新聚思 (SNX) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the SYNNEX Corporation third-quarter 2006 earnings results teleconference. (Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Laura Crowley.

Ms. Crowley, you may begin the conference.

Thank you, James.

Good afternoon and welcome to the SYNNEX Corporation's fiscal 2006 third-quarter earnings conference call.

Joining us on today's call are Bob Huang, President and Chief Executive Officer;

Dennis Polk, Chief Operating Officer; and John Paget, our President of our Technology Solutions Division.

Before we begin, the statements on today's call, which are not historical facts, are forward-looking statements within the meaning of the Security and Exchange Reform Act.

These forward-looking statements include but are not limited to statements on our current expectations of our revenue, net income and earnings per share for the fourth quarter of fiscal 2006, our tax rate, our growth rate, our profitability, our assembly business revenue, our ability to meet our 2006 goal growth of our Canadian distribution business, the effects and anticipated benefits of our Concentrix acquisition, continued focus on our Technology Solutions Division, investments in new lines of business, our growth and business strategy and anticipated benefits of our non-GAAP measures.

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 more recent Form 10-Q, for information on risk factors that could cause actual results to differ materially from those discuss in these forward-looking statements.

To supplement our financial results presented in accordance with GAAP, we use non-GAAP financial measures.

We present such non-GAAP financial measures in reporting our financial results to provide investors with an additional tool to evaluate our operating results.

Because these non-GAAP measures are not calculated in accordance with GAAP, they may not necessarily be comparable to like-titled measures employed by other companies.

These non-GAAP financial measures should not be considered in isolation or as a substitution for comparable GAAP measures and should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our management uses each of these non-GAAP financial measures internally to understand, manage and evaluate our business.

Our management believes it is useful for itself and our investors to review as applicable both GAAP information and the non-GAAP measures in order to assess the performance of our core continuing businesses and for planning and forecasting in future periods.

A detailed discussion and reconciliation of the adjustments between results calculated using GAAP and non-GAAP are included in our earnings release, which 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 to begin.

Dennis?

Thank you, Laura.

Good afternoon and thanks for joining our call today.

For today's call, I will review the financial highlights of our third-quarter performance.

And then, I will turn the call over to Bob to share his comments on the quarter and our expectations for the fourth quarter of 2006.

Total revenues for the third quarter of 2006, which exceeded the high end of our guidance, were 1.59 billion, an increase of 14.4% over the third quarter of 2005 and up 5.3% sequentially.

By segment, distribution revenues were 1.46 billion, an increase of 15.4% over the third quarter of 2005 and up 7.3% sequentially.

The year-over-year increase was due to continued growth in our US and Canadian distribution businesses and aided slightly by approximately 13 million in revenue from our acquisition of Azerty's Canadian distribution business in mid-June of Q3.

Note that this is an approximate number as we integrated Azerty into our existing business on the day the deal closed.

Thus, we cannot determine an exact revenue figure generated from this acquisition.

Contract assembly revenues were 134 million, an increase of 4.9% over the third quarter of 2005.

Third-quarter GAAP net income was 13.8 million or $0.43 per share compared to 9 million or $0.29 per share in the third quarter of 2005.

Third-quarter non-GAAP net income was 14.4 million or $0.45 per share compared to 10.5 million or $0.34 per share in Q3 2005.

Third-quarter 2006 non-GAAP net income excludes share-based compensation expense of approximately 610,000 net of tax or $0.02 per share due to the adoption of FAS 123R in fiscal 2006.

Third-quarter 2005 non-GAAP net income excludes net of tax 500,000 in restructuring charges related to our Canadian operations and a 1 million non-operating loss on our equity investment in MCJ Company.

As a reminder, we have provided a reconciliation of GAAP to non-GAAP numbers at the end of our press release issued today and on our website.

Turning to our gross margin, the gross margin percentage for the third quarter was 4.57%, an increase of 33 basis points from the prior-year quarter and up 5 basis points sequentially.

The increase in gross margin percentage was from our distribution segment and is representative of our focused efforts to improve our gross margin over the past year.

Third-quarter 2006 GAAP selling, general and administrative expense was 49.2 million or 3.09% of revenues.

On a non-GAAP basis, excluding 925,000 in share-based compensation expense, our SG&A expense was 48.3 million or 3.03% of revenues in the third quarter of 2006 compared to non-GAAP SG&A of 38.4 million or 2.76% for the prior-year quarter and 45 million or 2.98% for the second quarter of 2006.

