Strategic Movements December 2022

TD Synnex Pricing Spine-o-meter: 1 of 5 Vertebrae

TD Synnex, a global distributor of technology products from original equipment manufacturers, as well as supplier of technology to resellers, system integrators, and retailers, had an okay Q3 2022.  Revenue was up a mild 0.6% but operating margin was down 9 basis points from Q2 2022.  Comparisons to same quarter last year are difficult since TD Synnex only existed after the merger between Tech Data and Synnex was completed on 1 September 2021.

At their earnings call held on 27 September 2022, the priorities and focus of management were clearly stated.

CEO Richard Hume touted TD Synnex (1) achieving $140 million in cost savings through synergies which included a reduction in the number of ERP systems required to run the combined company, (2) serving 150,000 customers, a majority of which were small- and medium-sized IT resellers, and (3) of being named Hewlett-Packard Enterprise Global Distributor of the Year for 2022 and the Microsoft Worldwide Partner of the Year for 2022.  All fine accomplishments, but cost savings rarely lead to revenue growth.

When asked about pricing, CEO Richard Hume was equally clear.  He was clear that he lacks concern.  He mentioned that currently, prices are stable or slightly increasing but the future may yield price decreases.  This was of little concern to him since he foresaw the margin profile of TD Synnex remaining stable.

Elsewhere in the financial reports, TD Synnex stated, “Our business is characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of revenue, or operating margin. The market for IT products is generally characterized by declining unit prices and short product life cycles. We set our sales price based on the market supply and demand characteristics for each particular product or bundle of products we distribute and services we provide.”

In other words, TD Synnex sees itself as a distributor that makes its profits from reselling at prices outside of its control.  As such, management is focused on managing costs and is proud that (1) more than 90% of its costs are related to COGS and (2) its cash conversion cycle days are positive.

Other research reinforces the above understanding of the low priority of price management at TD Synnex today.  We found little evidence of a strong strategic pricing team.  We found evidence that Vistex, a price management software solution, is, or is being, implemented in TD Synnex Europe’s offices.

We should mention that completing a successful merger not much more than a year old and driving significant synergies in year one alone is quite an accomplishment.  Combining disparate organizations, procedures, and cultures is more than a twelve-month effort.  Given its stage of corporate development, it is not surprising that price management is not at the top of CEO Richard Hume’s priority list today.

Yet most B2B distributors are far from nonchalant about price management. There is a high contrast between the statements made by TD Synnex on price management with the actions and priority taken to manage prices at other B2B distributors like Grainger, Sysco, and Staples.

Given the attention given to price management at TD Synnex as indicated in their financial reports, management comments, and our understanding of their pricing team development as of Q3 2022, we have come to the following conclusion.

TD Synnex Pricing Spine-o-meter:  1 out of 5 vertebrae.

SNX (TD Synnex Corp.) rose from 84 on the day prior to their earnings call to 104 one month later. 12-month revenue ending 31 August 2021 of $62 B with a 1.6% EBIT margin and P/E ratio near 18.

Contact Wiglaf Pricing for your Pricing Spine-o-meter(TM) to benchmark against competitors and discover where your pricing practices can be improved. 

Danaher Pricing Spine-o-meter:  2 of 5 Vertebrae

Danaher, a global company working in life sciences, diagnostics, and environmental and applied solutions, had a positive Q3 2022.  Revenue of $7.6 B was up 6% from the same quarter last year. (4% increase in life sciences, 9.6% increase in diagnostics, and 5% increase in environmental and applied solutions.) Profits increased as well to yield an operating margin of 26%.

Of the 6.0% revenue growth at Danaher, management reports currency fluctuations had a negative 5.5% impact while price had a positive 4.5% impact.  This would leave a 7.0% positive impact to be attributed to sales volume. (The impact of sales volume growth could represent units sold changes or a combination of mix and units sold. Clarity is indeterminant from management statements.)

At their earnings call held on 20 September 2022, Danaher management was relatively silent on the issue of price management.  CEO Rainer Blair acknowledged prices were above historical levels in bioprocessing in Q3, one of several business units under his purview.  CFO Matt McGrew discussed potential impacts from currency changes on price capture.

Research into the quality of Danaher’s pricing team yielded suspicious results.  A few members of the pricing team in specific business units are clearly leaders in the field of pricing for life sciences.  Most pricing professionals across many business units appear to hold more business intelligence, administrative, or sales enablement roles.  The latter set of roles are useful but don’t deliver the potential profit impact that a more strategic emphasis would.

