Q2 2023 TD SYNNEX Corporation Earnings Call
Good morning, everyone and thank you for joining us today.
Second quarter proved out the resilient business model, we've been highlighting over the last several quarters as we saw a continuation of many of the trends from the February quarter.
Our unparalleled line card and diversified portfolio allowed us to realize growth in advanced solutions in high growth technologies, while year over year growth rates for endpoint solutions were impacted by short term weakness in the demand for PC products post pandemic.
We expect this PC demand decline to abate over time as customers upgrade an aging installed base of devices, allowing them to run the latest operating environments and leverage key security features and we're encouraged by the improving macro economic sense.
Cement and stable supply chain conditions that are mostly back to historical profile levels.
Although the pace of the recovery remains uncertain, we believe that gross billings and net revenue in fiscal Q2, and the outlook for Q3 represent the trough levels for endpoint solutions.
The breadth of our technology offerings again proved to be a differentiator for us as we were able to offset deeper than anticipated declines in endpoint solutions technology demand with growth in advanced solutions and high growth technologies.
Our teams delivered solid execution shifting to pockets of growth and on a year to year basis. We believe we maintained our overall market share position in the Americas, while growing market share in Europe .
The resilience of our business model, along with strategic investments that we have made augment our capability in the fastest growing areas of the market and helped us to expand margins in the quarter.
Working capital improved with lower revenues, which is a reflection of the counter cyclicality of our business model.
From a regional perspective, the Americas experienced the largest impact from the post pandemic.
<unk> and demand with year over year declines for PC ecosystem products Amir.
Americas Advanced solutions saw continued growth driven by demand for cloud and data center related technologies from.
From a customer perspective declines were primarily in the largest customer segment, while SMB and MSP customer segments have grown.
Europe continued to show resilience with smaller declines in the endpoint, given our broad technology footprint and diverse product line, including mobile phones, and a very strong growth in advanced solutions offerings and specialized solutions.
The Asia Pacific Japan region also saw strength in high growth technologies, and specialized solutions, partially offset by smaller declines and endpoint solutions.
At a company level, we continue to see solid momentum across our high growth technology areas that we've chosen to focus on which include cloud security.
Data AI, Iot and Hyperscale infrastructure.
These areas continue to see growth in the low teens on a year to year basis.
Our customers are prioritizing projects in these areas given the critical nature of these investments and their strategic importance and minimizing cyber attacks, enabling digital transformation and driving cost optimization.
Investing in these technologies is one of our four strategic pillars and foundational to our evolution from a traditional distribution partner to a solutions aggregation and orchestration partner.
Let me take a moment to provide some perspective on the steps we've made towards our goals in this area.
We are well into the solutions aggregation phase, where we build integrate and facilitate edge to cloud solutions for our customers.
Our role is to help our customers solve complex market challenges by aggregating multi vendor solutions and delivering easily deploy business outcomes.
We do this through our solutions factory methodology, where we build comprehensive repeatable solutions that include some combination of hardware software and cloud licenses.
A recent example of this involved in it solution provider and a consulting firm that wanted to provide a better backup solution for their clients.
Maintaining warranty and software support on proprietary backup appliances can be costly for end users and they wanted to begin recommending pure cloud backups where applicable.
This provider was able to utilize the <unk> solution factory and our cloud based click to run solutions, along with provisioning a pre configured cloud solution built by TD cynics within minutes.
This enabled the provider to deliver a solution to their end users more rapidly, while reducing configuration and deployment process times by 75%.
We have many examples like this and currently have over 7500 of these solutions deployed including offerings for software defined data centers hybrid cloud hyper converged infrastructures analytics and security.
We look forward to continuing to share updates with you on this important work.
Now.
Moving onto our merger integration efforts as we approach the two year Mark since we became TD <unk> I am pleased to report that we have realized our goal to achieve $200 million in merger related cost synergies ahead of schedule.
This is an important milestone and as a result of much hard work and effort by the teams across the company.
As we move forward, we expect to realize an additional $50 million and cost optimization over the next several quarters.
From an ERP systems perspective, we have made additional progress towards the completion of transitioning the Americas business to one system.
Approximately 80% of our Americas business is now on Cif and we remain on track with our transition goals.
Importantly, this progress opens the door to realizing merger related revenue synergies and to continually enhance our business.
While we know that some revenue synergies have already begun to be realized we believe this remains a more significant opportunity toward the end of 2023 and into 2024.
This month, we were honored to receive our updated fortune 500 rating being named number 64 on the list for 2023.
This is a testament to the strong relationships that we maintain with our customers and vendors during.