The raw dollar increase in SG&A is a result of variable costs associated with our higher revenue and profit attainment during the quarter, additional expenses associated with the acquisitions of Azerty and Telpar and continued investments in all aspects of our business.

GAAP operating income for the third quarter was 23.5 million or 1.48% of revenues.

On a non-GAAP basis, excluding share-based compensation expense, operating income was 24.4 million or 1.53% of revenues compared to non-GAAP operating income of 20.6 million or 1.48% of revenue in the prior year and 23.3 million or 1.54% of revenue in the second quarter of 2006.

On a segment basis, GAAP distribution operating income was 22 million or 1.51% of revenues compared to 17 million or 1.35% of revenues in the prior year.

On a non-GAAP basis, the distribution of operating income was 22.9 million or 1.57% of revenues.

Non-GAAP amounts for Q3 2005 were 17.9 million or 1.42% of revenues.

Assembly operating income was 1.5 million or 1.1% of revenues compared to 2.7 million or 2.09% of revenue in the prior-year quarter.

On a non-GAAP basis, assembly amounts were essentially the same for both periods.

The year-over-year decrease in operating income percentage was primarily due to pricing pressure on the products we assemble for our main assembly customer, slightly offset by improved margins in our non-Sun assembly business.

With respect to interest expense and finance charges, the total for the third quarter was 2.7 million, a decrease of 1 million over the prior year.

The main reason for this improvement was due to the long-term project business we engaged in with one of our customers in Mexico.

The primary churns from this business are related to long-term financing of computer hardware sold to our customer in Mexico and are reflected as a reduction to our net financing costs for the quarter.

From a continuing operations standpoint, our tax rate for the third quarter was 33.4%.

Our tax rate from the third quarter is lower than forecasted due to profitability in our Mexico operations and the result in tax accounting, which is primarily driven by the fact that we have historically not been profitable in Mexico.

Our current expectation for our tax rate for the full year 2006 is approximately 35%.

We expect that our tax rate will return to a more normalized 36 to 38% range in fiscal 2007.

However, as always, this is dependent upon many factors including which geographies we're profitable in.

Regarding our balance sheet metrics, accounts receivable totaled 627 million at August 31, 2006, which includes approximately 244 million associated with our off-balance sheet accounts receivable securitization program.

DSO, including the off-balance sheet programs, was approximately 41 days.

Inventory totaled 549 million at the end of the quarter.

Inventory days were approximately 33.

Including a day -- payable outstanding metric of approximately 34 days, our third-quarter cash conversion cycle was 40 days.

As noted in our last few earnings calls, we have added new line item classifications to our balance sheet to reflect the long-term project business conducted by our Mexico operation.

As evident by my earlier comment concerning the reduction in our net interest costs, this project business is beginning to mature and starting to contribute to sustain profitability for our Mexico subsidiary.

Including the reduction in our tax rate, the project business in Mexico contributed approximately $0.04 to our per share profits in Q3.

While this project business did contribute very favorably to us in Q3, due to the nature of this program, the associated accounting and the overall risks associated with long-term projects, we do not expect that the profit contribution will be this significant each quarter.

However, we do expect that the project should contribute approximately $0.08 to $0.10 a share each year over the life of the five-year program.

Other third-quarter metrics of note -- depreciation expense was approximately 1.4 million.

Amortization expense was approximately 1.0 million.

Capital expenditures were 1.1 million.

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 30 to 34%.

Software accounted for 9 to 13%.

And networking accounted for 4 to 8% of total distribution revenues.

The changes in the percentages from prior periods are primarily due to seasonality in our businesses.

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

And the other approximate 6% was from all other customers.

HP at approximately 25% was the only vendor accounting for more than 10% of sales during the third quarter of 2006.

Total headcount was 2781 at August 31, 2006.

This consists of 2234 permanent employees and 547 temporary personnel.

Moving to our fourth-quarter 2006 expectations, we expect revenues will be in the range of 1.67 billion to 1.72 billion.

Net income will be in the range of 14.2 million to 14.9 million, and earnings per share will be in the range of $0.44 to $0.46 per share.

The earnings and per share amounts include the effects of share-based compensation and other related non-cash compensation expense, which we expect will total approximately $0.03 in the fourth quarter of 2006.