This research raises questions: (1) Does the Danaher Business System, a form of Kaizen, not emphasize price management like other management philosophies that focus on cost reduction and quality improvements? (2) Some of Danaher’s business units suffer from limited capacity and fluctuating demand where customers can and will reserve capacity ahead of time. Has Danaher attempted to deploy yield management in those lines of business? (3) Pricing in life sciences offers strong profit opportunities in both price management of existing offers and price setting for new offerings.  These opportunities are best identified and seized by pricing specialists rather than sales support or product managers.  Is Danaher addressing these opportunities systematically or ad hoc?

Given the attention given to price management at Danaher as indicated in their financial reports, management comments, and our understanding of their pricing team development as of Q3 2022, we have come to the following conclusion.

Danaher Pricing Spine-o-meter:  2 out of 5 vertebrae.

DHR (Danaher Corp.) declined slightly from 279 on the day prior to their earnings call to 258 one month later. 2021 revenue of $29 B with a 16% net margin and P/E ratio near 30.

Contact Wiglaf Pricing for your Pricing Spine-o-meter™ to benchmark against competitors and discover where your pricing practices can be improved. 

Qualcomm Pricing Spine-o-meter:  2 of 5 Vertebrae

Qualcomm, a global wireless tech company working in mobile handsets, RF front-end, automotive, and the internet of things (IoT), reported record revenue and strong profits for Q4 2022 in their earnings call held on 2 November 2022. Revenue was relatively flat at $11.4B for Q4 2022 up from $9.3 B for the same quarter last year.  Profits (earnings before taxes) increased to $3.5 B for Q4 2022 from $3.3 B for the same quarter last year.

Qualcomm is challenged by many of the maladies familiar to any tech company working in silicon or RF technology.  Some are exogenous to Qualcomm’s management while others are somewhat endogenous. (1) High demand volatility arises from multiple macroeconomic factors and technology lifecycles.  Even individual product launches by partners can drive major revenue fluctuations.  (2) New challenges depress, or can depress, sales in China from their recent COVID restrictions to potential trade restrictions arising from U.S. and China policies. (3) Individual customers, in Qualcomm’s case it is Apple and Samsung, comprised more than 10% of revenue in 2022.  This poses a high risk to sales and price management given potential competitive alternatives and brand betrayal.

To address these challenges, Qualcomm, like many other tech companies working in silicon or RF technology, is relying upon their engineering prowess to address hypercompetitive product lifecycles and remain competitive.  In this thinking, old solutions quickly become outdated and redundant and new solutions are required to remain competitive.  Technology lifecycles, measured in months not years, are strongly driven by narrowing silicon linewidth and improvement in foundry technology.  Business performance is a result of staying ahead of the ever-changing technology requirements.  Prices on individual products are expected to decrease quickly with time.  Annual price deflation on products often reaches double digits.

In keeping with the industry’s zeitgeist as it relates to engineering prowess, Qualcomm management communicated a strong focus on continued technology innovation and the importance of maintaining positive employee relationships.  They specifically reiterated an overarching mission of becoming a connected processor company for the intelligent edge.

As to the industry’s zeitgeist as it relates to pricing, we cannot detect any clear differentiator.

The annual report identifies increases in average selling price and improvements in mix sold as the primary driver to revenue increases in Qualcomm’s largest segment, though unfortunately the report did not provide a profit bridge of the full Price-Volume-Mix analysis (p. 40).

Looking forward to next-generation RF technology, CEO Cristiano Renno Amon foresees the potential for average selling prices (ASP) to increase as they increase processor content and compete for the premium tier.

CFO Akash Palkhiwala mentions the importance of “staying disciplined on the pricing side,” yet provided no clarity on what that means for Qualcomm.

None of these facts or statements related to price management are distinct from what one would expect to learn from any other company working in silicon or RF technology at one point in time or another.

Research into the quality of Qualcomm’s pricing team yielded poor results.  Pricing appears to be managed by a mixture of product managers, financial analysts, sales leaders, and sometimes pricing analysts.  Strategic pricing is not identified as a core competency.

Which raises questions.  (1) If being disciplined in pricing is important to the CFO, who is managing that?  (2) If the ASP is expected to increase with the next-generation RF technology according to the CEO, who is responsible for evaluating and delivering to that expectation? (3) If business performance relies on innovation and engineering prowess, how is Qualcomm converting the value of their engineering prowess into pricing for their new offerings?  What systematic pricing process is aligned to their new product development (NPD) efforts?

