新聚思 (SNX) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the SYNNEX Corporation first 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 follow at that time. [Operator Instructions].

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Sandy Salah, Senior Director of Marketing and Investor Relations.

Ms. Salah, you may begin your conference.

Thank you, operator.

Good afternoon and welcome to the SYNNEX Corporation fiscal 2005 first 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 relating to our future capital expenditures, our current expectations of our revenue, net income and earnings per share for the second quarter of fiscal 2005, that the sale of our subsidiary in Japan will be completed by the end of April, 2005, when we expect to begin to realize the investment in SYNNEX Japan, and our expectation that we will recover the majority of our loss from insurance providers.

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 press release and documents filed with the Securities and Exchange Commission, specifically our most recent form 10-K, for information on risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements.

Additionally, this conference call is the property of SYNNEX.

And may not be recorded or rebroadcast without specific written permission from the Company.

I will now turn over the call to Dennis.

Thank you, Sandy, and good afternoon to everyone.

For today's call, I will review the financial highlights of our first 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 second quarter of 2005.

Once Bob is done with his statements, John, Bob and I will answer your questions.

Regarding our first quarter results, revenues were 1.35 billion, an increase of 10% over the first quarter of 2004, and a 9% sequential decline from the fourth quarter of 2004.

By segment, distribution revenues were 1.22 billion, an increase of 10% over the first quarter of 2004, and a 7% decline sequentially.

Contract assembly revenues were 130 million, an increase of 10% over the first quarter of 2004, and a 20% decline sequentially.

From an earnings standpoint, net income decreased 11 percent to 8.6 million, or $0.27 per share, compared to 9.7 million, or $0.33 per share in the first quarter of 2004.

Q1, 2005 results include an after-tax charge of 1.4 million, or $0.05 per share, related to integration and restructuring commenced at SYNNEX Canada in the first quarter.

The restructuring amount includes 1.6 million pre-tax in severance facility exit costs and other related charges, and 500,000 pre-tax related to the early retirement of high yield convertible debt assumed with the EMJ acquisition.

Regarding our gross margins, the gross margin percentage for the first quarter was 4.37%, up 4 basis points from the prior year quarter, and up 7 basis points sequentially.

The increase in gross margins, year-over-year and sequentially, was a result of our focused effort to increase our gross margins, consistent manufacturing margins, and the addition of the higher margin EMJ business in Q4, 2004.

Despite the overall increase, distribution margins in the U.S. were slightly down year-over-year and sequentially, due to competitive pressures.

First quarter 2005 selling, general & administrative expense was 41.7 million, or 3.09% of revenues.

This compares to SG&A expense of 2.89% of revenues in the prior year quarter and 2.71% of revenues in the fourth quarter of 2004.

As noted earlier, SG&A expense includes 1.6 million in restructuring related charges.

Without these charges, SG&A expense would have been 2.97% of revenues in the first quarter of 2005.

The increase in our year-over-year and sequential SG&A percentage was primarily a result of the EMJ acquisition and higher deferred compensation expense.

Operating income for the first quarter was 17.3 million, or 1.28% of revenues.

This compares to 17.6 million, or 1.44% of revenue in the prior year quarter.

Without the restructuring charge, operating income was 19 million, or 1.41% of revenues.

From a segment basis perspective, distribution operating income was 13.9 million, or 1.14% of revenues, and assembly operating income was 3.4 million or 2.63% of revenues.

Without the restructuring charge, distribution operating income was 15.6 million, or 1.28% of revenues.

Other expense consisting primarily of financing fees, net foreign currency losses, and net of miscellaneous income; increased by approximately 500,000 over the prior year quarter.

Higher financing fees and florie (ph) fees, along with the Canadian debt restructuring costs, were offset by lower foreign currency losses, and higher deferred compensation-related investment income.

Our tax rate was approximately 38% for the first quarter, which is within our expected range of 37 to 39%; of which the final percentage is primarily dependent upon the percentage mix of earnings from the geographies we operate in.

Regarding our balance sheet metrics: accounts receivable totaled 575 million at February 28, 2005; which includes approximately 119 million associated with our off balance sheet accounts receivable securitization program.

DSO, including the off balance sheet program, was approximately 39 days.

Inventory totaled 382 million at February 28, 2005.

Inventory days were approximately 27.

Including a DPO metric of approximately 31 day, our first quarter cash conversion cycle was 35 days.

