新聚思 (SNX) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SYNNEX Corporation second quarter conference call. (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.

Ma'am, you may begin your conference.

Good afternoon, and welcome to the SYNNEX Corporation fiscal 2005 second 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, 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 current expectations of our revenue, net income and earnings per share for the third quarter of fiscal 2005; our business focus and investments; results and benefits of the MCJ transaction; our capital expenditures; competitive pricing; and our growth and business strategy.

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-Q, for information on risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements.

To supplement the Company's consolidated financial statements presented on a GAAP basis, SYNNEX uses non-GAAP additional measures of operating results, net income and net income per share adjusted to exclude the results of the sale of the Company's ownership with SYNNEX Japan.

These adjustments of the Company's GAAP results are made with the intent of providing both management and investors a more complete understanding of the underlying operational results and related trends.

The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared in accordance with generally accepted accounting principles in the United States.

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 the call over to Dennis.

Good afternoon.

For today's call I will review the financial highlights of our second quarter performance, and then I will turn the call over to Bob to share his comments on the quarter and on our expectations for the third quarter of 2005.

After Bob's comments, John, Bob and I will answer your questions.

Before I begin reviewing the numbers for Q2 2005, I would like to inform you that I will be providing GAAP and non-GAAP results today, as we have reported the results of our Japan operations prior to its sale on April 19, 2005 as discontinued operations in our GAAP income statements.

This treatment is in accordance with recent accounting pronouncements.

Thus, when I discuss GAAP numbers in any period, it will be without Japan operations.

And when I discuss pro forma or non-GAAP numbers, which is what we based our guidance on, it will include Japan's operations through April 19, 2005, the date the Japan sale was completed.

In addition, I will provide more information later in this call about the details of the Japan sale.

Regarding our revenues.

Total GAAP revenues for the second quarter of 2005 were 1.35 billion, an increase of 9% over the second quarter of 2004 and a 3% sequential increase from the first quarter of 2005.

Total non-GAAP revenues, including the Japan operations for the second quarter, were 1.37 billion, an 8% year-over-year increase and a 2% sequential increase.

By segment, GAAP distribution revenues were 1.21 billion, an increase of 12% over the second quarter of 2004, and 3% sequentially.

Total distribution of revenues including the Japan operations were 1.24 billion, an increase of 10% over the prior year, and 1% sequentially.

Contract assembly revenues were 135 million, a decrease of 10% over the second quarter of 2004, and a 5% increase sequentially.

Second quarter GAAP net income, including all aspects of the sale of Japan and its operations through April 19, was 22.4 million, or $0.72 per share.

From a non-GAAP standpoint, which includes the operations of Japan through April 19, 2005, and excludes the gain on sale of our Japan subsidiary, and associated subsequent mark-to-market gains, and the stock received from the sale, net income was 9.5 million, or $0.31 per share, which is in line with expectations.

Comparable to Q2, 2004 profit was $0.34 per share.

Moving onto gross margins, the GAAP gross margin percentage for the second quarter was 4.2%, up 4 basis points from the prior quarter, and down 9 basis points sequentially.

Including the Japan operations for the quarter, the gross margin percentage was 4.25%, up 3 basis points from the prior year, and down 12 basis points sequentially.

The sequential decline for GAAP and non-GAAP in gross margin percentage was primarily due to a decline in U.S. distribution margins in the first half of our quarter.

This decline was due to competitive reasons and was a carryover from the end of our first quarter.

We did see, however, an improvement in our U.S. distribution margins towards the end of Q2, as we continued to balance revenue growth against profitable business.

Second quarter 2005 GAAP selling, general and administrative expense was 38.2 million, or 2.83% of revenues compared to 2.65% of revenues or 32.7 million in the prior year quarter.

Including the Japan operations for the quarter, SG&A was 39.3 million or 2.87% of revenues compared to 2.74% of revenues, or 34.9 million in the prior year.

The increase in SG&A expense in dollar and percentage terms for GAAP and non-GAAP, was primarily due to our acquisition of EMJ Q4 2004, continued investments in new selling initiatives and deferred compensation expense.

