Earnings Call: Q3 2021

Sep 28, 2021

Good morning. My name is Missy, and I will be your conference operator today. I would like to welcome everyone to the TD to next third quarter fiscal twenty twenty one 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. At this time, for opening remarks, I would like to pass the call over to Liz Morelli, Head of Investor Relations. Liz, you may begin. Thank you, and good morning to everyone. Thank you for joining us for today's call. With me today are Rick Toome, CEO and Marshall Witt, CFO. Before we continue, let me remind everyone 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 benefits of the merger to our various stakeholders, IT spending, demand, supply, expenses and growth. Actual results may differ materially from those mentioned in these forward looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form eight ks we filed today and in the Risk Factors section of our Form 10 ks and our other reports and filings with the SEC. 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 eight ks available on our Investor Relations website, ir.synex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without operation. I will now turn the call over to Marshall. Marshall? Thanks, Liz, and thanks to everyone who joined us today for the call. I will begin today by reviewing the legacy Connect's results and drivers for the fiscal third quarter ended March 31. Given our merger closed dated September all discussion and outlook for fiscal Q4 reflect the fourth quarter combined TD SYNNEX, and we will continue to use SYNNEX fiscal year end on November 30 going forward. Moving to the legacy SYNNEX fiscal Q3 results, I'd like to point out that year over year comparisons I will reference today are impacted by both the unusually strong performance we experienced a year ago, given the rapid adoption of work and learn from home trends during the pandemic and the supply constraints currently impacting our industry. Revenues came in at 5,200,000,000.0 reflecting a slight decline from the prior year due to ongoing industry supply chain constraints. As we indicated during our June earnings call, we expected the impact from these constraints to fiscal Q3 revenue would be $150,000,000 to $200,000,000 While demand in the quarter continues to be very strong, the impacts from the industry supply chain shortages were higher than anticipated. While it's difficult to quantify with precision, we believe the impact to our Q3 revenue most likely came in between 200,000,000 and $300,000,000 Demand in the quarter continued to be robust and fairly broad based, and we saw particular strength in commercial software, networking, security and notebooks. Our manufacturing success results were consistent with expectations. Gross profit of $313,000,000 increased $15,000,000 or 5% compared to the prior year, and gross margin was 6%, up from 5.6% in the prior year. Total adjusted SG and A expense was $144,000,000 down 3% year over year and represented 2.8% of revenue. Non GAAP operating income was $168,000,000 and improved by $20,000,000 or 13% versus the prior year, and non GAAP operating margin was 3.23%, up 43 basis points year over year. Q3 interest expense and finance charges were $26,000,000 and effective tax rate was 25%. Interest expense was higher due to the prefunding of $2,500,000,000 of bonds on August 9. Total non GAAP income from continuing operations was $112,000,000 up $15,000,000 and improved by 15% over the prior year. And non GAAP diluted EPS from continuing operations was $2.14 up from 1.8 in the prior year. Now turning to the balance sheet. We ended the quarter with cash and cash equivalents of 4,050,000,000.00 and debt of 4,030,000,000.00, which also reflects $2,500,000,000 of bonds related to merger, which I spoke to previously. Accounts receivable totaled approximately $2,200,000,000 down 20% year over year, and inventories totaled approximately $2,900,000,000 up 7% from the prior year. Our cash conversion cycle for the third quarter was thirty two days, an improvement by one day from the prior year. Cash used in operations was approximately $56,000,000 in the quarter. We are pleased to report that our Board of Directors has approved a quarterly cash dividend of $0.20 per common share for the current quarter. The dividend is expected to be paid on 10/29/2021, to stockholders of record as of the close of business on 10/15/2021. Now moving to our outlook for fiscal Q4, which is reflective of the combined TD and X company. Total revenue is expected to be in the range of $15,000,000,000 to 16,000,000,000 is expected to grow low to mid single digits year over year and in line with historical seasonal trends quarter over quarter despite the supply chain headwinds of approximately 4%. Our manufacturing business is expected to decline year over year due to a strong performance in Q4 of fiscal twenty twenty. This business is lumpy and is also experiencing supply chain constraints. Our approach remains consistent with our guidance, which is that we guide towards the lower end expected outcome for the manufacturing business. Non GAAP net income is expected to be in the range of $242,000,000 to $272,000,000 and non GAAP diluted EPS is expected to be in the range of $2.5 to $2.5 per diluted share on a weighted average shares outstanding basis of approximately 96,200,000.0. Non GAAP interest expense is expected to be approximately $40,000,000 and we expect non GAAP tax rate to be approximately 25%. Please note that these statements regarding our expectations for our fiscal fourth quarter twenty twenty one are forward looking and that our results may differ materially. I will now turn the call over to Rich. Thank you, Marshall, and good morning, everyone, and thank you for joining us today. We certainly accomplished a lot in the last six months. I am privileged to join you today on behalf of the new TG Synix and our more than 22,000 coworkers around the world. Since our official day one earlier this month, we've been hard at work, rolling out our new organizational structure and laying the groundwork for our future combined company. We've announced our executive leadership team comprised of seasoned leaders from both legacy companies. And thanks to our robust planning and integration efforts, we have hit the ground running on post day one goals and objectives. However, we have much to do, and I look forward to sharing updates with you as we progress. We are energized by the positive feedback from our customers and vendors and are well positioned to raise the bar on the value we provide to our partners. Those opportunities are reflected in our new name and logo. Leading position position in the company's position dimensions, including the growth of our business and our partner relationships. We also announced our new shared purpose, mission, vision and values for our coworkers, many of whom I have gotten the opportunity to get to know better in this past month. With each meeting, I come away even more impressed with their collective talent, motivation and commitment to excellence. Although still largely working remotely, we are united behind our vision of connecting the global IT ecosystem and unlocking its potential for all. As we enter our fiscal Q4, we have much to be optimistic about. Our role in the IT industry continues to increase in importance. Our products and services portfolio is tied to some of the highest growth technology markets such as cloud, security, big data and analytics, Internet of Things, mobility and everything we pleased pleased expand globally as we bring our enhanced portfolio to the markets that we serve. From a macroeconomic perspective, we are maintaining a sense of cautious optimism as the recovery from our global pandemic continues to be uneven by geography and industry. For our industry in particular, we believe in the long term drivers for IT spending, but continue to see a supply constrained environment for at least the next few quarters. For Q4, as Marshall noted, our distribution business is robust and on track for a normal seasonality from a sequential perspective and low to mid single digit growth year over year. We see strong demand across PC ecosystem products, advanced solutions and next generation technologies. We continue to see a significant backlog level on a combined basis. We estimate this impact to represent approximate 4% headwind to revenue, but we still believe in a robust demand picture based on discussions with our vendor partners and customers. From a merger perspective, we are on track and committed to achieving $100,000,000 of cost synergies and a 25% non GAAP EPS accretion over the next twelve months. We are optimistic that we can exceed our year one accretion targets. As I mentioned at the beginning of my remarks today, now the real work begins. We are primed and ready for the task of integrating our two great companies, and we'll leverage our wealth of experience in this area. As we contemplate changes, we come to decisions on our integration journey. Our focus is on establishing and maintaining a superior experience for our customers and vendor partners. Among our top objectives is the harmonization of various IT systems, applications and tools in The Americas. We be the company's leader the participation as we move forward together. The opportunities ahead of us are boundless. I look forward to meeting with our investors and analysts in the coming months, sharing our vision of the future of the IT ecosystem and keeping you updated on our integration progress. We will now take questions. Operator? At this time, if you would like The first question comes from the line of Adam Tindle with Raymond James. Okay. Thanks. Good morning, and congrats on closing the deal. I just wanted to start with some of the guidance that we're getting here first on revenue in Q4. So I looked at the eight ks and thanks for giving that historical Takeda information. Tech Data was about $11,000,000,000 of revenue in Q4 of last year. We know SYNNEX core was $6,000,000,000 Combined $17,000,000,000 but if you look at the guidance, it's $15,500,000,000 at the midpoint. Just wondering what I'm missing here. I know you talked about some of the changes in Hive and tough comps. It's hard to explain the full delta based on that. Maybe you can touch on any synergies that you're