新聚思 (SNX) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Synnex Corporation fourth quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

Instructions will follow at that time.

If anyone should require operator assistance during the conference, please press star then zero on your touch-tone telephone.

As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Sandy Salah.

Ms. Salah, you may begin.

Thank you, Richard.

Good afternoon, and welcome to Synnex's fourth quarter earnings conference call.

I'm Sandy Salah, Senior Director of Marketing and Investor Relations.

Joining us on today's call is Bob Huang, President and Chief Executive Officer;

Dennis Polk, Chief Financial Officer; and Cathy Chiu, Senior Vice President of Corporate Development and Communication.

Cathy joined the company two months ago and is the newest member of our executive management team.

She has an extensive background in investment banking, mergers and acquisitions, and corporate communications.

Welcome, Cathy.

Before we begin our discussion I have a Safe Harbor statement.

During today's call statements will be made that are forward-looking, which include but are not limited to statements about our expectations regarding the first quarter of 2004, and future periods including but not limited to future revenue expectations, profitability, net earnings and earnings per share and regarding future business trends.

These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties.

Please refer to today's earnings release and documents filed with the Securities and Exchange Commission, specifically our S-1 filing for information on risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements.

Today's discussion may also include certain non-GAAP financial measures which are provided as supplemental information to enhance your understanding of our financial results, as well as other financial metrics, such as accounts receivable, days of sales outstanding, and total borrowing, including the off-balance sheet debt associated with our accounts receivable securitization programming.

Additionally, this conference call is the property of Synnex and may not be recorded or rebroadcast without specific written permission from the company.

Now, I'd like to turn the call over to Dennis Polk for financial highlights.

Thank you, Sandy, and thanks to everyone for joining our call and webcast today.

We are glad to be conducting our first conference call as a public company since our IPO on November 25th, and we look forward to future dialogue with you moving forward.

As Sandy indicated, I will review the financial highlights of the last quarter and then Bob will share his comments on our fourth quarter and also on our expectations for the first quarter of 2004.

Once Bob is done with his comments, we will answer any questions you may have.

Regarding our fourth quarter results, let me start with our net revenues.

Fourth quarter net revenues were $1.25 billion, an increase of 16.7 percent over the fourth quarter of 2002, and 21 percent sequentially.

By segment, distribution net revenue was $1.16 billion, an increase of 14.8 percent over the fourth quarter of 2002, and 17.9 percent sequentially.

Assembly net revenue was $93.5 million, an increase of 48 percent over the fourth quarter of 2002, and 80 percent sequentially.

From an earnings standpoint, net income was $8.6 million or 35 cents per share, compared to $7.7 million or 31 cents per share in the fourth quarter of 2002.

These amounts are based on generally accepted accounting principles, or GAAP.

As previously disclosed, 2003 fourth quarter results include a charge of $1.8 million or $1.3 million net of tax, related to the departure of a former executive officer.

The effect of this charge was to increase SG&A by approximately $2 million, and decrease other expense by $260,000, and to decrease tax expense by approximately $450,000.

As our IPO officially closed on December 1, 2003, the EPS figures for the fourth quarter or any other periods discussed do not include the new shares issued in the offering.

In our press release today, and in our guidance section later in this call, we will discuss the approximate number of diluted shares expected to be outstanding for the fourth quarter of 2004- first quarter, excuse me.

Moving on to gross margins.

Our gross margin for the fourth quarter was 4.46 percent, essentially flat with the prior year quarter and down 8 basis points sequentially.

Fourth quarter of 2003, SG&A was $37.9 million or 3.02 percent of net revenues.

This compares to selling, general and administrative expense of 3.24 percent of revenues in the prior year quarter and 3.13 percent of revenues in the prior sequential quarter.

Operating income for the fourth quarter was 18 million or 1.44 percent of net revenue.

This compares to $13.2 million or 1.23 percent of revenue in the prior year quarter.

From a segment basis perspective, distribution operating income was $14.1 million or 1.21 percent of revenues, and assembly operating income was $3.9 million or 4.21 percent of net revenues.

