Q3 2026 TD SYNNEX Corp Earnings Call
Speaker #1: SYNNEX Q3 fiscal 2026 earnings call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
Speaker #1: At this time, for opening remarks, I would like to pass the call over to Nate Friedel, Head of Investor Relations at TD SYNNEX. Nate, you may begin.
Speaker #2: Good morning, everyone, and welcome to TD SYNNEX's fiscal 2026 Q3 earnings call. Joining me on today's call are Chief Executive Officer Patrick Zammit and Chief Financial Officer David Jordan.
Speaker #2: Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the Federal Securities Laws. Including predictions, estimates, projections, or other statements about future events, including statements about our strategy, demand, plans in positioning, growth, cash flow, capital allocation, and stockholder return.
Speaker #2: As well as our financial expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risk and uncertainties, discussed in today's earnings release, in the Form 8-K we filed today, in the risk factors section of our Form 10-K, and our other reports and filings with the FCC.
Speaker #2: We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP-to-non-GAAP results are included in our earnings press release and the related Form 8-K, available on our investor relations website, ir dot tdsynnex dot com.
Speaker #2: This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick.
Speaker #3: Thank you, Nate. And good morning, everyone. We delivered another record quarter with distribution in hive both performing above our expectations and growing above market within the quarter.
Speaker #3: Results were broad-based across geographies, technologies, customers, and programs, with notable strength in data center infrastructure. Our success securing opportunities with new and existing customers—particularly within hive—required working capital investment to support these ramps.
Speaker #3: As David will discuss in more detail, those investments affected near-term cash flow during the quarter. But position us to support committed customer demand and future growth.
Speaker #3: Looking beyond the quarter, we continue to see encouraging developments across the technology landscape. Enterprise AI adoption is progressing toward broader production deployments. Data center modernization remains a priority as organizations prepare for next-generation infrastructure requirements.
Speaker #3: While AI is driving new security, governance, and compliance requirements, across technology environments. We believe these trends expand our opportunities across both distribution and hive, and reinforce our confidence in the long-term growth opportunity ahead.
Speaker #3: I will now begin with distribution. Distribution delivered strong growth during the quarter, with non-GAAP gross billings reaching 24.8 billion dollars, up 27% year over year, exceeding our expectations and growing above market across each of our regions.
Speaker #1: Looking beyond the quarter, we continue to see encouraging developments across the technology landscape. Enterprise AI adoption is progressing toward broader production deployments. Data center modernization remains a priority, as organizations prepare for next-generation infrastructure requirements.
Speaker #3: Our performance reflects a broader trend across the technology ecosystem. As technology environments become more complex, customers increasingly need help integrating deploying securing and managing solutions across multiple vendors and technologies.
Speaker #1: While AI is driving new security, governance, and compliance requirements, across technology environments. We believe these trends expand our opportunities across both distribution and hive, and reinforce our confidence in the long-term growth opportunity ahead.
Speaker #3: Vendors are looking for partners that can not only efficiently reach customers, but enable customer capabilities, activate demand, and execute consistently around the world. This is increasing the strategic importance of distribution.
Speaker #1: I will now begin with distribution. Distribution delivered strong growth during the quarter, with non-GAAP gross billings reaching 24.8 billion dollars. Up 27% year over year, exceeding our expectations and growing above market across each of our regions.
Speaker #3: One area we are particularly encouraged by is the growing number of enterprises moving from AI experimentation towards production-scale centralized AI factory deployments. This quarter, TD SYNNEX and Mark III Systems signed an agreement to support an NVIDIA AI factory powered by Vera Rubin NVL72 Systems.
Speaker #1: Our performance reflects a broader trend across the technology ecosystem. As technology environments become more complex, customers increasingly need help integrating, deploying, securing, and managing solutions across multiple vendors and technologies.
Speaker #3: This is one of the largest enterprise AI factory infrastructure deployments expected to be delivered through the channel bringing together the design, integration, deployment, day-to-core admin operations, financing, and supply chain capabilities needed to operationalize a sophisticated NVIDIA-based AI factory platform for a large enterprise.
Speaker #1: Vendors are looking for partners that can not only efficiently reach customers, but enable customer capabilities, activate demand, and execute consistently around the world. This is increasing the strategic importance of distribution.
Speaker #1: One area we are particularly encouraged by is the growing number of enterprises moving from AI experimentation toward production-scale, centralized AI factory deployments. This quarter, TD SYNNEX and Marshall Witt Systems signed an agreement to support an NVIDIA AI factory powered by Verra Rubin NVL72 systems.
Speaker #3: As enterprises evaluate next-generation platforms, we are seeing growing demand for partners that can simplify complexity and accelerate implementation through their enablement capabilities. AI factories have the potential to power transformative new products and services, but realizing that potential requires far more than access to compute.
Speaker #1: This is one of the largest enterprise AI factory infrastructure deployments expected to be delivered through the channel, bringing together the design, integration, deployment, day-to-core admin operations, financing, and supply chain capabilities needed to operationalize a sophisticated NVIDIA-based AI factory platform for a large enterprise.
Speaker #3: Organizations that ensure AI investments are secure, governed, cost-effective, and aligned with measurable business outcomes. Similar to the evolution of cloud computing, we believe disciplines such as financial operations, and security operations will become increasingly important as AI becomes embedded in business-critical processes.
Speaker #1: As enterprises evaluate next-generation platforms, we are seeing growing demand for partners that can simplify complexity and accelerate implementation through their enablement capabilities. AI factories have the potential to power transformative new products and services, but realizing that potential requires far more than access to compute.
Speaker #3: Organizations will need support selecting the right models for the right workloads, deploying them on the right infrastructure, and balancing performance, security, and governance across edge, private, hybrid, and public cloud environments.
Speaker #3: While still early in the adoption curve, deployments of this scale signal a market that is moving toward broader deployment. As AI becomes embedded across more users, workloads, and business processes, we believe the requirements to secure, govern, optimize, and support these environments will continue to expand.
Speaker #1: Organizations that ensure AI investments are secure, governed, cost-effective, and aligned with measurable business outcomes. Similar to the evolution of cloud computing, we believe disciplines such as financial operations, and security operations will become increasingly important as AI becomes embedded in business-critical processes.
Speaker #3: Customers are also seeking greater flexibility in how they engage with us. And I've seen benefits from our digital strategy. Customers regularly engaging across our digital offerings have grown their spend with TD SYNNEX at nearly twice the pace of similar customers with us.
Speaker #1: Organizations will need support selecting the right models for the right workloads, deploying them on the right infrastructure, and balancing performance, security, and governance across edge, private, hybrid, and public cloud environments.
Speaker #3: Through solutions such as partner-first and digital bridge, enhanced with AI agents embedded throughout the customer experience, we help customers identify opportunities simplify purchasing decisions, and engage efficiently across a broad range of technologies and vendors.
Speaker #1: While still early in the adoption curve, deployments of this scale signal a market that is moving toward broader deployment. As AI becomes embedded across more users, workloads, and business processes, we believe the requirements to secure, govern, optimize, and support these environments will continue to expand.
Speaker #3: We view digital engagement as an extension of our broader enablement strategy. Whether customers engage through digital platforms, technical specialists, enablement programs, or a combination of all three, our objective remains the same: helping our customers build capabilities, grow their business, and better serve their end users.
Speaker #1: Customers are also seeking greater flexibility in how they engage with us. And I've seen benefits from our digital strategy. Customers regularly engaging across our digital offerings have grown their spend with TD SYNNEX at nearly twice the pace of similar customers with us.
Speaker #3: The same capabilities creating value for customers are also important for vendors. As technology portfolios expand and customer requirements become more specialized, vendors are seeking partners that can combine global execution, with expertise across technologies, customer segments, and geographies.
