新聚思 (SNX) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SYNNEX Corporation fiscal 2005 third quarter earnings 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. Laura Kelley, Director of Investor Relations and Public Relations for SYNNEX.

Ms. Kelley, you may begin your conference.

Good afternoon, and welcome to the SYNNEX Corporation's fiscal 2005 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, 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 fourth quarter of fiscal 2005, our business focus and investments, our capital expenditures, Canadian restructuring charges, competitive pricing, our growth and business strategy, and our overall assembly business, and our operating margins in this business.

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 our risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements.

The non-GAAP supplemental data included in our press release today and discussed on this call are included with the intention of providing investors a more complete understanding of our operational results and trends.

So it should only be used in conjunction with results reported in accordance with the generally accepted accounting principles.

The non-GAAP financial measures should enable investors to analyze the base financial and operating performance of SYNNEX and to facilitate period to period comparisons and analysis of operating trends.

Non-GAAP measures presented and discussed today or in other releases, presentations and similar documents issued by the Company exclude restructuring charges, nonoperating settlement gains or losses, results associated with the Company's discontinued Japan operations, gains or losses including foreign exchange, and the Company's equity investment in MCJ, and other infrequent or unusual items.

A detailed reconciliation of the adjustments between results calculated using GAAP and non-GAAP can be viewed in the Investor Relations section of our website.

Additionally, this conference call is the property of SYNNEX and not be recorded or rebroadcasted without specific written permission from the Company.

I will now turn the call over to Dennis Polk.

Good afternoon to everyone.

Before I begin reviewing the numbers for the third quarter of 2005, I would like to remind you that our current and prior period results from operations exclude our former Japan subsidiaries, as this business was sold in Q2 2005, and is accounted for as discontinued operations.

Total revenue for the third quarter of 2005 was 1.39 billion, an increase of 7% over the third quarter of 2004, and a 3% sequential increase from the second quarter of 2005.

By segment distribution revenues were 1.26 billion, an increase of 9% over the third quarter of 2004, and a 4% increase sequentially.

Contract assembly revenues were 128 million, a decrease of 13% over the third quarter of 2004, and a 5% sequential decrease.

The decrease was in line with our expectations as we are currently going through a product transition with our main customer.

Third quarter GAAP net income was 9 million, or $0.29 per share.

Third quarter non-GAAP net income was 10.5 million, or $0.34 per share, which is at the high end of our Q3 2005 guidance.

Comparable non-GAAP Q3 2004 net income was 10.7 million, or $0.36 per share.

Q3 2005 non-GAAP net income excludes an after-tax restructuring charge 513,000 at our Canadian operations, and a $1 million loss related to our equity holdings in MCJ Company.

The stock ownership in MCJ is a result of the sale of our former Japan operations.

As a result of an increase in the MCJ stock price subsequent to our quarter end and our hedging actions, we remain confident that we will ultimately realize a majority of the $20 million pre-tax gain originally recorded from this transaction.

As Laura indicated, we have provided a reconciliation of GAAP to non-GAAP amounts at the end of our press release issued today, as well as on our website.

In addition, all prior amounts related to our discontinued Japan operations can be found in our most recently filed 10-Q.

Regarding our gross margin, the gross margin percentage for the third quarter was 4.24%, up 20 basis points from the prior year quarter, and up 4% basis points sequentially.

As mentioned in our second quarter call, we continue to balance revenue growth against profitable business, which is the main factor in the improvement in our gross margin.

Third quarter 2005 GAAP selling, general and administrative expense was 39.2 million, or 2.83% of revenues compared to 2.59% of revenues, or 33.8 million, in the prior year quarter.

On a non-GAAP basis, excluding an $840,000 restructuring charge at our Canadian operation, our SG&A expense was 38.4 million, or 2.76% of revenues in the third quarter of 2005.

The year-over-year increase in SG&A expense in both dollar and percentage terms is primarily due to the acquisition of EMJ in Q4 2004, and continued investments in new selling initiatives.

