Q4 2022 TD Synnex Corp Earnings Call
Speaker 1: And.
Speaker 2: Good morning, my name is Devin and I will be your conference operator today. I would like to welcome everyone to the TD Cinex 4th Quarter Fiscal 2022 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. For the speakers remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Liz Morale, 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 .
Speaker 3: Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, including statements about strategy, plans, and positioning.
Speaker 4: as well as our expectations for future fiscal periods.
Speaker 5: 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.
Speaker 6: We do not intend to update any forward-looking statements.
Speaker 7: 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.tdsynx.com.
Speaker 8: This conference call is the property of TD Synnax and may not be recorded or rebroadcast without our permission.
Speaker 9: I will now turn the call over to Rich. Rich?
Speaker 10: Thank you, Liz. Good morning, everyone, and thanks for joining us for our first earnings call of the new calendar year.
Speaker 11: We were pleased with our strong fiscal Q4 results, closing out what was truly a phenomenal year for TD Synix.
Speaker 12: We began the year with a lot on our to-do list relative to the merger and integration activities and ended the year having met or exceeded our objectives.
Speaker 13: As I've mentioned along the way, this merger has gone very well. Today, TD Synix is a $62 billion company with over 23,000 coworkers, serving 150,000 customers across 100 countries.
Speaker 14: I judge the success of this merger from a few different perspectives. First, from the point of view of our customers and vendor partners, our teams continue to provide consistent and uninterrupted service to our partners post-merger. And the financial results we've delivered.
Speaker 15: are confirmation of the strong value proposition that we are delivering to the market. Next, from the perspective of our co-workers, we have largely completed our initiatives focused on harmonization of benefits and compensation, and recently undertook our first TD Synix.
Speaker 16: global co-worker survey, which indicated a high level of engagement, an accomplishment that can be hard to achieve in the first year of a large merger.
Speaker 17: Finally, looking at the merger through the lens of our shareholders, we exceeded the fiscal 22 financial targets we set.
Speaker 18: For fiscal 2022, we achieved revenue of $62.3 billion, up 9% year-over-year, adjusting for FX impacts and merger-related accounting policy alignment, which was above the 6-8% range we anticipated. For more information, visit www.fema.gov
Speaker 19: non-GAAP operating margin was 2.8%, also above the targeted range of 2.5 to 2.7%. And we delivered non-GAAP earnings per share of $11.94.
Speaker 20: 29 cents above the high end of our guidance range we provided for FY22 on our September earnings call and 74 cents above the high end of the original guidance range provided January of last year. Despite
Speaker 21: higher than forecasted FX and interest expense headwinds. Finally, we returned $240 million to shareholders via dividend and share repurchases during the fiscal year.
Speaker 22: representing progress towards our medium-term capital allocation goals.
Speaker 23: With regard to the merger integration, we set the ambitious goal of achieving $100 million in cost synergies by the end of year one. And we overachieved on that goal by 45%, realizing $145 million in fiscal 22.
Speaker 24: One of the largest integration projects is the consolidation of TechData, America's ERP systems into CIS.
Speaker 25: The Legacy Synix ERP platform.
Speaker 26: We have made excellent progress on the Canadian migration, which we transitioned first, and our U.S. transition is well underway, having recently completed another major milestone. I'm happy to report that more than 45% of U.S.
Speaker 27: of the legacy tech data US SAP business has now moved over to CIS and is executing well.
Speaker 28: We will continue transitioning the remainder of the business throughout the fiscal year and are on track with our plan to largely be complete within two years of the merger closed date.
Speaker 29: Let me now talk about the trends we saw in Fiscal Q4 from a market perspective. In short, we experienced a continuation of many of the themes that have played out over the past several quarters.
Speaker 30: Advanced solutions continue to experience robust growth in the corridor above expectations, with strength in servers, networking, and infrastructure.
Speaker 31: Endpoint Solutions' gross revenue was modestly down year over year as the PC market and related peripherals continued to see a normalization from last year's pandemic-related highs.
Speaker 32: Several areas of endpoint solutions saw solid growth, including printers and mobile phones.
Our services and specialized solution businesses also experience solid growth in the corridor.
Rounding out our portfolio, our hyperscale infrastructure-focused business, Hive, delivered a record quarter with continued outsized, robust revenue and profitability growth as we continue to fulfill strong demand from our CSP customers.
We also experienced operating profits above expectation from the high business, which Marshall will provide additional color on in a few minutes.
From a regional perspective, all three regions delivered strong revenue growth on a constant currency basis with operating margin expansion on a global basis.
We continue to accelerate our revenue in high growth technologies as the markets we are targeting grew faster than the market projections we provided at our March investor day.
