新聚思 (SNX) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SYNNEX first-quarter 2007 earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference call may be recorded.

I would now like to turn the conference over to our host, Ms.

Laura Crowley.

Please go ahead.

Good afternoon and welcome to the SYNNEX Corporation fiscal 2007 first quarter earnings conference call.

Joining us on today's call are Bob Huang, President and Chief Executive Officer; and Dennis Polk, Chief Operating Officer and Chief Financial Officer.

Before we begin, the statements on today's call which are not historical facts or forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include but are not limited to statements regarding our expected tax rate for 2007, expected revenue attributions to Link2Support and PC Wholesale, modification of our Canadian securitization arrangement, our efforts to grow our overall growth strategy, our profitability, anticipated benefits of our acquisition of Link2Support and PC Wholesale, our expectations of our revenues and sources of revenue, net income and earnings per share for the second quarter of fiscal 2007 and the consolidation of our Canadian facilities and related expenses, which are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in these forward-looking statements.

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

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

Now I'd like to turn the call over to Dennis Polk (technical difficulty).

Dennis?

Thank you, Laura.

Good afternoon and thanks for joining our call today.

Total revenues for the first quarter of 2007 were $1.59 billion, a 6% increase over the first quarter of 2006 and a 9% decrease sequentially.

Both percentage amounts were in line with our stated guidance for the quarter.

By segment, distribution revenues were $1.48 billion, an increase of 6% over the first quarter of 2006 and a 7% decrease sequentially.

The distribution revenue increased year over year [and the decrease] was in line with seasonal expectations.

Contract assembly revenues were $111.4 million, a slight decrease over the first quarter of 2006 and down 23% sequentially.

As noted in our fourth quarter call, an assembly project that emanated from our distribution business contributed to an increase in Q4 assembly sales.

Thus, the large sequential decline was expected as a much smaller portion of this total project was recorded in Q1 2007, when the build was completed.

First quarter net income was $13.9 million or $0.43 per share compared to $10.7 million or $0.34 per share in the first quarter of 2006.

On a dollar basis, year-over-year net income increased 30% and on an EPS basis net income increased 26%.

Moving on to our gross margin, the gross margin percentage for the first quarter of fiscal 2007 was 4.69%, an increase of 36 basis points over the prior-year quarter.

Continued focus on improving all aspects of our gross margin contributed to the increase.

As well, we saw gross margin improvement from each of our businesses and geographies.

First quarter 2007 selling, general and administrative expense was $49.5 million or 3.12% of revenues compared to $42.8 million or 2.85% of revenues in the first quarter of 2006.

The increase in SG&A expense on a dollar basis and as a percentage of sales is primarily due to the recent acquisitions that we had completed, the cost of generating higher-margin revenue and the incremental costs of increased revenue.

Income from operations for the first quarter was $24.9 million or 1.57% of revenues compared to $22.2 million or 1.48% of revenues in the prior year.

On a segment basis, distribution operating income was $23.6 million or 1.60% of revenue compared to $20.3 million or 1.46% of revenues in the prior-year period.

On a dollar basis, distribution operating income was up a solid 16% over the prior year.

Contract assembly operating income was $1.4 million or 1.24% of revenue compared to $2 million or 1.79% of revenues in the prior-year quarter.

With respect to interest expense and finance charges, the total for the first quarter of 2007 was $3.1 million, a decrease over the prior year quarter by $2.7 million.

The year-over-year decrease is due to interest income we received from our long-term project business in Mexico that started in earnest in Q3 2006.

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

The tax rate for the first quarter of fiscal 2007 was 37%, which was in line with our expectations.

The current expectation for our tax rate for full-year 2007 is that it will approximate the same rate as Q1.

However, as always, this is dependent upon several factors including profit contribution from the various geographies that we operate in.

Regarding our balance sheet metrics, accounts receivable totaled $654 million at February 28, 2007, which includes $64 million associated with our off balance sheet accounts receivable securitization program inn Canada.

DSO, including the off-balance (technical difficulty) was 43 days.

