Q4 2023 TD SYNNEX Corp Earnings Call
Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.
Abby: I would like to welcome everyone to the Tvs, The next fourth quarter and full year fiscal 2023 earnings call.
Abby: Today's call is being recorded and all lines have been placed on mute to prevent any background noise.
Abby: After the Speakers' remarks, there will be a question and answer session.
Abby: Okay.
Abby: At this time for opening remarks, I would like to pass the call over to live Murali head of Investor Relations you.
Murali: You may begin.
Murali: Thank you good morning.
Murali: Everyone and thank you for joining us for today's call with me today are rich Hume, CEO and Marshall Witt CFO.
Speaker Change: Before we continue let me remind you that today's discussion contains forward looking statements within the meaning of the federal Securities laws.
Speaker Change: Including predictions.
Speaker Change: Estimates.
Speaker Change: Projections or other statements about future events, including statements about demand cash flow and shareholder return.
Speaker Change: As well as our expectations for future fiscal periods.
Speaker Change: 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 and the form 8-K, we filed today and in the risk factors section of our Form 10-K, and our other reports and filings with the SEC.
Speaker Change: We do not intend to update any forward looking statements.
Speaker Change: 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 8-K available on our Investor Relations website, IR Dot T decent X dot com.
Speaker Change: This conference call is the property of T decent X and may not be recorded or rebroadcast without our permission.
Speaker Change: I will now turn the call over to rich rich.
Rich Hume: Thank you Liz good morning, everyone and thank you for joining us today.
Rich Hume: We delivered solid fourth quarter results with the gross billings at the high end of our outlook range and the significant EPS beat enabled by the continued execution of our business plan.
Rich Hume: <unk> dynamic market conditions.
Our strategic emphasis on high growth technology areas, coupled with our broad technology portfolio allowed us to pivot to margin accretive areas of growth and we saw signs of stabilization with healthy sequential improvement in revenue and gross billings.
Rich Hume: In the fourth quarter.
Rich Hume: For the full fiscal year, we successfully navigated the business environment growing our market share in both Americas and Europe.
Rich Hume: <unk>, our business mix of high growth technologies, and expanding our non-GAAP operating margin to 285% through a combination of mix shift.
Rich Hume: Execution of merger synergies.
Rich Hume: Our business model improved working capital management, and a healthier supply chain conditions enabled us to generate robust free cash flow of $1 3 billion ahead of our original $1 billion target.
Rich Hume: From this we returned over $750 million of capital to shareholders through dividends and share repurchases, representing approximately 60% of our free cash flow for the year.
Rich Hume: This exceeded our 50% target as we Opportunistically increase our share repurchases.
Rich Hume: In total we repurchased approximately six 5 million shares or 7% of shares outstanding.
As Marshall will further discuss we are also increasing our quarterly dividend in Q1 to <unk> 40 per share or a 14% increase compared to the prior quarter.
Rich Hume: Balanced capital allocation and returning capital to shareholders continues to be a top priority for the company as we execute our strategy and drive value for our shareholders move.
Rich Hume: Moving on to our fiscal fourth quarter results.
Rich Hume: From a gross billings perspective, the quarter played out at the high end of our expectation.
Rich Hume: With improving year over year declines in endpoint solutions.
Rich Hume: As expected advanced solutions declined slightly on a year over year basis, given the strong performance in FY 'twenty two enabled by record backlog levels.
Rich Hume: From a regional perspective, the market environment in the Americas continued to show signs of stabilization with improving year over year declines in endpoint solutions.
Rich Hume: Europe performed better than expected and improved sequentially, despite a muted macroeconomic environment.
Speaker Change: A P. J, we continue to see traction in our portfolio build out helping to offset some of the softness in endpoint demand.
Speaker Change: We made excellent progress on our strategic efforts to strengthen our end to end portfolio via new vendor additions, including Workday and meta where we are the exclusive north American distributor for their new suite of business products.
Speaker Change: We also expanded our security portfolio in Europe.
One of our key priorities with the addition of Palo Alto networks full range of cyber security hardware and software products to our offerings in the region.
Speaker Change: Our strong pipeline of new vendors is bolstering our best in class portfolio of over 2500 vendors, something which is becoming even more important.
Speaker Change: As <unk> solutions are increasingly comprised of bundled multi vendor offerings.
Speaker Change: As part of our focus on solutions segregation during the quarter, we launched our I S V acceleration program in North America, which is designed to help independent software vendors of all sizes to grow their businesses by accessing our extensive ecosystem technical expertise.
Speaker Change: <unk> marketing and sales resources.
Speaker Change: We were also honored to be recognized by several vendors with a variety of awards spanning the globe, including being named the global and North American distribution partner of the year by Palo Alto networks.
Speaker Change: We are proud of these distinctions and strive to continue elevating our offerings to help our partners grow their businesses.
Speaker Change: Our ESG goals and initiatives remained front and center during the fiscal year and we recently achieved our second consecutive top score in the corporate equality index, a leading benchmark survey and report measuring corporate policies related to LGBT.
Speaker Change: Q plus workplace equality.
Speaker Change: In addition, we formalized our commitment to disability inclusion at the company through my signing of disability and CEO letter.
Speaker Change: We're looking forward to sharing additional insights regarding our ESG initiatives and progress in our second corporate citizenship report, which we will plan to publish in the first half of the year.
Speaker Change: As we begin our new fiscal year I wanted to provide a bit more color regarding our recently announced executive changes for the organization last week, Patrick Zammit assumed the role of Chief operating officer for <unk>.
Speaker Change: Hello, Patrick continues to report to me and takes on the responsibility for leading our day to day distribution operations executing our business strategy to further drive profitable growth across the company and accelerating our penetration in strategic technologies.
Speaker Change: This will also benefit us further by allowing me to focus on leading our strategic initiatives identifying additional growth opportunities and focusing on relationships with key external stakeholders, including vendors partners and shareholders.
Speaker Change: I'd also like to take a moment to thank Michael Urban President Americas, who has decided to leave the company effective March one.