learning about the vendor or customer love, if any. Adam, this is Marshall. I'll start, and then Rich can chime in. Yes. We're happy to provide it, eight ks. Keep in mind that those quarters, legacy tech data are not our quarters in in regards to November year end measurement. So depending on which quarter you pick, you will get a different outcome. I I focus on Richard's comments around Q4 and the seasonal discussion and year over year discussions on growth rates. I think that's where you should focus on. In my prepared remarks, I did discuss high and its impact on Q3 and Q4. It's down year over year. That's probably one of the elements that's going to be skewing the overall relationship. But fundamentally, from a translation standpoint, relationships first down and typical what we've seen in the past. Yes. It's Rich, Adam. I hope you're doing well. A couple of things in the prepared remarks, you've heard that we've stated low to mid single digits for the distribution business. So you should think that is back in terms of our estimate. The second piece is that we are facing a 4% headwind due to the challenges year on year or sequentially. The backlog is getting bigger for sure. And the third piece that I would comment on at the tail end of your question, we are not anticipating nor have we seen negative revenue synergies associated with our merger? In fact, we have seen, as we had commented at the time of the announcement, even from day one and beyond, actually use of the complementary line cards for both sales teams. So we see those opportunities begin to emerge. Got it. That's helpful clarification. Thanks, Rich. And Marshall, maybe just as a follow-up. You went over cash and debt levels. I just want to make sure I'm getting true current leverage levels on a pro form a basis. And if you could also touch on how you think about normalized free cash flow in the combined entity and capital allocation priorities, that would be helpful. Sure. That's a mouthful. Try to get help for you. On leverage standpoint, we just don't think we're going to be in that 2.5 to 3x leverage. We're still going through the open balance sheet review. We'll have better visibility for that once we get through the quarter itself. But no difference than what we have said when we were looking at the deal and came out and announced what that would look like back in March when we announced the the merger. From a cash perspective, we also did say that after the fact, your expectation is we'll have a pro form a cash flow approaching a billion dollars. Clearly, a lot of that has to do with the momentum that both organizations bring together and the synergies that we believe we're gonna achieve, which is 100,000,000 first year and 200,000,000 in the second year. And Adam, your last point on capital allocation, we are building from ground up what this organization will look like. We're twenty eight days into the merger. But trust us as we get through the rest of the quarter, we're going have a good sense of what that looks like for FY '22, and we'll be able to speak to that in our call post close for q four. Sounds like you'll have a lot of options. Thank you. Your next question is from Shannon Cross with Cross Research. Thank you very much. Rich, I was wondering if you could talk a bit more about the the growth at Tech Data and what you're seeing, you know, sustainability and and that, during the last quarter, if you can give us some some background even going back a bit further, just in terms of what what big trends you're looking for, again, on the Tech Data side as opposed to the same quarter. Yes. So my reflection would be fairly consistent with what we had seen on on the legacy Synax side. So our industry and distribution in the business partner ecosystem have all benefited from the support from home scenario to over the past year and year to year and a half in total. So there's been some very positive trends there. While at the same time, in the early phases of COVID, the data center category was slower for obvious reasons. There's a lot of project based work that takes place there. And then, you know, the next generation technology as a service category was very robust over the last one point years time frame. As we look forward, I believe that although demand is still exceedingly strong in the PC ecosystem, through time that will begin to moderate a bit based on that whole cycle. But we would anticipate seeing the data center category being more robust. In fact, we did already moving forward as some of that pent up demand begins to emerge and has to be positioned by the market. And, of course, we'll continue to see accelerated growth in the next generation cloud as a service technologies moving forward. So that's how I would summarize this tenant. Okay. And then just on the financing business you recently added, do you think about the magnitude of what you see that growing to? Or, you know, was this just something that some customers were asking for and so you you decided it was good use of capital. Thank you. Shannon, this is Marshall. You broke up at the Divergent Union. Did you say finance business? Yes. I did. From TD