Q3 2022 TD Synnex Corp Earnings Call
In addition.
We have already realized merger related cost synergy benefit of $140 million.
Which is ahead of our initial expectation of $100 million in the first year.
Making those results possible our teams have been hard at work harmonizing every area of TD cynics from.
From partner facing elements benefits and policies, the organizational design finance and it systems corporate branding and culture.
As a result, we have become one combined company through an incredibly busy and dynamic year and I would like to personally. Thank our more than 22000 co workers for their exceptional work dedication and perseverance and helping to make it possible.
With the first year behind US we believe that the thesis for our merger is stronger today than we anticipated last September .
Our partners now more than ever realize the importance of broad global capabilities and deep customer relationships to help them efficiently expand.
For a 150000 plus customers the.
The majority of which are small and medium sized <unk> resellers.
It is increasingly important to have a trusted partner to help them navigate the landscape, especially in high growth technology areas, such as hybrid cloud security analytics, Iot as well as others.
We are pleased with the fact that these areas had robust growth in the quarter and continued to outpace our overall growth rates on an annualized basis.
In addition, our highest business, which serves the hyperscale infrastructure space also exceeded our revenue growth expectations for the quarter.
Turning to the third quarter, we performed above our expectations with worldwide revenue growing 7% year over year and 15% in constant currency when normalized for the merger related revenue recognition policy alignment.
This is better than the adjusted growth of 10% year over year that we expected when we provided our Q3 outlook in June .
In the quarter came from across our business with robust demand and endpoint data center and Hyperscale infrastructure.
And PC, specifically, where we primarily serve the commercial segment, we continued to see solid commercial client device demand and ASP increases during the quarter.
We also saw robust revenue growth on a constant currency basis across all three regions.
Fiscal 'twenty two has played out in line with our expectations at the beginning of the year.
Strong customer demand in the areas like data center networking hybrid cloud hyperscale infrastructure and security projects.
Supply chain disruptions continue to exist and remained elevated in the areas of data center infrastructure and networking, although improved in areas like endpoint, including Pcs, which have seen moderating year over year growth rate.
Given the variety of factors that have led to these supply chain issues over the past two or three years. It will take time to get back to a normalized supply chain environment.
Our backlog remains elevated compared to our historical levels and we anticipate that we will continue to see industry supply imbalances well into 2023 and some product categories.
As we look ahead to the fourth quarter, we project a solid demand picture as evidenced by our revenue guide of mid to high single digit growth when adjusted for constant currency and the merger related revenue recognition policy alignment.
Despite the less in certain environments ahead, we believe we have built a strong resilient business that has a long history of successfully operating in many different macro cycles.
Our broad solutions portfolio liquidity profile and variable cost structure have allowed us to deliver results through dynamic changes in the economy.
We continue to believe that the overall market will grow we also believe that solutions like hybrid cloud security Hyperscale infrastructure, Iot and analytics, we will have growth rates above the overall market and as we have discussed in the past.
We are investing in these high growth areas.
Progress is evident on our high growth technology strategy as year to date revenue in this area grew more than 20% and represented more than 20% of our third quarter total gross billings. We were also recently recognized with two very important partner award.
TD <unk> was named Hewlett Packard Enterprise global distributor of the year for 2022, and the Microsoft worldwide partner of the year for 2022.
Our second consecutive year in achieving this honor.
These acknowledgements are important testament to our commitment to invest and partner with top technology vendors, providing our customers with outstanding solutions based on leading edge cloud and as a service technologies.
For our customers. This is key as we helped simplify complexity accelerate their time to market reduced the skills gap and help them expand their portfolio to new markets.
Marshall will provide further details on our merger related cost synergy attainment and a few minutes.
Let me give you an update on our ERP system consolidation in the Americas.
As mentioned earlier this year, our Canadian conversion efforts were successful and approximately 90% of our Canadian business is now transacting and Cif.
The ERP system used by legacy Cynics.
Our U S transition is now underway.
And we expect to have a meaningful portion of that activity migrated by early Q1 with the remainder transitioning throughout fiscal 2023.
In closing I am proud and energized by how the efforts of our entire global team have come together and believe that we have the necessary market, leading capabilities and resources to serve the partner ecosystem now and into the future.
