新聚思 (SNX) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your SYNNEX Corporation's 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, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

And now, it is my pleasure to announce your moderator for today's program, Ms. Sandy Salah, (technical difficulty) Director of Marketing and Investor Relations. Ma'am, please go ahead.

Thank you, John. Good afternoon, and welcome to the SYNNEX Corporation fiscal 2004 fourth-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 rate and capital expenditures; customer relationships; the hiring of sales and marketing personnel; the IT spending environment; the EMJ acquisition; the repurchase of existing EMJ convertible securities and debt; are Microland investment; our securitization facility and working capital; our financial performance, including our expectations as to revenue, net earnings, and earnings per share for the first quarter of fiscal 2005 and future periods; our expectations regarding the performance of our U.S. and non-U.S. distribution entities; our growth strategy and growth rate; how we intend to grow our distribution businesses; and our plans to move further into 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 these forward-looking statements. Today's discussion may also include certain non-GAAP financial measures. 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 good afternoon to everyone. I will review the financial highlights of our fourth-quarter performance. And then I will turn over the call to Bob to share his comments on the quarter and on our expectations for the first quarter of 2005. Once Bob is done with (technical difficulty) statements, Bob, John and I will answer any questions you may have.

Regarding our fourth quarter results, revenues were 1.48 billion, an increase of 18 percent over the fourth quarter of 2003, and a 10 percent sequential increase from the third quarter of 2004. By segment, distribution revenues were 1.32 billion, an increase of 14 percent over the fourth quarter of 2003 and 10 percent sequentially. Revenues from our EMJ acquisition, which closed on September 17, 2004 (technical difficulty) 48 million. Without the effect of the EMJ acquisition, distribution revenues increased approximately 9 percent on a year-over-year basis and approximately 6 percent sequentially.

Contract assembly (technical difficulty) million, an increase of 74 percent over the fourth quarter of 2003 and up 10 percent sequentially. From an earnings standpoint, net income increased 77 percent to 15.3 million or 50 cents per share, compared to 8.6 million or 35 cents per share in the fourth quarter of 2003.

Q4 2004 results include a one-time gain of 2 million, or 7 cents per share, related to the recognition of a tax asset that was previously fully reserved. Without this one-time benefit, net income for Q4 would have been 13.3 million or 43 cents per share. As our IPO officially closed on December 1, 2003, the EPS figure for the fourth quarter of 2004 reflect the additional shares from the offering, whereas the fourth quarter of 2003 EPS amount does not.

Regarding gross margins -- our the gross margin percentage for the fourth quarter was 4.3 percent, down 16 basis points from the prior quarter and up 22 basis points sequentially. Assembly, customer, and product mix was the primary reason for the year-over-year decline. The sequential increase was the result of our focused effort to increase our distribution gross margin, slightly higher manufacturing margin, and the addition of the higher-margin EMJ business.

Fourth-quarter 2004 selling, general and administrative expense was 40.1 million, or 2.71 percent of revenues. This compares to SG&A expense of 3.02 percent of revenues in the prior-year quarter and 2.66 percent of revenues in the third quarter of 2004. The slight increase in our sequential SG&A percentage was primarily a result of the EMJ acquisition.

Operating income for the fourth quarter was 23.5 million, or 1.59 percent of revenues, which compares to 18 million or 1.44 percent of revenue in the prior-year quarter. From an segment basis perspective, distribution and operating income was 19.4 million or 1.47 percent of revenues, and assembly operating income was 4.1 million or 2.53 percent of revenues. Other expense, consisting primarily of financing fees, net foreign currency losses, and net of miscellaneous income decreased by approximately 1.7 million over the prior-year quarter, primarily due to lower foreign currency losses.

Without the effect of the one-time tax gain, our tax rate was approximately 36 percent for the fourth 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 percentage of mixed earnings in the geographies we operate in. We expect that our future quarter tax rates will be at the higher end of this range.