During Q2, we were privileged to be recognized with several awards, including being named HP partner of the year North America distributor of the year by Dell HPE and <unk>. In addition to other regional awards.
We also had the distinction of having 19 of our leaders recognized by CRM as top women of the channel last month.
Well deserved achievement and recognition of their significant contributions to our company and industry.
We are proud of their achievements and continue to be committed to gender diversity as part of our overall <unk> and ice strategy with the goal of increasing representation of female core workers to 40% of leadership roles by 2030.
We also closed on several new vendor partnerships during the quarter, including Gong and AI driven revenue intelligence platform and get lab via an exclusive partnership to address Dev ops and application modernization in Asia Pacific Japan.
These wins are indicative of our investment and commitment to grow and new technology areas and.
Enabling us.
To continue offering our customers the most complete portfolio in the industry.
Since the beginning of the fiscal year, we have added nearly 100, new vendors to our line card.
In closing as we contemplate fiscal Q3, while there remains some uncertainty in the macroeconomic environment. We are encouraged by the early signs of stabilization.
With the resolution of the U S debt ceiling reduced banking sector concerns.
And a serviceable supply chain.
We expect PC ecosystem demand declines to reduce following the past couple of years of intense buying by our customers and driven by the factors I mentioned earlier.
We remain well positioned to navigate the demand environment as highlighted by our performance this quarter and we believe that the long term drivers of spending remain intact.
I'll now turn it over to Marshall for some additional comments about Q2, and our Q3 outlook.
Marshall over to you.
Thanks, Rich and thanks to everyone for joining us today.
Our earnings and cash flow profile remained strong this quarter.
We delivered non-GAAP EPS of $2 43 per share within our previously guided range and generated over $700 million in cash flow from operations for the quarter.
Demonstrating the counter cyclical nature of our business model.
Our Q2 revenue performance was at the low end of the outlook range. We provided in March and as a result of the demand environment that vary greatly between endpoint and advanced solutions technologies as customers prepared for the rapid shift to hybrid work over the past few years growth for PC ecosystem products was well above.
Historical trends.
As rich mentioned demand for endpoint solutions is now declining with customers digesting the increase investments made over the past couple of years at the same time advanced solution technologies continued to see solid demand as customers focused on projects for data centers and continue to prioritize their cloud.
<unk>.
Given our broad portfolio and progress in high growth technologies, we were able to leverage the areas of growth in Q2, increasing our market share for these technologies in North America and Europe .
Worldwide gross billings were $18 7 billion down 4% in constant currency, while net revenue was $14 1 billion down 7% year over year in constant currency give.
Given that a greater percentage of our sales came from advanced solutions in the quarter more of the revenues were shown on a net basis in the quarter if.
If normalized for these additional gross to net adjustments, which primarily occur and advanced solutions the year over year net revenue decline in constant currency was 4%.
We continue to see solid growth in the high growth technologies of cloud security data.
Iot and Hyperscale infrastructure and collectively these areas grew in the low teens on a year over year basis and represented greater than 20% of our gross billings in the quarter.
non-GAAP gross profit was 969 million and non-GAAP gross margin was six 9% up 45 basis points year over year.
The improvement in gross margin was driven by a mix shift to advanced solutions in high growth technologies total adjusted SG&A expense was $593 million, representing four 2% of revenue up $8 million year over year, as we continued to make investments to enhance our capabilities and the strategic.
<unk> areas of the market.
We expect SG&A expenses as a percentage of net revenue will return to the three 5% to 4% range in the second half of fiscal 'twenty three as we began to realize the cost optimizations that rich mentioned earlier.
non-GAAP operating income was 376 million down five 6% year over year and non-GAAP operating margin was two 7% up six basis points year over year.
On a constant currency basis, non-GAAP operating income decreased 5% year over year.
Q2, non-GAAP interest expense and finance charges were $72 million 4 million better than our outlook and the non-GAAP effective tax rate was approximately 24%.
Total non-GAAP net income was $229 million and non-GAAP diluted EPS was $2 43.
Within our guidance range non-GAAP EPS for the quarter was down 11% year over year and excluding the impact of higher interest expense and FX translation. It would have been down 2% year over year.
Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of 852 million and debt of $4 1 billion. Our gross leverage ratio was two three times and net leverage was one eight times in line with our investment grade credit rating and approaching our previously communicated target of two times.
Gross leverage ratio.
Accounts receivable totaled $8 4 billion down from $9 4 billion in the prior quarter and inventories totaled $7 8 billion down from the $8 4 billion in the prior quarter.
Net working capital at the end of the second quarter was $3 8 billion down from $4 2 billion in Q1 due to declines in AR and inventory and partially offset by a decline in AP.
