Q2 2025 Ingram Micro Holding Corp Earnings Call

Speaker #4: Greetings and welcome to the Ingram Micro second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.

Speaker #4: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded.

Speaker #4: I will now turn the conference over to your host, Willa McManmon, Vice President of Investor Relations. Thank you. You may begin.

Speaker #5: Thank you, operator. I'm here today with Paul Bay, Ingram Micro's CEO, and Mike Zilis, our CFO. Before I turn the call over to Paul, let me remind you that today's discussion contains forward-looking statements within the meaning of the Federal Securities Laws including predictions estimates, projections, or other statements about future events, statements about our strategy, demand plans, and positioning growth, cash flow, capital allocation, and stockholder return, as well as our future expectations for future fiscal periods.

Speaker #5: Actual results may differ materially from those mentioned in these forward-looking statements because of risks and uncertainties discussed in today's earnings release and in our filings with the SEC.

Speaker #5: We do not intend to update any forward-looking statements. During this call, we will reference certain non-GAAP financial information. Reconciliations of non-GAAP results to GAAP results are included in our earnings press release and the related Form 8K available on the SEC website or on our Investor Relations website.

Speaker #5: With that, I'll turn the call over to Paul.

Speaker #6: Thank you, Willa. Good afternoon and thank ou for joining today's call. Which comes on the heels of the ransomware attack we experienced in early July.

Speaker #6: While no company wants to face the increasing reality of such an attack, our response reflects the way we do business as a platform company.

Speaker #6: Although some uncertainty remains regarding the potential impact on our business and future results, which Mike will address in more detail during the Q3 guidance discussion, I want to emphasize that the incident had no impact on our Q2 results.

Speaker #6: To recap, in early July, we identified ransomware on certain internal systems and we quickly took our systems offline, launched an investigation with top cybersecurity experts, and notified law enforcement.

Speaker #6: With respect to the incident, certain data was exfiltrated from our systems and in conjunction with this incident. We have engaged a third-party data analysis firm to assist us in reviewing relevant data.

Speaker #6: This process is ongoing and complex. Should we determine that personal information was affected, we notification based on relevant regulations. In terms of our response, we approached the incident as a business challenge and the entire organization mobilized to address it.

Speaker #6: Due to our scalable and modular platform architecture, and the tireless coordinated efforts of our team, we restored secure operations within days. Minimizing disruption to our customers and our partners and the overall business.

Speaker #6: The investigation into the cyber incident remains ongoing will provide and we continue to monitor our systems closely. While this attack was unanticipated, our rapid response reinforced the critical importance of our ex-managed platform architecture and the strength of our overall teams and partnership.

Speaker #6: I'll talk more about ex-manage in a minute. But first, let me discuss some key highlights of the second quarter. We were pleased that we exceeded the high end of our net sales guidance and landed towards the top end of our gross profit and earnings per share guidance ranges.

Speaker #6: We had growth across all lines of business, particularly in client and endpoint solutions. We also saw incremental year-over-year improvement in advanced solutions and continued growth in cloud.

Speaker #6: Geographically, year-over-year, the lower cost to serve and lower margin Asia-Pacific region demonstrated the highest net sales growth in the quarter. We also saw double-digit net sales growth in North America, single-digit net sales growth in EMEA, and return to growth in Latin America.

Speaker #6: India performed as we had expected, with some continued impact on gross margins from the heightened competitive market, and business improving as we progressed through Q2.

Speaker #6: From a customer perspective, we saw growth across all categories, with enterprise again outperforming. We were also encouraged by the return to modest growth in SMB.

Speaker #6: Since our last call, we began the divestiture of two non-core pieces of the business. First is a divestiture of assets related to an underperforming operation in our North America region, which closed in late July.

Speaker #6: And the second is cloud blue, which is expected to close in Q3. Both of these divestitures were a result of our ongoing portfolio review as we focus on continually improving our operational effectiveness and amplifying our core strengths.

Speaker #6: As a reminder, I've ked about the more than 600 million dollar investment that Ingram Micro has made in cloud, which has been the strategic to our long-term vision, enabled us to be the first to launch a comprehensive cloud marketplace and learn early on from our loud business.

Speaker #6: Cloud blue is part the initial foundation for the strategy, and we have retained the relevant IP from it. Instead building fragmented marketplaces, we have unified our cloud marketplaces within our ex-managed platform ecosystem to provide a single pane of glass.

Speaker #6: For hardware, software, cloud, and service solutions. This strategy is designed to provide our ustomers with speed, scale, and service in as corridor evolution into a platform company which we are executing upon through our ex-managed platform.

Speaker #6: We think about this evolution for Ingram Micro and the subsequent transformation of our customers' journeys in three phases. The first phase, which we have already delivering upon, is to remove friction to streamline operations and drive OPEX efficiencies.

Speaker #6: The second phase, which we are in the process of rolling out, leverages AI to automate and optimize demand signals, enabling more proactive go-to-market strategies and accelerating top-line growth.

Speaker #6: The third phase, we'll unlock greater value for our ustomers and our vendor partners by matching supply and demand, more intelligently, using data to drive growth and further enhance margins and operating leverage.

Speaker #6: It is during this phase that we expect to fully realize a flywheel network effect. Though this takes time, we continue to grow and remain profitable as we move through these phases.

Speaker #6: In July, Sanjeev Sahu, president of our Ingram Micro global platforms group, showcased the progression in discussed the way in which ex-manage is reshaping the IT distribution landscape.

Speaker #6: During the presentation, he walked through the platform's building blocks to underscore why it's unique real-time data mesh architecture and custom AI factory are foundational in building a truly single pane of glass platform.

