Q2 2025 TD SYNNEX Corp Earnings Call
Good morning, My name is Kate and I will be your conference operator today.
Speaker Change: I would like to welcome everyone to the <unk> second quarter fiscal 2025 earnings call.
Speaker Change: Today's call is being recorded and all lines have been placed on mute to prevent any background noise.
Speaker Change: After the Speakers' remarks, there will be a question and answer session.
Speaker Change: At this time for opening remarks, I would like to pass the call over to David Jordan.
Speaker Change: Erika CFO and head of Investor Relations at TD Cynics, David you may begin.
Speaker Change: Thank you good morning, everyone and thank you for joining us for today's call with me today is Patrick Zammit, our CEO and Marshall Witt, our CFO before we continue let me remind you that today's discussions contain forward looking statements within the meaning of the federal securities laws, including predictions estimates.
Speaker Change: Rejections or other statements about future events, including statements about our strategy demand plans and positioning growth cash flow capital allocation and stockholder return as well as our financial 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 in the form 8-K, we filed today and the risk factors section of our Form 10-K, and other reports and filings with the SEC, we do not intend to update any forward looking.
Speaker Change: Statements also during this call we will reference certain non-GAAP financial information reconciliations of GAAP to non-GAAP results are included in the earnings press release and the related form 8-K available on our Investor Relations website, IR Dot <unk> Dot com.
Speaker Change: This conference call is the property of TD, <unk> and may not be recorded or rebroadcast without our permission I will now turn the call over to Patrick Patrick.
Speaker Change: Thank you David.
Patrick Zammit: Good morning, everyone and thank you for joining us today.
Patrick Zammit: I'm excited to report on our strong second quarter performance and provide an update on the impacts we are seeing from the macroeconomic uncertainty.
Patrick Zammit: Our Q2 results demonstrate the continued strength of.
Patrick Zammit: Distribution and hyper scaler markets.
Patrick Zammit: Meanwhile, our strategy and execution of our team.
Patrick Zammit: Enabling us to grow ahead of market.
Patrick Zammit: In Q2.
Patrick Zammit: Those beatings grew 12%.
Patrick Zammit: 11% in constant currency and non-GAAP diluted EPS exceeded the high end of our guidance, we've all regions and major technologies contributing.
Patrick Zammit: We believe the quarter benefited from some demand pull forward.
Patrick Zammit: We then TTC next excluding hive claw.
Patrick Zammit: Billings grew 11% year over year and operating margins expanded.
Patrick Zammit: Resulting in strong operating income growth.
Patrick Zammit: From a technology perspective, we saw strong growth.
Patrick Zammit: Cross both endpoint and advanced solutions.
Speaker Change: Hi, <unk>.
Speaker Change: Which is included within the advanced solutions portfolio grew gross billings in the high teens.
Patrick Zammit: Highest profit margins declined sequentially on <unk>.
Patrick Zammit: Marshall will provide more color.
Patrick Zammit: We've introduced Phoenix, all regions and major technologies experienced growth during the quarter.
Patrick Zammit: Software continues to be a bright spot in our portfolio experiencing 20% billings growth.
Patrick Zammit: <unk> by cloud cyber security and infrastructure software.
Patrick Zammit: Additionally, we continue to see strong growth in Pcs driven.
Patrick Zammit: Driven by the refresh cycle.
Patrick Zammit: And we were also pleased to see growth in networking after multiple weak quarters.
Patrick Zammit: We saw broad based demand across all of our major customer segments, specifically, SMB msp's and public sector.
Patrick Zammit: All of which grew double digits during the quarter.
Patrick Zammit: At Investor Day, we shared five strategic imperatives, we believe will enable us to deliver above market growth.
Patrick Zammit: These include unifying our reach targeting new customers.
Patrick Zammit: Distribution market expansion diversifying our offerings.
Patrick Zammit: And accelerating on services.
Patrick Zammit: The execution of our strategy is recognized.
Patrick Zammit: 40, plus on those we received in the channel during the quarter.
Patrick Zammit: Additionally, HP announced yesterday TTC next is that global distribution partner of the year.
Patrick Zammit: Other highlights on this during the quarter include being named <unk> Americas distributor of the year.
Patrick Zammit: Strike America partner of the year.
Patrick Zammit: <unk> EMEA distributor of the year the novel U S distributor of the year net up Latam distributor of the year and fortunate Hong Kong distributor of the year among others.
Patrick Zammit: A key component of our strategy is targeting new customers and allowing them to scale through our digital capabilities.
Patrick Zammit: For example, <unk>.