Before I turn it over to Marshall to provide additional details on our financial performance.
<unk> know that our thoughts are with all of those impacted by hurricane in the safety and wellbeing of our co workers is top of mind for us and with one of our main offices in the Tampa Bay area. We are carefully monitoring the storms progress and projected path.
Marshall I'll turn it over to you.
Thanks, Rich and thanks to everyone for joining us today.
We performed well in fiscal Q3 with revenue growth above our expectations.
Margin growth year over year.
This is a testament to the focus and commitment of our teams amidst the hard to predict macroeconomic backdrop.
Please note that comparisons versus prior year on an as combined basis, which assumes the merger occurred at the beginning of the period.
Total worldwide revenue for fiscal Q3 was $15 4 billion.
Up 7% year over year.
And up 15% in constant currency when normalized for the revenue recognition policy alignment relating to the merger.
This is better than the 10% adjusted year over year growth rate, we expected when we last spoke in June .
Euro devaluation accounted for an approximate 700 million headwind year over year.
From a revenue perspective, all three regions grew in the quarter and.
And we saw broad based product growth across distribution with robust double digit growth in high growth technologies.
<unk> had a record quarter as this high growth technology business responded to unusually strong hyperscale demand.
Gross profit was $916 million and gross margin was 6%.
Down approximately 30 basis points from Q2, primarily due to customer and product mix.
Total adjusted SG&A expense was $544 million, representing three 5% of revenue in.
In line with our expectations and down approximately 30 basis points compared to Q2.
non-GAAP operating income was $398 million up $44 million or 12% year over year.
And non-GAAP operating margin was two 6% up approximately 10 basis points year over year, driven by cost discipline and merger synergy execution on.
On a constant currency basis, non-GAAP operating income increased 15% year over year.
Due to the higher than expected interest rates during the quarter non-GAAP interest expense and finance charges were $50 million.
$5 million above our outlook and the non-GAAP effective tax rate was approximately 24% in line with our expectations.
As a reminder, our outstanding senior notes bear a fixed interest rate.
While interest rates on borrowings under our term loan are variable and borrowings under our revolving credit facility bear a floating interest rate.
We are partially hedged the variable interest rate on our term loan.
Total non-GAAP net income was $263 million and non-GAAP diluted EPS was $2 74.
Consistent with our previous guidance.
Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $351 million and debt of $4 1 billion. Our gross leverage ratio was two four times and net leverage was two two times accounts.
<unk> totaled $8 1 billion up from $7 9 billion in the prior quarter.
Inventories totaled $9 8 billion up approximately $1 3 billion from the prior quarter, but offset by approximately $1 2 billion of increased AP as our partners continue to adjust their terms.
More than half of the inventory increase within our distribution network. This increase was due to strong revenue growth and the elevated backlog.
As a reminder, the majority of this inventory is covered by price protection agreement and recovery of inventory carrying costs.
The remainder of the increase represents purchases for our Hyperscale infrastructure business to support the demand forecast of our customers.
These inventory increases carry minimal risk and generally result in margin increases for high.
We expect this inventory to translate to revenue and profit generation in Q4 and beyond all in we expect inventory turns to improve in Q4 and into fiscal 'twenty three.
Our networking capital at the end of the third quarter was $3 9 billion, an increase of approximately $300 million from Q2.
Our cash conversion cycle for the third quarter was about 23 days up two days from Q2, and our cash used in operations in the quarter was approximately $67 million.
From a shareholder return perspective for the current quarter. Our board of directors has approved a cash dividend of <unk> 30 per common share.
The dividend is payable on October 28, 2022 to stockholders of record as of the close of business on October 14th 2022.
We continued executing on our share repurchase program in the quarter repurchasing $30 million of our stock and $83 million through the first three quarters of fiscal 'twenty two.
We remain ahead of pace to achieve our targeted repurchases of 100 million for fiscal 'twenty, two and are on track for our medium term target of 50% of free cash flow returned to shareholders in the form of dividends and buybacks, we have $317 million remaining on our three year stock repurchase authorization.
Which expires in July of 2023.
Finally from a merger related cost synergy perspective, we remain ahead of plan for year one.
Expecting to recognize a $140 million compared to our initial plan of $100 million. We continue to expect to achieve a total of $200 million in cost synergies by August 2023.