Inventory totaled $524 million at the end of the quarter.

Inventory days were 32.

Netting out at day's payable outstanding metric of 32 days, our first-quarter cash conversion cycle was 43 days.

Other first quarter metrics of note -- depreciation expense was $1.6 million.

Amortization expense was $1.2 million.

Capital expenditures were $1.9 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 28% to 32%.

Software accounted for 12% to 16%, and networking accounted for 3% to 7% of our total distribution revenues.

In our contract assembly business, from a customer mix standpoint, approximately 86% of our business was from our main customer and approximately 14% was from all other customers.

HP, at approximately 26%, was the only vendor accounting for more than 10% of sales during the first quarter of 2007.

Total headcount was 5,664 at February 28, 2007.

The large increase over the prior quarter is primarily due to our recent acquisition of Link2Support.

This acquisition added (technical difficulty) [a 2,400] total headcount.

Before I go over the second-quarter expectations, I would like to provide you with the following information on our recent completed acquisition as well as a bank financing update.

During the first quarter of 2007, we completed the acquisition of Link2Support and PC Wholesale for a total of approximately $55 million.

Both transactions were completed in the last week of the quarter, since the revenue and profit contributions were negligible.

As Link2Support is a fee-for-service business, its ongoing revenue contribution is not expected to be material to our total revenue.

As noted in our announcement on PC Wholesale, 2006 revenues in this business were approximately $224 million.

However, our expectation is that during the integration of the business and due to customer and credit overlap, our retention of this revenue run rate will be measurably lower.

Our long-term goal is to build this business past its prior revenue levels through synergies and other benefits of the combined organizations.

Earnings contributions from these two acquisitions will approximate $0.02 per share in Q2 2007.

On March 5, 2007, we completed the purchase of a new logistics facility in Guelph, Canada.

This facility is approximately 600,000 square feet.

Thus, this facility will allow for ample room to grow our existing business as well as pursue additional supply chain business.

The total purchase price for this facility was approximately $12 million.

We will be consolidating our two existing Ontario, Canada area facilities into this new facility over the next few quarters.

We expect up to $0.01 per-share per quarter in additional expense to operate the new and the existing facilities until the integration is complete.

This amount is factored into our second quarter outlook.

We may also incur additional non-recurring expenses once the existing facilities are closed.

During the quarter, we completed (technical difficulty) [an arrangement] with our existing bank group, which increased our US borrowing facilities to a maximum of $450 million from the previous level of $320 million.

The terms of the new arrangement allow for the accounts receivable securitization portion of the borrowing facilities to be classified as an on balance sheet borrowing transaction versus the prior borrowing facilities, which required the accounting for the funding to be off balance sheet.

Our balance sheet as of February 28, 2007 reflects this change and is evidenced by the increase in accounts receivable and borrowings.

We believe this change will bring enhanced visibility to our AR and debt levels that were previously disclosed in our financial statement footnotes.

Moving on to our second quarter 2007 expectations, for Q2 2007 we expect revenues will be in the range of $1.595 billion to $1.645 billion.

Net income will be in the range of $14 million to $14.7 million and earnings per share will be in the range of $0.43 to $0.45 per share.

These forecasted earnings per share figures are based on an approximate weighted average diluted share count of $32.8 million and do not include any impact of any special charges or restructuring amounts that could be incurred.

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

Before I turn over the call to Bob, I would like to point out that we are reviewing our current segment reporting.

Given the ongoing changes in the mix of our business, recent investments and the fact that our assembly business is truly becoming more of a combined sale with our distribution business, our current reporting will likely need to change.

As we work through this topic we will keep you posted on any planned changes.

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

Bob?

Thank you, Dennis, and good afternoon to everyone.

We are pleased with our result for the first quarter of 2007.

The SYNNEX team delivered another well executed quarter, and I would like to thank our employees, (technical difficulty) [customers] and our suppliers for their continued ability and support.

With the completion of our first quarter of 2007, SYNNEX has achieved our 79th consecutive profitable quarter.

