SNX - NYSE

My name is Kate, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Second Quarter Fiscal 2025 Earnings Call. Today's call is being recorded. And all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to David Jordan, Americas' CFO and Head of Investor Relations at TD SYNNEX. David, you may begin. Thank you.

Good morning, everyone, and thank you for joining us for today's call. With me today is Patrick

Thank you, David. Good morning, everyone, and thank you for joining us today. I'm excited to report on our strong second quarter performance and provide an update on the impacts we are seeing from the macroeconomic uncertainty. Our Q2 results demonstrate the continued strength of the IT distribution and hyperscaler markets. Meanwhile, our strategy and the execution of our team are enabling us to grow ahead of market. In Q2, gross billings grew 12%, 11% in constant currency, and non-GAAP diluted EPS exceeded the high end of our guidance with all regions and major technologies contributing. We believe the quarter benefited from some demand pull forward. Within TDC Next, excluding Hive, gross billings grew 11% year over year and operating margins expanded, resulting in strong operating income growth. From a technology perspective, we saw strong growth across both endpoint and advanced solutions. Hive, which is included within the Advanced Solutions portfolio, grew gross billings in the high teens. High profit margins declined sequentially on which Marshall will provide more color. Within TD SYNNEX, all regions and major technologies experienced growth during the quarter. Software continues to be a bright spot in our portfolio experiencing 20% billings growth fueled by cloud cybersecurity, and infrastructure software. Additionally, we continue to see strong growth in PCs driven by the refresh cycle, and we were also pleased to see growth in networking after multiple weak quarters. We saw broad-based demand across all our major customer segments specifically SMB, MSPs, and public sector all of which grew double digits during the quarter. At Investor Day, we shared five strategic imperatives we believe will enable us to deliver above market growth. This includes unifying our reach, targeting new customers, distribution market expansion, diversifying our offerings, and accelerating on services. The execution of our strategy is recognized by 40 plus honors we received in the channel during the quarter. Additionally, HPE announced yesterday TD SYNNEX is their Global Distribution Partner of the Year. Other highlights of Honors during the quarter include being named NVIDIA's Americas Distributor of the Year, CrowdStrike Americas Partner of the Year, Dell EMEA Distributor of the Year, Lenovo U.S. Distributor of the Year, NetApp LATAM distributor of the year, and Fortinet Hong Kong distributor of the year among others. A key component of our strategy is targeting new customers and allowing them to scale through our digital capabilities. For example, many customers invest a significant portion of their SG&A in operational overhead. And in The U.S, we held a new customer to address this with a specialized solution. We partnered with our customer to develop a completely integrated and automated operational model that drove efficiencies through TD SYNNEX transactional APIs and custom workflows. Everything from configuration to renewals. By fully leveraging our digital capabilities, our partner was able to make an outsized investment in sales marketing and engineering talent. This has resulted in exponential sales growth at accretive margins for both our partner and TD SYNNEX. Additionally, we continue to make great strides with our delivering services strategic imperative. In a recent example with a leading advanced solutions OEM, we are deeply engaged in several important services initiatives. Including building various data center solutions, and deploying the AI infrastructure solutions. We are certified to build solutions on their behalf, both for their direct and indirect channels and this facilitates robust supply chain acceleration to significantly improve their time to cash and extend their overall capacity. Between our multi-vendor technical expertise and our robust integration supply chain support and professional services we are well positioned to connect OEMs with a network of technology vendors required for their AI infrastructure solutions. Our North Star remains generating profitable growth and free cash flow while being a valued partner to our vendors and customers across the world. We continue to allocate excess cash to high return opportunities to ensure sustainable value creation for our shareholders. Now, I will pass it to Marshall for financial performance and outlook.