GAAP operating income for the second quarter was 18.4 million or 1.37% of revenues compared to 18.5 million or 1.51% of revenue in the prior year.

On a non-GAAP basis, including the Japan operations for the quarter, operating income was 18.9 million or 1.38% of revenues compared to 1.48% of revenues or 18.9 million in the prior year.

From a segment basis perspective, which I will do on a GAAP basis only, as the differences between GAAP and non-GAAP are not significant, distribution operating income was 14.4 million or 1.19% of revenue, compared to 14.4 million or 1.33% of revenues in the prior year quarter.

Without the effects of deferred compensation expense, or in the case of last year a benefit, the distribution operating income percentage was down less than 10 basis points year-over-year.

Assembly operating income was 4 million or 2.93% of revenues compared to 4.2 million or 2.78% of revenues in the prior year quarter.

Despite the anticipated decrease in our assembly revenue year-over-year, we did improve our return on revenue quarter over quarter as we added higher margin business to our assembly revenue mix over the past year.

Moving on to interest and other expenses.

Starting in Q2 and updated for prior period comparisons, we will present interest, securitizations, and foreign fee expense, net of interest income, on one line, and all other expenses net on a separate line.

We believe this will give investors a clearer view on the cost of financing our business.

Regarding interest expenses and finance charges on a GAAP basis, the total was 3.5 million in Q2 2005, an increase of 1.8 million over the prior year.

An overall higher interest rate environment, increased business, and higher debt levels in our Canadian subsidiary due to the EMJ acquisition was the primary causes of the increased expense over the prior year.

Non-GAAP amounts were not significantly different.

From a continuing operations standpoint, our tax rate was 38% for the second quarter, which is within our expected range of 37 to 39%.

Regarding the sale of our Japan subsidiary, as of April 19, 2005 we sold approximately 93% of our ownership of SYNNEX Japan to the MCJ Company, a public entity in Japan, in exchange for 8,603 shares of MCJ stock.

Prior to the closing of the acquisition, SYNNEX received an approximate $7.2 million dividend from SYNNEX Japan.

Based on the closing price of MCJ on the sale date, net of expenses, this sale resulted in an approximate $12.3 million gain or $0.39 per share after-tax.

As the MCJ stock is classified as a trade security for GAAP purposes, we will report mark-to-market gains and losses in our income statement based on the closing price of the MCJ stock at the end of each of our quarters moving forward.

For Q2 in our GAAP financial statements, this gain was approximately $560,000 net of tax, and is recorded in the other income expense line.

We are currently in the process of attempting to protect our gains on the MCJ stock and expect, as a result of this process that we will ultimately realize a majority of the initial profit recorded on this transaction.

Regarding our balance sheet metrics.

Accounts Receivable totaled 468 million at May 31, 2005, which includes approximately 140 million associated with our off balance sheet accounts receivable securitization program.

DSO, including the off balance sheet program was approximately 36 days.

Inventory totaled 374 million at May 31, 2005.

Inventory days were approximately 26.

Including a BPO metric of approximately 26 days, our second quarter cash conversion cycle was 36 days.

Other second quarter metrics of note all GAAP based, depreciation expense was approximately 1.2 million.

Amortization expense was approximately 1 million.

Capital expenditures were approximately 1.5 million.

Capital expenditures are expected to be a similar amount in Q3, excluding the expected purchase of our corporate headquarters building, which will occur in Q3 and total approximately 12 million.

From a distribution productline standpoint, peripherals accounted for 31 to 35% of our sales.

System components accounted for 19 to 23%.

IT systems accounted for 28 to 32%.

Software accounted for 10 to 14%, and networking accounted for 3 to 7%

In our contract assembly business from a customer mix standpoint, approximately 94% of our business is from our primary customer, Sun Micro, and approximately 6% 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 second quarter of 2005.

The IBM percentage includes the sales of Lenovo products which became a separate legal entity during Q2 '05.

In future quarters we will only report IBM or Lenovo sales as they individually exceed 10%.

