Ingram Micro - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered a return to year-over-year revenue growth: net sales $13.34B (+2.5% YoY; +3.3% FX-neutral), while non-GAAP diluted EPS was $0.92; excluding discrete India items, EPS would have been $0.99, above the high end of guidance, though gross margin declined 51 bps to 7.01% on mix and India impacts.
• Cloud and Client & Endpoint Solutions led growth; server and storage were up double digits, while networking remained soft; large enterprise demand strengthened globally, with SMB and public sector softer.
• Balance sheet and cash flow were a bright spot: cash from operations $310.0M and adjusted free cash flow $337.2M; FY 2024 debt repaid $483.1M (total $1.56B since 2022). Board declared a $0.074 dividend and approved up to $75M in repurchases tied to secondary offerings.
• Q1 2025 guidance sets net sales at $11.43–$11.83B, gross profit $785–$835M, and non-GAAP EPS $0.51–$0.61, reflecting continued PC refresh tailwinds and ongoing competitive pricing pressure in India; tax rate ~30% non-GAAP.

What Went Well and What Went Wrong

What Went Well

• Return to top-line growth with strength in Cloud and Client & Endpoint Solutions; server and storage up double digits: “we saw a return to year-over-year revenue growth… strong performance in Cloud and in Client and Endpoint Solutions”.
• Robust cash generation and deleveraging: Q4 cash from operations $310.0M and adjusted free cash flow $337.2M; FY 2024 debt repayment $483.1M; dividend initiation and buyback authorization underscore capital returns.
• Xvantage platform progress and operating leverage: management highlighted accelerated digital capabilities, >$600M cumulative cloud/digital investment, and efficiencies feeding OpEx leverage and throughput.

What Went Wrong

• Gross margin compression to 7.01% (-51 bps YoY) driven by mix shift (lower-margin CES, APAC growth, enterprise customer mix) and heightened competition, notably in India.
• Discrete India charges (inventory write-offs and GST/professional fees) and IPO-related stock-based comp reduced Q4 profitability by ~$54.4M (41 bps of sales) and ~$0.07 EPS, pulling non-GAAP EPS to $0.92.
• SMB and public sector remained soft across regions, tempering higher-margin services attachment; networking demand continued to lag despite sequential improvement signals.

Transcript

Operator (participant)

Greetings. Welcome to Ingram Micro fourth quarter and fiscal 2024 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Willa McManmon, Vice President, Investor Relations. Thank you. You may begin.

Willa McManmon (VP of Investor Relations)

Thank you, Operator. I'm here today with Paul Bay, Ingram Micro's CEO, and Mike Zilis, our CFO. Before I turn the call over to Paul, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, statements about our strategy, demand plans, and positioning, growth, cash flow, capital allocation, and stockholder return, as well as our expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements because of risks and uncertainties discussed in today's earnings release and in our filings with the SEC. We do not intend to update any forward-looking statements. During this call, we will reference certain non-GAAP financial information.

Reconciliations of Non-GAAP results to GAAP results are included in our earnings press release and the related Form 8-K available on the SEC's website or on our Investor Relations website. With that, I'll turn the call over to Paul.

Paul Bay (CEO)

Good afternoon, and thank you for joining today's call. Despite the macroeconomic challenges we saw throughout 2024, we exited Q4 with a return to year-over-year top-line growth of nearly 3.5% on an FX-neutral basis within our guidance range. We saw particular strength in Asia-Pacific and Latin America, both up over 7% on an FX-neutral basis, and I'm excited that North America returned to year-over-year growth. From a mixed perspective, we continue to see robust performance in Cloud and in Client and Endpoint Solutions, which both grew over year-over-year and quarter-over-quarter. Advanced Solutions were impacted by slowness in networking, but server and storage were each up double digits versus the prior year and sequentially. In terms of the customer category, we saw strength in sales to large and enterprise customers, while small and medium-sized businesses, along with public sector, remained softer.

Considering these dynamics, we believe the return to top-line growth we saw in Q4 will sustain in 2025. Client and Endpoint Solutions sales improved, consistent with the growth we are now seeing in desktop and notebook categories. We also expect to see networking continue to rebound from the challenging year-over-year comparisons that continued throughout 2024. Lastly, we see more end users and vendors sharpening their focus on evolving automation use cases, including the use of AI, where we are helping our customers and partners navigate a rapidly changing IT landscape. We will continue to forge the path with AI and automation, and we look forward to sharing the data with you in the coming quarters that demonstrates our progress as we become increasingly digital. 2024 was a pivotal year for Ingram Micro.

We celebrated our return to the public markets in October, but more importantly, we also do so as a different company than we were when we went private in 2016. Since that time, we have made strong progress on our cloud and digital strategy, and since the divestiture of our commerce and lifecycle business in 2022, we are even more focused on technology solutions and related value-added services. Since our founding 45 years ago, Ingram Micro has created a technology infrastructure that enables our over 1,500 vendor partners and more than 160,000 customers across 57 countries to connect, communicate, and grow. Today, we have taken this foundational infrastructure and digitized it with the goal of becoming a leading business-to-business platform for the global technology ecosystem. To do this, we have invested more than $600 million over roughly a decade in building our capabilities and technologies in cloud.

This was the foundation for our AI-driven digital experience platform, Xvantage, where we have now been investing for the last two years. Xvantage is built upon more than 29 million lines of code, 20 intelligent engines, all surrounded by more than 30 patents pending. We have rolled out Xvantage, the Xvantage platform, in 16 countries, with further deployments still to come. In addition to enabling real-time interaction, frictionless quoting, and data insights into a single platform, Xvantage allows for more seamless provisioning of Ingram Micro's own more profitable service offering, coupled with product sales as a result of bringing together a complete solution, including hardware, software, services, and cloud. Xvantage creates value for both our customers and our vendor partners. One example with a large customer of ours is in the transformation we have enabled with a leading cybersecurity vendor.