Speaker #6: He explained how Ingram Micro's more than 45 years of experience in IT distribution gives us not only deep expertise but significant business data to power our AI factory, which uses AI to redefine the customer journey through intelligent automation.

Speaker #6: This automation is the basis for our intelligent digital assistant or, as we call it, IDA, which helps our customers win more business and deploy their resources more effectively and efficiently.

Speaker #6: Sanjeev showed real-time examples of how IDA uses advanced AI and machine learning models to analyze our data across more than 50 attributes and help our customers identify, and prioritize, the sales opportunities most aligned to them.

Speaker #6: This moves them from reactive inbound order taking to proactive outbound order making. As a proof point to this, in Q2, through IDA alone, we brought in tens of thousands of opportunities to our partners valued at hundreds of millions of dollars, up nearly 50% sequentially.

Speaker #6: Some other real-world examples of how ex-manage is delivering to our customers and partners includes a leading solution provider in the public sector space who is focused on expanding into higher value solutions offerings, while maximizing operational efficiency.

Speaker #6: Using ex-managed capabilities, the solution provider was able to execute a multi-million dollar solution with a fraction of the effort previously required, and is now looking to create the same efficiencies with other vendor partners.

Speaker #6: Another illustration of the way customers are embracing ex-manage is a large new customer in France, who's CEO engaged directly with ex-manage and converted his company's entire go-to-market and customer relationship process onto the platform.

Speaker #6: The move to ex-manage enabled the company to generate and convert quotes into orders in under three minutes—a process that previously took up to half a day.

Speaker #6: Leading to significant revenue and market share gains. Of course, our customers' success is the best reflection of our success. And last quarter, we discussed a few of the many other platform metrics we use to gauge the way in which ex-manage is adding value.

Speaker #6: These include self-service orders, which in the second quarter grew nearly 200% year-over-year. During Q2, we also saw a near doubling in quotes created on the platform versus the prior year, driven by ongoing enhancements of advanced search, quoting, product data, and other capabilities.

Speaker #6: In the quarter, ex-manage also helped us reactivate nearly 2,000 dormant customers, who generated approximately 40% higher sales compared to their prior engagement. The second quarter brought with it solid business performance and entering Q3, a unique set of challenges.

Speaker #6: That demonstrated the strength of our platform. I'm incredibly grateful for the outpouring of support we received from our customers and our partners, and proud of the resilience shown by our team.

Speaker #6: As we move into the back half of the year, I'm increasingly encouraged by the impact of our platform strategy and what it's having across our entire ecosystem.

Speaker #6: By delivering a holistic platform for B2B, we are not just modernizing distribution; we are reimagining how we can help our customers solve real business problems.

Speaker #6: Thank you for your continued support, and with that, I'll turn the call over to Mike. Mike? Thank you, Paul, and good afternoon. Our second quarter results demonstrated solid performance with strong top-line growth across our primary lines of business.

Speaker #6: We are encouraged by the continued momentum in our client and endpoint solutions, but also by mid-single-digit growth in both advanced solutions and cloud. As we look ahead to the third quarter, we expect continued year-over-year top-line growth, enabled by strong execution across our core businesses, which I'll more in our guidance discussion shortly.

Speaker #6: Now, to discuss the quarter more detail, net sales of 12.79 billion dollars were up 10.9% year-over-year in US dollars, and 10.2% on an FX neutral basis.

Speaker #6: We saw sales of client and endpoint solutions grow most robustly at nearly 14% on an FX neutral basis. Which continues to be driven primarily by strength in desktop, notebook, and smartphone categories.

Speaker #6: Our mid-single-digit growth in advanced solutions was driven by servers, storage, and cybersecurity, along with strength in sales of GPUs used in emerging AI solutions, particularly in Asia-Pacific markets.

Speaker #6: Geographically, net sales grew across each of our regional segments. Our mix was similar to what we saw in the first quarter, with continued strength in Asia-Pacific, followed closely by North America.

Speaker #6: Both of which grew in the mid-teens year-over-year. We also saw a return to growth in Latin America, which increased by more than 6% year-over-year on an FX neutral basis.

Speaker #6: From the perspective of our customer categories, large corporate and enterprise sales again outpaced higher margin SMB sales. While we are seeing some growth in SMB in some of our markets, overall, this higher margin customer category remains more muted than large enterprise, as near-term macro uncertainty and inflationary trends continue to bear more on this type of customer.

Speaker #6: Overall, these mixed tors coupled with an improving but still very competitive India market continue to put pressure on margins. All of these factors and including an eight basis point one-time impact that I will elaborate on shortly, contributed to our gross margin decline year-over-year.

Speaker #6: While we have a generally heightened competitive environment in many markets in which we operate, when we look at like-for-like sales across a product or a customer category, we are not seeing any notable deterioration in margin profile.

Speaker #6: Furthermore, these concentrations of mix also favor lower cost to serve business, which coupled with efficiencies and automation from our ex-managed platform, and our cost reduction actions taken over the last year and a half, yield solid leverage on operating expenses and flows through to our bottom line.

Speaker #6: Turning to our regional segments, North America net sales were 4.98 billion dollars up 13.8% year-over-year on an FX neutral basis, driven by strong growth in servers, storage, and cybersecurity, but also continued robust demand in the desktop, notebook product categories with the pending Windows end-of-life continuing to spur the refresh cycle.

Speaker #6: As a result, client and endpoint solutions grew nearly 13% of the region. Sales were also more concentrated in large corporate and enterprise customers, though we also saw some positive momentum in SMB, which is quite encouraging going forward.

