新聚思 (SNX) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this SYNNEX Corporation first-quarter earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS).

I would now like turn the call over to Sandra Salah. Please go ahead, Ma'am.

Thank you, Jamie. Good afternoon and welcome to SYNNEX's fiscal 2004 first-quarter earnings conference call. I am Sandra Salah, Senior Director of Marketing and Investor Relations. Joining us on today's call are Bob Huang, President and Chief Executive Officer; Dennis Polk, Chief Financial Officer, and Cathy Chiu, Senior Vice President of Corporate Development and Communications.

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 second quarter of 2004 and future periods including but not limited to future revenue expectations, profitability, net earnings and earnings per share, capital expenditures, our growth, our supplier channel strategy, productivity of our sales force, our contract assembly business, our vendors' commitment to the IT channel, anticipated benefits of our distribution agreement with Maxtor, our leasing program with GE and recent acquisition of BSA, our distribution business outside the U.S., our strategy and statements 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 most recently filed Form 10-K, 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 borrowings, including the off-balance sheet debt associated with our Accounts Receivable securitization program.

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 would like turn the call over to Dennis Polk for financial highlights. Dennis?

Thank you, Sandy, and thanks to everyone for joining our call and webcast today. I will review the financial highlights of the first quarter, and then Bob will share his comments on the quarter and also on our expectations for the second quarter of 2004. When Bob is done, we will answer any questions you may have.

Regarding our first-quarter 2004 results, net revenue was 1.22 billion, an increase of 37 percent over the first quarter of 2003 and a slight 2.5 percent sequential decline from the fourth quarter of 2003.

By segment, distribution of net revenue was 1.1 billion, an increase of 30 percent over the first quarter of 2003 and a decrease of 4.7 percent sequentially. Assembly for net revenue was 117 million, an increase of 176 percent over the first quarter of 2003 and 25 percent sequentially.

From an earning standpoint, net income was 9.7 million or 33 cents per share compared to 6.7 million or 27 cents per share in the first quarter of 2003. As our recently completed IPO officially closed on December 1st, 2003, the EPS figure for the first quarter of 2004 reflects the additional shares from the offering, whereas the first quarter of 2003 EPS amount does not.

Moving onto gross margins. Our gross margin for the first quarter was 4.33 percent, down 37 basis points from the prior-year quarter and down 13 basis points sequentially.

Customer mix contributed to the year-over-year decline, whereas segment mix, i.e. distribution versus assembly, contributed to the sequential decline. Our distribution margin slightly increased sequentially, whereas our assembly margins decreased sequentially, which was primarily due to product mix.

First quarter of 2004 selling, general and administrative expense was 35.4 million or 2.89 percent of revenues. This compares to selling, general and administrative expense of 3.35 percent of revenues in the prior-year quarter and 3.02 percent of revenues in the prior sequential quarter.

Operating income for the first quarter was 17.6 million or 1.44 percent of revenue. This compares to 12.1 million or 1.35 percent of revenue in the prior-year quarter.

From a segment basis perspective, distribution operating income was 14.6 million or 1.33 percent of revenues, and assembly operating income was 3 million or 2.5 percent of revenues.

Non-operating other expense, consisting primarily of financing fees, net foreign currency losses and miscellaneous income expense, increased by $800,000 over the prior-year quarter. Higher overall revenue volume was the main contributor to the increased expense in this category.

Interest expense net of interest income was essentially unchanged quarter over quarter.

Our tax rate was 36.5 percent and is within our expected range of 36 to 39 percent, which is dependent upon the percentage mix of earnings from the geographies we operate in.

Regarding our balance sheet metrics, Accounts Receivable totaled 506 million at February 29th of 2004, which includes approximately 154 million associated with our off-balance sheet Accounts Receivable securitization program. DSO, included in the off-balance sheet program, was approximately 38 days.

Inventory totaled 386 million at the end of the first quarter. Our inventory did increase over the prior sequential quarter; however, it was due to a seasonal increase in our assembly inventory.

Inventory days were approximately 30. Including a DPO metric of approximately 32 days, our first-quarter cash conversion cycle was approximately 36 days.

Other first-quarter metrics of note -- depreciation expense was 927,000; amortization expense was 687,000; stock-based compensation expense was 137,000; capital expenditures were 1 million.