Full-time equivalent headcount was 2,418 at May 31, 2005.

This consists of 1,949 permanent employees and 469 temporary personnel.

Moving onto our third quarter 2005 expectations.

For Q3 2005 we expect revenues will be in the range of 1.36 billion to 1.41 billion.

Net earnings will be in the range of 9.8 million to 10.4 million.

And earnings per share will be in the range of $0.32 to $0.34 per share.

These forecasted earnings per share figures are based on an approximate weighted average diluted share count of 31 million, and do not include any impact of stock option expensing, substantial charges or restructuring amounts that could be incurred, including ongoing integration activities at our Canadian subsidiary, or gains or losses on our investments in MCJ.

Regarding our continued Canada integration activities, we postponed the closure of one of our Canadian facilities until Q3.

Thus did not incur any material restructuring charges as expected this quarter.

We do expect to incur a charge in Q3 2005.

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

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

Good afternoon to everyone.

Overall I am pleased with our performance in the second quarter, successfully delivering higher revenue results than our guidance, and net income within the expected range.

Regarding our Q2 results, I would like to highlight the following three areas.

First of all, our U.S. distribution business continues to be strong despite the competitive pricing pressures that occurred in Q1, and which extended into the first part of Q2.

As we discussed on the last call, SYNNEX made the decision to not participate in some regions which was very high volume, but not profitable.

While our revenues decreasing -- decreased as a result of these decisions, and with IT market not being as robust as last year, I am still pleased that we had reasonable topline growth in gross margins in spite of these circumstances.

Secondly, on our Canadian distribution business, with the restructuring efforts from the EMJ acquisition finishing up in the third quarter, and expense structures become more in line, we're now experiencing the beginning of expected synergies from the EMJ acquisition.

A positive sign regarding this point is that in the month of May we achieved for the first time revenue at the levels the two companies did separately prior to the acquisition.

More importantly, the combined entity began to generate accretive bottom line.

This achievement is not just from recovering lost revenue, but also gaining from the combined value propositions of the two companies.

Finally, on our timber business, while we did experience unexpected year-to-year declines and a slight sequential increase in revenues, I'm excited that our long-standing business, which includes a high-end solar built (ph), blade storage, and security appliances, is starting to contribute higher gross margins.

By leveraging our distribution relationships we expect to see further growth in this area.

From an overall market and a channel perspective, the distribution marketplace is still very competitive.

The IT demand, though not robust as last year, we expect it to remain relatively stable.

In the product categories that we sell, we saw continued strength in notebooks and fillers (ph) this quarter.

We have also seen improvement in our software and networking businesses as we continue to focus on our growth in these product segments.

As far as the slower growth categories, our printer business did experience a downward pressure in the quarter, reflecting the overall ASP decline; however, there is a growth in the color and multifunction printers.

Now let me comment on the guidance Dennis provided earlier.

Taking the midpoint of our range, which essentially is comparable to the prior year quarter, given the buy and sell of the EMJ and Japan businesses, our guidance suggests a slight increase in revenues year-over-year and sequentially.

This can be attributed to three primary reasons.

One, our assembly revenues will decline sequentially and year-over-year as we expect it to move through normal product conditions with our main customer, Sun.

However, we do expect that we will see continued growth in some long-standing product customers.

Two, our fiscal Q3 is the lowest seasonal period in Canada.

And as this business becomes a larger portion of our total sales, it is more apparent in our Q2 to Q2 comparisons, especially sequentially Q2 to Q3.

Three, overall we plan to continue to grow faster than the market, and to focus on customers to which we can add economic value.

This is especially evident on our topline, as in the prior year we were still doing the high volume and low profit businesses, as I noted earlier.

Our guidance is also reflective on the top and bottom line of the fact that we are continuing to make many investments in all of our business geographies and segments.

This investment, i.e. in growing our gross margins, integrating the EMJ acquisition in Canada, entering the auto ID POS market in the U.S., building on enterprise and solution distribution business, and diversifying our assembly business, are currently having a downward effect on our overall P&L.

