新聚思 (SNX) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SYNNEX Corporation first quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. And now it is my pleasure to introduce your host for today's conference, Ms. Laura Crowley.

Thank you. Good afternoon and welcome to SYNNEX Corporation's fiscal 2006 first-quarter earnings conference call. Joining us on today's call are Bob Huang, President and Chief Executive Officer, and Dennis Polk, Chief Financial Officer. John Paget, our President of North America and Chief Operating Officer, will be unable to join us this afternoon due to a bout with bronchitis.

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 expectation of our tax rates, expectations regarding our inventory, our current expectations of our revenues, net income and earnings per share for the second quarter of fiscal 2006, our stock option and other related non-cash compensation expense, our approximate weighted average diluted share count, product purchasing trends, sales projections for 2006, our growth rate, our profitability, maturity of the IT marketplace, our assembly business revenue, our ability to meet our 2006 goals, growth of our Canadian distribution business, continued focus on our technology solutions division, improvements in assembly business, 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-K, for information on 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, but should only be used in conjunction with results reported in accordance with Generally Accepted Accounting Principles. The non-GAAP financial measures [could] enable investors to analyze the base financial and operating performance of SYNNEX, and to facilitate period-to-period comparisons and analysis of operating trends. 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 Corporation, and may not be recorded or rebroadcast without specific written permission from the Company.

Now I would like to turn the call over to Dennis Polk, our Chief Financial Officer. Dennis?

Thank you, Laura. Good afternoon and thanks for joining our call today. Consistent with the past few quarters, I would like to remind you that our current and prior period results from continuing operations exclude our former Japan subsidiary, as this business was sold in the second quarter of 2005.

Total revenues for the first quarter of 2006 were a first quarter record of 1.5 billion, an increase of 15% over the first quarter of 2005 and down 6% sequentially. By segment, distribution revenues were 1.39 billion, an increase of 18% over the first quarter of 2005, and down 5% sequentially. The year-over-year increase was due to equally strong organic growth in both our U.S. and Canadian distribution businesses, including increased business from our larger customers and also strong retail sales in Canada.

Contract assembly revenues were 111 million, a decrease of 14% over the first quarter of 2005, and down 13% sequentially. Contract assembly revenues for the first quarter of 2006 were in line with our expectations.

First quarter GAAP income from continuing operations was 10.7 million, or $0.34 per share, compared to 8.3 million, or $0.26 per share in Q1 2005. First quarter non-GAAP income from continuing operations was 11.2 million, or $0.36 per share, compared to 9.7 million, or $0.31 per share in Q1 2005. Please note that we have provided a reconciliation of GAAP to non-GAAP numbers at the end of our press release today and on our Website.

Q1 2006 non-GAAP income from continuing operations excludes approximately $470,000 net of tax, or $0.02 per share in stock-based compensation expense, which has increased significantly from prior periods, primarily due to the adoption of FAS 123R in Q1 2006. Q1 2005 non-GAAP income from continuing operations excludes approximately 1.4 million, or $0.05 per share, related to the integration and restructuring of SYNNEX Canada in early 2005.

Regarding our gross margin, the gross margin percentage for the first quarter was 4.33%, an increase of 4 basis points from the prior year quarter and 13 basis points sequentially. The increase in gross margin percentage was primarily due to our continued focus on all aspects of our gross margin and our distribution business.

First quarter 2006 GAAP selling, general and administrative expense was 42.8 million, or 2.85% of revenues. On a non-GAAP basis, excluding 735,000 in stock-based compensation expense, our SG&A was 42 million, or 2.8% of revenues in the first quarter of 2006, compared to non-GAAP SG&A of 38.1 million, or 2.91% in the prior year quarter, and 41.9 million, or 2.63% for the fourth quarter of 2005. On a dollar basis, and as a percentage of sales, our SG&A is reflective of our continued investments in our business, the cost of generating higher margin revenue, and the incremental cost of increased revenue.