The cash conversion cycle for the second quarter was 24 days down two days from quarter, one which was consistent with expectations and typical seasonal patterns cash from operations in the quarter was $708 million and free cash flow was $677 million as the business demonstrated the benefits of its counter cyclical balance.
<unk>.
During Q2, we returned $93 million to shareholders via dividends of $33 million and share repurchases of $60 million for.
For the quarter, our board of Directors has approved a cash dividend of <unk> 35 per common share, which equates to a dividend yield of approximately one 5% payable on July 28 2023.
Stockholders of record as of the close of business on July 14th 2023 and.
As Richard mentioned, we are happy to report that we met our merger related cost synergy target ahead of schedule on realizing $30 million of incremental savings and over 200 million cumulatively. Despite.
Despite our success in achieving merger synergies there is more work to do to optimize our cost structure, especially given the unprecedented swing from strong market momentum exiting fiscal 'twenty two to the year over year declines in revenue for the first half of fiscal 'twenty three over.
Over the next three quarters, we will be pursuing cost optimizations that will drive SG&A costs lower by approximately $50 million on a run rate basis.
The cost savings will in part enabled by the integration of our two ERP systems into one enterprise platform in the Americas.
This opens up our full capabilities to dynamically manage and respond to where the market is going and provides us with confidence can realigning our cost structure to market conditions and to fully leverage cross sell revenue opportunities. So.
With this as the backdrop, let me now share our outlook for fiscal Q3 and high level thoughts regarding Q4.
We believe we will continue to see demand for PC ecosystem products improve and believe that fiscal Q2, and Q3 represent the trough levels for endpoint solutions gross billings and net revenue for.
For fiscal Q3, we expect gross billings of 18 billion to $19 3 billion, representing a 7% decline on a year over year basis in constant currency at the midpoint we.
We expect total revenue to be in the range of $13 5 billion to $14 5 billion, which equates to a 10% decline year over year on a constant currency basis at the midpoint. Our guidance is based on a euro to dollar exchange rate of 1.19 <unk>.
non-GAAP net income is expected to be in the range of $206 million to 253 million and non-GAAP diluted EPS is expected to be in the range of $2 20.
To $2 70 per diluted share based on weighted average shares outstanding of approximately $93 million non.
non-GAAP interest expense is expected to be approximately $72 million and we expect the tax rate to be approximately 24%.
We believe market sentiment flex a modest recovery beginning towards the latter part of Q3 and continuing into Q4 and would expect to see a seasonal sequential improvement in revenue of approximately 8% in Q4 as well as easier compares as we enter fiscal 'twenty four.
As a reminder, in Q4 of fiscal 'twenty, two we had a benefit of approximately 33.
non-GAAP EPS due to high margin recoveries, which we do not expect to repeat.
In closing I'd like to provide some comments regarding capital allocation given.
Given strong free cash flow generation in Q2, and our continued confidence in generating over $1 billion in free cash flow for fiscal 'twenty three we.
We are focused on deploying cash opportunistically.
We returned $241 million of capital to shareholders in the first half of the year and expect to increase that pace for the back half of the year by approximately $100 million, bringing our expected capital return for the back half of the year to approximately $340 million.
And the all in total for fiscal 'twenty $3 million to $580 million.
We will continue to be opportunistic with regards to capital allocation, while adhering to the general framework, we have previously communicated to the market.
With that we are now ready to take your questions operator.
Thank you if you would like to ask a question. Please press Star then one on your telephone keypad.
Request that you limit yourself to one question to allow time for other participants to ask their questions and if there is remaining time youre welcome to re queue with additional questions.
Our first question is from Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good morning, Richard I, just wanted to start with maybe a macro question and as we think back one of your largest customers had a surprising and to their march quarter, and a sizable cut to their forecast.
That investors are wondering this morning is the weakness that you've seen here on revenue is that reflected in data point from March because your quarter includes that month of March or have trends continued to weaken and if you could maybe touch on what's going on in the months of April may and how June is shaping up would be very helpful. And then I've got a follow up on cash flow for Marshall.
Sure.
So first of all.
Obviously, we were at the low end of our revenue guide.
For the quarter, so the demand in primarily the peaky PC ecosystem, where endpoint solutions.
Sure.
A little bit softer than we had anticipated we did have some offsets from the advanced solutions business and high growth technology business. As it was stated in our prepared comments, we do see a little bit more volatility month on month as we.
Move through Q2.
I would say that it was bumpier.
Lows and highs relative to.
We might see so it felt as if it was a little bit more volatile.
And I think.
Adam that.
This continuation of.
Realigning if you will the PC ecosystem inventory across the entirety of the supply chain.
It was perhaps a contributor too.