Regarding our balance sheet metrics, accounts receivable totaled 640 million at November 30, 2004, which includes approximately 196 million associated with our off-balance sheet accounts receivable securitization program. DSO, including the off-balance sheet program, was approximately 39 days. Inventory totaled 408 million at November 30, 2004. Inventory days were approximately 26. Including the detailed (ph) metric of approximately 29 days, our fourth-quarter cash conversion cycle was 36 days. Our cash conversion cycle metric is slightly higher than the previous quarter, which is primarily a result of the acquisition of EMJ.

Other fourth quarter metrics of note -- depreciation expense (technical difficulty) was approximately 1.2 million. Amortization expense was approximately 1.1 million. Capital expenditures were approximately 1 million.

From a distribution product line standpoint, peripherals accounted for 31 to 35 percent of our sales. System components accounted for 19 to 23 percent. IT systems accounted for 27 to 31 percent. Software accounted for 10 to 14 percent, and networking accounted for 3 to 7 percent. The changes in the categories from the prior period are primarily driven by the acquisition of EMJ.

In our contract assembly business, from a customer mix standpoint, approximately 83 percent of our business was from our primary customer, Sun Micro. And approximately 17 percent was from all other customers. HP, at approximately 27 percent, and IBM, at approximately 11 percent, were the only vendors accounting for more than 10 percent of sales during the fourth quarter of 2004.

Full-time equivalent headcount was approximately 2,680 at November 30, 2004. This amount consists of approximately 2,040 permanent employees and approximately 640 temporary personnel. Increase in headcount over the prior quarter is attributable to increased contract assembly sales and the acquisition of EMJ.

Now I'll go over our first-quarter 2005 expectations. For Q1 2005, we expect revenues will be in the range of 1.39 billion to 1.44 billion. Net earnings will be in the range of 11.6 million to 12.2 million. And earnings per share will be in the range of 37 to 39 cents. These forecasted earnings per share figures are based on an approximate weighted average diluted share count of 31.3 million, and do not include any special charges or restructuring amounts that could be incurred, including possible charges for the early retirement of EMJ preferred or debenture securities and other related acquisition expenses. The 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. We are very pleased to deliver another record quarter of the revenues and earnings results. With the closing of fiscal 2004, our first year as a public company, we were also able to deliver outstanding results, with year-over-year revenue growth of 29 percent and 55 percent in profit increase. Thank you to the SYNNEX team for this excellent execution and to our customers and suppliers for their continued loyalty and support.

Our solid fourth quarter of 2004 marks our 17th consecutive profitable quarter. Let me share with you factors contributing to our increased revenues and profits in each business segment, as follows.

In the distribution area, first, the combination of stable demand in the IT channel, including the typical seasonal uptick due to government and corporate spending along with the steady execution of our distribution strategies, enabled us to increase our distribution revenues over the previous year and prior quarter.

The next contributing factor is the acquisition of EMJ last September, as Dennis noted earlier. EMJ's ERP systems were fully converted into SYNNEX system from day 1 (ph), when we closed the transaction, and we should be seeing synergies from this transaction this quarter.

In the manufacturing segment, we continue to see strong revenue from our primary customer, and also saw customer diversification improve in the fourth quarter, as well. As Dennis mentioned earlier, revenues from new customers represented approximately 17 percent, and in particular, one of our new customers had a significant revenue contribution, primarily due to seasonal factors in their business. As this customer is primarily in the consumer market, we expected to see fluctuations in the shipment patterns. However, we do expect that we will maintain a solid and profitable relationship for the foreseeable future.

Lastly, as a result of our continued focus on improvements in our Mexico operations, we reduced the operation loss from 252,000 in Q3 2004 to approximately 50,000 this past quarter, essentially the breakeven point point we indicated that we would do for the quarter. At this point, our Q1 (ph) efforts are substantially complete, and our Mexico business operations are on track for positive performance in 2005.

We are pleased with the improved gross margin for reasons Dennis mentioned. We are even more excited that our productivity metrics, G-to-E (ph), i.e., the gross-margin-to-expense ratio, had to further improved from 1.5 last quarter to 1.59. A year ago, the ratio was 1.47. It is this productivity consistently outperforms our competitors and has enabled us to deliver the strong results we have posted today.

Regarding the distribution product categories that we sell, we saw continued strength in servers, storage systems, mobiles and desktop PCs. And even hard disk drives, which were down significantly in the summer, have shown signs of recovery.

