Yahoo Finance

Marshall Witt

Thanks, Patrick, and good morning, everyone. We had a solid performance in the first quarter with total gross billings of $20.7 billion, up 7.5% year-over-year, 9.5% in constant currency and at the high point of our guidance range. We were pleased to see year-over-year growth across all major geographies and most product categories.
In quarter one, there was an approximately 30% reduction from gross billings to net revenue, which was higher than expected and up from Q4, driven primarily by a higher mix of infrastructure software business, which is part of our Advanced Solutions portfolio. Net revenue was $14.5 billion, up 4% year-over-year and within our guidance range.
Our Endpoint Solutions portfolio grew 8% year-over-year driven by PCs and mobile. Our Advanced Solutions portfolio grew 7% year-over-year, driven by software, services and storage and Hyve. Gross profit was $1 billion or 4.82% of gross billings, representing a 9 basis point sequential decline and a 40 basis point decline year-over-year.
Most of the decline in profit margin year-over-year was driven by the expected tough compare in Hyve. There was an additional 10 basis point impact within Hyve attributed to investments in design and assembly as well as the impact of a temporary change in project composition.
Non-GAAP SG&A expense was $599 million or 2.89% of gross billings, representing a 13 basis point improvement year-over-year. The cost of gross profit percentage, which we define as the ratio of non-GAAP SG&A expense to gross profit was 60% in quarter one and slightly below expectations due to Hyve.
From a distribution perspective, we dropped through 50% of gross profit growth, demonstrating our commitment to profitable growth. Non-GAAP operating income was $399 million or 1.92% of gross billings, representing a 7 basis point sequential decline, and a 28 basis point decline year-over-year, primarily driven by Hyve. Interest expense and finance charges were $88 million, higher than expected due to increased working capital to support highest, largest customers.
The non-GAAP effective tax rate was approximately 23%, which was in line with expectations. Total non-GAAP net income was $237 million and non-GAAP diluted earnings per share was $2.80, both within our guidance range.
Turning to the balance sheet for quarter one. Net working capital was $4.3 billion, up approximately $1 billion, primarily due to the increase in Hyve inventory, which was previously discussed. The timing of payables and the overall growth of the business.
Free cash flow usage for the quarter was approximately $800 million, primarily due to higher working capital. We returned $138 million to stockholders in quarter one with $101 million of share repurchases and $37 million of dividend payments.
For the current quarter, our Board of Directors has approved a cash dividend of $0.44 per common share that will be payable on April 25, 2025, to stockholders of record as of the close of business on April 11, 2025. We ended the quarter with $542 million of cash and cash equivalents and debt of $4.3 billion. Our gross leverage ratio was 2.5 times and our net leverage ratio was 2.2 times.
Moving on to our outlook. These numbers are all non-GAAP. For the second quarter, we expect gross billings in the range of $19.7 billion to $20.7 billion, representing growth of approximately 5% at the midpoint. We do not anticipate a material currency impact year-over-year. Our outlook is based on a euro to dollar exchange rate of 1.08.
Net revenue in the range of $13.9 billion to $14.7 billion, which translates to an anticipated gross to net adjustment of approximately 29%. Non-GAAP net income in the range of $205 million to $247 million. Diluted earnings per share in the range of $2.45 to $2.95 per diluted share based on weighted average shares outstanding of approximately $83 million. We expect a tax rate of approximately 23% and interest expense of $86 million. We continue to assess the macroeconomic environment, including tariffs.
And as of today, we are well positioned to outperform the IT distribution market. In fiscal '25, we continue to be committed to mid-single-digit gross billings growth and generating $1.1 billion of free cash flow. Our outlook is adjusted to reflect temporary shortfalls in Hyve.
However, we remain highly confident in the long term outlook. We plan to host an Investor Day on April 10, where we will provide more detail on our strategy, medium term targets and capital allocation framework. With that, we'll open it up for your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) David Vogt, UBS.