Using Xvantage, the technology solutions provider was able to reduce its operational cycle time by over 80%, decreasing the average time required to create a ready-to-order complex cybersecurity quote from more than two hours down to 10 minutes or less. They were able to redeploy half of the team dedicated to those cybersecurity solutions to proactive sales activities including cross- and upselling, as well as renewal and growth initiatives related to subscriptions and licenses. Ingram Micro is also empowering small and medium businesses, such as a managed service provider, or MSP, that is using our platform to adopt self-serve quoting and ordering to help transform their decades-old sales processes and better manage their opportunity pipeline. The time savings and ease of use we provide through improved service level agreements with their end users have provided the MSP with the ability to shift resources to proactive sales and business development activities.

With the help of our platform, the customer is able to separate sales and operational tasks and achieve more than a 60% increase in sales activities without hiring additional resources. Industry analysts are also noticing the value of Ingram Micro Xvantage platform. In a recent article, IDC's Vice President for Channels and Alliances summarized what works and what doesn't in partner programs. The article describes Ingram Micro's ability to help IT providers stand out from the crowd, noting that vendors that figure out how to personalize their portals and content, like Ingram Micro's Xvantage platform, will have a distinct advantage. In 2024, we won over 100 industry awards, including AWS Global Partner of the Year and AWS Innovation Partner of the Year for the LATAM region, for helping empower thousands of channel partners to create more value on AWS.

We were also named HPE's Global Distributor of the Year for the second year in a row. During 2024, we also saw continued success with our global sustainability efforts, ranking in the top 1% for sustainability by EcoVadis for the second year in a row. These external recognitions underscore our commitment to optimizing the human touch while we become increasingly digital. Turning to 2025, aligning the company around continued progress on four guiding principles, let me walk you through each one briefly. The first is to be a leader in digital, which has been the center of our ongoing transformation. Internally, with our vendor partners and our customers, we are standardizing and modernizing the way we all work, serve, and support the industry through improved and human-enabled processes, with the Xvantage platform driving innovation and our supply chain backbone providing strength and stability.

Second is accelerating the growth in the high margin and more complex solutions that sit in our advanced solutions and cloud businesses, along with expanding recurring revenue. The path to success here is growing profitable operating income through sales, focus, and execution. Third is driving operational excellence to create efficiencies through targeted investments in automation, the simplification and modernization of our internal go-to-market and business processes, operations and supply chain solutions, and digital technology to create a high-performing global platform operating model. And fourth, building the Ingram Micro team of the future by developing our current talent pool and providing associates with paths to expand their skill sets and provide the best solutions, user experience, and return on investment to our partners and our customers. Entering 2025, these four guiding principles are driving continued innovation and differentiation on the platform.

Looking to the year, we are excited about the return to growth on the top line, which we believe is sustainable in 2025. We are confident we are taking the right and necessary steps to address the challenges in India that Mike will discuss here shortly. At the global level, the technology and operational investments we have made position us and our customer and vendor partners to gain efficiencies and drive growth, as well as we continue to roll out Xvantage globally. And as always, we remain committed to driving quality of revenue, optimizing working capital and free cash flow, and achieving operational efficiencies during the year. There's a lot to look forward to this year. With that, I'll turn the call over to Mike. Mike.

Mike Zilis (CFO)

Thank you, Paul, and thanks to everyone on the call. I'd like to reiterate how pleased we are at our return to growth to close the year and our progress with Xvantage. Now, let me touch on a few fiscal 2024 highlights with a bit deeper dive on the fourth quarter, and then I will provide our guidance for the first quarter of 2025. Note that I will be focusing primarily on our non-GAAP numbers in this overview. Fiscal year 2024 net sales were $48.0 billion, roughly flat versus 2023, and up 0.3% on an FX-neutral basis. As discussed, 2024 was impacted by macro headwinds, which we believe are beginning to shift as we look to 2025.

Year 2024 gross profit came in at $3.44 billion, or 7.18% of net sales, down 20 basis points from the same period last year, due primarily to line of business, product, and geographic mix, along with a stronger competitive environment in general. Full year operating expenses were $2.45 billion, or 5.10% of net sales, essentially flat from 2023. However, these OPEX levels continue to contain an elevated level of OPEX associated primarily with our investments in digital that Paul just discussed. These heightened expenses totaled $114.9 million, or 24 basis points of net sales in 2024, compared to $69.8 million, or 15 basis points of net sales in 2023. While we expect in 2025 to incur a relatively consistent level of investment into 2024, these costs will reduce over time as we complete our wider deployment of Xvantage and move to a steady state.

Thus, on a longer-term basis, we expect our annual run rate of OpEx as a percent of net sales will land below 5%, as we not only move to a more steady state, as I just noted, but also increasingly benefit from efficiencies from Xvantage, restructuring initiatives we've taken in the past year plus, continued focus on operational improvements in business processes and operations, and a mixed shift towards cloud and advanced solutions products. During fiscal year 2024, we also recorded restructuring costs equaling 8 basis points of net sales versus 4 basis points impact of restructuring charges in fiscal 2023. The 2024 actions reflect our efforts to enhance organizational efficiency and strengthen customer service capabilities, and they include organizational changes and headcount reductions recorded during our first and fourth quarters of 2024.

Collectively, the 2024 restructuring initiatives are expected to deliver annualized cost reductions in the range of $85-$95 million, although the impact of actions taken in the first quarter of fiscal 2024, which represent approximately half of the range of annual run rate savings I just noted, have largely already been achieved beginning in the third quarter of fiscal year 2024. Our fiscal year 2024 results also include $34.1 million of expense, or 7 basis points of net sales, representing the value of restricted stock units that immediately vested in connection with our IPO in October. Non-GAAP net income for the year was $627.9 million, and non-GAAP diluted EPS was $2.79. Adjusted EBITDA in 2024 was $1.32 billion, compared to $1.35 billion in 2023.