Speaker Change: His efforts in bringing TD cynics together over the past two years.
Speaker Change: He and his team delivered a very successful merger integration in the Americas, and we wish him well in his next career chapter.
Speaker Change: From a regional perspective, we are in strong position with the continued leadership of Peter old Rock in North America.
Speaker Change: <unk> lots of rainy in Latin America, and Jay Deep Mahoe truck and a P. J.
Speaker Change: All long time industry veterans and we look forward to announcing our next European leader in the very near future.
Speaker Change: With this highly skilled and experienced team, we enter 2024, well positioned to capitalize on the gradually improving it spending market dynamics.
Speaker Change: Looking forward on our outlook for fiscal 2024, we are optimistic that the market headwinds we have experienced over the past several quarters, we will continue to abate as the year progresses.
Speaker Change: Early indications are that the gradual recovery and endpoint solutions will build throughout the year fueled by the resumption of more normalized PC buying patterns.
Speaker Change: This will be balanced by tougher year on year compares for advanced solutions, given the strong growth in the first half of 2023.
Speaker Change: It should position us well for returning to overall growth as we move through the year.
Marshall will elaborate on this later.
Marshall W. Witt: As we think about our strategic priorities for FY 'twenty for a couple of areas of importance I want to touch on our our digital platform capability and advancements in AI.
Marshall W. Witt: Our software and services continue to represent a greater portion of the overall it spending for the industry. We remain focused on augmenting our capabilities in these areas help customers assemble the critical solutions that their end users require.
Marshall W. Witt: To do this we will continue investing in and building out our digital platform capabilities with the aim to provide customers with a one stop shop, where they can easily access unified multi vendor offerings.
Marshall W. Witt: AI is another clear growth vector as we continue to look ahead in our industry we.
Marshall W. Witt: We have invested for several years in this space via our data analytics practice. This created the foundation for our AI strategy and our decade plus of experience in data analytics puts us in a leadership position relative to this new exciting market opportunity.
Marshall W. Witt: We have built a state of the art vendor portfolio, starting with leading providers in the on Prem and off from infrastructure.
Marshall W. Witt: <unk> area required to run and trained AI models.
Marshall W. Witt: Many of our leading software vendors have announced or released embedded AI capabilities in their product lines and we are working with industry leaders.
Marshall W. Witt: Our AI foundational models to accelerate the development of use cases across our ecosystem.
Marshall W. Witt: In addition, we will leverage our strong relationships with PC Oems to support and enable the introduction and growth of AI enabled Pcs overtime as well as our relationships with key component suppliers and customers.
Marshall W. Witt: In addition to our previously announced destination AI program, we are partnering with others in the ecosystem such as our collaboration with Microsoft.
Marshall W. Witt: We launched a global AI enabled journey for Microsoft 365, co pilot last month.
Marshall W. Witt: We are also working with several other strategic vendors to capitalize on our destination AI framework to accelerate the adoption and use of new AI product set.
Marshall W. Witt: In closing we believe we have the right strategy and are well equipped to continue navigating the ever changing it landscape, while positioning ourselves to capitalize on new and emerging growth opportunities we.
Marshall W. Witt: We are committed to continuing to create shareholder value with a keen focus on execution and healthy capital returns.
Marshall W. Witt: Lastly, I want to take a moment to extend my sincere thanks to our customers and vendors, who we are privileged to help achieve great outcomes with technology everyday.
Marshall W. Witt: And to our 23000 coworkers around the world who enable this important work.
Marshall W. Witt: I will now turn the call over to Marshall So that he can provide additional details on our financial performance and outlook.
Marshall W. Witt: Marshall.
Marshall W. Witt: Thanks, Rich and good morning to everyone on today's call our fiscal 'twenty three full year results illustrate the power of our business model broad technology portfolio and the progress we've made in positioning ourselves as a leader in the high growth technologies of cloud security data analytics and AI.
Marshall W. Witt: Despite a challenging market environment due to industry wide reductions.
Marshall W. Witt: And demand for PC ecosystem products, we demonstrated continued strength across advanced solutions.
Marshall W. Witt: High growth technologies.
Marshall W. Witt: And grew both our gross and operating margins for the full year.
Marshall W. Witt: The resiliency of our business model helped to offset some of the pressure from the reduced revenue and.
Marshall W. Witt: Our businesses responded appropriately by acting to align our costs to the changes in volume and mix.
Marshall W. Witt: This enabled significant free cash flow generation and capital return to shareholders.
Marshall W. Witt: Moving to our fiscal fourth quarter performance as Rich mentioned, we had strong gross billings in Q4 and.
Marshall W. Witt: And importantly saw early signs of stabilization in it spending with lesser year on year declines and endpoint solutions.
Marshall W. Witt: Advanced solutions faced tougher compares given the strong performance last year when backlog levels are still elevated.
Marshall W. Witt: Fiscal Q4 total gross billings were $19 7 billion down 6% year over year.
And at the high end of our outlook range driven by stabilization in the Americas and outperformance in Europe.
Marshall W. Witt: Net revenue was $14 4 billion down 11% year over year and.
Marshall W. Witt: And near the midpoint of our outlook range.
Marshall W. Witt: Gross to net revenue adjustments were larger than expected due to a shift in business mix and the migration of our high customer to a consignment model.
Marshall W. Witt: As a reminder, this migration is due to certain components transitioning to a customer owned procurement model.
Marshall W. Witt: While this has a negative impact to our net revenue it does not materially impact operating profit for.
Marshall W. Witt: For the fiscal fourth quarter. This change impacted net revenue negatively by $270 million.
non-GAAP gross profit was $1 2 billion and non-GAAP gross margin was seven 7% up 44 basis points year over year.
Marshall W. Witt: As we continue to see a positive effects of a richer product mix and our progress in expanding high growth technologies, which continued to represent more than 20% of total gross billings for both the quarter and the full year.
Marshall W. Witt: Total adjusted SG&A expense was $592 million up $10 million year over year, and up $15 million quarter over quarter, which was expected given the sequential growth in gross billings of $1 billion.