And point solutions volumes being a.
A little bit lower than anticipated as.
As we had stated.
Our view for the remainder of the year is that we will see lesser declines in Q3, and Q4 are moving forward, but we do believe that that.
Digestion continues and as you know the as we move through time there still.
Are some reasonably tough comparison, they get easier as we move into next year.
So.
We think that clearly there is an improvement on a year over year basement basis, moving through time, but still sort of.
A declining environment with lesser and lesser declines as we move through time.
So that's kind of the summary.
Okay. That's helpful Rich and maybe Marshall as a follow up acknowledging cash flow very impressive in the quarter and your decision to talk about deploying cash opportunistically. If I recall, it's been a little bit more programmatic on share repurchases and smaller in the past. So first part of that question would be maybe just taking us into the discussion and whats change.
<unk> here from a qualitative perspective to move to this opportunistic stance and then secondly, if you could touch on the timing of cash flow over the next few quarters and for fiscal 'twenty. Four there has been times in these models, where we have the strong cash flow quarters that are followed by reversals. So I'm just wondering on the sustainability of cash flow from here. Thank you.
Thanks for the question Adam.
So programmatically, we will have in place that <unk> hundred one program and what that allows us to do is just have in place during all periods quiet an open to buy at various pricing levels based on what we believe to be the appropriate intrinsic value of the stock the opportunistic aspect of that Adam will be when we see price.
Changes in our stock and our ability to take advantage of that we will.
So that will be more of a case by case and thereby de decision in the second half.
Thinking of the cash flow and timing.
Quarter quarter, one we were at 26 days quarter, two we improved that to 24 days. So good improvement that was expected seasonally but also at the same time.
Did see some structural improvement that we think will hold does now we look for Q3, our expectation is for us to come down and improvement of probably about one cash day and then Q4.
Based on our comments about the seasonality recovery of 8% sequentially, sometimes that does consume working capital it's difficult to tell today, but still allows us to have confidence to achieve the one.
Billing plus cash flow for for 'twenty, three and invest.
Increase in the second half of share repurchases by $100 million and then your question about going into 'twenty. Four we have said in our Investor day in along the last couple of quarters that we still feel that that medium term target of being.
Able to generate free cash flow of $1 5 billion is still reachable and attainable.
I do think that coming out of 'twenty, two we were quite elevated on inventory.
I think we acknowledge that and that we would expect some of that inventory to unwind we have experienced that to date for the first half. We do expect that to continue continued to improve in the second half of 'twenty three.
Okay, and then into 2000 and for November .
Seeing that you're under two times net leverage you've got over $5 billion of liquidity.
If cash flow is going to continue like this I would imagine the capital return story doesn't end here, but don't want to put words in your mouth.
Thats correct and as you know, it's not always linear the indication of us increasing our share repurchases not indicative of anything we're doing on the M&A front. So we're always going to take that with a balanced approach.
Thank you.
Thank you Adam.
The next question is from Michael <unk> with Goldman Sachs. Your line is open.
Hey, good morning. Thank you for the question I just have one on SG&A.
Given that opex of 65% variable I was surprised to see it up year over year I know you mentioned the <unk>.
<unk> strategic growth areas that drove the elevated SG&A in the quarter I was just wondering if you could talk a little bit more about that.
What areas of growth were most impactful and then could you talk a little bit about the glide path towards coming back to that three 5% to 4% range in the back half is it.
Evenly split more back weighted towards the fiscal fourth quarter, how youre thinking about that thank you.
Yes. Thanks for the question so first.
I'll handle the first part and then Marshall can.
Assist on the glide path of the back half here so first.
When you think about areas of investment.
Pointing towards the high growth technologies.
This would be cloud analytics cyber security and then our hyperscale infrastructure business and you've been noting that.
Those have been performing quite well for us over time, so that's sort of the first data point the second data point is.
When we think about our SG&A structure, there clearly has been an impact with inflationary measures across.
Most of the.
On the SG&A category.
Whether it be labor and logistics centers or whether it be some of the.
Logistics and supplies like activities, which exist within it within that framework as well.
Yes.
That being said.
We've done a.
Pretty good piece of work to think about.
Where were headed for the back half of the year and in FY 'twenty four and have realigned if you will but the trajectory of our spend to be consistent with that.
We're getting us back to an overall business profile and ill, let Marshall comment a little bit on the yeah. Thanks, Rich. So just a few things to add as we said on our prepared remarks.
The near completion of our ERP in North America.
Certainly enables us to drive a lot more opportunity for efficiencies across all areas and thats not only just within SG&A, but thats margin optimization pricing scale et cetera. So I think that gives us additional confidence to know that deployed onto one system. We've got an opportunity to drive it down specifically to the $50 million.