Non-operating, other expense, consisting primarily of financing fees and net foreign currency losses, and net of miscellaneous income, increased by $3 million over the prior year quarter.

Foreign currency losses of $4.3 million, primarily the result of the purchase of Ford (phonetic) foreign currency contracts not conducted within normal company hedging practices and procedures, combined with a weakening U.S. dollar, was the main contributor to the increased expense.

A portion of this foreign currency loss was related to the first nine months of the year, but the effect on net income for that period was $1 million, which was not considered material.

We do not expect such significant foreign currency losses will continue in future quarters.

Our tax rate was 37.4 percent and is within our expected range of 36 to 39 percent, which is dependent upon the percentage mix of earnings from geographies we operate.

Regarding our balance sheet metrics, accounts receivable totaled $528 million at November 30, 2003, which includes $210 million associated with our off balance sheet accounts receivable securitization program.

DSO, including the off balance sheet program, was approximately 38.5 days.

Inventory totaled $361 million at November 30, 2003.

Inventory days were approximately 27.5.

Including a DPO metric of approximately 30 days, our fourth quarter cash conversion cycle was approximately 35.7 days.

Other fourth quarter metrics of note.

Depreciation expense was $900,000.

Amortization expense was $689,000.

Stock-based compensation expense was $773,000.

This amount includes $636,000 associated with a charge we took in the fourth quarter.

Capital expenditures were $1.2 million.

We expect that our future capital expenditures will be slightly higher than our current depreciation rate.

From a product line standpoint, peripherals accounted for 32 to 36 percent of our sales.

System components accounted for 24 to 28 percent.

IT systems accounted for 22 to 26 percent.

Software accounted for 9 to 13 percent, and networking accounted for approximately 3 to 7 percent.

These amounts are generally consistent with prior periods.

From a customer standpoint, we don't break out specific percentages by customer type.

However, we can note that our customer mix of VARs, DMRs, system builders and corporate resellers was generally consistent with prior periods.

HP, at approximately 29 percent, was the only vendor accounting for more than 10 percent of sales during the fourth quarter.

Regarding head count, full time equivalent head count was 2,092 at November 30, 2003.

The following is our expectation for the first quarter of 2004.

These statements are forward-looking and actual results may differ materially.

For the first quarter of 2004, we expect net revenues will be in the range of $1.125 billion to $1.175 billion.

Net earnings will be in the range of $8.8 million to $9.4 million, and earnings per share will be 30 to 32 cents per share.

These forecasted earnings per share figures are based on an approximate weighted average diluted share count of $29.3 million.

I will now turn over the call to Bob for his comments.

Bob.

Thanks, Dennis, and good afternoon to everyone.

As Dennis indicated, we are pleased to have completed our IPO in November, and we welcome the new shareholders to Synnex.

Without the dedication, efforts and loyalties of the entire Synnex team, completion of this offering would not have been possible.

I would like to thank all those involved in bringing Synnex to this point in our history, and I look forward to many more successful years in the future.

Regarding our fourth quarter, our results show we were clearly able to capitalize on the improving trend in IT market from the negative growth over the past few years, to flat or even slightly up over the trend now.

We are optimistic about our ability to continue our business momentum.

Our distribution business performed very well in the fourth quarter.

We were able to grow our revenue across all customer categories, including increase of sales to the small and medium markets, and to the government sector.

Some of this increase can be attributable to fourth quarter seasonality, however, we were also successful in our efforts to increase our customer count, and to extend our overall market share.

Average distribution gross margins did decrease from prior periods, as we have reported earlier today in the press release.

This is primarily due to a large mix of high volume and large deal sales to our bigger customers, because these type of sales typically carry lower gross margins.

We are pleased with the operating margin returns despite the lower gross margin.

Overall, the fourth quarter pricing environment was competitive, as would be expected in the market place during that time of the year.

We did not, however, feel any significant pressure during Q4 to adjust our pricing strategies in any meaningful way to maintain our business levels.

Geographically, the U.S. business continued to be the main growth engine in our fourth quarter of 2003, from the revenue, operating, and net income standpoint.