We expect that our future capital expenditures will be higher than our current depreciation rate, especially in the second quarter of 2004, as we will be moving into our new corporate headquarters during the quarter. As a result of this move, we will incur approximately $3 million in leasehold and other in capital improvements related to the new building.

From a product line standpoint, peripherals were in the range of 30 to 34 percent of our sales. System components were 25 to 29 percent. IT systems were 23 to 27 percent. Software was 10 to 14 percent, and networking was 2 to 6 percent. These amounts are generally consistent with prior periods.

From a customer mix standpoint, our percentage mix of VARs, DMRs, system integrators and corporate resellers remained relatively consistent with prior period. HP had approximately 27 percent, IBM had approximately 11 percent and Intel had approximately 10 percent. We are the only vendors accounting for more than 10 percent of our sales during the first quarter of 2004. While steadily increasing over the past few years, this is the first quarter IBM and Intel products were greater than 10 percent of our revenue.

Full-time equivalent headcount was 2044 at the end of the quarter.

For the second quarter of 2004, we expect net revenues will be in the range of 1.225 billion to 1.275 billion. Net earnings will be in the range of 9.9 million to 10.5 million, and earnings per share will be in the range of 33 to 35 cents per share. These forecasted earnings-per-share figures are based on an approximate weighted average diluted share count of 30.4 million.

Please note that these statements are forward-looking, and actual results may differ materially. I will now turn over the call to Bob for his comments. Bob?

Thank you, Dennis. Good afternoon, everyone. As we evidenced by strong earnings announcements from major distributors, the last few months have been strong for our sector. This signifies a healthier IT environment overall, but, more importantly, it reaffirms the value of the distribution channel to the IT industry.

While some of our competitors experienced healthy growth, many from Europe, SYNNEX growth and performance came primarily from North American. We are very pleased that we outperformed our guidance in the last quarter with a 37 percent (inaudible) growth of the prior-year quarter.

Once again, we grew our market share, and I wanted to take this opportunity to thank our customers and suppliers for their support and to extend my congratulations to the entire SYNNEX team globally for their excellent execution.

For the next few minutes, I will comment on the previous quarter's results, the Q2 guidance and then followed by our growth strategy. In addition to the overall improvement in the IT environment, the 37 percent Q1 revenue growth can be attributed to four different areas. I will start with the impact of changes in the channels and product strategies by some OEMs.

We have seen some of our major suppliers, most notably IBM, direct more of their business through the channel. This is in recognition of efficiency in the value-added that the channel provides.

Some of our suppliers, led by Intel, have also consolidated their distribution franchises, looking for a more optimal balance between market coverage and the channel management costs. We have benefited from the result of such shifts in major suppliers' channel strategies.

On the product side, we have had a major recovery on the sales of HP PCs from the product tradition that took place a year ago, after the HP and Compaq merger. Secondly, we benefited from the decision after the Iraqi war to extend our sales and marketing organization. Since then, we have grown our sales force in the U.S. by 30 percent and increased our customer accounts by 20 percent.

The third area is our contract assembly business, which, as you recall, had a very healthy growth in Q4 of 2003. That growth has continued into this fiscal year with revenues growing by 25 percent sequentially in Q1. The growth indicates great acceptance by the marketplace of the new products that we assembled. We expect the healthy contract assembly business to continue in the foreseeable future.

Lastly, I believe our revenue momentum also came from the energies and excitement among our employees from the Company's IPOs, as well as the subsequent stock price increase. Our people felt that their efforts and their faith in the Company were validated by the market, and this was a very, very powerful motivator.

We began an ESPP soon after the IPO, and now approximately half of our full-time employees in the U.S. have already signed up to purchase stock through this program. Our employees' commitment to the Company has certainly contributed to our strong performance.

Good job, guys, and keep it up.

As Dennis reported earlier, Q1 sales were 1.22 billion with 4.33 percent gross margin. (inaudible) revenues and gross margin percentage are important. The amount of gross margin dollars generated versus expenses is the key to profitability.

For the quarter, we generated $53 million gross profit with operating income of $17.6 million. This means, for every dollar we spend, we generated $1.50 gross profit and 50 cents in operating income. The ratio of 1.5 between gross profit and expense -- we call this the GPE ratio -- is one of the best indications of these activities in our business.

I am happy to say that ours is among the highest in the whole tech industry. Our business model of high-efficiency, focused vendor strategies and excellent execution has once again produced better financial performance.