Despite the shortfall on expected revenue, we maintained solid balance sheet metrics compared to prior quarters.

Other first quarter metrics of note, depreciation expense was 1.2 million, amortization expense was 1 million, capital expenditures were approximately 2.5 million.

Capital expenditures were higher than expected, as we purchased the land associated with a building we already own at our UK site during the quarter.

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

From a distribution product line standpoint, peripherals accounted for 30 to 34 percent of our sales, system components accounted for 20 to 24%, IT systems accounted for 27 to 31%, software accounted for 11 to 15%, and networking accounted for 2 to 6%.

In our contract assembly business, from a customer mix standpoint, approximately 91% of our business was from our primary customer, Sun Micro, and approximately 9% was from all other customers.

HP at approximately 28% and IBM at approximately 11, were the only vendors accounting for more than 10% of sales during the first quarter of 2005.

Full-time equivalent head count was approximately 2,450 at February 28, 2005.

This amount consists of approximately 2,005 permanent employees and approximately 445 temporary personnel.

Moving to our second quarter 2005 expectations.

For Q2, 2005, we expect revenues will be in the range of 1.3 billion to 1.35 billion, net earnings will be in the range of 9.35 million to 9.95 million, and earnings per share will be in the rage of $0.30 to $0.32 per share.

These forecasted earnings per share figures are based on an approximate weighted average diluted share count of 31.1 million and do not include any impact of stock option expensing, special charges, or restructuring amounts that could be incurred; including ongoing activities at our Canadian subsidiary.

These outlook amounts assume that the previously announced sale of our Japan subsidiary will close by the middle of April, 2005.

And does not include the gain we will recognize for this transaction.

Over the past three years, our Japan subsidiary contributed approximately 40 to 45 million in sales in our fiscal second quarter, and from break-even to a $0.005 per share of profit.

Based on the current run rates and forecasts, SYNNEX Japan would have contributed approximately $0.01 per share to slightly higher in Q2, 2005 if not sold during the quarter.

Other aspects of the Japan transaction to note: prior to the close of the acquisition, we'll receive an approximate $7.5 million dividend from SYNNEX Japan that will lower our unconsolidated investment in Japan to approximately 2 million.

We will sell approximately 90% of our ownership in SYNNEX Japan in exchange for 8,603 shares of MCJ Company, a public entity in Japan.

Based on the recent closing price of MCJ stock, the value of the stock received is approximately 20 million.

Based on this valuation, the Company will record an after tax gain of approximately 12 million from this transaction in the second quarter of 2005.

This gain is subject to change based on final accounting of the transaction, the stock price of MCJ upon closing of the transaction and the ultimate proceeds received upon any liquidation of the MCJ ownership.

Once we have recorded the investment in MCJ, subsequent changes in MCJ's market value or results of operation could result in non-operating gains or losses in future periods.

All of these statements are forward-looking and actual results may differ materially.

Finally, before I turn over the call to Bob, I want to acknowledge that we did experience a break-in at our Los Angeles distribution facility that occurred over the past weekend.

Based on preliminary estimates, an amount of product in the low single-digit millions was stolen.

We do not have full information regarding the theft at this time, and are working actively with law enforcement to investigate this crime.

However, currently, our facility in Los Angeles is fully operational and, based on what we know today, we expect that we will recover the majority of our loss from insurance providers.

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

Bob?

Thank you, Dennis.

Good afternoon, everyone.

Since we visited just a few weeks ago, during our updated earnings guidance call, and then our results came within our updated ranges, I'm going to limit my comments on Q1, 2005 results; as the reasons for the shortfall that we discussed at that time have not changed.

To recap our-- our prior call, our revenues and earnings for Q1, 2005 were less than our original expectations due to three primary reasons: One, increased competition in our core distribution business, coupled with a mild reduction in demand versus our expectations.

Two, supply shortage in our assembly business, which since have been resolved.

And three, less than expected results from our Canadian business due to slower to realize acquisition synergies from our recent combination of with EMJ in Canada.

Regarding our Canadian distribution business, we have been very actively working to improve the expense structure of this business, and expect it to do so through the next few quarters.

We're also encouraged by the fact that we are starting to see a return of some of the lost business from the integration.

By the end of our fiscal year, we're expected to realize the benefits of our EMJ transaction.