Now let me comment on the guidance Dennis provided earlier. The overall North American IT spending environment continues to be stable. We expect the typical seasonal decline for our Q1 2005 for both of our business segments, and are hopeful that we will see normal seasonal increases throughout the balance of the year.

The midpoint of our guidance suggests a 15.8 percent increase over the prior year and a 4.4 percent decline, sequentially. The increased forecast of sequential decline compared to the prior-year Q1 sequential decline of less than 3 percent is mostly driven by our assembly based in the (ph) sales. In Q1 2004, we were more in the recovery mode still, whereby we experienced sequential increases as opposed to a typical seasonal decline.

While our rapid expansion and increasing sales figures have made it more difficult to match the highest percentage gain of the past few years, we expect to continue to grow at a pace that is much faster than the industry growth rate, based on our ventilate (ph) effort on this space (ph) control, enhanced productivity, we'll continue to improve the G-to-E (ph) ratio to deliver stronger operating income.

Not least, as a part of our service strategy, we have recently made a minority investment in Microland Limited, an India-based IT infrastructure management services and technical support firm with over 835 engineers on staff. Microland provides businesses with 24-by-7 remote networking monitoring services as well as on-site and off-site technical support services of voice, e-mail, and Web-based applications.

In addition to the Microland investment, we have also partnered with ACL (ph) Corporation to extend integration and installation services to our resellers. The combination of these 2 partnerships enhances our service portfolio, and is a strong value-add for our resellers and vendors.

I would like to close by saying we are now in our 25th year in business, and complete our first year as a public company. We are very pleased of gross margin improvement last quarter and consistent earnings results we have delivered every quarter since the IPO. The Mexico problems were fixed on schedule. EMJ is fully integrated and about to make a contribution to the bottom-line. Moreover, there are still a lot of opportunities for our growth in the markets we have now or minimally participated, like networking, enterprise, and consumer electronics.

Ladies and gentlemen, we will continue to deliver outstanding economic return to our customers, vendors, shareholders and associates in the year to come. I want to once again recognize our employees worldwide for their exceptional execution, as well as 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.

Thanks, Bob. John, we would now like to open up the lines for any questions.

(OPERATOR INSTRUCTIONS). Brian Alexander.

Nice quarter. Question on the gross margins, Dennis. Can you just go into a little bit more detail on what you were able to do to improve gross margin sequentially in the distribution business? How much of that was either customer or product mix versus pricing? And can you just comment generally on the pricing environment?

Brian, let me take these questions. Essentially, our EMJ acquisition did help a lot in terms of margin improvement. The second factor coming into -- we reported to you a quarter (ph) -- we are working on the gross margin improvement where we think will be more selective in terms of what customers will (ph) do business. And that's the customer mix, and also some product mix did influence the gross margin improvements in U.S. and largely (ph) a small contribution from the assembly business we have to the business (ph) going up (ph). That's generally have a small contribution to the overall gross margins percentage.

And so, Bob, do you think this gross margin improvement that we've seen is sustainable, and that we should expect it to maybe trend a little higher over the next few quarters?

We are expecting to at least maintain the same percentage that we have today.

As far as your earlier question about the pricing environment, I think pricing is always very competitive in our industries, and I never discount that. But is it worse than before? I don't think so. In the future, is it going to be better? We don't expect that, either.

Great. And then can you just give us a little bit more detail on your plans to expand some of the lines that you inherited with EMJ into the U.S. and how much of a growth driver that could mean going forward? And are you still comfortable with that business contributing about 250 million for the entire year?

Okay. Let me address in (ph) the two things. As far as the $250 million, I think this is probably right, but we will not break it out in the future, after what Dennis reported to your earlier for last quarter.

As far as the U.S. side of it, this is going to be a new business for EMJ, the product lines. And as you know, it takes nine months to get pregnant (ph), and it will take longer to really get this going, to have a real impact to our overall business. But yes; the lines (ph) will be limited, as Dennis mentioned earlier. But we'll get it this quarter.

Okay, and then the last question -- just could you walk us through again the impact of adding new customer programs into the assembly mix, the impact that that has on margins, both initially and over time?

