TD Synnex (SNX) Q3 2026 earnings call

Good morning. My name is Rebecca, and I will be your conference operator today. I would like to welcome everyone to the TD Cinex third quarter fiscal 2026 earnings call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Nate Frito-Head of Investor Relations at TD Cinex. Nate, you may begin.

Good morning, everyone, and welcome to TD Cinex's fiscal 2026 third quarter earnings call. Joining me on today's call are Chief Executive Officer Patrick Xamet and Chief Financial Officer David Jordan. Before we continue, 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, including statements about our strategy, demand, plans and positioning, growth, cash flow, capital allocation, and stockholder return, as well as our financial expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release in the form 8K we filed today in the risk factors section of our form 10K and our other reports and filings with the FCC.

We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAP financial information. Reconciliation of gaps and non-GAP results are included in our earnings press release and the related form 8K available on our investor relations website, ir. tdsynx. com. This conference call is the property of TD SynX and may not be recorded or re-broadcast without our permission. I will now turn the call over to Patrick.

Thank you Nate and good morning everyone. We delivered another record quarter with distribution and Hive both performing above our expectations and growing above market within the quarter. Results were broad-based across geographies, technologies, customers, and programs with notable strength in data center infrastructure. Our success securing opportunities with new and existing customers, particularly within Hive, required working capital investment to support these rounds. As David will discuss in more detail, both investments affected near-term cash flow during the quarter, but position us to support committed customer demand and future growth. Looking beyond the quarter, we continue to see encouraging developments across the technology landscape. Enterprise AI adoption is progressing towards broader production deployments that are center modernization remains a priority as organizations prepare for next-generation infrastructure requirements.

While AI is driving new security, governance, and compliance requirements across technology environments, we believe this trends expand our opportunities across both distribution and Hive and reinforce our confidence in the long-term growth opportunity ahead.

I will now begin with distribution. Distribution delivered strong growth during the quarter with non-gap growth billings reaching $24.8 billion, up 27% year over year, exceeding our expectations and growing above market across each of our regions. Our performance reflects a broader trend across the technology ecosystem. As technology environments become more complex, customers increasingly need help integrating, deploying, securing, and managing solutions across multiple vendors and technologies. Vendors are looking for partners activate demand and execute consistently around the world. This is increasing the strategic importance of distribution. One area we are particularly encouraged by is the growing number of enterprises moving from AI experimentation towards production scale centralized AI factory deployments.

This quarter, TDCNX and Max3 systems signed an agreement to support an NVIDIA AI factory powered by Vera Rubin, NVL72 systems. This is one of the largest enterprise AI factory infrastructure deployments expected to be delivered through the channel, bringing together the design, integration, deployment, data to co-admin operations, financing, and supply chain capabilities needed to operationalize a sophisticated and video-based AI factory platform for a large enterprise.

As enterprises evaluate next generation platforms, we are seeing growing demand for partners that can simplify complexity and accelerate implementation through their enablement capabilities.

AI factories have the potential to power transformative new products and services, but realizing that potential requires far more than access to compute, organizations that ensure AI investments are secure, governed, cost-effective, and aligned with measurable business outcomes.

Similar to the evolution of cloud computing, we believe disciplines such as financial operations and security operations will become increasingly important as AI becomes embedded in business critical processes. Organizations will need support selecting the right models for the right workloads, deploying them on the right infrastructure and balancing performance, security, and governance across edge, private, hybrid, and public cloud environments.

While still early in the adoption curve, deployments of this scale signal a market that is moving toward broader deployment. As AI becomes embedded across more users, workloads, and business processes, we believe the requirements to secure, govern, optimize, and support these environments will continue to expand. Customers are also seeking greater flexibility in how they engage with us, and have seen benefits from our digital strategy. Customers regularly engaging across our digital offerings have grown their spend with TDC next at nearly twice the pace of similar customers with us.