However, we are working diligently to enjoy accretive (indiscernible) from this investment soon.

As it always has been, we will continue our strong emphasis on achieving a GP ratio that is a benchmark to our industry.

Our GP for Q2 was 1.48, once again representing strong performance in our industry.

We are also pleased to be the lowest cost operator in this industry as well.

In closing, I would like to point out that our performance in the second quarter marks our 72nd consecutive profitable quarter.

And once again, reflecting our confidence in our ability to deliver stolid economic returns to our shareholders over the long term.

Finally, as always, I want to extend my thanks and appreciation to our loyal customers and vendors for their continued partnership and support, as well as our employees for their dedication and hard work.

Thank you again for your time today and interest in SYNNEX.

Let's now turn the call back to the operator for questions.

Please open up the lines for questions.

(OPERATOR INSTRUCTIONS).

Brian Alexander of Raymond James.

I just wanted to revisit the gross margin issue.

You talked about pricing is getting better through the quarter.

But I guess I'm surprised that the gross margins stepped down as much as they did sequentially.

I guess the first question is, should we assume that all of that sequential decline came out of the distribution segment, given your comments about pricing and the fact that the assembly margins were up sequentially?

And then I guess given the improvement throughout the quarter on the distribution side, would we expect gross margins to be up sequentially in the August quarter?

This is Dennis.

Regarding the reduction from Q1 to Q2, you can assume that was all from the distribution business.

And for the reasons we talked about on the call, i.e. the competitive aspect of the business in the first part of the quarter.

And then second of all, looking forward we expect gross margins to be in the approximate range they were in Q2.

Just, I guess, generally if we sort of compare how you're feeling about the business now to a quarter ago, it sounds like on the pricing front you feel modestly encouraged relative to the pressure you saw a quarter ago.

And then I just wanted to better understand how you feel about the demand environment.

Would you say you feel better, worse or the same as you did three months ago?

This is Bob.

I don't really think there is a huge change on the demand environment.

As far as how do we feel about overall, I think we feel much better today than three months ago.

We feel we have much better control.

We have much better licensing (ph) in Canada.

Our enterprise -- the new business investment are starting to take off shape.

And as I mentioned earlier, even the assembly side of that, we see a very, very nice attractions coming from this new synergies I was talking about between the solutions and the manufacturing side of that.

And particularly for the product -- (indiscernible) what we talked to you a few quarters ago, about the consumer side of the system, which is much more cyclical.

This type of solar (ph) and blades, appliances, particularly the appliances, are a growing business, and very nice given the business we are in.

Then just two final questions.

One, on the components business, as a percentage of your the revenue continues to step down, is there any change in strategy there that we should know about?

I'm just trying to understand a little bit better why that is declining as a percentage of your overall business.

And then the last question for Dennis, any sense on what the charge might be that you alluded to put for the third quarter?

I will take both of those.

As far as the first question on the decline in the components percentage, some of it is just due to shift in other categories.

But the large portion of the decline is due to the sale of the Japan business.

We excluded that business from the numbers we gave you.

And Japan was more heavy on the components side.

And on the charge, we expect the charge to approximate $1 million U.S.

Joel Wagonfeld with First Albany.

Two clarifications.

Number one, on the pricing environment, it sounded like you suggested that toward the end of the quarter you felt better about it.

And I just wanted clarify, was that because the actual pricing environment itself improved, or because of actions that you took internally to manage it better?

And then number two, just wanted to make sure I heard you correctly that the assembly business with Sun would be down sequentially.

And I'm wondering if you can give us any thoughts on the linearity of that business over the next couple of quarters?

Why don't I take the first question.

This is Bob.

In terms of the pricing, we're talking about margins, right?

We're talking -- we think the gross margin improvement in the second half of the last quarter certainly will do two things.

One, we make a lot of more decision internally.

We decide to make sure that we have discipline in certain businesses, or transactions we don't get into.

And we also see the market responded that way as well.

So it is a combination of both.

It is a very difficult job to separate which one is which one.