And cost optimization.
We see that play out in general terms as we will start to feel that benefit in Q3.
Roughly around $10 million of incremental SG&A takeout, we think there'll be another $15 million or so in Q4 incremental.
That 25 for the rest of 'twenty three and then for fiscal 2000 for Q1, we expect the incremental.
An incremental $25 million in Q1, so that's how we expect it to play out.
I think just as Richard said Theres lots of things, we need to consider that will be continued investments going forward higher SG&A as it relates to our high growth technologies will continue to be important to US you probably experienced and seen in the past when we have some heavier SG&A typically that bears fruit two to three quarters down the road in terms of.
Better returns higher margin and cash flow coming back in and through the door. So that's how we expect it in terms of the glide path for Q3 will probably be right around 4% in Q3 for SG&A as a percentage of revenue and then we would expect to be between call. It three six to three eight.
As we as we enter Q4.
Okay. Thanks, rich. Thanks, Marshall, that's very helpful. I'll hop back into the queue. Thank.
Thank you. Thank you.
The next question is from Joseph Cardoso with Jpmorgan. Your line is open.
Hey, good morning, and thanks for the question just one from me as well.
As it relates to your business how are your Aaas in high growth technologies business, just curious to get some more granularity around the trends that youre seeing there.
Specifically is that.
There was some broader concerns from the investment community around maybe seeing a pullback as you kind of.
Digest some of the backlog in that business I guess can you just touch on whether you're seeing.
<unk> tracked ahead of your expectations 90 days ago.
Are you seeing any.
Pull back in terms of current demand trends, our order trends I'm, just curious to see how that business is tracking relative to your expectations 90 days ago.
Yes, a couple of things thanks for the question Joe So so first.
As has been growing at a reasonably robust pace.
There is for sure it's benefit growth rate has benefited from some backlog run off.
We are starting to reach sort of profile levels of of backlog generally speaking there are some very isolated.
Isolated pockets, so the way I kind of see it just.
To give you a trend here is I think that the <unk> growth rate.
Well, we will be coming down, but there'll still be growth for the back half of the year.
But at a bit of a lower growth rate. So if you think of the dynamics of our business, we talked about lesser declines in.
The PC ecosystem moving forward I think we then have.
Lower growth rates moving forward and the <unk> business and then as well the back half of last year, we had a very strong type business and we talked about the lumpiness of hive.
<unk>.
Over over the.
<unk> annual periods, and we think that hi will.
Have have less growth.
Perhaps decline as well in the back half of the year. So there is a changing dynamics going on within the portfolio I want to be clear that I think all of these are within the dynamic of the macro and as we move forward in the macro gas gets healthier I believe that the overall business.
All boats rise so to speak.
When we find ourself.
At that point and as we stated in the commentary.
The trends here recently have been I think quite positive relative to the macro.
They could ebb and flow as well so we talked about.
Clarity on the debt ceiling, we talked about.
The concern around the banking crisis or the banking issues.
And kind of.
Reducing quite significantly and then there is the continued narrative around.
<unk>.
Unemployment being low in GDP continuing to chug, along so we'll see how all of that plays out but longer term, we absolutely are confident that.
We'll we'll realign with its sort of normal growth attributes once we've cleared through this macro.
I appreciate the color rich I'll jump back in the queue. Thank you.
The next question is from Shannon Cross with Credit Suisse. Your line is open.
Thank you very much I wanted to ask about the revenue guidance.
If pcs are getting a bit better.
And yet at the low end revenue would be lower like what went into I guess the range that you provided in terms of your thinking and then I have a follow up thank you.
Hey, Shannon.
I'll go first.
<unk>.
Typically what we do every quarter is do a bottoms up review and best buy product by by region by leader no different than what we've done in the past so as we pull that together we have a range of outcomes that typically we then take and rich and I will look at that does get a sense of.
The range of our guide and that's really how we formulated it's no different than we did articulate last quarter that it was a little bit more difficult.
Given just the uncertainty that we saw in the second half of the year. So it very much is an informed perspective.
You can appreciate the Americas dynamics are different in Europe .
And those are different than high growth in.
And those those those impact.
Clearly the high growth continues to be the leader.
And endpoint now it's a matter of trying to determine how that recover so rich if you want to add anything yes Shannon.
I think sequentially here for a second first of all just a reminder, that we had a very strong back half of the year from memory, we had a 14% and 15% growth respectively, but if you think about it sequentially.
I think the dynamic is lesser of a decline in PC than less.
Lesser of a growth rate in <unk>.
As sort of the backlog piece that fueled a little bit extra revenue growth.
