As you're probably hardware and electronics companies at JP Morgan. The next session I'll be favorably hosting Ingram Micro and with us, Mike Zilis, who's the EVP and Chief Financial Officer. Mike, thank you for coming to the conference. Thank you to the audience as well. We're starting off every company with a question on the macros, so I'll do the same with you. It's more just to get your latest thinking on the macro based on the feedback you're getting from your customers. You talk to a lot of customers on a daily basis, and investors are concerned whether we should be thinking of a significant slowdown in the macro in the back half of the year. Based on what your conversations are like, what do you think you can offer in terms of what's your outlook in the back half?
How are you planning to run the business? Give me the scenarios that might play out for the back half.
Yeah. Realizing we just did our earnings last week and we only tied out a quarter, but I'll give some flavor on how we see things. We see some of this in our earnings release as well. As we look at Q2, we're still seeing growth. Our guide at the midpoint is around that single-digit growth, honestly. We've seen very—that's the most robust strength in the last couple of quarters has been more in the PC, desktop, notebook category, where we've seen strong double-digit growth in Q4 and Q1. We really get a lot of questions around, is there pull forward happening in advance of tariffs? It's really very challenging to quantify because remember, we're in a two-tier model where we're selling to resellers and ultimately on to end users. We get directional indications sometimes that some of this might be pull forward efforts.
Some of it is just normal investment. You have to remember in that category of products, there was a very long stretch where expectations were for refresh cycle to be happening, but it was happening at low single digits. I think a lot of it is just the spike in the refresh cycle, and then some of it is—probably a bit of it is pull forward, but it is hard to quantify. We are not really going to see pull forward in any other notable hardware areas, honestly, inclusive of our advanced solutions area. We have seen strength in servers, cybersecurity, cloud is still strong. We are seeing networking start to rebound into growth, not as growth, but growth, which is nice after some time. That is sort of how we see Q2 coming as well, albeit we are not assuming strong double-digit growth in that PC category.
We're assuming maybe it's decent single digits for sure. So it's still a refresh cycle. The big million-dollar question to where you're asking is, where do tariffs really land? Obviously, there's this respite in place for many countries. We're encouraged to see some deal negotiations happening. U.K. last week, colors on the table, China discussions happening. That's all encouraging because certainly certainty will help a lot regardless of where tariffs land. Just knowing the layout of the land will be quite helpful for us, but I'm not sure where things land in early July. If we see a very extensive tariff environment, my biggest concern right now in the market that we are in would be the impact of an inflationary or even recessionary environment more on the SMB space because that's where we make higher profits.
That's where we add more value with services attached, and the channel brings more value to the end user, customer, and we're compensated for that. That's an area that certainly today is more muted. We see demand, but we're seeing it take longer to close deals. There are deals in the pipeline, discussions happening. It's still intense, but I think there's a little bit more of a wait-and-see environment versus in more of a large enterprise, what we call national service providers in the U.S., as an example. That's been very nice growth, but that tends to be a lower margin business for us.
Maybe the same thing you refer to in terms of versus larger customers, if you can sort of offer the same perspective, if you were to see slowdowns in enterprise budgets, how do you think about the different product categories? You've been able to explain prices, networking, server storage, how you're thinking about resilience in demand for those categories?
I mean, I think we've been through a softer cycle, generally speaking, for the last year plus. In networking, it was a very unique circumstance for 2022. We had all the supply constraints on chips that came back into the flow in 2023. 2023 was a record year for growth for networking in many respects. We had that compare in 2024. That was very challenging. That's why I'm encouraged that that returns back to growth. There is still the windows end of life. There is the ability to extend, but that's a challenging one for corporations to keep doing in any extended way. We still believe that end of life at the end of this year is going to continue to drive refresh in that kind of device and systems category.
