新聚思 (SNX) 2009 Q4 法說會逐字稿

Good afternoon.

My name is Lisa.

At this time I'd like to welcome everyone to the SYNNEX fiscal 2009 fourth quarter earnings call.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions).

Thank you.

I'd like to turn the call over to Laura Crowley.

Ma'am, you may begin your conference.

Thank you.

Good afternoon, and welcome to the SYNNEX Corporation fiscal 2009 fourth quarter earnings conference call.

On today's call are Kevin Murai, President and Chief Executive Officer, Dennis Polk, Chief Operating Officer, Thomas Alsborg, Chief Financial Officer, and joining us remotely today is Chris Caldwell, Senior Vice President and General Manager, Global Business Services.

Before we begin, I would like to note that the statements on today's call which are not historical facts maybe 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 strategy including growth, profitability, investments, and business expansion, expectations for our operating expense, sales, revenues, net income, and earnings per share for the first quarter of fiscal 2010, impacts of changes in tax laws, flexibility, efficiency and benefits of our business model, market conditions, our expectations for our operating margins, and our ROIC, these 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-Q for information on Risk Factors that could cause actual results to differ materially from those discussed in these forward-looking statements.

The non-GAAP data included in our press release today and discussed on this call are included with the intention of providing investors a more complete understanding of our operational results and trends, but should only be used in conjunction with the results reported in accordance with Generally Accepted Accounting Principles, or GAAP.

The non-GAAP financial measures enable investors to analyze the base financial and operating performance of the Company, and facilitate period to period comparison and analysis of operating trends.

Non-GAAP measures presented in this release or other releases, presentations and similar documents issued by the Company, include the results associated with the company's discontinued HiChina web solutions operation.

A detailed schedule of historical results of operations with and without discontinued operations is posted on SYNNEX's website under the Investor Relations section.

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.

Thomas?

Thank you, Laura.

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

I'll begin by summarizing our results of operations for the quarter, with our key financial metrics, and then I will provide some further details on our results.

First, the big picture.

Highlights on our two most important financial performance metrics, EPS and ROIC.

Our fourth quarter EPS was $0.87 per diluted share, handily surpassing Wall Street estimates of $0.76 by $0.11 and $0.07 better than the Q4 results of 2008 of $0.80 per share.

Fiscal fourth quarter net income was $30.3 million compared to $26.4 million in the fourth quarter of fiscal 2008.

The strong net income and EPS performance in Q4 2009 was driven by revenue upside, operating leverage and continued cost savings.

On an annual EPS basis, our EPS was $2.70 per diluted share or $92.1 million compared with $2.52 per diluted share or $83.8 million for the fiscal year ended November 30, 2008.

In a year of deep economic recession, SYNNEX net income grew by nearly 10% year-over-year, while many companies actually saw the net income and EPS diminish in 2009.

As for ROIC, once again, SYNNEX rose and ROIC in our fourth quarter, marking the ninth quarter in a virtual string of year-over-year quarterly ROIC improvements.

Fourth quarter ROIC was 11%, well in excess of SYNNEX weighted average cost of capital of 9%.

On an annual run rate basis, SYNNEX has turned the corner on ROIC and is producing ROIC that meets or exceeds its cost of capital.

Our long term goal is to maintain a 2 to 3% spread between our weighted average cost of capital and ROIC.

Next, I will cover the details of SYNNEX's strong performance, financial performance, but before I begin reviewing the numbers, I would like to remind you that in Q1, fiscal 2010, we completed the previously announced sale of our majority stake in HiChina Web Solutions.

As a result of this decision to sell HiChina, we are presenting the results of HiChina's operations as discontinued operations in our press release and all SEC filings.

HiChina only contributed $37 million of revenue and approximately $0.11 in EPS in all of 2009 but because it had operating margins in the range of 14%, the discontinuation of HiChina's operations from SYNNEX overall results will make a more notable impact on SYNNEX's operating margin.

So, as I present our details of results of operations and my following remarks, I will provide for each line item results from continuing operations in accordance with US GAAP; however in the case of operating margins and EPS segment revenues, I will also provide for comparative purposes our operating margins and revenue on a pro forma basis inclusive of HiChina's results, so that analysts who still have HiChina included in their Q4 and fiscal year 2009 models as continuing operations can have comparable figures from which to evaluate SYNNEX overall performance for 2009.