GAAP operating income for the third quarter was 19.7 million, or 1.42% of revenues compared to 18.9 million, or 1.45% of revenues in the prior year.

On a non-GAAP basis, excluding the Canadian restructuring charge, operating income was 20.6 million, or 1.48% of revenues.

On a segment basis perspective, GAAP distribution operating income was 17 million, or 1.35% of revenues, compared to 15.7 million, or 1.36% of revenues in the prior year.

On a non-GAAP basis, excluding the Canadian restructuring charge, distribution operating income was 17.9 million, or 1.42% of revenues.

Assembly operating income was 2.7 million, or 2.09% of revenues, compared to 3.2 million, or 2.16% of revenues in the prior year quarter.

Pricing, product mix, and slightly lower volumes were the causes for the decline in our assembly operating income amounts and percentages.

With respect to interest expenses and finance charges, the total for the third quarter was 3.8 million, an increase of 2.4 million over the prior year.

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

From a continuing operations standpoint, our tax rate was 38.9% for the third quarter, which is in our expected range of 37 to 39%.

Regarding our balance sheet metrics, Accounts Receivable totaled 534 million at August 31, 2005, which includes approximately 171 million associated with our off balance sheet accounts receivable securitization program.

DPO, including the off balance sheet program, was approximately 40 days.

Inventory totaled 405 million at August 31, 2005.

Inventory days were approximately 28.

Including the DPO metric of approximately 30 days, our third quarter cash conversion cycle was 38 days.

Our cash conversion cycle is slightly higher than prior periods, but in line with expectations and within acceptable ranges.

Other third quarter metrics of note.

Depreciation expense was approximately 1.2 million, and amortization expense was approximately 1 million.

Capital expenditures were approximately 1 million.

Capital expenditures are expected to be a similar amount to slightly higher in Q4.

Also, in our prior quarter call we indicated our plan to acquire our corporate headquarters building.

Contractual issues with the current landlord have delayed this purchase, thus we will not have a capital outlay relating to this transaction in the foreseeable future.

From a distribution product line standpoint peripherals accounted for 30 to 34% of our sales.

System components accounted for 17 to 21%.

IT systems accounted for 29 to 33%.

Software accounted for 10 to 14%, and networking accounted for 4 to 8% of total distribution revenues.

In our contract assembly business from a customer mix standpoint approximately 94% of our business was from our primary customer Sun Micro, and approximately 6% was from all other customers.

HP, at approximately 27%, was the only vendor accounting for more than 10% of sales during the third quarter of 2005.

Total headcount was 2,350 at August 31, 2005.

This consists of 1,918 permanent employees and 432 temporary personnel.

Moving to our fourth quarter 2005 expectations.

For Q4 2005 we expect revenues will be in the range of 1.475 billion to 1.525 billion.

Net earnings will be in the range of 11.45 million to 12.15 million.

And earnings per share will be in the range of $0.37 to $0.39 per share.

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 impact of stock option expensing, special charges, or restructuring amounts that could be incurred, including any gains or losses on our investment in (technical difficulty).

Regarding our continued Canada integration activities, as discussed on our last conference call, we expect that the charge incurred in Q3 will be the last one related to this acquisition and the integration of the operation of EMJ.

This being said, we may incurred a small charge, likely less than $350,000 after-tax in Q4 related to the replacement of our current credit facility in Canada.

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 third quarter of 2005, improving operating income margins and delivering EPS results at the higher end of our guidance range is evidence that we executed well in the quarter.

Regarding our Q3 results, I would like to highlight the following areas.

Our U.S. distribution business continues to produce strong results, and our overall momentum in the North American marketplace continues to get better from earlier this year.

While the topline growth is not at the desirable level, we did achieve well in increasing our distribution operating income percentage year-over-year and sequentially in Q3.

Our decision last year to start to separate ourselves from a few high-volume, low profit customers appears to now be a good choice, given our overall improved margins.

Regarding our Canadian distribution business, we are very, very pleased with the results posted by SYNNEX Canada in the third quarter.