Across the other areas, there is still quite a bit of pending demand. Cybersecurity is something that's going to be very resilient through both cycles. It might not grow as robustly in some as others, but it's still going to continue to grow as technology becomes more complex. Technology in general is resilient. If there is a down cycle, automation, as you try to reduce costs, is the best way to move forward. Technology is a pretty resilient area that I'm not overly concerned if we see an inflationary or a recessionary environment that we would see a major downturn, but we may see flattening. I think the areas again that would be more sensitive on the customer side are going to be the small, medium-sized business where there's just more sensitivity to cost.
Just moving on then to the company that you operate in, your teamwork and at least my question from a lead sales in relation to competing with other large competitors in the space, distributor in terms of the differentiation, and you've done well over at least the last couple of years in terms of outperforming the market. Maybe just sort of give us sort of your maybe quick basic concept of how do they make the difference to the largest competitors in the space, and what is the differentiation for a distributor look like to the individual customer?
I think from our perspective, I think the biggest areas I would point out are, one, our breadth, and that's breadth geographically. For one, we touch 90% of the global population with the base in 57 countries. We service 200+ different countries around the world with our footprint on a combination of in-country presence and export models. That is inclusive of building and doubling down, honestly, in some of the more emerging markets such as Asia-Pacific and Latin America, where we have even purchased some of the businesses of some of our peers as we see more opportunity there over the years. Our combination of our APAC and LATAM businesses have now grown to be more than a third of our business, decently over a third in the last quarter, honestly, getting close to 40%.
That presence is important, especially when you think about global vendor relationships and how you work with global OEMs. That is the other area of breadth. We have more than 1,500 tech vendors that we work with, tech providers of hardware, software, services, and the like. Bringing that together, when you think about what we call advanced solutions, which is more of the enterprise-grade hardware, software, networking, and infrastructure, cloud sort of follows along with that. Our data shows that on average, six or more different products or services make up the end solution for a customer. You think about that value prop as well of that breadth and being able to have not just one, but two, three, four different alternatives in a certain category of products that are going to be able to be best suited to build those bespoke solutions.
That really is what advanced solutions represent. I would—that's a good segue to a second area, which is we have continued to invest into that advanced solutions and cloud area. We've invested more than $600 million over more than a decade plus into our Cloud Marketplace to develop a mode to market for everything as moving to as a service and now more and more moving to multi-year deals and the like. In advanced solutions where via both organic and inorganic investments, we've built capabilities, technical engineering skill sets, pre- and post-sale support, consultative skill sets, as well as a plethora of other service offerings that really round out that solution. Last but not least, the precursor of the cloud investment has now been now the basis for the last couple of years building our Xvantage platform, which is our digital go-to-market platform.
This is probably the single biggest differentiator, honestly, right now as far as how we are moving faster than peers as building out a true platform company in many ways. The Xvantage platform, the best way I would say to think about this is bringing a B2C experience into a B2B world. A couple of examples I would say here. If you think about what I said earlier, six or more products or services making up a solution, that's really complex. How do you build pricing on that? How do you deal with different vendor programs, rebates, incentives? We've now automated that. It's automated with a data mesh that lays over our systems. Therefore, it's ERP agnostic, and it creates the plugins not only into our capabilities and systems, but also outward into those of our vendors and customers.
We launched the integration hub in the last couple of quarters, which now, in a matter of minutes, customers and vendors can onboard with their CRMs or whatever their systems are seamlessly into Xvantage. That used to take weeks, months, or longer. We are doing that in a matter of minutes now. We have also launched a number of different large language models and AI and machine learning, more than 300 models embedded in this program, 4 PB of data now overlaying in this data mesh, 32 million lines of accounting as far as program code around this. This is real. It is in 20 of our 57 countries in a meaningful way. It is in 20 countries that are larger in size, so a majority of our revenue.
We see a lot of stories from others in the industry around things we are doing of a similar ilk, but I think we're ahead of the hill.