Thanks, Patrick, and good morning, everyone. We had a strong performance in the second quarter with gross billings of $21.6 billion, up 12% year over year, 11% in constant currency and above the high end of our guidance range. We were pleased to see year over year growth across all regions and major technologies. Our teams continue to execute extremely well, and in addition to that, we believe we are modestly aided by our customers advancing their forecasted purchases in light of a volatile economic environment. In Q2, there was approximately 31% reduction from gross billings to net revenue, which was slightly higher than our expectations. This was primarily driven by an increase in high transactions where we act as an agent and a higher mix of software. Net revenue was $14.9 billion, up 7% year over year and above the high end of our guidance range. In Q2, our Endpoint Solutions portfolio grew gross billings 13% year over year, driven by the ongoing PC refresh cycle and customers modestly advancing their forecasted purchases. Our Advanced Solutions portfolio grew gross billings 12% year over year, 10% year over year when excluding the impact of Hive, driven by accelerated demand for data center infrastructure and continued growth in cloud, security, AI, and other high growth technologies. HIVE, which is reported within the Advanced Solutions portfolio, grew in the high teens, primarily due to strength in programs associated with server and network rack builds. Gross profit increased 7% year over year to $1 billion. Gross margin as a percentage of gross billings was 5%, which was consistent sequentially and a decline of 21 basis points year over year. Excluding Hive, gross margins were relatively flat year over year. Hive gross margins declined from Q1 due to unrealized FX losses and program mix. We expect a portion of the unrealized FX losses will be recovered as we sell through the product in the back half of the year. Non-GAAP SG&A expense was $632 million or 3% of gross billings, representing an 11 basis point improvement year over year. The cost to gross profit percentage, which we define as the ratio of non-GAAP SG&A expense to gross profit, was 60% in Q2, consistent with quarter one. Non-GAAP operating income increased 7% to $414 million. Non-GAAP operating margin as a percentage of gross billings was 2%, representing a 10 basis point decline year over year and consistent with Q1. Interest expense and finance charges were $90 million, slightly higher than expectations and relatively consistent quarter over quarter. The non-GAAP effective tax rate was approximately 23%, which was in line with expectations. Total non-GAAP net income was $251 million and non-GAAP diluted earnings per share was $2.99, both above the upper end of our guidance range. Turning to the balance sheet for quarter two. Net working capital was $4 billion, which is an improvement quarter over quarter despite the accelerated growth that we experienced throughout the business. We experienced a four-day improvement in our cash conversion cycle on a net quarter over quarter consistent with expectations. Free cash flow generation for the quarter was approximately $543 million. We returned $186 million to stockholders in quarter two, with $149 million in share repurchases and $37 million in 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 July 25, 2025, to stockholders of record as of the close of business on July 11, 2025. We ended the quarter with $767 million in cash and cash equivalents, debt of $4.1 billion. Our growth leverage ratio was 2.4 times, our net leverage ratio was 1.9 times. Moving on to our outlook, I want to start by addressing the fact that we're in a volatile environment given the ongoing developments with respect to global trade. I also want to acknowledge that this is our best view based on what we know today. With that, for the third quarter, we expect non-GAAP gross billings in the range of $21 billion to $22 billion, representing growth of approximately 6% at the midpoint. Our outlook is based on a euro to dollar exchange rate of 1.13. Net revenue in the range of $14.7 billion to $15.5 billion, which translates to an anticipated gross to net adjustment of 30%. Non-GAAP net income in the range of $227 million to $268 million, non-GAAP diluted earnings per share in the range of $2.75 to $3.25 per diluted share based on weighted average shares outstanding of approximately 81.8 million. We expect a non-GAAP tax rate of approximately 23% interest expense of $89 million. We expect to execute approximately $105 million of share repurchases during the quarter and we'll remain opportunistic in our strategy to return excess cash to our shareholders. In closing, we believe we are in a strong financial position heading into the second half of the year, and are leveraging our strategy to ensure we remain the partner of choice in IT distribution. With that, open it up for your questions. Operator?

We request that you limit yourself to one question to allow time for the other participants to ask your questions. If there is first question comes from the line of Catherine Campana with Goldman Sachs. Your line is open.

Hi. It would be helpful if we could get some more color on the pull forward that you noted in the prepared remarks. Were there any particular products that benefited likely PCs is my guess, but would love to know more about the financial impact there. And is there any impacts we should be mindful of when we think about the ES and AS mix through the balance of the year because of this pull forward? Thank you.

Yes. Good morning. Thanks a lot for the question. So first thing overall, I mean we had a very strong quarter with sales and EPS at the high end of guidance. And double digit growth. So we looked at and we pulled forward So we saw a little bit of it in PCs. It's difficult to quantify, but we think that MAX we benefited from $100 million to $200 million in sales of pull ins no more than that. For the moment on PCs, we see the demand continuing to be strong, especially in B2B. Is driven again by the refresh refresh of the base purchase during the pandemic and of course the Windows 11 refresh.

And Catherine, this is Marshall. Just to comment on following comment for what Patrick said. From an overall margin benefit for the quarter, we expect that that probably was around $10 million of gross profit that was incremental to the quarter. And then thinking about your question on ESAF mix for the second half of the year, We do continue to expect there to be refreshed strength in the second half. So now, we think it's probably equal in regards to ESAF mix for the portfolio for the second half.