David Vogt

Great, thanks guys. Thanks, Patrick. Thanks, Marshall. So obviously, I think the elephant in the room is, can we maybe dig in a little bit more on Hyve, a couple of reasons. One, what were the component shortages in the quarter?
And then you mentioned Marshall and Patrick sort of a -- expected demand backdrop. Can you kind of help us understand kind of what's attributing -- what's kind of driving that sort of outlook? Is it a product transition? Is it lack of components? Is it just sort of a pause because I'm trying to think it through with regards to the gross billing commentary for the full year.
Still being relatively solid in that sort of mid-single-digit range. So is it a timing issue? Or just how do you think about it and you put some more color and some more guardrails around what's going on the Hyve? Thanks.

Patrick Zammit

Yes, good morning. Thanks a lot for the question, David. I just would like to set the scene. So we had, overall, a very strong sales growth this quarter, driven by distribution and Hyve. Hyve again grew double digits year-on-year. But unfortunately, slightly lower than expectation, and that's what we will provide a little bit more color on it in a second.
Just very rapidly on distribution, I just want to make some statements. First, we enjoyed very nice growth. We think we grew faster than the market at -- I mean, with a mid-single-digit growth. Operating margins are stable, and we were very pleased with the fact that we could bring to the bottom line, more than 50% of the GP growth. So that's on distribution, solid performance.
When you look at Hyve, what happened is, again, double-digit growth but some demand not materializing. So indeed, we have on stock. In fact, those components were on stock. As you know, for our customers, we also do strategic buys which we keep on stock, we get remunerated for it.
And when they need the components, then we ship them. I mean we had, in particular, one very large business we thought we would ship in Q1 that didn't materialize, we believe it's going to happen in Q2. So it's just temporary. It's just a delay in the shipment. But unfortunately, it impacted our gross profit, our operating margin percent and obviously, our cash flow generation. Marshall, do you want to add any to color?

Marshall Witt

Yeah, thank you, Patrick. Just David, to your question on softer demand, and I'll reference what we spoke to in terms of guidance for quarter two. We have one customer that has some temporary demand pause in their outlook -- and so that's one of the reasons why we're seeing a little bit softer backdrop in quarter two related to Hyve.
But thinking broader just in terms of the position we play, the markets we serve, the projects we're participating in, and also the upcoming customers that we're about to onboard, we feel really good about the demand environment and our ability to participate in growth.

Operator

Ruplu Bhattacharya, Bank of America.

Ruplu Bhattacharya

(inaudible) my questions. This quarter did you see any pull-in or prebuying by customers to avoid any increase in tariffs? And Marshall, you had last quarter guided that billings would grow mid-single digits every quarter. Is that still your understanding for 3Q and 4Q?
And how should we think about this -- the reduction from billings to revenue for the full year since I think you said software is a bigger part of the mix. So if you can give any color on pre-buys on what you're thinking about quarterly billings growth and the billings to revenue reduction?

Patrick Zammit

So good morning Ruplu. Thanks a lot for the question. I will take the first one about the prebuys. So in particular, when you think about PC where prebuys could be an option, I mean we have a very strong high single digit growth in PCs this quarter.
We believe that the impact of tariffs has been relatively limited, okay? So we believe that for the moment, the growth is driven really by the refresh of the base of the PC base both during the pandemic and the Windows 11 refresh. So again, limited impact for the moment.