Speaker #1: Through solutions such as partner-first and Digital Bridge, enhanced with AI agents embedded throughout the customer experience, we help customers identify opportunities, simplify purchasing decisions, and engage efficiently across a broad range of technologies and vendors.
Speaker #3: This is expanding the addressable market served through distribution. Earlier this quarter, IBM expanded its relationship with TD SYNNEX into 20 additional countries across Europe, Asia-Pacific, and Latin America.
Speaker #1: We view digital engagement as an extension of our broader enablement strategy. Whether customers engage through digital platforms, technical specialists, enablement programs, or a combination of all three, our objective remains the same: helping our customers build capabilities, grow their business, and better serve their end users.
Speaker #3: We believe this expansion reflects the strength of our go-to-market model and the confidence our vendors place in our ability to activate demand execute consistently across end markets around the world, and accelerate growth.
Speaker #1: The same capabilities creating value for customers are also important for vendors. As technology portfolios expand and customer requirements become more specialized, vendors are seeking partners that can combine global execution, with expertise across technologies, customer segments, and geographies.
Speaker #3: Collectively, over the last year, we've added multiple billion dollars of incremental gross billings into the portfolios through new customer wins and an expanded vendor line card.
Speaker #3: More importantly, we believe this relationships deepen our role in the technology ecosystem and create additional opportunities for long-term profitable growth and potential earnings expansion.
Speaker #1: This is expanding the addressable market served through distribution. Earlier this quarter, IBM expanded its relationship with TD SYNNEX into 20 additional countries across Europe, Asia-Pacific, and Latin America.
Speaker #3: Turning to Hive. Hive delivered a strong quarter with non-GAAP gross billings of 7 billion, up 117% year over year, exceeding our expectations as we saw continued increased demand from existing customers and programs.
Speaker #1: We believe this expansion reflects the strength of our go-to-market model and the confidence our vendors place in our ability to activate demand, execute consistently across end markets around the world, and accelerate growth.
Speaker #3: Our previously announced programs with new customers have progressed as planned. We've shipments expected to begin in our fiscal fourth quarter. These programs improve visibility into future growth, including maintaining a healthy pipeline of opportunities and support a broader customer and program mix over time.
Speaker #1: Collectively, over the last year, we've added multiple billion dollars of incremental gross billings into the portfolios through new customer wins and an expanded vendor line card.
Speaker #1: More importantly, we believe these relationships deepen our role in the technology ecosystem and create additional opportunities for long-term profitable growth and potential earnings expansion.
Speaker #3: We believe increasingly sophisticated infrastructure requirements are elevating the importance of expertise in engineering, validation, manufacturing, and supply chain execution. As a result, customers are engaging Hive earlier in the development process, creating additional opportunities to expand our relationship with our current customer base and potential new customers.
Speaker #1: Turning to Hive, Hive delivered a strong quarter with non-GAAP gross billings of $7 billion, up 117% year-over-year, exceeding our expectations as we saw continued increased demand from existing customers and programs.
Speaker #1: Our previously announced programs with new customers have progressed as planned. We have shipments expected to begin in our fiscal fourth quarter. These programs improve visibility into future growth, including maintaining a healthy pipeline of opportunities, and support a broader customer and program mix over time.
Speaker #3: One example is our work with multiple customers on the design of advanced liquid-cooled networking racks that are expected to enter into production in the first half of fiscal year 27.
Speaker #3: At the same time, we remain focused on ensuring growth translates into attractive long-term returns. While customer demand and revenue growth remain robust during the quarter, profitability remains an important area of focus.
Speaker #1: We believe that increasingly sophisticated infrastructure requirements are elevating the importance of expertise in engineering, validation, manufacturing, and supply chain execution. As a result, customers are engaging Hive earlier in the development process, creating additional opportunities to expand our relationships with our current customer base and potential new customers.
Speaker #3: The business is working through a period of significant customer runs manufacturing expansion and elevated investment activity. Including engineering talent, technical expertise, and operating capabilities as we support multiple large growth initiatives at the same time.
Speaker #1: One example is our work with multiple customers on the design of advanced liquid-cooled networking racks that are expected to enter into production in the first half of fiscal year 2027.
Speaker #3: Several opportunities in our pipeline are being awarded at margin profiles that are neutral to accretive relative to our current operating performance. As previously awarded programs mature and newer programs ramp, we expect modest margin improvement over time even as we continue investing to support future growth.
Speaker #1: At the same time, we remain focused on ensuring growth translates into attractive long-term returns. While customer demand and revenue growth remained robust during the quarter, profitability remains an important area of focus.
Speaker #3: Our manufacturing investments remain aligned with awarded customer programs and our focus remains on deploying capital in ways that strengthen our competitive position and are expected to generate attractive returns over time.
Speaker #1: The business is working through a period of significant customer runs manufacturing expansion and elevated investment activity. Including engineering talent, technical expertise, and operating capabilities as we support multiple large growth initiatives at the same time.
Speaker #3: In closing, we believe both distribution and Hive continue to benefit from durable technology trends and expanding customer relationships. Within distribution, enterprise AI adoption digitally enabled experiences paired with human expertise and growing technology complexity are increasing the value we provide to customers and vendors.
Speaker #1: Several opportunities in our pipeline are being awarded at margin profiles that are neutral to accretive relative to our current operating performance. As previously awarded programs mature and newer programs ramp, we expect modest margin improvement over time, even as we continue investing to support future growth.
Speaker #3: Within Hive, sophisticated infrastructure architectures are driving deeper customer engagement and expanding opportunities across a broader set of customer and programs. While we have deployed significant capital to support customer growth initiatives, particularly within Hive, we believe those investments strengthen our competitive position, support future growth, and increase the long-term earnings power of the company.
Speaker #1: Our manufacturing investments remain aligned with awarded customer programs, and our focus remains on deploying capital in ways that strengthen our competitive position and are expected to generate attractive returns over time.
Speaker #1: In closing, we believe both Distribution and Hive continue to benefit from durable technology trends and expanding customer relationships. We've seen Distribution enterprise AI adoption, digitally enabled experiences paired with human expertise, and growing technology complexity are increasing the value we provide to customers and vendors.
Speaker #3: As these programs mature, we expect free cash flow generation and conversion to improve, and we remain focused on demonstrating progress as we close fiscal year 26 and enter fiscal 27.
Speaker #3: With that, I'll turn it over to David to discuss our financial performance and outlook in greater detail. David?
Speaker #1: Within Hive, sophisticated infrastructure architectures are driving deeper customer engagement and expanding opportunities across a broader set of customers and programs. While we have deployed significant capital to support customer growth initiatives, particularly within Hive, we believe those investments strengthen our competitive position, support future growth, and increase the long-term earnings power of the company.
Speaker #2: Thank you, Patrick, and good morning, everyone. This was another strong quarter for TD SYNNEX, both distribution and Hive grew above market and contributed meaningfully to earnings.
Speaker #2: While our operating income and earnings per share continue to grow faster than gross billings. Starting with the top line, our non-GAAP gross billings for the third quarter was 31.8 billion dollars increasing 40% year over year, or 41% year over year in constant currency, and exceeding the high end of our guidance range.
Speaker #1: As these programs mature, we expect free cash flow generation and conversion to improve, and we remain focused on demonstrating progress as we close fiscal year 2026 and enter fiscal year 2027.
Speaker #2: Non-GAAP operating income was 736 million dollars an increase of 55% year over year, or 56% year over year in constant currency. Non-GAAP earnings per share was $5.68 an increase of 59% year over year, and above the high end of our guidance range.
Speaker #1: With that, I'll turn it over to David to discuss our financial performance and outlook in greater detail. David?
Speaker #2: Thank you, Patrick, and good morning, everyone. This was another strong quarter for TD SYNNEX. Both Distribution and Hive grew above market and contributed meaningfully to earnings.