Speaker #6: Amia, net sales of 3.48 billion dollars were up 4.8% year-over-year on a US dollar basis, and were essentially flat on an FX neutral basis.

Speaker #6: We saw continued strong double-digit growth in cloud, which was offset by flat client and endpoint solutions, and a low single-digit decline in advanced solutions.

Speaker #6: Asia-Pacific, once again, had strong growth with net sales of 3.48 billion dollars up 16.2% year-over-year in US dollars, and up 17.3% on an FX neutral basis.

Speaker #6: Net sales were driven by very strong double-digit rowth in client and endpoint solutions, primarily from lower margin mobility device sales particularly in China. Advanced solutions sales were down approximately 8%, as strength in networking was more than offset by declines in server and storage.

Speaker #6: Latin America net sales of 853 million dollars returned to growth this quarter, increasing 0.8% in US dollars, and up 6.4% in constant currency. The increase in net sales was primarily driven by growth in client and endpoint solutions, particularly in smartphones and tablets.

Speaker #6: This sales growth was partially offset by a decrease in advanced solutions, primarily in servers, specialty products, and networking. Second quarter gross profit came in at 839 million dollars or 6.56% of net sales.

Speaker #6: Included in this result is a one-time impact of 10.5 million dollars or eight basis points net sales associated with the health for sale accounting for the planned sale of assets of the underperforming non-core operation in North America that Paul touched on a few minutes ago.

Speaker #6: This divestiture closed in late July. The remaining year-over-year decline in gross margin was driven by a mix shift towards lower margin but generally lower cost to serve businesses, as I've already discussed from a customer product and geographic perspective.

Speaker #6: Q2 operating expenses were 696 million dollars or 5.44% of net sales, compared to 5.61% in the same period last year. Q2 2025 operating expenses included a write-down of 32.8 million dollars or 26 basis points of net sales, related to the health for sale accounting on the two divestitures we've ussed.

Speaker #6: Incurred a write-down the carrying amount of the assets of the disposal group to their estimated fair value less the cost to sell. From a regional perspective, both the 10.5 million dollar gross profit charge and the 32.8 million dollar operating expense charge related to health for sale accounting appear in our North America region.

Speaker #6: The year-over-year improvement in OPEX leverage reflects the cost actions we have taken over the last one and a half years, the impact of the ex-managed platform in driving leverage and productivity gains, and the mixed factors associated with a higher concentration of lower cost to serve sales and client and endpoint solutions, and in the APAC region, as I have just covered.

Speaker #6: Adjusted EBITDA the quarter was 294 million dollars, up nearly 6% in US dollars, and 5% in constant currency. And non-GAAP net income in the quarter was 142 million dollars, compared to 120 million dollars in Q2 of 2024, an increase of over 18% in US dollars, and more than 17% in constant currency.

Speaker #6: The non-GAAP net income measure benefited from a decrease of 14 million dollars or 16%, in net interest expense resulting from more than 600 million dollars in debt repayments we have made since the beginning of 2024.

Speaker #6: Our non-GAAP diluted EPS was 61 cents, up 12% from the prior year, and at the higher end of our guidance for Q2. Our current year EPS also includes the impact of approximately 2 cents from a higher tax rate in the quarter, resulting from heightened US withholding taxes on sales from our Latin America export business.

Speaker #6: Turning to our balance sheet, we ended the quarter with networking capital of 4.6 billion dollars, compared to 3.9 billion dollars to close the same period last year.

Speaker #6: The higher investment in working capital this year is driven by the increase in net sales and investment needed to capture these opportunities. On a days basis, our networking capital in Q2 2025 was 30 days, versus 31 days in the same period of 2024.

Speaker #6: On a similar note, adjusted free cash flow was an outflow 263 million dollars, again reflective of investments to grow the business, including some strategic buy-ins of inventory again this quarter to get ahead potential tariffs.

Speaker #6: We returned 23.5 million dollars to stockholders through dividends paid during Q2. And we announced a 2.6% increase to our quarterly dividend to be paid in Q3.

Speaker #6: We ended the quarter with 857 million dollars in cash and cash equivalents, and debt of 3.7 billion dollars. Our gross leverage ratio was 2.8 times, and our net leverage ratio was 2.2 times.

Speaker #6: Shifting now to our guidance for Q3, I want to start by framing our current view in light of the ransomware incident we experienced in early July.

Speaker #6: The timing of the incident over a long US holiday weekend, and in the early days of a new month and quarter, coupled with the speed of our response to get the majority of our go-to-market systems back up and running in a matter of days, may have limited the impact on our financial results.

Speaker #6: But even if minimized, there is still an impact from the days we were unable transact, which we are still working to quantify. Thus, our guidance reflects some conservatism, which we think is prudent to account for any potential loss of business, which would include for instance, potential bids or quotes we were unable participate in when our systems were down.

Speaker #6: I can't say quite positively that we've seen good indicators of business returning to more expected levels since bringing our systems back online. With this in mind, we are guiding net sales of 11.88 billion to 12.38 billion dollars, which represents year-over-year growth of more than 3% at the midpoint.

Speaker #6: We expect third quarter gross profit of 815 to 875 million dollars, which would represent gross margins just below 7% at the midpoint. Due to the expectation of more temperate growth than we experienced in the first half of this year in client and endpoint solutions, paired with improving growth rates in more profitable advanced solutions, and cloud businesses, as well as continued improvement in the SMB customer category.

Speaker #6: We expect non-GAAP diluted EPS to be in the range of 61 cents to 73 cents per diluted share. This guidance assumes a potential 2 to 4 cent impact related to the ransomware incident.