Through solutions such as partner first and digital bridge, enhanced with AI agents embedded throughout the customer experience, we help customers identify opportunities, simplify purchasing decisions, and engage efficiently across a broad range of technologies and vendors. We view digital engagement as an extension of our broader enablement strategy. Whoever customers engage through digital platforms, technical specialists, enablement programs, or a combination of all three. Our objective remains the same, helping our customers build capabilities, grow their business, and better serve their end users. The same capabilities creating value for customers are also important for vendors. As technology portfolios expand and customer requirements become more specialized, vendors are seeking partners that can combine global execution with expertise across technologies, customer segments, and geographies.

This is expanding the addressable market served through distribution. Earlier this quarter, IBM expanded its relationship with TDC next into 20 additional countries across Europe, Asia Pacific, and Latin America. We believe this expansion reflects the strength of our go-to market model, and the confidence of vendors place in our ability to activate demand, execute consistently across end markets around the world, and accelerate growth. Collectively, over the last year, we've added multiple billion dollars of incremental growth billings into the portfolios through new customer wins, and an expanded vendor line card. More importantly, we believe these relationships deepen our role in the technology ecosystem and create additional opportunities for long-term profitable growth and potential earnings expansion.

Turning to hype, hype delivered a strong quarter with non-gap growth billings of 7 billion, up 117% year over year, exceeding our expectations as we saw continued increased demand from existing customers and programs.

Our previously announced programs with new customers have progressed as planned, with shipments expected to begin in our fiscal fourth quarter. These programs improve visibility into future growth, including maintaining a healthy pipeline of opportunities, and support a broader customer and program mix of a time. We believe increasingly sophisticated infrastructure requirements are elevating the importance of expertise in engineering, validation, manufacturing, and supply chain execution. As a result, customers are engaging hype earlier in the development process, creating additional opportunities to expand our relationship with our current customer base and potential new customers. One example is our work with multiple customers on the design of advanced liquid cooled networking racks, but I expected to enter into production in the first half of fiscal year 27.

At the same time, we remain focused on ensuring growth translates into attractive long-term returns. While customer demand and revenue growth remain robust during the quarter, profitability remains an important area of focus. The business is working through a period of significant customer runs, manufacturing, expansion, and elevated investment activity, including engineering talent, technical expertise, and operating capabilities as we support multiple large growth initiatives at the same time.

Several opportunities in our pipeline are being awarded at margin profiles, but are neutral to the creative relative to our current operating performance. As previously awarded programs that you and your programs ramp, we expect modest margin improvement of a time, even as we continue investing to support future growth. Our manufacturing investments remain aligned with awarded customer programs, and our focus remains on deploying capital in ways that strengthen our competitive position and are expected to generate attractive returns of a time.

In closing, we believe both distribution and height continue to benefit from durable technology trends and expanding customer relationships. Within distribution, enterprise AI adoption digitally enabled experiences paired with human expertise and growing technology complexity are increasing the value we provide to customers and vendors.

Within height, sophisticated infrastructure architectures are driving deeper customer engagement and expanding opportunities across a broader set of customer programs. While we have deployed significant capital to support customer growth initiatives, particularly within height, we believe those investments strengthen our competitive position, support future growth, and increase the long-term earnings power of the company. As these programs mature, we expect free cash generation and conversion to improve, and we remain focused on demonstrating progress as we close fiscal year 26 and enter fiscal 27.

With that, I'll turn it over to David to discuss our financial performance, and I'll talk in great detail. David?

Thank you, Patrick, and good morning, everyone. This was another strong quarter for TD Cinex. Both distribution and height grew above market and contributed meaningfully to earnings. While our operating income and earnings per share continue to grow faster than gross billings. Starting with the top line, our non-gap gross billings for the third quarter was $31.8 billion, increasing 40% year over year or 41% year over year in constant currency and exceeding the high end of our guidance range. Non-gap operating income was $736 million, an increase of 55% year over year or 56% year over year in constant currency. Non-gap earnings per share was $5.68, an increase of 59% year over year and above the high end of our guidance range.