These revenue, income, and expense figures also include our expectations for our recent acquisition of Concentrix.

We believe that this acquisition will be dilutive to our earnings by approximately $0.01 in the fourth quarter.

These forecasted earnings per share figures are based on approximate weighted average diluted share count of 32.3 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 would like to now turn the call over to Bob for his comments.

Bob?

Thank you, Dennis, and good afternoon.

We are pleased to deliver another solid third-quarter revenue growth and record earnings results for our Q3 2006 strategies and investments that we have made over the past 12 to 18 months of (indiscernible) results.

The SYNNEX team continues to meet the high expectations set forth for them.

And I am pleased by our abilities to navigate a very competitive landscape while producing positive results.

Once again, the Q3 performance was driven primarily by our distribution business, which has grown more than 15%.

Our US distribution team not only has shown very impressive double-digit growth in revenue.

Most importantly, the operating income, excluding share-based compensation expenses, was up by 15% year-over-year.

In Canada, including the Azerty acquisition, our distribution [methods] also achieved a double-digit revenue growth from the previous year and operating income growth was even stronger.

In addition to the strong North American distribution performance, our investment in the project business in Mexico is starting to perform solidly and gives significant contribution in Q3, which Dennis noted earlier.

This project is another example of our ability to use all aspects of our supply chain capability while leveraging our financial strengths.

We have to work diligently on these projects for many more years to come to ensure we generate our total expected returns.

However, we're very pleased with the results to date.

From our overall distribution perspective, it appears to us that the North American segment remains relatively stable across all customer segments; although, the prices are always competitive.

From a product perspective, we have not experienced any major product demand situations that are not consistent with our OEM partners' performance or industry's trend.

Regarding our assembly business, while the revenue was generally in line with our expectations, the operating income of 1.1% in Q3 was disappointing.

This is due to a combination of profit mix and the continuing decline of ASP.

We expect this trend to continue into the foreseeable future.

However, we have made great progress on [known sense] system integration business with the highest gross margin contribution it has ever been in Q3.

Now, let me comment on our fourth-quarter guidance.

We are projecting 6.4% increase year-over-year.

Sales for the fourth quarter of 2006 is in the midpoint of our guidance.

This percentage increase is reflective of a couple factors.

We expected our assembly business will be slightly down year-over-year.

And two, we have very strong revenue growth in our distribution segment [last year], aided by government business from a small test of our customers, which are not likely to happen again.

However, we still expect our distribution business to perform at the rate of high-single digit growth.

On the profit, we expect it to grow by approximately [50%] year-over-year on non-GAAP basis.

Now, I would like to update you on some of our new initiatives, starting with our Technology Solution Division.

The TSD division has grown in line with our expectations, and we are gaining more traction in this business each quarter.

We were on a run rate to produce a fiscal 2006 revenue of 225 million (indiscernible) the end of Q2.

And now, we are on track to produce fiscal year 2006 revenues of more than $250 million.

On September 1, we officially launched our new Customer Electronics Division called NEXCE.

While our current investment is small in this initiative, we do see opportunity for growth in the profitability from CE division.

We will continue to invest in this newly-defined division, and we will share our progress in upcoming quarters.

In early September, we announced the acquisition of Concentrix Corporation by our wholly-owned subsidiary, BSA Sales.

Concentrix offers integrated marketing solutions and on-demand printing.

We see the combined as BSA and Concentrix into one company with the growth opportunity to provide additional resources to our existing customers while attracting new customers.

As we have stated consistently throughout this year, our goal is to grow our business faster than the industry but more importantly profitably.

How do we do this?

We have invested more in our employees with better training and focused care but set a higher expectation on their performance.

At the same time, we continue to find ways to add value to our suppliers and customers and deliver the best service at the lowest cost.

As we are consistently achieving this goal, our GPE -- gross profit to expense ratio -- ROE and ROIC improved, resulting in happy employees, happy customers and happy shareholders.

In closing, I would like to note that the third quarter of 2006 marked our 77th consecutive profitable quarter.

We had a new record on gross margin generated, net income and earnings per share from continuing operations.

This consistent and outstanding performance certainly did not happen by accident.

It required dedicated hard work from our colleagues worldwide.