While we will continue to be very focused on profitably growing this segment of our business, we must, obviously, also focus our attention on our Canada, Japan and Mexico entities, as returns from our non-U.S. business need to improve closer to U.S. levels.

We are very pleased that our contract assembly business sustained strong growth in this quarter.

Given the result of our assembly business over the past few years, we will maintain cautious about the long-term trend of our assembly revenues.

However, we are reasonably convinced that our contract assembly business has saw the bottom in the third quarter of 2003, and we will see conditions improve going forward.

Looking forward to the first quarter of 2004, we are encouraged by the continued positive trend we saw in our distribution business in the last quarter, and by the results achieved in the first bunch of our first quarter of 2004.

The combination of our early distribution results, strong shipments in our assembly business in the quarter to date, and the continued generally positive overall economic news, has allowed us to give revenue guidance above our typically seasonal reduction in revenues for the first quarter.

The fact that we are a public company would obviously affect our cost structures, due to the higher administration costs of being a public company.

However, we'll continue to focus on our industry leading efficiencies as we expand our company.

Looking beyond the first quarter of 2004, Synnex will continue to look for ways to profitably extend our distribution, logistic and assembly capabilities, either organically or through application.

The results from this past quarter, as well as for the whole year, benefited from improving overall IT spending in our sector.

However, we could not have achieved our success without the strong relationship we have built with our vendor partners, and our reseller customers.

The value we bring to them every day is what we make of them, weak and strong.

Our service machine is clearly working.

We have got dedicated employees and scalable IT systems.

We responded quickly to changes in market conditions, both in our distribution and our contrast assembly business.

In closing, I would like to reiterate my pride in the Synnex team for having achieved a great quarter, making it three straight years of consistent market share growth.

Again, I would like to thank all those involved in getting Synnex to this point in our corporate existence, especially our original shareholders who have been very patient and supportive over the years.

Our business model is clearly working, enabling us to deliver high quality service to our customers while maintaining our agility in responding quickly to changes in market condition.

Finally, this is my first time out as the CEO of a public company.

I am proud of our team, but I'm humbled by the responsibility to our shareholders.

I'll do my best to deserve their and your trust, and look forward to working with you all going forward.

Thank you.

Thank you, Bob.

Richard, we would like to now open the lines up for questions.

Thank you, Ms. Salah.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone.

If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone.

Our first question comes from Brian Alexander.

You may ask your question, Mr. Alexander.

Thank you.

Good evening.

Nice quarter.

Just a clarification, Dennis.

Excluding the severance charge that you mentioned, EPS would have been 40 cents versus 35; is that correct?

Yes.

If you add that back, that is correct.

Okay.

When I look at your guidance, your revenue guidance for the next quarter, how should we think about the sequential revenue change in the distribution business versus the assembly business, and how does that compare to normal seasonality in the first quarter?

As far as the distribution business, obviously, as Bob indicated, we saw a strong first part of the quarter, and so the seasonality we typically saw is essentially changing and we're seeing better results coming.

Once again, the assembly business has started to improve from the bottoming of the third quarter of 2003 and we don't quite have a seasonal trend yet, where seasonality improves, but it remains to be seen how that will move going forward.

So if I look at your mid-point of your guidance, I think it's for total revenue to be down about 8 percent sequentially.

Should we expect distribution to decline less than that, or more than that?

We're not giving specific guidance on the individual segments of our business.

Okay.

Also, can you just touch on the operating margins within the distribution segment.

If you were to exclude the charges for this quarter, how much did they change relative to the third quarter?

On a basis-point basis, down approximately three basis points.

Okay.

Thanks.

Sure.

Our next question comes from Keith Bachman.

Hey, Dennis.

A couple questions.

The EMS business had a pretty nice pick up.

I was trying to understand where that came from, and specifically, was that Sun has the dominant — Sun is your dominant customer there, it is the predominant customer that you have.

Was it market share gains with Sun?

Was it organic growth with Sun, was it new customer wins?

Any kind of color you can give us there?

Keith, this is Bob.

We still have primarily Sun as the dominant customers in that area, and it primarily comes from Sun on the growth.

Okay.

So was it market share gains with Sun or was it organic?