Is coming down a little bit and then clearly.
Hi.
Add back the back half of last year had some really big numbers. So.
Really.
Our remixing across the portfolio of those revenue dynamics that leads to the range of the guide that Marshall has provided.
Okay. Thank you and then.
I'll, probably remiss not to ask about AI curious can you talk about what youre thinking internally while player in Warrington here are customers and how maybe that can grow as part of some of your more solutions oriented sales. Thank you.
Yes, sure I actually read this morning a piece.
And one of our vendors that was released by you and your team. So thanks for those insights.
That's what I'll call on that.
So.
Three buckets here, so first and core distribution.
And I'm thinking now in terms of offerings right.
We fundamentally believe that we're going to see many.
Offerings now AI infused so.
There is not.
Obviously, there will be applications out there that might sell sort of AI as a service, but we kind of see the embedded AI is being.
Something that will lift the entire offerings portfolio almost end to end and you had the piece talking about how it might influence PC ecosystem. So as we move through time, I think offerings become more intelligent more robust and likely will have an influence on some of the asps as we move.
Through time second from our perspective, we all know that the hyperscale or is are going to be.
Building out a pretty big tranche over time of.
I'll call it AI tuned or AI.
Optimized.
Servers, and storage and networking and the entire the entire sort of data center category, So that will be an opportunity for us.
Two.
Compete.
To continue to win business within that category, and lastly from a operations perspective and productivity.
Obviously, we've been on a journey around machine learning and automation and now we get a little bit supercharged with.
What I'll call more advanced AI capabilities.
Candidly, we're we're really learning to determine.
Where the.
The best.
Pursuits are for our operation.
In terms of using that new technology.
Within within our <unk>.
Franchise overall.
Those are the three sort of categories that we think about AI.
Great. Thank you very much thank.
Thank you.
The next question is from <unk> Bhattacharya with Bank of America. Your line is open.
Hi, and thank you for taking my questions My.
My first question is regarding the pricing environment.
Are you seeing suppliers lower prices as commodity costs have come down.
And are your own customers buying leaner configurations, given the uncertain macro so can you give us your thoughts on your Asps.
Yes, so <unk> to be clear I am going to.
Address the asp's predominantly within the PC ecosystem space I mean, obviously when you get into data center the.
Following the configurations in the ebbs and flows it makes it a bit more difficult, but actually asps were.
Up in the quarter.
Which.
Which.
Might be a bit of a surprise this is for our business, but we see asp's actually increasing so therefore, I think we see inflationary impacts price, then and or Richard configurations.
And at the same time, the volume declines for a little bit larger to get us through sort of the average unit revenue if you will.
So asps are holding up.
However, within that higher ASP.
Sort of band there clearly is.
Continued.
Level of price competition that is healthy.
So that's how I would describe it is there is definitely very healthy price competition out there, but at the same time the asp's.
<unk>.
<unk> gone up a little bit on a year to year basis Marshall I don't know if you have anything to add just some color sequentially <unk>.
Rich is right in terms of the ASE, holding and improving year over year, clearly down and the PC ecosystem, but sequentially we saw.
Overall revenue improve and so that was one of the reasons. We also felt like there was some form of recovery underway. So just wanted to highlight that from a quarter to quarter perspective, we are starting to see the endpoint solution grow for Americas and Europe .
Okay. Thanks for the details there.
My follow up let me ask you a question on on revenues and specific to the Americas region.
This quarter, you had revenues declined 10% year over year in constant currency.
Can you give us your view on North America.
Spending growth this year and 2023 and I think you said endpoint solutions, you expect to trough in fiscal <unk>.
Let me ask you a little bit more detail on that I mean, why do you think <unk> is the trough why not <unk> I mean, what is giving you confidence in that <unk> will be the trough and the last part of that question is.
<unk> solutions I think you said would be slower in the second half is there any way to quantify that is that just because of tough year on year compares or how much floor versus the first half year on year growth versus the second half any any color you can guess thanks.
<unk>. Thank you for the Multipart question, Let me, let me see if I can.
I'll handle each one of those are experienced in.
In the Americas is that the challenge is clearly within the PC ecosystem and for one reason or another it has been.
More magnified than in the rest of the world that part of that is because.
Europe as an example, we have a broader.
Endpoint.
Segment, which is inclusive of mobile phones, which we don't have within the Americas so that.
That would be number one number two is.
As it relates to advanced solution and the slower growth as we move through I see it as predominantly.
The backlog.
Moving towards the profile.
And not having the increment on the revenue.
We had in I'll call it the last four quarters with.
Backlog assisting to provide a next or Joel too.
That growth.
Then as it relates to Pcs and why we see lesser of a decline and we think the trough would be.