Despite our challenges in the quarter, we still have many bright spots including 10% year-over-year growth in our core distribution business, increased overall gross margin percentage and a strong balance sheets management.

Now, let me comment on the guidance Dennis provided earlier.

The overall IT demand environment in North America is more challenging than last year, and the IT distribution channel continues to be very competitive; especially in our core product sets that we sell.

Also after a very strong March to-date, we are taking a conservative view of our assembly business for the balance of our quarter as revenue visibility is somewhat limited at this point.

This limited visibility, coupled with the typical seasonal declines in Canada, has caused us to be cautious in our overall guidance released today.

As Dennis also noted, our guidance does not include a full quarter of our Japan subsidiary, as we're expected to complete the sale of our majority stake in SYNNEX Japan by the second half of April.

Our reasons for the sale of SYNNEX Japan were as follows: First, we were not a market leader in the Japan IT distribution space and, after several attempts, did not see it pass to the leadership.

Second, the returns, although improved in recent months, from SYNNEX Japan were less than we desire.

Third, it allows us to focus on our mass market business where we think we can generate a stronger return.

And lastly, we believe we received a good value for the entity.

Since the stock received is restricted, the ultimate cash profit on this sale will not be determined for at least one year; however, given our low investment base, we should see a very good return from this transaction.

With this sale, SYNNEX will be more North American-focused than ever.

That's a geography that we have always said that we think we can generate the strong returns in, this does not mean that North America will always be our only focus; rather, the Japan sale allows us to pull back and take a look at where we think SYNNEX should be doing business over the long-term.

As we discuss, address and invest in markets to serve moving forward, including enterprise, Auto ID POS services, and consumer electronics; we will, more so than ever, ensure we have the best cost structure in the business by leveraging our global support operations.

Regarding our U.S.

Auto ID POS efforts, we did achieve the early success we planned for.

Just like all other new investments, slowly but surely progress is being made.

We continue to believe the focus -- focusing on the GPE ratio will deliver long-term growth and consistent possibilities.

Excluding the restructuring charge, ROTP for Q1 was 1.47; a very solid figure in our industry.

I would like to close by saying we recognize that our growth momentum has slowed, when looking at our actual numbers for Q1 and our forecast numbers for Q2.

This is because, one, a very competitive market.

Two, slower-than-expected market growth.

Three, our decision to not participate in approximately a few hundred million dollars revenue per year that we determined to be unprofitable for us.

We accept these facts as a challenge to continuously innovate and change our business model to such that, over the long-term, we grow our business faster than the competition and the market.

Also, we are still a very profitable company.

Now with 71 consecutive quarters, and that we are confident about our ability to deliver economic returns to our shareholders in the long run.

Finally, as always, I do want to extend my appreciation to our dedicated employees base, for their hard work in a very competitive market.

And my special thanks to our Japanese associates for generating a good return in our-- on our investment we did 10 years ago.

And on behalf of SYNNEX, many thanks to our loyal customers and vendor partners for their continued support.

Thanks again for your time today and your interest in SYNNEX.

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

Okay.

Thank you, Bob.

Operator, we're now ready to open the lines up for questions.

[Operator Instructions].

Joel Wagonfeld, First Albany.

Three, please, if I may.

Number one, on the revenue guidance, it seems to, at least by my calculation, suggest either a very modest snap back in terms of sequential growth in your assembly business and/or a sequential decline in your distribution business.

I was wondering if you could comment on that.

I was expecting a little bit more robust improvement in the assembly business based on your comments last quarter that you expected to recoup some of the business that had been pushed off.

Number two, I was just wondering, I might have missed it.

The 1.6 million charge goes back into SG&A for pro forma, where does the 0.5 million charge go?

And then number three, it sounded like you walked away from some business, and I was just wondering, is it still mostly tech data that's driving the competitive dynamics?

And if so, are there any particular segments in which you're seeing that more so than others?

Joel, it is Dennis here.

I'm going to answer the second question first.

The 1.6 million does go into SG&A, and the 500,000 goes into the other expense.

And I'm going to let John take the guidance question on the assembly business that you talked about.

Yes, Joel, I think we mentioned last time that we had some difficulty with components that did come back with a very strong March, as Bob said.

And we are -- we are looking at a conservative view for the rest of the quarter simply because we can't see-- see from this point exactly the visibility for the full quarter.

So is that assembly business supposed to -- expected to be up sequentially, though, in the quarter?

