新聚思 (SNX) 2004 Q3 法說會逐字稿

Welcome to your SYNNEX Corporation third-quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

Now it is my pleasure to announce your monitor for today's program, Ms. Sandy Salah, Senior Director of Marketing and Investor Relations.

Ma'am, please go ahead.

Good afternoon, everyone, and welcome to the SYNNEX Corporation's fiscal 2004 third-quarter earnings conference call.

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

Dennis Polk, Chief Financial Officer; and John Paget, President of North America and Chief Operating Officer.

Before we begin our discussion, the statements on today's call which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements include but are not limited to statements about our expectations regarding our future tax rates and capital expenditures; the financial treatment of the EMJ acquisition; the closing of the EMJ acquisition; the repurchase of existing EMJ convertible securities and debt, our securitization facility, and working capital; financial performance for the fourth quarter of 2004 and future periods; our expectations regarding the performance of our U.S. and non U.S. distribution entities; our government and corporate contracts; integration of EMJ's personnel and systems; benefits from the EMJ acquisition; and our plans to move further into the opportunities to service IT suppliers and VAR customers outside of product distribution.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those discussed in these forward-looking statements.

Please refer to today's earnings release and documents filed with the Securities and Exchange Commission, specifically our most recent Form 10-K and Form 10-Q, for information on risk factors that could cause actual results to differ materially from those discussed in those forward-looking statements.

Today's discussion may also include certain non-GAAP financial measures.

The reconciliation of the non-GAAP financial information can be found on our website at www.SYNNEX.com, which are provided as supplemental information to enhance your understanding of our financial results and other financial metrics.

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 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.

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

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

Regarding our third-quarter results, revenues were 1.34 billion, an increase of 29 percent over the third quarter of 2003 and a 5 percent sequential increase from the second quarter of 2004.

By segment, distribution revenues were 1.19 billion, an increase of 21 percent over the third quarter of 2003 and 6 percent sequentially.

Contract assembly revenues were 147 million, an increase of 184 percent over the third quarter of 2003 and down 2 percent sequentially.

From an earnings standpoint, net income increased 50 percent to 11.5 million or 38 cents per share, compared to 7.7 million or 32 cents per share in the third quarter of 2003.

Third-quarter 2004 earnings were positively impacted by a 1-time gain of approximately $700,000 after-tax, or 2 cents per share, as a result of the settlement of the final purchase price related to the acquisition of our current UK subsidiary from MiTAC International in the fiscal 2000.

As our IPO officially closed on December 1, 2003, the EPS figure for the third quarter of 2004 reflects the additional shares from the offering, whereas the third quarter of 2003 EPS amount did not.

Moving on to gross margin, our gross margin percentage for the third quarter was 4.08 percent, down 46 basis points from the prior-year quarter and down 14 basis points sequentially.

Distribution customer mix and assembly customer and product mix were the primary contributors to the year-over-year and sequential declines.

Third quarter of 2004 selling, general, and administrative expense was 35.7 million or 2.66 percent of revenues.

This compares to SG&A expense of 3.13 percent of revenues in the prior-year quarter and 2.74 percent of revenues in the prior sequential quarter.

Higher revenue and continued expense control contributed to the decline in our SG&A percentage.

This is the third quarter in a row that our SG&A percentages declined, despite the increased cost we have incurred as a result of being a public Company and the investments we have made in sales and other personnel.

Operating income for the third quarter was 19 million or 1.42 percent of revenues.

This compares to 14.6 million or 1.41 percent of revenue in the prior-year quarter.

From a segment basis perspective, distribution operating income was 15.8 million or 1.33 percent of revenues; and assembly operating income was 3.2 million or 2.16 percent of revenues.

Other expense, consisting primarily of financing fees, net (ph) foreign currency losses, and net of miscellaneous income, decreased by approximately $800,000 over the prior-year quarter.

The main contributor to the decline was the acquisition settlement proceeds noted earlier.

Our tax rate was 36 percent for the third quarter, which is at the lower end of our expected range of 36 to 39 percent, of which the final percentage is primarily dependent upon the percent of mix of earnings from the geographies we operate in.

We expect that future quarter tax rate will continue to be within the stated range.

Regarding our balance sheet metrics, accounts receivable totaled 547 million at August 31, 2004, which includes approximately 141 million associated with our off balance sheet accounts receivable securitization program.