We achieved greater than a 20% year-over-year growth in gross billings for the quarter and for the full year 2022 in these areas, which include cloud, security, data analytics, and hyperscale infrastructure.
This growth was in excess of our expectation and high growth technologies represented $16 billion of our total growth fillings in fiscal 2022, up from $13 billion in fiscal 2021.
We saw improvement in the supply chain during the quarter with a meaningful reduction in our backlog.
Despite decreases in both endpoint solutions and advanced solutions, our total backlog level remains elevated when compared to historical norms.
Our customers are living the reality of a more uncertain and volatile macroeconomic environment with inflation, higher interest rates, and a competitive market for talent.
This need for talent is particularly relevant in the IT sector, where the increasingly complex technology landscape and ongoing shift to cloud-based multi-vendor solutions requires an even greater level of knowledge and experience to serve the needs of the market.
For these reasons and others, the value proposition that TD Synix brings to the market resonates with our customers.
On the vendor side, our utility as a variable cost route to market also becomes more valuable in times of economic uncertainty when vendors desire to lower their cost.
During the quarter, we were privileged to receive further recognition from our partner community, including being named the 2022 North America Partner of the Year by CDW, the 2022 Global Distributor of the Year by Palo Alto Networks.
the EMEA Distributor Partner of the Year by AWS and Lenovo, and the Americas Distributor of the Year by Nutanix.
We also continue to progress on our ESG journey and expect to publish our first corporate citizenship report this quarter.
In addition, we recently received a grade of awareness from the carbon disclosure project. A strong achievement in our first year of combined reporting.
We look forward to continuing to share updates on our continued progress in this space.
As we think about fiscal 2023, the critical nature of technology as an enabler of customer experiences and coworker collaboration.
keeper of cyber safety, and a tool to realize cost optimization and efficiency cannot be underestimated. And for these reasons, we believe IT spending will continue to outpace GDP growth in 2023.
We are prepared and well-equipped to continue executing on our growth strategy and are targeting above market growth rates as we leverage our industry-leading portfolio of products and services and broad global footprint to bring world-class service and innovation to the market.
We enter Fiscal 23 even more confident in our strategy being capable of capitalizing on the trends shaping the IT industry and the opportunities ahead.
Lastly, I want to thank our 23,000 plus co-workers around the world for their exceptional efforts in making TD Synix's first fiscal year a great success.
I'll now pass it over to Marshall, who will share more details about our performance and outlook.
Thanks Rich and thanks to everyone for joining us today. Our financial accomplishments in Fiscal 2022 were significant.
With adjusted year-over-year revenue growth of 9%.
surpassing the high end of the 6 to 8 percent target we provided earlier this year.
Our operating margin performance also came in above the high end of our expectations at 2.8% for the fiscal year.
representing a 14% improvement over the prior year and above our 2.5 to 2.7% target.
These results demonstrate the power and reach of our business model and the strong value proposition that TD Synix is bringing to the market.
Please note that comparisons versus the prior year full fiscal year are on an as-combined basis, which assumes the merger occurred at the beginning of the period.
Moving now to our physical fourth quarter results.
Worldwide revenue for Fiscal Q4 was a record $16.2 billion, up 4% year-over-year.
and up 11 percent in constant currency.
When normalized for the revenue recognition policy alignment relating to the merger of $500 million, the year-over-year growth was 14%.
Currency impacts primarily driven by the Euro devaluation accounted for approximately 1 billion during Hillary Clinton's campaign since the comma but also sparks Flexibility
Revenue is at or above expectations across all regions and in both endpoint solutions and advanced solutions in Fiscal Q4.
Additionally, HIVE delivered strong results in Q4 driven by better than expected demand and timing related margin recoveries related to services performed in prior quarters.
non-GAAP gross profit had a record quarter of $1.08 billion, our first quarter greater than a billion, and non-GAAP gross margin of 6.63%, up 44 basis points year-over-year.
The improvement in gross margin was driven by mix shift to high growth technologies as well as the highest margin recoveries which approximated 25 basis points.
Total adjusted SG&A expense was $582 million, representing 3.6% of revenue.
non-GAAP operating income was $496 million, up $88 million, or 21.5% year-over-year. And non-GAAP operating margin was 3.05%, up 44 basis points year-over-year. Driven by revenue growth.
high value performance, the aforementioned margin recovery, cost discipline, and merger synergy execution. On a constant currency basis, non-GAAP operating income increased 26% year over year.
excluding margin recovery and highs, the year-over-year increase was 16%.
Q4 non-GAAP interest expense and finance charges were $78 million.
18 million above our outlook due to higher borrowing and interest rates.
For Fiscal Q4, the non-GAAP effective tax rate was approximately 21%, below the forecasted 24% rate, due to the mix of locations where earnings were achieved.
