TD SYNNEX Corporation, (NYSE:SNX), Q4 2022 Earnings Phone Transcript

TD SYNNEX Corporation (NYSE):SNX) Q4 2022 Earnings Call Transcript January 10, 2023

TD SYNNEX Corporation exceeds earnings forecasts. Expectations were for $2.91, while the reported EPS was $3.44.

Operator: Devin here, and today I am your conference operator. I would like everyone to join the TD SYNNEX Fourth quarter Fiscal 2022 Earnings Conference Call. The call is being recorded. All lines have been turned off to avoid background noise. There will be a Q-and-A session after the speakers have finished speaking. As an opening statement, I would like Liz Morali, Head, Investor Relations, to take the microphone. Liz, you may begin.

Liz Morali: We are grateful. Good morning everyone. We are grateful that you joined us today for the call. Rich Hume (CEO) and Marshall Witt (CFO), are joining me today. Before we move on, I want to remind you that today’s discussion contains forward looking statements within the meaning federal securities laws. This includes projections, estimates and projections as well statements about future events. It also includes statements about strategy, plans and positioning. Also, it is possible for us to expect future fiscal periods. These forward-looking statements are subject to risks and uncertainties that were discussed in today’s earnings release and in our Form 8-K. We also included Risk Factors in our Form 10-K. Our other reports and filings with SEC include the Risk Factors section. Actual results could differ materially.

Forward-looking statements are not intended to be updated. We will also reference non-GAAP financial information during the conference call. In our earnings press release, and the associated Form 8-K on our Investor Relations site, ir.tdsynex.com, reconciliations of GAAP to non–GAAP results are provided. This conference call is the property and rightful property of TD SYNNEX. It may not be recorded, rebroadcast or rebroadcast without permission. Rich now has the call. Rich?

Rich Hume: Liz, we are grateful. Good morning everyone. We appreciate you joining us for the first earnings call for the new year. We are happy with our strong fiscal quarter 4 results. This closes out a truly remarkable year for TD SYNNEX. While we had a lot of things on our to-do list for the integration and merger activities, we ended the year meeting or exceeding our goals. As I mentioned, the merger went very smoothly. Today, TD SYNNEX has a market capitalization of $62 billion and more than 23,000 employees. It serves 150,000 customers in over 100 countries. There are several ways I view the success of this merger. First, we can see that our vendors and customers continue to receive consistent and uninterrupted services from our partners after the merger.

We are proud of our strong value proposition to the market, and the financial results we produced are proof of that. We have completed the majority of our initiatives pertaining to harmonization and compensation. Additionally, our coworkers recently participated in our first TD SYNNEX global employee survey. The results showed a high degree of engagement. This achievement is not easy to achieve during a large merger. Finally, the merger was viewed through the eyes of our shareholders. We met or exceeded the fiscal ’22 financial targets. We achieved $62.3 billion in revenue for fiscal ’22. This was a 9% increase year-over-year after accounting for FX effects and merger-related accounting policies alignment. This was well above the range of 6% to 88% we expected.

Non-GAAP operating profit margin was 2.8%. This is in addition to the 2.5% to 2.7% target range. Non-GAAP earnings per share were $11.94. $0.29 above the high-end of our guidance range we provided for FY’22 on our September earnings call and $0.74 above the high-end of the original guidance range provided January of last year, despite higher-than-forecasted FX and interest expense headwinds. In the final quarter, $240 million was returned to shareholders by share repurchases and dividends. This represents progress towards our medium-term capital allocation goal. In terms of merger integration, we set an ambitious goal to achieve $100m in cost synergies within the first year. However, we exceeded that goal by 45 percent, realizing $145m in fiscal ’22.

Consolidating Tech Data’s Americas ERP Systems into CIS, a legacy SYNNEX ERP platform, is the biggest integration project. Our Canadian migration was a success. We also made significant progress, and we recently achieved another important milestone in the U.S. migration. I am pleased to report that more then 45% of our legacy Tech Data U.S. SAP businesses have now switched to CIS. This is a great achievement. The transition of the remaining business will be continued throughout the fiscal year. We are still on track to complete the plan within the two-year timeframe. Now let me talk about the market trends we saw during fiscal Q4. In summary, we saw continuation of many themes that were evident over the past few quarters.

Advanced Solutions saw strong growth in the third quarter, exceeding expectations. This was due to strength in networking, servers and infrastructure. Endpoint Solutions gross revenue declined slightly year-over-year due to a normalization in the PC market and associated peripherals from the pandemic-related highs last year. Endpoint Solutions saw solid growth in many areas, including printers and mobile phone sales. Services in specialized solution business also saw strong growth during the quarter. Rounding out our portfolio, our hyperscale infrastructure-focused business Hyve delivered a record quarter with continued outsized robust revenue and profitability growth as we continue to fulfill strong demand from our CSP customers.