I would also like to note that these results are inclusive of incremental expenses incurred with our status as a public company.

Now, let me comment on the guidance Dennis provided earlier. The overall IT spending was stronger than this time last year, has been somewhat quieter in the recent months than the second half of last calendar year. In the meantime, seasonal demand from state and local governments has also been slower due to budget delays or cuts.

On the positive side, while our market will always be competitive, we have seen the pricing environment stabilize. In addition, we believe the growth measures we have implemented, coupled with the shift of some major supplier strategy toward the indirect channels, as I mentioned earlier, would help drive our growth.

Accordingly, our guidance is for revenues to be flat or grow by approximately 5 percent sequentially and up between 30 percent to 35 percent over prior-year quarter.

In terms of our growth strategy, we expect to stay on the path that is consistent with our previously announced plans. We will grow our distribution business organically by serving existing or new customers and suppliers or through opportunistic acquisitions. And our objective to increase gross margin dollars, we will offer high value-added service to our customers and suppliers.

Consistent with this strategy, I am happy to say we have announced a distribution agreement with Maxtor recently. I would like to take this moment to applaud Maxtor for their strategy to promote strong distribution partnership and to stay away from traditional brokers.

To grow our service business, we have recently announced two important new service offerings -- one through a strategic partnership, the other through acquisition. Our recently announced leasing program with GE Commercial Finance provides our resellers the ability to offer leasing as an option to their customers. There is a tremendous opportunity for resellers to participate in the lease and revenue stream and to proactively manage product lifecycle opportunities.

With our recent acquisition of BSA, we also extended our service to suppliers and resellers to offer highly differentiated lead generation programs that create real demand at the end-user level.

I wanted to emphasize the implications to our distribution business of the types of programs that we are rolling out with GE and leasing in BSA in marketing services. Both of these programs added real value to this distribution channel now, and we have set the service fees generally and incremental or private-label to patch will make meaningful contribution to our bottom line in the future.

There are a lot more opportunities outside the product distribution as we get more into the service space. (inaudible) IT spending should help expenditures in the U.S.. The gross profit dollars generated by this entire distribution sector is a very, very small fraction. By adding innovative, valuable service to the channel, there is tremendous potential to significantly increase our gross margin dollars, which is, again, the source of profitabilities to our bottom-line.

In my last earnings call, I indicated that our distribution businesses outside the U.S. were not delivering the returns we expect. It is encouraging to report that our Canadian unit has shown improvement in the last quarter, and we continue to focus on performance enhancements there. However, our Mexican entity has suffered from poor economy and long payment cycles from our resellers. While these are relatively small entities, we have put resources on this front and expect it to correct the recent losses incurred in this business.

I would like to close by saying that we are very pleased with our last quarter excellent financial performance. I wanted to again acknowledge the great execution by our employees and the continued support from our customers and suppliers. I would also like to thank our investors for the approval of our ESPP program, which has enabled many U.S. SYNNEX employees to become shareholders. Their investment in the Company will ensure their commitment to help us achieve superior returns to our investors. Thank you.

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

(OPERATOR INSTRUCTIONS). Brian Alexander, Raymond James.

Dennis, I just wanted to make sure I understood you correctly. The sequential gross margin decline that we just saw in the first quarter -- all of that was attributable to a decline in the gross margins from the assembly business and the distribution business gross margins actually saw an uptick based on what you characterize as stable pricing; is that fair?

Right, that is correct. A slight increase in our distribution margin sequentially.

Okay, that is what I thought. Looking at the other expense line, it was a little bit higher than I was modeling. Is there anything unusual in that line item, and how should we think about that amount going forward?

It said -- nothing unusual in the line item. We obviously had a very large growth in our sales, and we fund our growth through our securitization program in the U.S. primarily, and that is where the fees associated with that go. It doesn't go in the interest expense line. It goes into the other line. So, if you look at it as a percentage of sales, that would be reasonable.

And that's the biggest component of that line item is the ARPs?

ARPS, flooring expense is also a bigger line item in that, and then some foreign currency is in there as well.

And looking at your revenue guidance for the next quarter, if I take the midpoint, it is up about 2 percent sequentially. I think last quarter you were up 6 percent sequentially, but the mix has changed quite a bit since then. Your assembly business is a lot larger than it was. And I guess what I am getting at is, if you can maybe walk us through how you're thinking about sequential growth in the distribution business this year relative to last year, which I think was up 6 percent?