So I wanted to recognize the SYNNEX team for another well-executed quarter and thanks to our customers and suppliers for their continuous loyalty and support.

I also wanted to welcome our new employees from Concentrix to the SYNNEX family.

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

Laura, let's take some calls.

Thank you, Bob.

James, please open up the line for questions.

(Operator Instructions).

Richard Kugele, Needham & Company.

I guess first, Bob, in terms of the guidance that you are discussing -- the line items -- in distribution, I think it is pretty widely known that there has been a pickup recently in government.

And I just wanted to get a little bit more clarity on why you think that that might not happen in the November quarter.

Did you see that happen in August?

And then, secondly, in terms of the assembly side -- if I remember correctly -- traditionally, you see in your fourth fiscal quarter a customer that you go and build for just that one particular quarter on the PC side for seasonal build.

Is that the delta versus last quarter?

On the government side, let me -- last year, we had pretty good numbers from one of our customers who is selling to the federal government.

We are not anticipating that particular customer business to repeat.

The second reason is that we want to be cautious about that particular segment.

We do see some of our vendors take more [recent direct] in the federal business segment.

And that is the reason on the public sector.

As far as your question on the assembly, we don't really have the PC assembly anymore like what we did a couple of years ago.

The comment I made earlier is strictly related to our largest customers in assembly space.

We felt that the combination of the ASPs and the product mix has somewhat resulted, but we are not optimistic.

Of course, we don't have the control of the sales in that area, and we might see a good surprise coming in the next quarter as well.

Then, just lastly, you have made a number of successful small tactical acquisitions that you have moved into TSD and other segments.

With your overall results though clearly improving, has your appetite changed at all for larger transactions, more enterprise-related larger transactions?

Or do you think that you can continue to grow through the smaller bolt-ons and organically?

We're always looking at deals that makes sense.

We do not exclude large deals or small deals or enterprise space or specifically in different even consumers electronic space.

Brian Alexander, Raymond James.

Dennis, you alluded to in your prepared remarks that a lot of the earnings upside this quarter was an interest in other and it relates to the Mexico project.

I guess I'm not exactly sure I understand the accounting for that business.

So could you kind of just walk through the mechanics of that again and why so much of that flows through the other and interest line items?

Sure.

Essentially, it's a long-term finance deal.

So we shift a little less than $100 million to our customer in Mexico, and much of the transaction is the financing of that.

So they are paying us over the five-year period.

So we have to treat that as interest income rather than margin -- gross margin or anything else.

So that income we get from that financing is in the interest and expense line.

So, does Mexico flow through other line items in the income statement as well, or is it all captured below the operating line?

No, this transaction does have a small amount of sales in gross margin.

But the primary income from this is in the interest expense line obviously net of interest expense.

Then, the $0.08 to $0.10 that you are expecting annually, can you say what you are expecting in the fourth quarter for that business?

It would be one quarter of that amount.

Because I think this quarter was a little bit larger than one quarter of that amount.

Right.

As I said in the script, we did have a more positive result from that transaction in the third quarter.

But based our expectations as of now, we expect the contribution to be a quarter of the range I gave you, which was $0.08 to $0.10.

Great.

And then, final question on TSD.

I don't know how much you are willing to kind of break out, but I want to get a better sense for what are the major kind of sub segments or categories that make up that 225 or $250 million run rate?

I'm just trying to get a sense for what is really driving TSD at this point and where do you expect the doubling of growth to come from by the end of next year and maybe just an update on PrintSolve as well.

That's a long question.

This is John Paget.

The five segments in TSD are enterprise, technology and converged solutions; the auto ID and physical security business; document management and professional printing.

And across all five of those segments, we are -- we have continued to gain traction.

We have continued to broaden our relationships with the vendors that we have there.

We have actually introduced a couple of new vendors.

But primarily, we have gained traction across there.

And the growth is coming pretty broadly across all of those segments at this point.

We are pleased with where we are and the progress against all of those as we specifically grow those businesses.

In terms of PrintSolve, we did introduce PrintSolve in mid-to-late July.

You know, we filed our patent early in July for that.

We have had a lot of activity in terms of teaching people how to use it.

We have a number of contracts that we have on hand now, so we are real pleased with where we are in PrintSolve right now.

Richard Gardner, Citigroup.

A couple of questions on the assembly business.

First of all, Dennis, I didn't catch what percentage Sun was of that business this quarter.