Similar next question, and I think someone who's seen a bit more feedback. Product would be essentially looked at the industry just runs from production product itself, and can we get something for the overall traditional way the industry has operated with expansion? Can you speak to whether sort of companies that you have with expanded edge? And then on their own platform, on their own basis, we can see sort of from the anecdotes that you shared, expanded edge is doing well with customers. What do you think in terms of revenue synergies as a result of it? When does it become a key revenue and cost synergy?
Yeah. So I think certainly others are working along similar lines, but I'm a firm believer. I realize I'm biased when I make this statement, but I believe with the investment we made in our Cloud Marketplace, again, as a baseline on this, and now taking this forward, by the way, the Cloud Marketplace is unified, so it's a single pane of glass. We don't have multiple places where a customer needs to go or a vendor needs to go in the system. I think we're multiple years ahead in many ways as far as what we're doing here. What we've seen first as far as the benefits of this actually have been more cost synergies. There's an example we give pretty frequently. Just in the U.S. alone, we used to take millions of order checks a year.
Somebody calling up just to understand, "Okay, where's my product?" That is now with the APIs that we've linked into the OEMs as well as into the common carriers that are carrying that product, again, bringing more of that B2C experience like you or I would all experience if we went onto Amazon and you can tell our order is unstuck and it's going to be there in the next day. That used to take time. It was sales admin kind of time where people are making calls to the vendors, to the carriers, trying to understand. It's a very complex issue to solve, but a very simple problem. If you think about it, that is now automated.
We've found that we've removed more than $200 million of annualized costs out of our business over the last year and a half, roughly, through actions where we knew that part of that was directed at areas where with the macro environment, it was a business that was struggling a little bit more, and we saw the need to take out costs. The beauty of what Xvantage has provided is that we do not have those costs down, and we can instead reinvest in a more proactive selling motion and not have to deal with some of those back office admin and other needs. Cost synergy is probably the first area. If I point to our last quarter where our FX neutral growth was double digits, up to 11%, I think that is above market growth as well.
I think we're starting to see that we're driving some of the revenue synergies that you just mentioned and ultimately GP synergies as well, which is highly dependent on the mix of the products we sell and the customer mix as well. We're starting to see some of those benefits come through.
Got it. Going back to the only call, you talked about IDA or digital assistant, and maybe just outline what that feature and convenience improvement looks like to some of your internal stakeholders as well as customers.
Yeah. So it's Intelligent Data Assistance. It's IDA, as we call it. And basically, this is a sales aid into our selling base, but also ultimately to our customers who are dealing with their end users. It's again, AI-enabled. It's basically taking predictive capabilities on buying proclivities of the end users. Where are they in their refresh cycles? Where are they in their product cycles? What have they purchased in the past? Where do we see that landing? And proactively prioritizing the selling process. It's a kind of perfect example where now we can be far more proactive in the selling cycle than reactive. You couple that with automated recommendations and Xvantage brings to the table of coupling different programs, warranties, service packs, other products with a sale.
It's enabling a go-to-market motion that can be far more proactive and consultative rather than reactive as what we've seen in the past. We are really excited about it. It's launched primarily in the U.S. and rolling out more widely, but we've seen significant success with it so far.
Got it. Moving to some of the product categories, and I know we talked about some of the places already and sort of your views in relation to what you're seeing for the refresh cycle there. But maybe if you can sort of comment on, you did mention that once you had very robust growth, you've taken a lower growth assumption with 2Q, but is that already starting to see as a step down in your orders? I mean, or are you just being cautious about potentially there having been a pull-in in 1 Q? And maybe second part of that is, have you seen any price increases already being passed through because of tariffs to customer, and what has the elasticity of demand from your standpoint look like?
Yeah. I'd say in April and May, we've seen, well, for April, we saw some similar trends of more robust growth. We gave some indication of this in our earnings call. May, perhaps tempering a little bit. It's still halfway through the month at this point. I think it's driving perhaps a little bit more towards the high end, maybe push us more towards the high end of our guidance if that were to continue. We'll see how that plays out over the course of the month. We just saw that as more of a prudent thought process aligned to IDC and other metrics that are out there as far as how we see that CCP top category moving. As far as price increases, we really haven't seen much.