Marshall W. Witt: non-GAAP operating income was 427 million and non-GAAP operating margin was approximately 3%.
Marshall W. Witt: non-GAAP interest expense and finance charges were $66 million 4 million better than our outlook and approximately flat quarter over quarter.
Marshall W. Witt: The non-GAAP effective tax rate was approximately 22% better than our forecast of 24% primarily due to the mix of our business within certain regions.
Marshall W. Witt: Total non-GAAP net income was 286 million and non-GAAP diluted EPS was $3 13.
Marshall W. Witt: 23 above the high end of our guidance range due to a combination of better than expected performance on gross billings profitability interest expense and taxes as well as higher share repurchases as a reminder, non-GAAP diluted EPS for the fourth quarter of fiscal year 'twenty two was $3 44.
Marshall W. Witt: But the year over year comparison for EPS is impacted by 33 of high margin recoveries and fiscal fourth quarter of 'twenty two.
Marshall W. Witt: Now turning to the balance sheet.
Marshall W. Witt: We ended the quarter with cash and cash equivalents of $1 billion.
Marshall W. Witt: And debt of $4 1 billion, our gross leverage ratio was two three times and net leverage was one seven times in line with our investment grade credit rating and approaching our target of two times gross leverage ratio.
Marshall W. Witt: Accounts receivable totaled $10 3 billion up from $8 9 billion in the prior quarter and inventories totaled $7 1 billion down from $7 5 billion in the prior quarter.
Marshall W. Witt: For the fourth quarter net working capital was $3 3 billion and the cash conversion cycle was 23 days both flat from Q3.
Marshall W. Witt: Cash from operations in the quarter was $211 million and free cash flow was $168 million.
Marshall W. Witt: In total we generated approximately $1 3 billion and free cash flow in fiscal 'twenty three.
Marshall W. Witt: Ahead of the $1 billion target, we guided to at the beginning of fiscal 'twenty three.
Marshall W. Witt: We returned $374 million to shareholders in the quarter, including $343 million via share repurchases and $31 million through dividend payments for the full fiscal year, we returned $751 million to shareholders of which $621 million was through share repurchases compared to 112.
Marshall W. Witt: $5 million in fiscal 'twenty two.
Marshall W. Witt: We currently have approximately $396 million remaining under our share repurchase authorization.
Marshall W. Witt: For the current quarter, our board of Directors has approved a 14% increase to our cash dividend and 40 per common share, which will be payable on January 26, 2024 to stockholders of record as of the close of business on January 19th 2024.
Marshall W. Witt: Moving now to our outlook for fiscal first quarter, we expect gross billings of $19 billion to $20 billion, representing a decline of 3% on a year over year basis at the midpoint.
Marshall W. Witt: We expect total revenue to be in the range of $14 billion to $14 7 billion, representing a decline of 5% on a year over year basis at the midpoint our.
Our guidance is based on a euro to dollar exchange rate of one point online.
Marshall W. Witt: non-GAAP net income is expected to be in the range of 232 million to 277 million and non-GAAP diluted EPS is expected to be in the range of $2 60 to $3 10 per diluted share.
Marshall W. Witt: Based on weighted average shares outstanding of approximately $88 4 million.
Marshall W. Witt: Interest expense is expected to be approximately $66 million and we expect non-GAAP tax rate to be approximately 23%.
Marshall W. Witt: Additionally, I wanted to highlight that effective next quarter, we will begin providing some additional disclosures to enhance our reporting to investors.
Marshall W. Witt: And other stakeholders starting in fiscal Q1, we will provide more clarity regarding our gross billings net revenue and gross profit for edge solutions and advanced solutions.
Marshall W. Witt: Edge solutions, which we previously referred to as endpoint solutions will include Pcs peripherals mobile print and other devices, including <unk>.
Marshall W. Witt: Advanced solutions will include Hyperscale infrastructure cloud servers networking storage and software our reportable segments will continue to be based on geographies of Americas, Europe and APG.
As we think about the full fiscal year for 2024, we currently expect non-GAAP gross billings to be approximately flat year over year in the first half of the fiscal year with expected growth of mid to high single digits in the second half of the fiscal year.
Marshall W. Witt: We expect to generate approximately $1 2 billion in free cash flow for the fiscal year and we remain committed to our medium term capital allocation targets, returning 50% of free cash flow to shareholders via both dividends and share repurchases, while remaining opportunistic depending on market conditions.
Marshall W. Witt: In closing, we successfully navigated the volatile market conditions in fiscal 'twenty, three and are well positioned to capitalize on our return to growth in fiscal 'twenty four with a focus on margin expansion robust free cash flow generation and our commitment to continued healthy shareholder returns.
Marshall W. Witt: With that we are now ready to take your questions operator.
Thank you.
Marshall W. Witt: And as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Marshall W. Witt: We ask that you. Please limit yourself to one question to allow time for other participants to ask their questions.
If there is a remaining kind you are welcome to re queue with additional questions.
Marshall W. Witt: Yeah.
And we will take our first question from David <unk> with UBS. Your line is open.
David: Great. Thanks, guys for taking the question. So maybe it's a question for both both the view in terms of how Youre thinking about fiscal 'twenty four we appreciate the color on sort of the gross billings commentary for the first half in the second half.
David: Can you kind of help us understand a little bit more how you are thinking about maybe at a higher level sort of what's underpinning that spending pattern from an it spending backdrop.
David: Whether you want to talk about it from an edge solutions perspective, new category or advanced solutions can you kind of help us think about how youre thinking about the broader market and in your position and your ability to kind of grow faster than the market I would assume is kind of embedded in your outlook. So maybe we'll just start there if that's okay. Thanks.
Rich Hume: David Good morning, and thanks for the question this is rich.
Rich Hume: Yes.
Rich Hume: You.
Rich Hume: Think about the evolution.
Rich Hume: Throughout and then the backend of Covid, obviously last year at about this time in the PC ecosystem set of products really went into a pretty significant decline at the same time backend of Covid, there was pent up demand and backlog for advanced solutions products.