Patrick Zammit: Many customers invest a significant portion of the SG&A in operational of it and in the U S. We had a new customer.
Patrick Zammit: To address this we have a specialized solution.
Patrick Zammit: We partnered with our customer to develop a completely integrated and automated operational model that drove efficiencies through td's, Phoenix transactional Apis and custom workflows ever.
Patrick Zammit: Everything from configuration to renewals.
Patrick Zammit: By fully leveraging our digital capabilities, our partner was able to make an outsized investment in sales marketing and engineering talent.
Patrick Zammit: This has resulted in exponential sales growth at accretive margins for both our partner and TD Phoenix.
Patrick Zammit: Additionally, we continue to make great strides.
Patrick Zammit: Our delivering services strategic imperative.
Patrick Zammit: In a recent example, we are a leading advanced solutions OEM. We are deeply engaged in several important services initiatives, including building values data center solutions and deploying the AI infrastructure solutions.
Patrick Zammit: We are certified to build solutions on their behalf.
Patrick Zammit: Both of our direct and indirect channels.
Patrick Zammit: And this facilitates robust supply chain acceleration to significantly improve their time to cash and extend the overall capacity.
Patrick Zammit: Between our multi vendor technical expertise and our robust integration supply chain support and professional services, we are well positioned to connect Oems with a network of technology vendors required for the AI infrastructure solutions.
Patrick Zammit: Our north star remains generating profitable growth and free cash flow, while being a valued partner to our vendors and customers across the world.
Patrick Zammit: We continue to allocate excess cash through high return opportunities to ensure sustainable value creation for our shareholders.
Marshall Witt: Now I will pass it to Marshall for financial performance and outlook.
Marshall Witt: Thanks, Patrick and good morning, everyone. We had a strong performance in the second quarter with gross billings of $21 6 billion up 12% year over year.
Patrick Zammit: 11% in constant currency and above the high end of our guidance range.
Patrick Zammit: We were pleased to see year over year growth across all regions and major technologies.
Patrick Zammit: Our teams continued to execute extremely well and in addition to that we believe we are modestly added by our customers advancing their forecasted purchases in light of a volatile economic environment.
Patrick Zammit: In Q2, there was approximately 31% reduction from gross billings to net revenue.
Patrick Zammit: Which was slightly higher than our expectations.
Patrick Zammit: This was primarily driven by an increase in high transactions, where we act as an agent and a higher mix of software.
Patrick Zammit: Net revenue was $14 9 billion up 7% year over year and above the high end of our guidance range.
Patrick Zammit: In Q2, our endpoint solutions portfolio grew gross billings, 13% year over year, driven by the ongoing PC refresh cycle and customers modestly advancing their forecasted purchases are.
Patrick Zammit: Our advanced solutions portfolio gross billings, 12% year over year, 10% year over year, when excluding the impact of higher driven.
Patrick Zammit: Driven by accelerated demand for data center infrastructure and continued growth in cloud security.
Patrick Zammit: In other high growth technologies.
Patrick Zammit: Hive, which is reported within the advanced solutions portfolio grew in the high teens, primarily due to strength in programs associated with server and network rack goats.
Patrick Zammit: Gross profit increased 7% year over year to $1 billion.
Patrick Zammit: Gross margin as a percentage of gross billings was 5%.
Patrick Zammit: Which was consistent sequentially and a decline of 21 basis points year over year.
Patrick Zammit: Excluding hive gross margins were relatively flat year over year.
Patrick Zammit: <unk> gross margins declined from Q1 due to unrealized FX losses and program mix.
Patrick Zammit: We expect a portion of the unrealized FX losses will be recovered as we sell through the product and the back half of the year.
Patrick Zammit: non-GAAP SG&A expense was $632 million or 3% of gross billings, representing an 11 basis point improvement year over year.
Patrick Zammit: The cost of gross profit percentage, which we define as the ratio of non-GAAP SG&A expense to gross profit was 60% in Q2 consistent with quarter one.
Patrick Zammit: non-GAAP operating income increased 7% to $414 million non.
Patrick Zammit: non-GAAP operating margin as a percentage of gross billings was 2% representing a 10 basis point decline year over year and consistent with Q1.
Patrick Zammit: Interest expense and finance charges were $90 million slightly higher than expectations and relatively consistent quarter over quarter.
Patrick Zammit: The non-GAAP effective tax rate was approximately 23% which was in line with expectations.
Patrick Zammit: Total non-GAAP net income was 251 million and non-GAAP diluted earnings per share was $2 99.
