新聚思 (SNX) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SYNNEX first quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Miss Laura Crowley, Director of Investor Relations.

Thank you.

Good afternoon, everyone, and thank you for joining SYNNEX Corporation's fiscal 2008 first-quarter earnings conference call.

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

Before we begin, I would like to note that 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 regarding our acquisition of New Age Electronics, seasonality, growth of our consumer electronics division, expectations of our revenue, gross margin, sales, net income, earnings per share, and return on invested capital, impact of the general economy on our business, our growth and profitability, and future benefits of our recent and planned acquisitions.

These statements 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 our 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 Thomas Alsborg for an update on our financial performance.

Good afternoon, everyone, and thank you for joining our call today.

I'm going to begin by summarizing our results of operations for the quarter.

Revenues for the first quarter of 2008 were $1.75 billion, a 10% increase over the first quarter of 2007 and an 11% decrease sequentially from our seasonally-high fourth quarter.

These revenue results are within our stated guidance and in line with analyst consensus for the quarter.

The sequential decrease is reflective of the seasonality associated with our business, in which case the first-quarter revenue is historically lower than our prior fourth quarter.

First-quarter net income was $16.8 million, or $0.51 per diluted share -- at the high-end of our stated guidance and above analyst consensus.

These results were driven by our continued operating margin expansion.

In the first quarter of fiscal 2008, our gross margin expanded to reach 5.48%, representing an increase of approximately 79 basis points compared to the same quarter prior year, and an increase of 13 basis points sequentially from Q4 of fiscal 2007.

This expansion is primarily driven by the impact of our strategic acquisitions in 2007.

While the gross margin will inevitably have puts and takes associated with normal business changes and cycles, we remain committed to our business services model, improving all drivers of our gross margin, and realizing efficiencies across our business.

First quarter 2008 selling, general and administrative expense was $63.1 million, or 3.61% of revenues, compared to $49.5 million, or 3.12% in the first quarter of fiscal 2007, and $68.6 million, or 3.48% in Q4 fiscal 2007.

The increase in expense as a percentage of revenue was primarily attributable to the cost of supporting our growing operations for our higher-margin growth business, and reflects the impact of seasonally-lower revenue levels in Q1 compared to the last quarter.

Income from operations was $32.8 million, or 1.87% of revenues, for the first quarter of 2008, compared to results of $24.9 million, or 1.57% of revenues, in the prior year, and $36.9 million, or 1.87% of revenues in the fiscal fourth quarter of 2007.

Our current level of operating margins in excess of 1.8% is an achievement that we're very proud of.

Turning to our net interest expense and finance charges, the total for the first quarter of 2008 was $4.2 million, a $1.1 million increase from the prior-year quarter of $3.1 million, as a result of financing the growth of our company.

Other expense of $2 million is mostly made of costs associated with unrealized losses in our deferred compensation program, which are offset to SG&A, thus having no bottom-line impact.

In addition, other expense also included about $630,000 for a nonrecurring charge to write down the cost associated with certain investments of the Company.

This $630,000 charge was onetime in nature and did flow through to the bottom-line of the P&L, thus reducing our reported EPS by $0.01.

The effective tax rate for the first quarter of fiscal 2008 was 35.9%.

Now I'd like to review our balance sheet information and metrics.

Accounts receivable totaled $678.6 million at February 29, 2008.

DSO, including the accounts receivable from our off-balance sheet program and vendor program AR, was 46 days.

Inventory totaled $625.1 million at the end of the quarter, translating to 35 days of inventory supply.

Days payable outstanding was 35 days.

So our net cash conversion cycle was 46 days.

Our DSO and days of inventory supply for the first quarter are naturally pressured upwards as our revenue seasonality contracts in the first quarter.

Excuse me.

Other first-quarter data and metrics of note are as follows.

Depreciation expense was $2.6 million.

Amortization expense was $1.8 million.

Capital expenditures were $3.9 million.

Cash flow from operations was approximately $73 million for the quarter.

From a distribution product line standpoint, peripherals accounted for 31 to 35% of our sales, systems components accounted for 15% to 19%, IT systems accounted for 29% to 33%, software accounted for 11% to 15%, and networking accounted for 4% to 8% of total distribution revenues.