Capital? Yeah. Okay. Yes. I'll start and then Rich can chime in. Certainly, that's a growing aspect of both organizations coming together. We believe we have to be prepared to address the way the demand in the market is going to go. And we clearly know that we can take a portion of that risk on our balance sheet. We also know that we need to partner with others as we see that economic solution continue to be a meaningful part of what we need to do to satisfy customers' needs. Was this a okay. Ahead, Shannon. Go ahead, please. I was just was is it a response to the shift more and more cloud and as a service and subscription and all of that? Or was this something I mean, was the number of the hardware companies and their partners in that type financing businesses for years. So I'm just wondering that process. Thank you. So, Shannon, I would I would comment both. Obviously, you know, this is something that provides advantage to the core. But as we look forward to cloud and the as a service, it becomes a meaningful part of the entire value proposition, you know, that that customers and are are looking for. So they're looking for sort of an end to end solution, kind of think of it as almost a life cycle type of thing. So we do believe that the financing is a critical element to our go forward strategy. And I just add one more thing to that. I was talking about early days in the merger. Right. The fact that it has a very robust solution that we're planning to deploy globally. So there's a lot of momentum potential behind this offering. Great. Thank you very much. The next question is from Jim Suzy with Citigroup. Thank you. On your prepared comments, you mentioned a 4% headwind. So I just want to make sure that's solely due to component constraints and shortages, and that's a year over year number as opposed to quarter over quarter. Just help me clarify and understand if I'm off on that. Yes, Tim. This is Rich. Good morning to you. A couple of things. So first, it is a year over year number. Second, when we take a look at the backlog of the business, it continues to grow. Third, it's fairly pervasive. It's not limited to one technology or another. We have backlog in what I would call the PC ecosystem segment, the advanced solutions segment as well as well as our our components business. So, you know, I think it's it's our our best portrayal right now of, you know, how we are next question is from the line of Matt Sheerin with Stifel. Yes. Thank you, and good morning. Just regarding the key constraints that you're seeing, Rich, it sounds like it is across the board. Have you seen that effect gotten worse? And as you look into as you get into fiscal 'twenty two, are you anticipating that to remain the same? Are you seeing any signs of losing there? Yes. So Matt, obviously, our intelligence is good as it is as we work with our vendor partners to get that insight. And I would say that anecdotally, the statements run from that there will be an impact to the first half of the year and could continue to provide some level of impact in the back half of the year. So I believe that they're improving upon the situation. And my crystal ball would be that they'll continue to sort of improve on the situation as we move through time, but this will not be a light switch flip, but rather sort of a gradual reduction in backlog as we move forward. Again, we're working very closely with each of the vendors to make sure that we're providing clarity in terms of our demands and where we're short and working with them to help alleviate that as we move through time. Okay. And a couple of modeling questions, Marshall. Marshall. Looking forward, one is just on gross margin. It looks like from the tech data financials that you provided, it looks like gross margin is similar. I know there's a lot of mix shifts seasonally for both companies. So how should we be thinking about gross margin and SG and A? And as you proceed into fiscal 'twenty two, can we get an idea of the cadence of that $100,000,000 in synergies cuts and when we expect to see that? Matt, as you know, we don't guide GM, but I will say that the results from legacy 10x for Q3 was positive. So we were happy to see the results. There is some confidence that this should continue going forward. And as you can see from the eight ks we filed with the historical PD quarterly data that the margin profile to 22 companies from a gross margin perspective historically is pretty consistent. In regards to SG and A, question. A lot of our investments that both companies have done historically have increased SG and A that's for the purpose of having good outcomes and returns going forward in the first three quarters. I would view 3.5% to 4% range if you're if you're just thinking about what that might look like for the rest of '21 and then '22. And then in regards to the cadence and and how the hundred million plays out, we'll work to build that out. We do expect some lumpiness throughout the the year. There could be some some back end synergy momentum and some some lighter synergies earlier on in the year, but we'll figure that out. And when we talk to you at the at the end of our q four and part of our