Speaker #2: GAAP operating income was 643 million dollars an increase of 68% year over year, GAAP earnings per share was $5.18 an increase of 89% year over year, and above the high end of our guidance range.
Speaker #2: While our operating income and earnings per share continue to grow faster than gross billings. Starting with the top line, our non-GAAP gross billings for the third quarter was $31.8 billion, increasing 40% year over year or 41% year over year in constant currency, and exceeding the high end of our guidance range.
Speaker #2: Turning to our quarterly performance for each business. Distribution non-GAAP gross billings increased 27% to 24.8 billion dollars with double-digit growth across each region and most major technologies.
Speaker #2: Non-GAAP operating income was $736 million, an increase of 55% year over year, or 56% year over year in constant currency. Non-GAAP earnings per share was $5.68, an increase of 59% year over year and above the high end of our guidance range.
Speaker #2: Our end-to-end portfolio continues to position us well across technology cycles with healthy demand throughout the business, and particular strength in data center infrastructure. Endpoint solutions gross billings increased 16% supported by continued strength in PCs including higher average selling prices and a modest decline in units.
Speaker #2: GAAP operating income was $643 million, an increase of 68% year over year. GAAP earnings per share was $5.18, an increase of 89% year over year and above the high end of our guidance range.
Speaker #2: Advanced solutions gross billings increased 37% driven by strength in infrastructure, software, and AI-related technologies. Distribution gross profit increased 22% to 1.15 billion dollars distribution gross margins were slightly impacted by customer and product mix which was more than offset by disciplined expense management.
Speaker #2: Turning to our quarterly performance for each business, Distribution non-GAAP gross billings increased 27% to $24.8 billion, with double-digit growth across each region and most major technologies.
Speaker #2: Non-GAAP operating income increased 55% to 483 million dollars and non-GAAP operating margin as a percentage of gross billings expanded 35 basis points year over year to 1.95%.
Speaker #2: Our end-to-end portfolio continues to position us well across technology cycles, with healthy demand throughout the business and particular strength in data center infrastructure. Endpoint Solutions gross billings increased 16%, supported by continued strength in PCs, including higher average selling prices and a modest decline in units.
Speaker #2: Turning to Hive. Hive's gross billings increased 117% to 7 billion dollars with growth across both manufacturing and supply chain services. Manufacturing grew in excess of 130% and represented approximately two-thirds of Hive's gross billings.
Speaker #2: Advanced Solutions gross billings increased 37%, driven by strength in infrastructure, software, and AI-related technologies. Distribution gross profit increased 22% to $1.15 billion. Distribution gross margins were slightly impacted by customer and product mix, which was more than offset by disciplined expense management.
Speaker #2: Reflecting higher volumes and expanded programs with existing customers. Supply chain services grew in excess of 90% supported by component demand associated with customer infrastructure deployments.
Speaker #2: Hive's gross profit increased 47% to 276 million dollars and non-GAAP operating income increased 56% to 253 million dollars. Non-GAAP operating margin as a percentage of gross billings was 3.61% compared with 5.04% in the prior year period.
Speaker #2: Non-gap operating income increased 55% to 483 million dollars and non-gap operating margin as a percentage of gross billings expanded 35 basis points year over year to 1.95%.
Speaker #2: Turning to Hive, Hive's gross billings increased 117% to $7 billion, with growth across both manufacturing and supply chain services. Manufacturing grew in excess of 130% and represented approximately two-thirds of Hive's gross billings, reflecting higher volumes and expanded programs with existing customers.
Speaker #2: As a reminder, our operating margins reflect the growing contribution from large AI rack programs that has been strategically important but diluted to Hive's operating margins creating a mixed headwind which we believe has stabilized.
Speaker #2: Our objective is to build a broader, more diversified Hive business that combines sustainable growth with improving profitability, stronger cash generation, and attractive returns on invested capital.
Speaker #2: Supply chain services grew in excess of 90% supported by component demand associated with customer infrastructure deployments. Hive's gross profit increased 47% to 276 million dollars and non-gap operating income increased 56% to 253 million dollars.
Speaker #2: Shifting to cash flow and capital allocation. Free cash flow consumption for the quarter was approximately 1 billion dollars driven by increased inventory in Hive's supply chain business in addition to new customers and new programs with existing customers.
Speaker #2: Non-GAAP operating margin as a percentage of gross billings was 3.61%, compared with 5.04% in the prior year period. As a reminder, our operating margins reflect the growing contribution from large AI rack programs that has been strategically important but dilutive to Hive's operating margins, creating a mixed headwind, which we believe has stabilized.
Speaker #2: Networking capital closed at 6.5 billion dollars with a gross cash conversion cycle of 22 days an increase of 5 days sequentially and 6 days year over year, reflecting incremental mix of Hive.
Speaker #2: Year to date, we have made substantial investments in Hive's working capital and believe we now have a significant portion of the investments to support our expected growth now in place.
Speaker #2: Our objective is to build a broader, more diversified Hive business that combines sustainable growth with improved profitability, stronger cash generation, and attractive returns on invested capital.
Speaker #2: Our focus is now on execution, cash conversion, and realizing the expected returns on our investments. We ended the quarter with 749 million dollars of cash and cash equivalents and net leverage of 1.9 times.
Speaker #2: Shifting to cash flow and capital allocation, free cash flow consumption for the quarter was approximately 1 billion dollars driven by increased inventory in Hive's supply chain business in addition to new customers and new programs with existing customers.
Speaker #2: During the quarter, we returned 100 million through share repurchases and 38 million dollars through dividends. Our board also approved a cash dividend of 48 cents per common share payable on October 30th, 2026 to shareholders of record as of the close of business on October 16th, 2026.
Speaker #2: Net working capital closed at $6.5 billion, with a gross cash conversion cycle of 22 days, an increase of 5 days sequentially and 6 days year over year, reflecting incremental mix of Hive.
Speaker #2: Turning to our fourth quarter outlook. We expect continued momentum across both businesses translating to non-GAAP gross billings of approximately 31.9 billion dollars plus or minus 500 million dollars up approximately 31% year over year at the midpoint.
Speaker #2: Year to date, we have made substantial investments in Hive's working capital, and believe we now have a significant portion of the investments to support our expected growth in place.
Speaker #2: Our focus is now on execution, cash conversion, and realizing the expected returns on our investments. We ended the quarter with $749 million of cash and cash equivalents, and net leverage of 1.9 times.
Speaker #2: A gross-to-net adjustment of approximately 30%, revenue of approximately 22.2 billion plus or minus 400 million dollars. Non-GAAP net income of approximately 474 million dollars plus or minus 20 million.
Speaker #2: During the quarter, we returned $100 million through share repurchases and $38 million through dividends. Our board also approved a cash dividend of $0.48 per common share, payable on October 30, 2026, to shareholders of record as of the close of business on October 16, 2026.
Speaker #2: Non-GAAP diluted earnings per share of approximately $5.90 plus or minus 25 cents up approximately 54% at the midpoint based on approximately 79.2 million diluted shares outstanding.
Speaker #2: We expect Hive's non-GAAP gross billings will increase sequentially quarter over quarter as we continue to see further benefit from ramping programs across multiple new customers.
Speaker #2: Turning to our fourth quarter outlook, we expect continued momentum across both businesses translating to non-gap gross billings of approximately 31.9 billion dollars plus or minus 500 million dollars up approximately 31% year over year at the midpoint.
Speaker #2: We expect we will generate cash in the quarter as recently deployed working capital begins to normalize. Looking ahead to fiscal 2027, we expect further improvements in Hive's cash conversion as programs mature.
Speaker #2: A gross-to-net adjustment of approximately 30%, revenue of approximately 22.2 billion plus or minus 400 million dollars. Non-gap net income of approximately 474 million dollars plus or minus 20 million.