GAAP operating income from continuing operations for the first quarter was 22.2 million, or 1.48% of revenues. On a non-GAAP basis, excluding stock-based compensation expense, operating income was 23 million, or 1.53% of revenues, compared to a non-GAAP operating income of 18.1 million, or 1.38% of revenue in the prior year, and 25 million, or 1.57% of revenue in the fourth quarter of 2005.

On a segment basis, GAAP distribution operating income was 20.2 million, or 1.46% of revenue, compared to 13 million, or 1.1% of revenues in the prior year. On a non-GAAP basis, distribution operating income was 20.9 million, or 1.51% of revenues, compared to non-GAAP distribution operating income of 14.7 million, or 1.24% in the prior year.

Assembly operating income was 2 million, or 1.79% of revenues, compared to 3.4 million, or 2.63% of revenues in the prior year quarter. On a non-GAAP basis, assembly amounts were essentially the same. The decline in assembly operating income percentage was primarily due to the lower revenue levels versus the prior year, and to a lesser extent, product and customer mix.

With respect to interest expenses and finance charges, the total for the first quarter of 2006 was 5.9 million, an increase of 2 million over the prior year. The primary reasons for the increase in interest expense are an overall higher interest rate environment versus the prior year, and higher borrowings due to our increase in business.

From a continuation operations standpoint, our tax rate for the first quarter was 36%. This rate is slightly lower than expectations, primarily due to expected higher profits in lower tax jurisdictions and the positive effects from continued improvements in our tax structure. Our current expectation for our tax rate in 2006 is approximately 36 to 37%.

Regarding our balance sheet metrics, accounts receivable totaled 591 million at February 28, 2006, which includes approximately 290 million associated with our off-balance sheet accounts receivable securitization programs. DSO, including the off-balance sheet programs, was approximately 41 days. Inventory totaled 525 million at the end of the quarter.

Inventory days were approximately 33. Including a days payable outstanding metric of 32 days, our first-quarter cash conversion cycle was 42 days. Our cash conversion cycle is slightly higher than seasonal norms, driven primarily by increased inventory days. Inventory days were up due to the timing of receipt of purchases, some opportunistic inventory positioning during the quarter and seasonality of assembly inventory. We do not expect that our inventory days will rise past current levels, and as of the current date, this metric has already cycled down.

Regarding our balance sheet, I would also like to point out that we added a few new lines in our statement in Q1 '06 that reflect the long-term project business we are participating in through our Mexico operation. The classifications reflect short and long-term receivables, short and long-term payables, deferred cost of goods sold and deferred revenues associated with this business. As we discussed in our last call, this long-term business does carry some additional risk versus our normal distribution operations; however, the incremental profit from this business should cover the incremental business risk.

Other first-quarter metrics of note. Depreciation expense was 1.2 million and amortization expense was 1 million. Capital expenditures were 3 million. Capital expenditures were higher than historical quarterly averages, due to the timing of certain infrastructure upgrades that occurred in Q1.

From a distribution product line standpoint, peripherals accounted for 30 to 34% of our sales, system components accounted for 16 to 20%, IT systems accounted for 29 to 33, software accounted for 12 to 16, and networking accounted for 3 to 7. The changes in the percentages from Q4 are primarily due to seasonality.

In our contract assembly business, from a customer mix standpoint, approximately 95% of our business was from our primary customer, Sun, and approximately 5% was from all other customers. HP, at approximately 25%, was the only vendor accounting for more than 10% of sales during the first quarter of 2006.

Total headcount was 2555 as of February 28, 2006. This consists of 2071 permanent employees and 484 temporary personnel.

Moving to our second quarter 2006 expectations, for Q2 2006, we expect revenue of 1.45 billion to 1.5 billion, net income will be in the range of 10.9 million to 11.6 million, and earnings per share will be in the range of $0.35 to $0.37 per share. The earnings and per-share amounts do not include the effects of stock-based compensation expense, which we expect will total approximately $0.02 to $0.03 in the second quarter of 2006. These forecasted earnings per share figures are based on an approximate weighted average diluted share count of 31.5 million, and also do not include any impact of any special charges or restructuring amounts that could be incurred as well. All these statements are forward-looking and actual results may differ materially.