Now moving to our outlook for fiscal Q4.
We expect total revenue to be in the range of $15 2 billion to $16 2 billion.
Which when adjusted for currency impacts of approximately $700 million and revenue recognition policy alignments of approximately $450 million equates to growth of around 8% at the midpoint on a year on year basis.
Growth rates are expected to be lower than Q3, primarily due to the unusually strong hyperscale demand and high in Q3, and a more cautionary approach to guidance given the macro backdrop. Our guidance is based on a euro to dollar exchange rate of 1.01.
non-GAAP net income is expected to be in the range of $259 million to $298 million.
non-GAAP diluted EPS is expected to be in the range of $2 70.
The $3 <unk> per diluted share.
Based on weighted average shares outstanding of approximately $95 $2 million.
This equates to full year 22, non-GAAP EPS of $11 19 to $11 59.
Compared to the outlook of $11 15.
To $11 65 that we provided in June .
Interest expense for Q4 is expected to be approximately $60 million and we expect the tax rate to be approximately 24%.
In closing despite the current economic headlines we are confident in our business and bullish on the growth prospects for our company given our participation in large and growing markets, our solid history of execution and shareholder value creation in our decades of experience in managing through economic cycles, We will now take your questions.
Operator.
At this time, if you would like to ask a question press star followed by the number one on your telephone keypad.
We ask if you limit yourself to one question and one follow up question.
Your first question comes from the line of Keith <unk> with Northcoast Research. Your line is open.
Good morning, guys and thanks for the opportunity.
If you'll just revisiting real quick the high growth technology area that was up year to date, 20% at risk can you remind us how big that is of the total business.
So usually Keith we talk about the high growth technology segment in terms of gross billing because.
A lot of those offerings, especially the cloud based ones getting out of it so.
As we said in the prepared script now.
Slightly over 20% of our entire.
From a gross billings perspective, and keep gross billings for the quarter came in just under $20 billion.
Great.
Okay.
In terms of the guidance as a follow up obviously, we're in a volatile time here.
Obviously, you are bullish on the trajectory of the business, but maybe talk a little bit about your puts and takes as you think about your guidance for the next quarter and we will take that.
To meet the high end or low end of the range.
Yes, there's a few things that.
That are influencing our overall thoughts for Q4, one of interest expense.
Just to step back when we guided Q3, we guided at $45 million and of course, we came above that at 50.
Got it for Q4 at $60 million, so thats, probably the biggest EPS difference in terms of where we thought we would be certainly the comment I made about the broader macro environment is putting us in a position to just being cautious and as usual Keith when we look at the the Hyperscale infrastructure range, we tend to guide at the <unk>.
Our end of that range.
Great I appreciate it guys. Thank you good luck.
Thanks Keith.
Your next question is from the line of Joseph Cardoso with Jpmorgan. Your line is open.
Thank you and good morning, guys.
So first question for Luc can you just provide us an update on how backlog has talked to exiting this quarter and how the mix of that is shaking out and also where do we stand relative to what we would consider to be normalized levels and any thoughts to when we might reach those more normal levels.
Yes, great question. Thank you very much.
There are a couple of things number one is the backlog.
It has come down.
But sort of the tale of two cities so first.
And segment backlog has come down and we're finding that the sort of the PC ecosystem things are more serviceable interestingly enough, where there was one vendor in particular that there was a really big backlog reduction.
They are really quite great progress relative to the.
Servicing that backlog, but the good news in that is that.
That particular vendor has a lot of strength going forward. So.
This isn't a situation we don't believe whereby the backlogs went off and suddenly we find ourselves sort of.
Trending to having a challenging growth.
Demand is strong but moving forward so.
Summarizing again endpoint is down but the predominance of that is led by one vendor who has a lot of strength going forward as.
As it relates to what we call the advanced solutions segment.
Within there.
Many that are still growing backlog and few that either are stable or declining so within the advanced solutions segment, we have not yet seen the peak if you will and.
So we would anticipate that it will it will take until sometime well into 'twenty three until we have stability.
<unk> advanced solutions perspective.
Thus barring obviously any new flare ups from COVID-19 or anything else that might happen in the world.
But it does remain elevated and I would say that we will be in that elevated state for the foreseeable future again.