Yes, Joel, we don't obviously guide on the individual segments of our business, but we don't expect a significant change in that business quarter-over-quarter.

Okay.

And Bob will handle the last question you had.

Joel, as far as the unprofitable business we decided to not participate partly, certainly as you indicated, the tech data is driving that.

There are -- there are also another-- some risky business we didn't think we should participate in, and we terminated that relationship over a year ago.

I'm sorry, it wasn't -- well, six months ago.

I'm sorry.

I'm sorry I missed that last point.

Can you say that again?

I said the second piece of the reasons we decided to not participate, we terminated about six months ago.

Okay.

And were there any particular product segments or geographies where you walked away or was it kind of across the board in a number of different cases?

These are pretty much all in North America.

So --

Keith Bachman, Bank of America.

Hey, Dennis, I got a couple things.

I'm a little confused on the Japanese subsidiary and the sale.

If the revenue was, in that business, is roughly 40 to 45, you excluded that from your guidance, right?

I mean I'm unclear about how this transaction is being structured impacting your guidance.

Maybe we should just start there.

Okay.

Let's start with that.

In our guidance we're expecting that that transaction will be completed in the middle of April, so in our guidance we're including one-half of a quarter of typical Japan revenue.

Okay.

And then how -- it seems a pretty significant change from your normal seasonal patterns, because then you're-- depending on how that one-half of Japan comes in, your guidance is going to be down pretty substantially on the net overall business.

Let's assume that the assembly business is flat quarter-to-quarter, or something like that.

It's a pretty significant seasonal downtick from March to June.

How should we be thinking about that?

That seems more draconian than what we're hearing from some of your competitors.

Well, these-- these are the reasons that we -- I said already to you, Keith.

Yes, it doesn't make sense to me.

I mean I heard what you said about more competition.

Is there any specific area that seems to stand out?

Or am I wrong about my assumptions on the assembly business being flat?

Given that at Sun that seems a pretty reasonable to conservative assumption.

I think your assumptions on assembly is fine.

There is nothing wrong with the assumption.

I think the overall environment-- environment, as I mentioned earlier, is challenging, from the demand -- a demand perspective.

And third, as I mentioned to you, also earlier, that there's a huge, you know, a few hundred million dollars per year reasons we decided not to participate.

So from the revenue perspective, it does translate into pretty high gross percentage.

Okay.

But forgive me, but I would assume that each and every quarter there is usually some business that you decide not to pursue, and I would think that would be part of your ongoing business, that you walk away from-- from opportunities where you think it's low marginal or negative marginal impact to your profitability.

No, these two particular accounts that we're talking about are very sizable and we made a management decision to do that.

Okay.

Let me try one more, Dennis.

The restructuring charge for Canada obviously had an impact this quarter.

Why shouldn't we take that into account for -- as part of your ongoing business?

In other words, is this going to translate into ongoing charges that we're going to see from the Canadian integration?

You'll likely see another restructuring event as part of our continued efforts in Canada this quarter.

But past this quarter, that should not occur.

And any sense on the magnitude of that?

Somewhere in the range of the first quarter.

Obviously on the SG&A line, we don't expect any additional debt refinancing restructuring charges in Q2.

So over $1 million in charges associated with that?

That's a fair statement.

Okay.

And then what gives you the comfort that it ends there?

We think that our -- from the expenses point of view we think is pretty much in line with what our expectations should be, number one.

Number two, as I indicated earlier, we begin to earn-- to earn back some business that we lost during the integration.

So the combination of both we believe that that should be over.

Brian Alexander, Raymond James.

Hi, this is Bob Gruendyke filling in for Brian.

It looks like, excluding the restructuring charge, expenses seem to be pretty flat sequentially; despite 130 million drop in revenue.

Should we view that as evidence that you've reached a ceiling maybe in terms of flexibility in reducing expenses?

Or is it something where the revenue softness happened so late in the quarter, and then you couldn't exit -- or maybe you're exiting the quarter lower but not low enough?

Yeah, Bob, this is Dennis.

Your answer at the end is partially true.

Obviously, the revenue short fall came near the end of the quarter.

Accordingly, the expenses couldn't be reduced as quickly as we would like.

That's one.

Two, we didn't know we had higher deferred compensation expense.

Once again that's not an affect our bottom line because the opposite comes out in the net -- the other income line as income, but it was higher than the prior quarter and prior year.