The performance of our distribution business continued to be the main factor contributing to our year-over-year increase in revenues and profits for this quarter.

I'm especially pleased by the 14 basis point improvement in distribution operating income year over year from both our US and Canadian businesses.

As Dennis noted earlier, our continued overall focus on improving our gross margin coupled with our relentless effort on improving our cost structure has allowed us to deliver strong operating and bottom-line improvements.

Our GP, gross profit to expense ratio, was 1.5 in the first quarter.

[If the] key productivity metrics where we continue to be the industry leader.

Our focus, as it has been over the past few years, will be to continue to improve these metrics through profitable growth with a higher focus on operating income versus the topline growth.

The distribution marketplace remained competitive during the quarter, but overall demand was as expected and the pricing continued to be rational.

In terms of the customer segment or private product categories, we did not see any significant differences from historical patterns or from what has been reported in the marketplace.

Regarding our assembly business, while revenue was generally in line with our expectations, more importantly, our operating income improved 20 basis points over Q4 of 2006.

We were able to improve profitability by continuing to diversify the business, especially on a gross margin basis, through synergies with our distribution business.

Evidence of this momentum is our recent announcement regarding future assembly and other services we will be providing to Dot Hill Systems.

Revenue will not begin until later in this year.

However, we are pleased by our progress and potential in this new project.

Now let me comment on our second quarter guidance.

At the midpoint of the guidance we are projecting a 7% increase in year-over-year sales for the second quarter of 2007 and a 22% increase in our earnings per share.

This growth rate is reflective of our continued focus on growing our business profitably.

The projected increase in our revenue also assumes from a gross standpoint the continued reasonable demand in IT distribution and normal seasonal patterns in the IT marketplace, and that our assembly revenue will be about flat with our first quarter.

As we have discussed in prior quarters, our future success will be dependent on our execution in all aspects of our business as well as generating returns on new investment that we have made or plan to make.

In this regard, I would like to update you on larger initiatives currently underway and our recent acquisitions.

First off, regarding our TSD business, I am pleased with our progress on growing this business and executing on our stated goal for this division.

We will continue to invest where necessary to further the prospect and the momentum of this business.

During the first quarter, we announced that the senior leadership of this division will be taken over by Jim Estill, our CEO of SYNNEX Canada and Peter Larocque, our President of US distribution.

Through this change we will see the benefit that these two senior leaders can add through existing businesses, synergies, and hence maximize our offering and returns.

For our CE retail business, even though sales for most vendors are still very insignificant, the GPS product for MiTAC has gained great traction.

We plan to invest further in this segment in hopes of continuing the current momentum.

On February 28 we announced the acquisition of PC Wholesale.

PCW was a distributor of a computer product with a strong focus on end of the life and refurbished product.

PCW complements SYNNEX's growth strategies and provides SYNNEX a net new customer base while providing additional service for our OEM partners.

On February 28, we announced the acquisition of Link2Support, an approximate 1,400-seat world-class technical support and contact center that delivers voice, e-mail and technical chat support as well as value-added services.

This acquisition further strengthens our emerging business process outsourcing initiative.

Our strategy is to leverage the strength of our existing Concentrix business and Link2Support to deliver more value to existing and new customers and OEM partners.

Both of these investments further diversify our offerings to our OEM partners and resellers.

We will be [launching] positive EPS contributors, and importantly, our ROIC accretive as well.

I would like to take this opportunity to welcome the employees of Link2Support and PCW to the SYNNEX team.

Before I turn the call over for questions, I would like to emphasize that we are very pleased with our current result and the opportunities we have to further our earnings growth potential.

As the IT distribution market continues to mature, it is likely the achievement of significant growth will be costly from a bottom-line perspective.

Based on this, our strategy is to maximize the return of our resources by providing more value added service to vendors and customers, including new investment in service like Link2 and PCW.

This means we will continue to grow our bottom-line at a much faster rate than topline growth and eventually achieve the double-digit ROIC goal.