Brian, as I commented earlier, last year -- the first quarter of last year, because of the HP and Compaq merger, we actually had a little bit lower revenue at that time. So, hence, the second quarter, particularly after the Iraqi war and the past benefits that we certainly see -- saw higher growth from quarter to quarter sequentially last year. But this year, as I commented earlier, overall I feel they are really softer than the second half of last year. That is one thing. And you know the local government spendings are actually going through the budget cuts. So, therefore, we think the numbers we guided you is the best we could see today.

I guess, just to clarify, I understood you on the discussion on state and local government, looking at the SMB customer, which is the lifeblood of your business, how would you just characterize the demand from that customer segment specifically? Would you say it is following normal seasonal patterns, or has it softened from that kind of trend?

No; I think we are pretty -- you will see it is pretty normal right now. There is nothing abnormal. You also want to look at -- the computer last year is still a huge 30 to 35 percent growth.

Keith Bachman, Bank of America.

A couple of things. Just to follow-up on Brian's question, can you help us understand if there is, you said, a little bit of weakness, where are you sensing that? I understand the government part, but is it any specific product categories? Is it generally across the band of your customer base? Is there any way to add some color to some of those comments ex- the government context, excluding the government context?

Well, overall, it doesn't give -- when you look at it on the day-to-day basis, it doesn't give us a very strong impression that the IT spending is going to be several points above the GDP growth, and I think that is what we need to be a little bit more careful about. And we could not tell you really specifically which area. I think it's pretty much across the board, and I could almost tell that from the customer set point of view, also there is no strong indication as to a particular sector is stronger than others.

And so is it normal seasonal patterns that we should just be thinking about, and you just had accelerated growth in the November and what just closed, the February quarters? Is it just normal seasonality that we are going to see in the May quarter?

I think what you said is right. We had a very strong Q1, and I think that right now Q2 I think is probably the right numbers to look at it.

In the assembly business, the growth there was pretty nice. It went up from 93 in change to over 117 million. Does that continue to be core growth within your existing customer base, or did you grab some new contracts there and new programs?

As we have talked about, Keith, we have one primary customer, and the increase in the business came from that customer.

But again, what I was really trying to drive at was that new programs within that existing customer?

No, the same programs from the last quarter.

Okay. And then the share count was a little bit higher than I had anticipated. Was that just a carryover? It was up almost 1 million shares.

The main reason for that was the increase in our share price.

So you just captured more of the options?

(multiple speakers) -- when we were talking to you last, our share price was averaging 13, 14, 15, and now it is much higher than that.

And, Dennis, any thoughts on margin? It was, as we already talked about, down a little bit. How we should be thinking about that throughout 2004? Should that be trending down a little bit from these levels, holding steady on the gross margin side? Any kind of comments there?

As we see it right now, it is holding steady is the best answer to that question.

Peter Barry, Bear Stearns.

Bob, could you speak to where you are in terms of the sales force expansion? Clearly, that had had a particularly impactive drive, or was it a meaningful driver in the quarter? Are you halfway there, or where do you think the sales force expansion takes us?

You are right. It certainly made a good contribution to our growth, and as I indicated earlier, we are about halfway right, too.

And is that likely to be completed by the end of this fiscal year?

Yes, yes; that is when we expect it to complete.

And might this be the first stage of a series of sales force expansions over the next several years, or do you think this will provide you with ample talent to get the job done?

I think we have already increased 30 percent on the sales force. Right? And that implies about 100 sales reps that we brought in in the last eight, nine months and have another 100. It is a huge army that we are bringing in. So we don't really -- unless the market changes in much faster fashions, I think the current plans would last for a little while.

So if I heard you correctly, did you add 100 people, or are you are planning to add 100 more people to your sales force?

We have already added 100 people, and we are taking (inaudible).

So there is another 100 to come?

That is correct.

Bob, you sound somewhat cautious about the IT capital spending environment for the remainder of your fiscal year. At least, that is what I heard. And I think the general expectation is that GDP growth will be quite satisfactory for the remainder of the year. But what we have not had is any meaningful expansion in employment. Will employment numbers have any meaningful effect on your business and obviously the flow of product through your pipeline?