Speaker #2: In summary, we're extremely proud of our teams for the results they continue to deliver. Distribution for multiple quarters has delivered above market growth and broad base growth, operating leverage, and cash flow.
Speaker #2: Non-GAAP diluted earnings per share of approximately $5.90, plus or minus $0.25, up approximately 54% at the midpoint, based on approximately 79.2 million diluted shares outstanding.
Speaker #2: Hive continues to add new customers and new programs with existing customers. We expect each of our major programs to generate attractive returns although some will not reach their full potential until the back half of fiscal 2027.
Speaker #2: With that, we'll open the call for questions. Operator?
Speaker #2: We expect Hive's non-gap gross billings will increase sequentially, quarter over quarter, as we continue to see further benefit from ramping programs across multiple new customers.
Speaker #1: You will now begin the question and answer session. We request that you limit yourself to one question to allow time for the other participants to ask their questions.
Speaker #2: We expect that we will generate cash in the quarter as recently deployed working capital begins to normalize. Looking ahead to fiscal 2027, we anticipate further improvements in Hive's cash conversion as programs mature.
Speaker #1: If there is remaining time, you are welcome to re-queue with additional questions. To ask a question, please press star one to raise your hand.
Speaker #1: To withdraw your question, press star one again. Please pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.
Speaker #2: In summary, we're extremely proud of our teams for the results they continue to deliver. Distribution for multiple quarters has delivered above-market growth and broad-based growth, operating leverage, and cash flow.
Speaker #1: Please stand by while we compile the Q&A roster. Your first question comes from Joseph Cardoso with JP Morgan. Please go ahead.
Speaker #2: Hive continues to add new customers and new programs with existing customers. We expect each of our major programs to generate attractive returns, although some will not reach their full potential until the back half of fiscal 2027.
Speaker #2: With that, we'll open the call for questions. Operator?
Speaker #3: This is NK in on for Joseph Cardoso from JP Morgan. Thank you for taking my question. Great results. I think my question is, are you stated several pipeline opportunities are being awarded at margins neutral to accurate relative to current performance?
Speaker #1: You will now begin the question and answer session. We request that you limit yourself to one question to allow time for the other participants to ask their questions.
Speaker #1: If there is remaining time, you are welcome to requeue with additional questions. To ask a question, please press star one to raise your hand.
Speaker #3: What is driving these this improved margin discipline and how sustainable is it as competition for AI infrastructure intensifies?
Speaker #1: To withdraw your question, press *1 again. Please pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.
Speaker #2: So thanks for your question. So just to provide this is David a little more clarity on Hive's operating margins and how the new customer programs are coming.
Speaker #1: Please stand by while we compile the Q&A roster. Your first question comes from Joseph Cardoso with JP Morgan. Please go ahead.
Speaker #2: What we've put in the prepared remarks and if you reflect on the commentary we provided on the call last quarter, Hive is ramping three new hyperscalers in multiple programs within each of those customers.
Speaker #3: This is NK, in on for Joseph Cardoso from JP Morgan. Thank you for taking my question. Great results. I think my question is, you stated several pipeline opportunities are being awarded at margins neutral to accurate relative to current performance?
Speaker #2: And so as we look forward, one of the comments that we made is the new programs that we've won which are predominantly manufacturing are neutral to accretive to Hive.
Speaker #2: Additionally, some of the programs that were ramping this year as those programs mature, we continue to find ways to improve the margins within there.
Speaker #3: What is driving this improved margin discipline, and how sustainable is it as competition for AI infrastructure intensifies?
Speaker #2: And so as we look forward, that's what gives us confidence that Hive's margins have stabilized and should improve as we move ove forward.
Speaker #2: So, thanks for your question. Just to provide—this is David—a little more clarity on Hive's operating margins and how the new customer programs are coming along.
Speaker #1: Your next question comes from Keith Housum with North Coast Research. Please go ahead.
Speaker #2: What we've put in the prepared remarks and if you reflect on the commentary we provided on the call last quarter, Hive is ramping three new hyperscalers and multiple customers.
Speaker #4: Good morning, guys. Hey, I appreciate the question and I'll welcome that. Great quarter for you guys. Hey, guys, it's we're kind of looking at the growth.
Speaker #4: Obviously, servers and storage were phenomenal for you guys this quarter, but strength was really broad based. But I think there might be concern with some investors that you're getting more rumors about data centers perhaps peaking here and I think there's rumors of Oracle even perhaps pulling back on data centers here.
Speaker #2: And so, as we look forward, one of the comments that we made is the new programs that we've won, which are predominantly manufacturing, are neutral to accretive to Hive.
Speaker #2: Additionally, some of the programs that we're ramping this year as those programs mature, we continue to find ways to improve the margins within there.
Speaker #4: How are you guys thinking about the data center market for the next year or two? Any concerns that you might have a pullback here on spending or any constraints out there?
Speaker #2: And so, as we look forward, that's what gives us confidence that Hive's margins have stabilized and should improve as we move forward.
Speaker #4: But how are you just thinking about the broader market?
Speaker #5: Yes. Keith, good morning. Thanks a lot for the question. So I mean, one, as you said, we are very pleased because the growth in the quarter has been broad-based by geo, distribution, Hive, by technology.
Speaker #1: Your next question comes from Keith Simpson with North Coast Research. Please go ahead.
Speaker #5: And by the way, our Q4 guidance reflects that. If you look at next year, so we're in the process of building our budget for next year and collecting all the data.
Speaker #4: Good morning, guys. Hey, I appreciate the question, and I also have a great quarter for you guys. Hey, guys, we're kind of looking at the growth.
Speaker #4: Obviously, servers and storage were phenomenal for you guys this quarter, but strength was really broad-based. But I think there might be concern with some investors that you're getting more rumors about data centers perhaps peaking here, and I think there's rumors of Oracle even perhaps pulling back on data centers here.
Speaker #5: We continue to be overall positive about the market prospects and we expect to continue to grow a little bit faster than the market. Specifically to data center, when you look at what is driving the demands, you have of course I mean, with the hyperscalers, they have continued to support the frontier models with capacity for training.
Speaker #4: How are you guys thinking about the data center market for the next year or two? Any concerns that you might have a pullback here on spending, or any constraints out there?
Speaker #4: But how are you just thinking about the broader market?
Speaker #5: Yes. Keith, good morning. Thanks a lot for the question. So I mean, one, as you said, we are very pleased because the growth in the quarter has been broad-based by geo, distribution, Hive, by technology.
Speaker #5: But I mean, what we see and that's confirmed by all the by our OEMs is that companies are now investing more and more enterprise are investing more and more in agentic capabilities.
Speaker #5: And, by the way, our Q4 guidance reflects that. If you look at next year—so we're in the process of building our budget for next year and collecting all the data.
Speaker #5: And we know that agentic AI is going to be a fantastic driver for productivity gains and improving customer experience. I mean, we've mentioned one of the one of the big win this quarter from an enterprise and we see that as clearly a trend accelerating.
Speaker #5: We continue to be overall positive about the market prospects, and we expect to continue to grow a little bit faster than the markets. Specifically, regarding data center, when you look at what is driving the demand, you have, of course, with the hyperscalers, they have continued to support the frontier models with capacity for training.
Speaker #5: So we continue to be positive about the prospects for next year. And specifically to Hive, as David just mentioned, we've won some new customers and we're going to benefit for the ramp-up.
Speaker #5: So overall, we are cautiously optimistic.
Speaker #5: But I mean, what we see and that's confirmed by all the by our OEMs is that companies are now investing more and more enterprise are investing more and more in agentic capabilities.
Speaker #4: Great. And just as a follow-up to that, like the business you win with Hive, is that cancellable if the market did go south by those customers or are these non-cancellable agreements that you guys enter into?
Speaker #5: So go ahead. Go ahead.