HP, at approximately 27% of sales, was the only vendor accounting for more than 10% of sales during the first quarter of 2008.

Our total company associates are 6344 at February 29, 2008, compared to 6616 at November 30, 2007.

This consists of 5872 permanent employees and 472 temporary personnel.

The reduction in headcount was due to our constant alignment of costs with our revenue.

As we have shared with you during previous calls, we are always focused on finding areas to improve our productivity and at the same time reduce our costs and expenses.

Moving to our second quarter 2008 expectations, for Q2 2008, we expect revenues will be in the range of $1.715 billion to $1.785 billion, in line with our seasonality trends and reflective of our conservative approach with respect to the current state of the economy.

Net income is expected to be in the range of $16.6 million to $17.2 million, and diluted earnings per share is anticipated to be in the range of $0.50 to $0.52 per share.

Our forecasted diluted earnings per share figures are based on an estimated weighted average diluted share count of approximately 33.2 million shares.

Essentially, we anticipate a flat-to-moderating revenue growth in the short-term.

However, net income and EPS are expected to grow.

Once again, this reflects our commitment to focus on value creation and growth within earnings and ROIC, even in a soft revenue environment.

We remain committed to our stated goal of 15% EPS growth and 10% ROIC in Q4 2008.

As a reminder, all these statements are forward-looking, and actual results may differ materially.

Also please note, while we are in the midst of closing the New Age acquisition, it is premature to include any acquired business in our guidance until after the proposed acquisition takes place.

We will provide additional guidance once the acquisition of New Age Electronics has closed.

The acquisition is anticipated to close within the next several weeks.

Now I will turn the call over to our CEO, Bob Huang, for his perspective on the business and our quarterly results.

Thank you, Thomas.

Good afternoon to everyone, and thank you for joining our call today.

Our very solid performance for the fiscal first quarter of 2008 is consistent with our commitment to deliver on our profitability goals, even in the midst of some economic uncertainty.

Again, I would like to thank our dedicated employees for their relentless hard work and commitment.

I also wanted to thank our customers and suppliers for their continued business and support.

With the completion of our first quarter 2008, SYNNEX has now achieved our 83rd consecutive quarter of profitability.

As Thomas noted, the change in our strategies over the last two years ago to target more profitable business and our 2007 acquisitions were key contributors to our profit margin and profit expansion.

I am pleased to note that our annualized ROIC for the last quarter was 7.8%, compared to 6.8% in the first quarter of 2007.

Though growth is moderating in some sectors, we believe the impact of the economic times on our overall IT demand and operating result was not as significant as what had been alluded to in the marketplace, particularly in comparison to the Tech Bust in 2000.

We noticed some slowdown in the second half of last quarter with SMB through shipments to the smaller resellers.

However, we also experienced healthy momentum through our solution providers and system integrators who serve the enterprise, healthcare and public sectors.

On the strategic acquisitions we made last year, let me emphasize again I am pleased with our result on expanding our business process services that can truly serve our vendors and customers through the entire lifecycle of their products, from demand generation, to supply chain management, to assembly and distribution, and aftermarket technical support.

And I am excited about our acquisition of HiChina, whose services to 100,000 small business customers throughout China provides a predictable service revenue stream in a high-growth market.

Our GPE -- gross profit to expense ratio -- was 1.52% in the first quarter, a 2 basis point improvement year-over-year and above our benchmark of 1.5%.

Also reflective of our profitable growth with a priority focus on growing operating income and returns rather than just top-line.

Now let me comment on our Q2 guidance and 2008 goals.

At the midpoint of our Q2 guidance, we are projecting a 4% increase in sales and a 13% increase in our earnings per share.

The projected growth rate in revenue remains moderate, and we are cautious in our approach in light of the current economic environment.

It is important to remember that the market for North America IT spend is very large and contains significant opportunities for growth and expansion for SYNNEX, not only organically, but through adjacent markets.

We had good success in growing our TSD business since its launch three years ago.

We have been very happy with our new entrance to adjacent markets in consumer electronics and end-of-life products, and the newly entered BPO market.

Given our small size relative to the large size of the market, our efficient infrastructure, and our agility, we are optimistic about our overall performance and confident we can continue to grow faster than the market.