Thank you very much.

Thank you.

Your next question comes from the line of Adam Tindle with Raymond James. Your line is open.

Okay. Thank you. Good morning. I just wanted to talk about that pull forward dynamic, Marshall. If I look at your guidance for Q3, it's similar to what you guided to last year. And we've got this pull forward dynamic that you talked about. We also have typically a big public sector quarter in Q3, just two that might be a little different and cause Q3 to be sub seasonal this year. So guess the question would be as you thought about Q3 guidance, why wouldn't we see a little bit more muted seasonality in that quarter this year versus last? And then secondly, if you could maybe just revisit obviously your tracking very well relative to the fiscal 2025 guidance that you gave at the Analyst Day, particularly on an earnings basis that 11.5 to $12 I wonder if that's something that we should be sort of reconsidering or maybe pushing the models towards the high end of that as we kind of think about shaping Q4? Thanks. Sure. I'll cover the pull forward and its impact, the potential impact in the second half. I'll have Patrick talk about the public sector and then I'll talk about the Analyst Day comments about the second half. So, yes, we as I said, we did we did experience some pull forward, as Patrick mentioned, $100 million to $200 million of revenues, margin benefit Right now we're being fairly prudent in our thoughts that continuing benefit in the second half of the year. Again, think the overall thought for us is that demand will soften in the second half of the year, is pretty consistent with we had said at Analyst Day. We we are expecting to be a little bit on the higher end of that range outcome for our guidance that we provided in quarter three. And then just thinking about quarter four, fairly similar to what what we shared at Analyst Day, which is that 3% to 4% growth and the typical seasonality you would experience, his historically between quarter three and quarter four activities and relationships. And Patrick, to public sector comment? Yes. So we had a very strong quarter for the public sector including Fed. I mean we saw also solid growth in the Fed business Q3, again, I mean, the majority the vast majority of our public sector business comes from the SLED and we continue to be positive on the prospects there. I just add to what Marshall explained that for the moment what we see the underlying trends by technology continue to be relatively positive. Thinking about software, PCs, server, networking is back to growth, cloud. But there is also a macro environment Tariff is one, but also the situation in The Middle East. Which for the moment leads us to be cautiously optimistic and a little bit prudent in our outlooks.

Okay. Maybe just a quick clarification for a follow-up. Marshall, you talked about free cash flow for the year, $1.1 billion, I think, was the target. Obviously, a much better quarter this quarter, but still negative year to date. It's a pretty big climb in the back half of the year. So just wanted you to maybe revisit your thoughts on free flow for the year. Is that something that should still stand? And if so, what would the levers be to get there? Thanks. Yep.

Sure. So we still believe that we'll be able to attain the $1.1 billion in free cash flow We were happy with the improvement in cash conversion and working capital in quarter two with a four day improvement. As you know, when we were commenting last quarter, we expected that to happen. It did. The majority of the working capital improvement is with our Hive organizations. We entered the year bit heavy on working capital for the reasons we articulated in our quarter one call. And expect that to unwind throughout the year So far, it's going as we had thought. There is some additional optimization that we think we can garner. Out of Pive. So our expectations for quarter three and quarter four for cash stays is probably two to three days in quarter three. Maybe one to two days in quarter four. Adam, the other thing just to think about is we're talking about the muted IT spots for the second half of the year. As you know, as as growth rates decline even though they are improving in terms of year over year, that does also aid and allow us to improve our working capital as overall growth rates decline. And then finally, as we mentioned in Analyst Day, we do expect the net to cash flow conversion to be at 95% for the full year. So we still feel good about hitting our $1.1 billion target.

Makes sense. Thank you. Thank you.

Your next question comes from the line of Eric Woodring with Morgan Stanley. Your line is open.

Hey guys, good morning. Thank you so much for taking my Patrick or Marshall, for either one of you, I would love you could just maybe give us a bit more detail on demand linear in the quarter. And really what I'm trying to get at is April was a relatively challenging month. We heard from some of the enterprise OEMs. And so obviously your May quarter kind of straddles that. So I'd love to just better understand a little bit how demand progressed you know, from April into May and then May thus far into June. And anything that stood out for for you guys if you look at that by either AS or ES trends? Thanks so much.