Gap operating income was $643 million, an increase of 68% year over year. Gap earnings per share was $5.18, an increase of 89% year over year and above the high end of our guidance range.

Turning to our quarterly performance for each business, distribution non-gap gross billings increased 27% to $24.8 billion with double digit growth across each region and most major technologies. Our end-to-end portfolio continues to position us well across technology cycles with healthy demand throughout the business in particular strength and data center infrastructure. Endpoint solutions gross billings increased 16% supported by continued strength in PCs, including higher average selling prices and a modest decline in units. Advanced solutions gross billings increased 37% driven by strength in infrastructure, software and AI related technologies.

Distribution gross profit increased 22% to $1.15 billion. Distribution gross margins were slightly impacted by customer and product mix, which is more than offset by discipline expense management. Non-gap operating income increased 55% to $483 million and non-gap operating margin as a percentage of gross billings expanded 35 basis points year over year to 1.95%.

Turning to hives, hives gross billings increased 117% to $7 billion with growth across both manufacturing and supply chain services. Manufacturing grew in excess of 130% and represented approximately two thirds of hives gross billings, reflecting higher volumes and expanded programs with existing customers. Supply chain services grew in excess of 90% supported by component demand associated with customer infrastructure deployments. Hives gross profit increased 47% to $276 million and non-gap operating income increased 56% to $253 million. Non-gap operating margin as a percentage of gross billings was 3.61% compared with 5.04% in the prior year period. As a reminder, our operating margins reflect the growing contribution from large AI RAC programs that has been strategically important but deluded to hives operating margins, creating a mixed headwind, which we believe is state-wise.

Our objective is to build a broader more diversified hive business that combines sustainable growth with improving profitability, stronger cash generation and attractive returns on invested capital. Shifting to cash flow and capital allocation, free cash flow consumption for the quarter was approximately $1 billion, driven by increased inventory and hives supply chain business in addition to new customers and new programs with existing customers. Networking capital closed at $6.5 billion with a gross cash conversion cycle of 22 days, an increase of five days sequentially in six days year-over-year, reflecting incremental mix of hives. Year-to-date, we have made substantial investments in hives working capital and believe we now have a significant portion of the investments to support our expected growth now in place.

Our focus is now on execution, cash conversion, and realizing the expected returns on our investments. We ended the quarter with $749 million of cash in cash equivalents and net leverage of 1.9 times. During the quarter, we returned 100 million through share repurchases and $38 million through dividends. Our board also approved a cash dividend of 48 cents per common share payable on October 30, 2026 to shareholders or record as of the business on October 16, 2026.

Turning to our fourth-quarter outlook, we expect continued momentum across both businesses translating to non-gapped gross billings of approximately $31.9 billion plus or minus $500 million of approximately 31% year-over-year at the midpoint. A gross-to-net adjustment of approximately 30% revenue of approximately $22.2 billion plus or minus $400 million. Non-gapped net income of approximately $474 million plus or minus $20 million.

Non-gapped diluted earnings per share of approximately $5.90 plus or minus 25 cents up approximately 54% at the midpoint based on approximately $79.2 million diluted shares outstanding. We expect hives non-gapped gross billings will increase sequentially quarter over quarter as we continue to see further benefit from ramping programs across multiple new customers. We expect we will generate cash in the quarter as recently deployed working capital begins to normalize.

Looking ahead to fiscal 2027, we expect further improvements in hives cash conversion as programs mature. In summary, we're extremely proud of our teams for the results they continue to deliver. Distribution from multiple quarters has delivered above market growth and broad-based growth operating leverage and cash flow. Hyde continues to add new customers and new programs with existing customers. We expect each of our major programs to generate attractive returns, although some will not reach their full potential until the back half of fiscal 2027.