Marshall Witt

And then, Ruplu, just on the theme of tariff for Hyve, just to cover that off, we effectively pass through careful costs, we recoup those -- so no impact to the high business. And our position with Hyve relative to the last time tariffs were introduced back in 2016, 2017, we're much better positioned today with our onshore capabilities that we continue to provide Hyve with the competitive advantage in the marketplace.
If I respond to your question about the mid-single digit growth for the full year, we still believe that we will be able to achieve mid-single digit growth in quarter two. We think that distribution will be at mid-single digits or a little bit higher and that Hyve will have a slightly down year-over-year revenue performance. But we do expect that, that mid-single digit will play through for the second half of the year.
And then your last comment or question in regards to gross versus net. We came in just around 30%. I did mention that, that was up about 300 bps from what we had expected. That continues to reflect a mix shift in the AS versus ES portfolio.
We do think it's somewhat flattened out. If we think about our ES, AS balance for the rest of this year, we think they're going to be fairly equal in terms of their growth rates. So right now, my expectation is that probably stays in that 28% to 30% gross versus net for the next three quarters.

Operator

Keith Housum, Northcoast Research.

Keith Housum

Thanks, appreciate the opportunity, guys. In terms of the price increases that you're seeing from your vendors, perhaps you can provide a little bit of guidance about what you're seeing is perhaps the average price increases.
And if we're seeing them come into play yet, it is being effective. And then is this enough to offset some perhaps demand challenges that may happen throughout the rest of the year as a result of price increases? How do you all think about how they work together?

Patrick Zammit

So good morning, Keith. So we see some price increases. Some vendors are starting to increase prices. But again, it's not across the board. It's relatively limited for the moment. It's very specific. I mean, clearly, if indeed, we see an acceleration of the price increases.
As you know, we are going to pass it through then to the channel. I mean it will create a tailwind in the short term. And of course, then the question will be what could be the impact on the volume. But again, for the moment, okay, based on what we see, it's relatively limited -- and where we have visibility, we took it into account in our guidance.

Operator

Adam Tindle, Raymond James.

Adam Tindle

Okay, thanks. Good morning. I just wanted to return to Hyve for a second, Marshall. You talked about, I think, 10 basis points in Q1 impact. The part of the question would be, if you could maybe help quantify this issue and the timing to return what happens in Q2 and on a go-forward basis.
And I'm wondering if that is also impacting cash flow, which was very weak in the quarter, if you could maybe speak to what happens to cash flow for the rest of the year and your expectations on that and maybe open some capital allocation on that given the stock is starting to approach book value here in the premarket. Thanks.

Marshall Witt

Sure. I'll start and Patrick here, please chime in. In regards to the 10 basis points, Adam, it's around -- in quarter one, we referenced the portfolio, temporary portfolio mix. That's really just the mix of the current projects underway and that has a slight negative impact to gross profit or gross margin.
The other piece is that as we're seeing this temporary pause in demand, we're committed to keep our specialized skilled resources on board, knowing that demand will return and expecting it to return. So that's the headwind we spoke to.
As we think about that now for quarter two, those two same commitments are in place as well, temporary project portfolio mix, bringing down the margin slightly. And then the overall commitment for labor. The broader comment that is playing out for fiscal '25, Adam, that we spoke to last call was the significant investments that we're making in Hyve around specialized skill sets.
We recognize that in our design capabilities, we need to continue to enhance that and win new business. So we're onboarding a significant amount of technical engineers to enable that to happen. As you know, in many situations, the onboarding and the success of that can take 18 to 24 months to manifest itself.
So we feel good about the investments, but we know that the revenue may come in future quarters. In regards to the cash flow usage in the quarter, typically within our business, we'll see some cash consumption within the distribution behavior between quarter four and quarter one.
A lot of that has to do with the large quarter for some of that carries into quarter one, and we usually see a cash usage. The incremental amount is driven by Hyve primarily due to two things; one, elevated inventory into quite a bit of payables that came out the door. So that did hurt us.
If I think about how we recover that, we expect to see a recovery of about two to three days per quarter. That gets us back to around a 20-day cash conversion as we exit '25. The last thing I'll remind you and the rest is that we were in a similar situation coming out of fiscal '21 into '22 where we saw strong demand, but we saw inventory build within our high portfolio.
And it built for the first two to three quarters in '22, we saw margin depression associated with carrying that. But then we started to see it sell through. We saw a strong recovery of our cost of capital and good margin profile for the inventory that we purchased on behalf of our customers.
We expect that to be a similar pattern that will take place with Hyve this year and going into '26. And then finally, absolutely, our position has been that we will be and remain opportunistic on our share buyback strategy. We repurchased $100 million in quarter one.
We commented about $100 million in quarter two. As you know, in fiscal '24, we repurchased and also through dividends, 72% of our free cash flow went to share buybacks and dividends, and we expect that to be what we would do in '25, given that, that still remains a very good IRR and a very heavy and positive ROI.