Sure, Eric. I'll start. Within the quarter, we did see strength in March and April. Call it mid teens growth rate Then it softened a little bit in May, but still a good growth rate in terms of year over year. It ended up being a very solid quarter for us. So far in June, it reflects what we're guiding if you just think about our outlook. So we generally see fairly consistent behavior all in quarter two and quarter three from a gross billings perspective. You can see that on guidance And then just to comment briefly on high for quarter two, you remember, when we came into the quarter, we thought that they would be slightly down. And Patrick's prepared remarks. High grew in the high teens. So they did exceptionally well during the quarter, showed great momentum. So in addition to the distribution intra quarter behavior, we also saw strong growth in Hyatt. And Patrick, anything on ES or AS you want to comment Yes. So very rapidly, I mean, I look at the main product categories, you look at so let me start with software. I mean software continues to be really strong. Especially in virtualization. We see very nice demand. As I mentioned, public cloud continues to grow double digits very solid growth. And no reason to see a slowdown there. Security is another bright spot. I mean, the need for defending against cyber attacks continues to be there and so demand should remain healthy. PCs, we had a very strong quarter. We still believe that next quarter demand will be there. As I mentioned because of the refresh cycle. But refresh cycle is not over. I mean the good news this quarter was networking. I mean, as we talked about in the previous quarters, we have there was a tough compare. But now we see this market also coming back growing and becoming a tailwind overall. So So that's positive. From a regional standpoint, Europe continues to be strong. APJ was very strong. And most important North America is we see the market also enjoying solid growth. So a geographic standpoint, yes, I am cautiously optimistic.

Great. Thanks so much for the color guys. Good luck.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open.

Hi, thank you for taking my questions. So last quarter you talked about two issues in Hive. There was a demand shortfall I think from a customer and there was an issue with inventory and working capital. So are you seeing improvement in both issues with the rest And then Patrick, for my follow-up, I'd like to ask that if we look at your billings growth in 1Q, it was high single digits about 8% year on year. 2Q, you just reported 12%. Europe seems to have grown very strong 17% year on year. So what is it that is giving you pause to think or giving you cost to think that there's a pause in demand in fiscal 2Q Or are you just being conservative for the full year? Thank you. I'm going take the first part.

Yes. So go start with Haif. Hi, Ruplu. So yes, you're right. The two items we discussed in quarter one around Hive First of all, Hive still had a great quarter in quarter one, another fantastic quarter in quarter two. I think quarter one, we said 23% growth, so pretty good. Quarter two, 19% mid high teens, pretty good. So the demand shortfall was relatively muted against the strong growth within the quarter. For both quarters. We did comment about a component buy that we expected to see in quarter quarter one. We expect that to sell through in the second half of this year. So we're good. We're happy about that. And then the comments around inventory working capital, addressed this a little bit earlier. With Adam's question around the improvement that we saw in cash and in working capital, was primarily driven by the improvement in Hive working capital as well. We would expect that to continue to unwind for the rest of the fiscal year.

And Ruplu just on the second question about the year on year growth rate for Q3. So it's true that Q1 Q2 we were close to double digit or above double digit So for Q3, I would say first last year Q3 started to see the recovery in distribution. And HIVE had a very strong quarter. So a tougher base if you will, in Q3 last year versus so which which explains a little bit the growth rate or the forecasted growth rate for Q3. Second point is the macro uncertainty, which leads us to be again a little bit more cautious And but nevertheless, as I just explained before, good underlying tailwinds by technology and by region. So the blend of all that leads us to the guidance we provided. And we will see at the end of Q3. And then briefly just to follow-up on the the comment of your your question on quarter one being 8%, quarter two being 12 And as Patrick's prepared remarks, across the board, we just saw better than expected outcomes for the reasons that we articulated. Just a good performance, good position and and good outcomes for the business.

Sorry, just to clarify one thing. Are you actually seeing any weakness right now in any region or any product line? Or is it your expectation that it could based on the the political and the economic issues that are out there, there could be some weakness or are you actually seeing any slowdown, right? Now? So what we see in June is in line with the guidance we provided.

As you know July is when we will know more about tariffs. And so difficult to forecast the impact. So July August and August is a month which is interesting So it's a vacation month for example in Europe. And you have The Middle East, what could be the impact. So again, so far no concerns. Everything is in line with with the guidance.

Okay. You so much.

Your next question comes from the line of David Voigt with UBS. Your line is open.

Great. Thank you. Thanks, Patrick. Thanks, Marshall. Patrick, can I just dive back into Hi for a second? I think you talked about strong billings of high teens. The margin mix was a little bit lower. So could we infer from that comment that what you saw strength in this quarter was more on the Centimeters side versus sort of the spare parts ODM side of the business. Then how does that play into the comments again? I think you touched on it briefly, but last quarter there was some push out of orders. Did we see those orders come back this quarter? For that second customer that's ramping? Is that still on the come as we go into the third and the fourth quarter? And then I have a follow-up.