Speaker #6: Our EPS guidance assumes approximately 235.5 million weighted average shares outstanding, and a non-GAAP tax rate returning to a more expected rate of 30%. So in closing, we expect continued year-over-year top-line growth, enabled by strong execution across our core businesses and the progress we are making in our platform transformation.

Speaker #6: With that, operator, we will now open up the call to take questions.

Speaker #2: Thank you. And at this time, we will conduct our question and answer session. If you would like to ask a question, please press star one.

Speaker #2: On your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker #2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for estions.

Speaker #2: And our first question comes from Michael Ng with Goldman Sachs. Please state your question.

Speaker #3: Hi, good afternoon. thank you for the question. I just have two, first, just as you think about, the third quarter, I was wondering if you could provide some, color on your expectations, related to endpoint and advanced, as you think about the, the revenue growth for the third quarter.

Speaker #3: and then, you know, secondly, just on the the strength in in mobility in China, you know, how much of that was primarily driven by, the consumer subsidies given by the by the government and, you know, is that a a key driver of the kind of deceleration in in top-line growth, as we head into next quarter?

Speaker #3: Thank ou.

Speaker #6: Yeah. So, this is Mike. Michael, thanks for the question. I'll I'll answer the, first one first. I think on the guide, you know, we're we're our midpoint is is, at about 3% growth.

Speaker #6: Our, our top end is about 5% growth year-over-year. and I'll I'll k about more of the top end because that's that's really where if we didn't have a little bit of an impact to the cyber incident, which is probably, you ow, about 1 to 2 percent maybe on the top line.

Speaker #6: You know, we that that's where where we probably would have landed, I guess. as as more of a midpoint. So if you think about that, what we baked in there is certainly, as I said in my prepared remarks, a little bit more tempered growth in the client and endpoint.

Speaker #6: You know, we we grew double digits, as we said. but we're assuming something more like mid-single digits. And honestly, we're we're the bigger drop is, we're still seeing strength and should see strength.

Speaker #6: On refresh of desktops and notebooks as we look, towards the end of life of Windows and and so forth carrying out into even the early part of Q4.

Speaker #6: So we still see that as being fairly strong. but it's really more the smartphone growth that we see less of, as we look into Q3.

Speaker #6: So call it roughly mid-single digits at the high end of our guide. On, client and endpoint, probably low to mid, on advanced solutions, which continues to be probably stronger servers and storage networking is rebounding to growth, but a little bit more modest in its it depends on the market you're in.

Speaker #6: And then higher single digits on cloud, which, you ow, we're we're excited about that returning. We had a a harder compare in Q2 of last year.

Speaker #6: that, ou know, and and a little bit of that in Q1 of this year as well compared to last year. So, you know, we're cited about that, returning to a little bit more robust growth.

Speaker #6: So that that's sort of the mixed story. And then on your second question on China, you ow, it's hard to gauge. I I think there probably is a little bit that's pulled forward by some of those stimulus plans as well as some of the potential for tariffs and retaliatory tariffs playing across that market.

Speaker #6: I think our growth there, certainly was was more geared towards that smartphone category. as well as a little bit in some of the high-end GPUs, which we had across other parts APAC as well.

Speaker #6: So, you know, that that's that's that's what I would say on that. It's it's hard to gauge exactly. The only other this, Paul. Michael, the only other thing I would add to it as it relates to the, mobility, is we've had strong growth in mobility all of last year in Asia Pacific and into the first two quarters of this year.

Speaker #6: So, nothing that was way over the top relative to what we've been seeing in terms of demand. And that market, around the smartphone, business.

Speaker #3: Great. thanks, Mike. Thanks, Paul. That's really pful.

Speaker #2: Thank ou. And your next question comes from Samik Chatterjee with JP Morgan Chase and Company. Please state your estion.

Speaker #7: Hi. Thanks for the question. This is actually Joe Perdoso on for Samik. I guess maybe my first one is more of a clarification point.

Speaker #7: obviously, you guys ked about the mobility and maybe that, continuing through the second half. But maybe if we focus on North America so strong sequential growth this quarter there, just curious, I don't think you guys necessarily talked about it at all, but, you know, are you seeing any demand pull forward across any of the hardware products that you ys are shipping in specifically?

Speaker #7: Can you bifurcate that between devices and infrastructure? And whether you've en any of those pull forward on that in the first half and some goodness going through and and some of the conservatism going into the back off.

Speaker #7: It's just related to not a continuation of that trend. And then I have a quick follow-up.

Speaker #6: So it's a and we don't break out by America. So from a North America standpoint, I'll speak more on behalf of that. But, we didn't see meaningful pull forward in in all the categories if there was anything that was still maybe a little bit around the desktop notebook refresh, but nothing that was material.

Speaker #6: Anything we built in A for Q2 and then really in our guide in Q3 also.

Speaker #7: Nope, got it very clear. And then maybe second question. Sorry for the second question. And maybe more of a big picture one. But obviously, the big beautiful bill was passed like some months ago.

Speaker #7: And we're just curious if that's coming up in any of the customer discussions you're having here in the States. And if so, if you could provide any insights on how customers are thinking about any of the implications there, ither positive or negative.

Speaker #7: Thanks for the question, guys.

Speaker #6: Yeah, absolutely. and so if you look at, I think most of the impact from the big beautiful bill is going to be more wrapped around kind of the fed-sled, area.

Speaker #6: So public sector call it. And public sector for us is not a material piece of our business. So I think you'll see, depending, you know, stuff moving from name from federal that's going to local and/or state.

Speaker #6: Stuff shifting back and forth. So for us, I know there's conversations going on, again, it's not a meaningful part of our business. And we play in all those categories.