Patrick Zammit

Yes. I just want to add a few comments. The first one is, thanks to Hyve we can play in this huge hyperscaler market, I mean, $250 billion at least of investments. And so we believe that, that demand continues to be healthy. The fact is that the demand in that space is really project driven.
And yes, we have a few projects where for the moment, the demand is lower than expected. But again, we believe it's temporary. It's going to come back, and it will help us consume some of the elevated inventory. Yeah, the inventory is really for the moment from a cash flow standpoint issue.
But again, we are covered and it's a temporary situation. So we are very confident that we are going to address and fix it over the next two quarters, as Marshall mentioned. From a cash flow standpoint, I just want to add that on the distribution side, the cash days, in fact, are even lower than expected in Q1. So that's good. So we have a very healthy cash less situation on distribution, which should help us also for the coming quarters.

Operator

Joseph Cardoso, JPMorgan.

Joseph Cardoso

Hey, good morning. Thanks for the questions. Maybe just a quick kind of clarification questions, so I'll ask them kind of upfront here. First one is just in terms of the F2Q lower seasonality maybe relative to expectations heading into the fiscal year. sounds like that's a bit of a high dynamic. But I just want to be clear, like anything else you're seeing contributing to the lower sequential decline or the sequential decline in the quarter beyond Hyve in the traditional distribution portfolio?
And then the second clarification question here is, just in terms of the full year outlook, any change in terms of how you're thinking about the contribution of ES and AS to the full year guide, including Hyve?
And then just piggybacking off of that, just if Hyve is kind of tracking a little bit lower than you expected from a full year contribution standpoint, I guess, what are you seeing in the AS portfolio offsetting that if you're still expecting that to track kind of in that mid-single-digit range. Thanks for the questions.

Patrick Zammit

So good morning, Joe. Thanks a lot for the question. I will take the first question. So for distribution, again, very solid Q1, mid-single digit growth. Our guidance for Q2 assumes that -- the same we will see the same pattern. We are cautiously optimistic about the market.
We have a few technologies driving the demand at the moment. The PC refresh is one. Cloud continues to be very solid. Security continues to be very solid. AI-related products are ramping up. In enterprise, it's not ramping up as fast as expected.
But I mean, quarter-after-quarter, we see the weight of AI products increasing. And we are also expecting the networking technology segment to recover. And software continues to be very strong. So lots of technology segments in distribution justifying us to be cautiously optimistic.
On the margin side, again, as I mentioned at the very beginning, we see the margin stabilizing, which is a positive. And because of our cost management, we are going to drop through a significant amount of the additional GP. So on the distribution side, again, positive, cautiously optimistic, but overall positive.

Marshall Witt

And just to add to that, Joe, on your question about the growth expectations for the portfolio and how that plays out ES and AS and how we sustain that confidence in AS growth. Just what Patrick said, security, cloud, data analytics, we put that in strat technology portfolio. That was growing for the quarter at over 20%. So it's a healthy growth rate that will kind of buoy some of the softness that we anticipate seeing in Hyve for the rest of this year.

Operator

Michael Ng, Goldman Sachs.

Michael Ng

Hey, good morning, thanks for the question. I just have two clarification questions on Hyve. I guess, first, on the customer that had a temporary demand pause. Was that related to your historically main large customer? Or is it the newer customer that ramps last year?
And then second, I just wanted to ask if I could get some clarification on if there was a specific business within Hyve that was the key driver of some of these issues? Was it primarily the strategic buy piece? And the reason why I asked is I think the strategic buy piece, that'll have some revenue recognitions once you ship those components, but any thoughts there would be great. Thank you.