Crystal ball sometime mid 'twenty three may be there is better stabilization and I'd just add to that you asked the question Josef on what is normalized level. It's a good question, we didnt track it.
Very extensively pre pandemic, but if I were just to gas and I'll also look at rich, it's usually about a month's worth of term is how I think about it rich do you have any.
We are materially over that Phil.
No I appreciate all the colors and then maybe just a quick follow up on the high business.
It sounds like this quarter the business is very strong.
<unk> you.
You guys highlighting record levels, but there seemed to be broader concerns from the investment community around hyperscale spending moderating going forward and I think it is led by commentary from some of the component suppliers in memory and storage alike.
Given what youre seeing from your customers today can you provide any color on what youre seeing relative to demand trends there going forward and are you concerned about potential digestion period heading into 2023.
And maybe I'll start and then turn it over.
Marshalls, So first but just a reminder to everyone. We state this.
Every opportunity we get hive is a lumpy business.
But we feel as if it always offers great.
Growth attributes on an annualized basis.
So as Marshall said in his prepared comments this time the Lumpiness was.
More positive than we thought so we see good demand and candidly I think we see demand consistent with our guide here as we look into Q4.
Which still is pretty pretty good demand overall.
For that segment.
So I think that from.
From a strategic perspective, we always talk about over the over the longer periods Hyperscale.
Segment being double digit sort of growth attributes and.
I know nothing that would.
Cost me to think differently relative to that segment.
Yes, Joseph I would just add in regards to hyperscale infrastructure on the supply chain constraints. There is also a supply chain and efficiency on the data center availability and opening so that the hyperscale or are struggling to keep up with their capacity themselves. So we do have quite a bit of product that is in Q.
Read it to be.
Positioned and put into data centers. So it's not just the supply chain itself, but it's all the way through to getting the <unk> into data centers and if I could just to kind of finish Marshalls thought.
Supply that he talks about in queue, we have hard orders for all of it it's just the.
The ebbs and flows.
The construction of the data centers, that's right and that stays obviously inventory on our books, which is one of the reasons why we see elevated inventory in the highest space.
No makes sense I appreciate all the color.
Okay.
Your next question is from the line of <unk> <unk> with Bank of America. Your line is open hi.
Thank you for taking my questions rich from the commentary that you gave it looks like demand remains very strong and you talked about continuing demand even in the PC business, the endpoint business and strong growth more than 20% in the advanced solutions business, but.
But I'm trying to reconcile that against what we've heard so far from Oems right. So we've heard certain Oems talk about <unk>.
<unk> in the PC.
End market consumers consumer PC market, but also in the commercial PC market.
Weakness developing and then some Oems have talked about some incremental weakness in the enterprise businesses as well so help us reconcile the strength that you're seeing versus what we are hearing from Oems is there is there could it be because of share gains that you are having could it be because of the synergies that youre seeing revenue synergies. So how should we reconcile.
The commentary that we're hearing from some Oems versus what what's your.
Gene.
Yes, thanks for the question.
First I think it's important too.
Highlight once again that.
We don't have a.
Big reliance upon the consumer segment and for our numbers perspective.
The consumer segment is where things are being more deeply felt.
Second.
I think once again here, we benefit from our portfolio, we have the privilege of serving.
The top tier.
PC vendors in the market and.
Sometimes those demands for products.
Flow between them.
Depending on their cycles et cetera, So I think that that that serves us well.
No that Marshall has some more detailed comments he wants to make but I just want to be clear that when we take a look at our Q3.
Both the endpoint and advanced segment had pretty significant growth in actually.
Relative to the midpoint of our guidance.
The upside for US really came from that endpoint segment, which is PC ecosystem content as well as.
As well as high as Marshall had talked about earlier, when we look into Q4.
We see an overall reasonably healthy environment as well.
So we really.
I feel pretty comfortable relative to the execution.
And each of our segments.
As we move into Q4, but Marshall I know that you have some particular ASP and unit volume information you want the share.
Briefly on the PC ecosystem for for our distribution network, it's not an exact science, but if we look at our Q3 results volume was probably in the low to single digit growth rate in Asps was probably in the high single to low double digit growth rates. So all in net net we grew in the <unk>.
<unk> ecosystem business.
I think what's going to happen through time is that those asp's.
We'll probably start.