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

Thank you, Dennis, and good afternoon to everyone. Once again, we were pleased to deliver another solid quarter of revenue and earnings results in the first quarter, and I am encouraged by our strong performance in an otherwise normally slow seasonal period.

Our above-market 15% revenue growth year-over-year and our improved earnings per shares are evidence that we continue to execute on our stated goals. Q1 2006 marked our 75th consecutive profitable quarter. Similar to last quarter, our Q1 performance was driven by our U.S. and Canadian distribution businesses.

Regarding our U.S. distribution business, during the first quarter of 2006, we built on the momentum generated during the second half of 2005. And as a result, we were able to deliver a very healthy 14% year-over-year improvement in revenue growth. More importantly, our efforts over the past year to focus on profitable growth has paid off as well, as our operating income growth in the U.S. was even higher at approximately 23%. Please note that these amounts exclude stock-based compensation expenses.

Our Canadian distribution business continues to produce very strong organic revenue and operating growth as well. Almost a year after the restructuring of this business unit, and after the EMJ acquisition, SYNNEX Canada is enjoying much success and a [logistic] benefit from the combined organization, growing revenue and operating income in the first quarter at a faster rate than in the U.S.

From an overall market perspective, the North America distribution channel [demand] involvement appears to be remaining stable and running through normal seasonable patterns. Also from the product perspective, the mix has stayed relatively constant.

Regarding our assembly business, we did experience a decline in revenue from the period -- prior period -- excuse me -- however, it is mostly a factor of product and ASP mix, as we produced more units for our main customer in the first quarter of 2006 versus the first quarter of 2005, and some minor material constraints that have cleared in March.

Despite the topline challenges with Sun, our relationship is still very solid, and we expect that will remain solid. In addition to our Sun business, we continue to focus on growing our non-Sun business. While this business was only 5% of our sales in Q1, the gross margin contribution to our assembly P&L was much more significant.

Moving now to our second-quarter guidance -- at the midpoint of our guidance, we are projecting a 10% increase in year-over-year sales for the second quarter of 2006. This growth rate is reflective of our desire to grow our business faster than the industry's, but also [respectful] of growing profitably and reflective of the seasonality of our business. The projected increase in our revenue also assumes from a growth standpoint continuing maturity of the IT marketplace, and that our assembly revenue will be slightly higher than Q1 '06.

We believe we can accomplish our Q2 and fiscal 2006 goals through solid execution in our main operating units, including the following.

One, focus on areas where we can both better serve our customers and vendors. Two, work [patiently] on improving our margins by taking profitable business, by reducing unprofitable business, and by ensuring our cost structure is in line with the reality of our business. This includes our [relentless] efforts to improve our gross profit expense, or GPE, ratio. Regarding this metric, we are encouraged by our GPE ratio of 1.55 in the first quarter of 2006, up from 1.47 in the prior year. Three, continue to focus on our newly created technology solutions division which we announced last quarter. Through the first quarter of '06 this business is performing to our expectations. Four, pursuing additional [fee-based] and other opportunities to enhance our assembly business.

The combination of all of these factors and our continuing ability to execute and improve on our day-to-day operations will be the driving factors for our success for the balance of the year. Before I turn the call over to Laura, as always, I want to thank the SYNNEX family for another well-executed quarter, and to our customers and suppliers for their continued loyalty and support. Thanks again for your time today and your interest in SYNNEX. Laura?

Thanks, Bob. Omar, please open up the line for questions.

(OPERATOR INSTRUCTIONS). Rich Kugele, Needham & Company.

I guess first, you commented that the North American environment was stable and seasonal this past quarter. Some of your -- one of your competitors in particular had commented that there were some troubling signs from a pricing perspective. Is there a way of rationalizing these two comments?