Marshall Witt

Sure, yeah, I'll start. So the temporary pause was with the customer that we ramped last year. And a lot of what we believe is taking place is that the demand precision and forecasting is what has caused that temporary pause. We felt that in quarter one, we anticipate it to take place in quarter two. Our expectation is that it kind of returns back to its momentum as we go into quarter three.
And then just back to the question about what -- around what business segments if you were within Hyve, were key drivers. You're right, Mike, strat procurement is one of the four kind of major elements of what we do within Hyve. We made that component purchase in '24. We thought it would get shipped in Q1, and it didn't, so it moved into quarter two. So you could say that part of our business showed some softness within Hyve.

Operator

Ananda Baruah, Loop Capital.

Ananda Baruah

Hey, thanks guys. Good morning thanks for taking the question. Yeah, actually just kind of staying on Hyve there. Is any part of this -- and I'm just picking up on the language that you guys used sort of in the prepared remarks.
Was any part of this due to offer inventory by the market has seen a dynamic where folks sort of basically customers, whether it's as large as CSPs and even the tier 2 guys buying less copper servers than they originally anticipated kind of through the fall into this year.
And so some folks have had more hopper inventory than they anticipated they might. Just that's been a general industry dynamic. Is any part of what you guys are experiencing getting caught up in that dynamic? Is it really the question?

Marshall Witt

Hey Ananda, thanks for the question. Let me just step up a little bit higher with that and not get specific on SKUs per se, but the majority, if not all of the inventory that we purchased on the behalf of our customers is to fulfill their demand forecast.
And where we find there is either an oversupply of certain components or SKUs, that is where we have full protection to recover the carrying costs associated with that and no obsolescence risk around that. So there could be some buildup of how they want their supply chains to be covered in the way that gets satisfied in terms of how we build out the racks, but nothing specific around what elements of the SKUs are in more or less demand.

Operator

George Wang, Barclays.

George Wang

Well, hey, guys, thanks for taking my question. Patrick, can you kind of talk about the broader geographic exposure for TD SYNNEX related to some of the smaller players in the space. How does that sort of translate into potential share gains, especially in this environment?
And then maybe to Marshall, can you kind of talk about the dynamic in Europe? I noticed on a regime basis, Europe was a bit softer based on gross billings in terms of the year-over-year growth rate. So can you kind of talk about puts and takes.
And if I can squeeze in one more kind of follow-up just in terms of the operating expense efficiency, Marshall, can you talk about the expectation for the SG&A kind of operating expense versus gross billings kind of how to think about in the second half? Thank you.

Marshall Witt

Just on the SG&A question, Patrick's got quite a bit of good knowledge on Europe. So I'll let him talk about that in terms of just the softness that we experienced there on margins. And then I think what you wanted was a better understanding of how our overall breadth and depth of capabilities is positioning us relative to our peers or our competitors.
So with SG&A, in the prepared remarks, we said that the cost to serve was around 6%. It came in a little bit heavier than what we had expected, primarily due to the to Hyve and the Hyve element was two things. It was a little bit more SG&A but a lot less GP. And so that combination is what caused that cost to serve to come in at 60%. We expect that, that will improve over time.
If you look at the distribution side of the house, extremely efficient in the prepared remarks, saying 50% of the GP fall through the bottom line is fantastic. It's a great representation and reflection of the hard work that the teams are doing to continue to build ways of supporting the growth of our business and a very profitable fall-through.
I'll say a couple of words on Europe and pitch it over to Patrick. But within our regional portfolio, we had mentioned in last quarter's call that we knew there was going to be headwinds in Europe due to vendor mix and we saw that play out. But Patrick, if you want to provide a little bit more color on Europe and then the geo competitive pressures?