Moving to the fourth quarter, net sales were $13.34 billion, up 2.5% year over year in US dollars and up 3.3% on an FX-neutral basis, driven primarily by strength across geographies in client and endpoint solutions, which saw sequential growth for the past three quarters. This was offset by weakness in advanced solutions, where we had solid momentum in server and storage, but another soft quarter in networking. On a more positive note, networking is gradually improving from a low in the first quarter of 2024. As a reminder, CES has a lower profit margin than advanced solutions, which contributed in part to lower overall gross margins in the fourth quarter of 7.01%, down 51 basis points versus prior year.

Also contributing to this year-over-year margin trend are a higher mix of sales, particularly in the U.S., towards enterprise customers, where we don't provide as much attached value-added services as we do, for instance, in SMB, where demand remains more muted. A final contributing factor is a higher growth rate in our lower margin, lower cost-to-serve Asia-Pacific region. While we expect our long-term product mix will skew more towards higher margin advanced solutions and cloud products, the anticipated growth from the PC refresh driving CES sales may impact margins in the short term, depending on the solutions and geographical mix within a given quarter and region. We remain committed to above-market growth and higher margin advanced solutions in cloud, while we also hold our associates accountable for quality of revenues and a creative return to shareholders across the whole of the business.

From a regional perspective in the fourth quarter, North America net sales were $4.67 billion, up 3.0% in US dollars and up 3.3% on an FX-neutral basis versus the prior year fourth quarter, driven by strength across all lines of business, but particular strength, as I noted earlier, in sales to enterprise customers. EMEA net sales of $4.07 billion were down 1.5% year over year and down 1.3% on an FX-neutral basis, primarily due to weakness in advanced solutions versus prior year. Demand levels in general have remained more muted, particularly in the Western European market. Net sales in Asia-Pacific were $3.60 billion, up 7.8% over the same quarter in 2023 in US dollars and up 7.7% on an FX-neutral basis, driven by strength in CES sales, offset partially by weakness in advanced solutions.

Certain countries within APAC were strong, but we are seeing a very competitive market in India impacting both sales and margin, as we are remaining appropriately selective on the business we pursue there. This is a trend that continues into the early part of 2025 as well. Finally, net sales in Latin America were $1.01 billion, down 0.9% in US dollars, but up 7.5% in constant currency, as most local currencies weakened notably since 2023. The stronger FX-neutral sales in LATAM reflected solid growth trends across all product categories. Fourth quarter gross profit came in at $936.1 million, or 7.01% of net sales, down 51 basis points from the same period last year. The year-over-year decrease in gross margin was driven primarily by the mixed factors I've already noted, but also reflective of a heightened competitive environment across most markets, and particularly in India, as I just mentioned.

Q4 operating expenses were $630.8 million, or 4.73% of net sales, compared to 4.65% in the same period last year. In Q4, we had discrete charges that related to our previously disclosed fraud matter in our India operation. These charges impacted gross profit and operating expenses, as well as related margins. The first charge impacting gross profit related to inventory write-offs associated with the professional services business, totaling $9.1 million, or 7 basis points of net sales. The second charge impacted operating expenses and related to goods and services tax, or GST, and professional fees associated with the completion of our investigation into this matter. Specifically, the GST charge is connected to true-ups related to adjustments we recorded earlier in 2024 on this matter, as we filed GST returns at the end of the calendar year.

The professional costs relate to our pursuit of settlements and recovery efforts with the parties involved in this matter. These operating expense impacts total $11.2 million, or 8 basis points of net sales. Our Q4 2024 results also include the impact of $34.1 million, or 26 basis points of net sales, related to the stock-based compensation charge in connection with our IPO in October. The combined impact of the discrete charges in India and the stock compensation charge is $54.4 million, or 41 basis points of net sales in the fourth quarter of 2024. During the quarter, adjusted income from operations, which included the aforementioned charges, totaled $305.2 million, and adjusted income from operations margin came in at 2.29%, compared to 2.86% in the same period last year. Our non-GAAP net income for the quarter was $213.1 million, compared to $220.9 million in the comparable period last year.

Fourth quarter non-GAAP diluted EPS was $0.92. Excluding the two discrete items in India that I just noted, our non-GAAP diluted EPS in the fourth quarter would have been $0.99, above the high end of our guidance range. Fourth quarter adjusted EBITDA was $418.1 million, compared to $435.4 million in the comparable period last year. Turning to our balance sheet, at the end of Q4, net working capital was $4.1 billion, compared to $4.4 billion to close the same period last year. We maintain a strong focus on working capital management to maximize returns on investment and cash provided by operations to improve our debt levels. This discipline allowed us to improve our annual net debt to adjusted EBITDA leverage ratio by more than 0.4 times since our third quarter. Adjusted free cash flow was strong in the quarter at $337.2 million.

Our adjusted free cash flow for the full year was $443.3 million. As I've noted before, our free cash flow is seasonally driven. Our goal over time is to drop 30% or more of EBITDA annually to free cash flow, but this will not necessarily be the case in each quarter due to this seasonality, as well as the timely investments we make in opportunities for profitable growth. As anticipated, our board of directors has approved a quarterly cash dividend in the first quarter of 2025 of $0.74 per share, or $17.5 million, which will be payable on March 25 to shareholders of record on March 11, 2025.

Our board of directors also approved a one-year share repurchase plan through which the company can purchase up to $75 million of the company's common stock in connection with one or more secondary offerings by our controlling stockholder when an independent committee of our board deems repurchases to be an appropriate use of our capital. During 2024, we paid down $483 million of our term loan balance, bringing our total repayment on term loans to $1.56 billion since the beginning of 2022. With the cash flow generation I just mentioned, I am also pleased to note that we will repay an incremental $125 million of our term loan later this month. During 2024, our interest expense was lower by $41.8 million year-over-year, primarily as a result of our debt paydowns over the past couple of years.