And we say in Q2 slash Q3.
It is truly because number one the inventory clearly has been digested across the supply chain number two is we're beginning to see.
Real stability.
In that backlog.
Overall.
Then the third part is.
We all read within the industry about the aging profile of the of the installed base out there and some of the benefits of the new Oss, which are available in the market.
And then some of those <unk> as we now have an exploration date sometime in calendar 'twenty five so generally speaking the install base starts to move when it gets aged and when there are our productivity and mostly security benefits with some of the new offerings and then that.
That coupled with the exploration date.
And Oh by the way the compares begin to get easier. So all of those things together are and then discussions clearly with vendors and customers all those things together it would lead us to sort of feeling as if the trough is Q2 Q3.
Got it thanks for all the details.
Hopefully I answered all your questions.
Yes, you did thank you okay. Thank you.
The next question is from Keith <unk> with Northcoast Research Your line is open.
Good morning, guys I appreciate the opportunity here.
Richard maybe perhaps touch a little bit based on the sales cycle. We're hearing a lot from the resellers and competitor or is that net sales. So sales cycles, just elongate across the board, but really don't think we've heard too much of that here from the discussion here. What are you guys seeing that in terms of for the quarter and for the rest of the year expectations.
So.
I think as part of the.
The the.
The decline that we've seen in PC and then moving forward to the lesser declines and then.
The growth rates that we talked about and then.
Even within our high business, we have tough compares in the back half of the year.
And no debt.
We'll be challenged from an overall sales perspective, all of these things have multiple factors Keith I think it starts with the macro and I talk about the macro and Marshall has a couple of time in what is.
Certainly one of the one of the outcomes of the macro are elongated sales cycles more more.
Scrutiny, if you will around the purchase more on.
Absolutely limiting the purchase to what's needed now as opposed to what can be foregone for a period of time, so I didn't.
Maybe I didn't directly state that the protracted cell cycle time.
As an outcome, but certainly I see it as tied to sort of the macro and natural and natural reaction given the macro.
Great I appreciate it and just as a follow up with the additional cash flow. That's available is the reduction of the business.
And putting that capital to use how do you guys see the M&A environment today and your opportunities available to you.
So.
I think.
M&A is something that we always have an active pipeline on.
And we continue to.
Engage on that pipeline things come in things fall off.
I would tell you that our M&A interests are are pretty consistent with.
<unk>.
What they have been over time.
As you well know within this industry.
There is.
The ability to grow organically.
Predominantly driven in the.
The new.
Technology areas.
There is the ability to grow inorganically and over the continuing continue I'm sorry.
I think that both of those tools will be utilized.
In order to.
Continue to drive our enterprise.
Great. Thank you guys. Thanks.
Thank you.
The next question is from that sharing with Stifel. Your line is open.
Yes, Thank you and good morning, I had a question on the gross margin.
Marshalls the implied gross margin guide is roughly six 7% so down 20 basis points sequentially you talked at the end of your comments Youre opening comments about.
Hi, I'm, having some I guess some catch up in some pricing with customers in that it was sort of a one time.
The positive impact so could you talk about expectations for gross margin, particularly as you get into the back half of the year with advance solutions on slowing and client devices picking up and particularly your consumer business also picking up seasonally should we expect gross margin to be down again in Q4.
Yeah. So I'll address the second half and then rich certainly can can chime in so we think the gross margins probably come down slightly most of that I think Matt is just due to seasonality as you as you know quarter four tends to be a little bit more <unk> weighted.
And with that it tends to have a little bit lower gross margin profile.
But you are right.
Had some one time items that won't repeat themselves in Q4 for hive and that definitely did benefit last year's quarter four margin gross margin, but generally said the majority of the uplift. If you think about the year over year compares on gross margin are primarily due to the mix shift between Aaas and Aas.
And also the increased amount of gross versus net that's taking place within the enterprise, we roughly have about a 3% higher grossing of those revenues year on year. So it does actually.
Artificially or mathematically increase the margin profile, while gross profit dollars stay relatively consistent or constant relative to overall revenue volatility.
Yeah.
Okay, I have nothing to add I think Matt.
Marshall et cetera.
Marginally with the anticipation would be.
A sequential down couple.
A couple of basis points, along the way.
But fairly stable I think.
In Q4, then.
Yeah.
Okay. Thank you and then.
Other question on macro and what Youre seeing.
You talked about rich about.
The enterprise being the weakest end market segment in SMB.
Holding up relatively well.
Is that your expectation.
<unk> SMB maybe lagging.
Cycle.
And they may get more cautious in terms of spending as you get into next year any insight or any visibility there.
Yes so.
