TD SYNNEX Corporation

Thank you. Good morning, everyone, and thank you for joining us for today's call. With me today are Rich Hume, CEO, and Marshall Witt, CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, including statements about demand, cash flow, and shareholder return, as well as our expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 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 thank you for joining us today. The strength of our business model and our relentless focus on execution were evident in our fiscal third quarter results. Our strategy is working and our expansive portfolio of products, services, and solutions have enabled us to navigate the fluctuations in the post-pandemic IT spending environment. For another consecutive quarter, a greater portion of our business was generated from high growth technology categories, and we saw improving performance in endpoint solutions. The business mix helped us to expand margins, deliver earnings per share above our guidance, generate strong free cash flow, and increase capital return to our shareholders in the quarter. We were encouraged to see signs of stability in our endpoint business. as the Americas experience reduced year-on-year declines and grew quarter-over-quarter. In advanced solutions, the Americas saw decelerating growth, but also grew quarter-over-quarter. In Europe, however, we began to see the impacts from the macroeconomic backdrop, which led to a more challenging quarter. Asia Pacific Japan grew in the quarter, driven by strength in advanced solutions, high growth technologies, and momentum in India and the Australia, New Zealand region. In addition, the industry supply chain continues to be healthy with backlogs back to normal historical levels. This has allowed us to strategically reduce our inventory position, leading to significantly improved working capital and strong free cash flow generation for the quarter. Last quarter, we announced our goal to pursue an additional $50 million in cost optimization over the next few quarters. We achieved our target for fiscal Q3 and are on track to capture the remainder by fiscal Q1 of 24. Our ERP systems migration efforts have proceeded well, and we are now largely complete. with significant milestones successfully achieved. There remain a few pieces to migrate, primarily within our advanced solutions business, and we anticipate that this will be concluded in the first half of fiscal 24. We remain focused on ensuring a seamless customer and vendor experience and will proceed accordingly. As a company, we remain focused on partnering with our customers to maximize the value of their end users' IT investments by demonstrating business outcomes and unlocking growth opportunities through low cost and efficient delivery capabilities. This quarter, we launched two new solutions aimed at doing just that. One is Partner Health and Fitness Tool, which utilizes a custom algorithm to analyze a reseller's offerings across the advanced solution and high-growth technologies, enabling partners to understand where they stand in comparison to the broader TD Cinex partner landscape. Using the data to provide this type of actionable insight is one way we are providing distinctive value for our customers, helping to guide their decision-making regarding portfolio diversification to capture growth. The second solution we launched is Destination AI, a comprehensive aggregation of resources to equip resellers with knowledge and connections to capture opportunities across AI, machine learning, and advanced analytics. As this marketplace rapidly evolves, TD Cynics is working with more than 40 vendors across the AI space. including AI-enabled independent software vendors, AI accelerators, core AI software platform providers, and AI infrastructure firms. Our catalog of pre-validated, ready-to-deploy solutions, combined with our ability to provide multi-vendor offerings aggregating best-of-breed services, software and hardware, and edge devices, places us in a unique position with the business partner ecosystem to add value to our customers. Next week, we will be hosting two of our marquee ecosystem events, bringing together thousands of our customers and vendor partners to network and collaborate, gaining critical knowledge and insights to further grow their businesses. Ahead of those events, we recently completed an expansive survey of our B2B channel partners from over 60 countries, asking them about their expectations over the next year and beyond. Channel partners told us that they are remaining agile in this environment, adapting their business models to focus on emerging technologies and rebalancing their priorities and offerings to meet the evolving needs of their end users. There were many interesting findings in the survey, but most clear was the continued importance of the channel in helping partners to navigate the rapidly changing technology landscape, providing technical expertise and helping to fill gaps in the talent pipeline. During the quarter, we were honored to be recognized with a silver medal by EcoVadis, a leading provider of business sustainability ratings. and an improvement from our prior year score of a bronze medal. Importantly, this places TD Cinex in the top 25% of companies assessed by EcoVadis. Our European business was also awarded an environmental sustainability specialization by Cisco, providing a framework for technology recycling and circular economy initiatives. We are proud of these achievements and of the progress that we have made on our environmental, social, and governance goals. As we begin the final quarter of the fiscal year, we believe that we have seen the trough of our endpoint solutions business and that we will continue to see smaller declines moving forward. It is an exciting time to be in the IT industry, and we believe that in the long term, IT spending will continue to outpace GDP growth. We see a variety of drivers on the horizon, including AI enablement, which we believe we will see across the majority of our offering set as vendors bring these features and functionality to their products and services over time. I will now turn the call over to Marshall for some additional comments about Q3 and our Q4 outlook.