Total non-GAAP net income was $330 million and non-GAAP diluted EPS was $3.44.
above our prior guidance of $2.70 but $3.10.
Note that the previously mentioned high margin recoveries contributed approximately 33 cents per share of non-GAAP-polluted EPS for the corridor. Removing these non-GAAP-BPS would have been $3.11, slightly above the high end of our prior guidance range.
despite headwinds from elevated interest expense.
Now, turning to the balance sheet. We ended the quarter with cash in cash equivalent of $523 million and debt of $4.1 billion. Our growth leverage ratio was 2.3 times and net leverage was two times, in line with our investment grade profile and approaching our previously communicated target of two times growth leverage ratio.
Accounts receivable totaled $9.4 billion, up from $8.1 billion in the prior quarter, and inventories totaled $9.1 billion, down 689 million, or 7%, from the prior quarter.
Networking capital at the end of the fourth quarter was $3.8 billion, a decrease of approximately $35 million from Q3. The cash conversion cycle for the fourth quarter was 23 days, flat from Q3, and cash from operations in the quarter was $302 million.
From a shareholder return perspective for the current quarter, our Board of Directors has approved a cash dividend of 35 cents per common share, which represents a 17% increase from the prior quarter. The dividend is payable on January 27, 2023.
to stockholders of record as of the close of business on January 20, 2023.
For the full fiscal year 2022, we returned $115 million to shareholders via dividend, reflecting a 1.2% dividend yield. We also continued executing on our share repurchase program in the quarter, repurchasing $42 million of our stock. For more information, visit www.fema.gov
and approximately $125 million in total during fiscal 22, which exceeded our $100 million target for the year.
Earlier today, we announced that our Board of Directors approved a new $1 billion share repurchase authorization, which expires in January 2026 and replaces our prior authorization. We expect to increase our share repurchases year over year in fiscal 2023.
as we progress towards our medium-term capital allocation target. Before I move to discussing our financial outlook for Q1, I wanted to provide an update on our merger related cost synergies. As Rich had mentioned, the teams did a phenomenal job of identifying, tracking, and realizing synergy opportunities in 2022.
allowing us to achieve our Year 1 targets more quickly than anticipated. We achieved $145 million in cost synergies through Fiscal Q4 and continue to expect to achieve an additional $55 million in Fiscal Q23.
with much of the savings coming from the completion of our ERP system migration, which is on track for the second half of 2023. Once we are fully integrated on one ERP system for the Americas, we expect to continue to find optimization opportunities and generate revenue synergies.
Now, moving to our outlook for fiscal Q1, we expect total revenue to be in the range of $15.2 billion to $16.2 billion, which equates to year-over-year growth of around 5% on a constant currency basis at the midpoint. This outlook reflects the impact of the outlook on the current outlook. In October , the IMF dashboarded its stressed HELM moon market, forming in Techno to look
year-over-year foreign exchange headwind of approximately 500 million
and interest rate movements of 33 million. Our guidance is based on a euro to dollar exchange of 1.05.
non-GAAP net income is expected to be in the range of $248,287,000,000, and non-GAAP diluted DPS is expected to be in the range of $2.60 to $3 per diluted share.
based on weighted average shares outstanding of approximately $94.8 million. Interest expense for Q1 is expected to be approximately $73 million and we expect the tax rate to be approximately 24%.
As we enter 2023, I wanted to provide a few modeling points to assist you.
As Rich mentioned, we believe IT spending will continue to outpace GDP growth in 2023 and estimate our revenue growth to be 3 to 5% on a reported basis.
From an operating margin perspective for the year, we expect a range of 2.6 to 2.8 percent, with improvements in distribution margins offset by lower year-over-year contribution from highs.
Hive working capital is expected to improve throughout the year, which is expected to reduce the recovery of carrying costs associated with these programs.
While it is a challenge to forecast interest expense with precision in the current rain environment, we would anticipate trending toward our guidance for fiscal Q1 of $73 million per quarter at least through the first half of fiscal year and then slightly declining in the second half.
We expect our non-GAAP corporate tax rate to be approximately 24%.
From a cash flow perspective, we continue to expect to generate in excess of 1 billion in free cash flow in fiscal 23 and anticipate working capital to be a source of cash this year, despite top-line growth as supply chain constraints continue to ease throughout the year and our inventory position improves.
We are committed to progressing towards a medium-term capital allocation framework targeting approximately 50% of free test flow returned to shareholders via dividends and share repurchases.
as best demonstrated by today's announcement, with the other 50% targeted to reinvestment in our business and M&A.
In closing, I'd like to thank all our coworkers for their focus and hard work in fiscal 2022, helping to build a cohesive company dedicated to providing best in class support and partnership to our customers and vendors.