Also, please note we have posted on the SYNNEX IR website a brief historical schedule of operating income from continuing operations which excludes HiChina results.

Now I will cover our detailed financial results.

Fueled by better than expected demand and seasonality, total revenues for the fiscal fourth quarter of 2009 were $2.2 billion, surpassing our expectations and those of Wall Street representing growth of 5.3% over the fourth quarter of 2008 and an increase of 10% sequentially.

On an annual basis, at $7.72 billion, revenues were essentially level compared to the fiscal year ended November 30, 2008, demonstrating very solid market share gains in an otherwise negative growth year for the industry.

At the segment level, Q4 2009 revenues from the distribution segment were $2.18 billion compared to $2.07 billion in Q4 2008, up 5.2% and on an annual basis, the distribution segment revenues were $7.64 billion for fiscal 2009, essentially flat compared to fiscal 2008.

The goal of business services segment's fourth quarter revenues from continuing operations were $26.3 million compared to $22.9 million in the fourth quarter of 2008.

In fiscal 2009, GBS revenue from continuing operations was $101 million, compared to $82.5 million for fiscal 2008.

On the subject of revenue, I should note that the Company is considering opportunities which include more fee-based revenue as we go forward, and SYNNEX may consider transitioning some of its existing revenue streams to a net fee basis as this more appropriately may represent the changing characteristics of our customer or vendor agreements moving forward.

In the fourth quarter of fiscal 2009, SYNNEX gross margin from continuing operations was 5.24%, essentially flat with the third quarter of 2009 at 5.30%, on the same basis of results from continuing operations for the prior year fourth quarter, gross margin was 5.63%.

On a comparative basis with the last several quarters, the fourth quarter of 2009 gross margin is on the lower side of our gross margin range, due to our mix of business and the current economic and marketplace dynamics.

Nevertheless, our gross profit dollars continue to reflect the healthy demand we have experienced for our products and services.

The Q4 2009 mix of business continues to reflect the stronger demand for the incrementally higher velocity business that began in Q3, stemming from share gains with certain longstanding customers.

It also reflects not only a stable demand, but in the US a return of growth of demand by certain large volume customer groups, and a corresponding disproportionate growth in demand of certain lower margin higher volume products such as mobile computers, peripherals, and software.

This is business that has been direct but for efficiency purposes was decided that the business would be better served through SYNNEX.

By contrast to Q4 2008, Q4 2008 was a particularly strong quarter for gross margin due to mix and favorable price arrangements.

There will always be movement within a given range for our gross margins due to mix and a myriad of other day-to-day variables but going forward we expect a gross margin range to continue to move higher as we continue to invest in new higher margin services businesses and attract ourselves into adjacent markets.

More importantly, however is this.

Regardless of the mix of business and associated gross margins, we are in the business to make good operating profit, so whether it is the core traditional high velocity business that we run very efficiently, or the high value add service business that necessitates higher gross margins, in either case, we have demonstrated a propensity to deliver good industry leading operating profits and operating margins and consistently expand our operating margins over time.

So this along with our continued investments in services, businesses, and adjacent Markets continues to be one of the key sets of drivers behind our continued expectations of continued long term operating margin expansion.

Our operating margins and operating profit remain a key focus driver of our EPS and ROIC growth at SYNNEX.

Throughout the last two years, SYNNEX has continued to grow its operating margin, differentiating itself operationally and financially in terms of results compared to its closest competitors.

2009 represents a milestone in this respect as for comparative purposes, on a pro forma basis inclusive of HiChina for the full year, SYNNEX achieved a 2.0% operating margin for fiscal 2009.

I will now cover operating income and operating margin for the quarter and the fiscal year.

Both on the basis of continuing operations and on a pro forma basis, to include the results of HiChina's operations.

I will first do this for the consolidated Company and then for each of our two business segments.

I will begin with results from continuing operations.

SYNNEX fourth quarter 2009 operating income and margin from continuing operations was $47.7 million or 2.17%, compared to $46.5 million or 2.23% for Q4 2008.

SYNNEX fiscal 2009 annual operating income and margin from continuing operations was $149.6 million or 1.94% compared to $146.4 million or 1.89% for fiscal 2008.