It's kind of single-digit percentages, and I'm going to focus with the U.S. on that commentary because sort of the response of Paris and other countries are on our tail, honestly, to see how that really plays out. In the U.S., you can kind of see single-digit percentages of our product where we've seen price increases kick in in relatively modest and manageable ways. We're working proactively with our vendors to understand how they see that playing out in the future, depending on where tariffs land. The good news is, I think this is actually a benefit of the COVID scenario. I think the OEMs in our space did a tremendous amount coming out of the COVID world of 2021 to diversify their manufacturing and sourcing. Now it's all about toggling. Where is it best for us to source from depending on where that product is going?
It is diminishing some of the impact of this. Not all of it, but some of it. So far, not a lot of price increases, and we are working closely to understand how that will follow through as we see the tariff situation stabilize in the coming months.
Got it. Got it. Just to follow up to that, the momentum that you're seeing in client devices, is that constrained to the US, or what does the international market look like in terms of client devices?
It's been fairly similar everywhere. A little bit more tempered in Latin America for probably a variety of reasons. Currency and other being in play there. Generally speaking, we're seeing growth in that category around the world.
Got it. Okay. Good. Moving to the customer cohort, I mean, we did talk about SMB, but in the call you've had, highlighted that you're seeing more resilience in large enterprises, and SMBs may be a bit weaker. Is that a commentary to U.S. alone, or is that a broader global?
I would say similarly. It's probably a little bit more pronounced in the U.S. And some of that is just a function of we tend in the U.S., with the business the size of our U.S. business, tends to have more of the larger enterprise customers, but maybe a little bit more pronounced in the U.S. and in North America in general. But it is a phenomenon we're seeing everywhere where SMB is just a little bit more weaker.
Okay. Moving to AI, maybe I'll start you off with the AI infrastructure first, and then we can move to the ITCs. What is the goal? You are obviously embedding AI in your service itself. When you think about enterprise adoption of AI infrastructure or AI PCs, what is the role that Ingram plays, particularly given this different infrastructure where it is obviously some value capture that a retailer is also looking to do? How do you think about how much of that value on the services side flows through Ingram?
We absolutely see that as a value prop longer term. AI is going to become more proliferated throughout solutions, but it's still early innings, honestly. I think where investment in AI is happening tends to be more in the larger enterprise where there can be a little bit more experimentation around how you can allow AI solutions in different ways. We've seen a little bit more there. There's the common question of AI-enabled systems as well. When there are systems out there, they tend to be a higher price point, and OEMs are putting more and more out that'll serve mid-market, and that becomes intriguing. Perhaps that levels off some of the physicality of PC refresh, honestly, on a longer-term basis, even after the Windows end of life comes around as AI-enabled devices become more available and more cost-effective.
It has been early innings as far as real impact on the business. That said, we've continued to invest, especially in areas like infrastructure that may be needed to serve AI solutions. We are seeing investment there for sure into data center, both hybrid and cloud native. We are continuing to build capabilities and consultative skills and the certifications that come along with it to be able to serve that opportunity of AI in the longer term as we see that mature a little bit.
How does the opportunity look really through when you think about enterprise versus SMB as two different segments that you're working with? Does the opportunity look different with the SMBs and what the large enterprise offers?
I think the value prop of Ingram will be where you get to this is more for the SMB side of the equation, where you get to more repeatable solutions that solve a certain problem that's going to be common to the SMB. There is more work towards that. That's going to be a very big value prop. That does not mean SMB would not invest in bespoke solutions as well. They absolutely will, and there is intention there. I think you need to see a little bit more cost-effectiveness and other factors come into play. That is why I see that what we see a little bit more of the investment happening is more in the large enterprise areas, where there is more funding, more capital budgets to be looking at opportunities there and to build out the comparative, and we are seeing that for sure.