Our beta or come down in the U S.
Probably not in the not too distant future so there'll be some moderation there.
Europe is a little bit more tricky to figure out from an ASP perspective, we all know that things might start to abate from an inflationary perspective, but.
The currency hockey stick weakening of the Euro is sort of a second dimension that manifest itself in increased asps as we know that that industry is pretty much a dollar based industry. So it takes a lot more euro to buy by sort of the PC category.
So.
I think that that ASP dynamic in Europe might have a bit longer of a life relative to what we'd like to see in other jurisdictions.
Okay. Okay. Thanks for that rich I appreciate all the details can I ask you you had also talked about solutions aggregation and integration.
As a new opportunity for the combined company.
When do you think that materializes and is this like in the next 12 months or is this an opportunity that is longer term and what type of investments do you need to.
Feed the revenues material revenues from that opportunity.
Yes, very very good question. So if you go back to our Investor day, we talked about solutions aggregation being a build in 'twenty two 'twenty three 'twenty four we're well underway relative to.
Aggregating multi vendor solutions and our cloud marketplaces.
This this happens quite frequently and we also have been building our whole inventory of what we call click to run solution. So these are pre configured solutions that we make available on our cloud platform. So.
Thats a ramp certainly that helps to accelerate our overall cloud platform growth typically the margin profiles of aggregated solutions are better than point product sales overall so.
It's a build to answer your question in 'twenty, two 'twenty three and then in.
To the future, but it is a critical element of strategically driving our cloud growth going forward and then of course as you know I think we said in late 'twenty four 'twenty five timeframe.
Really then move into sort of this orchestration model. So we're building out all of those platform capabilities. So to answer your last question.
The investments that have to be made are in resources.
Engineering resources to qualify these aggregated solutions.
More technical sales resources and then the last piece is the inverse.
Investment in the platform, which is it's been all lined up but we've been continually increments that in those investments as we move.
Over over time.
Okay, great. Thanks for all the details appreciate it.
Yes.
Your next question is from the line of Ashley Ellis with Credit Suisse. Your line is open.
Hi, Thank you for taking my question.
Sorry, if we could go back to guidance and look at it on a sequential basis.
Using kind of our estimated historical as it seems like growth is slower than usual for the fourthquarter Marshall could you maybe give us kind of like what are the headwinds what are your expectations for currency are you expecting kind of a step down in high but the low end of the range and then if I kind of interpret the comments on backlog is it fair to assume that.
Maybe <unk> benefited from PC backlog coming down but in fourth quarter. You think overall backlog will stay flat just anything to kind of break out to that 2% growth in the fourth quarter.
Sure I'll start and then let rich alpha touch on whatever you want plus backlog. So you do think about the sequential relationships. Ashley we did have a strong Q3, and so that does make the compare to Q4 a little bit.
More unusual typically we will see a 5% to 10% revenue growth rate.
At 8% constant currency is kind of right in the middle.
So I think that explains some of the relationships do you think about the headwinds we did call out FX continuing to be impacted by the euro we're guiding at $1. One it wasn't that long ago. When we were at $1 eight a one dot 109. So that continues to have some headwinds for us and then I did mention in the conversations around.
Hi, when we do guide to.
Typically go towards the lower ended up at the highest outcome on the ranges.
That said, we still expect year on year growth within the Hyperscale infrastructure high growth technology business as well as solid growth in the distribution networks, whether it's Asia Pac Europe or America Bridgestone up do you have any national I'd add to that no. Thank you Marshall.
Right.
Quite comprehensive.
Okay. Thank you and then.
Looking at your merger synergies.
Typically that both companies have always kind of over performed outperformed in generating more synergies. So do you see room to raise that $200 million target and then kind of as the macro environment is weakening how are you thinking about your spending and would you maybe consider I know youre, keeping you know Asia and Europe on their own ERP system.
The opportunity to move those to the same system just kind of.
Maybe like a plan b in the event that we go into a recession, how are you thinking about spending on synergies.
Yes, I'll touch on synergies.
Actually we have.
Typically over performed our synergy targets not only earlier, but higher right now as you saw in our prepared remarks, we're at $1 40, so that stepped up $10 million from the last time, we spoke.
We still are confident in the $200 million of synergies as we as we.