For the Distribution segment, fourth quarter 2009 operating income and margin was $44.4 million or 2.04% compared to $44.0 million or 2.12% for Q4 2008, and for the fiscal year 2009, the Distribution segment's annual operating income and margin from continuing operations was $137.8 million or 1.80% compared to $138.8 million or 1.81% for fiscal 2008.

For the Global Business Services segment, fourth quarter 2009 operating income and margin from continuing operations was $3.3 million or 12.67% compared to $2.5 million or 11.05% for Q4 2008 and for the fiscal year, the GBS segment's annual operating income and margin from continuing operations was $11.9 million or 11.79% compared to $7.5 million or 9.14% for fiscal 2008.

So those were the results from continuing operations.

Now, I will provide the pro forma operating income and operating margins that include the results of the HiChina operations for the fourth quarter and fiscal year for the Company and the segments as applicable.

SYNNEX fourth quarter 2009 operating income and margin pro forma with HiChina was $49.3 million or 2.23%, compared to $47.9 million or 2.28% for Q4 2008.

SYNNEX fiscal 2009 annual operating income and margin pro forma with HiChina was $154.9 million or 2.00% compared to $151.8 million or 1.95% for fiscal 2008.

The Global Business Services segment fourth quarter pro forma operating income and margin including HiChina was $4.9 million or 13.46% compared to $3.9 million or 12.53% for Q4 2008, and for the fiscal year 2009, the GBS segments pro forma annual operating income and margin including HiChina was $17.2 million or 12.44% compared to $13.0 million or 11.42% for the fiscal 2008 year.

The Distribution segment's numbers of course will be the same as those from the continuing operations segment as HiChina was not part of the Distribution segment.

Our operations remain very efficient for Q4 2009.

SG&A expense from continuing operations was $67.6 million or 3.07% of revenues compared to 3.4% in the fourth quarter of fiscal 2008 and 3.40% sequentially.

Q4 2009 SG&A benefited by a reduction in bad debt expense as the economy recovered relative to Q4 2008.

This, combined with lower levels of personnel costs offset by an approximate $4.3 million swing in the net deferred comp expense in Q4 2009 relative to the prior year are the major drivers of the net lower SG&A expense in 2009 relative to fiscal Q4 2008.

As a reminder, unrealized gains and losses on deferred comp instruments are offset against the deferred comp liability and hence have no bottom line impact to the P & L.

The Company achieved a Companywide gross profit to expense ratio of 1.71 in the fourth quarter.

up 15 basis points from the third quarter.

With respect to net interest expense, finance charges and other expenses, the total for the fourth quarter of 2009 was $2.2 million, a $6.3 million decrease from the prior year quarter of $8.6 million.

Within this amount in Q4 2009 is net interest expense and finance charges of $3.5 million compared to $4.0 million in Q4 2008 and $3.2 million in the fiscal third quarter of 2009.

Q4 2009 interest expense is lower than Q4 2008 primarily as a result of lower borrowing on our Credit Facilities.

This is a result of year-over-year improvements in our cash to cash cycle, which I will comment on shortly.

Q4 2009 also includes a $4.3 million relative year-over-year change in other income due to net gains in our executive deferred compensation plan assets compared to the prior year losses.

Again, this was offset in the corresponding deferred compensation expense line within our SG&A, with no bottom line impact to our P & L.

A net change in foreign exchange gains and losses accounted for the majority of the balance of the remaining year-over-year fluctuation.

The effective tax rate for the fourth quarter in fiscal 2009 was 35.2%, compared to 35.7% in the fourth quarter of 2008.

The decrease in effective tax rate is primarily due to changes in profitability, mixed by geography.

In addition to the P & L, we also had excellent performance on our balance sheet with significant reduction in our cash to cash cycle and debt levels.

Our overall cash conversion cycle improved by 36 days, a four day improvement over the third quarter of 2009 and an eight day improvement relative to Q4 2008.

Because of cash to cash cycle is driven by quarter end balance sheet numbers, timing of AR and AP cash movements in particular can impact the calculation from one quarter to the next.

Thus in Q4 the timing worked out in our favor.

Some quarters it does not, but regardless of short-term puts and takes, it has been a main focus at SYNNEX to systematically reduce our cash to cash cycle as part of our ongoing initiative to drive cash efficiency and improve ROIC.

The progress will not always be so dramatic and linear as we saw in Q4 2009, but the improvements over last year are reflective of our continued effort to drive efficiency in our working capital management.