Speaker #6: So as maybe there's defunding in one area, and there's areas that are shifted more to, to from fed maybe to state. We'll be le to participate in that.

Speaker #6: Yeah. And the one thing I would just add, you know, that favorability on the CapEx treatment is certainly going to benefit some companies. You know, it may benefit larger companies to larger magnitudes, perhaps.

Speaker #6: So we're we're keeping an eye on it and, and, to see. And we're certainly poised to capture that if it does drive some demand pull forward for sure.

Speaker #7: Thanks, gentlemen.

Speaker #2: Thank ou. And your next estion comes from Eric Woodring with Morgan Stanley. Please state your estion.

Speaker #8: Hey, guys. Thanks so much for, for taking my questions. I, I, I. Too as well. And, and maybe just to start, another kind of big picture, question, related to some of the end market comments, that you guys made and really it's just, you know, when when you speak to your customers, or you or you look at, h, you know, the pipeline to the to the degree that you have visibility into it, you know, I, I you you've been kind of in clear on on smartphones and PCs.

Speaker #8: but big picture, kind of where do you see the market, for some of these various major products? Where where do you see, us at in the cycle right now?

Speaker #8: You know, if we think about storage and servers and and netcom and PCs and smartphones, you know, do do ou think big picture we're, you know, mid-cycle?

Speaker #8: Are we late cycle? Like, I'm I'm re there's differences between each of those products, but I'm just trying to a better understanding of, of where things could ultimately go again.

Speaker #8: If if there wasn't disruption, from, the multitude of factors that are obviously impacting the macro. And then I just have a follow-up. Thank ou.

Speaker #6: Yeah, sure. This is Paul. I'll jump in. So, from an end market standpoint, I'll talk about it. It's it's interesting when you look at kind of categories as you've been following us and and work been looking, talking about the networking category.

Speaker #6: for quite some time, all of last year and how it was down. Well, we're in a similar situation really from an end market perspective.

Speaker #6: Or the I'll use them generically, our customers, our ution providers, around the SMB markets. And so we hadn't seen, growth, and it's been down double digits since Q1 of last year, 2024.

Speaker #6: So Q1, Q2, Q3, Q4. And Q1 of this year. And then seeing single-digit growth in Q2 this most recent earning. So we're excited about that, that we're starting to see growth there.

Speaker #6: We've talked about how that market historically comes back a little bit, more slowly relative to the investment and spend we've en, more around mid-market and enterprise.

Speaker #6: As it relates to the products that, we did see some, and Mike touched on it briefly, around some of the GPU activity that's going on really around AI.

Speaker #6: And it's a global comment too, so it's not just necessarily driven around one territory. that we're seeing across both networking and servers. So we saw good growth, double-digit growth this quarter in storage, server, and networking.

Speaker #6: Some a little bit more, growth in other server being the biggest growth out of all of those. So, I would say we're kind , if I if I had to to peg it, we're ably mid-endings on this, as we're seeing.

Speaker #6: And then we'll see other services and capabilities kind of follow behind as those, GPU products continue to get delivered in the full solution.

Speaker #2: Awesome. Super helpful. ank you. Thank you for that, Paul. And then, you know, Mike, Mike, maybe just turning to you. I I know you referenced, some cost actions and mixed factors that impacted, OPEX.

Speaker #2: You know, it was so up sequentially fairly strongly. And I know, obviously, you had larger revenue base. And so maybe my question is, you know, the sequential growth that we saw this two-Q in OPEX, which was stronger than the two-Q of of last year, you know, is that really just the the higher revenue base?

Speaker #2: Or were you able to pull forward any investments to take advantage that top line outperformance? And and maybe just push a little bit of that through from a from a timing perspective, and that's all I had.

Speaker #2: Thanks so much, guys.

Speaker #6: Just to bear in mind, we, you know, 32-point 7 million of that one-time charge was flowing through our OPEX, which was up, you know, one-time health for sale accounting.

Speaker #6: So, I don't ow if you're backing that out of the numbers you're you're you're looking at. sequentially, there is a bit of an increase, and and, and year-over-year we continue to manage more to sales volumes.

Speaker #6: And how we manage leverage on a percentage of OPEX because certainly with 10%, growth year-over-year, from a revenue perspective, you're you you have a, you know, that degree of variable OPEX.

Speaker #6: We have timing as far as how sort of annual merits kick in and so forth that start in Q2 as well. And then lastly, there is a little bit of a pull forward where we saw opportunities, especially around some of the things we're ing on our investments in ex-manage that that, Sanjeev talked a couple of weeks ago.

Speaker #6: In mid-July, you know, where we saw opportunities to expedite some that work in Q2. So so there's a little bit of timing there as well.

Speaker #2: Great. Thanks so much, uys. Good luck. Thank you. And your next question comes from Rupalu Bhattacharya with Bank of America. Please state your question.

Speaker #9: Hi. Thanks for taking my questions. I've got two, one for Mike and one for Paul. Mike, when we look at the guide for fiscal 3Q, revenues are down 5% sequentially.

Speaker #9: But gross margin is up 40 bips, quarter over quarter. You talked about a lower mix of client devices that is helping. But can you also comment on the impact of the pricing environment?

Speaker #9: I think in prior quarters, we had talked about competitive pricing in some markets like India. How is that trending? And also, how are you seeing the mix of regions contributing to this?

Speaker #9: If Asia remains strong, how much of a headwind is this to gross margin?

Speaker #6: Yeah. Thanks, Rupalu. Good questions. I think the, you know, so I so I think the big the big overriding factor you call about, which is really just more of the mix normalizing a little bit between client and endpoint and advanced solutions, and then and then cloud being a little bit higher growth.

