And endpoint, now it's a matter of trying to determine how that recovers. So, Rich, I don't know if you want to add anything.

Yeah, Shannon, if I think sequentially here for a second, first of all, just a reminder that we had a very strong back half of the year. From memory, we had a 14% and 15% growth, respectively. But if you think about it sequentially, I think the dynamic is lesser of a decline in P.C., then lesser of a growth rate in AS as sort of the backlog piece that fueled a little bit extra revenue growth is, you know, coming down a little bit. And then clearly, you know, Hive had back half of last year had some really big numbers. So, you know, it's really a remixing across the portfolio of those revenue dynamics that lead to the range of the guide that Marshall had provided.

Okay, thank you. And then I'm probably remiss not to ask about AI. I'm curious, can you talk about what you're thinking internally as well as what you're hearing from your customers and how maybe that can grow as part of some of your more solutions-oriented sales? Thank you.

Yeah, sure. I actually read this morning a piece on AI in one of our vendors that was released by you and your team, so thanks for those insights.

Oh, I'll pick you up for a call on that soon.

So, you know, three buckets here. So first in core distribution, and I'm thinking now in terms of offerings, right? You know, we fundamentally believe that we're going to see many offerings now AI infused. So, you know, there's not, you know, obviously there will be applications out there that might sell sort of AI products as a service, but we kind of see the embedded AI as being, you know, something that will lift the entire offerings portfolio almost end-to-end. And you had the piece talking about how AI might influence PC ecosystem. So, you know, as we move through time, I think offerings become more intelligent, more robust, and, you know, likely will have an influence on some of the ASPs as we move through time. Second, from a Hive perspective, We all know that the hyperscalers are going to be building out a pretty big tranche over time of, I'll call it AI-tuned or AI-optimized servers and storage and networking and the entire data center category. So that will be an opportunity for us to compete to continue to win business within that category. And lastly, you know, from a operations perspective and productivity, obviously we've been on a journey around machine learning and automation. And now we get a little bit supercharged with all what I'll call more advanced AI capabilities. And candidly, we're, we're really learning to determine where the, the, the best, uh, pursuits are for our operation in terms of using that new technology within our franchise overall. So those are the three sort of categories that we think about AI in.

Great. Thank you very much.

Thank you. The next question is from Ruplu Bhattacharya with Bank of America. Your line is open.

Hi. Thank you for taking my questions. My first question is regarding the pricing environment. Are you seeing suppliers lower prices as commodity costs have come down? And are your own customers buying leaner configurations given the uncertain macro? So can you give us your thoughts on your ASPs?

Yeah. So, Rupalu, to be clear, I'm going to address the ASPs predominantly within the PC ecosystem space. Obviously, when you get into data center, following the configurations and the ebbs and flows, it makes it a bit more difficult. But actually, ASPs were up in the quarter, which might be a bit of a surprise. This is for our business, but we see ASPs actually increasing. So therefore, I think we see inflationary impacts priced in. and or richer configurations. And at the same time, you know, the volume declines for a little bit larger to get us to sort of the average unit revenue, if you will. So, you know, ASPs are holding up. However, within that higher ASP sort of band, there clearly is a continued level of price competition that's healthy. So that's how I would describe it. There is definitely very healthy price competition out there, but at the same time, the ASPs have gotten up a little bit on a year-to-year basis. Marshall, I don't know if you have anything to add.

Yeah, just some color sequentially, Rupu. Rich is right in terms of the ASP holding and approving year-over-year clearly down in the PC ecosystem, but sequentially, we saw overall revenue improve. And so that was one of the reasons we also felt like there was some form of recovery underway. So just wanted to highlight that from a quarter-to-quarter perspective, we are starting to see the endpoint solution grow for Americas and Europe.

Okay. Thanks for the details there. For my follow-up, let me ask you a question on revenues and specific to the Americas region. This quarter, you had revenues decline 10% year-over-year in constant currency. Can you give us your view on North America IT spending growth this year in 2023? And I think you said endpoint solutions you expect to trough in fiscal 3Q. So let me ask you a little bit more detail on that. I mean, why do you think 3Q is the trough? Why not 4Q? I mean, what is giving you confidence in that 3Q will be the trough And the last part of that question is, you know, advanced solutions, I think you said, would be slower in the second half. Is there any way to quantify that? Is that just because of tough year-on-year compares? Or, you know, how much slower versus the first half year-on-year growth versus the second half? Any color you can give? Thanks.