I will now turn the call back over to the operator to begin the Q&A session. Operator.
At this time, I would like to remind everyone to ask a question, press star and then the number one on your telephone keypad.
Our first question comes from Rablu Patapra with Bank of America.
Hi. Thanks for taking my questions and congrats on the strong quarter. Rich, the PC OEMs have talked about elevated channel inventory levels. Can you talk about how you see PC channel inventory trending both commercial as well as consumer?
And when do you think that gets worked off? Are you seeing additional promotional activity and rebates from vendors? And specifically, what have you factored in for TD-SENEX PC revenue growth in fiscal 23?
Good morning, Rupalu, and thank you for your question, and happy New Year.
To all of you, so first I'll comment that when we think about our inventory that it might be marginally ahead of our profile, but nothing out of out of the bandwidth of what I would call the norm.
When we look at the backlog for the PC ecosystem category, I would say that it's generally at profile. So, sort of consistent with the serviceability requirements that we had seen in the pre-covid time.
Yes, there is some, I'll say traditional activity, pre-COVID activity in terms of promotions and rebates, et cetera, that are underway. But I kind of think about it as, as I said earlier, as returning to sort of the pre-COVID situation.
if you will, sort of ebb and flow of the business.
Okay, thanks for that. For my next question, maybe I'll ask a question on regional performance. Looks like in 4Q on a constant currency basis, you saw the strongest growth in Asia, followed by Europe and then Americas. As we look to fiscal 1Q, should we expect a different relative performance by region given –
So your question in regards to Q1, even though we're not forecasting on a regional basis, we still expect to see on a constant currency basis, a
modest growth in Q1 and then in terms of Europe and the question in regards to being structural we still believe that we're going to have a good quarter for Europe in Q1.
Yeah, and as it relates to your margin profile, if I could, there are two call-outs. First is that traditionally the margin profile in Europe has been lower. There's more costs of doing business in Europe related to country complexity. And then the second thing is the profile of the business.
You know, where we, for example, have mobile phone distribution tends to have a bit of a lower margin profile. However, those areas with lower margins have great working capital attributes. So the ROIC on those businesses that have sort of a lower margin profile.
and specifically cloud. How levered is that to overall cloud capex spend? So if cloud capex is still strong but lower in fiscal 23 versus 22, do you think that TD Synix cloud revenues can still grow mid-teens as you've done in the past?
So any thoughts on cloud revenues would be great. Thank you so much. Yeah, I'll start, Rupu and then Rich can chime in. We still feel that the high growth.
We'll see a more modest growth in fiscal 23, but in terms of our overall longer term thoughts on high growth technology in cloud, we think it's going to be meaningfully above the average growth rate for the business. Just speaking about your question in regards to CapEx, just as a reminder, CapEx is one correlation, but it's not the only correlation to the services that we provide to our hyperscale customers. Thanks for all the details. Thank you.
Our next question comes from Joseph Cardoso with JP Morgan.
Hi, good morning, guys, and thanks for the questions. First one for me, some of your partner OEMs have highlighted longer decision-making, tightening of purse strings, among other things from end customers. They appear to seem to be cautioning around the IT environment, spending environment. I guess that's it.
you know, are you guys seeing a similar environment from your end customers? And if so, what is driving you guys to be more optimistic around the IP spending environment and more specifically your growth outlook for fiscal 23? And then I have a follow-up. Thank you.
Sure. Joe, this is Rich. Let me handle that first. So if we think about the back half of last year, you know, I think our reported growth rates in both the third quarter and the fourth quarter at constant currency and then, you know, adjusted for the accounting difference during the merge.
were double digit, mid double digit teams, if you will. And when you take a look at Marshall's comment relative to our preliminary thoughts around the year, he's talking about three to 5%. So from my point of view, there's a pretty material, if you will, change.
correlations or had seen the best correlations to our GDP. You know, without getting into all of the details, our business is very concentrated in the Americas and Europe . And if you take a look at the GDP for those two regions, it nears flat. I think the Americas are up a couple of tenths and Europe is down a couple of tenths.
And over the 15-year average, IT is outpaced GDP by about 3 points.
So, this is based on the theory that we use when we think about the likely outcomes for our business in the coming year.
Every quarter we take a look at what are we hearing in market as it relates to GDP? I would say that it has been somewhat volatile. So we continue to look at that metric as the greater macroeconomic scene plays out in front of us.
Got it. Appreciate the color there. And then my second question, you know, if I look at your revenue guidance for the February quarter, it's actually in line with what you were expecting for the November quarter. However, their earnings guide is a bit softer. You know, it sounds like from your commentary that it's largely driven by interest rate headwinds and some FX.