Operating profit was also higher than expected from the Hyve business. Marshall will give more details in a few moments. Regionally, all three regions experienced strong revenue growth, on a constant currency basis. However, operating margins increased globally. As the markets we target grew faster than our March Investor Day projections, we continue to increase our revenue in high growth technologies. For the quarter, we achieved a more than 20% increase in gross billings year-over-year in these areas, which include cloud, security and data analytics, and full-year 2022. This was a much higher growth than expected. In fiscal 2022, $16 billion represented high growth technologies. It is an increase of $13 billion from fiscal 2021.

The quarter saw significant improvements in the supply chain, including a reduction in our backlog. Our total backlog remains high despite decreases in Endpoint Solutions as well as Advanced Solutions. This is in contrast to historical norms. Customers are now living in a volatile and uncertain macroeconomic environment, with higher interest rates and an increasingly competitive talent market. This is especially true in the IT sector where the changing technology landscape and shift to multi-vendor cloud-based solutions require a greater level of expertise and knowledge to meet the market’s needs. These are just a few of the reasons why TD SYNNEX is a valued partner to the market.

Our utility’s variable-cost route to market is also valuable for vendors in times of economic uncertainty, when vendors want to reduce their costs. We were honored to be 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, Lenovo, and the Americas distributor of the years by Nutanix. We have also made progress in our ESG journey. This quarter, we will publish our first corporate citizenship report. We also received a grade from the Carbon Disclosure Project. This was a significant achievement in our first year combined reporting.

We look forward sharing updates about our progress in this area. We cannot underestimate the critical role of technology in enabling customer experiences and coworker collaboration, keeping cyber safe and helping to achieve cost optimization and efficiency when we look at fiscal 2023. These are the reasons we believe IT spending in 2023 will outpace GDP growth. We are ready and well equipped to carry out our growth strategy. We aim to achieve above-market growth rates by leveraging our industry-leading portfolio and wide global reach to deliver world-class innovation and service to the market. We are confident that our strategy can capitalize on the IT industry’s future trends.

Finally, I’d like to express my gratitude to our 23,000 plus coworkers from around the globe for their outstanding efforts in making TD SYNNEX’s inaugural fiscal year a success. Marshall will be sharing more information about our performance, outlook and I’ll pass it on to Marshall.

Marshall Witt Rich, thank you for being here today. With adjusted year-over year revenue growth of 9.9%, our financial achievements in fiscal 2022 exceeded the high-end target of 6% to 8.8% we set earlier this year, which was significant. The fiscal year’s operating margin performance, which was 2.8%, also exceeded our expectations. This represented a 14% improvement on the prior year and surpasses our 2.5%-2.7% target. These results are a testament to the strength and reach our business model, and the strong value proposition TD SYNNEX offers the market. Please note that the comparisons to the previous full-fiscal years are made on an as-combined basis. This assumes that the merger took place at the beginning of each period.

Now, let’s look at our fiscal fourth quarter results. Record $16.2 billion was earned worldwide in fiscal Q4, an increase of 4% and 11% respectively, respectively. Normalized for revenue recognition policy alignment related to the merger of 500 million, the year over-year growth was 14%. Fiscal Q4 saw approximately $1 billion in currency effects, mainly driven by the Euro’s devaluation. All regions saw revenue that was higher than expected, including End Point Solutions as well as Advanced Solutions. Hyve also delivered strong results in fiscal Q4, driven by higher than expected demand and timing-related marg recoveries for services that were performed in prior quarters. Non-GAAP Gross Profit reached a record quarter at $1.08 Billion, an increase of 44 basis points over the previous year. Non-GAAP Gross Margin was at 6.63% and our first quarter exceeding $1 billion.

Mix shift to high-growth technologies and Hyve margin recovery, which amounted to approximately 25 basis points, drove the improvement in gross margin. Total adjusted SG&A expense was $582 million, representing 3.6% of revenue. Non-GAAP operating revenue was $496million, an increase of $88 million or 21.5% over the previous year. Non-GAAP Operating Margin was 3.05%. This was driven by Hyve performance, revenue growth, Hyve performance and the previously mentioned margin recovery, cost discipline, and merger synergy execution. Non-GAAP operating income increased by 26% on a constant currency basis. Year-over-year, the increase was 16% excluding margin recovery from Hyve. Non-GAAP Q4 interest expense and finance costs were $78 Million, $18 Million more than our outlook. This was due to higher borrowings as well as higher interest rates.