Got it. If I could just open it up and see if there's any questions in the room, otherwise we can continue. Anything in the audience? Okay. Let me continue here. Maybe one of the questions that used to come up a lot more when in context of cloud companies and how they were spending on AI, but it's now more relevant going into sort of enterprise when it comes to AI investment is, do you see AI as an incremental opportunity completely, or do you think as enterprises ramp their AI spending, it will cannibalize more traditional infrastructure spending at the same time?
I would see there is absolutely some incrementality to what we would see on AI on the longer term. Like I said, right now, it's certainly incremental spending in means of data interchange, security around it, and the infrastructure to support data needs. That's probably where we play in bigger pieces of this. Ultimately, I think AI can solve problems that would potentially cannibalize some expenditure, but more of the expenditure on people and administrative activities that can be automated. Therefore, from our perspective, it's incremental spend as far as how we serve those markets, even if it may be cannibalizing other areas of spend within a company.
Okay. Okay. Is there also concern about enterprises and SMB in particular, everything more public cloud over the long-term equation, and particularly how do you think that impacts Ingram's overall sort of long-term outlook?
Honestly, we sell public cloud. We sell hybrid, and we help build out on-prem solutions. Any and all of the above are helpful, honestly, as far as how we build our business. I'm personally a firm believer that hybrid is largely interesting. I think there's a balancing act between comfort of what goes fully into public cloud versus what companies want to retain. I think everybody's finding a little bit of that hybrid balancing act, honestly. Because of this, infrastructure as a service, the large-scale hyperscalers, I think Azure, I think AWS as examples, among others, GCP and others, those are big growth areas, honestly. That's why our cloud business has continued to grow the way it has, is because a lot of that's driven by actually infrastructure spend servicing any and all of those solutions.
Okay. Maybe just following up on that, I mean, your cloud business has grown quite robustly. Could you just give us a bit more granularity in terms of what is the sort of product you're selling or what you're reselling to the customer? How do you sort of, how do you drive confidence in relation to sustainability like that? More importantly, I think the cloud profit contribution of the cloud segment is a lot bigger than the revenue contribution. Where do you see that growing in maybe four or five years?
Yeah. Cloud's grown on average double digits for us for years. In fact, it's not too long ago. I remember when it was triple-digit growth. I think that's all about the base, honestly. Cloud business started with selling operating systems, like Windows. I need X number of Windows subscriptions to run my business. We still sell a lot of Windows and operating systems, but infrastructure is probably the area where we've seen the more robust growth from a cloud perspective, honestly, like I mentioned a minute or two ago, and has become a bigger share of that business. To your point on size and scale, from an accounting convention, a lot of the sales of cloud are sold on a net basis as an agent kind of model, and therefore the revenues are only about 1% of our nearly $50 billion revenues.
The cloud gross profit has grown in Q1, as an example, to be 15% of our gross profit. This is meaningfully scaled, very profitable business. There's no inventory, so working capital investment in it tends to average in the low single digits or even zero or negative at times. You can get the sense of why we would invest in that area. It's 15% of our gross profit in Q1. That was 13% a year ago. That gives you a sense of how that sector is growing and becoming a decent share of our overall profitability now. There's no reason to believe we wouldn't continue to see a similar kind of growth sector going forward as we move that forward.
On the selling motion side of things, if I go back again to my example of six or more products making up an advanced solution, that might be some on-prem hardware in the form of servers or networking kit, but then there's the infrastructure that is sold seamlessly as a solution in that kind of one-stop-shop manner that it's not selling to different parts of our business. This is one motion, and that infrastructure or, again, the operating systems or whatever it may be, anything as a service, anything subscription-based that the customer may be seeking as part of that end solution, that's going to be part of that same selling motion that we've been growing our business around.
Okay. Last couple of questions. One, gross margins. You have kind of mentioned 2023 to the same margin in 2024. Maybe just sort of go through what drove the slowdown in the gross margin in 2024, and then do you see that largely as temporary, and do you see more opportunity in growing gross margins?