That is two.

And then our restructurings in Canada were more toward the end of the quarter.

So those savings from that restructuring will be in future quarters, not necessarily in the quarter.

The totality of those is why the expenses were relatively flat compared to the revenues being down over last quarter.

John Coyle, JMP Securities.

First, could you, Bob or John, go into a little bit more detail about your statement of seeing a weaker demand environment?

Obviously, the increased competitive environment exists, but could you explain what you're seeing from the end customer or the end resellers, and what -- the sentiment you're getting from them?

I guess-- what we saw is that last year, probably due to the -- the Y2K replacement, we saw a pretty strong business on the IT side of that.

You saw that too.

And we just don't see it this year.

That's basically, you know, our -- our observation.

Have things changed in any way from the beginning of the year until now, into March materially?

Or has it been pretty much the same?

It generally always is slow, because of seasonality.

February picked up a little bit, March, slightly up, but it's nothing we feel very comfortable with.

Okay.

Moving on to EMJ, can you give an update on the progress you've made in terms of extending its-- its line card, particularly in the point of sale business, beyond Canada?

Yeah, I think we are getting more support from-- from our vendors and that's what I said earlier, we're encouraged how we are seeing more progresses in that area.

But to have any significant impact, it will be-- take a long time.

Okay.

So does that mean that you have authorization now to sell those products?

That's correct.

You do have that already?

We do, yes.

Peter Barry, Bear Stearns.

Bob, given where we sit right now, is there any reason for us to assume that the competitive environment isn't going to get more intense?

And the market share question, I don't think was asked.

Is that competitive pressure beginning to affect your market shares?

Are they down?

All right.

Two questions, Peter.

I think we -- from our competitors point of view, I think pricing was not as bad as the first part of this quarter, the calendar quarter, but it's complete -- it didn't go away.

I think there's still some residual effects out there.

Your second question as far as does that impact our market share, because of the size we are now, to continue to gain the type of market shares that we did or growth rate we had, it's not possible.

And we talked about this many quarters ago.

And are we losing share?

I don't think we're really losing market share.

I don't think we are gaining market share as fast as we did in the last few years.

Another question having to do with the demand side of the equation, clearly last year, the momentum, demand momentum seemed to mount as the year progressed.

That's, it seems, going to make the year comparisons that much more difficult this year and it's quite possible, at least per my model, that Q4 is down year-to-year.

Would any of that be incorrect, Dennis or Bob?

Are you talking on a macro level or a SYNNEX level?

SYNNEX level.

But I would like to ask you about, you know, the overall climate as well.

The overall climate right now, Peter, we don't have a good visibility, as we mentioned earlier.

So, you know, the -- the coming quarter will be very good.

And I don't know how we're going to be able to comment on the Q4.

Dennis, can you shed any --

Yes, obviously we don't project out past what we've talked about in our press release and our conference call today.

You know, as Bob spoke about, you know, we -- and I'm going to also mention the -- earlier it was mentioned that the demand environment was weak.

We haven't said.

What we said is it's more challenging on a year-over-year basis growth-wise than we expected to see this year.

That, along with a more competitive environment, and us separating ourselves from some low margin business, has caused our estimates to come down.

Is there any reason for us to believe that any of that will change over the next six months?

I think as Bob has talked about, we recognize what's in front of us, we recognize the change in the market and changes versus our expectations.

We're obviously investing in new businesses, the enterprise business which, maybe John can comment on in a second here, the Auto ID POS in the U.S.

So we're investing in those businesses and others, trying to invest in our assembly business as well.

So we recognize the challenge, and we do recognize the challenges in the distribution marketplace.

We're taking a look at those and trying to, obviously, grow our revenues accordingly.

So John, do you want to make a comment on the enterprise business, how we're doing there?

In the enterprise business, we are-- we're really pleased with the progress we're making right now in enabling us to move into that business, the solutions business.

We continue to add vendors and you have seen those announcements and we'll continue to make those announcements throughout this quarter.

Our certifications and our sales training are going well.

You know, it's going to be some time before those become significant in terms of an earnings impact, but we think of them as a long-term investment and are pleased with where we are right now.

You know, Peter, you opted to look at our cost structure.

I think we still have a very, very strong structure relative to competition and I think we are at the point, wanted to make a decision that we're going to pick the good business and make sure that our GP is right and moving forward.