Patrick Zammit: Both above the upper end of our guidance range.
Patrick Zammit: Turning to the balance sheet for quarter, two net working capital was $4 billion.
Patrick Zammit: Which is an improvement quarter over quarter, despite the accelerated growth that we experienced throughout the business.
Patrick Zammit: We experienced a four day improvement in our cash conversion cycle on a net basis quarter over quarter consistent with expectations free cash flow generation for the quarter was approximately $543 million, we returned $186 million to stockholders in quarter, two with $149 million in share repurchases and 37.
Patrick Zammit: <unk> million dollars in dividend payments.
Patrick Zammit: For the current quarter, our board of Directors has approved a cash dividend of <unk> 44 per common share that will be payable on July 25, 2025 to stockholders of record as of the close of business on July 11 2025.
Patrick Zammit: We ended the quarter with $767 million in cash and cash equivalents.
Patrick Zammit: And debt of $4 1 billion, our gross leverage ratio was two four times and our net leverage ratio was one nine times.
Patrick Zammit: Moving on to our outlook I want to start by addressing the fact that we're in a volatile environment given the ongoing developments with respect to global trade I also want to acknowledge that this is our best view based on what we know today.
Patrick Zammit: With that for the third quarter, we expect non-GAAP gross billings in the range of 21 to 22 billion representing growth of approximately 6% at the midpoint. Our outlook is based on a euro to dollar exchange rate of 113.
Patrick Zammit: Net revenue in the range of 14, 7% to $15 5 billion, which translates to an anticipated growth to net adjustment of 30%.
Patrick Zammit: non-GAAP net income in the range of 227% to $268 million non.
Patrick Zammit: non-GAAP diluted earnings per share in the range of $2 75 to $3 25 per diluted share based on weighted average shares outstanding of approximately $81 $8 million we.
Patrick Zammit: We expect a non-GAAP tax rate of approximately 23% and interest expense of $89 million.
Patrick Zammit: We expect to execute approximately $175 million of share repurchases during the quarter and will remain opportunistic in our strategy to return excess cash to our shareholders.
Patrick Zammit: In closing we believe we are in a strong financial position heading into the second half of the year and are leveraging our strategy to ensure we remain the partner of choice in distribution with that we'll open it up for your questions operator.
Speaker Change: We request that you limit yourself to one question to allow time for the other participants to ask your questions. If there is remaining time, you're welcome to re queue with additional questions.
Speaker Change: Your first question comes from the line of Katherine <unk> with Goldman Sachs. Your line is open.
Katherine: Hi, Thank you for the question.
Katherine: That would be helpful. If we could get some more color on the demand pull forward that you noted in the prepared remarks were there any particular products that benefited.
Katherine: <unk>. This is my guess, but I would love to know more about the financial impacts there.
Katherine: And is there any impacts we should be mindful of when we think about the SaaS mix through the balance of the year because of this pull forward. Thank you.
Katherine: Yes. Good morning, Thanks, a lot for the question. So first thing overall I mean, we had a very strong quarter with sales and EPS at the high end of guidance and double digit growth. So we looked at.
Katherine: And he put forward.
Patrick Zammit: So we saw a little bit of it in Pcs.
Patrick Zammit: It's difficult to quantify but.
Katherine: We think that Max.
Katherine: We benefited from $100 million to $200 million in saves of pull.
Katherine: <unk> no more than that for the moment on Pcs, we see.
Katherine: The demand continuing to be strong, especially in <unk> and is driven again by the refresh refresh of the base purchase during the pandemic and of course the.
Marshall Witt: The Windows 11, non refresh and Catherine this is Marshall.
Marshall Witt: Comment on.
Speaker Change: Comment Patrick Stead from a overall margin benefit for the quarter, we expect that that probably was around $10 million of gross profit Inc.
Speaker Change: Incremental to the quarter and then thinking about your question on mix for the second half of the year.
Speaker Change: We do continue to expect there to be refreshed strength in the second half, though right now we think it's probably equal in regards to asset mix for the portfolio for the second half.
Speaker Change: Thank you very much.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Adam Tindle with Raymond James Your line is open.
Speaker Change: Okay. Thank you good morning.
Adam Tindle: Wanted to talk about that pull forward dynamic Marshall if I look at your guidance for Q3, it's similar to what you guided to last year and we've got this pull forward dynamic that you talked about we also have typically a big public sector.