As we discussed on our call last quarter, we started to see the expected synergies from the EMJ acquisition taking hold in May, and this continued throughout the third quarter as well.

The solid execution from our Canadian team in Calgary is especially satisfying in an otherwise seasonable slow period in Canada.

Our (indiscernible) assembly business, as Dennis indicated, pricing profit mix and a slightly lower sales contributed to our lower operating margin in the third quarter.

As we continue to transition to newer platforms from our main customer Sun Micro, and as they continue to be a significant percentage of our overall assembly business, we expect that our operating margins in this business will be more in line with current results than recent higher quarters.

It has been said we are still focused on this business and are working to diversify our customers' reliance.

While we did add any significant new customers in the third quarter, our existing non Sun business performed to expectations in the quarter, and we are pleased with the execution in this area.

Now looking at the overall IT distribution channel.

Last year a very competitive marketplace though overall demand environment remains stable, and the pricing environment remains improved over the beginning of the year.

In the product categories that we sell, mobile computers and similar products have continued as our highest growing product sets.

As well, due to continued focus our software and networking categories performed well again in Q3.

On the slower growth front, the overall downward pressure on our printer business continues during the quarter as well.

Our component business has had topline pressure; however, components is an area where we have focused on profitable business versus topline growth.

In addition, as the number of the notebook shipments begins to past desktop sales, we have begin to ship our component sales resource to focus on server and storage systems, an area that we believe will show growth moving forward and is synergistic with our assembly capabilities.

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

At the midpoint of our guidance we are projecting a 4% increase in year-over-year sales.

This is not a rate we're accustomed to growing at, nor is it a rate we will accept as part of our long-term growth target.

It is reflective, however, of our continued focus on growing profitably.

Though overall maturities of the IT market and that our assembly business will likely be down approximately 20% in Q4 of this year versus Q4 of last year due to the aforementioned product transition, as well as the assembly business we had last year that will not repeat this year.

We also expect there will be at least some effect on the overall economy in the IT spending environment due to the higher price of oil.

However, hopefully this will be only a short-term issue and potentially offset by economic stimulus provided by hurricane reconstruction effort.

Despite the lower topline growth rate we're guiding to a return on sales figures that continues to be very strong versus our direct competitors.

As well, our North American distribution business continues to grow faster than the overall IT market place.

In addition to the commentary on our Q4 guidance, I also wanted to update you on our progress on investments we have been making in our business over the last several quarters.

As we have discussed, we have made investments recently in new businesses, including demand generation marketing services through BSA, the auto ID point-of-sale distribution in the U.S., and the price and the solution of distribution, and remote monitoring through our Microland investment, as well as others.

While these investments are at the various stages, we are starting to see shipments and revenues, and we are encouraged by the early progress.

While the overall amounts are still very small compared to our total revenue base, we are committed to bringing these projects to fruition.

And we continue to identify new initiatives in an attempt to profitably diversify our main distribution base business, as well as adding value to the supply chain.

Along with our new investments we will still be focusing on our ROI and maintaining our leadership at the lowest cost, the most efficient provider in IT supply chain, which is evidenced by our industry leading GPE ratio of 1.54 in Q4.

This 1.54 gross profit to expense ratio is up from last quarter and at the same level as last year's Q3.

As always, I wanted to thank our loyal customers and vendors for their continued business and support of SYNNEX.

I wanted to thank the dedicated employees of SYNNEX for all their efforts in Q3 allowing us to post our 73rd consecutive profitable quarter.

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

Laura, let's take some questions.

Thank you, Bob.

Andrian, please open up the line for questions.

(OPERATOR INSTRUCTIONS).

Brian Alexander from Raymond James.

I just wanted to revisit the revenue guidance just to make sure I understood you correctly.

Based on the comments about the assembly business being down about 20% year-over-year, my math gets me to distribution up about 7 to 10% sequentially, up 5 to 8% year-over-year.

Is that math correct, and is that what you would consider normal seasonality?

This is Dennis.

Your math is correct, and we agree that that is reflective of normal seasonality.