discussion on earnings, we'll give a little more sense of what that looks like for fiscal 'twenty two by quarter. Okay. Great. And just lastly, if I could just talk if we could talk about what you're seeing by region. You did say earlier that there's some uneven demand trends by region. And obviously, you're much global, a global company now that you're combined. And going forward, will we be able to see the results by region and perhaps operating results by region as well? Yes. So we will be publishing the results by region as we move forward, Matt. What I would tell you is this global picture of work from home and it's doing a pretty good opportunity and continues is a global team. This idea of the data center having a bit of a pent up view is also a global piece. Obviously, COVID took the world home. And now a lot of that data center capability either is requiring more capacity or is requiring a refresh. And arguably, there is a big pause in that for the first year of COVID, albeit that it is now recovering, as I said earlier. What I would tell you where you see a little bit of unevenness is when you run into pockets of pandemic concentrated issues, I guess a great example of that might be like in India, where not now, but in previous months, you see a big, big pause or in some of the other Asian countries. So I would say that the overall global picture is fairly consistent, but short or long might be dictated by where a specific country is within the evolution of the pandemic. Okay. Great. Thanks a lot. It's clear, Matt, that we have growth in backlog everywhere. Got it. The next question is from the line of Amanda Barula with Loop Capital. Hey, guys. Yeah. Congrats on congrats on everything and thanks for taking the questions. I got two quick ones if I could. The first, Rich, you mentioned, I think it was in your remarks. I actually may have been to it to an answering q and a. With regards to the sales team, you're already starting to see value added combined using combined line of cards. Do you also think is there an expectation or a belief that you guys could also gain supplier share from key suppliers? And what might that dynamic look like? And then I have a quick follow-up for Marshall. So I hope I understand your question correctly. But I think what we've seen is that very and and early early on is that customers of legacy SYNNEX and customers of legacy tech data are interested in supporting line cards that we historically haven't had. It just literally showed on day one where we had requests for things that legacy Cynics carried that we did not and vice versa. So I think that that's an early indicator that we'll be able to, with extension of the line part, able to bring better service to our customers, which in turn should lead to a good sales opportunity and revenue opportunity for us as we move through time. You just realize that right now, these requests are coming while we aren't fully system capable with each other's line card. Certainly, we'll get there in a short period of time. But customer awareness is pretty good relative to things that the other one or the other side has. So I suggest that that should lead to a good opportunity for us moving forward. That sounds exciting. And I guess just to clarify what my question was, because I remember at one point in time in QTier, there's a to some extent with the dynamic where, you know, suppliers, you know, may apportion certain certain amounts of supplies kind of, you know, across the board in in various proportions. And that's if there's sort of two tier distributors could over perform and show that you can consistently over perform the targets that we get, know, a portion or supply. And so that was really the question in in that regard. Is that the dynamic that that still exists? Or was I misinterpreting it sort of from the time that I was aware of it? So I'm going to put my vendor hat on back when I was working with a vendor. The only time that perhaps supply would be apportioned to the extent you were in a constrained environment. And usually, what you decide to do is to be fair to your to all of your customers. So I would anticipate that if we have real demand in a steady state environment that we'll get strong support from our vendors to fulfill that requirement. I'm I'm pretty confident in that. That's that's really helpful. Thanks for clearing that up. And, Marshall, just just real quick. Anything with regards to debt pay down, no cadence that we should calibrate our expectations to? Yeah. And I'm gonna coming back on on the question that Adam had, same answer here. We are IG rated. So with that, we're going be mindful of the balance and the need to make sure that leverage stays, call it, properly balanced. And as we committed to that, two to 2.5x leverage in the next twelve to eighteen months is our goal. Clearly, that, depending on growth and free cash flow and working capital needs and other investments in part of our business, that will all get balanced. Ultimately, that's that's our thought. It's the free cash flow we've spent out, and we're gonna certainly allocate a portion to debt, a portion to reinvest in back in the business, M