I'm going to comment. So thanks a lot. I'm going to comment on the top line and then Marshall will give you more color on the margin. So if you look at the top line, again very, very, very strong growth for the ODMCM business. 45%. Primarily driven by our largest customer. So, really the largest customer drove that growth. The second customer in fact last quarter the demand paused and we saw demand coming back this quarter slightly below our expectation, but the demand is back which is a positive.

Hey, David. Hey, Marshall. How's it going? So, in regards to the overall margin profile and in my prepared comments, I referenced unrealized FX that was a hit to our margin in Hive. But we expect that to recover in the second half of the year. So that was one of the one of the headwinds related to margins for Hive. The other is within the Centimeters ODM mix that itself, just the various program Its profile for the quarter ended up being a little bit negative to the margins expectations for the quarter. We do expect those to unwind and for margins to improve for Hive in quarter three. And then if you think about the overall range of the portfolio, ODM, Centimeters is around 6% of total product. And then as we said at Analyst Day, which is still consistent, our spares, we'll call it data center supply chain ranges between 2% to 4% of total gross billings reason why we gave that range is it's got a little bit of volatility and bumpiness quarter to quarter. But we were a little bit more towards the higher end of that 2% to 4% in quarter '2. But wanted to give you that context as well.

No, that's it. I appreciate it. And I'm sorry. Go ahead, Patrick.

Yes. I just wanted to add one thing which is that what we see is really the I mean exclude the unrealized effects the margin for HIVE is really stabilizing now. I mean, when you look at it quarter by quarter to quarter, we see the stabilization, which is very encouraging. Sorry. Got it.

And Marshall, just one final question. Can you remind us again, I guess, April when you kind of laid out the balance of this year, kind of what was the underlying assumption for the tariff regime going forward? As we're coming up to July, not really a comment about the demand profile now, but just remind us again what we kind of embedding? Do tariffs come back sort of on a 10% reciprocal basis? Across most of the markets that you serve? Kind of just how should we think about it given the level of uncertainty, maybe kind of the baseline?

Yes. Well, you remember, we were living it live in April. And so it wasn't a ground up assessment other than knowing the demand on kind of the last iteration that we saw in 2018 and 2019 did soften. I think that to some extent our ability to see that and forecast a high level what that represented and now we're laying out maybe a little bit stronger thought for quarter three within that context. But back to Patrick's point, still a lot of uncertainty going be difficult to know what happens on July 9. And its impact and where that ultimately settles. So a long way of telling you that it's still very uncertain as to what that demand outcome looks like as we finish up this year and going into next year.

Great. Thanks Marshall. Thanks Patrick.

Your next question comes from the line of David Paige with RBC Capital Markets. Your line is open.

Hi, good morning. Thank you for taking our question. Just want to circle back to PC refresh was wondering if you could just in terms of innings, where are we in terms of the refresh cycle? Or are we just starting in the middle towards the end? And then that's it.

Thanks. Good morning, David. So according to me, we are in the middle of it. We are not at the start We saw already the refresh starting at least one if not two quarters ago. So we I think we are in the middle of it. So yes, And that's the reason when you look at our guidance, continue to be positive on the contribution of PC to the overall growth.

Thanks Patrick. Appreciate Your next question comes from the line of Joseph Cardoso with JPMorgan. Your line is open.

Hey, good morning. Thanks for the question. Maybe another follow-up question on PCs or ES maybe more broadly. You've had a couple of quarters in a row sequential margin improvement in this business. And I was just curious if you could walk us through what is driving this margin improvement, particularly maybe not an apples to apples comparison, but when I look at your OEM partners, they've obviously high some margin pressure within their respective PC businesses. So just curious, what's been driving the strength in the margin sequentially now for what it looks like four quarters or so? And how are you thinking about the sustainability of that as we think about going into the back half of this year? Thanks.

Joe. It's Marshall. Typically, we do see refresh, we've been through a few of these. There is increased demand. With that, it does come a little bit of a a stronger pricing environment in general. So we did mention in the call that we saw some of the momentum in Poland related that strength and also the margin incremental margin associated with the pricing associated with that. There is a little bit of temporary aspect to that. But as Patrick said, middle of the game here, still think there's probably benefits for us as we go forward. As you might know, in certain parts of our markets, specifically in North America, we do a lot of large buys around the pizza ecosystem. That creates benefits for us that may continue going forward Your question about what does it look like after the refresh kind of gets through it game. We typically expect to fall back to normal IT spend plus our normal market share. Expectations for that. So sustainability, we feel good about it, probably have a little momentum behind us. Hard to know if that carries through the end of this year or if it extends into next year.