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

I will now turn the call back to the operator for questions.

Thank you, Bob.

Can we go ahead and open up the call for questions, please?

(OPERATOR INSTRUCTIONS).

Ben Radinsky from Bear Stearns.

Can you talk about your revenue expectations in a little bit more detail in terms of your long-term targets, given your comments in the prepared remarks?

Sure, Ben, thanks for the question.

Our stated goal has always been to grow faster than the distribution marketplace when it comes to topline growth.

But as we have talked about on the call here today and talked about in the past, our number one goal is to grow our operating income and our net income faster than that rate.

Our goal is to take profitable revenue growth, not just chase revenue to grow the topline.

So our goal moving forward will be, again, to grow faster than the market when that allows us to grow profitably.

Just to clarify, I think historically you used to comment on two times the market.

Would you say that that has materially changed?

I think we have done this in the last several years, and we felt we [got to] reaching to the point that the market is saturated, pretty much saturated, and is getting more and more difficult to grow at that type of rate without paying a lot of expenses to the bottom-line.

Hence, as I mentioned earlier, we have, particularly two years ago when we were on the roadshow for the second offering, we heard our investors want to have higher and higher ROIC's.

We did come back and look at that, and indeed that's -- we should be putting more focus and see how we could best utilize our capitals and our human resources we have investment in.

So that's where the strategy came from.

Over the last couple years you have probably seen, particularly on the gross margins, improvement in the bottom-line improvement.

So it's not our goals to continue that double-digit growth [and] we communicate a few years ago.

We will be putting a lot more focus on the bottom-line, and you should see that.

You have seen this, and you should continue to see that strategy being executed.

Just two quick ones.

Is the operating margin that you reported this quarter sustainable for the time being?

Or I guess more explicitly, do you have a benchmark that you are now targeting for your operating margin?

On that question, historically our goal is to have a one point operating margin and then grow that five basis points each year.

In 2006, we achieved that goal, and so now our goal is to hit 1.55% operating margin return.

In Q1 we were successful in doing that and we will endeavor to maintain and achieve that level in the quarters moving forward.

The last one for me and then I'll hop back in the queue.

Can you talk about your accounts receivable and your debt levels?

I'm assuming that the securitization is now on balance sheet?

Yes.

From an accounts receivable standpoint for our US facility, previously that was accounted for off-balance sheet.

But with the new agreement that we signed in February of this year, the accounting for that now is on balance sheet.

So you'll see a close-up of the AR and the borrowing in our accounts receivable account and our short-term borrowing line item.

So just for a comparability point of view, do you have in front of you what the comparable period was a year ago in terms of DSO's, including the off-balance sheet debt, then?

The DSO number we have given out in the current period and in prior periods always assumes that the borrowing facility was on balance sheet.

So our DSO that we disclosed on the calls have always been consistent apples-to-apples comparison.

Jason Gursky from JPMorgan.

Couple of quick housekeeping ones for you, Dennis.

Do you have a cash flow from operations number for us today?

Sure.

Again, this is a bit affected by the change in the accounting for the securitizations.

I'm going to give you an apples-to-apples number as well.

The cash flow from operations was about $60 million for the quarter.

Again, that excludes the new accounting for the on balance sheet.

But from a comparability to last year, the $60 million is the amount to be looked at.

Any update on the CFO search?

Are you going to hold on to both titles for the time being?

That's an easy answer.

My goal in life is not to have both jobs.

We have made great progress in that search, actually.

I've met a lot of good folk in the recent past and we hope to have an announcement on that in the very near future.

Then maybe two questions for either you or Bob.

Last quarter you had mentioned qualitatively some comments about Vista and your expectations around what that was going to do to the demand.

Maybe just an update there?

Then on the assembly revenues, I think, if I heard correctly, it was flat quarter on quarter.

Obviously, last year you had quite a bit of a seasonal bump, so I'm just wondering if this is more ASP driven, as you have talked about here in the recent past, or are you seeing a drop-off in volumes in the assembly business (technical difficulty) --

On the first, [at least the] question is pretty much what I expected.