Clearly I think for the first half of the year, we've seen this trend when we talk about.
The <unk>.
I will say the larger customer set.
Where.
We see.
The biggest challenges in SMB and MSP.
Offering a better outcome as it relates to productivity.
Yes.
I think Matt this differ.
Difficult question to ask answer and I'll tell you why that part of this is because I believe there is a.
Disproportionate consumption of new technologies, predominantly cloud and as a service based solutions.
Do you follow technology cycles, they hit first and enterprise and then kind of make their way down so.
Think that.
My speculation is the growth rates of sort of cloud oriented things are higher in SMB now than they are in enterprise because there is a bit more of a saturation. So I think there is a benefit relative to the portfolio consumption in SMB.
Kind of following.
Following the evolution, if you will some of these newer technologies being consumed there and then.
You get into what happens with the macro and we find ourself in a situation where when smbs.
Might be thinking of slowing that we have sort of an improvement in the macro so it's sort of those things that might allow for a better transition within SMB and MSP as opposed to what we've seen in the I'll call. It the larger end customers.
Okay, great and if I can squeeze in a third question just regarding your comments on high in the fact that that's going to be weaker in the second half could you just talk about I mean, I know that there is lumpiness in that business, but how you are positioned sort of as you get past this digestion period.
This slow period, how youre looking going into next year.
Yeah.
Hey, Matt.
So yes.
It's a tough compare the second half of 'twenty two with exceptionally strong.
For <unk>. It was contributed four three equal reason.
<unk> themselves continued to show strong demand in our distribution network enabled us to.
Two to perform those type of services for our Hyperscale customers and then spare parts et cetera. It was just.
Extremely healthy in the second half so it just makes it a really tough compare sequentially. If you think about the behavior of five from Q1 to Q2, good quarters strong good margin profile those expect to come down a little bit in the second half I think a lot of it is just connected to the overall thoughts of.
Hydro technology still having above average compared to our core growth rate that will continue but it should abate I think to your question about when does that digestion period, and we think we exit 'twenty three and find ourselves in 'twenty four kind of back in a normal growth rate pattern, it's hard to deter.
And if thats, a 5% growth 10% growth, but we do think it's positive.
I will just reiterate the second half of this year, we expect tied to be down year over year, primarily just due to the tough compares yes, so and I would summarize marshall's comment very simply by saying that my point of view is.
The Hyatt ebb and flow here is strictly related to the macro.
We're executing quite well in that business, we are participating in a lot of new design opportunities for the future.
The business is executing solidly and.
Think that.
This is a sort of more of a macro as opposed to anything else in the execution engine is quite strong and then the final thing I'll say, which we think quite often.
Matt is that if you look at the annualized trailing 12.
Performance of high for the last three years, they continue to show growth in topline and bottom line.
Okay very helpful. Thanks, a lot.
Okay.
Our final question today is from Ashish <unk> with RBC capital markets. Your line is open.
This is Patrick Jackson on for Ashish. Thank you for taking the question.
In Europe , it's great to hear about the continued share gains could you share a bit more how trends have developed across advanced solutions endpoint in that region and for your mobile distribution business in Europe that you mentioned earlier could you talk about how demand has trended in the quarter and what you've seen from a supply chain perspective. Thank you.
Sure.
It's been an ongoing narrative for our business that.
The impacts of the PC ecosystem, our endpoint solutions have been more significant in the Americas versus Europe .
Although Europe has experienced declines in endpoint solutions.
Have have been.
Much lower declines than.
In.
In the.
The Americas as it relates to.
<unk>.
The.
Mobile phone piece.
It.
It has been performing reasonably well we have.
Two providers that we are engaged with over there and the <unk>.
I'd say the demand has been reasonably solid.
Overtime, and we wouldn't anticipate any.
A major change in that trajectory moving forward.
And then lastly from an advanced solutions perspective.
The benefit of good growth in advanced solutions is sort of consistent globally.
Where each one of the regions.
Are seeing that trend, so I wouldn't say that it's out.
Out of the norm.
Europe versus the rest of the world there.
But I would say just being a little bit repetitive that.
In the first half of the year.
The outsized declines in PC ecosystem have been within the Americas.
Thank you.
Thank you our question and answer session I'll turn it over to <unk> for any closing comments.
So first thanks to all of you for attending the call today in closing.
I want to thank our co workers around the world for their persistence and can do attitude and staying focused.
Making sure that we keep at the forefront of the success of our vendors and customers, which we rely upon to.
Drive our business moving forward and thanks to all of you for joining and I Hope you have a great day.
This concludes today's conference call you may now disconnect.
Sure.
Okay.
Yeah.
Yeah.