Speaker #6: you do have the eight basis point one-time impact also in our margins in Q2 that, you know, wouldn't recur in Q3. So that's another sequential, differential that you just need to take into account if you weren't already, and then I think we are still seeing, and I said this in my my prepared remarks, you know, I think we're eing a heightened competitive environment everywhere in this environment.

Speaker #6: When macro is a little bit more volatile or softer, you do see that heightened competitive factor. But it's it's rational. And even in India, where we did call out in prior quarters, a, a bit less rational, behavior in some cases, that was most pronounced in Q1.

Speaker #6: Q2 really fell through exactly as we predicted in our last call, which was about half that level of impact in Q2. And as we sit here now in Q3, we see it returning to more normal levels.

Speaker #6: But India will always be a more competitive environment just given the growth prospects there and and so forth. So, so, you ow, I think that's what I would say on the competitive factors.

Speaker #6: And and and I'll just reiterate what I also said in my prepared remarks. You know, on a like-for-like basis, when we look across a customer category or a product category, we really aren't seeing any significant or notable deterioration in pricings or margins.

Speaker #6: It really is more that mix as we see as a whole. I think I hit on all your questions. Oh, no. You also asked about Asia PAC.

Speaker #6: So we certainly still see Asia PAC as a higher growth opportunity. That's going to probably continue for the foreseeable future. Whereas Amia might be the opposite end of the spectrum, especially in some the Western markets where we still see a more challenging macro environment.

Speaker #6: But, but most we're most we're encouraged about is we're just seeing a return to double-digit growth in North America, which is a a very good sign, between that and APAC as, two of our biggest, geographic segments.

Speaker #2: Okay, Mike. I appreciate all the details there. As a follow-up, Paul, can I ask you, are you seeing any AI-driven, specifically AI-driven hardware purchases from customers either AI PCs or AI servers?

Speaker #2: And if so, what percent of your revenues this year would you say are AI-driven? And kind of related to this, you talked in your prepared remarks and Sanjeev, the other day also talked about expanded helping to drive sales.

Speaker #2: Is there a way to quantify how much revenue in a year you expect expanded to drive? Thanks. Thanks for taking my questions.

Speaker #6: Yeah. So I'll start with the expanded. So and I I talked about and you heard thank you. It sounds like you attended Sanjeev's, presentation.

Speaker #6: And so we continue to help do things like we talk about IDA. And I talked about it in my prepared remarks of what we've e.

I'll I'll touch aipc. So, a majority of the Refresh on PC so far for us have not been AI driven. I think we're in the early days of that still early endings, um, as we talked to customers and kind of end Partners, uh, in terms of that Evolution, most of, that has been around, just aged systems and the windows refresh. And, and the windows end of life, we did, it might touch on a briefly. We are seeing some opportunities and we've been very opportunistic. Um, 1 in North America, we had some pretty big 1-time opportunities and and also in Asia Pacific.

Around gpus and some of the GPU data that's enabling uh, the AI capability. So we're starting to see more and more of that. Uh, then I would have said a couple of quarters ago. So that's that's encouraging. I think again long term, it'll be more around. How do you service around those capabilities and services that are being delivered?

Thanks for all the details, appreciate it.

And your next question comes from, Adam Tindle with Raymond James, please State your question.

Okay, thanks, good afternoon. Um, Mike, I just wanted to start on guidance for Q3 on Revenue, uh, and understand there's a lot of moving Parts here, but if I look at the model, it's you're typically up sequentially in in Q3. I know it's like a strong public sector quarter, uh, you know, among other things. So if I look at the guidance that you provided here, uh, looks like it would be down a little over half a billion uh, in Revenue dollars sequentially. So call it, you know, subseasonal relative to what we would typically expect. Uh, you've got a, some Devastator in there, you've got, uh, obviously the Cyber instance incident, that I think you're still trying to quantify, I guess, any, you know, kind of framework. You can provide for us as we kind of think about Q3 Revenue, guidance, and the different buckets that are causing the below, uh, typical seasonality and any comments that you can give on uh, public sector in particular. I don't know if Paul wants to weigh in on that, uh, given fed fiscal year end.

thank you, 1, and Q2 usually we do start to see

Some of that Peak more into Q3 and then, certainly in Q4 on normal budgeting Cycles but the um, the refresh cycle really kicking in in full gear. Uh, you know, going back to Q4 of last year and through the first half of this year has created probably a different seasonal effect than what we would normally see. And, you know, as as we pointed out, while we've guided our guidance assumes that the high end, you know, more in the mid single digit growth for CES would be a little higher than that on the desktop notebook, category, a little lower than that on smartphones, you know, if as you've seen in the last 2 quarters, if we continue to see that robust, demand continued, we're set up to capture it. It would mean some dilution of margin rate because of the the mix of the business, but it would also create uh, quite a bit more leverage on off effects, given the uh, low cost to serve for those kinds of sales. So I I that's probably the biggest thing I would point out. You asked about public sector, I would just reiterate

Uh, what we've said before, it's not a it's it's it's a pretty minor part of our business overall, uh, single digit percentages on public sector. And certainly fed is weaker. Uh, right now, in this environment, uh, sled is a little bit better, uh, overall but um, but you know that, that would create some comparative too but it's not a massive impact for us. I don't know anything else. We can say education, we expect. So yeah, we were down. Kind of mid

Single digits in each of the categories, the high single digits.

In Q2 and we expect to be better than that. In Q3 that we built into our guide.