However, I just want to confirm there that you're not seeing any other material pressures to areas of the P&L like gross margins. Maybe even more specifically, are you expecting gross margins to improve going into next quarter as you continue to benefit from the mixed shift that you saw this quarter? Hey Joe, so
As you think about it, as we think about 22, there was some benefit to the pricing environment. We called it out five to ten basis points on gross margin. I would expect that to abate or normalize in 23. And I think the other influencing factor about Q1 is just the mix shift, as we talked about earlier. Calculus within Q1 is just half of a, 4.8 times the maximum.
Distribution, we expect to continue to grow well. High growth technology specific to the hyperscale hive business will decline slightly, so the mix itself is probably the last piece of trying to triangulate the margin profile for Q1.
Yeah, if I could just add on to the comments. The fundamentals of the execution of our businesses are quite good. I think of three buckets relating to, as you I think you're called the softer guide from an earnings perspective. So three points.
Number one is interest by far the biggest a year to year then second is you know, there's some currency overhang Presuming a more stable euro that that's sort of a base as we move into the future, you know that the FX discussions
Then the third is the mix, in particular, lesser growth in that overall three to five guide. It's those three factors. But we're very, very pleased with the fundamentals and the profiles of our businesses.
Thanks for the question guys and congrats on the results.
Thank you.
Our next question comes from Samir Kalucha with RBC.
Hi, this is Samir Kulkare calling in for Ashish Tabata. Thanks for taking my question. I was wondering if you could provide some more color on the inventory normalization.
Do you think there is any pull forward of demand over here or is supply chain normalization happening as it heard from
partners, and when do you expect the supply chain on the advanced solution side to normalize?
Yes, Samir, thank you for your question. So, a couple of things. Number one is, hopefully I'm going to answer all your questions here, but number one is certainly the... it's been about three years since we've tried to be waiting for my
Reduction of the backlog benefited our overall sales growth at 14 percent when normalized for constant currency as well as the accounting 606. When we think about the backlog, to give you a little bit more insight, as I said earlier, the backlog has been
for the PC ecosystem businesses generally are at profile and serviceability levels that we had seen pre-COVID.
We're still elevated in advanced solutions, and my crystal ball says, with maybe some minor exceptions by the time we get to the mid-year point that we should...
probably make our way near profile and have sort of pre-COVID serviceability for the majority of the advanced solutions categories.
So, I do see in Q1 and Q2 a bit more of a backlog runoff in that Advanced Solutions category and hopefully by the mid of the year we'll be at profile.
Thank you. And just a quick follow-up. We all hear from.
partners and industry players saying cloud spending is being
more rationalized and companies are looking at their spends more carefully than they have been.
in earlier times, how do you see that slowdown and highs playing out? Do you think it's a very...
very short term, any one or two quarters kind of a thing. What do you think is a little bit something more structural to look in the say mid-term when companies try to re-architect their applications which will likely take longer. So any thoughts you can provide on that.
Sure Samir, I'll start first. We're used to pencil sharpening. I mean it's part of the business of always trying to create and invent ways of providing more value. So whether it's distribution, whether it's high-growth...
those areas over time will feel pressure from just a competitive environment and from a pricing environment. But I think the majority of what we're seeing in Fiscal 23 as it relates to cloud service providers and their thoughts is how can we continue to provide more end-to-end solutions beyond just data center fulfillment?
So, we're seeing that breadth of portfolio play out, and it's upon us to continue to kind of create new value that creates more premium and ultimately more margin for us. Rich, I don't think there's anything else you want to add to that. Yeah, just two thoughts, and I want to break this between core distribution and high. Just on core distribution…
Remember that our client faces more towards small, medium-sized clients overall.
And when new technology gets deployed, like cloud, it's very much enterprise first and then makes its way down through the rest of the customer sets as offerings become more efficiently packaged.
So, you know, my guess is that if we look at the customer segmentation around cloud, you'll see that the growth rates are more robust in the SMB space because of the evolution of technology maybe versus the enterprise.
You know, that sort of relative to the total picture should be beneficial for us. As it relates to Hive and that business, as you know, it services the CSPs. You know, I'd share two thoughts with you. Number one is I do believe that the long-term view for hyperspace is a very important part of the CSPs. And I think that's a very important part of the CSPs.
our customer prospects, if you will, as we move through time and really taking advantage, if you will, of expanding our customer portfolio.
Got it. Thank you.
Our next question comes from Jim Suva with Citigroup.
Thank you. Can you go over a little more details about the high probability changes and what is purchasing, timing, true up and why isn't it?
is sustainable or just why the volatility there and the profitability. Thank you.
Hi, Jim. It's Marshall. Yeah, as we disclose or discuss in our prepared comments, quite often within HIVE, and we do this in distribution as well, we have programs that we perform throughout any given cycle or year for which once we perform the service, the cost plus margin gets recovered. And when we...