And I just want to add one more thing. It's also mix related, product mix related. PC has been driving the growth of the Endpoint segment. Also the component business has been very strong. And those two categories have better margins. Relatively speaking, the mobile category has grown much slower and there the margin is lower. So again mix is also nicely contributing to the improvement of the of the margin.

Very clear. Thanks for the color guys. Appreciate it. Thanks, Joe.

Your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.

Yes. On APJ, what drove the strength there? And is that sustainable? Yes. So good morning.

So we had a very strong quarter in APJ. More or less every country contributed, but specifically India and Japan. In Japan, it's driven by the consumer business India, it's more the B2B business. We continue to be positive about the prospects of APJ. I mean, we have a low share in the region. So we have an aggressive growth plan. But most important, are I mean our growth plan is focused on the margin reach customer segments and product segments. We believe that we're going to continue to see solid growth but also a solid gross profit generation and operating profit generation.

Thanks for the color. Thanks, Ben.

Your next question comes from the line of Fernando Bairova with Loop Capital. Your line is open.

Hey, good morning guys. Thanks for taking the question. I guess going back to Hive, a couple if I could. Is there any distinction or what are the distinctions to be aware of between the 45% growth in the ODM Centimeters segment and in the high teens growth in highs And then Patrick, in your prepared remarks, you talked about in some detail working with working with hyperscalers to build out data center solutions and some of the work you're doing there. Is is that sort of description, are we are we watching real time you expanding the complexities of your engagement engagements and the the complexity of the scope of the work you're doing with the hyperscalers Could that be part of the reason the margins are starting to be more favorable as to your remarks a moment ago? And then just one last thing, it's a clarification. Did you say that networking you were seeing networking improvement in Hive or that Hive was one of the drivers for the improvement in networking? And I'll stop there. Thanks, guys.

I'll go first and then pass it over to Patrick. Good question. So yes, we did call out the ODMTM compare and the growth year over year is around 45% and you're right mid teens. What's the difference? Supply chain was a little bit down year over year. So that's why the math works that way. So we still as we acknowledge, believe it's a good part of our business. It's lumpy, so it does move around quite a bit. But that's how you get to that mid teen overall growth for Hive. In regards to the complexity of engagements with our hyperscale customers, I'll let Patrick speak to that. I'll let him speak to the pipeline not only with existing customers but potential new expansion as well. Then anything around how network might be driving high growth.

Yes. So good morning and thanks for the question. So I start with Hive and then I will address the networking question. So I mean, strategy is clearly, we want to move up the value chain. That's the reason we are investing in engineering capabilities to be more on the ODM side rather than Centimeters We're also investing in our SMT capabilities in The U.S, because we think that based on the environment it's going to give us a competitive advantage. But also we are diversifying our customer base. And we may do more in the future for example, with sovereign customers where we believe the margin should be slightly better. So that's so yes, that's the reason margins are stabilizing and we hope that the outcome of all the actions I just talked about will in fact take us to even better margins going forward. On networking, yes, HIVE also had a strong quarter on networking, but excluding in distribution networking got back to growth. Modest growth, I mean low single digit, but we are back to growth.

That's all super helpful. Quick follow-up if I could. Are you guys seeing any sort of increased conversation with regards to Hive from a made in America context. With hyperscalers. And I know I know the customer base opportunity is more global than that. With sovereign and neo cloud. But just with the hyperscale specifically, is there any sort of incremental made in conversation that's going on? Thanks. That's it for me. Thanks.

Yes. Again, high level. I mean, have a very nice pipeline of opportunities. So with our existing customers, we are working on several programs and hopefully we're going to close some of them. Again, design cycle is long. So we're never completely sure when that's going to close. But many, many opportunities I can confirm that there is also interest from other customers to work with us. Because of the expertise and the manufacturing capabilities and the service we are providing.

Great. Thank you, guys.

Thanks.

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

You everyone for joining us. I want to take a moment to express gratitude to our customers, partners and our investors for their support and importantly our outstanding team of over 23,000 coworkers around the globe for their dedication to serving our customers. Look forward to reconnecting next quarter. I hope you have a good day.