Here are the working capital specifics.

Accounts Receivable totaled $821 million at November 30, 2009, DSO was 38 days, inventory totaled $714 million, translating to 31 days of inventory supply and days payable outstanding was 33 days, as a result of these improvements in working capital metrics, our debt to capitalization ratio for Q4 was 27%, down from 46% in Q4 2008 and down from 33% in Q3 2009.

Thus as we have said we would, we have indeed generated very significant cash flow in 2009.

Other financial data and metrics of note for continuing operations are as follows.

Fourth quarter depreciation expense was $2.7 million excluding discontinued operations.

Amortization expense was $1.8 million, excluding discontinued operations.

Return on equity for the fourth quarter was 15.1%.

Hewlett Packard had approximately 36.7% of sales was the only vendor accounting for more than 10% of sales during the fourth quarter 2009.

Capital Expenditures were $4.6 million for the fourth quarter and $21.7 million for the fiscal year.

This includes $12.2 million for the purchase of our corporate headquarters facility in Fremont, California during Q3 2009.

Preliminary year-to-date cash flow provided from operations was approximately $260 million for fiscal 2009.

Our total Company full time associates were 6,896 at November 30, 2009, before the sale of HiChina.

Now, before discussing our Q1 guidance, I would like to discuss some items we have considered in setting our Q1 2010 guidance.

First, beginning in fiscal 2010, SYNNEX is implementing ASC 470-20 debt with conversions and other options, and in compliance with this pronouncement, we will recognize as non-cash interest expense the accretion of our convertible bonds at an 8% interest rate rather than the 4% cash coupon rate that they bear.

This will impact first quarter 2010 by approximately $700,000 or $0.02 per diluted share and fiscal 2010 by approximately $2.7 million or $0.08 per diluted share.

Our first quarter guidance reflects this additional non-cash expense.

Those numbers I mentioned are on an after-tax basis ,by the way.

Second, as previously noted, on December 23, 2009, during SYNNEX first fiscal quarter 2010, we completed the sale of our controlling interest in HiChina Web Solutions.

Consequently, our first fiscal quarter EPS guidance includes approximately three weeks income from operations for HiChina Web Solutions, and also an after-tax gain on the sale of HiChina Web Solutions in the amount of $9 million to $10 million or $0.26 to $0.28 per diluted share.

HiChina Web Solutions contributed $0.02 per diluted share to EPS in Q1 2009, and $0.11 per diluted share for all of fiscal 2009.

The third point I wanted to raise is that during the first quarter 2010, we announced a definitive agreement to acquire all of the North American assets of Jack of All Games, Inc, a leading video games distributor.

We expect the sale of the assets to close late in the first fiscal quarter or early in the second fiscal quarter of 2010.

Therefore any revenue, income or expense associated with this acquisition is not reflected in our Q1 2010 guidance.

With this many moving parts to our forecast, in order to ensure clarity and to prevent any misunderstandings, I would like to demonstrate the implications of the information I have just shared with an illustration using the existing consensus estimates from Wall Street for Q1 fiscal 2010.

Just before this call, consensus for diluted EPS was $0.62 per share.

This consensus does not factor in the effects of ASC470-20 for incremental non-cash interest or the impact of HiChina discontinued operations, including the gains from the sale of HiChina which has occurred in Q1 2010, so for comparative purposes to our Q1 2010 guidance, I'm about to share, in our view, given as a starting point existing pre-release consensus EPS of $0.62 and adjusted comparable Wall Street estimate figure for Q1 2010 might be $0.85, calculated by adding to the $0.62 consensus, the mid point of the range of our expected gain from the sale of HiChina, which is about $9.5 million or $0.27 and subtracting out an estimate of $0.02 for the ongoing contributions that HiChina may have delivered have we not sold it and also subtracting out the impact of the non-cash expense of $0.02 per share for the adoption of ASC470-20.

Of course, we know estimates will change after the call but we wanted to make sure that everyone was on the same page with regards to these various moving parts.

Now, moving to our actual first quarter 2010 expectations.

The following statements are based on the Company's current expectations for the first quarter of 2010.

These statements are forward-looking and actual results may differ materially.

Revenues are expected to be in the range of $1.88 billion to $1.98 billion.

