TD SYNNEX

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

TD SYNNEX Corporation is a global IT distribution and solutions aggregator, connecting technology vendors with a diverse network of resellers and end-customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

TD Synnex operates in a relatively fragmented and competitive industry as a distributor within the information technology sector.

The company acts as an intermediary, purchasing IT products from manufacturers and then reselling them to value-added resellers (VARs), systems integrators, and other retailers. The company does not develop or manufacture any of the products itself.

Revenue Distribution:

  • Americas: This segment represents the largest portion of revenue, covering North and South America.
  • Europe: This segment primarily encompasses sales within the European market.
  • Asia Pacific and Japan (APJ): This segment captures revenue from sales made within the APJ region.

It’s important to understand that the company has recently undergone a merger, with Tech Data being acquired by Synnex, forming TD SYNNEX. While the companies were historically in the technology distribution business, they used slightly different strategies which we will examine.

Industry Trends:

  • Shift to Cloud and SaaS: The IT industry is experiencing a major shift toward cloud-based services and software-as-a-service (SaaS) models. This requires distributors like TD SYNNEX to adapt to new delivery and partnership models.
  • Increased Specialization: Resellers are increasingly demanding that their distributors are able to handle the complexities and expertise needed to serve the most complex customer needs.
  • Growth in Cybersecurity: With the increasing number of cyber attacks, businesses are increasingly looking for new security products, creating demand in the cybersecurity space which will trickle down to vendors and to distributors like TD SYNNEX.
  • E-commerce Growth: The rise in online purchases is influencing all industries, and while most of the purchases go through resellers, many resellers are moving to online sales as well.

Recent News and Concerns:

  • Supply Chain Issues: The company has faced challenges from an unstable and strained supply chain, along with an inflationary environment that has increased expenses. Management has said that supply chain issues were improving, but it’s important to take note of this external risk.
  • Guidance Revision: In the recent earnings call, the management had to reduce their guidance for both FY23 and also FY24, causing a significant stock drop. This was caused due to slowdown in corporate spending which affects the business.
  • Merger Synergies: The most recent earnings call stressed more synergies resulting from the merger with tech data. While revenue growth has slowed, management seems focused on integration and cost efficiencies.
  • Debt: Management did address the high debt and said they are focused on returning back to a target debt ratio (15%) over time, and also are focused on cash generation, which we will see later in the report.

Competitive Landscape:

  • The IT distribution industry is highly competitive and has several major players.
  • The company competes with other global distributors that provide similar services and products. Competitors include Ingram Micro, Arrow Electronics and D&H Distributing.
  • The company also faces indirect competition from vendors that may choose to sell directly to end-users.

What Makes TD SYNNEX Different:

  • Scale: Being a large player through the merger gives it scale advantages, allowing the company to negotiate better prices with vendors and offer a wider range of products to its resellers.
  • Geographic Breadth: TD SYNNEX has operations across the Americas, Europe, and APJ, giving it a global reach and potential to serve a broader set of customers.
  • Service Offerings: In addition to traditional distribution, TD SYNNEX offers a range of value-added services such as cloud solutions, security assessments, and IT training, which helps attract more resellers and enables the company to generate better margins and recurring income.
  • Integrated Solutions: The company is positioning itself to provide integrated solutions, helping customers connect different products from different brands.
  • Strong Alliances: TD SYNNEX has strategic partnerships with many leading tech vendors, such as Microsoft, Apple, HP, and Cisco, which enables it to offer a vast range of products.
  • Data Analytics: Management has mentioned multiple times the capability of the platform to analyze data which improves sales efficiency for them and their partners.

Financials: The company does generate a significant amount of revenue with around $60 billion for 2022 but is not able to convert it to profits. Profit margins are extremely thin, with a 3% gross margin, a 1.6% operating margin and a 1% net profit margin for full year 2022. Here is what makes these margins and financials unique and noteworthy:

  • The majority of their revenues are not actual sales to end customers, but are reselling to resellers that purchase the goods, so margins tend to be lower.
  • The company has high leverage and operates with very low margins. Hence it has a low tolerance for losses due to demand or other business issues.
  • The company has significant goodwill and intangible assets as a result of acquisitions, which can lead to significant write-offs in case the acquisitions don’t play out properly.
  • Due to the reliance on credit facilities for operations, interest rate risk may be amplified.
  • Revenue growth has come down significantly and margins are expected to decline as well.
  • Recent guidance cuts make forecasts for profits uncertain.
  • Net income is volatile.
  • Capital structure has significant debt.

Moat Analysis: 2 / 5

TD SYNNEX exhibits limited evidence of a strong, sustainable moat. Here’s a detailed breakdown of the factors considered:

1. Intangible Assets

  • Brands: TD SYNNEX does not sell its own products, and so, does not have its own brand. While brands they do sell have moats, TD SYNNEX does not own any brands.
  • Patents and Licenses: The company does not manufacture any unique technology protected by patents. Most distributors have similar licenses from vendors.
  • Regulatory Approvals: While some government regulations may restrict other distributors from providing solutions, they are not significant for the most part.

2. Switching Costs:

  • Switching costs for resellers are low, as they have the choice of using competing distributors with few transaction costs.

  • While the company does build relationships with its resellers and provide certain services, there is enough competition where switching costs become insignificant.

    3. Network Effects:

  • There is very little evidence for any network effect present in their business.

4. Cost Advantage:

  • Process advantages while they have invested in operations and technology to improve the process, these can be easily replicated.
  • Location advantages while they have a global reach, but this does not give a lot of competitive advantage as this type of operation can be replicated easily.
  • Scale while they do have a big size, this still doesn’t give significant advantages, as competitors are also quite large. In addition, the company’s thin margins means it is not very efficient with its capital as larger size should improve the returns.

Conclusion: TD SYNNEX exhibits some signs of possessing a narrow moat due to scale, however, their inability to differentiate the company or its offering makes it not as durable or sustainable.

Legitimate Risks to Moat and Business Resilience

  • Economic Downturn: A decrease in corporate spending or a recession may decrease demand for IT products and services, which could hurt the company’s revenue and profits, due to its dependence on those external factors.
  • Supply Chain Disruptions: The business has been hit quite hard by supply chain issues, and it could always be a major risk that affects the delivery of components to them.
  • Technological Disruption: The rapid pace of technological change may render some IT products and solutions obsolete, or it may lead to new, more innovative solutions that create disruption. This would force the company to constantly be evaluating their strategy to stay relevant.
  • Pricing Pressures: Intense competition within the IT distribution industry leads to high pricing pressures for vendors and for distributors, which in turn may lower the margins of the company. The company needs a good strategy to maintain the margins and create value for the shareholders.
  • Integration Risk: It’s important that management delivers on the cost synergies that are expected to arise from the merger. Also, how fast they can integrate the two companies successfully.
  • Acquisition Risk: Since acquisitions are important to their growth, the integration process with the new companies are very complex and can bring a number of unexpected problems.
  • Concentration of Customers: TD SYNNEX relies on a small number of resellers for a large percentage of its revenue. The loss of any major reseller could have a material adverse effect on the business.
  • Debt Levels: High debt is a concern, especially in a period of higher interest rates and economic volatility.

Business Resilience:

  • Diversification in products and services could provide some stability.
  • Wide global distribution helps to reduce concentration risk.
  • Strategic relationships with vendors provides some sort of business stability.

Understandability Rating: 3 / 5

The company is not too difficult to understand, but it’s not extremely simple either. The company functions as a middle man in the IT supply chain, connecting producers to consumers. The business and its operations can be hard to understand, but the concepts are easy to grasp. A rating of 3 reflects a reasonable level of complexity.

Balance Sheet Health: 4 / 5

TD SYNNEX has a stable but a leveraged balance sheet. Here’s a more granular analysis:

  • Positive aspects:
    • Adequate levels of cash and cash equivalents to manage short-term debt obligations and operational requirements.
    • The company has substantial assets to cover its debts.
    • Good working capital levels that shows the company can easily meet short-term debt obligations.
  • Negative aspects:
  • High level of debt (almost 20 billion) compared to equity (around 7 billion) which means there is a risk that they could default if the company faces any liquidity problems. * There is $9 billion in goodwill and other intangible assets which could be written down.
  • Relatively low liquidity in its balance sheet which reflects the higher use of short-term financing.

Conclusion: Although the high debt needs to be watched out for, the company’s overall balance sheet is relatively healthy. Given these reasons we give it a rating of 4.