With that, we'll open the call for questions. Operator?

You will now begin the question and answer session. We request that you limit yourself to one question to allow time for the other participants to ask their questions. If there is remaining time, you are welcome to recue with additional questions. To ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Please pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Joseph Cardoso with JP Morgan. Please go ahead.

Thanks for your question. Just to provide, this is David, a little more clarity on Hives operating margins and how the new customer programs are coming. What we put in the prepared remarks, and if you reflect on the commentary we provided on the call last quarter, Hives ramping three new hyperscalers and multiple programs within each of those customers. And so as we look forward, one of the comments that we made is the new programs that we've won, which are predominantly manufacturing, are neutral to accretive to Hives. Additionally, some of the programs that were ramping this year, as those programs mature, we continue to find ways to improve the margins within there. And so as we look forward, that's what gives us confidence that Hives margins have stabilized and should improve as we move forward.

Your next question comes from North Coast research. Please go ahead.

Yes, Keith, good morning. Thanks a lot for the question. So, I mean, one, as you said, we are very pleased because the growth in the quarter has been brought based by geo distribution high, by technology. And by the way, our Q4 guidance reflects that. If you look at next year, so we're in the process of building our budget for next year and collecting all the data, we continue to be overall positive about the market prospects. And we expect to continue to grow a little bit demand. You are, of course, I mean, with the hyperscalers, they have brought you to support the frontier models with capacity for training. But I mean, what we see and that's confirmed by all the, by our OEMs, is that companies are now investing more and more, enterprise of investing more and more in agentic capabilities.

And we know that agentic AI is going to be a fantastic driver for productivity gains and improving customer experience. I mean, we've mentioned one of the one of the big win this quarter from an enterprise. And we see that as clearly a trend accelerating. So, David just mentioned, we've won some new customers and we're going to benefit for the ramp up. So, overall, we are cautiously optimistic.

So, go ahead. Go ahead.

The way the programs work is similar to distribution. You could cancel contracts. But these are longer term agreements. Both sides have potential cancellation rights that people don't perform. But when you go into one of these programs, we can take you in a year to get up to speed. And what we're working on is we want a category within a hyperscalable, we support kind of a multi-year PC.

So, in many cases, these programs can last a few years. But there's always the potential that I'm going to see you go around. But we feel really good about where Hive sits within the customers that it supports the value that it adds and then how we stack that relatively so all of those items will provide some level of insulation.

I just want to add two things. So, one, when you look at the forecast we've received or the backlog we have, we don't see any sign of concern today at point number one. Point number two is it was interesting to watch the results of Q3 and clearly everybody referring to the fact that there is not enough capacity in the data center to meet the demands. And so, again, the combination of the two makes me feel cautiously optimistic for next year.

Your next question comes from Rupu Batacharya with Bank of America. Please go ahead.

Sure. Thanks, Rupu. When you look at the overall margins, we just focus on distribution for a second. The mix that we're referring to is largely product related. So, within North America, there was a few larger transactions specifically around infrastructure buildouts. And some of those categories have slightly lower gross margins relative to the average. Within Hive, it's the same impact that we had commented on last quarter, which was we have ramped a large AI server program that's profitable, but at margins that are slightly below the average high margin. And that's what's caused the year over year decline for Hive. But really nice job managing margin, managing pricing, and making sure that within distribution, when volume shifts between categories, that they prudently manage their costs to continue to drive operating weather.

So, we feel very good about the performance that the teams put out for the quarter.

Your next question comes from Eric Woodring with Morgan Stanley. Please go ahead.

Sure. No, Eric, thanks for the question. And you've read it correctly. When you look at the overall margins, if you really start to double click them, they're relatively stable. And so, as we've shared previously, our business, we make a percentage of the average selling price. And so, what impacted the quarter is we had a couple of large transactions and larger orders tend to be slightly lower margin. And so the mix of that is what caused some of the margin. In fact, in addition to us selling a decent amount of AI infrastructure, it's all profitable business. It's all good ROIC business, but that is what impacted the margin specifically in advanced solutions year over year. Structurally, the margins remain highly resilient when you look at it from a category perspective.