But we're happy, very happy about the results where we can matter.

John, do you want to take the call on the manufacturing side of that?

Sure.

I understand your question.

You were taking a look at overall looking forward.

As you well know, we give out guidance on the next quarter.

And what we are saying there is in fact we're going through some product transitions, so we will have somewhat of a decline sequentially, although we are growing the non Sun business that Bob spoke about, the high-end server, the security business, the blades storage business, and typical business like that.

So we're pretty confident that we are doing well in that business, and look forward to continued overall -- our performance in that business, especially in the margins arena.

If I could just ask a follow-up on that.

Do you feel like your share of the Sun business is remaining relatively constant, or is that any factor in how big that business is in any given quarter?

I think our shares are remaining very constant.

And we were very comfortable with our relationship with Sun.

Matt Sheerin with Thomas Weisel Partners.

We just had a couple of questions on the demand picture.

It looks like your revenue came in toward the higher end of your guidance.

I am trying to figure out where you saw it in terms of customer base.

And if you could specifically talk about the government market, because we're hearing mixed things about demand in state and local vs. federal.

Thanks.

This is Bob.

As far as the federal is a seasonality issue.

I think the people -- our general focus is weaker this time.

It is mixed signals on the state side of that.

Some we see is stronger than other states.

But overall it is not very, very robust on that.

However, we do see the VARs -- the SMB market continues to be performing pretty well.

And we see the corporate side of the (indiscernible) or enterprise part of that is looking weaker.

That is basically what I think.

Did I answer your question?

Yes.

You did.

And just going ahead, if you look at your guidance and you strip out the assembly business, it looks like you're looking potentially a mid single digit sequentially growth.

Where do you see that growth coming from?

Why don't you --.

This is Dennis.

Your assumptions are generally in line with what we are seeing.

And we see that growth coming from the areas that Bob talked about.

We are into a seasonal period of state and local business, and toward the end of our quarter the federal business.

So the general seasonal uptick there.

But we also, as Bob indicated, seeing continued growth in the SMB market.

So the combination of those two well get us to the numbers we're projecting at this point in time.

So despite the temporary slowdown in federal, you're looking at a normal seasonal demand then?

Right.

Yes.

John Coyle of JMP Securities.

Just following up on some of the demand environment question.

I wonder if you can get a little more specific on some of the new initiatives, particularly on the enterprise side, the relationship with Avaya, the Microland, and just give some comments on how those initiatives are ramping?

This is John Paget.

We have been very pleased.

We have completed our field salesforce and the certification of our field salesforce.

We have completed the certification internally of all of our internal salesforce.

And we were able this month to begin to quote many of the products that we have talked about, the HP Enterprise, the Avaya, the Quantum enterprise storage.

We have been very pleased at this point with where we are and the flow of business.

Those will start shipping some this month, some next month and on forward.

Where we are with Microland is we have been able to create some very good relationships from a tech support standpoint.

We are rolling out the monitoring and management, and have a tremendous amount of interest in remote monitoring and management.

So at this point in time, as Bob said, we're really encouraged with the investments we have made there, and we will begin to start to see the fruits of our labor.

Have there been any sales related to the remote management to date, or is it still just rolling it out?

We're just rolling it out at this point in time.

And then on EMJ, in terms of -- it sounds like things are on track in Canada.

But in terms of, I believe, last quarter you noted that you were able to get their line card, I guess validated to be sold in the U.S.

And I wanted to see what the progress has been there, and in terms of ramping the AIDC, the point-of-sale products in the U.S. market?

This is Bob.

We do have currently 29 vendors signed up with us for the U.S.

And the larger ones are Lybras (ph), Cinemax (ph), Byon (ph), etc.

So we see very good potentials here in the U.S.

Just last one, housekeeping for you, Dennis.

What was cash flow from operations in the quarter?

We don't disclose that in our conference call.

We will have that in our Q when we file that in a couple of weeks.

Peter Barry of Bear Stearns.

Bob, I was wondering if we might just try to add a little more color to the auto ID POS initiative in the U.S.