Any comments in particular on federal spending?

Obviously a lot of mixed data points out there.

I know it is not a huge part of your business, but it will probably have some impact in the month of September.

Maybe if you could just kind of walk us through how that has progressed over the last couple months?

Overall, relative to last year, is not as strong as last year from the Q3 to Q4, but we certainly see the typical seasonal uptick in the coming months.

Just on your distribution profitability, obviously an excellent recovery in your margins.

I am just curious how sustainable do you think the operating margins are at these levels above 1.4%?

And maybe just talk about some of the key factors that drove that strong sequential improvement in profitability, how much of that was gross margin vs.

OpEx, specifically how much was from savings due to the EMJ integration?

Thanks.

First of all, your operating margin will never be happy with anything less than 1.5%.

That is always in our internal goals.

Even we're probably putting more emphasis on the GPE versus the operating margin, but that is one thing we always look at it.

As far as what percentage comes from the OpEx versus the gross margin, Dennis, do you have any --?

I would say that the lion's share of the improvement came from more the focus on the gross margin than OpEx, but we did have improvements on both sides.

Dennis, could you just drill down into that gross margin improvement?

How much of that was pricing?

You guys mention that prison isn't as intense I guess as it was earlier in the year.

How much was due to maybe volume incentives or other factors?

For the most part the increase in gross margin was primarily due to our focus on taking the right business and taking profitable business.

That is the driver of the increase.

Scott Craig from Banc of America.

Just a couple of quick questions here.

First, you rattled off a number of business opportunities where you have been making investments.

Can you maybe outline one or two that you think probably provide the greatest opportunity for you on a near-term and longer-term basis?

This is John.

We have spent considerable time and effort in developing an enterprise and solutions distribution business.

We have instituted a billed (ph) sales organization.

And we have made significant headway in adding some of the more complex product, especially from HP, in their enterprise storage business.

And so we see this as a strong step into our future as we continue to be involved in the more complex solutions sets.

And then around the focus on profitable business versus volumes, how far along in the process are you from weaning off some of those customers that you don't feel quite get up to your profitability level?

I guess another way of asking it is have you completed most of the margin expansion that you think you can get from that?

Thanks.

We talked about this a couple of quarters ago.

It is only very, very few customers that we were talking about, and we are pretty much don't with that.

I think we -- moving forward, I think we continue to look at our business on the order base, on the customer base, on the product base.

So that is our strategy.

John Coyle from JMP Securities.

Just switching to OpEx with that (ph).

I just wonder if you might give a little bit more color on the assembly business, and specifically on your efforts to diversify the customer base?

As you well know, we continue to focus on diversifying the customer base.

We worked diligently along with our SID (ph) organization in reaching into a marketplace to build nodes and to assemble cluster kind of product, and that continues to move along well.

Our main customers still continues to be Sun.

And as they make the transition from one product to another, you see the decrease that we experienced in the third quarter.

We certainly expect that we will continue to focus on this business, and this business will remain pretty significant to the Company going forward.

Is it fair to say that if you're looking at that business in terms of a pipeline that you are more optimistic about the other opportunities out there right now, or is it basically steady state?

Relative to our main customer business, other ones in the pipeline are still relatively small.

However, they do present us very, very good opportunities in the storage area, in the securities appliance area, and we feel very good about that.

Then just on the topic of some of the other initiatives, such as Microland and Avaya, I wonder, John, if you might be able to give a little bit more color on where those stand?

I think there's probably three that we ought to talk about.

POS would be one, and what we're doing was bringing the auto ID and POS business the U.S.

We have gotten good traction here.

We have gotten good customer counts.

And at this point customer accounts are really important to us as we grow the overall business.

Our Microland business from remote monitoring management and tech support is being well accepted.

Again, still very much in the infancy stage, but good prospect base, a lot of attention at the webinar level.

A lot of resellers looking to create stickiness within their customer accounts by providing this level of service.

And in the Voice over IP product we continue to raise that customer count as well.

And we are very pleased with where we are right now with Voice over IP and TTI.