and A opportunities, and then the dividend that we announced today, clearly, is a part of that, and then our open repurchase program. Awesome. Thanks a lot. Appreciate it. You're welcome. Next from the line line of Raju Barcira with Bank of America. I have two questions, and I apologize if they've been asked. I just joined the call late. But Rich, you've talked about cross selling opportunities between Connects and Tech Data. But I don't think I or Lisa, don't know if you've quantified any revenue synergy targets between different companies. I think you've talked about $100,000,000 in cost synergies, I would think, you know, two big organizations, you must have some revenue synergies that are possible. So so any any thoughts on that? Yeah. So first, I agree with you that I believe we're going to have the opportunity to have positive revenue synergies as we move forward. Second, as a matter of form, when you create a business case, as we had for our our combined GB Synix going forward, we didn't rely upon positive revenue synergies in that business case. I think that's a typical market paradigm because they're always hard to quantify. So we see them as a sort of incremental opportunity as we move forward. And most important to us right now is to make sure that we're serving those needs. And as Marshall had indicated, maybe we'll get closer to quantifying those as we look at our full year 'twenty two and moving forward. But as I said earlier, it's a it's a great opportunity that we hadn't relied upon in the business case. Got it. Thanks for that. Thanks for that. For for my second question, can I ask you about Hive business? I mean, it's a it's a great business. It's more on the EMS side, manufacturing side. I mean, I understand that it was a very significant, you know, business. But given the size of the revenues for the combined PD SYNNEX, I mean, it's it's probably less significant now, but still, you know, it's a significant business. What is your long term thought on that business? Is this something that you think is an integral part of TD SYNNEX? Or do you think that this is a business that potentially you could have some kind of a spin off or could be divested at some point or spun off? But so just your thoughts on how integrated this business is into the combined company and your long term thoughts for that? Rupul, this is Marshall. Yeah. It it continues to be a meaningful part of our strategy today and going forward. As you know, we're we're still filling out and diversifying the customer base. We're building out and creating new solutions to help diversify our portfolio of what we provide to our customers. And then going forward, it's still gonna be an important aspect of our go to market strategy and a very critical part of our success as an overall TD Connect organization. Okay. Okay. Thanks for that. And if I can, sorry, sneak one more in. Rich, before the merger, when you before you you went private, actually, you know, you had laid out a certain digital transformation plan for Takeda. Now that the two companies have merged, I mean, is that plan still in place in terms of the the the expenditure on that or and in terms of the the different, you know, steps you have in that process? Or has that changed somewhat? So first, we are fully committed to providing an outstanding customer and coworker experience customer lender and coworker experience with transforming our business digitally through time. So that's a given. The second piece is we have now relative to our DG legacy, we have a whole new pool of assets to consider. So the answer is that the initiative will be maintained. The solutioning of the tools and process and IT and capabilities that we put forward will likely get mixed a bit differently as we leverage all of the assets from our two legacy companies. So we're very excited about our customer experience going forward and know that we can unlock a lot of value by making sure that we're providing an industry leading experience through digital means. Okay. Thanks for all the details and congrats again on the quarter. Thank you. There are no further questions at this time. I will turn the call back over to Rich for closing remarks. Well, first, thanks to all of you for joining this morning, very encouraged with our engagement. I would tell you that we're arguably now twenty eight days in. And as I look at our business moving forward, I could not be more excited about the opportunities that we have in front of us. The promise of being able to serve the business partner ecosystem with more value, the promise of being able to drive meaningful returns for our investors and shareholders, our insight and becoming clearer to me. As we had stated in the prepared remarks, we had committed in the business case to 25% accretion. And as we kind of look at our crystal ball right now, we believe that we will overachieve that goal moving forward. So our future from an overall customer, vendor, coworker and investor perspective is quite bright, and I'm very excited about the opportunities. So thanks for your time, and we'll be talking to you soon. This concludes today's conference call. You may now disconnect.