In late February we announced our intention to acquire substantially all the assets of New Age Electronics, a leading US distributor of IT and consumer electronics products.

We believe the acquisition of New Age is another very important strategic investment.

The New Age acquisition will significantly expand our U.S.

supplies and consumer electronics offering.

It will extend our reach to the retail channels.

Once the acquisition of New Age is complete, both our consumer electronics business and our supplies business will reach over $1 billion in revenues.

Most importantly, the transaction will provide profit potential that is anticipated to raise our previous EPS target from a 15% growth to the range of 20% to 30% per year.

This will accelerate our goal of achieving $100 million in net profit and a double-digit ROIC by 2010.

In closing, it was a great quarter, even in a soft market.

With our strategy and our ability to execute, I am very optimistic about 2008.

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

Laura, let's now turn the call back to the operator for questions.

Thank you, Bob.

Let's go ahead and open up the line for questions.

(OPERATOR INSTRUCTIONS).

Ananda Baruah, Banc of America.

The first one is around revenue growth, and sort of if you could talk about what the softness that you alluded to or spoke about on the call the second half of the quarter, really what it was around, and how incremental was it to what you were seeing before?

I guess your guidance implies, like Bob said, 4% year-over-year growth.

But I guess by our count, you'll probably be a little bit lower than that on an organic basis, which kind of puts you in between what your two major competitors in the US have spoken about recently.

Can you just talk about some of the dynamics you saw during the quarter?

And where do you think the market really is, in terms of growth in the US right now?

I mentioned earlier it's softer in the second half of the quarter, and we have not seen it picking up yet.

And that's reflected in our forecast and our guidelines.

There isn't really anything specific in a particular sector.

I think, to some degree, I mentioned earlier more on the SMB, and also there is some seasonality as well.

I think we just need to be cautious in this particular quarter.

You reaffirmed your 15% EPS growth target for 2008.

Can you give us a sense of -- does that imply -- does that embed normal seasonality for the second half of the year?

So the question is, do you need to see growth better in the second half of the year than you are guiding to for the second quarter to be able to hit that EPS target?

That's correct.

If you look at what we did last quarter and we're guiding for this quarter, the 15% is not an easy task, I must say, in this environment.

But given the seasonality, particularly with the business we have in the retailer side, which is very strong in the fourth quarter, I think these numbers -- the 15% is very doable for us.

I just wanted to, Bob, confirm the comments that you made about New Age a moment ago.

I don't know if that was an intention to give guidance or not, but it sounded like you were saying once you get New Age kind of integrated the way that you think you can, it would actually be quite accretive to your 2008 EPS.

I just wanted to get clarification around those comments.

We don't buy businesses without looking at their potentials, and that, from my perspective, I felt, is a huge potential out there.

We could not give you the official guidance yet because we have not got the business yet, and we know we are doing a lot of things for the integration.

But as soon as, like Thomas said, we complete the transaction, then we'll give you an update on that.

If I could go back to the EPS growth goal.

So, is the takeaway that if the environment does not improve from this point forward, you sort of see muted seasonality and low single-digit year-over-year revenue growth for the balance of the year, then your 15% year-over-year EPS growth goal would then be in jeopardy?

Is that the correct takeaway?

I wouldn't go that far.

Remember, there's many ways you could bring in the bottom-line.

Top-line is one, gross margin improvement is another, and then you also control expenses.

Those are more under your control; you could do a lot of things to improve your activities and reduce your expenses.

So there are many things you could do.

That's what I mentioned earlier.

Because our infrastructure, because our organization and our very agile culture, I think we could cope with the environment a lot faster than probably most companies.

And you could see that in our history.

That's why -- we didn't come to this -- 83 consecutive profitable quarters -- without having these type of corporate cultures embedded.

If I could add to Bob's comments, for the reasons that he just described, the way I could characterize it for you is to say that, first of all, every time we meet with you we revise and review our forecast.

So based on everything we see today, including a relatively flat Q2, given modest -- and I would say modest -- that is to say some reduced seasonality at the end of this year compared to normal, given everything we've seen, we still feel confident about growing our EPS in 2008 to be over 15% of 2007 EPS.

Thomas, could you remind us what your operating expansion goals are?

Sure.