Last quarter, we noted our belief that the fourth quarter would demonstrate a gradual improvement in the demand environment, and we are pleased that this is what has happened. As Paul said, we believe the return to year-over-year growth is sustainable, though we expect quarterly volatility. That said, as I now turn to guidance for the first quarter of 2025, we forecast net sales in the range of $11.43-$11.83 billion, representing year-over-year growth of 2.6% at the midpoint. As I mentioned, as CES improves, it may have a short-term negative impact on gross margin, but we remain focused on quality of revenue and outsized growth in advanced solutions and cloud over time. Thus, we expect gross margins to expand over time as the mix changes. For the first quarter of 2025, we expect gross profit to be in the range of $785-$835 million.

This guidance assumes we continue to see competitive and mixed factors on gross margin consistent with what we've discussed today for Q4 of 2024, but particularly in our India business, where we see some irrational competitive pricing pressures, mainly on the bidding process on large contracts. As we see extremely aggressive pricing behaviors from global, sub-regional, and local players in that market, we expect our own gross margin in India will be temporarily impacted. We have invested in India for more than two decades and remain very committed to pursuing profitable growth in the India market. We expect non-GAAP diluted EPS to be in the range of $0.51-$0.61 per diluted share, which is based on weighted average shares outstanding of approximately 234.9 million. Our non-GAAP tax rate is expected to be approximately 30%.

As I close out my comments, we are quite proud of our finish to fiscal 2024, as we saw growth in the top line, but also a solid profit result despite some unique P&L hits we incurred in India, but we did so with strong management of the balance sheet as well, generating solid cash flow that allowed us to repay debt and bring our net debt to EBITDA leverage south of two times to close the quarter. This gives us nice momentum in Q1 of 2025, where we expect a second quarter of year-over-year growth despite some of the headwinds we've discussed in parts of EMEA and in India. We see a more solid environment in North America and Latin America, while we continue to optimize our business and drive leverage over time in our operating expenses.

We are balancing the use of cash generated from operations with another repayment of debt in March, while also commencing a return to shareholders in the form of a dividend in our first full quarter as a publicly traded company. With that, operator, we are ready for the question and answer session.

Willa McManmon (VP of Investor Relations)

Thank you. Sorry for that technical difficulty. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your headset before pressing the Star keys. We ask that you please ask one question and one follow-up question and re-queue for additional questions. Our next question is from Michael Nagy with Goldman Sachs. Please proceed.

Michael Nagy (Company Representative)

Hey, good afternoon. Thank you for the question. I wanted to ask about the large enterprise momentum, which seemed like it was largely focused in North America. Could you talk a little bit about why large enterprise is outperforming? Are you seeing any sophisticated buying ahead of tariffs? Is there a bit of a pull forward? And any comments on where you feel like we are on the PC cycle? Are you seeing green shoots on the refresh? Thank you.

Paul Bay (CEO)

Yeah, Michael, this is Paul. Good afternoon. So I would tell you that the purchasing, when we mentioned large enterprise business, was actually across the board and across all of the regions. So it wasn't just North America. North America was one of those that experienced that also. One of the things we did see, actually, in North America was actually growth in all three areas too: client endpoint solutions, advanced solutions, and cloud. But the large customer comment was across the board and across all of the four regions. As it relates to your question around the refresh, we have continued to see momentum around the notebook desktop refresh, primarily around Windows refresh and HPE systems to a little bit of an extent, some AI PCs, but really just being driven by the refresh coming up.

So again, large customer enterprise, bigger customers across the board globally, and also refresh starting from a notebook desktop perspective.

Michael Nagy (Company Representative)

Great. Thank you, Paull.

Willa McManmon (VP of Investor Relations)

Our next question is from Eric Woodring with Morgan Stanley. Please proceed.

Erik Woodring (Head of US IT Hardware)

Awesome. Thanks so much for taking my questions. Paul, maybe if I just start, your comments on relative areas of spending strength versus weakness align with a lot of what we're hearing in the market more broadly, and my question really is, the world is uncertain and volatile today, and just what are you hearing from your customers, and what do you see in your pipeline that gives you enough confidence to say you can return to top-line growth in 2025, and then I have a follow-up. Thanks.

Paul Bay (CEO)

Thank you, Eric, for the question. We've seen, if you look at kind of how we exited the year and talking about the momentum we had specifically around endpoint and client endpoint solutions, as I just mentioned, we continue to see strength there. If we look at advanced solutions, one of the areas that we focused on that we've had challenges through 2024 was around the networking business. That was down in Q4 and full year by double digit, and the expectation that that comes back. As we see slowly getting better throughout 2024, as I mentioned, it was still down for full year 2024. If you look at IDC's 2025 base case, they say that it's going to be up 8% coming off of a negative 6% in 2024.

And I would also tell you that our leading indicators we're seeing from our large vendors right now are showing signs of that improving, and then continued strength around cloud and other areas that we saw good strength around server storage and, again, cybersecurity being one of those also. So that's what gives us the confidence that we're going to continue to see growth. And again, for the first time in many quarters, we finally got to talk about the North America momentum that we saw exiting the year and really continuing at the beginning parts of this year.

Erik Woodring (Head of US IT Hardware)

Okay. That's helpful. Thank you, Paul. And then maybe my follow-up, Mike, can you help me just or us understand if there are any one-time costs embedded in your Q1 profitability guide? Because I believe if you kind of back into EPS and net income, it implies both are declining year-over-year in Q1 despite revenue growth. And so really just trying to understand what some of the cost headwinds are. I know you mentioned India and mix shifts, but outside of that, what the cost headwinds would be in Q1 and how kind of one-time versus sustainable they might be as we think about the remainder of 2025. Thanks so much.