Got it super helpful maybe just a a follow-up mic on cash flow. Um if we were to, you know, kind of think about the environment that you're describing year to date or client and endpoint is very strong Mobility, has been very strong. We think about those businesses. We typically think of those as lower margin but you know much better. Uh working capital Dynamics faster, asset terms Etc. Um yet if we look at cash flow year to date, it's more than a half a billion of cash use. Um, so if you could maybe just parse out, I know you mentioned buy-ins in there but, uh, talk about, you know, sort of that mixing towards these areas and faster growth than these areas yet, uh, how sizable, the cash use has been here today. And then if you could also, you know, maybe touch on uh cash flow from here. Do we reverse this out over the next couple quarters and get the positive cash flow for the year? What is the Cadence look like thanks?

Sure. Yeah. I mean, our typical seasonality Q3 is a is a cash outflow or what? What? Mainly? Because we're procuring, inventory for a bit of that hockey stick. In Q4, it has been a unique, uh, result for the same reasons. You just pointed out, just hire, you know, double digit growth year to date, is required investment in the inventory, to serve both in q1. And Q2 we did have some pull forward, opportunistic, buys. And we're sending out a little bit heightened level of

Inventory exiting Q2 because there are a handful of large deals that are closing in the early part of Q3 that we had to start stocking for that. Drove a little bit of an anomaly there, which will be, you know, that'll drive a positive offset in Q3. But what I would expect or and I guess the last thing I would point out is, you know, on a days basis in q1, we were about 4 days. Better on total networking, capital year-over-year in q1. We were about, I sorry Q2, we were about a day better year-over-year in overall, networking Capital. So we're still managing it on days around that growth and that is really what is driving that outflow uh on a year-to-date basis. So Q3 I would assume uh, you know, a bit you know, could be a little bit neutral to some outflow, as we continue to invest in the working capital, perhaps offset by some of that inventory working through the cycle. And then Q4, as you saw last year,

Is where we spun off some cash, where we, uh, saw that inventory convert into receivables, much of which was collected before the end of the year. And then we overlay that with how we manage payables with all.

All of our vendors.

Okay, got it. Thank you.

Thank you. And your next question comes from David Paige with RBC Capital markets, please State your question.

Hi Mike Paul. Thank you for taking my question.

Folio is right-sized here, or should we expect either, you know, bolt-on M&A or more divestitures going forward? Thank you.

Yeah, thank you. David for the question. This is Paul. So if I walk through and and I talked about the 3 phases of, where we're at the US and I would say North America to some extent too is most mature on where we are and starting to get into that second phase, which is where we really start leveraging and Ai and automation to optimize demand signals which allows us to be more proactive. And I talked about our intelligent digital assistant Ida. That is absolutely an area that the US has taken advantage of which is really shortening sales cycle, and you can see it in their revenue growth that we said from a, uh, from a North America standpoint. And that's really the ability to go to that SMD Market. This is about self-service, it's about helping them be more educated as they go to their end users and shortening those sales cycle using AI to say this end user historically purchases within the X amount of days you should go have a conversation with them because we can see the data.

Data relative to all the the uh, end consumption. So uh it's a very good pickup on your point that yes, it is being driven and we believe that's all being spurred some of the the uh growth in SMB specifically.

North America.

Our portfolio, rationalization, and Mike can jump into the divestitures. We continue to look at what's best for the company and the best return from a shareholder perspective. Although there were two here, we're going to continue to manage the business, but nothing specifically, as we continue to manage the business that we're looking at, as we continue to invest in.

Core capabilities. And

Being a platform.

Company. Mike, I don't know if you. Yeah, I mean we we remain well capitalized to go. After m&a, if there's something opportunistic but as you've seen in the recent past start

On the acquisition side of the equation, it's been smaller tuck-ins over the last several years, which have been very strategic because of the capabilities. They bring that that's going to continue to be the Wheelhouse. Unless something big is very opportunistic for us.

Great, thank you so much.

Thank you.

And your next question comes from.

Ananda barua with loop capital markets, please State your question.

Hey, yeah, thanks guys. Uh, appreciate the questions. So 2 2 quick. Clarifications if I could, um, Paul just a couple of times you made reference to, uh, to AI, um, in a couple different product contacts. And I think gpus going into APAC. So, I think you in some context, you mentioned, gpus, going into APAC and other context, I believe you were talking about, um, some of your products. I think, I think storage systems and server systems, or maybe quite as part of the solutions going into customers. Can you can you just clarify uh, that for us put the context around it where your guys's exposure is? And uh, and what are the Avenues that you're getting at some Marketplace for that and then they have a quick follow-up. Thanks a lot. Yeah, you're welcome. So, uh, Ananda good. Thanks for the question. So I was relating to we have the gpus we've had

And the the the ability to service it was Asia Pacific. And then we actually had some new authorizations and some new opportunities specifically in North America, which we capitalize on. And we had a very large deal that we were able to close here in North America. So we're excited about that as opposed to the exposure. I look at it as more opportunity for us as we move forward. Um and then if you just look at the growth and networking server storage, and a combination thereof, there is GPU.

View that are going into that and we saw a good growth, the highest 1 being in the server category, uh, followed by storage and networking, uh, very closely there. All 3 of those categories had double digit growth for us and and again, there's gpus that are aligned in all 3 of those categories.

That's helpful. Can you can you just, can you comment at all with the customer, like, what sort of like, the the customer segments said is, is it is it Neo clouds? Is it, is it, uh, is it Enterprise? Is it a big deal Cloud complex in in Malaysia? What is it near clouds? Is it is it Enterprises? Is it in the other flavor?