X the second year, but I do also believe that as we get closer to this year end and kind of do a bottoms up thought for all of fiscal 'twenty three.
Probably have more informed conversations around what that outlook may be but for now they turn a million is a good number to use.
Yes on the backend on the ERP systems, we've got a lot of work to do.
And in the U S. In particular now we're in the middle of that migration from.
The legacy Tech data ERP onto the system.
We are steadfastly focused on that the plan was that we would maintain our ERP systems outside of the U S.
And then keep everybody all hands on deck because.
We're going to have a combined $40 billion entity.
While it make sure we arent distracted and get that done properly.
Then sometime down the road.
We will carry out an evaluation to determine whether there are future changes to the ERP or whether it makes sense. The way we are aligned right now.
Okay.
Okay. Thank you.
Thank you actually have a great day.
Your next question is from Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good morning, I guess I wanted to start on.
Since you cited strength in Europe as a reason for the mid teens non.
non-GAAP operating income growth in constant currency during the quarter I think that's probably surprising to some people. So maybe you could comment on the cadence of demand there and what youre seeing here at the end of September in the EMEA region Theres, just so many macro headlines on recessionary fears.
And everything related to that just wondering what youre learning real time there.
The cadence of demand through Q3 real time in September and what's embedded in your guidance for Q4 for Europe .
Yes, Adam I'll start and then rich you can you can chime in so from a from a cadence standpoint in Europe , Adam what we saw year on year by month has strengthened and we saw continued strength in August .
Our guidance continues to reflect that confidence as we think about Q4. So it is.
I don't know if the word is surprising but it is definitely.
Something we didn't expect to see that kind of strength to continue and grow in speaking with our European team. They do the same thing that the rest of world does they do bottoms up.
Analysis and forecast and are quite convicted looking at the overall macro backdrop, plus the supply chain issues and their demand to.
To come up with with our thoughts around Q4, rich, yes, Adam So first.
A little bit a little bit of a pleasant surprise actually when we take a look at the.
The entirety of the channel it had a.
Mid sort of mid slightly higher single digit growth rate overall.
From memory Marshall Correct me, if I'm wrong, but I think that relative to the visibility that we had we grew substantially higher than that.
So our business has has strength in Europe and as Marshall has stated for the coming quarter, we sort of build bottoms up in and.
Have a good visibility from our country country country perspective.
The aggregate of that is.
Pretty robust outlook, if you will for Q4 as well so.
We we like you.
Yes.
Read the headlines relative to the challenges in Europe , yet technology seems to be.
The solution to help in driving some efficiencies for.
A lot of business entities.
And I think that we always talk about the fact that when things are tough.
Got it.
Outpaces GDP and I, just think my own personal opinion is that it's such a useful tool.
This is a necessary tool and orders for businesses to remain competitive going forward that there seems to be.
I'll call it more consumption than than historical levels.
How long will that hold up is yet to be seen but.
Right now.
So we see a pretty solid solid environment in the third quarter.
As part of the production in the fourth as well.
Okay.
And maybe as a follow up Marshall on cash flow, which has been volatile since since the merger and I look at it here you are talking about an inventory build I understand the hype component, but you did say the majority of that build is related to the distribution business. So.
Im kind of trying to figure out what got you comfortable letting inventory days continue to extend in the core distribution business. Given you have a softer guide for forward growth.
Those kind of dynamics for those two you usually have a more robust forecast for for growth as you let inventory days.
Grow.
And the timing for that to flush out.
And then maybe just lastly, not to build too far on this question, but I think cash flow is just so important given the targets that you have out there for the medium term.
Any kind of structural dynamics, you can talk about outside of the cyclical inventory days.
On payables and receive receivables here you know theres a lot of offsetting factors and I'm wondering if there's temporary benefits how.
How do we think about kind of a normalized structure in normalized cash conversion cycle beyond the inventory days, so starting with the inventory cyclicality aspect and then the structural aspect of how the business will generate $1 billion plus of cash flow next year.
Yes, sure I'll start and then rich certainly chime in as you is you've got other commentary, but we still expect to generate $1 billion in free cash flow in 'twenty, three assuming a stable supply chain environment.
So that just want to make sure that you understand that and then just going one level down are clicking into that in Q3, our inventory did go up by over $1 billion.