Mike Zilis (CFO)

Yeah. So there's not anything notable one-off. It's mainly more of the margin factors. So we talked about India, and Paul can elaborate on this for sure if you'd like. But those competitive factors are driving notable drops in margin. But we're seeing a heightened competitive environment, I guess, really almost everywhere in the world. It's not probably uncommon when you have more of a down cycle. But again, nothing notable other than margin and really driven by mix and then heightened a little bit in the India market by some of the factors there. Sorry, Eric. Sorry, just one thing to add to that. I mean, I think the only thing I would add to that is we're still seeing continued momentum as we continue to optimize costs.

We have a wraparound impact of further reductions we announced in early December as well, for instance, that really aren't taking hold entirely even in Q1. That'll give a little bit more momentum on the cost side as well as we go through the year.

Erik Woodring (Head of US IT Hardware)

Great. Thanks so much for the comment, guys. Goodbye.

Willa McManmon (VP of Investor Relations)

Our next question is from Samik Chatterjee with JPMorgan Chase. Please proceed.

Samik Chatterjee (Managing Director and Equity Research Analyst)

Yep. Thank you. Thanks for taking my questions. Maybe for the first one, Paul, just more directly at the tariff discussion, wondering what you're hearing from your North America customers on that front in terms of how should we think about, and obviously, you've been through many cycles here, including previous tariffs. How are you thinking about and how are customers sort of relaying what probably changes in terms of demand if tariffs were to sort of, and I guess tariffs are now implemented? So how are you thinking about sort of changes in demand profile between the product categories and how comfortable you feel passing through some of those sort of increased costs to your customers? And I have a quick follow-up after that.

Paul Bay (CEO)

Yeah. Samik Chatterjee, Paul. So the tariff situation, to state the obvious, is very fluid. As you pointed out, we're well-versed in operating in a tariff environment. We typically pass through those tariffs, and we don't bear those costs. I think the one thing will be is what's the impact potentially on the overall demand side? So really, that's going to depend on, I'll call it the price elasticity and in the end consumption, the end businesses having the tolerance to absorb those tariff impacts. Again, it's too early right now to say what the impacts will be. We're less impacted again because we're not manufacturing products. But with that said, a couple of recent comments. So some of our vendors continue to focus on making their supply chain networks more resilient and creating mitigation plans.

And some that I was talking with in the middle of last year were already working for some time to diversify where their products are being manufactured to minimize the impacts. Specifically, I would say there's some comments around that for the U.S. and how some of our large manufacturers are moving around the world to try and offset that. I would also say, and this is a pretty recent comment, I was at a customer event last night with our Trust X Alliance community, which is our powerful global community of some of our top strategic customers. And I actually asked them for real-time feedback, kind of how they're looking at tariffs with their end businesses that they're serving every day.

One of the comments was that one of our customers is actually seeing deals and believes it may be a good offset, in that they're moving deals from maybe cash or shorter-term cycles to financing deals through our Micro Financial services. So he believes that if the end businesses, if it becomes too much of a price increase, then there's going to be an opportunity to have to look at how they can finance to really solve that business outcome. So again, that's how we're kind of looking at tariffs right now. And as you mentioned, it is a fluid situation and a bit of uncertainty on where we're going to land on this. Could there be, to your point, could there be a potential pocket of price benefit for the inventory that we carry on a global basis? Yes, there could be.

And so we were looking at strategic opportunities that we looked at in Q4 to make sure that we had the right amount of inventory to help service our 161,000 customers on a global basis. But that'll be a point in time. I think we'll have to wait and see kind of where the water level sets in a little bit longer term over the coming weeks and days.

Samik Chatterjee (Managing Director and Equity Research Analyst)

Great. Got it. Interesting. Thank you. Thanks for the insight. Maybe for my follow-up for Mike, Mike, you're guiding the non-GAAP EPS to be a year-over-year decline despite the growth in revenue because of the competitive market environment that you are perceiving in non-GAAP. As you look through those sort of exiting the year or sort of the opportunity to get EPS back to a growth trajectory as well, it seems like there's some sort of lever, somewhat of a lever on the OpEx to pull through the remainder of the year. But how do you think about the opportunity to get EPS back to growth, or what are the other additional levers you can think of that would be available to the company to get EPS back to growth here?

Mike Zilis (CFO)

Yeah, it's a good question. It's a couple of points I would make, and this would just build off of what you just repeated back. I mean, it is really a margin story more than anything, and it's a mixed factor. I guess if I look at a couple of different mixed factors that really drive rates, as we talked about in our prepared remarks, one, you have mix more towards Client and Endpoint Solutions and specifically seeing some strength not only in just PC and desktop, but also in mobility devices, and those do tend to be lower margin. They're also lower cost to serve, and the product moves fast, so it's a nice turning environment from a working capital perspective, but it will dilute margins.

And if we see that strength of a PC notebook refresh continue for a handful of quarters, that is going to have a dilutive impact on at least the gross margins. Then you have customer mix. And as we talked about also in our prepared remarks and some of the follow-up here, we're seeing a predominance more towards the large enterprise or large customers. And if you think about it, that is a lower value-add kind of relationship for us. Where we make more margin is where we have more value-add in the form of services, value-add pre-engineering and post-engineering support, deployment skills, as well as just the complexity of the products when we're selling more into SMB as an example.

As we talked about, SMB has remained a little bit softer, but we're seeing signs where that would start to improve as long as we start to see the market stabilize a little bit in the form of inflation and in interest rate environments. Then lastly, you have the geographic mix. We've talked about this before where we're entering at north of 7% in our Asia-Pac region to close out the year. And that is a lower margin, lower cost-to-serve business. A couple of our largest markets there have a more predominance of Client and Endpoint Solutions business in their own right. And so that too has a dilutive margin impact. So as long as we now start to see more traction in North America, we see continued traction in LATAM, which has been solid and is one of our most profitable regions.