Um, and it sounds like you're getting going there in some context, so so that's exciting.

thanks, and then, I'll I'll

Yeah, so keep in mind of our customer.

Market. So I'm not going to speak on behalf of where our customers are deploying those, those Technologies, but the ones that are procuring it from us, that are buying it from us from a solution. Standpoint are really wrapped around mid-market and Enterprise.

I got 1 more for you that's helpful. Are these bars? Are you talking about your large? Some of your larger bars?

yeah, I mean their bars are

National solution providers. They're I mean everybody. So we kind of Define it as the really big ones, the next ones and then kind of the the mid-market, the kind of down below to SNB all the way down to the SNB.

I got it. That's super helpful. Thanks a lot.

Thank you and a reminder to the audience to ask a question. Press star, 1 to remove yourself from the queue press star 2. Your next question comes from Ahmed darani with evercore isi, please State your question.

Yep. Um I guess maybe to start with you. You talked about growth in the SMB markets, uh, in your prepared commentary. Could you just talk about kind of how broad that growth was from a product basis? And you know, historically I feel like SMB Market has been a bit of a leading indicator for the rest of the business. So should we see a better recovery on a much more broader level given what you see on the SMB side

Yeah, so I think SMB, you know, it's still more muted as we said, but we're excited that it's it's it's growth even if it is a bit more modest, that is a good indicator for sure. But the mix has been not too dissimilar from what we've seen elsewhere, where it tends to be more into the server storage and certainly the, the desktop and notebook, and, and even a little bit of the not, not as much of the smartphone phenomenon is, is there. But certainly, the desktop and notebook piece, uh, is, is more centered where those products sales are, which even in the SMB, while it typically drives higher margins for us when you have more of the um Technical Solutions, multiple products services that get embedded, Etc. Um you know these are these are uh not as much that kind of value add sale that you that you would see that uptick

Yeah, I think they're I think that they're finally participating in some of the, the refresh that's happening, too. Sure. Because if you would have looked at kind of q1 and prior, as as as we talked about being down, double digits for us, we actually saw growth in both Advanced Solutions and client endpoint Solutions, within the SMB markets.

And then you know, I I guess, you know, Paula Mike is you you inventory dollars are up like I don't know 810 million since December to would you focus just reported in June uh, of this update? You're seeing an inventory. Very specifically, how much of this is strategic pre-b, buying versus positioning for what you think demand will look like in the back half and then how do you get confidence? That, you know, you don't end up with obsolescence risk or write-offs given the spike in inventory versus this will just flow through the revenue Channel over time.

yeah, really, no, no concerns about any material right off as as

I think we did have a little, we do have a little bit higher inventory than we normally would have coming out of Q2, which was more buying for specific, large deals in in, in a couple cases that are, are going to close in in Q3 with no no. Expected risk on that front. Uh, most of the Buy in stuff, that was just getting ahead of, uh, you know, potential for tariffs and other factors. A lot of that is bought, you know, early in the quarter sold through largely in the quarter. But, you know, again on the dais basis, I know, I came back to that earlier, too, but on a days basis, we're basically flat year-over-year from a Dio perspective. So we're absorbing back growth through the heightened sales, as you can see,

Thank you.

Thank you. And our last question comes from Carl Akerman with BNP pariba Asset Management. Please State your question.

Yes, thank you. I have 2, please. Um, first you mentioned growth of server and storage. Yet comments have been limited on networking and cyber security. Um, I guess our order Trends declining there. I guess, what are you seeing there in the SMB space specifically, given that tends to be a higher margin solution, sale.

Uh, cybersecurity actually had good growth for us. If you look at, within our Advanced Solutions, the percentage of business that goes through the larger categories are more networking.

Followed by server and storage, shortly thereafter our server business. So I apologize, our server business actually was very strong in the quarter. Um, and so we're pleased with the server growth that we had, and then cybersecurity was strong. Also, cyber is just a smaller portion of our overall Advanced Solutions business.

Got it. Um you know and then just based on the cogs and Opex disclosure, it seems a cloud blue couldn't sustain as a standalone entity. I guess why do you believe that is? And how does the sale of cloud blue impact X Advantage system of Records if at all and your ability to shift more of your sails toward uh Services. Thank you.

Yeah. So

And remind. So,

For our Cloud platform that we had and I mentioned in my prepared remarks in early days, the 600 million dollars that we invested around cloud. And we use that as the underpinning for uh our expanded team to build, really a single plane of glass where you can now buy Cloud Solutions, Hardware, software, and services. All In 1 platform as opposed to having multiple different systems. So, as we looked at our long-term strategy, the capabilities over there, and we retained the relevant IP, uh, that we've had within Cloud blue, and the important pieces of that, 600 million dollar investment. And so, we believed it was right from a strategic perspective to continue to invest in our platform strategy and the capabilities of cloud blue. Um, moving forward was, was best to, uh, to look at as a divestiture.

And Carl just 1 quick last point on that, you know, Cloud blue, the that that business was has always been housed in sort of cloud results that we've talked about, but it was a pretty, honestly, a pretty small part of that cloud result. So, uh, not not as it's it's an immaterial ultimate, go forward impact. When, when you think about that, diversity from a financial perspective,

Thank you.

Thank you.

And that concludes our question-and-answer session. I'll now turn the call over to Paul Bay for closing remarks.

Thank you all for your questions and continued interest in Anger micro. And as always for 23,000, plus key members are customers and vendor Partners. As we continue to deliver on our short term, uh, and execute against our long-term vision of being a platform company, and delivering a holistic platform for business to business. Thank you, again, for your interest and have a great night.

This concludes today's conference. All parties may disconnect. Have a good day.