There always -- the market always is very competitive in our industry, and there always are some pockets more competitive than others. But I think overall, it's a reasonably stable environment. That's our view. We don't have the same (indiscernible) point like our competitors you were talking about.

And you're seeing that environment continue as well into this coming quarter?

We don't know for sure; it depends on how our competitors react. If they react more aggressively, the pricing pressure would increase. However, we don't really see -- overall, we don't see that happening.

And secondly, just delving a little bit deeper into the contract assembly business, because of the ASP change on the new product with the large customer there, is it fair to say that it's harder to grow that topline? Do you think that you can grow the units fast enough to really show the same type of revenue growth, or revenue levels we've seen a year ago, year and a half ago?

We don't really see we are losing market shares with our customers per se. But we basically (indiscernible) [it to their growth]. We don't really have a very good visibility in that area. But I do know that we have a strong relationship, and I do know that we produce a lot more units than used to be. And I do know those units we shipped out to get were accepted.

Lastly, on your technology solutions business, you've now been going for a couple of quarters on that. At what point do you think it could be of a significant enough scale where we could get perhaps a breakout of it? And is there anything that you would need to do, or anything you're looking to do to maybe accelerate that growth through strategic acquisitions? Is everything in place today to make that business grow?

We made an announcement last quarter that we will grow this business in three years to $500 million (indiscernible) second quarter from our only two months ago we announced. I think everything is running very good and to our expectations, and we certainly look at all possible acquisition activities all the time to accelerate this growth.

Joel Wagonfeld, First Albany Capital.

A couple of questions, if I could. First of all, your above-market revenue growth and distribution this quarter seems to imply that you took share. I was wondering if you could elaborate on were there any particular segments, either product or customer, where you took share in particular? And in terms of the revenue guidance, it implies that year-over-year growth is actually slowing versus this most recent quarter, despite easier comparisons. I'm just wondering if you can refresh us on some of the dynamic that might have been going on that you're thinking about on a year-over-year basis, or is this just potentially conservative. And then I have a follow-up on Sun, if I could.

On your first question about where the growth came from, I think we would mention one is that our -- in terms of seasonalities, particularly in Canada, we have very strong, very strong year-end sales in the retail market. And that's one major factor of that. The second factor is the (indiscernible) we have a couple of larger customers that we do a lot of more shipments than we originally forecasted. Those are the two main reasons.

So you gained share in retail primarily, is what you're saying?

Yes. I'm pretty sure we are getting market share (indiscernible) grow 14, 15%.

And on the slower year-over-year growth this coming quarter despite easier comparisons -- is that just conservatism?

A couple of issues there. One, we did have a very strong December in Q1 as we reported strong federal business for us, and as Bob mentioned, in Canada, strong retail. We won't have that necessarily continue on, given the timeframe in Q2; it's not a strong federal period. And plus, after March, the Canadian business does tend to step down due to its seasonality. And as that's become a larger percentage of our business, that affects our numbers on a comparison basis, sequentially and year-over-year.

If I could just return to a previous question about Sun and ask it maybe a little bit differently. I guess the question is, understanding that you're not losing share at Sun, is it fair to say that the negative impact of lower ASPs is greater relative to the increase in units than you may have expected, such that it's going to be tough to ever really see material revenue growth if the ASPs remain where they are? And have there been any surprises as you've ramped the new Sun products, given the traction that you (inaudible) last quarter?

We could not comment as to future growth on those areas. We only (indiscernible) from the forecast that we are getting, I think we are doing very well in that area.

But I guess my question is, was the impact of the lower ASPs greater than you had anticipated, or was it pretty much in line with what you expected?

I think that's a fair statement.

To follow-up --

Which is fair, that it was greater than you expected or it was --

Greater then -- the lower-end servers essentially shipping (indiscernible) units than we originally anticipated. And hence, lower ASPs.

And the impact was greater than you (multiple speakers)

That's correct.

Okay. I'm sorry; Dennis?

I was just going to answer your -- as far as surprises, there were no significant surprises during the transition.