First of all, again, I want to highlight the fact that we're quite proud of the fact that we have achieved operating margin this quarter of 1.87, which is the same margin we had last quarter.

So to be above a 1.8 operating margin sustainably is something we feel good about.

And one of the comments I shared with you on our January 10th earnings release call was that as we looked out into 2008, we saw operating margin expansion growing, and that for the year as a whole we saw operating margins in this range.

I compared the operating margins of Q4 to that of what we would see for the whole year of 2008, and we still feel comfortable in that range.

Matt Sheerin, Thomas Weisel Parkers.

This is actually Aaron Berman filling in for Matt.

I just had a quick question just following up on what you were talking about, what you guys mentioned as far as just relative softness out there.

Have you seen any sort of incremental competitiveness across the industry, maybe on pricing or anything else?

In the 27 years I've been in this business, I've never seen any single day not be competitive.

But I can tell you as the business is getting tougher, there is certainly some particular larger transactions that tend to be more pricey than the small transactions.

And that's the decision we have to make.

Right?

We have to make the right decision on that type of top-line revenues, or we should walk away from that.

And that's our focused decision.

Okay.

But if you look at just over the past quarter, have you seen any sort of -- have you seen the pricing environment deteriorate more so than it has been, especially given the weaker environment?

No.

I wouldn't say it was any noticeably different from previous quarters, Aaron, in that regard.

I know you mentioned end markets, as far as like SMB and what you're seeing in that market.

But if you could maybe give me some color on if you're seeing any sort of softness with regards to any of your product segments, peripherals, systems, networking, anything like that, or is it just pretty much across the board?

It's pretty much across the board in terms of products, except that we certainly get benefit substantially when our vendors do very well.

You could see that HP has done very well, so we did very well.

But other than that, it's pretty much across the board.

One quick question on New Age.

They have approximately $900 million in revenues.

So, would you expect to see significant attrition there, given you guys already have a decent presence in consumer electronics?

Dennis, you want to make a comment on this?

Because you are closer to this?

Sure, yes.

The question was on New Age and our go-forward expectations on the revenue.

Once again, we haven't closed the transaction, so this is just an overall comment, not guidance necessarily.

New Age, their revenue base is very complementary to our revenue base.

So we do expect to keep a substantial portion of the revenue as many of their customers, their larger customers, are not customers we're doing business with today.

And some of their product sets are product sets that we do not sell today.

So we do expect to keep a good portion of the business.

That being said, just like we've talked about the past few years, we're going to keep the profitable business of the organization, and any unprofitable business we will walk away from.

Brian Alexander, Raymond James.

Just wanted to go back to the comments Bob made on New Age, just to make sure I understand.

You've been talking about EPS growth of 15% consistently for the last two quarters.

And Bob mentioned with the inclusion of New Age you should be on track to grow 20% to 30% per year.

So I just want to confirm (A) he was referring to this year; but then also, if this acquisition isn't closing until the middle of the year, how could it have such a dramatic impact on growth for this year?

That's a good point, Brian.

I thought you were on vacation.

When I said 20% to 30%, period of time I'm referring to is the first 12 months.

First 12 months post-close?

After completion, that's correct.

(multiple speakers)

So that implies, then, we're looking for earnings accretion of somewhere around $0.10 to $0.30 in the first 12 months, which is consistent with what we've been thinking.

But why such a wide range?

What causes you to be at the lower end or the higher end of that range?

Because, one, we have not closed yet; two, the market is a bit more uncertain than what normally we would -- we have seen.

So we just want to make sure of that.

But in either case, if it's 20, 25%, it's 30% -- it's all accretive, first of all, and pretty sizably accretive for what we paid for it.

So I think that's what gets me very excited about this deal, and that's why I think we want to get into this and want to see what we can do.

Thomas, on the BPO initiatives, is there any way to quantify how much of an impact those two acquisitions are having, the ones you did last year, HiChina, Link2Support?

What impact are they having on gross and operating margins?

And how much of the 15% earnings growth is coming from those businesses specifically?

When these acquisitions are large enough as a BPO place to break them out, we certainly will.

Right now what I would tell you is that certainly, as we have talked about in the past, the margin profiles of this BPO business are substantially higher.