Speaker Change: Quarter in Q3, just two factors that might be a little different and cause Q3 to be sub seasonal. This year. So I guess the question would be as you thought about Q3 guidance why wouldn't we see a little bit more muted seasonality in that quarter. This year versus last and then secondly, if you could maybe just revisit obviously you're tracking them.
Speaker Change: Well relative to the.
Speaker Change: Fiscal 2025 guidance that you gave at the analyst day, particularly on an earnings basis that 11% to 12 Bucks I Wonder if that's something that we should be sort of reconsidering or maybe pushing the models towards the high end of that as we kind of think about shaping Q4. Thanks.
Speaker Change: I'll cover the <unk>.
Speaker Change: We'll forward and its impact or potential impact in the second half of Patrick talk about the public sector and then I'll talk about the analyst day comments about the second half.
Speaker Change: So yes, we are as I said, we did we did experience some pull forward as Patrick mentioned, the $100 million to $200 million of revenues the margin benefit right now we're being fairly prudent in our thoughts for that continuing benefit in the second half of the year.
Speaker Change: Again, I think the overall spot for US is that demand will soften in the second half of the year, which is pretty consistent with what we had said at analyst day.
Speaker Change: We are expecting to be a little bit on the higher end of that range outcome for our guidance that we provided in quarter three and then just thinking about quarter four.
Speaker Change: Fairly similar to what we shared at analyst day, which is that 3% to 4% growth and the typical seasonality you would experience historically between quarter, three and quarter four activities in our relationship and Patrick to public sector comment, yes. So we have a very strong quarter for the public sector, including fed when we saw.
Speaker Change: Also solid growth in deferred business.
Speaker Change: <unk> again, I mean, the majority the vast majority of our public sector business comes from the sled.
Speaker Change: And we continue to be positive on the prospects there and just add to what Marshall explained that.
Speaker Change: For the moment, what we see the underlying trends by technology continued to be relatively positive thinking about software Pcs.
Speaker Change: Networking is back to growth.
Speaker Change: Our cloud but.
Speaker Change: He is also a microenvironment.
Speaker Change: Tariff is one but also the situation in the middle East, which.
Speaker Change: For the moment leads us to be cautiously optimistic and a little bit prudent in our outlooks.
Speaker Change: Okay.
Speaker Change: Okay, and maybe just a quick clarification for a follow up Marshall you talked about for free cash flow for the year $1 1 billion I think was the target obviously, a much better quarter this quarter, but still negative year to date, and it's a pretty big climb in the back half of the year. So just wanted you to maybe revisit your thoughts on free cash flow for the year is that something that should still stand.
Speaker Change: So what were the levers for you to get there. Thanks.
Speaker Change: Sure. So we still believe that we will be able to attain the $1 1 billion in free cash flow.
Speaker Change: We're happy with the improvement in cash conversion and working capital in quarter, two with a four day improvement as you know when we were commenting last quarter, we expected that to happen it did.
Speaker Change: The majority of the working capital improvement is with our high organization, we entered the year little bit heavy on working capital for the reasons, we articulated in our quarter one call.
Speaker Change: Back that to unwind throughout the year so far.
Speaker Change: As we had thought there is some additional optimization that we think we can garner out.
Speaker Change: RFID.
Speaker Change: Our expectations for quarter, three and quarter four for cash days is probably two to three days in quarter three maybe one to two days in quarter four.
Adam Tindle: Adam the other thing just to think about as we were talking about the muted.
Adam Tindle: But for the second half of the year as you know.
Adam Tindle: As growth rates decline, even though they are improving in terms of year over year that does also aid and allow us to.
Adam Tindle: To improve our working capital as overall growth rates decline and then finally as we mentioned in analyst day, we do expect the netting to cash flow conversion to be at 95% for the full year. So we still feel good about hitting our $1 1 billion target.
Adam Tindle: Makes sense. Thank you.
Adam Tindle: Thank you.
Erik Woodring: Your next question comes from the line of Erik Woodring with Morgan Stanley. Your line is open.
Erik Woodring: Hey, guys. Good morning. Thank you so much for taking my question.
Erik Woodring: Yeah, Patrick or Marshall just for either one of you I was wondering if you could just maybe give us a bit more detail on demand linearity in the quarter and really what I'm trying to get at.
Erik Woodring: Is.
Erik Woodring: April was a relatively challenging months, we heard from some of the enterprise Oems.
Erik Woodring: So obviously your may quarter kind of straddles that so I'd love to just better understand a little bit how demand progressed.
Erik Woodring: April into May and then may thus far into June and then anything that stood out for you guys. If you look at that by either.
Erik Woodring: <unk> or <unk> trends. Thanks, so much.