Marshall, over to you. Thanks, Rich, and good morning to everyone on today's call. As Rich mentioned, our Q3 results illustrate the progress we have made on our business strategy. Revenue in the strategic focus areas of cloud, security, and data analytics grew in the low double digits on a year-over-year basis, and we saw smaller declines in endpoint solutions. As a result, we expanded margins and grew non-GAAP earnings per share while our counter-cyclical model enabled us to generate significant free cash flow, leading us to increase our share repurchases in the quarter. For fiscal Q3, total gross billings were $18.6 billion and net revenue was $14 million, both consistent with expectations. As Rich highlighted, although revenue declined year-over-year in the Americas, we saw signs of stabilization. Europe saw a decline during the quarter as we began to see impacts related to the challenging macroeconomic environment. And Asia-Pacific Japan grew revenue by 10% year-over-year, driven by high growth technologies and strength in some emerging markets. High performed better than expected in the quarter, despite a tough year-over-year comparison due to the record revenue realized in Q3 of fiscal 22. Non-GAAP gross profit was $974 million, up 3% year-over-year, and non-GAAP gross margin was a record 7%, up 84 basis points year-over-year. The significant improvement in gross margin was driven by the continued mix shift to advanced solutions and high-growth technologies, as well as margin expansion in high-growth technologies. Total adjusted SG&A expense was $577 million, down $16 million from the prior quarter, and representing 4.1% of net revenue and 3.1% of gross billings. As Rich discussed, we are proceeding well on the 50 million cost savings program we announced last quarter and exceeded the $10 million target for fiscal Q3. We are well positioned to achieve our full target by early next year and expect SG&A as percentage of gross billings to remain in the 2.75 to 3.25% range that we have seen historically. Going forward, we will be citing SG&A as a percentage to gross billings, given the increased impact from growth to net adjustments as a greater proportion of our portfolio is in advanced solutions and high-growth technologies. Non-GAAP operating income was $379 million, approximately flat year-over-year, and non-GAAP operating margin was 2.8 percent, up 25 basis points year-over-year. Q3 non-GAAP interest expense and finance charges were $65 million, $7 million better than our outlook due to working capital efficiencies, which resulted in less borrowing. The non-GAAP effective tax rate was approximately 21%, better than our forecast at 24%, primarily due to our ability to utilize tax credits earned in certain jurisdictions. Total non-GAAP net income was $260 million, and non-GAAP diluted EPS was $2.78, $0.08 above the high end of our guidance range and up 1.5% year over year. Now, turning to the balance sheet. We ended the quarter with cash and cash equivalents of $1.25 billion and debt of $4.1 billion. Our gross leverage ratio was 2.2 times, and net leverage was 1.6 times, in line with our investment grade credit rating. and approaching our target of two times gross leverage ratio. Accounts receivable totaled $8.9 billion, up from $8.4 billion in the prior quarter, and inventories totaled $7.5 billion, down from $7.8 billion in the prior quarter. Networking capital at the end of the third quarter was $3.3 billion, down from $3.8 billion in quarter two, primarily due to declines in inventory and increased accounts payable. The cash conversion cycle for the third quarter was 23 days, a one-day improvement from quarter two, primarily due to improvements in our inventory profile, given the healthier supply chain environment. Cash from operations in the quarter was $592 million, and free cash flow was $552 million. We have generated approximately $1.1 billion in free cash flow year to date. We continue to prioritize shareholder returns during the quarter, returning $103 million via share repurchases and $33 million through dividend payments. Year-to-date, we now have repurchased $278 million and have approximately $740 million remaining under our current share repurchase authorization. For the current quarter, our Board of Directors has approved a cash dividend of $0.35 for a common share payable on October 27th of 2023 to stockholders of record as of the close of business on October 13, 2023. Moving now to our outlook for fiscal fourth quarter. We expect gross billings of $18.5 billion to $19.7 billion, representing a 3% sequential improvement from quarter three and a decline of 9% on a year-over-year basis at the midpoint. We expect total revenue to be the range of $14 billion to $15 billion. which equates to a 4% sequential improvement from quarter three and a decline of 11% on a year-over-year basis at the midpoint. The expected sequential improvement from quarter three is slightly below our historical compares and is primarily driven by the market challenges in Europe, partially offset by improvements in the Americas. For the PC segment, as we discussed in June, we believe we have seen the low point for year-over-year declines and expect the recovery to continue in Q4. With smaller year-over-year declines, our guidance is based on a euro-to-dollar exchange of 1.08. Non-GAAP net income is expected to be in the range of 223 million to 269 million, and non-GAAP diluted EPS is expected to be in the range of $2.40 to $2.90 per diluted share based on weighted average shares outstanding of approximately $91.9 million. Non-GAAP interest expense is expected to be approximately $70 million, and we expect the non-GAAP tax rate to be approximately 24%. Lastly, on shareholder returns, we have generated $1.1 billion of free cash flow year-to-date and have returned $377 million to shareholders through share repurchases and dividends. putting us on track to reach the full-year target discussed in June of $580 million. We are now expecting to generate approximately $1.3 billion of free cash flow for the year, outperforming our original target of $1 billion for fiscal 23. We will continue to be opportunistic regarding share repurchases while adhering to the general framework we have previously communicated to the market. In closing, we remain confident in our ability to successfully navigate fluctuations in the demand environment as customers react to rapidly changing technology needs and will continue to lean on our strategic priorities to expand in high-growth technologies while also optimizing our core business as we return to a more normalized spending environment. With that, we are now ready to take your questions. Operator?