Because you went from effectively 52 million to 93 million, if I did my quick math right.

Those are primarily -- a good portion come from the new product.

From the new products, you said?

That's correct.

What product is it with Sun?

I'm pretty familiar with their product line.

I don't think we can comment.

We don't get into specific products, but we can tell you it's the low end of the product line.

Oh, okay.

So it wasn't that you took business from some of the other EMS suppliers, please tell me if this characterization is right.

It wasn't that you took business away from the other EMS suppliers, it's you are on some programs that were really doing well.

Is that a fair way to think about it?

We would not be able to comment on that.

Okay.

Okay.

Let me try Brian's question a different way.

Would you expect seasonality in the EMS business in the February quarter?

Seasonality as compared to what happened last year?

Are you asking if we're having the same visibility to the --

Yeah.

I'm trying to figure -- will the EMS business be up in the February quarter, down, flat, any kind of directional change?

Once again, our guidance we're not breaking it out between distribution and assembly, but as Bob indicated, we are seeing a return to the revenue growth, if you will, in that business.

Okay.

Let me just ask a few more questions.

Is the growth, again, there, is it mostly with Sun or are you seeing some new customer wins in addition to Sun?

It's mostly with Sun.

Okay.

Okay.

When do you think you might pick up some additional customers there to diversify your portfolio a little bit?

We are continuing to working on that area, and we will not be able to give you the new customers at this point in time yet.

Okay.

Okay.

I'll turn the call back then, thanks very much.

Thank you.

Thank you.

Our next question comes from Peter Barry.

Bob, Dennis, good afternoon.

Good afternoon, Peter.

Bob, given both yours and Bob's comments regarding IT trends, do you think it would be premature to get increasingly, if not enthusiastic, at least positive about the remainder of '04 in that regard, or was there something unusual that's beginning to impact the first quarter?

You know, overall, I think we have been saying that IT spending certainly has turned from the negative growth to the positive, and we are capitalized beyond the growth.

So if you're talking about the remainder of the year, we are reasonably optimistic about it, on the overall IT spending.

And Bob, would you expect within the context of that, that the seasonality pattern that you've exhibited over the last couple of years would continue, and, in fact, you would likely finish on a strong note as you have in the last couple of years?

Yes.

The strength in contract manufacturing.

I know this has been asked several different ways, but within the context, again, of the IT environment that you see, do you think that strength is sustainable?

And on an annual basis, we might see a meaningful rise in revenues for '04 over '03?

As we talked about, Peter, we saw the business increase in the fourth quarter, and we have reasonable expectations for the first.

We have new products coming out that we're doing, so it remains to be seen how they're accepted for the remainder of the year.

But so far the business has turned upward and we're pleased by the progress.

Is it fair to say that white box business will probably contribute meaningfully to that as the year progresses?

From the contract assembly business side, are you talking?

Correct, yes.

There is some white box business in that area, but it's not, at this point in time it's not really in a meaningful level yet.

But it is a strategic focus, Bob, as you look out over the next couple of years?

Absolutely.

Are there any new vendors on the horizon that you might be able to discuss, that perhaps even already began to impact your business in Q4 and maybe in Q1, as well?

Peter, we're always talking to and evaluating new effective (phonetic) vendors.

I'm sure you are.

Nothing new to report at this point, Peter, but we're working on it.

I hear you.

The share count for Q1 of 29.3, is that the number we should use for the full year or is something closer to 30 million likely to be the terminal number?

Right.

It's somewhat dependent upon on our stock price, given the option effect, using the treasury stock method.

If our stock price increases we have to increase the share count, clearly.

So the possibility of 30 million is definitely possible.

Okay.

Just one final question from me.

Would it be fair for us, for modeling purposes, to assume, as has been the case for the last few years, that Q1 is the lowest quarter of the year earnings-wise?

Based on what we see right now, yes.

Thank you very much.

By the way, welcome to the public forum.

Thank you very much.

Thank you.

Our next question comes from Brian Alexander.

Just a quick follow-up.

I think you mentioned that your HP mix was about 29%.

I believe last quarter it was above 30.