Eric: Sure Eric I'll start.
Speaker Change: Within the quarter, we did see strength in March and April.
Speaker Change: Call. It mid mid teen growth rate, then it softened a little bit in may, but still good growth rate in terms of year over year. So it ended up being a very solid quarter for us.
Speaker Change: So far in June it reflects what we're guiding if you just think about our outlook.
Speaker Change: We generally see fairly consistent behavior, all in quarter, two and quarter three.
Speaker Change: Gross billings perspective.
Speaker Change: You can see that on our on our guidance.
Patrick Zammit: Just to comment briefly on high for quarter two as you remember when we came into the quarter, we thought that they would be slightly down on Patrick's prepared remarks.
Patrick Zammit: <unk> grew in the high teens, so they did exceptionally well during the quarter so great momentum.
Patrick Zammit: So in addition to the distribution.
Patrick: Intra quarter behavior. We also saw strong growth in higher and Patrick anything on ESR as you want to comment on.
Patrick Zammit: Yes, so so very rapidly I mean, if I look at the main product categories.
Patrick Zammit: You look at so let me start with software.
Patrick Zammit: Software continues to be really strong.
Patrick Zammit: Especially in virtualization, we see very nice demand.
Patrick Zammit: As I mentioned public cloud continues to grow.
Patrick Zammit: Double digit very solid growth and no reason to see a slowdown Vale security is another bright spot.
Patrick Zammit: I mean, the need for <unk>.
Patrick Zammit: Pending against cyber attacks continues to be there and so demand should remain healthy Pcs, we had a very strong quarter. We still believe that next quarter. The demand will be there as I mentioned because of the refresh cycle.
Patrick Zammit: Cycle is not over.
Patrick Zammit: The good news this quarter was networking.
Patrick Zammit: As we talked about in the previous quarters, there was a tough compare but now we see this market also coming back growing and becoming less.
Edwin: Edwin overall so.
Patrick Zammit: So that's a positive from a regional standpoint.
Patrick Zammit: Europe continues to be strong <unk> was very strong and most important North America is we see the market also.
Patrick Zammit: Enjoying solid growth so from a geographic standpoint.
Patrick Zammit: Yeah.
Patrick Zammit: <unk>.
Patrick Zammit: Cautiously optimistic.
Patrick Zammit: Great. Thanks, so much for the color guys. Good luck.
Speaker Change: Your next question comes from the line of her at Bluebird Mario <unk> with Bank of America. Your line is open hi.
Speaker Change: Hi, Thank you for taking my questions. So last quarter, you talked about two issues in high there was a demand shortfall I think from a customer and there was an issue with inventory and working capital. So are you seeing improvement in both both issues with respect to highest and then Patrick for my follow up I'd like to ask that if we look at your billings.
Speaker Change: Growth in <unk> was high single digits about 8% year on year <unk>, you just reported 12% Europe seems to have grown very strong 17% year on year. So what is it that is giving you pause to think.
Speaker Change: Giving you cause to think that there is a pause in demand in fiscal <unk> or are you just being conservative for the full year.
Speaker Change: Yes ill start with <unk>, so, yes, youre right. The two items, we discussed in quarter one around high.
Speaker Change: First of all hype still had a great quarter in quarter, one another fantastic quarter and quarter to quarter. One we said, 23% growth so pretty good quarter to 19%.
Speaker Change: High teens pretty good.
Speaker Change: So.
Speaker Change: Demand shortfall was was relatively.
Speaker Change: Our muted against the strong growth within the quarter for both quarters.
Speaker Change: A comment about our component by that we expected to see in quarter quarter. One we expect that to sell through in the second half of this year. So we're good we're happy.
Speaker Change: Happy about that and then the comments around inventory working capital I addressed this a little bit earlier.
Adam Tindle: Adam's question around the improvement that we saw in cash and then working capital, which was primarily driven by the improvement in.
Adam Tindle: And high working capital as well and we would expect that to continue to unwind through the rest of this fiscal year.
Adam Tindle: Yes.
Adam Tindle: Just on the second question about the year on year.
Adam Tindle: Growth rates for Q3, so it's true that Q1, Q2, we were close to double digits or above double digit.
Adam Tindle: So flex is free.
Adam Tindle: I would say first last year Q3, we started to see the recovery.
Adam Tindle: In distribution and hive has a very strong quarter. So.
Adam Tindle: Tougher base, if you will.
Adam Tindle: In Q3 last year versus.
Adam Tindle: So, which which explains a little bit.
Adam Tindle: The growth rate.