And then we also start to see perhaps some of the economic headwinds that exist today in Europe and particularly Western European markets start to subside. All of those things are going to have the impact of driving an upward trend, generally speaking, on gross margins. In the meantime, OpEx does remain optimized. As I just responded to Eric a minute ago, I think we are seeing still wraparound impact of some of the cost reduction efforts, but we do still have some of the heightened investment in our OpEx associated with our digital deployment Xvantage still rolling out in various ways through 2025 and even into the early part of next year that causes some heightened OpEx. So as we said in our prepared remarks, we do see line of sight where we would be bringing OpEx out to 5%.

I think that's probably as we get into next year. That's 5% on net sales leverage perspective, and I think we're optimizing that quite well and continue to capitalize on that.

Samik Chatterjee (Managing Director and Equity Research Analyst)

Great. Thank you. Thanks for taking my questions.

Willa McManmon (VP of Investor Relations)

We ask that you please limit to one question now as in consideration of time. Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed.

Ruplu Bhattacharya (Director)

Hi. Thanks for taking my questions. Paul and Mike, in your opinion, at what rate is the overall IT distribution market growing? And did Ingram lose or gain share in the December quarter? I know you talked about a tough pricing environment in India. Is that the only region? And what is your strategy to deal with this? Is price the only lever, or can this impact working capital in terms of you having to extend more credit? So if you can just talk about the market and what your strategy is to deal with this environment. Thank you.

Paul Bay (CEO)

Yeah, that's Paul. I'll start with Ruplu. Thank you. I'll just touch again. North America definitely stabilizing and returning to growth. As we mentioned, we saw growth in all three lines of business: our client endpoint solutions, advanced solutions, and cloud in Q4, and we expect to continue to see that momentum. In Europe, I would say performing relatively well based off of expectations. The broader macroeconomic environment gave us a little bit of headwinds there. We're focused, as we talk about, quality of earnings and growth of what we're looking at. We've had a little bit of headwinds, specifically as you've heard Mike and I talk about, Asia-Pacific, which is still strong, particularly in client endpoint solutions business, but definitely a competitive environment that we haven't seen for quite some time in that market specifically.

There are deals that we actually walked away from that didn't meet our profitability and ROI expectations that would have been in a P&L. So you've heard me and Mike again say that we're focused on quality of revenue. I think you'll see that show up in our earnings. So what are we doing? We're focused on, as we came out of some of the challenges for the back half of the year and the fraud that Mike talked about in the prepared remarks, rebuilding the right teams, making sure we're operating with the right level of integrity and controls. We're hiring the appropriate talent. We're getting back to focusing on the customer. I think some of that challenges that we had starting in Q2 with the fraud and the investigation; we were a bit internally focused, and now we're focused on the customers and vendors.

We've also put some controls around kind of the marginal and transactional level to minimize negative margin impact, and I'll go back to this is one of our largest countries, as you know, and we've been doing business, and we're getting the team focused. We've been doing business in India for the past two decades and being a leader there, so we're going to get back to what we know how to do to grow and continue to be a leader in that business. If you look at Latin America, we continue to execute very well in Latin America because of our reach and our depth that we have and the investments we've made throughout the years in that region, and so we expect to continue to see momentum there. That would be kind of the overall environment where we see.

Mike Zilis (CFO)

Yeah, Ruplu, the only thing I would add to that is, as you've heard pretty clearly, India is probably where we're seeing more irrationality right now as far as pricing, but it is a competitive market everywhere. To your question on balance sheet, yes, we are seeing at times a lengthening of terms being granted, although I don't think it's as notable of a factor. We're seeing a bit of that, and we need to make sure as we select what deals we're going to participate in that it is with an appropriate return on invested capital and return to shareholders. But I'm not as concerned about the balance sheet side of the equation. It's more just making sure we're taking the deals that make sense and that overall continuing to grow, as we've always said, is our strategy: grow in advanced solutions and cloud above market.

And over time, we've demonstrated that we've been doing that. And growing client and endpoint, where you tend to have a little bit more of that turf war from a margin perspective, can get a little bit more exacerbated, growing that with market and being selective as to the nature of business we want to pursue. Hey, Ruplu, the only last thing I would say real quick is if you look at Xvantage and the investments we've made, and as we've talked about over the last nine quarters, we've taken out upwards of $200 million worth of OpEx, which we've reinvested some of that back into Xvantage, but it's been enabled internal efficiencies.

The benefit we have is we're showing up to provide our customers a singular experience around hardware, software, services, and cloud in one area that they can transact with and ease of doing business ultimately for those end businesses, the millions that they're serving each and every day.

Ruplu Bhattacharya (Director)

Thanks for the details. Appreciate it.

Willa McManmon (VP of Investor Relations)

Our next question is from Surinder Thind with Jefferies. Please proceed.

Surinder Thind (Equity Research Analyst)

About the SMB market and what you're seeing there at this point, is it fair to characterize that it's a bit weaker at this point in the cycle than you're anticipating? Just any color around that would be helpful and maybe your expectations as the year progresses.

Paul Bay (CEO)

Surinder, this is Paul. So thank you for the question. Yes, SMB was down, as I mentioned, double-digit for most quarters and exiting the year in Q4. Early indications are that we believe that is going to come back, and we're seeing early signs of that. Part of that, I believe, too, is tied to the advanced solutions and the opportunity we have as areas like networking continue to make progress towards not having declines in 2024 going into 2025. So wrapping our advanced solutions, our cloud, and the endpoint solutions together, we think that there'll be some strength coming back into SMB. Maybe not as much in Q1, but the conversations we're having with customers as they see a pretty good back half of the year as they're building out their pipelines relative to the end businesses they're serving today.