Rich Hume: So as we come into this fiscal you have an easier compare within the PC ecosystem, you have a more difficult compare in the advanced solutions.
Rich Hume: Because of the cycles that had had transpired in the past.
Rich Hume: No.
Rich Hume: Our point of view is when we think about the first half that there'll be some level of growth in PC ecosystem, but the advanced solutions will face a bit of a more challenging compare.
And then when we get to the back half of the year, we believe that.
Most of the reps if you will have have concluded in that.
Rich Hume: Both of those major segment will have growth attribute.
Rich Hume: And that's that's what has led us to the guide of.
Rich Hume: Kind of flattish in the first half with mid high single digit in the second half and yes of course.
Rich Hume: Its always our intention too.
Rich Hume: Do better than the market in fact in the prepared remarks, we talked about in the.
The Americas theater, as well as I'm, sorry, the North America theater as well as the European Theater that we had gained some market share. So Marshall I don't know if you have anything to add yes, David just some more color when.
Marshall W. Witt: When we do our assessment for quarter, one and for the full fiscal 'twenty four we come at it from a bottoms up perspective, so think about it for all the countries that we do business in each one of those leaders looks at what that is for their territory. So theres a country assessment and within that there is certainly a vendor and a customer comparison as well as third party.
Marshall W. Witt: Industry data just to triangulate, where we should land.
Speaker Change: And then with that as Richard said, we certainly will look at the GDP.
Speaker Change: The overall trajectory of what that looks like by market. What it spend correlation is expected to be relative to GDP and in our ability to outgrow that.
Speaker Change: Hey can I just ask a follow up I said in the prepared remarks, you talked extensively about AI.
Speaker Change: And obviously that being a contributor to the business.
Speaker Change: How should we think about.
Speaker Change: AI across the business, let's say over the next year or two and how is that factored into your outlook. This year I guess I mean, I would imagine there's a lot of discussion by chipmakers Oems et cetera that let's say on the endpoint or edge solution market you'll.
Speaker Change: You'll see stuff at the latter half of I guess 2020 for calendar 'twenty four I should say and just would love to kind of get your thoughts on how you think that kind of shapes through the year from an AI perspective.
Speaker Change: Yes, so David I would.
Speaker Change: Use the cloud as a parallel or an analogy here. So obviously there was a lot of.
Speaker Change: Marketing and and fanfare the call it the hype curve I think IDC calls it the hype curve at the front end.
Speaker Change: Clearly this is a real technology, that's going to bring a lot of benefit but the.
Speaker Change: The plans are defined and there is a bit of a gap until.
Speaker Change: The reality starts to flow through the market.
Speaker Change: From AI perspective, there will be a lot of AI embedded in existing offerings. So im sure there is going to be.
Speaker Change: A fairly comprehensive discussion on how to count AI as there was plowed back in the day.
Speaker Change: The emergence of new AI capabilities.
Speaker Change: What comes to mind is AI servers et cetera. So.
Speaker Change: Right now certainly there are products and market that our AI enabled as we move through time, there'll be more and more and more.
Speaker Change: We had incorporated that.
Speaker Change: Thoughts of AI into our <unk>.
Speaker Change: Our forecast for the full year.
Speaker Change: But as you as you had indicated.
Speaker Change: It's more of a.
Speaker Change: In early ramp what the expectation that there'll be more robust demand as we move through time now the only other thing that I would tell you is that I believe is the reality is that this isn't just an incremental on top of whatever it spending might have been planned prior to AI every company.
Speaker Change: Lids within an envelope they decide what that budgeted envelope is and there might be some expansion, but this won't be just.
Speaker Change: A new market segment that provide a.
Speaker Change: A complete on top increment, but rather there'll be some re prioritization that happens relative to how how customers spend their dollars moving forward. So yes, I think it will have a positive effect that I see growth, but again it won't be a complete increments.
Speaker Change: Alright, Thats helpful. Rich thanks, guys.
Speaker Change: Yes.
Speaker Change: And we will take our next question from Vince Colicchio with Barrington Research. Your line is open.
Vincent A. Colicchio: Yeah rich.
Vincent A. Colicchio: Curious how you thank you.
Vince Colicchio: Sure.
Vince Colicchio: Your share position performed in all your geographies this quarter.
Vince Colicchio: As we have.
Vince Colicchio: <unk> reported in the past.
Vince Colicchio: When we think about share we have really good insight relative to North America and Europe, but.
Vince Colicchio: Really don't have visibility yet there is a service that is emerging in Europe.
Vince Colicchio: As it relates to the quarter, our information, we'd say, we lost a couple of tenths of.
Vince Colicchio: Market share tenths of 1% if you will.
Vince Colicchio: <unk>.
Vince Colicchio: The aggregated basis, while having grown share.
For the full year.
Vince Colicchio: And then could.
Speaker Change: Could you provide a bit more color on what gives you confidence in that.
Speaker Change: Improvement of endpoint solutions throughout the year.
Speaker Change: Yes, so yes.
Speaker Change: Marshall talked about the.
Speaker Change: We have a very comprehensive process that we go through.
Speaker Change: Our indicators and talking to customers vendors working with our own teams are that yes.
Speaker Change: Yes, we will see growth.
Speaker Change: Moving forward, an endpoint and in fact.
Speaker Change: Within our Q1 guide we anticipate.
Speaker Change: Some growth within the endpoint so we feel good about that.
Speaker Change: While we have a moderating situation and advanced solutions based on the commentary that I provided earlier.
Speaker Change: Okay.
Speaker Change: When you talk about growth in that point, you're talking about sequential I suppose.
Speaker Change: Year on year.
Speaker Change: Really good to hear.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: We will take our next question from <unk> Bhattacharya Bank of America. Your line is open.
Speaker Change: Good morning.
Bhattacharya: Thanks for taking my questions my congrats to Patrick on the new role.
Bhattacharya: Thanks for giving guidance on billings I was wondering if you can talk a little bit more about the impact of this mix shift to more netted down items.