Rupalu, thank you for the multi-part question. Let me see if I can, you know, handle each one of those. Our experience in the Americas is that the challenge is clearly within the PC ecosystem. And for one reason or another, it has been more magnified than in the rest of the world. Now, part of that is because in Europe, as an example, we have a broader endpoint segment, which is inclusive of mobile phones, which we don't have within the Americas. You know, that would be number one. Number two is, you know, as it relates to advanced solution and the slower growth as we move through, I see it as predominantly, you know, the backlog moving towards the profile and, you know, not having the increment on the revenue that we had in, I'll call it the last four quarters, with, you know, backlog assisting to provide an extra jolt to that growth. And then as it relates to PCs and why we see lesser of a decline and we think the trough would be, you know, in we say in Q2 slash Q3 is truly because number one, you know, the inventory clearly has been digested across the supply chain. Number two is we're beginning to see real stability in that backlog overall. Then the third part is we all read within the industry about the aging profile of the install base out there. And, you know, some of the benefits of, you know, the new OSs which are available in the market. And then some of those OSs we know have an expiration date sometime in calendar 25. So generally speaking, the install base starts to move when it gets aged and when there are productivity and mostly security benefits with some of the new offerings. And then, you know, that coupled with the expiration date. And oh, by the way, the compares begin to get easier. So all of those things together are, and then, you know, discussions clearly with vendors and customers, all those things together would lead us to sort of feeling as if the trough is Q2, Q3.

Got it. Thanks for all the details.

Hopefully I answered all your questions.

Yes, you did. Thank you.

Okay. Thank you.

The next question is from Keith Housen with North Coast Research. Your line is open.

Good morning, guys. Appreciate the opportunity here. Rich, maybe perhaps touch a little bit based on the sales cycle. You know, we're hearing a lot from, you know, the resellers and competitors that the sales cycle has just been elongated across the board, but really don't think we've heard too much of that here from this discussion here. What are you guys seeing that in terms of for the quarter and for the rest of the year expectations?

So, you know, I think it's part of the, you know, the decline that we've seen in PC and then moving forward to the lesser declines and then, you know, the AS growth rates that we talked about. And then, you know, even within our high business, we have tough compares in the back half of the year and know that, you know, we'll be challenged, you know, from a an overall sales perspective. All of these things have multiple factors, Keith. I think it starts with the macro, and I talk about the macro, and Marshall has a couple of times. And certainly one of the outcomes of the macro are elongated sell cycles, more scrutiny, if you will, around the purchase, more on absolutely limiting the purchase to what's needed now. as opposed to what can be forgone for a period of time. So I didn't, you know, maybe I didn't directly state that, you know, the protracted cell cycle time is an outcome, but certainly I see it as tied to sort of the macro and a natural reaction given the macro.

Great. I appreciate it. And just as a follow-up, you know, with the additional cash flow that's available as a reduction of the business and putting that capital to use, how do you guys see the M&A environment today and your opportunities available to you?

So, you know, I think M&A is something that we always have an active pipeline on, and we continue to, you know, engage on that pipeline. You know, things come in, things fall off. I would tell you that our M&A interests are pretty consistent with what they have been over time. As you well know, within this industry, there's the ability to grow organically, predominantly driven in the new technology areas and there's the ability to grow inorganically and over the continuing Continuum, sorry. You know, I think that both of those tools will be utilized in order to, you know, continue to drive our enterprise.

Great. Thank you, guys. Thank you. Thank you.

The next question is from Matt Sheeran with Stifel. Your line is open.

Yes, thank you, and good morning. I had a question on the gross margin. Marshall, the implied gross margin guide is roughly 6.7%, so down 20 basis points sequentially. You talked at the end of your comments, your opening comments about Hive having some, I guess, some catch-up in some pricing with customers in that it was sort of a one-time positive impact. So could you talk about expectations for gross margin, particularly as you get into the back half of the year with advanced solutions slowing and client devices picking up, and particularly your consumer business also picking up seasonally. Should we expect gross margin to be down again in Q4?

Yeah, so I'll address the second half, and then Rich certainly can chime in. So we think the gross margins probably come down slightly. Most of that, I think, Matt, it's just due to seasonality. As you know, quarter four tends to be a little bit more PC-weighted. And with that, it tends to have a little bit lower gross margin profile. But you're right. We had some one-time items that won't repeat themselves in Q4 for hive, and that definitely did benefit last year's quarter four margin, gross margin. But generally said, the majority of the uplift, if you think about the year-over-year compares on gross margin, are primarily due to the mixed shift between AS and ES, Matt, and also the increased amount of gross versus net that's taking place within the enterprise. We roughly have about a 3% higher grossing of those revenues year on year, so it does actually artificially or mathematically increase the margin profile, while gross profit dollars stay relatively

consistent or constant relative to overall revenue volatility. I have nothing to add.

I think, Matt, as Marshall had said, maybe marginally the anticipation would be a sequential down a couple of basis points along the way. But fairly stable, I think, in Q4, then.