95%.

Secondly, can you specifically address the ASP decline and mix issues that contributed to the margin decline in that business?

My impression was that it was a cost-plus business, so I'm not sure why ASP declines would contribute to a decline in margin percentage for the business.

This is Bob.

No, the business is not purely a cost-plus fee base.

It's actually a regular EMS business.

So if ASP come down, it does impact.

And particularly because of the product mix, it would put even more pressure on the gross margin side.

But I want to talk to earlier I comment about this assembly business.

On a non-Sun area, I just wanted to let you know how significant it is today.

If you look at the total gross margin generated from the non-Sun business, today is more than 25% of our total assembly gross margin.

So that is getting more and more significant.

Early part of this year (indiscernible) to say that and it's getting there.

We're very, very pleased to leverage our manufacturing capability to improve or grow our system integration business.

We're getting to the silvers, platinums, which I talked a few times in the past.

And that's really become very successful business for us.

So I would not just look at it Sun by itself, I would look at the whole thing.

Wherever particularly the assembly side on system integrations that has a lot of synergies with distribution because they are from the common customer set and we got a very, very (indiscernible) from Intel and from (indiscernible) on the components as well.

A couple of other questions, Bob, on that point.

Do you expect the non-Sun portion of the business to increase materially as a percentage of revenue say over the next 12 to 18 months?

And then, on the revenue guidance you gave for contract assembly of down year-over-year, that seems to imply that the business will be down pretty nicely sequentially.

I'm wondering why that would be the case.

Two things on this.

Because we focus lower because of we don't really have good control in the servers area, particularly on the enterprise area is somewhat a concern to us overall.

So we won't just be cautious about that.

Now, as far as the non-Sun business -- because the Sun business is really big.

When you look at $0.5 billion of business a year, that is very, very big for non-Sun business to catch up on.

However, it's more important how much gross margin we generate.

And I mentioned to you, the 25% has become very, very significant.

And we anticipate that this will continue to grow as I said earlier.

Jason Gursky, JPMorgan.

Just a couple of quick questions on acquisition related to revenues and costs during the quarter.

Dennis, can you give us a sense of how much of revenue on a year-on-year basis was incremental from your acquisitions?

And then during your prepared remarks, you also mentioned that the sequential increase -- year-over-year increase in SG&A, part of that came from acquisition costs as well as some investments.

I'm just trying to get a sense of as we move out into the next 12 months here, how much of this starts to lap and go away?

And how much more do you anticipate ratcheting up the investments, particularly in the TSD division?

Sure, to your first question on the acquisition, Azerty contributed approximately 13 million in the quarter and the other acquisition -- the smaller one we did -- it was Telpar, which was 1 million.

So in total, approximately $14 million from acquisitions in the third quarter.

Again, these are approximate numbers because we integrate the businesses on the day we acquire them.

As far as the SG&A, our expenses are up year over year and sequentially.

It's reflective of many factors, including Telpar and Azerty acquisitions, stock-based compensation, and also the many investments we've made over the past year -- TSD, NEXCE and other initiatives included.

These investments are most evident by looking at our recent headcount growth.

Versus last year, our headcount is up approximately 18% and it's up almost 5% sequentially.

As evident by our recent result, we believe the investments (indiscernible) have been worth it obviously.

To your question about when these will sunset, we continue to invest in our business.

The rate at which we will invest will depend upon the success in these initiatives, but you will see our SG&A in raw dollars increase as we grow our business.

But as these initiatives take hold, you should see it come down as a percentage of sales.

Then just going back to the Mexico thing to fully understand that, the 5 million that you had in interest expense going to 2.7 this quarter, the bulk of that came from the Mexico thing.

And we ought to be thinking interest expense more at the current levels.

Is that a fair characterization?

The good portion of the reduction in the net interest expense was due to the Mexico program; although, we did run more efficient in our cash convergence cycle.

So our interest expense, excluding the Mexico transaction, was down slightly as well.

Moving forward, the effect of the Mexico transaction on the interest expense line will be the $0.02 I noted obviously grossed up for tax purposes.

And then just lastly on the assembly business, you talked about ASPs and mix being an issue.

Are there any real short-term fixes here on efficiency and net operation that you can put in place to kind of keep up with those cost-downs that you're faced with?

Good point.