Speaker #5: And we know that agentic AI is going to be a fantastic driver for productivity gains and improving customer experience. I mean, we've mentioned one of the big wins this quarter from an enterprise, and we see that as clearly a trend accelerating.
Speaker #2: The way the programs work are similar to distribution you could cancel contracts but these are longer-term agreements. Both sides have potential cancellation rights if people don't perform.
Speaker #2: But when you go into one of these programs, it can take you a year to get up to speed and what we're working on is we want a category within a hyperscaler where we support kind of a multi-year piece of technology.
Speaker #5: So we continue to be positive about the prospects for next year. And specifically to Hive, as David just mentioned, we've won some new customers and we're going to benefit from the ramp-up.
Speaker #5: So, overall, we are cautiously optimistic.
Speaker #2: So in many cases, these programs can last a few years but there is always the potential that volumes can move around. But we feel really good about where Hive sits within the customers that it supports, the value that it adds, and how we stack that relative to the competition.
Speaker #4: Great. And just as a follow-up to that, like the business you win with Hive, is that cancelable if the market did go south by those customers or are these non-cancelable agreements that you guys enter into?
Speaker #5: So go ahead. Go ahead.
Speaker #2: And so all of those items will provide some level of insulation.
Speaker #2: The way the programs work, it's similar to distribution. You could cancel contracts, but these are longer-term agreements. Both sides have potential cancellation rights if people don't perform.
Speaker #5: I just want to add two things. So one, when you look at the forecast we've received or the backlog we have, we don't see any sign of concern today.
Speaker #2: But when you go into one of these programs, it can take you a year to get up to speed. What we're working on is, we've won a category within a hyperscaler where we support kind of a multi-year piece of technology.
Speaker #5: Point number one. Point number two is it was interesting to watch the results of Q3 and clearly everybody referring to the fact that there is not enough capacity today in the data center to meet the demands.
Speaker #2: And so, in many cases, these programs can last a few years, but there is always the potential that volumes can move around. But we feel really good about where Hive sits within the customers that it supports, the value that it adds, and how we stack up relative to the competition.
Speaker #5: And so again, the combination of the two makes me feel I mean, cautiously optimistic for next year.
Speaker #4: Great. Thank you, guys.
Speaker #1: Your next question comes from Ruplu Bhattacharya with Bank of America. Please go ahead.
Speaker #2: And so, all of those items will provide some level of insulation as we move forward.
Speaker #6: Hi, good morning, Patrick and David. Thanks for taking my question. You've reported good results and guidance. Looks like gross margin overall declined 60 bips year on year.
Speaker #5: I just want to add two things. First, when you look at the forecast we've received or the backlog we have, we don't see any sign of concern today.
Speaker #6: Can you elaborate more on what was that mix that impacted margins and was there anything unique about the advanced solution side of the America's distribution business?
Speaker #5: Point number one. Point number two is, it was interesting to watch the results of Q3, and clearly everybody is referring to the fact that there is not enough capacity today in the data center to meet the demands.
Speaker #6: Because it looks like that region had gross margins down the most about 120 bips. So any further color on what impacted margins? Thank you.
Speaker #2: Sure. Thanks, Ruplu. When you look at the overall margins, we just focus on distribution for a second. The mix that we're referring to is largely product-related.
Speaker #5: And so, again, the combination of the two makes me feel, I mean, cautiously optimistic for next year.
Speaker #4: Great. Thank you, guys.
Speaker #1: Your next question comes from Ruplu Bhattacharya with Bank of America. Please go ahead.
Speaker #2: So within North America, there was a few larger transactions specifically around infrastructure build-outs. And some of those categories have slightly lower gross margins relative to the average.
Speaker #6: Hi, good morning, Patrick and David. Thanks for taking my question. You've reported good results and guidance. It looks like gross margin overall declined 60 basis points year on year.
Speaker #2: Within Hive, it's the same impact that we accommodate on last quarter, which was we have ramped a large AI server program that's profitable, but it margins that are slightly below the average Hive margin.
Speaker #6: Can you elaborate more on what was that mix that impacted margins, and was there anything unique about the advanced solutions side of the Americas distribution business?
Speaker #6: Because it looks like that region had gross margins down the most—about 120 basis points. So, any further color on what impacted margins? Thank you.
Speaker #2: And that's what's caused the year-over-year declines for Hive. But net net, when you take a huge step back, our teams both in distribution and Hive have done a really nice job managing margin, managing pricing, and making sure that within distribution, when volume shifts between categories, that they prudently manage their cost to continue to drive operating levels.
Speaker #2: Sure. Thanks, Ruplu. When you look at the overall margins, if we just focus on distribution for a second, the mix that we're referring to is largely product-related.
Speaker #2: So, within North America, there were a few larger transactions, specifically around infrastructure build-outs. Some of those categories have slightly lower gross margins relative to the average.
Speaker #2: So we feel very good about the performance that the teams put out for the quarter.
Speaker #6: Okay. Thanks for the details.
Speaker #1: Your next question comes from Erik Woodring with Morgan Stanley. Please go ahead.
Speaker #2: Within Hive, it's the same impact that we commented on last quarter, which was that we have ramped a large AI server program that's profitable, but with margins that are slightly below the average Hive margin.
Speaker #7: Super, guys. Thank you so much for taking my question. And I'm going to ask something kind of similar to Ruplu there. Maybe try to be a little more specific, which is on that advanced solution side, you're talking about mix.
Speaker #2: And that's what's caused the year-over-year decline for Hive. But net-net, when you take a huge step back, our teams, both in Distribution and Hive, have done a really nice job managing margin, managing pricing, and making sure that within Distribution, when volume shifts between categories, they prudently manage their costs to continue to drive operating levels.
Speaker #7: I just want to make sure and clarify for everyone here I think there's probably some concern there could be pricing issues with the cost plus model just because of where pricing is going.
Speaker #7: Can you just clarify for us that the advanced solutions margin gross margin pressure that you saw was really just a function of mix and those deals and that any like-for-like margins were not seeing we're not seeing pressure year over year this quarter?
Speaker #2: So we feel very good about the performance that the teams put out for the quarter.
Speaker #7: Thanks so much, guys.
Speaker #6: Okay. Thanks for the details.
Speaker #2: Sure. No, Erik, thanks for the question. And you've read it correctly. When you look at the overall margins, if you really start to double-click them, they're relatively stable.
Speaker #1: Your next question comes from Eric Woodring with Morgan Stanley. Please go ahead.
Speaker #2: And so as we've shared previously, our business, we make a percentage of the average selling price. And so what impacted the quarter is we had a couple of large transactions and larger orders tend to be slightly lower margin.
Speaker #4: Super, guys. Thank you so much for of similar to Ruplu there. Maybe try to be a little more specific, which is on that advanced solution side, you're talking about mix.
Speaker #4: I just want to make sure and clarify for everyone here. I think there's probably some concern that there could be pricing issues with the cost-plus model, just because of where pricing is going.
Speaker #2: And so the mix of that is what caused some of the margin impact. In addition to us selling a decent amount of AI infrastructure.
Speaker #4: Can you just clarify for us that the Advanced Solutions gross margin pressure that you saw was really just a function of mix and those deals, and that any like-for-like margins—we're not seeing pressure year over year this quarter?
Speaker #2: It's all profitable business. It's all good ROIC business. But that is what impacted the margin specifically in advanced solutions year over year. Structurally, there's the margins remain highly resilient when you look at it from a category perspective.
Speaker #4: Thanks so much, guys.
Speaker #2: Sure. No, Eric, thanks for the question. And you've read it correctly. When you look at the overall margins, if you really start to double-click them, they're relatively stable.
Speaker #2: So we feel pretty good about that.
Speaker #5: And Erik, good morning. I just want to add one thing. So talking a little bit about our management system. So every month, we are reviewing our margins.