So, we feel pretty good about that.

And Eric, good morning. I just want to add one thing. So, talking a little bit about our management system. So, every month, we are reviewing our margins, of course, by geography, but most important by technology and by vendor and customer segment. And so, we are monitoring that indeed, I mean, like for like margins are stable or evolving.

And then we look for the why and take corrective measures. So, it's a very disciplined approach. That's the reason when we talk about mix. It's either a customer segment who grew faster and has a lower margin or higher margin or a geo who grew faster and has a higher margin or lower margin. So, it's really mixed. Otherwise, very, very strong discipline on margin reviews. I mean, to anticipate any issues and take corrective actions very, very rapidly. But again, as David mentioned today, we have no issues. Awesome. Thank you so much. Good luck. And the other thing I would add just is, and that's very important. I mean, we talked about I mean, taking to the bottom line at least 50% of the GP growth.

And you can see that today that ratio is significantly better than that. Again, the teams are doing a fabulous job managing cost. We are also obviously starting to leverage AI, which I mean, basically is improving the productivity of the overall team. So, I mean, operating margins have been consistently improving over the past quarters. And it was true again in Q3.

Comes from a David vote with UBS. Please go ahead.

That's a good question. So, thanks David. When you think about what we put in our prepared remarks is we expect to generate cash in Q4, you're right that seasonally we tend to generate more cash in the back half of the year. Here's the way we think about it. So, we would expect, you know, a couple of days of improvement in gross cash days, quarter over quarter, that is largely driven by two things, continued momentum across both distribution and Hive. And knowing that a lot of the cash consumption year to date has come from Hive, and we have to make investments in programs ahead of the ramp. And so, as those programs ramp, we expect them to be cash generative.

As you think about 2027 or more on the long or more beyond, we expect all of our businesses to be sustainable cash generators. And so, we recognize that FY26 was a period of hyper growth. But we also front loaded a lot of working capital investments to enable that. And so, as we move forward, we would expect those all of our businesses to become cash generative. And we feel pretty good about where we are.

Just add one remark. When we look at more mature programs at Hive, I mean, indeed, we see that when they reach maturity, they are generating free cash flow. So, no concerns from that standpoint. But the reality is that the team has done a very good job winning some new programs, expanding the customer base. And yes, we are in an investment phase to ramp up all those programs. But again, when the program matures, it generates free cash flow.

Your next question comes from Catherine Murphy with Goldman Sachs. Please go ahead.

Yeah, so good morning. So, if you look at the quarter, Q3, so we had this large GPU program and networking continued to be very strong. If you look at the new programs we've won, they are primarily networking programs. Again, at a good margin. We started seeing some of the ramped this quarter. And we're going to see an acceleration in Q4 and Q1.

Thank you. Your next question comes from a guy Hardwick with Barclays. Please go ahead.

Thanks for the question. So, we'll try to cover both of them. When you, as you know, we announced a Warren agreement with Amazon. And what we shared at that time is we expect this to be mutually beneficial to both of us. And so, you know, this is an agreement that's seven years long. And so, you know, we would expect over the course of the agreement that both sides to benefit. I think it's too soon to get into exact specifics on how things played out in the quarter. But what I can tell you is our relationships across all of our customers within Hive are very good. And we continue to invest in capabilities that add value to all of our partners.

When you think about the mix within margins, as it relates to Hive, you are correct that the AI server program that we've referenced, which has caused some of the margin to client year over year as a manufacturing program. And then a lot of the new programs that we've won are also manufacturing. And so, this has been a year where we've had somewhat of a headwind to gross margins. But as we look forward, and as these new programs ran, we feel very good about the trajectory of the margins, as a lot of these new programs are neutral to accretive, to hive until.