We certainly look at every penny we spending over there and we look at the efficiencies, how they work.

And hopefully, we would include the operating income somewhere.

Ben Radinsky, Bear Stearns.

Can you talk about the inventory build?

It seems to me that the turns are the lowest they've been in a couple of years.

And I'm wondering if that is related to specific investments.

If you could put some color around that, that would be great.

Sure.

Our inventory metric did increase by a day sequentially, and it's up a bit over our historical trends.

But it's really a reflection of timing more than anything else.

Inventories at the cutoff date at the quarter end is dependent upon shipments from our vendors primarily.

So, again, it did pick up by day.

But if you look at our BPO metric, that increased by four days.

So that will give you an idea of how the quarter ended from an inventory standpoint and a shipment timing standpoint.

Overall, we're very comfortable with all aspects of our cash conversion cycles and the current status that net of 40 days cash conversion cycles for the quarter.

And then, can you talk about Motorola's purchase of Symbol.

Does that change how they will go about distribution and maybe you'll have a better opportunity growing the AIDC/POS business?

Yes, we hope we have better opportunities than that.

But we're selling Symbol today.

So you would view that as an incremental positive, the change of ownership, or is it neutral?

It's probably -- as of today, it's neutral.

But we're always looking for new relationships.

Then lastly, can you just put a little bit more color on some of the programs that have helped gross margin increase to some very, very nice levels?

Let me just comment a few things.

First of all, at the macro level, we talked overall the market demand is stable and rationale.

We have a TSD division certainly chipping it even very small -- still chip in.

And we continue to -- as we said in the past, we always make sure that the profit the customers make sense from -- the profit from the customer makes sense.

And we continue to make sure we deliver the value to the assets of the customers and the suppliers.

And these concentric things is also potentially even next quarter immediately after the acquisitions, we see that diluted where they can fold.

In a normal one, we're pretty sure that we are going to find some opportunities in the general more in margin and profit from that, just like what we did in BSA.

So, it's a combination of many things.

It's nothing really -- there's no silver bullet that we would say -- ah, this is what we're going to do.

It's a very, very complicated environment from technologies in IT systems and service employees as I mentioned earlier.

Then the last one for me, are you projecting Azerty and Telpar contributing a similar amount to the fourth quarter?

Is that what is baked into your assumptions?

On the -- in Telpar?

No, Azerty and Telpar, their contribution in Q4 will be similar to slightly higher in Q4.

Richard Kugele, Needham & Company.

Just quickly, John, I'm interested in how you were able to secure the distribution pack for the SMB market with Nortel.

That seems to be a pretty good coo for you guys and certainly indicative of your efforts there in TSD and just interested in how you were able to secure that deal.

As you well know, we have put a real focused effort in the telephony Voice over IP business.

We have tremendous strength in our technology and our technical staff.

We have been -- we were awarded the fastest-growing Nortel distributor just prior to that.

So we worked together with them, created a plan that made sense to them and brought the full strength from the organization together and moved forward basically as a VAT in this particular case.

So we're really pleased with their support.

Do you see other networking opportunities on the backs of this agreement?

We continue to look at products on an ongoing basis.

As you well know, we brought Fortinet on, which is an UTM and other products on this quarter.

So we continue to focus in that area.

And as we can find the appropriate solution, we will bring it into TSD.

Brian Alexander, Raymond James.

Could you just ballpark how much of that federal deal was in the fourth quarter last year?

And then, aside from this not recurring this year, are you expecting the federal government seasonal period which peaks in September to be seasonally normal?

It's hard to really separate that.

Because it's a number of the deals in there, so we would not be able to give you or quantify that number for you.

Are you expecting just the overall federal season, which is winding down here, has it behaved seasonally or is it better or worse than seasonal?

The end-user market I think is pretty much similar to last year.

As I mentioned to you earlier other than the deals we had last year, it is also the dynamics from the vendors side that would change our revenue into the market.

Dennis, what was the operating cash flow in the quarter?

Do you have that handy?

I have not released that number with our press release today.

We will bring that out in our 10-Q in a few weeks.

Can you say whether it was positive or negative?

That will be slightly negative this quarter for the nine months ended.

Thank you.

At this time, I show no further questions.

This concludes our third-quarter 2006 earnings conference call.

Thank you 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 October 5, 2006.

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 does conclude the program.

You may now disconnect.