Bhattacharya: Specifically what year on year impact to revenues and margins is embedded in your fiscal <unk> guidance and if you can talk about how we should think about this.
Bhattacharya: For fiscal year 'twenty four.
Bhattacharya: As this shift happens should we expect this difference between gross billings and revenue to continue to expand throughout the year.
Speaker Change: Thanks for the question <unk>. So for Q1, we gave a guidance of gross billings I think around 3% down on net around five <unk>.
Speaker Change: <unk>, if you think about the overall gross versus net momentum if you want to call. It that we were around 22% to 23% of <unk>.
Speaker Change: Netted down revenue in fiscal 'twenty, two that is gone now to 25% to 26% and 23.
Anticipate that will probably continue into 'twenty four it's hard to call that beyond the first quarter in terms of the relationship.
Speaker Change: But for US the mix shift is a reflection of how assets played against US I would say that as we think about next year.
Speaker Change: And the.
Increased expected performance of Aes, there may be a shift or a stabilization of that gross versus net maybe it sticks around 26%.
Speaker Change: It's quite possible just given what we're seeing behavior wise.
Speaker Change: Our thoughts in terms of forecast is as we get into the year there could be a more balanced growth rates for both the FNF, whereas in the past there has been kind of a predominant es growth and then that takes a backseat in AF comes in and take the front seat. So I would use a 25% to 26% adjustment for <unk>.
Speaker Change: Four.
Speaker Change: Then as we plot Alon will inform you as to the behavior of what that looks like one thing just to call out that was in the prepared remarks was the consignment program for hive.
Alon: That had about a $270 million impact on net revenue no impact on profit.
Alon: We're expecting that to be about $250 million per quarter now that all aspects of continuing.
Alon: Volume related to this the consignment program with this type customer.
Speaker Change: Okay Marshall Thanks for all the details there.
Speaker Change: Just for my follow up if I can ask.
You guided free cash flow to $1 2 billion and you maintain the shareholder return of 50%.
Speaker Change: Turns and 50% reinvestment in the business. So when we think about that reinvestment, 50%. How are you thinking about organic investments versus M&A now that your integration with.
Speaker Change: The two large companies is now more or less complete in North America. So is it now time for further M&A. So can you thoughts there. Thank you <unk>. Good morning. Thank you for the question. This is rich.
Rich Hume: So when we talk about our capital allocation strategy as you know, it's 50%, 50% over the continuum, there could be periods, where we're heavier weight it one way or the other obviously Marshall talked about.
Rich Hume: FY2023 in his prepared remarks, and we were I think a 60% ish for.
Rich Hume: Return to shareholder in total.
Rich Hume: So.
Rich Hume: As we kind of plot through the year.
Rich Hume: Certainly we have a pipeline of.
Rich Hume: Acquisition targets that we continue to look at and work.
Rich Hume: Those those deals have done.
Rich Hume: <unk>.
Rich Hume: Have.
Rich Hume: A willing recipient on the other end and they've got to work for for US usually we take a look at those acquisition targets and really wanted to make sure that they complement our strategy. So.
Going forward I would tell you. That's a 50 50 is sort of a good way to think about it and again things don't always go exactly as planned so yes, we admit.
Rich Hume: Adjusted of course.
Speaker Change: As required based on the circumstance. So Marshall anything you have that you have really just one other thing that to call out.
Marshall W. Witt: If you think about our quarter, one, but there is a little bit incremental SG&A related to I'll call. It reinvestment for continued investment specifically in AF.
Marshall W. Witt: At <unk>, we're not going to soften our investment so there could be a little bit of a heavier SG&A in the front half of 'twenty four so I just wanted to let you know that it may appear as if there is imbalanced in that relationship of EDA are on a gross billings basis, but it's a very well thought out as we believe as we get into the second half.
Marshall W. Witt: As an opportunity forecasted opportunity to recover.
Okay. Thank you for all the details appreciate it.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Michael <unk> with Goldman Sachs. Your line is open.
Michael Urban: Hi, Good morning, Thank you very much for the questions.
Speaker Change: Marshall, maybe just to follow up on the SG&A point that you just made.
Speaker Change: <unk> is $2, 75% to 3.25% of billings still the right way to think about that and maybe you could just help us think about how.
Speaker Change: Shay evolves throughout the year and then I just have a quick follow up.
Speaker Change: Sure, Yes, Youre right, Mike it's that range of $2 75 to $3 25 in relation to gross billings.
Speaker Change: We'll start right around 3% in quarter, one and the expectation has been that structures that help build out the growth in the portfolio and should.
Speaker Change: Call, it ratably or incrementally come down.
Speaker Change: To something below 3%.
If I think about a couple of relationships one is the year over year on SG&A.
Speaker Change: Quarter, one there's two things one was the investment the other thing although it somewhat subtle. This time last year, we had already started to feed the decline in the performance and started to step down some of our provisions around variable pay.
Speaker Change: This year. The good news is we're assuming we're going to hit our number and grow it so theres a little bit heavier bonus in variable pay associated with quarter. One. The other thing is the actual FX itself from a euro perspective is up so thats about it.
Speaker Change: $10 million to $15 million of headwind on that and then finally, the SG&A investment that we've stated on an.
Speaker Change: On Aaas is another investment that we believe is important to be made so we feel that we're in a strong position. We think the 3% is probably going to be the top end for fiscal 'twenty, four and we should see that improve as we play it out quarter by quarter.
Speaker Change: Alright. Thank you that's very clear Marshall.
Marshall W. Witt: It was encouraging to hear about the new segment disclosures.
Marshall W. Witt: Byproduct around billings revenue and I think you said gross profit as well.
Marshall W. Witt: I was just wondering if you could give us a little bit of a preview of some of the potential.
Marshall W. Witt: Regulations that we may have as you give out those in your disclosures.
Marshall W. Witt: Does the narrative.
Marshall W. Witt: Kind of tightened up around the growth and margin outlook for <unk>.
Those segments.
Near mid term thank you.
Yes, Mike I think for.