Adam Tindle: <unk> growth rate for Q3.
Adam Tindle: Second point is the macro uncertainty, which leaves us to be again.
Adam Tindle: More cautious.
Adam Tindle: And but nevertheless, as I just explained before good.
Adam Tindle: Underlying tailwind.
Adam Tindle: By technology and by region. So the blend of all of that leads us to the guidance we provided.
Adam Tindle: And we will see at the end of Q3, and then briefly just to follow up on the comment that your your question on quarter, one being 8% quarter between <unk> and in Patrick's.
Adam Tindle: Prepared remarks across the board, we just saw better than expected outcome.
Adam Tindle: The reasons that we articulated so.
Adam Tindle: Just a good performance good position.
Adam Tindle: And good outcomes for the business.
Speaker Change: Sorry, just to clarify one thing are you actually seeing any weakness right now in any region or any product line or is it your expectation that it could based on the political and economic.
Speaker Change: The issues that are out there there could be some weakness or are you actually seeing any slowdown right now.
Speaker Change: So what we see in June is in line with the guidance. We provided as you know July is when we will know more about tariffs and so difficult to <unk>.
Speaker Change: Forecast the impact So July August and August is.
Speaker Change: As a month, which is interesting.
Speaker Change: Vacation Mone for example in Europe.
Speaker Change: And you have the middle east what could be the impact. So again, so far no concerns everything is in line with.
Speaker Change: The guidance.
Speaker Change: Okay. Thank you so much.
Speaker Change: Your next question comes from the line of David Lewis with UBS. Your line is open.
David Lewis: Great. Thank you. Thanks, Patrick Thanks, Marshall Patrick can I, just dive back into high for a second.
David Lewis: Thank you talked about strong billings of high teens, but the margin mix was a little bit lower so can we infer from that comment that what you saw strength. This quarter was more on the CRM side versus sort of a spare parts ODM side of the business and then how does that play into the comments again I think you touched on it briefly but last quarter. There was some push out of orders.
David Lewis: Or do we see those orders come back this quarter, but that second customer that's ramping or is that still on the comments. We go into the third and the fourth quarter and then I have a follow up.
Marshall Witt: I'm going to comment so thanks, a lot and I'm going to comment on the topline and Marshall will give you more color on the margin. So if you look at the topline.
David Lewis: Again, very very very strong growth for the <unk> business.
David Lewis: 45%, primarily driven by our largest customer.
David Lewis: So really the largest customer drove that growth.
David Lewis: The second customer in fact last quarter, the demand pause and we saw demand coming back this quarter slightly below our expectation, but the demand is back which is a positive.
David Lewis: Hey, David.
David Lewis: Marshall.
David Lewis: Is it going.
Speaker Change: Yeah in regards to the overall margin profile and in my prepared comments I referenced unrealized FX that was a hit to our margin and high.
David Lewis: But we expect that to recover in the second half of the year. So that was one of the.
David Lewis: One of the headwinds related to margins for hide the other is within that TM OEM mix itself just the various program.
David Lewis: Profile for the quarter ended up being a little bit negative to the margins expectations for the quarter, we do expect those to unwind and for margins to improve for highs in quarter three.
David Lewis: And then if you think about the overall range of.
David Lewis: But the portfolio ODM theme is around 6% of total product and then as we said at analyst day, which is still consistent is our spares for call. It data center supply chain ranges between 2% to 4% of total gross billing. The reason why we gave that range has got a little bit of volatility and lumpiness quarter to quarter, but we were a little bit more.
David Lewis: Towards the higher end of that 2% to 4% in quarter, two but wanted to give you that context as well.
Patrick: I appreciate it and just I'm, sorry got Patrick Yes, just wanted to add one thing which is that what we see is really the excluded.
David Lewis: It excludes the unrealized effects.
David Lewis: The margin for Hive is really stabilizing at all I mean, when you look at it quarter by quarter to quarter.
David Lewis: We see this stabilization, which is very encouraging.
Speaker Change: Got it and then Marshall just one final question can you remind us again I guess in April when you kind of laid out the balance of this year kind of what was the underlying assumption for the tariff regime going forward.
David Lewis: We're coming up to July not really a comment about the demand profile now, but just remind us again, what you're kind of embedding two tariffs come back sort of on a 10% reciprocal basis across most of the markets that you serve kind of just how should we think about it just given the level of uncertainty or maybe kind of the baseline.
David Lewis: Yeah, well if you remember we were living at live in April.
David Lewis: Okay.