Speaker #2: And so as we've shared previously, our business, we make a percentage of the average selling price. And so what impacted the quarter is we had a couple of large transactions and larger orders tend to be slightly lower margin.
Speaker #5: Of course, by geography, but most important, by technology and by vendor and customer segment. And so we are monitoring that indeed. I mean, like-for-like, margins are stable or evolving.
Speaker #2: And so, the mix of that is what caused some of the margin impact. In addition to us selling a decent amount of AI infrastructure, it's all profitable business.
Speaker #5: And then we look for the why and take corrective measures. So it's a very disciplined approach. And that's the reason when we talk about mix, it's either customer segment who grew faster and has a lower margin or higher margin or a geo who grew faster and has a higher margin or lower margin.
Speaker #2: It's all good ROIC business, but that is what impacted the margin specifically in Advanced Solutions year over year. Structurally, the margins remain highly resilient when you look at it from a category perspective.
Speaker #5: So it's really mix. Otherwise, very, very strong discipline on margin reviews. I mean, to I mean, anticipate any issues and take corrective actions very, very rapidly.
Speaker #2: So, we feel pretty good about that.
Speaker #5: And Eric, good morning. I just want to add one thing. Talking a little bit about our management system—every month, we review our margins, of course, by geography.
Speaker #5: But again, as David mentioned today, we have no issues.
Speaker #5: But most importantly, by technology and by vendor and customer segment. And so we are monitoring that, indeed. I mean, like-for-like, margins are stable or evolving.
Speaker #7: Awesome. Thank you so much, guys. Good luck.
Speaker #5: And the other thing I would add just is and that's very important. I mean, we talked about I mean, taking to the bottom line at least 50% of the GP growth.
Speaker #5: And you can see that today that ratio is significantly better than that. Again, the teams are doing a fabulous job managing cost. We are also obviously starting to leverage AI.
Speaker #5: And then we look for the why and take corrective measures. So, it's a very disciplined approach. And that's the reason when we talk about mix: it's either a customer segment that grew faster and has a lower margin or higher margin, or a geo that grew faster and has a higher margin or lower margin.
Speaker #5: Which I mean, basically is improving the productivity of the overall team. So I mean, operating margins have been consistently improving over the past quarters.
Speaker #5: So it's really mixed. Otherwise, very, very strong discipline on margin reviews. I mean, to anticipate any issues and take corrective actions very, very rapidly.
Speaker #5: And it was true again in Q3.
Speaker #7: Thank you, Patrick.
Speaker #1: And comes from David Vogt with UBS. Please go ahead.
Speaker #5: But again, as David mentioned today, we have no issues.
Speaker #4: Great. Thanks, guys. I'll just squeeze in one in just a little bit multi-part question for David. So David, you touched on seeing free cash flow getting better.
Speaker #4: Awesome. Thank you so much, guys. Good luck.
Speaker #5: And the other thing I would add is, and that's very important, I mean, we talked about taking to the bottom line at least 50% of the GP growth.
Speaker #4: In Q4 and seasonally Q4 is your better period of conversion, better conversion of working capital. Can you kind of help us think through kind of where you think the company's cash flow needs look like as we stretch out into '27?
Speaker #5: And you can see that today, that ratio is significantly better than that. Again, the teams are doing a fabulous job managing cost. We are also, obviously, starting to leverage AI.
Speaker #4: Because the business structurally, 50% bigger than it was effectively a year ago. Just trying to get a sense for where your cash needs are today, what you feel comfortable with, with cash on your balance sheet, and how you're thinking about all the different vectors and permutations, particularly as Hive should continue to grow pretty nicely next year.
Speaker #5: Which, I mean, basically is improving the productivity of the overall team. So, I mean, operating margins have been consistently improving over the past quarters.
Speaker #5: And it was true again in Q3.
Speaker #4: Thank you, Patrick.
Speaker #4: Thanks.
Speaker #1: Next, we have a question from David Vought with UBS. Please go ahead.
Speaker #2: No, it's a good question. So thanks, David. When you think about what we put in our prepared remarks is we expect to generate cash in Q4.
Speaker #4: Great, thanks, guys. I'll just squeeze in one more, just a little bit of a multi-part question for David. So, David, you touched on seeing free cash flow getting better.
Speaker #2: You're right that seasonally, we tend to generate more cash in the back half of the year. Here's the way we think about it. So we would expect a couple of days of improvement in gross cash days quarter over quarter.
Speaker #4: In Q4 and seasonally Q4 is your better period of conversion, better conversion of working capital. Can you kind of help us think through kind of where you think the company's cash flow needs look like as we stretch out into '27?
Speaker #2: That is largely driven by two things. Continued momentum across both distribution and Hive. And knowing that a lot of the cash consumption year to date has come from Hive, and we have to make investments in programs ahead of the ramp.
Speaker #4: Because the business is structurally 50% bigger than it was, effectively, a year ago. I'm just trying to get a sense for where your cash needs are today, what you feel comfortable with in terms of cash on your balance sheet, and how you're thinking about all the different vectors and permutations, particularly as Hive should continue to grow pretty nicely next year.
Speaker #2: And so as those programs ramp, we expect them to be cash generative. As you think about 2027 or more on the long or more beyond, we expect all of our businesses to be sustainable cash generators.
Speaker #4: Thanks.
Speaker #2: No, it's a good question. So thanks, David. When you think about what we put in our prepared remarks is we expect to generate cash in Q4.
Speaker #2: And so we recognize that FY '26 was a period of hypergrowth. But we also front-loaded a lot of working capital investments to enable that.
Speaker #2: You're right that seasonally we tend to generate more cash in the back half of the year. Here's the way we think about it. So we would expect a couple of days of improvement in gross cash days quarter over quarter.
Speaker #2: And so as we move forward, we would expect those all of our businesses to become cash generative. And we feel pretty good about where we are.
Speaker #2: That is largely driven by two things. Continued momentum across both distribution and Hive. And knowing that a lot of the cash consumption year to date has come from Hive and we have to make investments in programs ahead of the ramp.
Speaker #5: And just add one remark. When we look at our more mature programs, at Hive, I mean, indeed, we see that when they reach maturity, they are generating free cash flow.
Speaker #2: And so as those programs ramp, we expect them to be cash generative. As you think about 2027 or more on the long or more beyond, we expect all of our businesses to be sustainable cash generators.
Speaker #5: Okay? So no concerns from that standpoint. But the reality is that the team has done a very good job winning some new programs. Expanding the customer base.
Speaker #5: And yes, so we are in an investment phase to ramp up all those programs. But again, when the program matures, it is it generates free cash flow.
Speaker #2: And so we recognize that FY26 was a period of hypergrowth, but we also front-loaded a lot of working capital investments to enable that. As we move forward, we would expect all of our businesses to become cash generative.
Speaker #4: Great. Thanks, Patrick.
Speaker #1: Your next question comes from Katherine Murphy with Goldman Sachs. Please go ahead.
Speaker #2: And we feel pretty good about where we are.
Speaker #6: Thank you for the question. Maybe to stick on the Hive manufacturing piece, can you talk more about the mix of programs in the quarter?
Speaker #5: And just add one remark. When we look at our more mature programs, at Hive, I mean, indeed, we see that when they reach maturity, they are generating free cash flow.
Speaker #6: You mentioned that the AI server business that you highlighted last quarter remains largely stable. And as these new programs layer in, mix should improve.
Speaker #5: Okay, so no concerns from that standpoint. But the reality is that the team has done a very good job winning some new programs and expanding the customer base.
Speaker #6: But maybe talk more to the outlook for the traditional server, networking, storage programs. In the new engagements, as well as the timing of when some of these legacy engagements may start to roll off or be less significant.
Speaker #5: And yes, so we are in an investment phase to ramp up all those programs. But again, when the program matures, it is it generates free cash flow.