DSO, including the off balance sheet program, was approximately 37.5 days.

Inventory totaled 357 million at August 31, 2004.

Inventory days were approximately 25.

Including an EPO (ph) metric of approximately 30 days, our third-quarter cash conversion cycle was 32.5 days.

On a year-over-year and sequential basis, we have achieved improvements in our cash conversion cycle.

Other third-quarter metrics of note, depreciation expense was approximately 1.1 million; amortization expense was approximately 800,000; stock-based compensation expense was 0; capital expenditures were approximately $900,000.

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

From a productline standpoint, peripherals accounted for 30 to 34 percent of our sales.

System components accounted for 22 to 26 percent.

IT systems accounted for 26 to 30 percent.

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

HP at approximately 28 percent and IBM at approximately 12 percent were the only vendors accounting for more than 10 percent of sales during the third quarter of 2004.

Full-time equivalent headcount was approximately 2,332 at August 31, 2004.

Before I go over fourth-quarter expectations I would like to provide the following information on our recently completed acquisition of EMJ Data Systems.

The acquisition of EMJ was completed on December 18, 2004, therefore the revenues and expenses of EMJ will be included in our consolidated numbers from this day forward.

Subject to completion of our final valuation study, we expect the purchase price to exceed net assets by approximately 25 million, of which approximately half of this amount is expected to be an amortizable intangible asset and the remaining will be goodwill.

We acquired by a cash tender offer more than 90 percent of the common shares outstanding of EMJ; and we expect to tender and close on the remaining percentage by the end of our fiscal year.

EMJ has approximately $15 million in convertible preferreds and subordinated debt outstanding; and prior to the closing of the transaction EMJ repurchased more than 2/3 of the conversion features of this debt.

It is expected that the remaining conversion features, and possibly the debt, will likely be repurchased as well.

The acquisition was financed utilizing availability in our securitization and working capital facilities.

While we believe we have adequate availability in our securitization and working capital lines subsequent to the acquisition, we will likely be renegotiating facilities in the near future to increase our availability.

At the end of Q3 2004, our debt-to-capital was approximately 35 percent.

Our debt-to-capital including the purchase price and assumed debt will be approximately 43 percent subject to the subsequent EMJ acquisition.

These percentages are approximate and include our off balance sheet securitization program.

We're comfortable in this current capital structure.

Regarding our expectations for the fourth quarter of 2004, for Q4 2004 we expect revenues will be in the range of 1.4 billion to 1.45 billion.

Net earnings will be in the range of 11.8 million to 12.4 million; and earnings per share will be in the range of 39 to 41 cents.

These forecasted earnings per share figures are based on approximate weighted average diluted share count of 30.5 million and do not include any special charges or restructuring amounts that could be incurred.

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

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

Thank you, Dennis.

Good afternoon, everyone.

Thanks to the efforts of our SYNNEX team and the continued loyalty and support of our customers and suppliers, we were able to again record the solid revenue and net income gains year-over-year as well as sequentially for the third quarter of 2004.

Factors contributing to our increased revenues in our 69 consecutive profitable quarters were as follows.

First, our distribution business continued to perform well.

The combination of the sustained demand on the IT channel, reasonable market conditions as compared to last year, and the continued steady execution of our distribution strategies, such as the salesforce expansion initiative in the last year's summer (ph), allowed us to grow our distribution revenues organically over the prior year and quarter.

Given that the third quarter is typically seasonally flat in the U.S. and down in other countries we operate in, the 5 percent sequential increase in sales is additional evidence of our ability to execute in all types of market conditions.

Regarding the (indiscernible) product types we sell, in particular, we saw continuous strength in servers and storage systems, mobile and desktop PCs, displays and monitors, networking and software.

These categories were offset somewhat by tempered growth in printers and a decline in hard disk sales.

The second factor contributing to our increased numbers in Q2 was the continued growth of our contract assembly business.

While we did see a slight expected decline sequentially in revenue and operating earnings during the quarter, we are encouraged by the fact that our assembly business has now contributed over 500 million in revenue over the 12 months through August 31, 2004, and the fact that we did somewhat diversify the business in the third quarter, by adding a few new customers and new types of products to our assembly mix.

Revenues from new customers more than doubled from last quarter and included products such as PCs, storage, blade servers, and multiscreen LCD displays.

