Q2 2024 Earnings Summary
- TD SYNNEX is strategically positioned across all critical technologies, especially AI, which is expected to benefit most technology sectors in the coming years. The company's end-to-end portfolio and global presence, with potential to invest and grow in markets like India, provide a big strategic advantage for future growth.
- The company expects sequential improvement in the PC market, with growth expected to continue quarter after quarter, benefiting from three tailwinds: pandemic-related PC refreshes, Windows 11 upgrades, and the ramp-up of AI PCs. The acceleration of AI PCs in the second half at lower price points is expected to benefit the PC market and the company's business.
- TD SYNNEX is focusing on profitable growth, with high-growth technologies contributing positively to margins, and recent upgrades to IT platforms in North America and Europe enabling process and system efficiencies. This allows the company to reduce costs and improve operating income, leading to favorable margin mix and better profitability.
- The company's earnings are expected to be flat year-over-year in Q3, with management confirming that this trend may continue into Q4 and Q1, indicating limited near-term earnings growth.
- Management acknowledged that some customers are pausing their investments for 3 to 6 months, which could delay revenue growth and recovery in demand.
- Softness in the networking segment is negatively impacting gross margins, as networking products have higher margins, and this softness may persist until at least October or November, affecting profitability.
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Hyve Revenue Growth
Q: How will Hyve's growth impact revenue and cash flow?
A: Hyve experienced robust growth in the quarter, exceeding expectations, and we anticipate this momentum to continue as customer #2 ramps up. While this growth requires investments in working capital—particularly in accounts receivable and inventory—that may impact cash flows in the short term, these are positive developments for the business. Overall, we expect accretive margin returns from Hyve as we continue to invest in our partnerships. -
CEO Focus and Vision
Q: What are your top focus areas for the next 12 months?
A: Our focus is on growth that generates profits, with technologies driving growth expected to have positive margins. Hyve will continue contributing to this growth. We have upgraded our IT platforms in North America and Europe, allowing us to improve efficiency and redeploy resources to high-growth categories, while reducing our cost to gross profit ratio as we did in Q2. Overall, we see strong prospects for profitable growth impacting operating income. -
Capital Allocation Strategy
Q: How will you balance shareholder returns and M&A opportunities?
A: We plan to return 50% of cash flow to shareholders and are comfortable with this approach. M&A is an opportunity to accelerate growth, and we are diligent with financial metrics when considering acquisitions. We see opportunities in regions like APJ, Latin America, and Europe, and in specific technologies. Excluding M&A, we believe our current capital allocation is a good start and will review it as the situation evolves. -
Gross Margin Outlook
Q: How will margins be affected in the second half?
A: We expect gross margins to decline around 20 basis points due to a mix shift towards Endpoint Solutions, which has a lower gross margin profile. Additionally, investments in ramping Hyve's new customer and softness in networking have impacted margins this quarter. However, our strategic technology portfolio, now at 25% of gross billings and an all-time high, tends to have higher margin attributes. -
PC Market Recovery
Q: What's your outlook for PC recovery in the second half?
A: We are seeing sequential improvement in the PC market, returning to growth this quarter. We expect this growth to continue, driven by three tailwinds: the refresh of PCs bought during the pandemic, the adoption of Windows 11, and the ramp-up of AI PCs. The acceleration of new AI PCs at lower price points in the second half should benefit the PC market. -
Customer Delays for AI PCs
Q: Are customers delaying PC purchases awaiting AI PCs?
A: Currently, there aren't enough AI PC products launched, so customers may be waiting to see available offerings. As low-end AI PCs come to market, this should unblock many purchases and accelerate demand in the second half. We agree that any pause in investments is likely short-term, around 3–6 months. -
Guidance vs. Consensus
Q: How do you reconcile positive commentary with flat guidance?
A: Actual gross billings growth was 3% in Q2, and we're guiding to about 5% growth in Q3 at the midpoint. We see sequential improvements each quarter, though perhaps at a slightly slower trajectory than initially anticipated. We encourage focusing on gross billings rather than net revenue due to netting effects. -
Networking Demand Impact
Q: How has networking demand affected margins?
A: The networking segment remains soft, impacting margins as it typically has a higher gross margin profile. Networking was the last area to recover from supply chain issues, and its backlog runoff went further into last year. We expect easier comparisons starting in Q4 as the situation normalizes. -
Geographical Performance
Q: How did different regions perform this quarter?
A: North America and Europe performed similarly, with slight growth. Europe entered the correction later but is now aligned with North America. In Asia-Pacific and Japan (APJ), we are experiencing double-digit growth driven by data center investments, particularly from Tier 2 cloud service providers.
Research analysts covering TD SYNNEX.