Total net income is expected to be in the range of $29.2 million to $31.2 million, and including approximately $9 million to $10 million contributed from the net gain on the sale of HiChina Web Solutions and a non-cash interest charge net of tax of approximately $0.7 million on the adoption of ASC470-20.

Total diluted earnings per share are expected to be in the range of $0.83 to $0.89 including the contribution of approximately $0.26 to $0.28 per diluted share from the net gain on the sale of HiChina Web Solutions and a non-cash interest charge net of tax of approximately $0.02 per diluted share upon the adoption of ASC470-20.

The calculation of diluted earnings per share for the first quarter of fiscal 2010 is based on an approximate diluted weighted average common share count of 35.2 million shares.

I should also note that this share count does not include any dilutive impact from our convertible bonds once they earn the money.

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

I will now turn the call over to Kevin Murai for his perspective on the business and the quarterly results.

Kevin?

Thank you, Thomas.

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

I'll start my commentary with a review of 2009 and then I'll provide some color on our fourth quarter results.

As we look back on 2009, we entered the year under one of the most challenging economic periods in modern history.

Each quarter, we faced more uncertainty in the market than we had experienced before, but we believe that our actions and results during these tough times would define our future and how SYNNEX will be perceived going forward.

We continued our strong focus on customer service and operational execution and also continued to make investments in areas we believe would provide growth and differentiation.

So as we are leaving the recession and have completed our 2009 fiscal year, I think it's important to note some key distinguishing accomplishments achieved SYNNEX.

We grew our annual EPS by 7% over fiscal 2008, and in fact we grew our EPS each quarter throughout 2009.

Each quarter throughout 2009, we improved our ROIC on a year-over-year basis with Q4 marking the ninth in our virtual string of year-over-year growth in quarterly ROIC improvement.

For our fiscal fourth quarter, we delivered a record ROIC of 11%.

For the full year, including contributions from our HiChina operations, we achieved a 2% operating margin, another differentiating milestone for SYNNEX.

We delivered sales on par with 2008, performing significantly better than the market and our peers, evidence of accelerated market share gains in North America.

And Wall Street has recognized our accomplishment.

In July of this year, SYNNEX reached the threshold of a $1 billion market cap.

I'd like to take this opportunity to thank each of our over 6300 SYNNEX employees around the world from making this all happen.

Our people are the number one reason for our success, and I appreciate the hard work, dedication and sacrifice of the entire SYNNEX team.

Now, with regard to our fourth quarter, we had very tough comparisons from the year ago quarter as Q2 2008 was a quarter in which we hit on all cylinders; however, once again the SYNNEX team was up to the challenge in 2009.

We produced strong 7% growth in our EPS and delivered record level ROIC at over 11% and we did so while growing market share and achieving a year-over-year revenue growth of 5.3%.

Our Q4 was aided by better than expected seasonality, good retail demand, healthy demand within our consumer electronics business, healthy Federal Government business, and as Thomas commented, continued and growing strengthen our higher velocity lower margin formats due to increasing demand at year-end.

This said, SYNNEX continues to get traction and is gaining share in its targeted higher margin verticals and markets and notwithstanding the decision to sell our HiChina interest for reasons of synergy and strategic fit, we will continue to reinvest in our higher margin GBS BPO business which continues to be an important aspect of our business process services strategy & Company wide value proposition.

So, as previously indicated, we expect our range of gross margin and operating margins to continue to move higher over time.

I would like to highlight just a few examples of areas of traction we have made in our strategy to grow our business in higher value, higher margin, adjacent Markets.

The number of customers we deal within the enterprise server and storage group has more than doubled over this same time in 2008 and our sales have grown even faster, which shows that even though this market has not yet come back as fast as others, we are winning business in this target market.

We're also winning notable share in the networking space.

Our share is up 40% year-over-year for the vendors we serve.

Our integrated communications group business has increased by more than 50% over the same period a year ago, and our print solve business has more than doubled over the same quarter in 2008, with over 550 million images printed in our fourth quarter 2009.

So SYNNEX is doing well on both fronts, traditional business and target markets, and we're winning more than our share of business in each, hence our resulting outstanding EPS and ROIC performance and with the completion of our fourth quarter of 2009, SYNNEX achieved our 9th consecutive quarter of profitability, continuing our strong track record of achieving our core operating and financial objectives.

So, how was SYNNEX able to achieve these results in 2009?