This is John Paget. Clearly, when you add a line, you have a little bit of ramp up on the margin as you build your productivity into the lines. Once that comes up to speed, then your margin starts to improve. And you saw some gross margin improvement in the manufacturing line.

Peter Barry, Bear Stearns.

Bob, could you give us a sense of what the remedies were in Mexico? And are there any other areas that are creating similar angst, if you will?

Fortunately, we only have 5 countries, and we don't really see any issues like what we had in Mexico. So generally, I think we are doing pretty well in other countries, as well.

And could you share with us what some of the remedies were that allowed you to get profitability back on track reasonably quickly?

As we said, the problem was more receivables. There's 2 problems. One is we had early -- or last year. When we grew the business so fast in Mexico, we saw the payment became some problem. So we tightened it up (ph), and then we started to be more selective with which customers we were going to do business with. That's what we did. And essentially, we scaled-down some business, and we reduced our headcounts. So now we are profitable.

Just taking that one step further, Bob, would you expect any meaningful shift in the geographical revenue mix in the Company as we go forward? Certainly, I suspect EMJ will contribute to that. But anywhere else as well?

No. We continue to be focused in North American. Like I said earlier, there are still quite a few markets we have not addressed. And so there's a huge potentials in that, and we felt that we should put more focus here.

And any surprises, positive or negative, as it relates to EMJ and the integration of that process?

It has been as good as we can get, and we are very happy with the result.

Aaron Hussick (ph), Morgan Stanley.

Just 2 quick things on the EMJ acquisition. Can you tell us how much inventory you acquired with that?

It was approximately $20 million U.S.

Okay. And roughly how much operating income did that add in the quarter?

We don't break get out. We did, on the last call, give some guidance. That would be neutral to our bottom line in the fourth quarter of 2004.

Rich Kugele, Needham & Company.

Good quarter. Just quickly, on Microland, a little bit more on the rationale behind your investment. Is this targeting -- are their customers mainly small/medium-size businesses, or are there larger enterprises among that mix? And does that imply that we should be thinking that there will be some incremental SG&A related to that as you try and help them?

And then, I guess, secondly, post EMJ, could you give us a sense for 2005 what a reasonable gross margin range we should be thinking about?

Let me deal with the Microland first. First of all, Microland has 2 sets of customers, one at the very high enterprise level, where they were doing remote monitoring and management. And then they also deal in the SMB market, which is perfect for the market that we are in.

So we are using Microland's capabilities to come down through our reseller community and offer those same levels of services to the SMB market. Typically, that would be in (technical difficulty) the 15 to 20 devices on a network that are being monitored and managed, along with technical support that goes along, specifically aimed primarily at emerging vendors. As we bring vendors on, many of them need the technical support/help desk kind of capability that's necessary there. So we would not anticipate seeing incremental SG&A into our company the way that we have it designed.

And then, Rich, on the second question with regards to the EMJ gross margins I believe you asked about, we are not going to break out the EMJ gross margins or sales moving forward, as we've fully integrated that business into our Canadian entity, and doing so would be very difficult.

Yes, I was actually thinking of the overall corporate margins -- not EMJ broken out, just overall SYNNEX.

Well, the guidance we've given includes the margins that we think we'll get from the EMJ business in the first quarter.

Any thoughts for the year?

No; we are not guiding past the first quarter.

Okay. And then I guess just lastly, any comments on what you think about the North American IT spending growth for the year? You use this word "reasonable;" any additional color you can provide on that?

I don't think we have more information than what IDC or other database (ph) companies putting out, but we are more -- also, we feel that we will be growing faster than -- with a good premium over the competition or over IT's total growth rate.

(OPERATOR INSTRUCTIONS). Showing no further questions in queue at this time, I would like to turn the program back over to you for any concluding remarks.

Okay, thank you, John. This does conclude our fourth-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 January 25. It will be posted on our website at ir.synnex.com, and the replay number for domestic dial is 866-219-1444 and 703-925-2474 for international. The conference ID number is 64509.

Thank you for your participation today.

Ladies and gentlemen, this does conclude today's presentation. Everyone have a great day. You may now disconnect. Good day.