Your next question comes from Dave, David Page with RBC Capital Markets. Please go ahead.

Yeah, thanks a lot. So good morning. So PC did overall well and grow double-digit. Now, if you build the onion, units were down. I mean, we had forecasted the PC units to go down mid to high single-digit, which is what happened with quarter, and more than offset by price increases and mix.

So let me just provide some color here. So indeed, the component price increase has driven an increase of AS average selling prices. But another phenomenon, which is very interesting, is the fact that the market is buying more the mid-range and higher-range type PCs, rather than the low range. Why? Because also when our manufacturers get their allocations, they allocate them to the mid-range and the higher range of their portfolio. So some of the ASP increases really due to components, but some of it is due to a change in mix. The refresh is not over. So we should still see some tailwinds because of that. Now, the price increase, as expected, is having some impact on the volume.

It has less impact on B2B where we play. It will have, it has more impact on B2C where we don't place, we have a very small play in the market. So PC continues to be overall in value, a very good category. And just add that AIPCs continue to grow and represent now close to 50% of the total revenue for us. And AIPCs is potentially becoming an important part of the infrastructure to run AI workloads.

Thank you.

Your next question comes from Vincent Coletio with Barrington Research. Please go ahead.

So good morning. Thanks a lot for the question. I mean, as you have noticed, we grew faster than market and we've done that more consistently for many quarters. I think it's due to two things. So one, from a customer side, indeed, I mean, we have this collection of specialist approach, which means that we have a very appealing value added value proposition by technology.

And that puts our teams in a very good position to support customers who have to deliver business outcomes, which are more and more complex to deliver. So yes, I believe that our approach has makes us, I would say, probably very well differentiated to help our customers win the deals and grow. But we see at the same time in the vendor community, a trend accelerating in terms of rationalizing the go-to market, so reducing the number of direct customers, direct resellers, and number of distributors. And because of our value prop, because of the relationships we've built over the years, I think we are going to continue to benefit from that trend.

Thank you.

Your next question comes from Alec Valero with Loop Capital. Please go ahead.

Okay. So good morning. So I'm going to distinguish between compute and storage on compute two things. So you still have the refresh of the general compute server base. And as you know, the new generation has more cores and can replace several servers from the old generation. So what you see is a decline in unit, but an average value, which is significantly higher. So we see very nice growth in general compute. And we also see, obviously, I mean, an increased demand when it comes to AI compute, driven by the fact that companies are absolutely building their factories to take advantage of a genetic AI. And what we see is some very large deals coming from large enterprises.

But we are starting to see also mid-sized companies investing in that space. On storage, what we see is a modernization, an acceleration of the modernization of the data center. I think AI will continue to play a key role. An important aspect, if you want to get the full benefit of your language models, you need to have the data in a good shape. And that means investing in storage. So I mean, that's something we are seeing too. And here for storage, we see an increase in units, and of course, in value.

Yeah. So networking, again, just want to put some context. If you just go back last year, was a little bit a challenge category. Things have completely changed now. I mean, you have a need for massive refresh. I mean, Wi-Fi 7 switches to support AI. So you have a series of tailwinds in networking, which are driving nice increase in units. And on top of it, the magnitude is not comparable to what we see in Compute or PCs. But we start seeing some price increases also. And so the combination of the two makes the category very strong. And I think it's going to continue for some time. So it's another category where we are very optimistic for the coming quarters.

We have reached the end of the Q&A session. I will now turn the call back to Patrick for closing remarks.

Thank you all for joining us this morning. As we conclude, I'd like to express my gratitude to our co-workers around the world, whose hard work, dedication, and commitment make our success possible, as well as to our partners for their continued trust and support. To everyone on today's call, thank you for your ongoing interest in TDCNX. And I'm wishing you a great day.

This concludes today's conference call. You may now disconnect. Have a great day.