David Lewis: It wasn't a ground up assessment other than knowing the demand based on kind of the last iteration that we saw in.
David Lewis: <unk> 18, and 19 did soften.
David Lewis: I think that to some extent our ability to see that and forecast with a high level what that represented in now we're laying out maybe a little bit stronger but for quarter three within that context.
David Lewis: But back to Patrick's point still a lot of uncertainty really going to be developed to know what happens on July nine and its impact and where that ultimately settled.
David Lewis: <unk>.
David Lewis: Along the way of telling you that it's still very uncertain as to what that demand outcome looks like as we finished up this year and going into next year Greg.
Patrick: Alright, Thanks, Marshall Thanks, Patrick.
Patrick: Thank you.
Speaker Change: Your next question comes from the line of David Patriot, The RBC capital markets. Your line is open.
David Patriot: Hi, Good morning, Thank you for taking our question.
David Patriot: I just wanted to circle back to PC refresh I was wondering if you could.
David Patriot: Just.
David Patriot: In terms of innings, where are we in terms of the refresh cycle or are we just starting in the middle towards the end.
David Patriot: Thanks.
David: Hey, good morning, David.
Speaker Change: According to me we are in the middle of it we are not at the start.
Speaker Change: We saw already the refresh starting to at.
Speaker Change: At least one if not two quarters ago. So I think we are in the middle of it.
Speaker Change: So yes.
Speaker Change: Yes, and Thats. The reason when you look at our guidance, we continue to be positive.
Speaker Change: On the contribution of <unk> to the overall growth.
Speaker Change: Thanks, Patrick appreciate.
Speaker Change: Your next question comes from the line of Joseph Cardoso with JP Morgan Your line is open.
Speaker Change: Hey, good morning, Thanks for the question Kevin maybe.
Speaker Change: Maybe another follow up question on Pcs or maybe more broadly.
Speaker Change: You've had a couple quarters in a row of sequential margin improvement in this business and I was just curious if you could walk us through what is driving this margin improvement, particularly maybe not an apple to Apple comparison, but when I look at your OEM partners, they've obviously highlighted some margin pressure within their respective PC businesses. So just curious whats been.
Speaker Change: Dragging will strengthen our margins sequentially not for it looks like four quarters, or so and how you're thinking about the sustainability of that as we think about going into the back half of this year. Thanks.
Speaker Change: Hey, Joe It's Marshall typically.
Speaker Change: Typically when we do see refresh we've been through a few of these there is increased demand with that does come a little bit of a stronger pricing environment in general. So we did mentioned in the call that we thought some of the momentum in the fall and related to that strength and also the margin incremental.
Speaker Change: Incremental margin associated with with the pricing associated with that so there is a little bit of temporary.
Patrick: Aspects of that but as Patrick said.
Speaker Change: Middle of the game here and still think there is probably a benefit for us as we go forward as you might know in certain parts of our market specific in North America, we do a lot of large five around the PC ecosystem that creates benefits for us that may continue going forward. Your question about what does it look like.
Patrick: After the refresh kind of gets through its game, we typically expect to fall back to normal it spend.
Patrick: Plus our normal market share expectation for that though sustainability Philly feel good about it probably have a little more momentum behind them hard to know if that carries through the end of this year or if it extends into next year.
Patrick: I just want to add one more thing.
Mitch: So Mitch.
Patrick: Mixed related product mix related.
Patrick: PC has been this has been driving to grow fast.
Patrick: Endpoints segment also the component business has been very strong and those two categories have better margins.
Patrick: But relatively speaking the mobile category has grown much slowly and where the margin is lower so again mix is also nicely contributing to the improvement of the of the margin.
Speaker Change: Okay cool thanks for that color guys I appreciate it.
Speaker Change: Thanks, Jeff.
Speaker Change: Your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.
Patrick: Yeah.
Patrick: Yes.
Patrick: P J.
Patrick: What drove the strength there and is that sustainable.
Patrick: Yes, so good morning.
Patrick: So we have a very strong quarter in APG.
Patrick: More or less every country contributed but specifically, India and Japan.
Patrick: In Japan, it's driven by the consumer business, India, it's more of the B to B business.
Patrick: We continue to be positive about the prospects of APG.
Patrick: I mean, we evolution in the region. So we have.
Patrick: The aggressive growth plan.
Patrick: But most important.
Patrick: We are I mean, our growth plan is focused on the margin rich customer segments.
Patrick: Product segments. So we believe that we're going to continue to see solid growth, but also a solid model gross profit generation and operating profit generation.
Speaker Change: Thanks for the color.