Is pricing at Qualcomm all hat and no cattle?

Given the importance of pricing at Qualcomm for driving business results as indicated in their financial reports and management comments, and acknowledging their licensing revenue, but also given the underdevelopment of a pricing team to deliver those business results as of Q4 2022, we have come to the following conclusion.

Qualcomm’s Pricing Spine-o-meter:  2 out of 5 vertebrae.

QCOM (Qualcomm Inc.) rose from 117 on the day prior to their earnings call to 126 one month later. 2022 revenue of $37 B with a 32% net margin and P/E ratio near 11.

Contact Wiglaf Pricing for your Pricing Spine-o-meter™ to benchmark against competitors and discover where your pricing practices can be improved. 

Cummins Pricing Spine-o-meter: 5 of 5 Vertebrae

Cummins, a global power technology company that designs, manufactures, and distributes engines, filtration, and power generation products, had a positive Q3 2022.  Revenues hit $7.3 B for the quarter.  To compare performance to the same quarter last year, we strip out the performance of the Meritor line of business whose acquisition was completed only in August of 2022 and look at continuing operations alone. For continuing operations, revenue hit $6.6 B in Q3 2022 up from $6.0 B in the same quarter last year; EBITDA hit $923 M up from $862 M in the same quarter last year.

Like other global companies working in engineered solutions and manufacturing, management at Cummins have dealt with many challenges.  (1) Acquisition and now integration of the Meritor line of business while simultaneously preparing for the separation of the Filtration line of business.  (2) Electronic component supply challenges as well as inflation in labor and input costs. (3) Operations in Russia (albeit a small portion of Cummins overall) have been suspended indefinitely due to the armed conflict with Ukraine.  (4) Operations in China declined due to a slowdown in the China markets.  (5) Legislation in multiple jurisdictions and cultural shifts are necessitating a decarbonization of power solutions requiring investments in green power through their New Power line of business.

Despite these challenges, Cummins management delivered positive business results.

How did Cummins improve revenue and EBITDA over last year?  Through both higher prices and higher volumes.  (1) Engine revenue grew 13% over same quarter last year due to positive pricing actions and strong North American truck demand.  (2) Improved profitability in distribution (engine and power distribution, service, and parts), components, and power systems is attributed to higher volumes in pricing actions.

In the 3 November 2022 earnings call, CEO Jennifer Rumsey reported, “Gross margin percentage improved in the third quarter, compared to the third quarter of 2021, as the benefit of higher volumes and pricing exceeded the manufacturing, logistics, and material cost increases and higher product coverage costs during the quarter.”

CFO Mark Smith echoed that stating higher gross margins were driven by “strong volumes and higher pricing, which more than offset higher material and people costs.”

CEO Jennifer Rumsey continued with an expectation of 4% price improvement in engines and stated, “We’re able to price more rapidly into our aftermarket business.”

Research into the quality of Cummins pricing team yielded robust results.  Pricing professionals take roles from administrators and analysts to managers, directors, and strategists.  These pricing professionals worked in multiple lines of business and multiple geographies within Cummins.  Pricing strengths were found in vice presidents, product managers, and regional directors.  Pricing challenges were addressed not only by pricing dedicated pricing professionals, but also in coordination with product managers, financial analysts, and sales leaders.  Strategic pricing and price management are identified as a core competency at Cummins.

At Cummins, pricing competency is recognized by the CEO and CFO as a required element for driving business performance.  Management has invested in price management and has the team to support the needed effort.  Business performance has been positively impacted by pricing decisions even during difficult economic situations.  While other facts could have been provided, such as a Price-Volume-Mix-Currency analysis of their profit bridge, the facts gathered do sufficiently enable a Pricing Spine-o-meter measurement.

Given the facts derived from financial reports, management comments in earnings calls, and research into the pricing team at Cummins, we have come to the following conclusion for 2022.

Cummins’ Pricing Spine-o-meter:  5 out of 5 vertebrae.

CMI (Cummins Inc.) rose from 241 on the day prior to their earnings call to 250 one month later. 2022 revenue of $26 B and P/E ratio near 18. EBITDA margins are near 15%.

Contact Wiglaf Pricing for your Pricing Spine-o-meter™ to benchmark against competitors and discover where your pricing practices can be improved.