Close those out or do the refinement review we tend to. Get some final settlements or final.
So we wanted to call that out because it was meaningful in Q4. It happens in distribution as well as we're working with partners and customers and refining and making sure that the margins that we agree to receive are achieved and recognized. So it just isn't as visible. We wanted to...
Demonstrate that that was part of the strength in Q4. It wasn't the only reason why we outperformed, but it was one of those. And then, Jim, as I think about 23, you know, Hive, we expect will continue to perform well. The strong 22 is just a tough compare.
And the margin profile itself was very, very exceptional for 22.
Yes, Jim, I just would maybe provide a little bit more clarity. When I think about the overperformance to the midpoint of the guide, I would share with you a couple of thoughts. So, first of all, there's two pieces to HIVE. One is, as Marshall talked about, the
margin catch up and we tried to provide the clarity on that. Second is just the incredible performance overall in sort of the base business. We always talk about, you know, the lumpiness of our Hive business. Then, we actually overperformed our expectation within core distribution.
And then kind of a take back was an interest expense.
So it'd be those four elements, the core distribution, overperformance.
significant overperformance in HIVE, the HIVE margin recovery, and then the interest expense give back.
Okay, and then earlier in the Q&A you talked about the PC market and things like that. I'm just curious, on the mobile phone market, there were some supply disruptions. How's mobile phone demand and channel supply, but most importantly demand from what you're talking about?
So it's sort of in that theater. We saw very good demand for mobile phones. I would say that yes, we tactically have seen some issue relative to the volatility of the game.
out of some of the Asian markets, but we fully anticipate that supply has touched up really rapidly.
Thank you so much for the additional details and clarifications and congratulations to you and your teams.
Thank you so much for the additional details and clarifications and congratulations to you and your teams. Thank you, Tim.
Our next question comes from Shannon Cross with Credit Suisse.
Thank you very much.
I was wondering, as you look at 2023,
Can you talk about what you see are the biggest pockets of growth? And I'm wondering if you can talk both from end demand as well as – because there's just so many questions out there about what's happening, right? So end demand and then also backlog fulfillment. So if you go through some of your product lines –
Yeah, thank you, Shannon. So, you know, I'm going to embellish a little bit more here. When we were on this call last year, we had informed that we had a point of view that said that the first half of the year, or actually the entire year, we would see a moderating PC.
But in the second half of the year, we would see a robust sort of data center.
market. And in fact, we were talking about it yesterday. The year played out exactly as we had envisioned it from a category perspective. Obviously, if we take a look at the first half of this year, we believe that PCs will be, you know,
challenging category as most of the market had most of the vendors had projected with the expectation that there'll be a recovery in the back half of the year and I know that you're well informed in the PC ecosystem market but it's things like operating systems, transitions.
as well as more premium devices given the worker profile is different than it previously had been. And then there was even comments around the net useful life of a laptop, which is more prevailing these days, is shorter than many of the equipment institutions in the US
sort of a desktop, all of those things, you know, I think are anecdotally feel right to me. So I do believe it's going to be, you know, a bit of a slow PC category in the first half with that opportunity in the back half.
And then I think that we'll continue to run off backlog in advanced solutions, you know, in the first half and then see a more moderating advanced solutions in the back half.
So, you know, those are sort of the big themes that we think will play out. You know, obviously things will ebb and flow based on the economic circumstance or the reality as the move or the year moves forward as well. But
Those are the big thoughts for this year for us. Thank you. And then can you talk about what this – I don't know if it's a transition, but at least it's somewhat of a shift from transactional to device as a service, infrastructure as a service.
You know, pretty soon nobody will own anything. But you know, the shift of purchasing from CapEx to OpEx.
How are you seeing that play out? And do you feel like it's still a push from a company perspective versus a pull from a customer perspective? And how should we think about it running through your P&L over time? Thank you.
Sure. So let me start with the infrastructure as a service thought. We see that as material and meaningful and building and a lot of the, obviously we have the traditional infrastructure as a service platform as a service.
So I see that one sort of developing and ramping.
Candidly speaking,
Although we provide device as a service offerings as well.
You know that those discussions had you know begun arguably as many as five years ago
We haven't necessarily seen a ramp or that monetized the way it has been envisioned. We do participate in, I'll call it more niche sort of activities around that space right now. We continue to work with vendors to see if that promise will play out.
But I would have to say of the two, the infrastructure, one has more momentum right now than the device as a service one.
Great. And then just my last question is on cash flow. Is there any working capital levers that you can pull for 2023 beyond getting the inventory levels down to drive incremental cash flow?