We said we expected not so much on the enterprise side but on the SMB's, there probably will be some slowdown last quarters, and we see some picked up on the sourcing on the consumer space that once launched, people want to jump on to Vista.

There's some shipments on the SMB as well.

There is very, very minimal on the enterprise space on the Vista shipments.

On the assembly, I think you said it right.

It was a special project.

One-time opportunities we had last year and that we felt that the revenues were currently what we have been, always a flat to flat.

It's a combination of the ASP's as well.

But obviously, your largest customer there typically has a seasonally strong quarter.

Here, there is that -- so it's mainly the ASP that's driving a less than seasonable uptick for you?

Yeah, I think seasonal -- is combination of the ASP's and that the seasonal factor is out there.

Rich Kugele from Needham and Company.

Just a few questions.

In terms of Link2Support with their Philippines base, does this change in any way your thinking about penetrating the Asian markets?

That's a very good question.

One is that you probably noticed that today in China alone we have over almost 700 employees over there, and we started in late 1990s to move some of the back office to China, essentially to take advantage of the labor costs and certainly the quality of the employees we have over there were very good.

Now, the Link2Support, to a similar degree, because the labor costs is substantially lower in Philippines, so from the call center's point of view it makes a lot of sense, particularly in the current environment, where India is extremely, extremely expensive -- you know, getting very pricey and the turnover is also very high.

Philippines turns out a very, very good market for us to go in.

And then just secondly, in terms of Dot Hill, obviously helpful in helping to diversify away from Sun.

But do you see similar transactions to that or was that somewhat unique because of the MiTAC relationship?

It's a combination.

This Dot Hill has about more synergies with the distribution business.

The components, the logistics coming from distribution.

It is true that MiTAC is providing very essential engineerings and [to SMT's] productions back in China.

However, there's a lot more services we provide into Dot Hill's in US beyond just a system integration like we do for our primary customers.

So theoretically, the margins ultimately could be better on that type of business?

We would not be able to comment that.

We certainly wanted to make sure that the business makes sense.

And then just lastly, Dennis, from an operating expense standpoint, how should we think about the run rate from this level post-acquisitions?

Sure, Rich.

We only give explicit top and bottom line guidance, but you should expect that our SG&A from a raw dollar perspective will increase in Q2, given the acquisitions of Link2Support and PC Wholesale.

They were both done near the end of the quarter, so we will have a complete full quarter with them in Q2.

Outside of those acquisitions, we're very much managing our organic expenses, if you will, on a very tight basis.

So you shouldn't see anything other than a increase based on the increase in revenue.

(OPERATOR INSTRUCTIONS).

Brian Alexander with Raymond James.

Just on the gross margin improvement that you saw sequentially that was a lot more than I was expecting, but then it was offset by a rise in OpEx.

So I'm just wondering how much of that margin improvement was due to traction that you're gaining with the TSD business because I would think that that gross margin would translate into higher operating margins, which wasn't the case here.

So I guess what I'm getting at is how much of the gross margin improvement was due to TSD versus maybe other mix shifts within the distribution business, either a customer or product mix?

The main gross margin increase still coming from overall focus on the profitable business because TSD, relatively speaking, is still small as a percentage of the total business.

So even [if it has] some improvement on that, it would not reflect on the total gross margin improvement that we have shown.

The second area, certainly, the Concentrix Corporation, a year ago we had very small business in that, and that's generally fee-for-service a larger gross margin that ate up some gross margin contribution as well.

So those are the two major components.

Dennis, did you have anything to add to that part of this?

No, though, to reflect, it will contribute to the increase in our gross margin for the quarter.

But I will emphasize, as Bob noted, that the distribution, the core distribution business was a very solid contributor to the increase in gross margin in this quarter.

I guess maybe the follow-on to that would be what drove the increase in the OpEx ratio from, call it 2.9 to 3.1% sequentially?

It's several things.

First of all, we're still continuing to invest in our business.

We did have a little bit of expense from the acquisitions that we did.