Willa McManmon (VP of Investor Relations)

Our next question is from Nick Altmann with Deutsche Bank. Please proceed.

Paul Bay (CEO)

Matt, are you there?

Matt Niknam (Director of Equity Research)

Hey, guys. Can you hear me?

Mike Zilis (CFO)

Yeah, now we can. Yeah, we can hear you.

Matt Niknam (Director of Equity Research)

Okay. Awesome. Awesome, so two follow-ups. First, on public sector, you referenced some softness. I'm just wondering, is that U.S.-related? Is that related to the election and hence more transitory in nature, or is this expected to continue? And then just on working cap and OCF, Mike, maybe if we can how you're thinking about working cap and operating cash flow in Q1 with the implied seasonal sales dip and maybe more of a mix shift towards client and endpoint.

Paul Bay (CEO)

This is Paul. I'll answer the public sector. Yes, the significant piece was from a North America perspective, but I would also say the other regions also were down too. It's kind of a global public sector environment. The expectation was prior to some of the decisions that were made here recently over the last 24 hours that we would see some return to growth in public sector depending on which season it is, whether it's Fed, SLED, or education. But there may actually be some opportunity now too, I would say, in the European markets as there's potentially some more preparing to how they're going to move forward. There may be some public sector opportunities there too.

But the expectation is that, yes, it would start to come back this year because it was down by double digits on a global basis for us in Q4.

Mike Zilis (CFO)

So then just to tack on on the working capital question, yeah, I'll just remind everybody we have a decent amount of seasonality to our business where we invest in the second half of the year for the peak of sales going into Q4. Those sales were higher as we talked about. We saw nice growth in Q4, and therefore we're more in collection mode on the receivables that came out of Q4 as we get into Q1. But I would also point out we did have a very strong free cash flow fourth quarter.

And some of that was not only sell-through very successfully of inventory levels and translating that into sales, but also some strategic work with our vendors and payables to extend that. And obviously, you can only do that so much on an ongoing basis. So we're more in collection mode as we go into Q1 on the receivables, but we also see typically a little bit more of a seasonal lull in Q1 and Q2 as you would see in our normal sales cycle. So what I would just say is over time, and I made this remark in my prepared remarks, we expect to generate consistent free cash flow over the annual periods as long as we bear through those seasonality factors and see some of that bear out throughout the year.

It's our goal that on a consistent basis, we're driving 30% or more of our EBITDA through to free cash flow. If we start to see, as we usually do with the countercyclicality of the business, quite a bit of growth opportunity, that requires investment in working capital. Endpoint solutions requires less than advanced solutions does. If we start to see networking rebound and advanced solutions return to more significant growth given the project-based nature of that business, that might require some investment in working capital. Rest assured, where we look at that is with an eye absolutely towards shareholder return and making sure we're balancing that with the profitability of the deals we're pursuing.

Matt Niknam (Director of Equity Research)

Thank you.

Willa McManmon (VP of Investor Relations)

Our next question is from Adam Tindle with Raymond James. Please proceed with your question.

Adam Tindle (Managing Director)

Operating income dollars are kind of a good proxy that neutralizes for all the mixed impacts and trying to figure out what's going on with PCs versus infrastructure. And if I look at that metric, it was down almost 20% year over year in the quarter. Understand tough macro in India and some of those other factors going on. But your main competitor, I think on that metric, was down about 1%. And your main customers, whether it's a CDW, etc., were kind of flattish on that metric. So I guess relative to the competitors and your customers, it's just a big delta on the operating income dollar line. I'm trying to figure out how to reconcile what's going on there. And then for Mike, if you could just expand on your Q1 guidance. It's on gross profit dollars and EPS, but we don't have the OI dollars.

Hard to model the below-the-line items, but I think I'm getting to around 210 on EBIT dollars. If you could maybe just help us a little bit on what's implied for Q1 on the operating income dollar line, that'd be helpful. Thank you, guys.

Mike Zilis (CFO)

Yeah. So let me hit on the trend in Q4 first. Yeah, just remind you, not only do we have the India charges, which were about $20.3 million, but we also have the stock-based comp charge that goes through OpEx and operating income. We add that back when you get down into adjusted EBITDA and non-GAAP net income, but it is not added back into adjusted operating income. So that's $50.4 million. It's 41 basis points of sales. And I think that probably explains the bulk of what you're talking about relative to what you would see perhaps in some other markets on the operating income line item. And then on top of that, as I've said a couple of times here, I think we continue to find ways where we can optimize sales.

And also, as we see Xvantage driving some of the benefits we've talked about in previous discussions as well as today, as we return to growth, we have the opportunity to grow without having to add back as much operating expense to serve that because we're now more automated than we were a year ago, two years ago, etc. So those are really the more optimal benefits there. I'm sorry, could you just repeat your second part of your question, though? You were asking more on EBITDA, I think.

Adam Tindle (Managing Director)

Yeah. I was mainly trying to get into Q1 to make sure we don't mismodel this in Q1 again because it was such a big deviation in Q4 on the operating income dollar line. And I think you're implying just over 200 million of EBIT on the Q1 line. But any color you can give us in terms of modeling, and we could take it offline if we need to, but.

Mike Zilis (CFO)

Yeah. I can definitely get back to you with more specifics when we have some follow-ons. But I think, generally speaking, I think you're about right as far as what we would see. As far as trending, we're seeing a little bit off on the operating income non-GAAP line, again, because we have some of that heightened investment on a year-over-year basis in Xvantage and so forth. You're seeing a little bit more muted number on a year-over-year basis. But directionally, you're not too far off on the EBIT, I believe.

Adam Tindle (Managing Director)

Okay. That clarification is helpful. Thanks, Mike.