Had there been any sales of the Microland services to date, or is it still more in the -- resellers are still more attesting it out, trying to understand it?

Clearly there have been sales in all of those -- all the products that I just spoke about.

Peter Barry from Bear Stearns.

John, just to continue on that line of conversation regarding auto ID and POS, could you give us a sense of the state of that market, how it looks to you?

Is it robust?

And if you might, what has been the competitive response to your arrival on the scene in the United States?

Peter, let me make a couple of comments on this.

Our competitors always see us a strong player in the market, so they don't really take us very lightly at all.

And we're making some headway.

Last time we said we had 20 some new vendors signed up.

Today we have 30 some vendors signed up with us.

I think we're in the right track, and we have some of momentum generally.

Last quarter I said probably a year from today we should see some numbers that would have been more significant to our bottom line to speak of.

Bob, is pricing a part of the competitive dynamic here or not?

I think the overall the service level is very important to all these resellers who are involved on the vertical solutions, either this point-of-sales, or we're talking about CTI enterprise areas, the story becomes a huge piece of that, the total solution that we can bring to the table.

To another subject, would one of you speak to the product transition that Sun is going through?

One, how unique it is?

How long is it likely to take?

Is this essentially a recurring event every cycle, whatever length of time that might involve?

Certainly, it is an ongoing event as a manufacturer transitions from one product set to another, or asset family to another.

As they end of life one product and begin another product set there's always that transition time period.

Speaking to the breadth of it, you have read as much as everyone else has read about Sun's transition in the marketplace and where they are focused.

And we're just a part of that overall transition as they continue to use us in the assembly business.

John, in your planning process have you tried to make a reasonably intelligent guess as to how long this may take, and obviously the negative impact it has on your margin?

I think we -- the transition really began.

We're looking about another quarter, no more than two quarters I think the production should be in full swing.

As far as the product life, the storage type of product tends to have a lot longer life cycle than the desktop or other notebook devices that we are used to.

But we talk in previous -- a good long life cycle.

One final for me.

If I recall correctly HP was 28% of revenues in the preceding quarter, 27% of this quarter's revenues.

Would you deem that to be a significant change?

And/or have things really stabilized as it relates to HP's channel commitment as best you can tell?

I think the HP channel commitment from -- it depends on the different product group, but I think overall it is on the right direction.

And this has been happening for the last couple of years, at least I remember.

So I don't see really anything particularly negative in that area.

As far as from the 28% to 27%, that is a small decimal point that we probably run up somewhat.

But let me tell you maybe specifically the areas that we felt numbers came down somewhat is the printers area.

In this was no secret.

Dell is making some dent on the lower end side of that.

On the other hand, the color printers and MSEs, the multi functional printers, are doing reasonably well for us.

(OPERATOR INSTRUCTIONS).

Jeffrey Matthews from Ram Partners.

On that printer issue, I wondered -- it is not the first time you have talked about it.

I wonder if there is a secular decline issue here, or if it is a product transition issue, or the vendors that you carry that is leading this to be such a week category for some time?

Actually we do overall, as I mentioned earlier, the whole printer category as a whole actually is still pretty good.

We don't really say the making of a huge drop when we look at printers as a whole.

However, when I look at the low end side of that, yes, it is declining.

And as I mentioned, the Dell (indiscernible).

We do well with the Xerox, very well.

We do really well with other printers.

Oki is doing pretty well for us.

Are you saying -- when you say you are doing -- it is the low end issue, are you saying it is an ASP issue as opposed to a unit issue?

Both.

It is probably by far -- once ASPs drop down to some level, yes, the Dell is a 799 printer.

It is very, very difficult for our resellers to do anything in those areas.

So (multiple speakers).

Brian Alexander.

Just a couple of quick follow-ups.

One, just to go back to HP, obviously a lot of questions about their channel strategies.

Maybe a little bit more color on what changes you think they might make, when they might make them, and how you think you're positioned with respect to their changes?

I know that they just had a partner event, so I'm hoping maybe there's a little bit more clarity to their strategy.