Marshall W. Witt: As a general response to that rich and I have spoken to the margin attributes of <unk>, we've spoken about the growth attributes.
Marshall W. Witt: But it just allows us to be more specific so I do think that the revelations.
And the clarity that we can speak to the Axa performance within the portfolios I think just helps drive better understanding of the mix.
Marshall W. Witt: The profit margins are the gross margins business. We believe it is an enhancer, we think it is a value contributor.
Marshall W. Witt: And we do think it will help inform.
Marshall W. Witt: The actual performance for the quarter and what our thoughts are for the upcoming quarter.
Speaker Change: Yes, just to add to that I think generally my point of view is the narrative that we provide in the call as is.
Speaker Change: Is fairly Directionally correct relative to what I think you'll see in the segmentation going forward, we always talk about the segments in <unk>.
You all S for insights around the segment, but this will put sort of definitive clarity out there.
Speaker Change: In print.
Speaker Change: And then the second point that I would make Michael is that.
Speaker Change: You guys are pretty good at modeling every time.
Speaker Change: Got to get an insight relative to models.
Speaker Change: We are impressed relative to how you guys think about the business and how you laid out.
Speaker Change: Great well, thank you for the incremental transparency appreciate it rich.
Speaker Change: Okay.
And we will take our next question from Alex <unk> with loop capital. Your line is open.
Speaker Change: Yes.
Hey, guys.
Alex: Another today. Thank you for taking my question.
Alex: So my question there.
Alex: I believe the highest and become the Boston Gen. AIG server builds we've heard from her work that they may be.
Speaker Change: I'm, sorry can you repeat that you broke up a little bit.
Speaker Change: For sure.
Speaker Change: My question was do you guys believe that highest can become involved in journey II server builds.
Yes.
Speaker Change: Question is do we believe high volt participate in.
Speaker Change: AI server build.
Speaker Change: Absolutely.
Speaker Change: Remember that.
Segment of high base.
Speaker Change: ODM type of.
Speaker Change: Business.
Speaker Change: And so we end up building.
Building, what our customers have interest in and certainly we have full expectation that we will be participating in.
In.
Speaker Change: The AI builds are moving forward.
Speaker Change: Awesome awesome.
Speaker Change: So as a quick follow up what are.
Speaker Change: What key spending areas, where software that you may have anticipated or softer than typical seasonality and maybe if you can touch on what you expect from PC seasonality in February and May quarters.
Speaker Change: Yes, if I may as it relates to Q4.
Speaker Change: The prepared remarks.
Speaker Change: This is.
Speaker Change: I guess the pleasant surprises.
Speaker Change: For the most part the sales were consistent with our expectations.
Speaker Change: Marshall talked a little bit about maybe some.
Speaker Change: A little bit better strength in Europe versus our expectation, but it wasn't overwhelmingly different and then for each of the segments a sort of came in fairly consistent with.
Speaker Change: Our expectation.
Speaker Change: As we move ahead.
Speaker Change: As we had talked about.
Speaker Change: <unk>.
Speaker Change: Because of the backlog run off last year in <unk>, we would anticipate.
Speaker Change: A more.
Speaker Change: More challenging compare year on year.
Speaker Change: And then as we sort of move through the year that.
Speaker Change: Compare sort of through time get a little bit easier as the backlog had had dissipated if you will through the year and so.
Speaker Change: That that would be our expectation.
Speaker Change: But again, our our crystal ball would say that both of those segments are growing in the second half of next year, both the endpoints as well as the events segment.
Speaker Change: Awesome. Thank you guys really appreciate it.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Adam Tindle with Raymond James Your line is open.
Adam Tindle: Okay. Thanks, Good morning, I wanted to ask on trends in profit dollars for the business overall and just observing that you finished fiscal 'twenty three with non-GAAP net income just down I think over 8%.
Adam Tindle: We executed on synergies during the year, so ex that I would think non-GAAP net income down double digits.
Speaker Change: And if I look at the midpoint for Q1 based on your guidance. It looks like net net income is going to be down close to 10% and it looks like you've got some cost optimization that may be helping a little bit in the first half of the year, So probably north of 10% ex that.
Speaker Change: So for investors that are seeing the double digit net income declines maybe you could touch on the drivers that are causing that trend and whether you think that's just kind of a structural aspect of the business at this point and we are working on just optimization on that or is there a stake in the ground that you want to put on timing to return that to growth. Thanks.
Speaker Change: Hey, Adam This is Marshall I'll start I'll take it first and just the overall.
Marshall W. Witt: Revenue attribute and the comment we made about our expectations on.
Marshall W. Witt: Showing positive growth.
Marshall W. Witt: Attributes in quarter, one so with that comes a margin profile gross margin profile that is somewhat.
Marshall W. Witt: Then the margin profile, we think thats, probably about 20 bps and just in terms of the mix. We think that that plays out for quarter. One and then just if I touch on some of the cost attributes that I commented on earlier and thinking about quarter one.
Marshall W. Witt: Quarter, one last year with kind of the beginning point, where we started to see the volumes of our business fall. We had identified that we had seen some mismatch inefficient mismatches in quarter, two and three so we took some additional cost reduction.
Marshall W. Witt: Opportunities.
Marshall W. Witt: We were able to kind of recoup that inflated costs back in by the time, we got towards the end of this year and now in terms of the net headwinds going into quarter. One as I said earlier. There is some overall expectation that we're going to be growing into a better performance throughout the year. So with that we're kind of filling our our variable.
Marshall W. Witt: <unk> for for pay versus last year, we had already started to take down those variable attributes given where we thought the business was going and then again as I said earlier.
<unk> investments.
We're leaning into those so there is a little bit higher cost associated with that which is driving maybe some of the margin headwinds.
On that so.
Marshall W. Witt: I think inflationary might be the last one where we are seeing a little bit of a.
A longer tail on some of the inflationary areas around health care, but as you probably have seen in the past we figure out ways to create productivity to offset that it may take a couple of quarters to get there.
Marshall W. Witt: I do think the compare itself is a little bit more difficult in quarter, one from a margin profile perspective, but if I actually think about the margin attribute of Aaas and es.