Yeah. I think it is. I would view it as temporary. I think even in the first part of 2024, margins were growing on a year-over-year basis. It really was more in the latter half of the year and into Q1 where we've seen a little bit of a drop in margins. It's purely mix, honestly. There are really three factors I would call out from a mix perspective and then one more discrete item that we talked about in our earnings. We have product mix, Wi-Fi and endpoint solutions. We've sold a lot of mobility devices as well in recent quarters. That's a lower-margin business. It's customer mix. As I mentioned already, we have more of the large customers where we aren't bringing quite as much of the same value-added solutions, services, and other things to the table.
Some of those sales tend to be more fulfillment mode in many ways versus the SMB being more muted where we channel and Ingram, as a key part of that, bring that value and that service offering to the table. Thirdly, we've seen far more robust growth in our Asia-Pacific market. 23% of ex-mutual growth in Q1. Asia-Pacific, as a rule, is a lower margin but lower cost-to-serve environment. Those three factors, as far as mix, have driven a bit of margin rate headwind. Margin gross profit dollars have been trending in a more favorable manner because the top lines have been growing quite nicely. On top of that, those are lower cost-to-serve areas. We're getting significant leverage on the OpEx side of the equation, and operating margins have been moving in the right direction in that regard as well.
The last thing I would just point out from a more discrete standpoint is we have a very unique and hyper-competitive environment in India. India has now grown a few 10% of our business globally. It is a fantastic market. It is one we continue to grow in, but we are seeing behaviors that are pricing behaviors that negative margins on deals. We are simply not going to participate in those deals. We are going to continue to grow in the areas that are strategic. We are going to continue to bid competitively where it makes sense. We still grew a mix of digits in our Q1 in our India business despite those factors. We are starting to see that level as we expected. Behaviors are subsiding a bit. They are still heightened, but it is starting to get better.
We will see the second half as more normal as we see it today, here in mid-May. That is a very unique factor to India. We see a more competitive market generally around the world. That may impact a bit on pricing or even the terms and conditions and on credit days and things like that that we offer and what others offer into the market. It is pretty nominal, honestly. We operate in a pretty rational industry as a whole. India has just gotten a bit more hyper-competitive on a temporary basis.
Sure. Does the customer mix, the geographic mix of revenue, can this impact the margins more greatly once your cloud business ramps up further and becomes a larger piece overall? Definitely more revenue at high margin, I would assume.
Yeah. Yeah. Cloud will still be double-digit margins, high double-digit margins on that netted down revenue base. That will always be a boost to profit dollars and, sorry, profit margin, I should say, on an ongoing basis. When you do still see growth of nearly 15% of ex-mutual and client and endpoint solutions, that is very robust. That is a sale that tends to be, on average, low to mid-single-digit kind of gross margins and very low cost-to-serve. A lot of that has been sold on fulfillment where the inventory does not even cross through our warehouses. That is why you see that leverage on the OpEx side of the equation. That mix factor is just hard to predict.
Okay. Okay. No problem. We're almost out of time, so I'll wrap it up here. Thank you for coming to the conference and the audience as well. Thank you. You can. I should be on the side.
Yeah.
You mentioned that you feel that the tariffs would have a definitive impact on the entire migration industry in terms of people's pricing that's costing investment. Are you seeing any evidence of your OEM vendors really happy with this market strategy and how they're going to see that tariffs? Do you think they're going to have a significant change?
Not a lot of the stretch on the strategy question. Not a lot of change as far as where we're seeing that so far, but we're monitoring that closely as far as how we see the vendors. Even to the first part of your question, I think it's a little bit early days. I think we're seeing, as far as where we're seeing growth, whether it's cloud or in other areas, that certainly it's been more tempered in some of the cloud and advanced solutions areas versus the client and endpoint, which is, again, more systems, smartphones, accessories, and so forth. We can find a way to yield the room to somebody else that can pick up.
All right. Thanks.