How much of that decline in exposure to HP is a conscious decision, by either Synnex or HP, you know, to lessen that relationship versus maybe HP's competitive position overall?

Yeah, Brian, it's really related to the increase in our assembly business.

We do HP as a percentage of our total revenue.

So if you back out the increase we had in our fourth quarter, the percentage of HP business is essentially the same as the periods we presented in the past.

Okay, great.

And then just going back to the distribution margins, I think you said down three basis points, backing out the charge quarter-over-quarter, and you mentioned a couple of factors for some gross margin pressure.

I'm just trying to get an idea of which of those two factors had a bigger impact on the gross margin decline sequentially in distribution this quarter.

The mix of customers versus the pricing pressure that you talked about?

Much more due to mix of customers.

So, at this point, would you -- this has been a pretty big topic, I guess over the last few quarters of distribution, the pricing environment in North America and one of your competitors has taken some action to get more aggressive to gain market share.

I am just trying to understand how you would characterize the pricing environment?

I know it's always competitive.

But at this point would you call it stable, intensifying or maybe alleviating.

Stably competitive.

Great, thanks.

Our next question comes from Keith Bachman.

Hey, guys, a couple of follow-ups.

First off, I always seem to be one step behind Brian, but I wanted to see if you could run over the numbers on the charge again?

Sure.

The amount included in SG&A.

Was 2 --

2 million.

Yeah.

Other expense, 260,000.

That was a decrease in other expense.

And the tax effect is 450,000.

Right.

And the net GPS was a nickel?

Right.

Okay.

How -- what's your -- we talked a little bit about HP, and what's your read that you're getting from HP as it relates to their North American strategy?

They seem to kind of go back and forth a number of different public forums.

What's your recent conversations with them about their objectives in North America on the two tier versus direct?

I think they -- what we are getting, hearing from them is that they will maintain the current mix between the direct and indirect.

Okay.

So I don't think you are going to see further erosions on the two tiers side of HP business.

Right.

Okay.

Okay.

And then when I think about M&A, I want to revisit where your potential acquisition interest may lie.

Is there any kind of flavor that you can give on where you have interest or preference, I should say, in terms of geographic opportunities, any specific, U.K., France, China, what have you, any kind of direction you can give us there?

And then anything that jumps out to you on the product side that you may want to look at a very targeted acquisition, any kind of product areas you think look particularly interesting?

From a geographical standpoint, it's likely that we'd stay closer to home than venture outside of our main geographies right now.

From a product standpoint --

So just let me interrupt there, just so I'm clear.

That would suggest North America, that would include Latin America, because you're in Mexico pretty heavily.

Right.

Primarily North America.

Okay.

Okay.

From a product line standpoint, you've heard our product percentages.

Yes.

Clearly, we could be stronger in software and networking.

They are the ones to think about.

We are always interested in the white box building environments as well.

And with the white box, because you have intentions there on the EMS side, is that to leverage the two, or is that completely independent?

Those are completely independent.

Okay.

Okay.

Thank you.

Our next question comes from Brian Alexander.

Okay, this is the final follow-up, I promise.

When you talk about the fact that you saw this mix shift in customers this quarter doing more business with larger customers, I assume that means direct marketers like CDW and Insight; is that correct?

Or are we talking about another category of customers?

Yeah, that's correct, Brian.

So would you say that that's more a reflection of their share gains from smaller customers, or is that Synnex gaining share from other distributors serving those customers, if that makes sense?

It's a combination of those two.

Okay.

Could you say which one you think is having a bigger impact?

It's equal.

Okay.

Thanks a lot.

Ms. Salah, at this time there appear to be no further questions.

Okay.

Thank you, Richard.

This concludes our fourth quarter earnings conference call.

Thank you for joining us today.

We will have a replay of this call available for two weeks, beginning today at approximately 5:00 p.m.

Pacific Standard Time, through January 22.

It will be posted on our website at ir.synnex.com, and the replay number for domestic dial is 888-211-2648 and 703-925-2474 for international.

Thank you for your participation today.

Ladies and gentlemen, thank you for your participation in today's conference call.

Your program has concluded.

You may now disconnect, and have a good day.