The non-GAAP effective rate of tax was 21% for fiscal Q4. This is lower than the 24% forecasted rate because of the variety in locations where earnings were realized. Non-GAAP net income totalled $330 million and non-GAAP adjusted EPS was $3.44. This is higher than our previous guidance of USD2.70-USD3.10. Noting that Hyve margin recoveries contributed $0.33 per share to non-GAAPdiluted EPS for quarter, as previously discussed. These were removed and non-GAAPEPS would have been at $3.11, slightly more than our prior guidance range. This is despite the headwinds of higher interest expense. We now turn to the balance sheets. The quarter ended with $523 million in cash and $4.1 billion in debt. Our gross leverage ratio of 2.3x and net leverage were 2x, both in line our investment-grade profile. This is close to our previously disclosed target of 2x gross lever ratio.

Also see Agriculture Stocks List: 25 Biggest Companies Jim Cramer’s Comeback Stocks.

Receivables totaled $9.4B, an increase of $8.1B in the preceding quarter. Inventory totals totaled 9.1B, which is $689M or 7% less than the prior quarter. The fourth quarter’s net working capital was $3.8 billion. This is a 35 million decrease from Q3. The cash conversion process for the fourth quarter took 23 days. It was the same as Q3, and cash from operation was $302million. The current quarter’s shareholder return perspective has our Board of Directors approved $0.35 per common stock, which is a 70% increase over the quarter before. The dividend will be paid to stockholders who were registered as of January 20, 2023. We paid $115 million in dividends to shareholders for the whole fiscal year 2022. That’s a 1.2% dividend return.

In the fourth quarter, we continued to execute our share repurchase plan. We repurchased $42 million of stock and $125 million total in fiscal ’22. This exceeded our $100 million goal for the year. We announced earlier today that the Board of Directors has approved a $1 billion share purchase authorization. This authorization expires January 2026 and replaces the prior authorization. We plan to increase our share purchases year-over–year in fiscal 233, as we move towards our medium term capital allocation target. Before I discuss our Q1 financial outlook, I want to update you on the merger-related cost synergies. Rich mentioned that the teams did an amazing job of tracking, identifying and realizing synergy potential in 2022. This allowed us to reach our year-one goal faster than we anticipated.

We have achieved cost synergies of $145million in fiscal Q4 and expect an additional $35million in fiscal ’23. Most of the savings are due to the successful completion of our ERP migration, which is currently on schedule for the second quarter of 2023. We expect to continue to optimize and create revenue synergies once we are integrated into one ERP system for Americas. Let’s now look at our fiscal Q1 outlook. Our total revenue forecast for fiscal Q1 is USD15.2 billion to US16.2 billion. This equates to a year-over-year increase of approximately 5% on a constant currency basis. This outlook is due to the effect of USD15.2 billion to USD16.2 billion in foreign exchange headwinds and $33 million interest rate movements year-over-year.

Our guidance assumes a Euro to Dollar exchange of 1.05. The range of non-GAAP net income and non-GAAP dilute EPS are expected to range from USD2.60 to US3.00 per share. Based on 94.8 million shares. The Q1 interest expense is estimated to be about $73million and the tax rate to average 24%. A few modeling points are available as we move into 2023. Rich stated that we believe IT spending will outpace GDP growth in 2023. We estimate our revenue growth at 3% to 5.5%. For the year, we anticipate an operating margin of between 2.6% and 2.8%. We also expect improvements in distribution margins to offset the lower contribution from Hyve.

The year is expected that Hyve’s working capital will improve, which will help to lower the carrying costs. It is difficult to forecast interest expense in this rate environment. However, we anticipate that fiscal Q1’s guidance will remain at $73M per quarter. We expect the fiscal Q1 guidance to be slightly lower in the second half of fiscal year. Our non-GAAP corporate tax rate is expected to be around 24%. Our cash flow outlook continues to show that we expect to generate over $1 billion in free cashflow in fiscal ’23. Additionally, working capital is expected to continue to be a source cash this year, despite topline and supply chain growth.

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. To close, I want to thank our co-workers and their hard work during fiscal 2022. They helped build a cohesive company that is committed to providing the best support and partnership to customers and vendors. I will now turn the call back over to the operator to begin the Q&A session. Operator?

Q – Ruplu Battacharya Hello, thank you for taking the time to answer my questions. Also, congrats for a successful quarter. Rich, PC OEMs spoke of elevated channel inventory levels. Could you share your thoughts on how you see the PC channel inventory trending, both commercially and consumer? And when you think that will be resolved. Are you receiving additional rebates and promotional activity from vendors? What have you considered for TD SYNNEX’s PC revenue growth in fiscal?23?

To continue reading the Q&A session, please click here.