Speaker #6: Thank you very much.
Speaker #5: Yeah. So good morning. So if you look at the quarter, Q3, so we had this large GPU program. And networking continued to be very strong.
Speaker #4: Great. Thanks, Patrick.
Speaker #1: Your next question comes from Catherine Murphy with Goldman Sachs. Please go ahead.
Speaker #5: If you look at the new programs we've won, they are primarily networking programs, okay? So again, at a good margin. We started seeing some of the ramp this quarter and we are going to see an acceleration in Q4 and Q1.
Speaker #6: Thank you for the question. Maybe to stick with the Hive manufacturing piece, can you talk more about the mix of programs in the quarter?
Speaker #6: You mentioned that the AI server business, which you highlighted last quarter, remains largely stable. And as these new programs layer in, the mix should improve.
Speaker #6: But maybe talk more about the outlook for the traditional server, networking, and storage programs in the new engagements, as well as the timing of when some of these legacy engagements may start to roll off or become less significant.
Speaker #6: Thank you.
Speaker #1: Your next question comes from Guy Hardwick with Barclays. Please go ahead.
Speaker #6: Thank you very much.
Speaker #4: Hi, good morning. I wonder if you guys could update us on the agreement, the agreement with Amazon, whether that's had an impact on revenues in the quarter, on and also whether it's also some of the revenues the unvested portion or vested portion has been netted off the revenues.
Speaker #5: Yeah, so, good morning. If you look at the quarter—Q3—we had this large GPU program, and networking continued to be very strong.
Speaker #5: If you look at the new programs we've won, they are primarily networking programs, okay? So again, at a good margin. We started seeing some of the ramp this quarter, and we are going to see an acceleration in Q4 and Q1.
Speaker #4: And then a follow-up question on Hive. Given there was more manufacturing growth and supply chain growth, though I know you've kind of already answered the question, you would expect a positive mix on that, but you're saying within manufacturing, there's a negative mix.
Speaker #4: Is that am I understanding that correctly?
Speaker #2: Thanks for the question. So we'll try to cover both of them. When you as you know, we announced a warrant agreement with Amazon and what we shared at that time is we expect this to be mutually beneficial to both of us.
Speaker #6: Thank you.
Speaker #1: Your next question comes from Guy Hardwick with Barclays. Please go ahead.
Speaker #7: Hi, good morning. I wonder if you guys could update us on the agreement, the agreement with Amazon, whether that's had an impact on revenues in the quarter and also whether it's also some of the revenues the unvested portion or vested portion has been netted off the revenues.
Speaker #2: And so this is an agreement that's seven years long. And so we would expect over the course of the agreement that both sides to benefit.
Speaker #2: I think it's too soon to get into exact specifics on how things played out in the quarter, but what I can tell you is our relationships across all of our customers within Hive are very good and we continue to invest in capabilities that add value to all of our partners.
Speaker #7: And then a follow-up question on Hive. Given there was more manufacturing growth and supply chain growth—though I know you've kind of already answered the question—you would expect a positive mix on that, but you're saying within manufacturing, there's a negative mix.
Speaker #2: When you think about the mix, within margins as it relates to Hive, you are correct that the AI server program that we've referenced, which has caused some of the margin decline, year over year is a manufacturing program.
Speaker #7: Is that am I understanding that correctly?
Speaker #2: Thanks for the question. So we'll try to cover both of them. As you know, we announced a warrant agreement with Amazon, and what we shared at that time is we expect this to be mutually beneficial to both of us.
Speaker #2: And then a lot of the new programs that we've won are also manufacturing. And so this has been a year where we've had somewhat of a headwind to gross margins, but as we look forward and as these new programs ramp, we feel very good about the trajectory of the margins as a lot of these new programs are neutral to accretive to Hive in total.
Speaker #2: And so this is an agreement that is seven years long. And so we would expect, over the course of the agreement, that both sides benefit.
Speaker #2: I think it's too soon to get into exact specifics on how things played out in the quarter. But what I can tell you is our relationships across all of our customers within Hive are very good.
Speaker #4: Thank you.
Speaker #1: Your next question comes from David Page with RBC Capital Markets. Please go ahead.
Speaker #2: And we continue to invest in capabilities that add value to all of our partners. When you think about the mix within margins, as it relates to Hive, you are correct that the AI server program that we've referenced—which has caused some of the margin decline year over year—is a manufacturing program.
Speaker #7: Hi, good morning, Patrick, David. Thanks for taking my question. I want to ask on distribution and endpoint. One of your closest competitors had noted that there's still 300 more million unrefreshed to Windows 11.
Speaker #7: So it looks like you had good growth in PC in the quarter. So I just wanted to get your thoughts on, I guess, the demand environment, the refresh cycle, and what you see going forward.
Speaker #2: And then a lot of the new programs that we've won are also manufacturing, and so this has been a year where we've had somewhat of a headwind to gross margins.
Speaker #2: But as we look forward, and as these new programs ramp, we feel very good about the trajectory of the margins, as a lot of these new programs are neutral to accretive to Hive in total.
Speaker #7: Thanks.
Speaker #5: Yeah. Thanks a lot. So good morning. So PC did overall well. Grew double digit. Now if you peel the onion, units were down. I mean, we had forecasted the PC units to go down mid to high single digit, which is what happened this quarter.
Speaker #7: Thank you.
Speaker #1: Your next question comes from David Page with RBC Capital Markets. Please go ahead.
Speaker #8: Hi, good morning Patrick, David. Thanks for taking my question. I want to ask about distribution and endpoint. One of your closest competitors noted that there are still 300 or 400 million devices not yet refreshed to Windows 11.
Speaker #5: And more than offset by price increases and mix. So let me just provide some color here. So indeed, component price increase has driven an increase of average selling prices.
Speaker #8: So it looks like you had good growth in PC in the quarter. I just wanted to get your thoughts on the demand environment, the refresh cycle, and what you see going forward.
Speaker #5: But another phenomenon which is very interesting is the fact that the market is buying more the mid-range and higher range type PCs. Rather than the low range.
Speaker #8: Thanks.
Speaker #5: Yeah, thanks a lot. So, good morning. PC did overall well and grew double-digit. Now, if you peel the onion, units were down.
Speaker #5: Why? Because also when our manufacturers get their allocations, they allocate them to the mid-range and the higher range of their portfolio. So some of the ASP increase is really due to components, but some of it is due to a change in mix.
Speaker #5: I mean, we had forecasted PC units to go down mid to high single digits, which is what happened this quarter, and that was more than offset by price increases and mix.
Speaker #5: The refresh is not over. So and so we should still see some tailwinds because of that. Now the price increase, as expected, is having some impact on the volume.
Speaker #5: Let me just provide some color here. Indeed, component price increases have driven an increase in average selling prices. But another phenomenon, which is very interesting, is the fact that the market is buying more of the mid-range and higher-range type PCs.
Speaker #5: It has less impact on B2B, where we play. It will have it has more impact on B2C, where we don't place we have a very small play in the market.
Speaker #5: So PC continues to be overall in value a very good category. And just add that AI PCs continue to grow and represent now close to 50% of the total revenue for us.
Speaker #5: Rather than the low range, why? Because also when our manufacturers get their allocations, they allocate them to the mid-range and the higher range of their portfolio.
Speaker #5: So some of the ASP increase is really due to components, but some of it is due to a change in mix. The refresh is not over.
Speaker #5: And AI PCs is potentially becoming an important part of the infrastructure to run AI workloads.
Speaker #5: So, we should still see some tailwinds because of that. Now, the price increase—as expected—is having some impact on the volume.
Speaker #7: Thank you.
Speaker #1: Your next question comes from Vincent Colicchio with Barrington Research. Please go ahead.
Speaker #5: It has less impact on B2B, where we play. It will have more impact on B2C, where we don't play; we have a very small presence in the market.