As we said both for distribution and high caused reason AP offset that for the most part as I said in my prepared comments too Adam inventory.
Should we expect this to translate to revenue profit generation in Q4 and beyond.
Obviously, there's volatility in supply chain that theres, some temporary effects and delays in our cash flow.
Thinking back and just looking at our seasonality. We just finished our first year around the Sun together.
And it does give us a sense of what cash days. When you look at last year. We finished at 15 and cash days and now we're at 23, so up eight what caused that.
Basically it was split 50 50 between higher infrastructure and distribution, we do think that that starts to abate and unwind in Q4 and into 'twenty three but at the end of the day. It really does come down to the overall certainty year volatility around supply chain and how that manifests itself into 'twenty three rich anything.
Restaurant App.
So Adam.
I want to make sure everybody.
Understand that it's not lost on us the importance of free cash flow and generating free cash flow.
As.
As I think about it a big part of this has been due to the volatility.
The ups and downs.
Of the.
Prior pandemic et cetera, and I actually went and carried out some analysis to take a look across our vendor base and look at what's happening with their inventories.
Largely speaking they are elevated.
Pretty pretty materially.
As an aggregate group. So again I think that's just a manifestation of.
Trying to manage the shorts and long.
Through through through what we've been through.
That being said.
I fundamentally believe that moving forward, we will find our way to our profile and cash state. We do start to as I said earlier see stability within the PC ecosystem.
So there is less I'll call it erotic newness.
Ed.
Might be a little bit bumpy in the space for the.
First couple of quarters of next year, but I think that we find out.
Growth swing as we as we move through the year.
So, yes, I would say correct that they are elevated but we have all the confidence that we can manage to the profile once we get.
Some of these some.
Some of these challenges around the supply chain settlement.
Thank you.
Your next question is from Vincent Colicchio with Barrington Research. Your line is open.
Yes.
A lot of questions on the cost synergies I'm curious are you seeing any meaningful revenue synergies just what are your thoughts there.
Yes, again on the revenue synergies, we clearly have a lot of opportunity around revenue synergies as we move into a common.
ERP system, they become a lot more.
Executable.
Because you have half all of the I'll say at the vendors that one site had that the other side didn't that you can take advantage of.
And so I.
I believe that as we get to sort of.
The startup next year there'll be a ramp and as we move through the year that we'll be able to take more advantage of that because we'll move more towards being on that one ERP system.
Have all the training done not only on the ERP system, we're in the middle of that now but also.
The cross training that happens with the vendors that once I have that the others havent.
All of that will sort of the.
I'll say FY 'twenty three activity in ret, So we definitely see that opportunity ahead of us.
And.
Obviously in the middle of a large.
Integration.
Yeah, so as we move into a meaningful recession here should we expect you to be opportunistic perhaps some smaller deals.
I'll go first on this.
Think given our history and experience.
And if you are talking about actual inventory buys that youre talking about M&A opportunities I want to make sure.
The ladder M&A.
M&A, yes.
Yes, yes, I would say.
Guidance of economic environments, I think we've been pretty steady and our ability and appetite to look at deals that are better appropriate and value added whether it's the footprint expansion or capability Spansion rich no I think thats right. I mean, we we are frequently around the table with our strategic teams looking at the pipeline if you will.
And we believe we have the balance sheet, if we see the right set of assets too.
Pursue them.
I think that.
Although the market.
Articulate that there is a buying opportunity.
Just based on the way multiples are rolling I think people are still up the realization of headwinds here.
And I am still work, where I was so some of that test of time, we'll have the path.
Again, I think that.
Our company will continue to be acquisitive as the two companies previously have always been.
Matter of just finding the right assets and being patient to.
I will make sure that you find things, which are complementary to your business.
Thanks, guys.
Well thank you.
Your next question is from Alex Valero with loop capital markets. Your line is open.
Hey, How's it going guys I'm actually all fernanda.
My question, then so you guys seen any impact from pricing broadly.
If pricing were to come down what do you see any impact to margin.
So maybe I'll start there.
We still are living in a <unk> environment.
Neither price price stability or ASP increases.
Certainly we have a long history of seeing those things ebb and flow through time.
We can't predict when but I think in time.