Marshall W. Witt: Our intention sorry that we still believe we can grow both of those portfolio margin attribute over the course of the year.
Marshall W. Witt: Mix itself in some of these SG&A elements that I think are causing some of the story to change a lot of it.
Got it okay. So maybe just to follow up on that you helped with the gross billings for the year to kind of flat first half mid to high single digits in the back half, let's just call. It mid single digit growth for the year and gross billings overall to keep it simple.
Marshall W. Witt: Given everything that you just mentioned there would growth in non-GAAP net income.
Marshall W. Witt: B at <unk>.
Similar level of gross billings growth and why or why not.
Speaker Change: Yes, I mean, roughly said our expectations is that gross profit hopefully will be flat to up and non-GAAP op income will be flat.
Speaker Change: Again that's.
That's the expectation well have to see how it plays out as we.
Speaker Change: As we expect that second half growth profile to be in that mid to high single digit range, Yes, I think Adam just.
Speaker Change: Maybe be a bit repetitive.
Speaker Change: The thing that we've got to work through it.
Speaker Change: The mix shifted back now to more endpoint and as that happens as Marshall said.
Speaker Change: Probably a 20 basis point headwind.
Speaker Change: We need to work on and figure out.
Speaker Change: How to improve upon.
Speaker Change: No.
Speaker Change: I would say that we're reasonably proud of the fact that when you take a look at the.
Op income margin for FY 'twenty, three we have been able to hold that.
We held that that despite the.
Speaker Change: The revenue declines that we had faced so there was some work to do going forward, but.
Speaker Change: We kind of have our eye on it and we had the.
Speaker Change: The execution engine will will kind of focus on how do we drive improvement moving forward.
Speaker Change: Okay, and maybe just a quick follow up rich you talked a lot about higher than consignment.
Speaker Change: I think on the last call. It was you talked about a new customer ramp that you were expecting in fiscal 'twenty four could you give us maybe any update on that and visibility into the timing and magnitude of that.
So the customer ramp was just a little bit of delay due to timing of things, but we fully anticipate that we are cleared to go moving forward.
Speaker Change: Okay.
Speaker Change: Do you have a sense of timing or magnitude on it yet.
Speaker Change: Timing, we think the ramp should begin in quarter, one and probably show itself a little bit more in quarter. Two so at that point hopefully it will be meaningful enough for us to speak to.
Okay.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you Ed.
And we'll take our next question from George Wang with Barclays. Your line is open.
George Wang: Oh, Hey, guys Richard Marshall.
George Wang: Just have a question just on the ITC I just wanted to double click to say, especially in terms of the timeline.
George Wang: It's on cadence for the rent just curious if you had any more color to share just kind of from your perspective.
George Wang: And also we heard a bunch from the OEM and the kind of chipmakers, just curious kind of full.
George Wang: Whats a specification that you can disclose.
George Wang: To better and so they contributed to the IPC weight, if you will.
Yes, thanks for the question and good morning.
George Wang: Obviously, it's a new technology coming in.
George Wang: All indications that we have it will be sort of at the high end of the premium price band going forward as one would anticipate or in the fiscal year coming I should say.
George Wang: All of the intelligence that we have says that it'll be sort of a single digit percentage of total of the entire PC popular.
George Wang: Population and then I think becoming more meaningful in FY 'twenty, five and then into FY 'twenty six.
George Wang: Great opportunity going forward.
Kind of.
George Wang: Best Crystal ball estimate is sort of mid single digit back half of the year percent of total PC volume and then.
George Wang: Growing meaningfully up to them.
Speaker Change: Okay, great. That's it from me thanks.
Speaker Change: Thank you.
Speaker Change: We will take our next question from Joseph Cardoso with Jpmorgan. Your line is open.
Joseph Cardoso: Hi, good morning, and thanks for the question Yeah, just one for me just wanted to piggyback on some of the ask questions. First can you just clarify if the year over year declines in Aaas were largely in line with your expectations 90 days ago, and then more specifically can you just elaborate on the trends youre seeing across some of the product category.
Joseph Cardoso: They're like servers networking as well as any others and just curious if any of those are trending better or worse relative to your expectations and then just the second part of that question as you think about a recovery in the back half is that broad based across these product categories or youre thinking that its more concentrated to a particular one thanks for the question guys.
Speaker Change: Joe Good morning, and thank you for the question so.
Speaker Change: Yes.
Joe: The way the way I would talk about this is I think that the underlying demand across all of these technologies.
Joe: Pretty good.
Joe: And the lead with how to think about.
Joe: How these technologies emerge and have growth from my from my point of view is to think about.
Joe: When their backlogs recovered last year, because thats inevitably.
Joe: The increments of the compare year on year that.
Joe: That.
Joe: I think sort of distorts the numbers a little bit.
Joe: And when I come at it from that perspective server and storage had recovered its backlog earlier.
Joe: And then networking had carried the backlog later into last year and so when I think about the recovery on a year to year basis.
Joe: Server and storage emerge earlier in networking because of that backlog hanging around for a longer period of time.
Joe: It will be.
Later in the cycle.
Joe: As we had stated earlier than when we get to the back half of the year.
Joe: Thanks.
Joe: Each of these categories should should have.
Joe: Growth attributes that's at least our expectation.
Speaker Change: No. It makes sense. Thanks, rich I appreciate all the color thanks, guys.
Speaker Change: Thanks, Joe.
Speaker Change: And we will take our next question from Keith <unk> with Northcoast Research. Your line is open.
Keith: Good morning, guys. A question for you on the revenue synergies that we anticipated from the ERP integrations I guess are those proceeding as you guys expected and how are you expecting those to ramp up throughout the rest of the year is baked into your guidance.
Speaker Change: So Keith good morning, I hope everything is well.
Keith: Yes, they are proceeding consistent with our expectations.
Keith: We would anticipate.
Keith: As we think about this year that we're going to start to see meaningful progress relative to our cross sell opportunities with our customers.