We have gross margins in the 20% to 50% range.

And on SG&A that's also equally high.

So our operating margins, we tend to focus, tends to be in the low double-digits.

Having said that, we also know that these are relatively small in size.

So while there's an upward impact to our operating margins and to our EPS, it is rather nominal at this time.

What I would point you to is that when I referred to in my prepared remarks about our acquisitions having a positive impact on our margins, and in particular our gross margin, I was not only talking about BPO acquisitions, but also our distribution acquisitions, such as RGC, for example.

These acquisitions are also having a very good impact.

PCW had a positive impact on our margins.

And then on top of that, the underlying business, as I've shared in the past, continues to execute very well.

So the expansion that we're seeing in our margins is both on the distribution side of the business and aided by the BPO.

And then, within the distribution side, whether it's acquisition or it's our core business, they are both having good, positive growth.

Just the final question on the working capital, on receivables in inventory.

I'm not sure I understand the explanation of the increase in those metrics.

I think you referenced seasonality in your prepared remarks.

But if I just look at Q1 DSOs and inventory days, it looks like this is the highest level they've been in quite some time.

So I was just hoping you could expand on that.

Thanks.

Sure, Brian.

I'll jump in, and Thomas can fill in any blanks as well.

First of all, as we always remind folks, this is a point-in-time metric.

The real important aspect of these two metrics are the quality and are we getting paid for the days that we're holding, be it accounts receivable or inventory.

And the answers to both those questions are (A) the quality is still very high.

We're very pleased by the quality of our portfolio and accounts receivable and inventory.

And (B) we are getting paid for the days that we are carrying, and that is evident in our higher operating margin that we produced and showed today.

That being said, I'd also like to mention that the DSO specifically is higher because there has been a bit of a mix change in our portfolio.

So there's a bit more business that is longer collection cycle days.

But again, that has been paid for through how we finance the business and how we have gone to market with our customers.

And also, we've moved away from some of our flooring business that we talked about in the past, and that shifts the days out as well.

The only thing I would add to that is, again, Dennis mentioned the quality.

A lot of this is really just the timing of when this falls in the quarter.

And as it turns out, we had some large receivables and some large inventory purchases towards the end of the quarter.

Having said that, I just want to emphasize to you that our aging is fine.

And you would also notice in the timing that our payables and our inventory are somewhat offsetting because the acquisitions took place in the very remaining weeks of the quarter.

I guess that was the source of my confusion, because it sounds like the quarter got a little bit softer toward the end, which would, naturally, lead one to believe that the inventory balances would be shrinking, not growing, and the receivables may not be as high as they are.

But we can discuss off-line.

Thank you.

(OPERATOR INSTRUCTIONS).

Rich Kugele, Needham & Company.

First, just to understand New Age just a little bit better, especially given their consumer presence, can you just talk about how their results have been lately, even if it's just qualitatively?

And then I have a follow-up.

As you probably know, first of all, New Age is not a publicly traded company, so their information is not publicly available.

You could go onto their Web site to see some information.

But certainly, because this transaction hasn't closed, it would be, I think, inappropriate for us to speak on their behalf.

Secondly, we often get questions about credit.

So if there's any comments you can make about your own ability to finance -- do your off-balance sheet financing, and the ability of your customers and VARs to get credit as well.

Obviously, results were fine.

But, any comments you have on what you see on the market?

I would just tell you in short that the quality of our credit ourselves is still good.

No issues there.

We have good relationships, long-term relationships, with our banks.

And we have working capital facilities that are contractually agreed to and in place.

So we're very comfortable with our own liquidity.

With regards to our customers, and our vendors for that matter, I would say the same thing is true.

I would add that for, Rich -- the expenses -- the interest expenses should come down with the way it goes right now.

So I think it actually is a good thing for us from that point of view.

(OPERATOR INSTRUCTIONS).

There are no further questions.

Thank you very much.

This concludes our first-quarter earnings conference call.

Thank you for joining us today.

We will have a replay of this call available for the next two weeks, beginning today at approximately 5 PM Pacific Time, through April 3rd, 2008.

As always, should you have any follow-up questions, both Thomas and I are available to take your calls.

Thank you and have a good day.

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

This concludes the program.

You may now disconnect.