Bob, if I may, my final question, could you put a little color on the Auto ID POS initiative?

It sounds like ScanSource was your cross hairs?

And if so how do you break into that business, given the very strong and very deep relationships that they appear to have?

You know, we do not underestimate the ScanSource abilities and their market presence.

And we just need to work hard.

We got a very strong relationship with our customers.

We got, again, a very efficient model.

We think we will be gradually getting some business.

Will that be a measurable amount of business in fiscal '05?

Or is that more '06?

Yes, it's probably -- it will be more '06 out.

Carter Shoop, Deutsche Bank.

Another question on end demand.

On your last conference call, when you guys pre-announced, it appeared -- or it seemed that your tone in regards to end market demand for the -- this upcoming quarter and the rest of the year was a little bit more optimistic than it is now, despite the fact that you said March did pick up.

So I guess what I'm trying to better understand is did March really pick up in a meaningful way, or was it more in the components business as a result of the third month of one of your customers' quarters there?

I guess it's a combination of a few factors.

One is that we look on a daily basis on the -- in terms of daily shipments in March is slightly better than February, but not like what we saw a year ago.

Then if you have any --

You know, you kind of went back and forth there.

Bob's commented on the distribution side and then you also mentioned on the assembly side as well.

As we talked about, we did see the step-up in the March month versus February and that likely due to the traditional quarter end.

And once again, as far as our outlook in the rest of the quarter, we're a little cautious on that based on what we see right now.

Okay.

So it sounds like March, at least for the contract manufacturing division was more or less in line with expectations-- for the month of March?

For the month of March, you can make that assumption that's correct.

Brian Alexander, Raymond James.

Hi, Bob again.

If we excluded Canada from the whole equation and focused on U.S. distribution revenue, maybe--t was the U.S. significantly higher?

Is that something that you can quantify?

We did state in the script that the U.S. core distribution was up 10% year-over-year.

[Operator Instructions].

Benny Lorenzo, Aspira Capital Management.

I'm sorry if this question was asked, but can you give us a sense of your geographic revenue distribution in North America, Europe?

Yes, the substantial majority of our distribution business is in North America.

Primarily U.S. and then Canada as well.

So U.S. is like 90%?

U.S. is a significant part, but we don't break down the percentages between U.S. and Canada.

Okay.

So that's the answer.

The other question that I had is, in terms of your -- your enterprise business, versus the other segments that you have, could you talk a little bit more about that?

Is that -- the enterprise business, getting better, worse?

Give us a sense, because as you're hearing these questions, we're also wondering why is it that things are slowing down.

It appears that they're slowing down.

From an enterprise standpoint, Benny, we are just implementing an enterprise solutions business at SYNNEX.

It is an investment business for us.

And we're focusing on networking security and storage, just initially getting started building the certifications and so forth.

I think if you'd been involved in previous calls you would have heard about a minority investment in MicroLAN to provide engineering support and so forth.

So, again, we don't break that business out, but it is-- it is in its infancy and we're looking at it as a long-term investment business that will pay us in the future as we change our business model.

Okay.

And what about the rest of your business?

You know, your core business?

Is that -- is that just -- is it just more difficult to figure out whether things are getting weaker or stronger?

What's going on?

I still -- I've been listening to the call and I still can't pinpoint it in terms of the message you're trying to give us.

Well, the message is -- I think we -- last time we said this something probably just only a few weeks ago.

The -- there are still a lot of activities on the SMB market, you know, if you're talking about more enterprise market, it's not as active as SMB.

And you probably know the federal side of that, this is not the season for federal purchases, either.

However, the states and locals should start to pick up, will start, you know, around April, May, time frame.

And then you see education follow after that.

So I don't think there is anything particularly wrong, you know, with what we are saying or what we see in the market per se.

I think based on what we see the visibility right now, we're just a little bit more cautious than the last time we talked.

Okay.

That's fair enough.

And one last question.

In terms of vendor-- I don't know if I should call them rebates or just vendor funds coming back to you, have there been any changes there?

Have they cut, you know, have they reduced those or increased them?

Very good question.

It will never be enough.

Never enough for what you do.

At this time, I show no further questions.

Okay.

Thank you very much.

This concludes our first quarter earnings conference call, and I thank all of 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 April 12, 2005.

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.

Conference id is 670930.

Thank you for your participation today.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may now disconnect.