Has it moved ahead to your satisfaction?

Is it on time, on schedule?

You mentioned 29 vendors.

How many more do you think you might need to achieve a level of a meaningful presence in the marketplace?

And when do you think we might begin to see some impact from that effort in terms of the P&L?

This is Bob.

A couple of things.

In terms of the other major vendors, we (indiscernible) always working with the larger ones.

But we do see some -- the real impacts to P&L would probably we will get about a year from today.

And you can achieve what it is you hope to achieve with the vendors you have now, but will add to that number as opportunity presents, is that correct?

That's correct.

That's correct.

Bob, I was wondering if there were any notable outliers in any of the product categories as it relates to the pricing environment that you saw improve in the second half of the second quarter, either positive or negative?

Are prices generally beginning to improve, or are there isolated segments, product segments, that you would look to that are improving more so than, let's call it, the average?

I hope we will see, as you already know, that LCD, the pricing was pretty, pretty bad in the first half.

And I think we are getting stabilized in that area.

So hopefully we'll see better margin coming up on LCDs.

And I'm pretty sure you also know the storage side of that.

The hard disk was pretty bad a year ago or -- and now it is getting also better too.

Most of the areas I could see a good improvement down the road.

We are uncertain about the printer side of that because of the competitive nature we see in that particular segment.

So that is the area that we're not too sure how the margin would improve.

But overall, other than that, I think we look at it pretty positively from the notebook and the silvers (ph) and all the other -- the software side of it we engage on.

So we believe that our product portfolio should do well based on what we see today.

Dennis, is there any lingering doubt in your mind that the $1 million restructuring charge in the third quarter won't fully account for that effort?

No, there is no lingering doubt in my mind about that charge.

Richard Kugele of Needham & Company.

I guess just first, Bob, one point of clarification.

Did you mention that the enterprise was weaker in the second quarter?

I just wanted to make sure I heard you right.

And then just secondly, in the past you have talked about growing roughly 10%, or at least more than the overall distribution market.

Are you still expecting that type of a long-term growth as you focus more on profitability instead of share gains?

I think from -- as far as the enterprise goes, the enterprise side of it, what I commented the enterprise on the customer side of that, the end-user market -- end-user enterprise market I think is still somewhat weaker relative speaking, relative to SMB.

That is what we see.

And your second question is --?

The overall growth rate in -- as you have been focusing more on profitability.

Like I said earlier, we believe that we'll be continuing to grow faster than the market.

And that is just because we're so good in executions and we believe we could continue to do that.

And we're very focused on those markets.

That is the area that we feel that we could, now particularly after we sold the Japan, we can put all energies into North America.

We think we can grow faster than the market.

I guess just lastly, you commented on how pricing improved during the end of the second quarter.

Have you seen that trend continue, or at least be stable here thus far in the first part of the third quarter?

I think that is what we see today and we excepted.

Unless our competitors act irrationally, otherwise we think things should go stable.

Jeff Matthews of Graham Partners.

Is your printer weakness a price weakness or a unit weakness or both?

Like I said earlier, there are two segments.

The low end printers -- certainly I think our units are very good.

We have no issue with the units.

But the requirement is (indiscernible) such that it is hard to see the growth.

As far as the color printers, the market functional printers, I think we're doing really very well in those areas.

Do you include laser in that?

It depends on the -- the low end laser printers sell less than $99 for that.

So it depends -- it is hard -- the color -- we are talking about color color printers, color, color laser printers.

That is still laser printers.

But that (technical difficulty) had a good growth.

And is it all a customer -- is it all vendors cutting prices or is this any aggressiveness on one particular part?

In terms of low end, if the market rides the price, that is correct.

At this time I show no further questions.

I would assume that this concludes our call then for today.

And thank you everyone for joining us on the call today.

We will have a replay of this call available for two weeks beginning today at approximately 5:00 PM Pacific daylight time through July 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.

The conference ID is 723832.

Thank you everyone for your participation today.

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

This does conclude the program.

You may now disconnect.