Willa McManmon (VP of Investor Relations)

Our next question is from David Page with RBC Capital Markets. Please proceed.

David Paige (AVP of Equity Research)

Hi. Thank you for taking my question. I was wondering if you could just give some maybe qualitative thoughts around how you're leveraging the Xvantage platform in 2025, in particular with respect to hyperscalers. I think on the Q3 call, you had mentioned some momentum with AWS. So I was wondering how that was going and then just hyperscaler demand in general. Thank you.

Paul Bay (CEO)

Yeah, so thank you, David, so let me give you a couple of thoughts on how we're looking at maybe some of the platform metrics, so as it relates to the hyperscalers, yes, we have actually created some integrations and ease of use on how technology wants to be deployed. Specifically with AWS, they mentioned at their re:Invent conference, and you probably saw a press release on us of what we're doing to integrate seamlessly with their marketplace, and we will continue to integrate and move forward with all the hyperscalers from a customer and really an ease-of-use standpoint, but let me give you a couple of thoughts that we have. These are year-end, full-year kind of metrics that we look at. There's really three different ways that we look at the metrics with regard to the business.

So the first one is we would talk about end-user engagement and how we're moving forward with end-user engagement. That would be things like searches and active users. That was up over 50% year over year for the full year of 2024. The second one, as we call it, is customer. And as we look at the customer, one of the metrics that we use is dormant customers. And a dormant customer is us. For us, as somebody that hasn't transacted with us in 12 months or more, we have reactivated over 8,000. And those 8,000 new dormant customers that we've been working with have actually started to deliver meaningful revenue for those net new customers, I'll call them. And the last one is financial and operational. And one of the metrics that we use there is self-service orders.

And those have more than doubled, which helps demonstrate if you're doing self-service orders that touchless, and it demonstrates ease of use and much more less touch and friction in the business. So those are a couple of different ways we're looking at user engagement, financial, and operational, and customer. And I just gave you one metric that we use among many that we have. So we're seeing good progress on our Xvantage adoption and ease of doing business is what we've expected. And we feel good about where we're at right now.

David Paige (AVP of Equity Research)

Great. Thank you.

Willa McManmon (VP of Investor Relations)

Our next question is from Amit Daryanani with Evercore ISI. Please proceed.

Amit Daryanani (Senior Managing Director)

Yep. Thanks, Paul. I guess I was just hoping you could talk a little bit about in December and March, what are you folks looking at about mid 2%, 2.5% top-line growth. As we go through calendar 2025, just qualitatively, do you folks expect that growth to accelerate as the year progresses, especially given some of the comments you made on the networking recovery and some of the endpoint payments? I'm trying to understand, do you think this growth accelerates, or what are the cross currents we should be thinking about as it comes to 2025 growth? And then if you could just quantify how big is India for you folks right now, that would be helpful. Thank you.

Paul Bay (CEO)

So we don't give guidance for the year from a revenue standpoint. I think there's a couple of variables. We're seeing the notebook desktop refresh. I think that's going to depend. It's going to be dependent on how quickly that happens. Again, we're seeing nice momentum exiting the year and really going into the first part of Q1. So we're pleased with the momentum that we're seeing around that. Again, that's coming out of the Windows refresh and just aged systems in general, people looking for new technology to refresh the business. And again, if IDC is correct in kind of their thoughts and the business moving on networking from negative 6% last year to somewhere high single digits, they called 8%, that will definitely impact us. Networking is one of our larger pieces of business within our advanced solutions business and continued momentum in cloud.

So that's kind of how we see the makeup of where we're going to continue to invest. India, I think your question. You broke up a little bit. India and kind of the size of it is one of our largest businesses that we have from a company perspective. So within Asia-Pacific, it's a very large piece of the overall business.

Amit Daryanani (Senior Managing Director)

Thank you.

Willa McManmon (VP of Investor Relations)

Our final question will be from Maggie Nolan with William Blair. Please proceed with your question.

Maggie Nolan (Research Analyst)

Thank you. Is there a change in the expectation for the year of how you're going to drive operating leverage, just given some of the dynamics with pricing and advanced solutions? Are you going to need to be looking at more cost solutions and efficiencies, and anything beyond this year as well that you would want to comment on is welcome, too?

Paul Bay (CEO)

Yeah, Maggie, this is Paul. So as we went through the budgeting process and looking at kind of what could be some of the headwinds or challenges, I think we saw maybe some of the potential headwinds in Europe as a potential, and how do we look at protecting that on a go-forward basis? As we mentioned, exiting the year, which was late in the year, we announced we're taking out 3.5% of OpEx on a global basis. And the expectation was that we'll continue to get the efficiencies, as you heard me talk about, Xvantage. So how do we give a better experience, more touchless, stated another way, and lower OpEx? And so that's what we're really focused on, is making sure we're benefiting out of the investments we've made in those 16 countries where we have the Xvantage platform.

And so we continue to build additional competencies and capabilities that we're offering each of the countries. And one of the benefits we have, as we've mentioned before, which we think is a significant differentiator, is that because the way we've set up our architecture around Xvantage, that when we do development and create code around it, it goes to all 16 countries. So the way we like to say it is we create the data once, and we get to use it multiple times because it allows us to scale at a much lower cost in terms of innovation. So we're going to continue to focus on that for the first half of the year. And again, we were planning for kind of downside scenarios that we thought exiting the year and going into the first half of 2025.

Willa McManmon (VP of Investor Relations)

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Paul Bay for closing remarks.

Paul Bay (CEO)

Thank you, everyone, for today's call. Thank you to our 24,000 team members for their commitment to innovation and to our vendor partners and customers for continuing to evolve alongside us. We hope to see many of you at the Morgan Stanley TMTA conference tomorrow, as well as many of the other conferences in the coming months. Thanks for your interest, and have a great rest of the day.

Willa McManmon (VP of Investor Relations)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.