Prices will will either be stable or start to decrease in the instance, when those prices start to come down typically we have the opportunity to retain our merch margin profile because we take on those.
Tori at a particular.
What's up.
The vendors are selling it to the Ford typically we're able to hold our overall margin profile Marshall has commented that in the <unk>.
Escalating.
ASP environment that we've seen in the past that we've benefited somewhere around 10 basis points.
That's starting to slow down a little bit because theres not as much activity. There is a bit of a smoothing happening there but.
As we move forward, we would expect that the margin profile of the business would stay reasonably stable.
Yes.
Regardless.
The price.
Either increases or decreases.
Okay.
Thank you for that maybe as a quick follow up so are your key cost areas are you guys. You guys have any sense of which areas I think any thought there may be stronger and maybe if you can expand.
Geography as well.
Alex was the question about where are we seeing strength or weaknesses in our product capabilities globally.
Yeah, that's right and on your product Vegas.
So.
I'll start with this.
We.
We in Q3 has seen uniform strength across all of our major product categories.
<unk> in every region.
So.
There wasn't anything that surprised if you will to the downside, which frankly.
It might be a bit unusual.
And as we had I think commented earlier, if you think about our adjusted revenue of 15% in Q3 and the midpoint of the guide in Q4 being sort of eight five ish overall.
There isn't anything that's really falling out.
But rather I think it's fairly uniform view.
Of.
I think.
Revenue growing in.
In each of the categories going forward, maybe a little bit less growth in.
Hi business unit, but the other ones are.
Pretty pretty pretty good I mean high single digits pretty good.
Book.
So there.
There isn't a particular area that I would say that that we would report in Q3.
Being weak.
Awesome. Thank you for that.
Your final question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you so much.
We know that from the past the high high businesses had some big.
Big builds and then some inventory digestion or some unpredictable linearity in it.
As you sit here now running your company and look at the demand from it.
That business at a equilibrium point or I know it was just a big quarter is there some inventory digestion, but that has to occur from where you sit and see things.
Jim.
Yes, it still remains fairly lumpy.
As we've said to give it a little bit broader perspective on AR.
Call It a trailing 12 month basis, our year on year.
Revenue and operating income continues to grow in that in that space.
One thing we did mentioned earlier Jim is that there is some.
Capacity constraints with our Hyperscale datacenter customers, where they their demand is greater than their ability to absorb and so what we do is we have our racks are the rack that we've customized for our hyperscale customers.
Sitting in kind of a ready to go position inventory.
Inventory on our books until they accept it.
And then it translates to revenue and then where it is.
Through the cycle that has built up over the first three quarters of this fiscal I think thats one thing that as that normality comes into play or equalizes in 'twenty. Three we may see inventory related to that start to come down.
Okay that makes sense and then switching gears to Oh.
Oh go ahead.
Jim I was just going to say.
We're more of a reminder that.
For what we do in that space around our Hyperscale customers, we do get paid for holding that for them until they are ready to digest. So it's not the inventory that isn't being recovered from a margin perspective.
Okay that makes sense and then can you remind us again of your PC percent of total company exposure, maybe in totality and then the breakdown of consumer versus enterprise and then maybe Europe versus U S. Because it just seems like there's a lot of changes that are on the come for Europe versus U S.
Yes.
Yes, So let me answer the global question Marshall can keep me honest, we talked about this a little bit in the last earnings call. So the PC exposure overall sort of low <unk>.
20% of total revenue of our portfolio.
The consumer piece is.
Sort of the mid single digit.
The total portfolio percent.
And.
Don't know Marshall do you have the facts relative to Europe versus the Americas I think they are reasonably balanced I think they are fairly fairly equal.
So there isn't a.
Strong.
There isn't a strong concentration in one versus the other one caveat to that.
And in Europe .
We have our mobility business.
With one of the top tier of mobility.
Vendors, so that if you were to conserve consider the mobility.
Within PC, then there might be.
A bit of.
Larger constant larger concentration in Europe .
That mobility business is quite healthy right now and Thats primarily commercial.
Primarily commercial.
Right.
Excellent.
In Europe , the mobility business serves the broad market commercial and consumer okay.
Great. Thank you so much for the clarifications.
Thanks, Jim.
Okay.
Thank you for your participation today. This concludes today's conference call. You may now disconnect have a nice day.
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