Thanks.

We have very, very strong relationship with HP.

We are probably one of the best partners they have and most efficient.

And so from that perspective we don't see moving forward any change in terms of our relationship with HP.

And then just back to the question on federal spending.

I know you have said a couple of things.

One, I think you've said that it is not as strong as last year, but that you're seeing a typical budget flush.

Maybe I'm just trying to sort of reconcile those two comments.

Does that mean that earlier this year it was weaker, hence, the difficult comparison?

But now as we kind of move into the end of the federal fiscal year, it is behaving like you would normally expect, but not enough to kind of snap back where you would have originally hoped?

Is that a good way to characterize it?

That's probably fair.

I would not go back to the early part of this year.

I'm talking about year-over-year.

If I look at Q3 through Q4 in the last fiscal year, I would say last year was a stronger -- feels like, because we still have a couple of months to go, feels like it is stronger than this year.

Richard Kugele from Needham & Company.

Just to follow a little bit more on this assembly business.

For some time you guys have been able to go and add customers from time to time.

Not sizable enough to go and decrease the Sun percentage enough.

But is there any color you could provide on the challenges in acquiring new customers or ramping them to a meaningful size?

Would that business be able to grow faster as a stand-alone company?

And then even in that vein, what are the working capital requirements on your end to run that business?

I think there is a couple of questions inside of there.

And first and foremost, our assembly business is focused on the server, the storage and the appliance business.

So it does not focused on the PC or client business.

So consequently what we add may not grow exponentially, but is a highly complex environment, which lends itself to the type of skills and talents and engineering skills that we have built up over the years.

As you well know, our Sun business is also a server business.

We see a great deal of synergy between our systems integration business, or our white box business, and our assembly and manufacturing business.

Many of our customers have come directly from those relationships that we have had in the distribution side with them.

And they tend to lead us to more opportunities as we get into the appliance side and so forth as they source from our distribution business so we then can move it into an assembly business.

So you still think it is core to your operation, and it wouldn't make any sense to divest and focus on the distribution side?

We feel there's a lot of synergy between our manufacturing assembly business and our distribution business, yes.

John Coyle.

I just wanted to see if you might go into a little more detail on the pricing environment.

From what you said earlier it sounds like the improvements in gross margin were some things that you did to price more I guess strategically.

I was wondering if you could just put that more in the context of what you're seeing from the competition?

Are they being less aggressive or has anything changed in that respect?

It looks like everyone is behaving pretty rational right now, and there's nothing particularly abnormal out there.

And we just try to be, as you put it, fighting more strategically, and that is what we do.

And then just on the demand, you alluded in your comments to potential negative impacts from the hurricanes, but then at the same time it could be an uptick given the rebuilding.

Have you to date seem much of an impact from that, or from your reseller community, have they gotten more cautious, or where does that stand?

We look at our -- we talk to our customers, particularly those who are affected in that area.

The numbers of resellers in that area is so few, so we didn't really see anything significant today yet.

I guess I'm asking more of the question, just given the impact it has had on the increase in energy prices and so on and so forth, which impacts the entire country, have you seen any cautious tone or new behavior from the reseller base, and hence their customers?

John, do you see anything --?

No, I don't believe we have seen anything as of yet with respect to concern about overall fuel increases and so forth.

Certainly we are all experiencing some surcharge increases in rates, and that is across the industry so I think it is fairly well spread across the industry.

The macroeconomic issues will always be a concern to us.

We probably have very much an advantage being as cost-effective and as efficient as we are in being able to absorb some of those.

There are no further questions at this time.

This concludes our call for today.

Thank you everyone for joining us.

We will have a replay of this call available for two weeks beginning today at approximately 5 PM Pacific time through October 14, 2005.

It will be posted on our website at ir.synnex.com.

And the replay number for domestic dial is 866-219-1444.

And for international dial that is 703-925-2474.

The conference ID for both lines is 777138.

Thank you everyone for your participation today.

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

This concludes the program.

You may now disconnect.