This is consistent with our growth strategy to expand and diversify this business.

The third factor is our relentless effort in driving up our productivity.

The 2.66 percent SG&A is the lowest in our industry.

Our 1.54 G-to-E ratio -- i.e., the ratio between expense and gross profit dollars generated --consistently outperformed our competitors.

Finally, we reduced the operating loss in the Mexico operations from 660,000 in Q2 2004 to 262,000 this past quarter.

This problem should be behind us before the end of this year, as we said and the last earnings call.

Let me comment on the guidance Dennis provided earlier.

The overall North America IT spending environment continues to be reasonable and stable, albeit not a growth rate we would all like to see.

We are hopeful that we will see a normal seasonal trend throughout the balance of the year, although we don't necessarily expect to see the robust increase experienced last year.

Furthermore, from a sequential perspective, there are less selling days in Q4 versus Q3, which is translated to 9.5 percent to 13.4 percent sequential growth in terms of daily shipments.

As a result of the acquisition and integration of EMJ into our Canadian operations, our fourth quarter should see a slight benefit of approximately 15 million in revenue from the EMJ business.

We are in the process of rapidly integrating the EMJ personnel and system into our Canadian business; and we should complete this process in the next few weeks.

This process and its expense will essentially neutralize any bottom-line benefit from EMJ for the current fourth quarter.

For the 2005, based on current expectations and our ability to successfully integrate the business, EMJ should continue contribute approximately US$250 million to our top line and EPS by 7 to 8 cents.

The real success of the transaction will be defined as, 1, establishing SYNNEX and EMJ as the leader in Canadian distribution market; 2, enjoying synergistic bottom-line contributions through the consolidation; 3, bifurcating the current Canadian EMJ POS and auto-ID business in the U.S.

In addition to executing on the various assets of EMJ acquisitions, our goals and growth strategy moving forward will be simply continuing what we have been communicating to you in the last 12 months, by further expanding our sales and marketing organizations and enhancing our service strategies such as leasing programs and the end-user demand generation for our suppliers and resellers through BSA. (ph)

I would like to close by saying that we are very pleased with our steady execution in our marketplace, resulting in the strong revenue and earnings growth reported.

I want to again thank our employees for their continuous exceptional execution, as well as the ongoing support from our customers and suppliers.

Thanks again for your time today and interest in SYNNEX.

Sandy, let's now turn the call back to the operator for questions.

Thank you Bob.

We would like to open up the lines now for any questions.

(OPERATOR INSTRUCTIONS) Peter Barry from Bear Stearns.

Dennis, as I look at the sales mix by product rundown that you gave us, and Bob, you I think in part already answered some of this, but I couldn't help but notice that IT systems and networking seemed to be a bit stronger than normal; and components were a bit weaker than what would be considered normal. 1, is that true?

And could you put a little more color on that for us?

First of all I will start talking about the component side.

The component side is pretty straightforward.

You heard that from all the storage companies in some degree; you also heard directly from Intel as well.

So the white-box area -- you are right -- is weaker than we all hoped.

In particular on the storage drives area it was very weak.

As for the systems side of it, we saw very strong demands on the server side of that, on the storage systems that really even caught our surprise.

We certainly saw the mobile notebooks, PCs very strong, and even desktop was very strong.

As far as the networking side of that, we do have Nortels and other new vendors we have been working on for some time.

That is why we also saw a very strong business on the networking side of it.

But remember our networking base is much smaller, so from the growth rate point of view it is much faster growth than the whole market.

Bob, did those patterns continue in September?

It looks like that way; yes.

So far I think that's the pattern.

You're right.

Could you give us a sense of the number of new customers that you signed up?

Last time we told you about 3,500 right?

This time it was probably somewhere around 4,500 to 5,000 now, just U.S. alone.

Now, thank you for the insights as regards EMJ contribution next year.

Should we look at that 7 to 8 cents as clearly incremental to what some of us have been expecting to be about a 15 percent growth rate?

Or should we include that in that sort of growth rate expectation?

The 7 to 8 cents per share is incremental to the numbers you just talked about.

This does in fact accelerate the Company's overall growth rate, however modestly, but accelerate it nonetheless?

Agreed.

Dennis, one more question for me.

You mentioned the tax rate.