Patrick Zammit

Yes. So in Europe, by the way, I just want to mention the figures you see include Hyve. So again, I'm speaking only about distribution now. So in Europe, market is growing. We grew faster than the market. And on the margin standpoint -- from a margin standpoint, as Marshall mentioned, it's a mix -- it's a vendor mix.
It's driven by the vendor mix, which had an impact more specifically on the back-end margin. But again, the team does very well from a cost management standpoint. And so from an operating margin standpoint, they managed to keep it flat year-on-year.
And so nice growth, operating margin, nice drop-through to the bottom line. So Europe contributed nicely to add the good performance of distribution. Now looking from a global standpoint. As you know, in North America and in Europe, we have a strong market position. APJ and Latin America are really faster-growing countries and our market share is much more modest.
So for us, it's a very nice opportunity for profitable growth. I want to insist on the fact that in both regions, we focus on the SMB market, which drives higher margin. So not only we should continue to enjoy, I would say, a faster growth than in Europe and in North America. But on top of it, it should be -- it should have a very positive impact on our operating margins. The last point is, obviously, I mean, we have both strong relationships with the vendors.
Thanks to our position in North America and in Europe. And we are clearly benefiting from it as we continue to expand in Latin America and APJ. So that explains the very good results in those two regions and the nice double digit growth in those regions.

Operator

David Paige, RBC Capital Markets.

David Paige

Hi, good morning. Thank you for taking my question. Just, I guess, a more broader question and initiatives at TD SYNNEX have. What is the, I guess, the benefits of the long term with initiatives like Digital Bridge and StreamOne? And how is that helping you navigate through I guess, just like a very uncertain macro environment. Thank you.

Patrick Zammit

Yeah. So -- when you think about our value proposition to our customers and again, customers for us is partners and vendors. I mean, one, we are here to accelerate their growth, help them grow in the market. But the other dimension is obviously optimizing their operating models and basically reducing the cost of transacting in the market. And that's where our platform and Digital Bridge play a big role.
So we have an excellent platform, an excellent digital platform, which basically provides our customers the opportunity to transact with us 24/7 automate transactions with us. And if you look at Digital Bridge, it's the same concept, but we think it's even more powerful.
Because where when you think about it, when customers our customers interact through the platform, they have to move out from there, I would say applications to go into our platform. With Digital Bridge, what we are doing is integrating our platform into their tools.
And that's the reason it's so powerful and resonates very well. It's a tool we develop by the way, with our community solves for our customers I mean, basically, they came to us with a specification and together with engineered that solution, which is going to, I think, differentiate very nicely in the market.

Operator

Vincent Colicchio, Barrington Research.

Vincent Colicchio

Yes. It looks like despite the strength in PCs, peripherals weren't overly strong. What are your thoughts going forward for peripherals?

Patrick Zammit

Yeah. So peripherals, includes printing. So the market for printing is continues to be challenged, okay, with low single-digit decline. But then the main reason for the decline is, in North America, we had one large business, which was not profitable.
I mean we had to bid, as you know, we are absolutely focused on a strict financial discipline. We could not get the right return. And so we've lost that business. So that's the reason for the decline. The two reasons for the decline on peripherals. We are now -- I just want to insist on it.
So what happens in both cases is obviously, I mean, we are looking for new business more in the SMB segment where the margins are higher and more sustainable for the long run. So that's what we are working on.

Operator

I will turn the call back over to management for closing remarks.

Patrick Zammit

So thank you everyone for joining us. I want to take a moment to thank our customers, partners, and investors for their support. This quarter, we were named as one of the world's most admired companies by Fortune for the fourth consecutive year.
This achievement reflects the culture fostered by our 23,000 co-workers worldwide who are committed to delivering exceptional value to our customers. We look forward to reconnecting next quarter. I hope you have a good day.

Operator

That concludes today's conference call. You may not disconnect. Have a nice day.