I believe there are two keys to our success.

First is the way we manage our business, something we call the SYNNEX Difference, and second is our business strategy.

At a high level, the SYNNEX Difference consists of three elements.

Our differentiated business model that includes assembly and BPO services, our highly efficient low cost model with our proprietary ERP system and a streamline low cost infrastructure and our focus on superior execution, service, and relationships aided by our superior IT system.

And at a high level, our business strategy is focused in three areas.

Differentiation through services offerings including BPO, logistics, and professional services, our focus on growth and investments in adjacent high growth Markets like consumer electronics, data capture and point-of-sale, enterprise technology solutions, and managed services and healthcare.

And finally our focus on optimizing our core business through continued focus on cost efficiencies, working Capital Management, line card expansion and enhanced go to market capabilities.

These differentiators and strategic focus areas are in large part the reason that SYNNEX has been able to consistently deliver on its financial goals and why we believe we can continue to out perform and lead our industry with superior operational and financial metrics in the coming year.

Now, turning to the outlook for 2010, the addressable market for North American IT spend still remains very large and is estimated at $300 billion, roughly $60 billion of that spend is forecasted to go through the distribution channel.

IDC is predicting growth in North American IT spend of approximately 2% for 2010 as we ease out of this recession, and some believe it could be even stronger.

We remain optimistic, but in any case, we're poised for above market success just as we accomplished in 2009.

This market continues to present significant opportunities for growth and expansion for SYNNEX, not only organically but through adjacent marketplace opportunities as well.

As always, we intend to grow our business profitably and faster than the overall market.

And as we enter fiscal 2010, our strategy again remains focused on growing our market share by adding more value add services up and down the supply chain while driving increased profit and ROIC growth.

We'll continue to optimize our core business by leveraging our infrastructure and controlling our costs.

We will continue to diversify through services we offer both within our core distribution business and within our Global Business Services business to gain additional strength of partnership with our current vendors and customers as well as attracting new ones and finally, we'll continue to invest in adjacent markets that will provide additional growth opportunities and synergies within our core businesses.

We have had much initial success with our entry into the consumer electronics market through our 2008 acquisition of New Age Electronics and in our opinion, we have really just begun to tap into this estimated $178 billion market.

This represents a significant growth opportunity for SYNNEX in the coming years, and we will look to replicate our success here by adding to our arsenal in this and other adjacent markets.

Our recent announcement regarding the acquisition of Jack of all Games, a leading video game distributer, will provide a strong foothold in the console and computer games market and is very complimentary to our consumer electronics business.

Through this acquisition, we expect to realize good cross selling opportunities, synergies between the two businesses, as well as gain a net new set of customers and vendors SYNNEX currently does not have a relationship with.

We look forward to sharing more detail about this business once we close this transaction in the coming months.

As a final thought, we performed very well in 2009 and as we enter the New Year, we will continue our disciplined, focused approach to achieving superior EPS and ROIC growth goals.

Our track record speaks for itself, and I have every confidence that the SYNNEX team is up for the challenges that lie ahead.

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

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

Thank you, Kevin.

Lisa, let's go ahead and open up the line for questions please.

(Operator Instructions).

Our first question will come from the line of Ananda Baruah with Brean Murray.

Thanks guys for taking the question.

I guess just kind of a quick one but a question on margins, both gross margin and then on OpEx and how we should think about the mix of business and maybe the seasonality and kind of the in the key mix of business as that shifts here going forward, the impact on gross margin, and then I guess secondarily, just on the OpEx, I think maybe the OpEx dollars, or the SG&A dollars were down sequentially for the first time and pretty significantly for the first time in a while if even this has happened before, so if you could talk about maybe what we should expect in terms of SG&A dynamics as well.

This is Thomas.

I'll start off with that.

First on the gross margin, as far as seasonality goes, I would point out that this is the first Q4 that we've had where we've seen a full seasonality of our consumer electronics business including the New Age Electronics and so we think frankly that the seasonality that we saw in Q4 and also relative to Q3 and in Q1 guidance is pretty close to what we think will be the new norm, as we first prepare guidance for Q4 and shared that a quarter ago, we were not yet at that time sure if we were going to be back to a normal economy and normal demand but as it turns out, we have, and so we think that what you saw in Q4 is a good example of what we would be thinking about as we approach Q4 and 2010.