The '05 tax rate we should use should be in that 36 to 38 percent range?

Yes, I would put it at the midpoint of that range to slightly higher.

Thank you very much.

Thank you.

Keith Bachman, Banc of America Securities.

A couple of things.

Dennis, could just talk about the gross margin for a second?

It was a little bit weaker than I anticipated.

Could you flesh it out a little bit?

In particular, if I look at the operating margins as a proxy for that, it looks like the operating margins on the distie side were fine; but the assembly business was a little bit weaker.

Maybe you can help triangulate those data points.

That is my first question.

Let's just talk about that, then I have a couple of follow-ups.

As far as directly to the assembly question, that did come down a bit.

It was related to product mix; and we also added some additional customers.

I think John might want to add something there.

As we have brought on new customers, clearly we start at a slower rate as we ramp up.

So that is the decrease that you see there.

John, to stick with that, if your primary assembly customer -- I think we know who that is -- they are going to have a much harder ramp than what you demonstrated.

They are going to have a much harder ramp down that what you demonstrate in your revenue growth.

So you must have a putting significant uptick in incremental customer wins in this quarter.

We certainly -- we have got from about 2 percent to 7 percent of the revenue.

So that is a pretty significant increase on the short-term basis.

Again, it is a relatively small number compared to the total.

But we're pleased with the ramp and we have had a lot of interest.

So we're very pleased with where we are right now.

Where is that going to be, you think, in November quarter in terms of other non-Sun business?

It will probably still stay in the single digit area.

We probably still do stay in the single digit; but certainly we'll see it increase from where it has been in this quarter.

But then by the same token, the assembly operating margin should increase if those programs that you already won ramp.

Is that a fair comment?

That is certainly our plan.

Dennis, can we go back to the gross margin for a second?

Sure.

If you could just flesh out.

Is this a -- the assembly business had some program ramps, so that probably hurt your gross margin.

But where, for instance, how should we be thinking about this gross margin?

It keeps ticking down every quarter.

Where do you think it stabilizes?

Or does it keeps ticking down, and then you make it up on the operating margin or revenue side?

As far as the question on gross margin for distribution, why it came down, we talked about it.

It was primarily driven by customer mix.

But at this point in time, based on our forecast and what we are seeing, we believe we can keep that margin flat going forward.

The gross margin of 4.08 percent?

Are you referring to the operating margin of the distie side?

I'm referring to the gross margin.

So it feels about stable around here.

Agreed.

Okay.

In terms of --.

Let me see if I clarify.

I think your question was more on the assembly side of that.

Well, no, they all tie together.

Overall, I think we should be seeing a slightly uptick in what we saw last quarter.

Okay.

But Dennis, when you say customer mix, what does that mean?

Maybe you can help me understand what that means on the distie side?

That means we're doing much more business with some of the larger customers; and they tend to be a little bit more aggressive on the price.

Therefore as that volume increases it taps down our gross margin.

Okay.

Let me ask one last question then I will cede the floor.

In terms of inventories, you mentioned that the HCDs (ph) was a little bit weaker.

How did you end up in inventory in disk drives?

Overall, we're very comfortable in our inventory position.

We had a very good quarter when it comes to inventory, the terms (ph), etc.

To our specific drive level, if you will, very comfortable in that position.

We don't necessarily break out individual amounts with regards to our inventory by product category.

But once again, we don't have any issues right now with regards to our levels of the raw disk drives.

Why do you think printers were weak?

That's a good question.

Let me answer from a different angle.

I think overall printers, I think there was a huge replacement cycle last year; and this year the IT spending seems to move towards the system and server side of that.

On the consumer side of that, you probably know as much as I do about the reasons why consumer spending is less than it used to be, when it comes to the IT product.

Okay.

Thanks very much, gentleman.

(OPERATOR INSTRUCTIONS) Brian Alexander from Raymond James.

First question relates to the revenue guidance for next quarter.

I would assume with these new customer wins and with seasonality helping you in the fourth quarter, you would expect that business to be up sequentially.

If that is the case, and backing out the 50 million of the EMJ acquisition, it seems to me that you're looking for your core distribution organic revenue, if you will, to grow about 2 to 2.5 percent sequentially.

I just wanted to confirm that.

That is my first question.

I think again, like I said on my script, the numbers of days in the fourth quarter, for our quarter, is only 62 days.