Link2Support was done with ten days to go in the quarter and a few days of PC Wholesale.

But those are the primary reasons for the increase in raw dollar SG&A and as a percentage of sales as well.

Dennis, can you remind us of what your targets are for TSD for this year and for next year?

Are you still comfortable with those targets?

Sure.

The last quarter we talked about our goal for the 2007 fiscal year for TSD would be $350 million in revenue, and we're still comfortable with those goals.

Finally, on the Link2Support, could you tell us how much of the $55 million purchase price for both acquisitions was strictly related to Link2Support?

And maybe just a little bit more detail on the strategy here.

I guess I'm struggling to understand exactly what this business is, how does it fit with Concentrix?

Who is the customer?

Is it an end user?

Is it a reseller?

I'm just trying to understand how this fits into your overall strategy.

Let me take a shot on the Link2Support strategies, and then Dennis can comment on the other things.

The Link2Support -- essentially, what we're trying to do all along, we see our OEM suppliers more as a customer than as pure vendors, and we try to offer them as many different type of services as we could.

In the past we started from manufacturing, and we have the main generations, and now we're getting to the tech support area.

The Link2Support support essentially doing mostly today is tech support and also have some (indiscernible) activities as well, for off sales and that type of thing.

So it's a very good extension from what we are offering today.

Now, as far as the specific Link2Support Concentrix, Concentrix also have a lot of call center [reasons] that today the costs to operate in Rochester is too high.

So it would make a lot of since if we could move some of the unprofitable business offshore, it probably will make us even a lot more competitive.

So those are the synergies that we could see today, and we see some customers -- even the reseller customers are interested in having the tech support to help that set of services that we could provide.

So it's a whole slew of different type of services we provide for our current partners, either the vendors or OEMs, suppliers or our resellers or existing Concentrix customers.

This is my last question.

Can you just talk about how concentrated or diverse the vendor portfolio is within Link2Support?

In other words, could you just disclose who the vendors are that are currently using them?

Is it highly concentrated or is it pretty diversified?

We would not be able to.

We would not be able to share that with you, on the concentration ratios.

But we do have a few -- more than a few -- customers we're working with.

These will grow.

This business will grow before you even know about it.

So I'm very, very optimistic about the potential, this 2,300 -- 2,400 employees that we are all of a sudden seeing in a country where the cost is very low and English is their official language.

I assume of the $0.02 from the acquisitions you're expecting in Q2, about $0.01 of that is from Link2Support.

How about the purchase price?

Is it in the $20 million range?

Is that how much is what you paid for Link2Support?

The purchase price for PC Wholesale was approximately 30, and the purchase price for Link2Support was approximately 25.

(OPERATOR INSTRUCTIONS).

Follow-up question from Jason Gursky from JPMorgan.

Just one bookkeeping one, Dennis, for you.

The profitability from the Mexican operation this quarter, was that in line with your expectations?

How does this -- any change there as to the interest income line going forward?

From the Mexico contribution from the project that we have there, the profit contribution was in line with our stated guidance on that from a few quarters back, which is $0.08 to $0.10 a year, so approximately $0.025 per quarter.

The project that we are getting that profit from is moving along well, and there's been no change in how we do business or how the business is maturing for that project.

Just on interest expense going forward, given the financings that you did this quarter, are there any material changes, given the current debt levels?

No material changes other than the additional debt carry that we would have from those two acquisitions.

Then on the segments, you had suggested that you're going to perhaps change that going forward.

Would you just be rolling in everything into the distribution?

Is that the thought?

Yes, that is a possibility.

We're obviously looking at many aspects of our business and how we break it out, given all the changes that have occurred over the past few quarters.

But that is one of the possibilities that we're looking at.

Operator, we have time for one more question.

(OPERATOR INSTRUCTIONS).

I show no further questions.

Great.

Okay, this concludes our first-quarter 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 daylight time through April 5, 2007.

Thank you again for your participation.

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

This concludes the program.

You may all disconnect, and have a wonderful day.