Did that answer your first question?

Yes, I believe so.

At least anecdotally.

So thanks, I appreciate the commentary.

So when you say, Thomas, kind of to use this Q4 as a proxy for what to expect the next Q4, are you talking about kind of order of magnitude or is it like a 525 sort of level?

I would think I didn't catch 525 what that refers to?

The gross margins for the quarter.

Oh, excuse me.

Sorry.

They were like 524.

Okay.

So first of all we typically don't give guidance specifically on gross margin so I wouldn't want to give you a particular number, but one of the things I'd call out is that on our website as I mentioned in my prepared remarks, we shared some historical information where we backed out HiChina from the operations and we didn't specifically break out gross margin because we don't typically report that at a segment level but I think that gives you a good indication as to what operationally has been happening.

If you were to look at a comparative basis, Q4, I mean the numbers we shared with you just now, on a DiscOps basis, we did highlight the change in the gross margin and you saw the implications of the removal of HiChina then, so the only other comment I'd make is as we go forward with regards to gross margin, both Kevin and I touched on the fact that our gross margin is going to change from quarter to quarter, due to a myriad of very different things that are affecting our business but the range overall we expect to continue to move up and to the right as we continue to invest in some of the higher margin areas where we're growing in addition to our traditional business that we have.

Okay, I appreciate that.

Should we expect kind of Q1, I guess Q1 to be sort of the low quarter as we go forward here, or is it going to be--

Yes, again, on a gross margin basis, I wouldn't want to give you specific guidance.

Okay.

And then just on the OpEx, Thomas?

Yes, so on the OpEx, probably the main thing I would highlight for you is that in Q4, relative to the same quarter last year, we had a lot less bad debt expense, and again the reason for that is throughout 2009 including Q4 of 2008, we were booking some above normal levels of bad debt expenses.

I know you're aware and so our bad debt in that respect is probably a little higher than usual and this quarter might have been a little bit on the lower side.

Okay, and I think last quarter you gave, didn't you give the delta in the bad debt expense?

Yes, if you were to look on a year-over-year basis for bad debt, we are about $5 million less in bad debt expense in Q4 2009 than we were in Q4 2008, the swing, that's the total swing.

The other thing I'd highlight for you as I mentioned in my remarks also, is from a personnel expense, when you consider all of our compensation expense because we do have fewer employees now than we did a year ago, that also is impacting our total SG&A.

Okay, great.

Thanks a lot.

All right.

Our next question will come from the line of [Navil Hernando] with Raymond James.

Thanks.

I just wanted to ask one more question on the gross margin.

On a pro forma basis, it sounded like if I heard your comments, it still declined.

Is this just due to the mix of retail or is some of the large orders that you took for the second consecutive quarter, what was the driving factor there?

Navil, it's Kevin.

In fourth quarter, there were really two major factors in why our gross margin was slightly depressed and those were the reasons.

It was sales of higher volume lower gross margin product categorized in some incremental retail business that we did calling out mobile computing as one example but also other business that had historically gone direct to our customers that we found efficiency in being able to deliver through us, and even though both of those businesses are characterized by lower gross margin, because of our cost efficiency that we have in our business, we're actually able to drive very good profitability in returns for that business, so net-net, the answer is actually a very good answer for the Company but it did have an impact in fourth quarter because of the relative mix of that business to the total on our gross margin.

Okay, that helps, and then just do you think you could discuss whether you believe you gained market share in your core VAR customer base or if retail is what drove most of the quarter-over-quarter revenue growth?

It's hard to pinpoint exactly category, sub segment by sub segment but overall, I would say as an overall comment and in particular for all of 2009, we do believe we gained share pretty much across-the-board.

Our growth beyond just our consumer electronics segment was consistently higher than overall market growth, and we do believe that that did continue as well into the fourth quarter.

Okay, that helps.

And then just the last question on Jack of All Games, how should we think about the revenue retention?

I believe you stated in your press release they did $282 million in trailing 12 month revenue and just the cost synergies expected, will it be easy to integrate into your systems and do you have any idea how much you think you could save?

Hi, this is Dennis.

I'll take that question.

First of all from a revenue perspective, because it is a new market for us, we do expect to retain a significantly high percentage of the total revenue that Jack does today, so we look forward to again achieving a high percentage of that revenue.