That is 3 days less than last quarter.

So if you factor that in, essentially we are talking about --even backing out the EMJ factor we are talking about -- the guidance will give you a 6 percent to 9 percent sequential growth.

Given a lot of uncertainties right now, with elections and geopolitics issues, I think you probably could appreciate that is a very strong growth we have (indiscernible) makes sense for us.

Bob, is that 6 to 9 percent in distribution, or is that overall?

We don't break out on the guidance.

We don't break out that way, but that probably will give you a good sense of what it is.

Let me offer a little more.

It is overall, as Bob just said.

Your statement you made during the first part of your question, I think you're going more toward the assembly business being sequentially up.

Right.

To give you a little guidance on that, we're not modeling it that way at this point in time.

Okay, that's helpful.

Were the selling days any different last year sequentially?

Just because I am looking at last year's distribution business being up 18 percent sequentially.

So even up 6 to 9 may be a little bit stronger in distribution if assembly is down.

Seems like your sequential growth this year is going to be a lot lower than last year; and in the third quarter it wasn't that much lower.

So I'm trying to get at -- is this your view, that the market growth has slowed here as of late?

Or are you seeing more competitive pressures from some of your competitors that may be a little bit more price aggressive?

A couple of things.

Last year was certainly much more robust than this year.

You heard that from Cisco, from HP, from also other IT companies that they see the fourth quarter somewhat slower than we all want to see.

So that is how (ph) we give you some indication; we feel that probably the sequential number that we give to you is a pretty good estimate.

Okay.

Just moving back to margins, if you exclude some of the operating improvements you made in Mexico this quarter, it looks like the operating margins in your distribution business were down a little bit, which seems to have been the trend over the last few quarters.

Even though the revenue continues to grow impressively, the operating margins continue to tick down.

I understand your comment about customer mix.

Although the first part of my question is, why is the customer mix continuing to have an impact on your gross margins when we are not hearing that same type of commentary out of some of your competitors?

My second question is, wouldn't that also be offset by lower OpEx, such that the impact on your operating margins is more neutral than negative?

As far as your question on the distribution operating margin, it has been somewhat flat -- percentage I should say -- somewhat flat for the past 3 quarters, right around this 1.3 percent.

We have been obviously ramping up with larger customers, and that has caused the overall gross margins to go down.

You're right, some of that should flow to the higher operating percentage income, because of the cost it takes to service the larger customer.

But we also are incurring quite a few expenses associated with being a public Company this year over last year; such as (indiscernible) going to the end of the year with the final audits and the Sarbanes-Oxley processes, etc.

Okay.

Just a couple other quick ones if I can.

First of all, how big is the federal government business for you guys?

How would you describe the health of that customer base?

It seems like there is a lot of mixed data points out there about federal; and it seems (technical difficulty) we kind of wound down the month of September here.

So did you see it finish with a flurry like it normally did?

Just some comments on federal.

And then as it relates to the components business, now that spot prices for a lot of components are starting to behave more normally and they are starting to decline at more normal rates, wouldn't that help the white-box PC builder relative to some of the branded manufacturers?

Are you starting to see them become more competitive?

Thanks.

On the federal, we don't break out the federal business.

But it's very sizable for us, and we certainly get a good benefit from the federal buying season that we're in right now.

As far as the white-box side of it, you're right.

If you do the drive side of it in terms of the pricing, it gets stabilized somewhat as compared to previous 2 to 3 quarters.

And we are getting more stabilized gross margin on that.

Did I answer your questions?

Yes, thanks.

David Manthey, from Robert W. Baird.

Thanks, my question has been answered.

(OPERATOR INSTRUCTIONS) Ms. Salah, I'm showing no further questions in the queue at this time.

I would like to turn the program back to you.

Thank you, John.

This concludes our third-quarter earnings conference call.

Thank you for joining us today.

We will have a replay of this call available for 2 weeks beginning today at approximately 5:00 PM Pacific Standard Time through October 13.

It will be posted on our website at IR.SYNNEX.com; and the replay number for the domestic dial is 866-219-1444 and 703-925-2474 for international.

The conference ID number is 561315.

Thank you for your participation today.

Ladies and gentlemen, this does conclude today's presentation.

Everyone have a nice day.

You may now disconnect.

Good day.