TD Synnex Endpoint Sales Start To Stabilize, But Revenue Still Falls In Q3

‘For another consecutive quarter, a greater portion of our business was generated from high-growth technology categories, and we saw improving performance in endpoint solutions. The business mix helped us to expand margins, deliver earnings per share above our guidance, generate strong free cash flow, and increase capital return to our shareholders in the quarter,’ says TD Synnex CEO Rich Hume.

Relative stability in TD Synnex’s endpoint business was not enough to overcome the macroeconomic and sales headwinds the IT distribution giant saw in its third fiscal quarter 2023, leading to a big year-over-year drop in revenue and a decrease in income.

TD Synnex Tuesday also said its expectations for its fourth fiscal quarter show a continued fall in revenue and income.

Investors showed their displeasure with the news by driving TD Synnex’s share price down 5.2 percent to $96.56 per share by the close of the trading day.

[Related: TD Synnex CEO: We’re Bringing ‘Sales Engagement Or Energy To Where There Is Demand’]

TD Synnex CEO Rich Hume, during his prepared remarks during the company’s third fiscal quarter 2023 quarterly financial analyst call, said his company’s strategy is working, and that an expansive portfolio of products, services, and solutions have enabled it to navigate the post-pandemic IT spending environment spending fluctuations.

“For another consecutive quarter, a greater portion of our business was generated from high-growth technology categories, and we saw improving performance in endpoint solutions,” Hume said. “The business mix helped us to expand margins, deliver earnings per share above our guidance, generate strong free cash flow, and increase capital return to our shareholders in the quarter.”

TD Synnex saw signs of stability in its endpoint business, as its Americas business experienced reduced year-on-year declines and grew quarter-over-quarter, Hume said. Its advanced solutions business in the Americas, however, saw decelerating growth, he said.

TD Synnex’s third fiscal quarter European business decline was due to impacts from the macroeconomic backdrop, while its Asia Pacific and Japan business grew driven by strength in advanced solutions, high-growth technologies, and momentum in India, Australia, and New Zealand, he said.

“In addition, the industry supply chain continues to be healthy with backlogs back to normal historical levels,” he said. “This has allowed us to strategically reduce our inventory position, leading to significantly improved working capital and strong free cash flow generation for the quarter.”

TD Synnex’s last quarter set a goal to find an additional $50 million in cost optimization over the next few quarters, Hume said. “We achieved our target for fiscal Q3, and are on track to capture the remainder by fiscal Q1 of 2024,” he said.

TD Synnex remains focused on partnering with the channel to maximize the value of their end users’ IT investments, and during the third fiscal quarter 2023 by launched two new solutions aimed at that goal, Hume said.

The first is a partner health and fitness tool using a custom algorithm to analyze a partners’ offerings across the advanced solution and high growth technologies to show them where they stand in comparison to the broader TD Synnex partner landscape, Hume said.

“Using data to provide this type of actionable insight is one way we are providing distinctive value for our customers, helping to guide their decision making regarding portfolio diversification to capture growth,” he said.

The second solution is Destination AI, which aggregates resources to provide solution provider partners the knowledge and connections to capture opportunities across AI, machine learning, and advanced analytics, Hume said.

“As this marketplace rapidly evolves, TD Synnex is working with more than 40 vendors across the AI space, including AI-enabled independent software vendors, AI accelerators, core AI software platform providers, and AI infrastructure firms,” he said. “Our catalog of pre-validated, ready-to-deploy solutions, combined with our ability to provide multi-vendor offerings aggregating best of breed services, software, and hardware and edge devices, places us in a unique position with the business partner ecosystem to add value to our customers.”

TD Synnex next week will be hosting two partner events during which it will present results of a survey it did of B2B channel partners from over 60 countries about their expectations over the next year and beyond, Hume said.

“Channel partners told us that they are remaining agile in this environment, adapting their business models to focus on emerging technologies and rebalancing their priorities and offerings to meet the evolving needs of their end users,” he said. “There were many interesting findings in the survey. But most clear was the continued importance of the channel in helping partners to navigate the rapidly changing technology landscape, providing technical expertise and helping to fill gaps in the talent pipeline.”

TD Synnex has likely seen the trough of its endpoint solutions business, and will continue to see smaller declines moving forward, Hume said.

“It is an exciting time to be in the IT industry,” he said. “And we believe that in the long term, IT spending will continue to outpace GDP growth. We see a variety of drivers on the horizon, including AI enablement, which we believe we will see across the majority of our offering set as vendors bring these features and functionality to their products and services over time.”

During the question and answer section of the conference call, when an analyst asked for more information on why TD Synnex thinks it is seeing the trough in its endpoint business, Hume said that the company in the second and third fiscal quarters saw lesser decline, and expects the same in the fourth fiscal quarter.

“But I would also comment that globally, although there were lesser declines, PC as a category was a little bit weaker than we had thought, and advanced solutions was a little bit stronger,” he said. “As you know, the overall revenue came in at the midpoint of the guide. So there was some mix shift happening there.”

TD Synnex’ federal and education businesses saw some strength in the quarter, with Chromebooks helping the education business., Hume said.

“The Chrome category last year was very weak, and we started to see Chrome emerge a bit within the education domain in the reported quarter,” he said.

When asked by an analyst about trends he is seeing in North America, Hume said TD Synnex’s advanced solutions have consistently been its star performers throughout the year.

“[We’ve seen] pretty robust growth rates in that business,” he said. “At the same time, from a vertical perspective, as stated earlier, the Federal has been a stronger vertical overall. And then the benefit, if you will, of moving through a time of lesser declines in the endpoint. And again, we believe that that trend will continue as we move forward.”

For its third fiscal quarter 2023, which ended August 31, TD Synnex reported revenue of $13.96 billion, down about 9.1 percent from the $15.36 billion the company reported for its third fiscal quarter 2022.

That revenue figure missed analyst expectations by $150 million, according to Seeking Alpha.

For the quarter, TD Synnex reported GAAP net income of $139.3 million or $1.49 per share, down from last year’s $148.8 million or $1.55 per share. On a non-GAAP basis, the distributor reported net income of $259.8 million or $2.78 per share, down from last year’s $263.4 million or $2.74 per share.

Non-GAAP earnings per share missed analyst expectations by 98 cents, according to Seeking Alpha.

Looking ahead, TD Synnex expects fourth fiscal quarter 2023 gross billings of $18.5 billion to $19.7 billion, which represents a decline of 9 percent on a year-over-year basis at the midpoint. The company also expects total revenue to be the range of $14.0 billion to $15.0 billion, or a decline of 11 year over year at the midpoint.

TD Synnex also expects non-GAAP net income to be in the range of $223 million to $269 million, and non-GAAP earnings of $2.40 to $2.90 per share.