Okay, thank you. And then another question on macro and what you're seeing. You talked about, Rich, about the enterprise, you know, being the weakest in market segment and SMB holding up relatively well. Is that your expectation or, you know, SMB maybe lagging, you know, this cycle? and they may get more cautious in terms of spending as you get into next year. Any insight or any visibility there?

Yeah, so clearly I think for the first half of the year we've seen this trend. We talk about, you know, I'll say the larger customer set being where we see the biggest challenges, and then SMB and MSPs. you know, offering a better outcome as it relates to productivity. You know, I think, Matt, this is a difficult question to ask or answer, and I'll tell you why. Part of this is because I believe there's a disproportionate consumption of new technologies, predominantly cloud and as a service-based solutions, that, you know, you follow technology cycles. They hit first in enterprise and then kind of make their way down. So, you know, I think that my speculation is the growth rates of sort of cloud-oriented things are higher in SMB now than they are in enterprise because there's a bit more of a saturation. So I think there's a benefit relative to the portfolio consumption in SMB, you know, kind of following the evolution, if you will, of some of these newer technologies being consumed there. And then, you know, you get into what happens with the macro and we find ourselves in a situation where when SMBs might be thinking of slowing that we have sort of an improvement in the macro. It's sort of those things that might allow for a better transition within SMB and MSB as opposed to what we've seen in the, I'll call it the larger end customers.

Okay, great. And if I can squeeze in a third question just regarding your comments on Hive and the fact that that's going to be weaker in the second half. Could you just talk about, I mean, I know that there's lumpiness in that business, but how you're positioned sort of as you get past this digestion period or this slow period, how you're looking going into next year.

Hey, Matt. So yeah, it's a tough compare. The second half of 22 was exceptionally strong for Hive, and it was contributed for three equal reasons. The racks themselves continued to show strong demand, and then our distribution network enabled us to to perform those types of services for our hyperscale customers and then spare parts, et cetera. It was just extremely healthy in the second half, so it just makes it a really tough compare. Sequentially, if you think about the behavior of five from Q1 to Q2, good quarters, strong, good margin profile. Those expect to come down a little bit in the second half. I think a lot of it is just connected to the overall thoughts of high-growth technology still having above-average performance compared to core growth rates. That will continue, but it should abate. I think to your question about when does the digestion period end, we think we exit 23 and find ourselves in 24 kind of back in a normal growth rate pattern. It's hard to determine if that's a 5% growth, 10% growth, but we do think it's positive. And I will just reiterate the second half of this year, we expect Hive to be down year over year, primarily just due to the tough comparison.

Yeah, so, and I would summarize Marshall's comment very simply by saying that my point of view is, you know, the high ebb and flow here is strictly related to the macro. You know, we're executing quite well in that business. We are participating in a lot of new design opportunities for the future. You know, the business is executing solidly and, you know, I think that This is sort of more of a macro as opposed to anything else, and the execution engine is quite strong.

And then the final thing I'll say, which we say quite often to you, Matt, is that if you look at the annualized trailing 12 performance of high for the last three years, they continue to show growth in top line and bottom line.

Okay, very helpful. Thanks a lot.

Our final question today is from Ashish Sabhadra with RBC Capital Markets. Your line is open.

This is Patrick Jackson on for Ashish. Thank you for taking the question. In Europe, it's great to hear about the continued share gains. Could you share a bit more how trends have developed across advanced solutions and endpoint in that region? And for your mobile distribution business in Europe that you mentioned earlier, could you talk about how demand has trended in the quarter and what you have seen from a supply chain perspective? Thank you.

Sure. You know, it's been an ongoing narrative for our business that the impacts of the PC ecosystem or endpoint solutions have been more significant in the Americas versus Europe. So although Europe has experienced declines in endpoint solutions, they have been much lower declines than in the Americas. As it relates to the mobile phone piece, it has been performing reasonably well. We have two providers that we are engaged with over there. And I'd say the demand has been reasonably solid over time. And we wouldn't anticipate any major change in that trajectory moving forward. And then lastly, from an advanced solutions perspective, the benefit of good growth in advanced solutions is sort of consistent globally, where each one of the regions are seeing that trend. So I wouldn't say that it's out of the norm, Europe versus the rest of the world there. But I would say, just being a little bit repetitive, that in the first half of the year, the outsized declines in PC ecosystem have been within the Americas.

Thank you.

Thank you. To conclude our question and answer session, I'll turn it over to Rich Hume for any closing comments.

So first, thanks to all of you for attending the call today. I want to thank our coworkers around the world for their persistence and can-do attitudes in staying focused and making sure that we keep at the forefront the success of our vendors and customers, which we rely upon to drive our business moving forward. Thanks to all of you for joining, and I hope you have a great day.

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