Shannon, if we think about 23 and the comments we made around cash flow being at $1 billion plus, we certainly understand that earnings itself will be a big component of that. We certainly expect that the inventory declines due to supply chain constraints will be a benefit. The last piece is we do all...
some of that goodness will be felt in these working capital efficiency comments I made.
Yes, Shannon, the way I think about it is the inventory is, if you want to use the 80-20 or the 90-10 rule, kind of think of it in the context of that. There are some other working capital efficiencies to be gained, but by far and away, the inventory is the big one. So, let me test that and then...
about it is the inventory is if you want to use the 80-20 or the 90-10 rule kind of think of it in the context of that. You know there are some other working capital efficiencies to be gained but by far and away the inventory is the big one. Great, thank you very much.
No, thank you. Our next question comes from Keith Howsam with North Coast Research.
Good morning guys. Just circling back to high, I just want to make sure I understand the margin benefit you guys in the fourth quarter. Is this really just more of a timing difference, the recovery from the third quarter which had probably a lower margin on the high than we expected? Just kind of off-setting, but for a full year you're exactly where you'd expect it to be.
Yeah, Keith, it's more timing within the year, but the first piece was the strong outperformance on HIVE in Q4. So revenue was better than expected, and from that came better expected margins.
Great. I appreciate that. Both pieces.
Got it, got it. And in Marshall, interest rates I believe out of CR are still continuing to go up, especially if you listen to this, that. How are you thinking in terms of the interest rate for the entire year? I'm assuming your guidance here is based on where interest rates are today, but assuming they go up, does that change, I guess, your target for your leverage and how you think about prioritizing the payment debt of debt?
Yeah, Keith, near end we are modeling another 50 bits in Q1, so we'll see if that – hopefully that's inaccurate and it's lower than that, but we model that in to get to our guide of 73 million for Q1, and then I think that'll stay around that range for Q2. And then given the –
cash flow benefits, working capital efficiencies we spoke to, I think it starts to come down a little bit in the second half of the year. But it will be elevated and it will be ahead when year on year.
Okay, appreciate it. And if I could speak one more in here. Obviously, working down the backlog has been a benefit here for you, but as you're thinking about the first quarter, it sounds like order flow is exactly where you'd expect it to be for where we're at today, and that gives you the confidence you have in your guidance.
Yeah, there's nothing that's materially different in the order flow than what we were anticipating with the guide. It's early in the quarter, but that's sort of our view.
Yeah, there's nothing that's materially different in the order flow than what we were anticipating with the guide. Obviously, it's early in the quarter, but that's sort of our view. Great. Thanks. 18 5
Thank you. Our next question comes from Adam Tindall with Raymond James.
Adam, you there?
Can you hear me?
Yep, can hear you now.
Okay, yeah, first one I wanted to just clarify with Marshall on the fiscal 23 revenue guidance. You said three to five percent reported. What is that in FX and accounting adjustments of the adjusted growth?
Yeah, Adam, at least for Q1, it's as adjusted, constant currency about 5%.
It's difficult to figure out where we think FX will go. Right now it's probably going to end up being somewhat of a push because we're lapping a declining euro year on year. So as we progress through this year at 105, I think it will end up being somewhat flat, plus or minus two or three hundred million quarter, two, three and four.
Yeah, and then the 606 adjustments are completely behind us now.
All right, good to know, Rich. On that Q1 outlook, that 5 percent growth in constant currency, I looked at the last year, I think, that like-for-like comparison was about 6 percent. So looking at a similar growth rate as this time last year, but the environment seems a lot worse from a PC perspective in particular.
Maybe you could just give us any confidence that you have, especially, you know, talk about how you're feeling here relative to that plan based on what you're seeing here on January 10th.
Okay, so a couple things. First, when we look at or think about Q4, our endpoint solution segment was marginally down.
year on year. You know as we we think about the first quarter, you know, I would tell you the following. First, we as we talked before, this is our forecast process builds bottoms up. So you know we go to country to region to global.
And so we have that visibility and usually the teams have a pretty good feel as to what's going on on the ground. It is certainly a more volatile environment now than usual. So obviously we pay attention to that. As of January 10th, Um, you know.
specialized businesses, contributing growth as well is the way we think about it.
Just the last one, Rich. You mentioned revenue synergy upon completion of America's ERP. Just an early look at any sort of timing, ballpark quantification of this. You think that's going to come from vendors or customers. What do we have to look forward to in terms of revenue synergy when that materializes?...
Yeah, so first of all, in our prepared comments, we talked about moving over 45% of legacy tech data SAP onto CIS. So in the rounding, roughly two-thirds to 70% of our business now is on the strategic CIS platform in the Americas.