Brian Alexander, Raymond James.

Nice quarter. Just wanted to follow-up on the revenue guidance as well. It sounds like basically you're expecting normal seasonality in the U.S. on a sequential basis. I just wanted to clarify that, because it sounds like the biggest swing factor relative to prior year seasonality is that Canada is growing as a percentage of the total, and you had a nice quarter in Canada. So, just clarify that, and maybe help us understand how big is Canada as a percentage of distribution now versus a year or two ago. That's my first question and I have a follow-up.

(indiscernible) your statement that it's true, the comment on the seasonality, as well as Canada's effect on that. Canada is approaching 20% of our sales, and a year to two years ago it was 10 to 12%. So it has become a more significant percentage of our total sales.

Is that total distribution revenue, Dennis, or is that total revenue?

Total company revenue.

Dennis, could you just touch a little bit on inventory? It looked like it was up a little bit sequentially. Just want to get a sense for what areas might you have been building inventory in. Just given the fact that you're expecting flat to down sales in the second quarter, that was a little surprising. And then I guess I have one more follow-up after that.

As we mentioned in the script, we did build inventory a bit. Some of it was just due to pure timing and when the inventory comes in, but also due to some opportunistic buys that we made; then, on top of that, our assembly inventory is up due to the stronger March month that we anticipate for the Sun business. We (technical difficulty) position. So, the total of those three are why our inventory was up. But as we also noted, it has already started to cycle down in the March month.

Great. With respect to the solutions initiative, remind us again the margin differential between that business as a stand-alone unit versus your core distribution business. My understanding was that you could be achieving up to 2X type of gross margins in that business segment relative to what you're used to. I just want to understand that better.

I think that's still what we are looking at.

Are the margins in that segment coming down at all, or are they remaining relatively stable on the solutions side?

It's relatively stable in that area.

Jason Gursky, JP Morgan.

Just a couple of quick ones. One -- maybe one for Bob. I think in your prepared remarks you made a quick comment about some shortages in some parts for your Sun assembly business. I was wondering if you could go into a bit more detail on exactly what that was.

Jason, specifically, I do not get into these specific parts per se. I think the issue gets resolved. I think as we said on the script, that it had been cleared. The materials are being cleared in March.

Okay. But it wasn't (indiscernible) time issue or something like that, where this was just a timing on the parts coming in in time, or is there --

It's all related more (indiscernible) more new product traditions and environmental requirements.

Great. That's helpful. And then -- on the enterprise distribution, I was just wondering if you could perhaps talk a little bit about what contribution sales in this quarter may or may not have had on the year-over-year and quarter-on-quarter increase in gross margins, whether that's kind of playing through nicely for you as planned. And then secondly, to get to this 500 million number, in your view, what do you need to do as far as bringing on new vendors and new line cards. Are you 25% of the way there now, 50% of the way there now? Just to get us -- give us a sense of what types of milestones we should be looking for going forward.

From the vendors' perspectives -- first of all, from our investment point of view, John mentioned quite a few times that we have the outside sales force in place, and we've got certifications in place, and we continue to have new vendors coming in. And we indicated (indiscernible) was EVA on enterprise -- storage products from HP (indiscernible) [pick and point]. (indiscernible) other storage products coming in. And by now (indiscernible) still insignificant relative to the total business we have. So, we probably would not be able to give you numbers, more meaningful numbers, until 4000 (indiscernible) probably end of this year or first part of next year, because everything takes -- especially on the enterprise type of products, takes a very long time to do to get qualified to get account closed to get vendors signed up.

Were there any new ones in the quarter? Do you plan to put out a press release each time that you sign on a new vendor?

We do that.

Okay. And lastly, for either Bob or Dennis, can you just remind us exactly what the retail portion of your business is in Canada?

Retail is (multiple speakers) it's a third (indiscernible) Canadian business. That's what we have.

Peter Barry, Bear Stearns.