Patrick: Thanks Vince.
Patrick: Yes.
Patrick: Your next question comes from the line of Ananda Baruah with loop capital. Your line is open.
Ananda Baruah: Hey, good morning, guys. Thanks for taking the question.
Patrick: I guess.
Patrick: Going back to high a couple if I could.
Patrick: Is there any distinction here what are the distinction to be aware of between 45% growth in the ODM cm segment and in the high teens growth.
Patrick: Hi, and then Patrick.
Patrick: In your prepared remarks, you talked about.
Patrick: Is that a detailed working with working with Hyperscale or is to get our data center solutions and some of the work Youre doing there.
Patrick: Is that sort of discussion and we are we watching real time.
Patrick: We're expanding the complexities of your engagement.
Patrick: Engagements and the complexity of the scope of the work you're doing with the hyper scale.
Patrick: Could that be part of the reason the margins just starting.
Patrick: To be more favorable as to your remarks, a moment ago.
Patrick: And then just one last thing it's a clarification did you say that networking you're seeing networking.
Patrick: Or that was one of the drivers for the improvement in networking.
Patrick: And I'll stop there thanks guys.
Speaker Change: I'll go first and then pass it over to Patrick.
Patrick: Good question. So, yes, we did call out the ODM M compare and the growth year over year is around 45% and you're right mid teens, what's the different supply chain with a little bit down.
Patrick: <unk>.
Patrick: Year over year, So thats why the math works that way. So we still as we acknowledged believe it's a good part of our business, it's lumpy, but it doesn't move around quite a bit but thats, how you get to that mid teen overall growth for <unk>.
Patrick: In regards to the complexity of engagements with our Hyperscale customers.
Patrick Zammit: I'll, let patrick speak to that let them speak to the pipeline not only with existing customers, but potential new expansion as well and then anything around network might be driving client growth.
Speaker Change: Yes, so good morning, and thanks for the question.
Speaker Change: I start with hive and win I would address the networking question. So I mean, our strategy is clearly we want to.
Speaker Change: Move up the value chain is the reason we are investing in engineering capabilities.
Patrick: To be more on the ODM side, rather than cm. We are also investing in our SMT capabilities in the U S. Because we think that based on.
Patrick: The environment is going to give us a competitive advantage, but also we are diversifying.
Patrick: Customer.
Patrick: Bayes and we May do more in the future.
Patrick: For example, we've submarine customers.
Patrick: We believe the margin should be slightly better so thats.
Patrick: So yes, that's the reason margins are stabilizing and.
Patrick: We hope that the outcome of all the actions I just talked about we did in fact take us to even better margins going forward on networking, yes, Hive also had a strong quarter in networking, but excluding hive.
Patrick: In distribution networking.
Patrick: Got back to growth modest growth I mean, low single digit but.
Patrick: We are back to growth.
Speaker Change: That's all Super helpful. A quick follow up if I could are you guys seeing any.
Speaker Change: Sort of increased conversation with regards to highs.
Speaker Change: Hum.
Speaker Change: Our made in America contacts.
Speaker Change: With the Hyperscale.
Speaker Change: I know the customer base opportunity is more global than that.
Speaker Change: Sabra in EMEA cloud, but that's where the Hyperscale is specifically is there any sort of incremental made in America conversation that's going on.
Speaker Change: Thats It for me thanks.
Speaker Change: Again very high level I mean, we have a very nice pipeline of opportunities.
Speaker Change: So.
Speaker Change: We are all existing customers, we are working on several programs.
Speaker Change: And hopefully we're going to close some of them.
Speaker Change: Again, the design cycle is long so.
Speaker Change: We're never completely sure when that's going to close but many many opportunities, but I can confirm that there is also interest from other customers to work with us because of the expertise.
Speaker Change: The manufacturing capabilities and the service we are providing.
Speaker Change: Yeah.
Speaker Change: Great. Thank you guys.
Speaker Change: Thanks Amanda.
Speaker Change: Again, if you would like to ask a question Crestar one on your telephone keypad.
Speaker Change: I will turn the call back over to Patrick for closing remarks.
Speaker Change: Thank you everyone for joining us.
Patrick: Want to take a moment to express gratitude to our customers partners and our investors for their support and importantly, our outstanding team of over 23000 coworkers around the globe.
Patrick: Their dedication to serving our customers.
Speaker Change: We look forward to <unk> next quarter.
Speaker Change: Hope you have a good day.
Speaker Change:
Speaker Change: That concludes today's conference call you may now disconnect have a nice day.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yeah.