So it's a good chunk that's now in there. We have begun, Adam, to see you know some of the vendors which were complementary to one side or the other start to take off in those sales lanes if you will. You know we think of it as sort of a build which will
grow and grow as we move throughout the year. But we aren't prepared to comment relative to what the quantification of that is. We're going to wait to pass a couple more metrics and or milestones before we provide that visibility. We're going to wait to pass a couple more metrics and or milestones before we provide that visibility. But we're not prepared to comment relative to what the quantification of that is. We're going to wait to pass a couple more metrics and or milestones before we provide that visibility.
But right now I view it as
The sales teams, as I said, we see real transactions occurring, are getting up to speed with regard to product details, sales plans, etc. And we'll see how that goes moving forward.
Okay, thank you.
Thank you.
Our next question comes from Ananda Beruja with Loop Capital.
Hey guys, thanks for taking the question and Happy New Year. Just a couple if I could. Is there a mix, mix outlook on the year?
I guess super simplistically the guidance for Q1, the revenue was
Sort of totally right line and bracketing Street the EPS guys is a little bit softer and So Marshall sounds like sounds like a little bit of that is interest rate What are the other components?
as well or do you think street was just maybe sort of you know sort of inappropriately set with with the non-dip when you can when you compare Q1 to Q1 for us.
33 million higher for interest expense, and then the FX impact is about 500 million, which 10 to 12 cents is. So those two largely contribute to at least the compare and the discussion year on year. And then when we think about our thoughts on mixed outlook.
For 23, distribution we expect will continue to show momentum, and we think that the majority of high growth technology will continue to show momentum with the commentary we had around the hyperscale infrastructure slash 5, just having a real tough compare to 22.
but still we expect hive to grow. But when you take those into consideration, the mix plays out the way we guided for Q1.
All right, that's super helpful.
Are you guys thinking about getting active on M&A again?
I guess where in M&A kind of in the stack would you get active like tuck-in versus you know sort of medium-sized? I'm assuming you wouldn't do anything big Because of the debt and we are in the integration with each other, but but we're in M&A wanting to get active this year.
Yeah, Ananda, thanks for the question. As you had stated, you know...
a transaction that's the size of the merger of the company is, you know, not necessarily on the radar or something that I would forecast, but as is usually the case, we're always prospecting and have a pipeline around M&A and predominantly looking to
looking at targets that would allow us to.
accelerate our strategy.
And so, you know, they come in sort of two categories, the first one being the traditional one, so I won't spend a lot of time explaining that. And we also, you know,
are very interested in accelerating the capabilities in our cloud platform. And, you know, if we find the right IP investment that would allow us to accomplish that, we would consider that along the way. And then, as it relates to...
to our interests strategically. You know, obviously, Europe is less consolidated, Asia Pacific is even less consolidated. So, you know, if something were to appear in those theaters, they would be of interest.
So that's how we think about the M&A, pretty consistent with what we talked about previously.
Awesome. That's really helpful. Thanks a lot, guys.
Thank you.
Our next question comes from Matt Sheeran with Stifel.
Yes, thanks, and good morning, everyone.
Just a couple of questions for me. One just on the pricing environment. Last year we saw price increases across all your hardware product categories including advanced solutions and PC's. We're hearing about pricing pressure on PC's particularly as...
memory and other component costs come through? What's your take there and how does that flow through in terms of your top line or any impact on your business? Yeah, Matt, thanks for the question. So, you know, with the overall supply chain profile sort of returning to...
Pre-COVID levels for the PC ecosystem, I would suggest that we're going to see those dynamics and pricing sort of return to pre-COVID levels. As someone had mentioned earlier, I believe that there's ample supply in PC and to the extent there's shorts and longs, that's going to dictate what will happen.
activity within Advanced Solutions when compared to last year, but I would suspect that by the time we get to the mid of the year that those dynamics would return to normal. Just one last point of note, you know, in Q4 on a year-to-year basis, we had commented that the
endpoint solution segment was marginally down. I would say that with the backdrop of that, actually, ASPs were up in both the Americas as well as Europe , even in Q4. But I think there's a point in time where that left and then...
You know, we're kind of over it. I would speculate that, you know, maybe. Maybe there's still some stability in ASD in the 1st quarter, but we get back to traditional dynamics after that would be my crystal ball.
Okay, thank you. And then regarding the cost synergies, you're ahead of plan. You've got 60 million left. How should we think about how that flows through your P&L this year? Is this more back-end loaded because of the ERP implementation? Hi, Matt. That's correct. ERP is.
is expected to complete in the second half, and then with that comes two elements. One is the system-related cost that should go away, and then two is the duplicative cost around supporting two systems, and that efficiency should also play through primarily in the second half of 23.
Okay, thank you. Thank you.
There are no further questions at this time, which concludes today's call. You may now disconnect.