I just wanted to make sure I heard you correctly. (technical difficulty) operating income in U.S. distribution was up 23% year-to-year in the quarter?

Yes. That's for U.S. distribution. Yes.

And Dennis, Canadian distribution, Bob continued saying, was up even faster than U.S.?

That's correct. That's what we said.

Could you give us a bit of additional color in terms of what's driving maybe both the revenues and the profitability in Canada at the present time?

Sure. It's obviously a lot to do with our acquisition of EMJ and the integration out of it that we did over the past year. Again, the synergies of that acquisition is really coming through. We put the two businesses together, and we are enjoying quite a bit of success with many customers, including the retail business that we talked about, but also outside the retail business as well.

Going on to your sales mix by category, I couldn't help but notice that software was particularly strong sequentially as a percentage of revenues. Any particular driver that you can discuss with us there?

Yes. It's some enterprise software that happened at year end that helped.

Okay. Has that basically slowed now, so the relationship -- the percentage of revenues will move back perhaps closer to 11 to 13, or in that neighborhood?

That's correct.

Bob, could you provide us with an update on what's going on in the auto ID area?

We have -- we continue to make progress in that area. Again, that becomes a part of the TSPs (inaudible) still very small, or relatively to the whole business.

But you are apparently taking market share with a fair degree of consistency.

We are getting some business, but it's still very small. (multiple speakers) certainly (indiscernible) hundred (indiscernible) from a year ago, but it's still very small.

When would you expect the technology solutions to turn profitable if it hasn't already, Bob?

It always -- we don't -- we don't invest too much ahead of ourselves, so we always want to make sure that the investments -- that the pace of it (indiscernible) the list.

And just to follow up on an earlier question, the 2X margin potential in that space -- what creates that dynamic?

A couple of factors. One is that on the [TSD] product lines, [general] gross margins is higher. It's on the high single-digit area and. And because our efficiencies, as you can see from our P&L, we think we should be able to get 2X operating margins.

And just (indiscernible) could you share with us your thoughts about industry growth (inaudible) for the remainder of your fiscal year?

Industry growth for our total business?

Yes.

The total business we probably (indiscernible) looking about 5%. 4%, 5% is in North America IT. That's probably (indiscernible) that you see on NPD data, if you have some subscription on it.

Thank you, Peter. We have time for one more question. Operator?

Scott Craig, Banc of America.

Dennis, on the balance sheet, is there new sort of targeted levels for cash cycle or inventory? For example, if I look at inventory, it's been steadily increasing on a day basis over the last few quarters year-over-year, and the cash cycle as well. So, is there some new metrics there, or is this just a temporary blip?

This is a temporary blip. We don't want our inventory days to increase past the current levels; in fact, we're working on bringing those down. And as always, our DSO, we want to keep that below 40. It's been 40, 41 the past few quarters. But again, we're working on that to bring it down as well.

So, from an inventory days perspective, it used to be more like in the mid 20s back in early '05, late '04. How realistic is it to get it back down to that level over the next few quarters?

We have to take one step at a time. We are currently at 33. We want to get back down to the 30 level. And then once we get back down to that level, we'll take a look at the business to see if we can drive it down further.

I wanted to also -- when we take inventory, we always look at economics. If it makes sense, then we do it. So it may change over the period of time.

Just a quick follow-up on the Microsoft Vista. Bob, can you describe what typically happens to your business when you see new product launches like this? Is there a delay before purchasing where people hold off until the new product comes out, or is it just kind of not a big deal for you guys? Maybe you can describe that.

Probably not so much a big deal, because we deal more with the commercial space. And this probably would impact more the consumer side more so than commercials. As you can imagine, enterprise typically would -- adoption cycle is much longer than consumers.

There are no more questions at this time.

Thank you. This concludes our first quarter 2006 earnings conference call. Thank you all for joining us today. We will have a replay of this call available for two weeks beginning today at approximately 5 PM Pacific Time through April 6. The link will be posted on our Website at IR.SYNNEX.com. Thank you again for your participation today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.