Speaker #8: Yes. Are you seeing customers consolidate their distribution relationships as technology becomes more complex? And is the company gaining wild share as a result?
Speaker #5: So, PC continues to be, overall in value, a very good category. And just to add, AI PCs continue to grow and now represent close to 50% of the total revenue.
Speaker #5: So good morning. Thanks a lot for the question. I mean, as you have noticed, we grew faster than market and we've done that now consistently for many quarters.
Speaker #5: I think it's due to two things. So one, from a customer side, indeed, I mean, we have this collection of specialist approach, which means that we have a very appealing value-added value proposition by technology.
Speaker #5: For us, an AI PCs is potentially becoming an important part of the infrastructure to run AI workloads.
Speaker #8: Thank you.
Speaker #5: And that puts our teams in a very good position to support customers who have to deliver business outcomes which are more and more complex to deliver.
Speaker #1: Your next question comes from Vincent Coliccio with Barrington Research. Please go ahead.
Speaker #8: Yes. Are you seeing customers consolidate their distribution relationships as technology becomes more complex? And is the company gaining market share as a result?
Speaker #5: So yes, I believe that our approach has makes us, I would say, probably very well differentiated to help our customers win the deals and grow.
Speaker #5: Good morning. Thanks a lot for the question. As you have noticed, we grew faster than the market, and we've done that now consistently for many quarters.
Speaker #5: But we see at the same time, in the vendor community, a trend accelerating in terms of rationalizing the go-to-market. So reducing the number of direct customers, direct resellers, and number of distributors.
Speaker #5: I think it's due to two things. So, one, from a customer side—indeed, I mean, we have this collection of specialist approach, which means that we have a very appealing, value-added value proposition by technology.
Speaker #5: And because of our value prop, because of the relationships we've built, over the years, I think we are going to continue to benefit from that trend.
Speaker #5: And that puts our teams in a very good position to support customers who have to deliver business outcomes, which are more and more complex to deliver.
Speaker #8: Thank you.
Speaker #1: Your next question comes from Alek Valero with Luke Capital. Please go ahead.
Speaker #5: So yes, I believe that our approach has made us, I would say, probably very well differentiated to help our customers win the deals and grow.
Speaker #6: Hey guys, good morning. Thank you for taking my question. My first question is on enterprise. So you've mentioned that you're seeing more growth in enterprise.
Speaker #6: It sounds like this is something that's going to continue. Can you talk to the kinds of things that enterprise customers are prioritizing and where are you best positioned to capture that spend?
Speaker #5: But we see, at the same time, in the vendor community, a trend accelerating in terms of rationalizing the go-to-market—so reducing the number of direct customers, direct resellers, and the number of distributors.
Speaker #5: Okay. So good morning. So I'm going to distinguish between compute and storage. On compute, two things. So you still have the refresh of the general compute server base.
Speaker #5: And because of our value prop, and because of the relationships we've built over the years, I think we are going to continue to benefit from that trend.
Speaker #5: And as you know, the new generation has more cores and can replace several servers from the old generation. So what you see is a decline in unit.
Speaker #8: Thank you.
Speaker #1: Your next question comes from Alec Valero with Loop Capital. Please go ahead.
Speaker #5: But an average value which is significantly higher. So we see very nice growth in general compute. And we also see, obviously, I mean, an increased demand when it comes to AI compute driven by the fact that companies are absolutely building their factories to take advantage of agentic AI.
Speaker #6: Hey, guys. Good morning. Thank you for taking my question. My first question is on enterprise. So you've mentioned that you're seeing more growth in enterprise.
Speaker #6: It sounds like this is something that's going to continue. Can you talk to the kinds of things that enterprise customers are prioritizing and where are you best positioned to capture that spend?
Speaker #5: Okay, so good morning. I’m going to distinguish between compute and storage. On compute, two things: you still have the refresh of the general compute server base.
Speaker #5: And what we see is some very large deals coming from large enterprises but we are starting to see also mid-sized companies investing in that space.
Speaker #5: On storage, what we see is a modernization, an acceleration of the modernization of the data center. I think AI will continue to play a key role.
Speaker #5: And as you know, the new generation has more cores and can replace several servers from the old generation. So what you see is a decline in units.
Speaker #5: Important aspect, if you want to get the full benefit of your language models, you need to have the data in a good shape. And that means investing in storage.
Speaker #5: But an average value which is significantly higher. So we see very nice growth in general compute. And we also see obviously I mean, an increased demand when it comes to AI compute driven by the fact that companies are absolutely building their factories to take advantage of agentic AI.
Speaker #5: So I mean, that's something we are seeing too. And here for storage, we see an increase in units and of course in value.
Speaker #6: Got it. That's super helpful. Thank you for that. And just a quick follow-up on networking actually. So I see networking grew 19% year over year.
Speaker #5: And what we see is some very large deals coming from large enterprises, but we are starting to see mid-sized companies investing in that space as well.
Speaker #6: Although it was the slowest growing hardware category, what are the puts and takes puts and takes there? Any color you can provide on networking?
Speaker #5: On storage, what we see is an acceleration of the modernization of the data center. I think AI will continue to play a key role.
Speaker #5: Yeah. So networking, again, just want to put some context. If you just go back last year, was a little bit a challenge category. Things have completely changed now.
Speaker #5: An important aspect—if you want to get the full benefit of your language models—is that you need to have the data in good shape. And that means investing in storage.
Speaker #5: I mean, you have a need for massive refresh I mean, Wi-Fi 7, switches, to support AI. So you have a series of tailwinds in networking.
Speaker #5: Which are driving a nice increase in units. And on top of it, so the magnitude is not comparable to what we see in compute or PCs, but we start seeing some price increases also.
Speaker #5: So, I mean, that's something we are seeing too. And here, for storage, we see an increase in units and, of course, in value.
Speaker #6: Got it. That's super helpful. Thank you for that. And just a quick follow-up on networking, actually. I see networking grew 19% year over year.
Speaker #5: And so the combination of the two makes the category very strong. And I think it's going to continue for some time. So it's another category where we are very optimistic.
Speaker #6: Although it was the slowest-growing hardware category, what are the puts and takes there? Any color that you can provide on networking?
Speaker #5: For the coming quarters. And yeah.
Speaker #5: Yeah, so networking—again, just to put some context—if you go back to last year, it was a bit of a challenging category. Things have completely changed now.
Speaker #6: Awesome. Thank you.
Speaker #1: We have reached the end of the Q&A session. I will now turn the call back to Patrick for closing remarks.
Speaker #5: I mean, you have a need for massive refresh I mean, Wi-Fi 7, switches, to support AI. So you have a series of tailwinds in networking.
Speaker #5: Thank you all for joining us this morning. As we conclude, I'd like to express my gratitude to our co-workers around the world whose hard work, dedication, and commitment make our success possible as well as to our partners for their continued trust and support.
Speaker #5: Which are driving a nice increase in units. And on top of that, while the magnitude is not comparable to what we see in compute or PCs, we have started seeing some price increases as well.
Speaker #5: To everyone on today's call, thank you for your ongoing interest in TD SYNNEX. And I'm wishing you a great day.
Speaker #5: And so the combination of the two makes the category very strong, and I think it's going to continue for some time. So it's another category where we are very optimistic.
Speaker #5: For the coming quarters. And yeah.
Speaker #6: Awesome. Thank you.
Speaker #1: We have reached the end of the Q&A session. I will now turn the call back to Patrick for closing remarks.
Speaker #5: Thank you all for joining us this morning. As we conclude, I'd like to express my gratitude to our co-workers around the world whose hard work, dedication, and commitment make our success possible as well as to our partners for their continued trust and support.
Speaker #5: To everyone on today's call, thank you for your ongoing interest in TD SYNNEX. I wish you a great day.