Keith: When we think about our guide we fundamentally believe that we've baked that opportunity into the guide and it will really kind of ramp up and hopefully be a bit more meaningful in the back half of the year.
Speaker Change: Do you have anything.
Speaker Change: Okay.
Speaker Change: I appreciate it and if I could just touch on real quick we acquisition from you announced over the past week or two I believe its coke.
Speaker Change: Please correct me if I sum the name wrong.
Speaker Change: But it appears more of lifecycle services company I guess, perhaps talk about the strategy and making that investment now when I think to your largest competitor actually got out of that business recently, perhaps there is a strategy that version in Nevada.
Speaker Change: On opportunistic our competitive advantage you have versus your competitors.
Speaker Change: So.
Speaker Change: First of all let's talk about the the primary capabilities that are offered.
Speaker Change: With the acquisition of <unk>.
Speaker Change: As a round repair than tests done refurbishment, we certainly participate in those businesses today, it really we connect quite well relative to assisting our vendors.
Speaker Change: In that regard.
Speaker Change: We like the business and obviously it also offers.
Speaker Change: Up to.
Speaker Change: 228000 square feet, what piece of real estate, which will allow us to do more integration for customers as well, but we see a good demand of solid demand for.
Speaker Change: Keep those services with our vendors and they've been encouraging us to.
Grow that footprint, which we are doing the other.
Speaker Change: Sure thing.
Speaker Change: I'd like for you to think about is.
Speaker Change: There is more of a focus on on these types of things, especially the refurb segment moving forward as sustainability comes front and center.
So we also see sort of.
Speaker Change: If you will a bit of a revival around reefer.
Speaker Change: As the world tries to become more sustainable. So we think that there's going to be an extra kicker relative to these types of businesses moving forward.
Based on that focus.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: And well take our last question from Ashish <unk> with RBC capital markets. Your line is open.
ashish: Thanks for taking my question there was a lot of discussion around dynamics.
ashish: Dynamics near term.
ashish: The first half in the second half of 'twenty, four but as we get through some of that near term liquidity. I was wondering if you can talk about how should we think about the midterm growth for the es solution as well as margin profile for that business or the Mcdonough.
Speaker Change: Yeah, So I'll start rates and you can China. So for US as we had said in our prepared remarks.
Speaker Change: We still have some backlog from a comparative standpoint that will be make it a difficult comparison year on year as were in quarter. One we think as we play out.
Speaker Change: Rest of fiscal 'twenty, four we expect to see a return to growth for both portfolios ESN Aaas.
Speaker Change: That what caused the sequential.
Speaker Change: Momentum of that a rate ability of that is still somewhat to be determined.
Speaker Change: But I do think back to the comments, we made about how we build up our forecast we do rely quite a bit on our leaders at the country level to look at their <unk> relationships and to figure out and determine how best we think thats going to grow.
Speaker Change: Thinking about that LOE are.
Speaker Change: Mid single digit to high single digit growth rate I would also think about performing in that same range in the second half.
Speaker Change: Maybe to clarify is that.
Speaker Change: When you think about that.
Speaker Change: Exiting at mid to high single digit growth for Es in 'twenty four is that the right growth profile or could we see a further acceleration there over the next two years, let's say midterm.
Speaker Change: Yes, so beyond the thoughts we gave we don't provide guidance or thoughts around what it looks like in 'twenty five and 26 and are certainly will we go back to our strategic initiatives and how we position our investments in.
Speaker Change: And the commentary we made near term about what we're going to lean into.
Speaker Change: SG&A in the skill sets and how important it is to retain those and grow those so we're certainly confident in that market space, but beyond the commentary not much more we can provide in terms of what that looks like.
Speaker Change: I guess.
Speaker Change: The only thing that I would add to Marshall's comments as we always have an aspiration to grow a bit faster than the market.
Speaker Change: I think history would say that we had been successful relative to that pursuit.
Speaker Change: <unk>.
Speaker Change: We would we would kind of characterize 25 and 26 with that type of expectation that whatever the market growth is that we would have.
Speaker Change: Aspire to and execute.
Speaker Change: Above little bit above market expectations.
Speaker Change: That's very helpful color and maybe if I can ask a clarifying question BC decline, obviously was a big headwind in fiscal year 'twenty. Three have you quantified or is that a way to think about the total revenue headwinds from the PC decline in the fiscal year 'twenty three last year.
Speaker Change: Okay.
Speaker Change: So.
Speaker Change: Specific number now it clearly was in the PC ecosystem.
Speaker Change: Negative contributor to the overall decline in our revenue.
Speaker Change: Our portfolio. So it did have a meaningful impact if I step back and think about <unk> something es had its moment in 'twenty, one and halfway through 'twenty, two and ask that at the moment in 'twenty, two and 'twenty three.
Speaker Change: We're happy that we've got such a broad and diverse portfolio and yes, we have certain attributes that behave differently from time to time, but the benefit of our large portfolio allows us to have.
Speaker Change: A balanced view win win.
Speaker Change: When certain aspects of es or down in certain aspects of <unk> could be up but.
The complimentary line card I think is what really benefits us.
Speaker Change: Yes.
Speaker Change: A way of thinking about this is last year, we knew <unk> had grown in Es had decline those are the two major segments of our business. So if you take a look at the net change in revenue year on year, it's probably getting close to the answer.
Speaker Change: That's very helpful color. Thank you. Thanks again.
Speaker Change: And ladies and gentlemen, I will now turn the call back to Mr regime for closing remarks.
Well, thanks, everyone and thanks for participating in the call today FY2023 certainly.
Speaker Change: Played out different than we all had anticipated as we sat around the table. This time last year that being said I'm very proud of what we've accomplished I'm very proud of our relationships with our vendors.
And our customers. They are primary stakeholders then.
Speaker Change: My congratulations to our 23000 co workers around the world for doing a great job executing in this more challenging environment than anticipated with that I wish you all a great day.
Speaker Change: And ladies and gentlemen that concludes today's call and we thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yeah.
Yeah.
Speaker Change: Yeah.