Well, let me just try the first part. The second part is a different question that I am not sure I could add a lot of comment on that. The first half is that we are talking about -- I actually commented on the immediate, current quarter that I probably give you the impression that I am more cautious about. But I think, given what Keith commented earlier, because we had such a strong quarter, we do not want to misguide you, will be another 10 percent or 20 percent increase sequentially, and that is what is the comment we are making. We are not saying the market is going to come down substantially, so we need to be very cautious. That is the comment we are making.

So you see no signs of slowing as it relates to IT capital spending?

As I said earlier, the fact is that you have get local government and the states are delaying the budget and cutting the budget, and we are certainly going to see some slight impact from that.

And clearly, your market share growth has had a very positive offsetting influence on your revenue performance.

Absolutely.

I think, Dennis, you may already have spoken to this. But the opportunity for further operating margin expansion -- I gather you think it is somewhat limited in the nearby?

No. If we continue to grow our revenues and maintain our margins as we talked about, we are always working on the operating expense line. There is definitely an opportunity to increase our operating margin.

And one final one for me. Any sign of a couple of new, maybe even a significant new OEM source over the next quarter or two?

Peter, you know, you asked the same question last time. We are always talking. We are always trying to win some fast yield suppliers, and you know that.

Only two conference calls, and you have already caught me in a rut.

(OPERATOR INSTRUCTIONS). Brian Alexander.

Just a quick follow-up on the headcount. I thought I heard you say over 2000 total employees, and I think, as of the end of the fourth quarter, you were around 1660. Are my numbers right?

You are probably looking -- when we say 1660, that is the full time. Including the number I gave is the full-time equivalents, which include temporary employees as well.

Okay. You talked about losing money in Mexico. Any way you could quantify that or ballpark range on how much you are losing there?

We are not going to speak to specifics on where our losses are in Mexico. It is included in our other category when we break out our geographies.

Dave Manthey, Robert W. Baird.

I just want to clarify here. I hate to keep going back to this, but I want to be real clear on what it is you are exactly saying. A year ago you said that in the year-ago quarter you had very strong sequential growth of plus 6 percent from first quarter to second quarter. You have had a very strong first quarter this year, fiscal 2004. And now, when you are guiding to flat to up 5 percent -- and I think you said that is in line with normal seasonality -- if that is the case, I'm trying to grasp the -- people have been talking about a cautious outlook here, and I am just trying to understand that. That sounds to me like a continuation of a fairly strong trend. Can you help me with that?

Yes. One of the reasons -- actually, the difference is not that big in terms of sequential growth from fiscal year, if you compare two years. But what I said earlier is the first quarter of the last year, of the last year, was weaker because the product conditions during the HP and Compaq merger. And hence, the first quarter of Q1 was much lower than any seasonality factor you can have. And because of lower revenues in last year, therefore, you have higher sequential growth when moving to the 2Q, whereas we don't have that problem this year.

If you go back further than last year and you look at the normal sequential pattern in your business, what is that, then, approximately?

I think that is probably what we see today, either flat or maybe a little bit up. And also, last year, remember, we finished the war, and there are a lot of cuts being announced from Q2. So there is another factor on that as well, so you need to remember that.

Richard Gardner, Smith Barney.

This is Les Santiago (ph) for Richard Gardner. I had a quick question regarding your components business. Can you give us a sense of what is going on there in terms of lead times in specific components, any specific components with higher lead times compared to others?

And then Intel, you talked about it being 10 percent of your revenues this quarter. Was that primarily because of their consolidation efforts, or was there something else?

I got the first part, but I did not quite get the second part of the question. Let me finish the first part first, and then we will come back to the second. In terms of components, the pricing product -- the type of product that we handle is the processors and the (inaudible) doesn't primarily go into the why box space. We don't really see any shortage, per se, on that space, and the leadtime is pretty normal, so I think that is fine.

As for the second, the consolidation, I mentioned that Intel made efforts to consolidate the distribution (inaudible), and therefore, we get benefit out of that.

Okay. That answers my question.

There are no further questions.

Okay. Thank you, Jamie. This concludes our first-quarter earnings conference call. Thank you all for joining us today. We will have a replay of this call available for two weeks beginning today at approximately 5:00 PM Pacific Standard time through April 8. It will be posted on our website at IR.SYNNEX.com. And the replay number for the domestic dial is 866-837-8032 and 334-420-0860 for international. The conference ID is 4060158.

Thank you for your participation today.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect.