Sean Kerins: You know, probably too early to call Q2 from a seasonality perspective, Joe, I can tell you when we look at Q1, we are guiding below normal seasonality overall. That’s really a function of some more macro pressure in the West, with evidence of some softness in industrial and parts of automotive. I think in Asia, we’re not necessarily assuming the typical uptick that you’d see post the Chinese New Year. But as we work through backlog and as inventories start to normalize, we’re going to get better visibility to near-term demand, and that’s going to be a good signal for the business and the market overall.
Operator: Your next question comes from the line of William Stein from Truist Securities. Please go ahead.
William Stein : Thanks for taking my question. Congratulations on the good results this quarter. I’m hoping you can linger a little bit on the legal settlement. If you can maybe remind us what that’s related to? How big was it in which segment?
Sean Kerins: Sure, Will, and thank you. I’ll let Raj speak to the number. But just for context, the settlement was related to a commercial dispute with a subset of our supplier base that dates back well more than a decade ago. Many of us weren’t even on the scene when this played out, but we are very pleased this resolved, and we anticipate no ongoing consequences. Raj, maybe you can speak to the numbers?
Raj Agrawal: And Will, this was all in the third quarter. As, the settlement that we took into our OpEx, there was $62 million, the legal benefit settlement that we got the benefit of that. That was in the components business, and that was worth about 100 basis points in to the components margins in that quarter.
William Stein : Great. And then share count. I know you’re — I know you have — well, maybe you can just update us on what your expectation is for the share count in the current quarter.
Raj Agrawal: Yes. We didn’t give a guide to share count because we don’t typically guide the amount of share repurchase because that’s going to vary from quarter-to-quarter, as you can see, based on what we did in the fourth quarter. So, we felt that giving an actual share count wouldn’t be appropriate either. Maybe the most important piece, though, well, we gave you the EPS number that we’re targeting and some of the other components to — in the P&L that you can sort of back into some of those key assumptions. So, nothing unusual there. Just — we don’t really guide the number of shares repurchase so we didn’t give the share count either.
Sean Kerins: Will, I would also add, just to reconfirm, our capital allocation priorities have not changed. Number one is organic investment or investment for organic growth. Number two being appropriate M&A. And then number three, of course, returning cash to shareholders. As you can imagine, in this environment, we’re going to be pretty surgical when it comes to organic investments. So in lieu of an appropriate M&A target, we’re still very prone to buybacks as it makes sense relative to our debt capacity.
Operator: [Operator Instructions]. Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead.
Ruplu Bhattacharya: I have one for Sean and one for Raj. Sean, you were talking about investing organically. So, in this weaker environment, can you talk about what areas you’re going to be investing in? And in the prepared remarks, you talked a lot about — several times about IT as-a-service. So how relevant is this to revenues? How should we think about that progressing over the next couple of years? And in terms of your growing portfolio of recurring revenue, how should we think about that?
Sean Kerins: So okay, you got a few different threads there. Let me try and take them one at a time. Again, my comments about investment in this environment, again, the keyword there is surgical. We’re taking the right steps and making the right moves to protect our cost structure and our profitability while we navigate this correction to the extent that we have the ability to invest. We just remain focused on the things that are core to our strategy, demand creation, value-added offerings and capabilities, certainly, our IP&E selling motion and then, of course, the transition to IT as-a-service in our ECS business. And so, we’re going to make sure that we’re careful with respect to what’s happening in the broader market in the meantime, but our investment priorities are fairly focused.
With regard to your question about IT as-a-service, it’s basically changing the shape of our sales number in that business. The more we drive infrastructure software, cloud-related solutions and services, the more you’ll see our mix shift to a model that’s more about GP dollars than it is reported sales. And really, the right way to look at that business over time is through the lens of GP dollar and OI dollar growth as a result. But a good consequence of that pivot, and as you know, we’ve been on that journey for a good couple plus years now, has been the growth in the recurring piece of our total ECS business. We think now, when you look at cloud, when you look at things like the transition for software from perpetual to subscription-based licensing models, yes, the recurring piece of our total mix is now approaching 1/3.
And so, we like that. It’s predictable, it’s sticky, and ultimately, brings about accretive contribution margins for that piece of our business. So, we’re staying the course there as well. And you’ll have to forgive me, but I think you had a third question in there, I want to make sure we don’t forget it.
Ruplu Bhattacharya: I didn’t, but I’m going to put one in. Just in terms of IT as-a-service. What are people buying? Are they buying hardware? Or is it just software at this point?
Sean Kerins: Ultimately, we think it’s about both. But in the near term and recently, it’s been more about software.
Ruplu Bhattacharya: Okay. Great. Raj, I just want to have a quick follow-up with you on margins. With respect to component margins, they were 5.1% this quarter. Is there a revenue level you need to keep the segment margin above 5%? And then the same question on the ECS side, I think Sean talked about optimizing customers and line cards in Americas. Does that impact how we should think about margin trends in ECS this year? Or is it the 1Q is the lowest and then we should see sequential margin improvement until 4Q? So just your thoughts on these, on the margins for both of these segments.
Raj Agrawal: Yes. Let me — there’s a few questions in there, Ruplu. Let me take the first one to start. On the Component side, I don’t think we have a set revenue level in mind for the higher margin target. We still are comfortable with the 5.5% to 6% in the components business in a normal environment. Right now, we’re going through the down cycle. And as you heard some of the commentary, the gross margins seem to be relatively steady and stable, and it’s really a function of negative leverage with the reduced revenue levels. So, given the structurally higher margins that we have today based on all the things that we did, we know that when revenue returns to a more normal environment, and that’s to be defined, we’re going to get that leverage back and margins will take care of themselves. So, we’re confident about the long-term target that we have. And I’m going to turn to Sean a little bit on the second question. Can you just repeat your question, Ruplu?
Ruplu Bhattacharya: Yes. I just referred to what Sean has said about in the ECS segment. I think in the Americas region, you’re trying to optimize customers and line cards. And so, like where are you with that? And how does that impact how we should think about margins? Like, I mean, does that impact your margins positively this year versus prior years? And how should we think about the trend in ECS margins?
Sean Kerins: So, I’m happy to take that, Ruplu. So again, for context, we’ve got kind of two different models in our ECS business. We’ve got a regional business in Europe that really suits our strategy nicely. It’s a mid-market region, and it’s one that lends itself nicely to a channel-based selling motion. The mix, as we grew up in that business, was more about software and now cloud as compared to the mix in the way that we grew up in North America, which was historically about hardware and larger enterprise accounts. So, we’re on the same path in North America to create the same model that we enjoy in Europe. And ultimately, there should be accretive on the margin line. But we’re not calling it out for the full year yet at this point.