From a cost synergy perspective, that's an area that we think will have some wins when we integrate this Company.

We will not be taking on any additional facilities from a distribution center perspective with the Jack acquisition so we're able to bring that business into our existing facility and gain cost synergies there as well.

So that's the main driver of the cost synergy that we'll see on the Jack integration going forward.

All right, thank you very much.

Thank you.

Our next question will come from the line of Shaw Wu with Kaufman Brothers.

Okay, thanks.

Yes, just probably a question for Thomas.

Just back on the SG&A question, when looking at your guidance and this is Xing out all of the items, it looks like your SG&A, you're basically guiding it to be, I guess essentially kind of flattish, and I guess two questions on that.

First, your SG&A level hit 3.1% of revenue.

That's pretty low compared to where it's been historically, where it's been over four or around 3.6%.

How sustainable is that, and then second, just on expense seasonality.

I mean, normally you see a decline in expenses in the February quarter.

Should we expect that or as I guess your guidance implies kind of flattish.

Just any color there, thanks.

Sure.

So again, given that the two things that were the major driver of our SG&A being lower than normal for Q4 and at this revenue level, one of them was the bad debt piece.

I don't want to be specific to Q1 or any particular quarter, but as we move forward, of course you should expect to see our bad debt expense to normalize over time.

What we saw in Q4 was, if you will the benefit of performing better on our accounts receivable collection than we had planned for and reserved for throughout 2009 given the severity of the economic environment.

I think that benefit that we saw in Q4 will taper off rather quickly in the rest of fiscal 2010.

The other variable I should touch on again is the headcount.

Our headcount personnel expense, two things.

One is that number has been down relative to prior quarters as a result of the again the economic environment overall.

As the economic environment ticks up, we'll probably have more personnel related expenses on a go forward basis.

That said, if you look over time, you'll see there is definitely a trend in the increase or the variability of our SG&A, based on the level of volume of business that we have, so as we grow our revenues, you'll also see SG&A spend not just because of headcount but also primarily because of headcount.

Okay, Thomas, just to elaborate, why would the bad debt I guess expenses change?

I guess you'd be more conservative again in terms of setting aside more reserves, or I'm just thinking seasonally, your revenues are going to be down.

If you take the mid points down 12% sequentially, I understand your explanation for the current quarter but shouldn't your cores also go down as well?

Yeah, so the bad debt that we book, the reserves that we book, they aren't, well they are largely correlated to the volume of [denses] that we have and they're also in part due to basically the probability that we think we're actually going to have to write-off reserves in general because of the economic environment and then also because of specific customers or specific receivables that we might have concerns about, and again, during from effectively Q4 of 2008 throughout especially the third three quarters of 2009, we were booking larger bad debt reserves in general than we had been historically and as I looked going forward because of the strength of our customer base and because of the economic recovery, I think that the amount of reserves we're going to be booking in general will be lower.

Again, there's a correlation to sales but it's not 100% correlated to sales alone.

Does that make sense?

Yes, okay, thanks.

I'll ask a follow-up later, thanks.

Sure.

(Operator Instructions).

Our next question will come from the line of Richard Gardner with Citigroup.

Thank you.

Thomas?

I just wanted to ask you, you mentioned demand and market dynamics in your discussion of gross margin in the prepared remarks, but your subsequent discussions have revolved around mix, primarily.

I just wanted to get a sense of whether pricing was more aggressive than you thought during the quarter.

Obviously Ingraham has been going for share a little bit more aggressively.

Was that a significant factor in your gross margin during the quarter and just generally what are you seeing out there in the market and then I've got a follow-up.

Hi Richard, this is actually Kevin.

Hi Kevin.

The short answer to your question is no, it was not a significant factor but the overall market I would say in terms of price competitiveness was within the range of what we would consider to be normal.

There's always going to be spot business here and there and usually in particular it's the large bid business where you see a little bit more price competitiveness but overall, it was within the range of normal.

Okay, great.

And then the other question related to the comment about transitioning more to net fee revenue recognition.

I just wanted to get a sense of how quickly you plan to make that transition, and how much it affects existing business versus occurs at the margin and whether it has a material impact on revenue growth in 2010.

Sure.

So as far as how quickly and so forth, this is an evaluation that we're currently undergoing so I couldn't say specifics.

I mention it because I think at some level you will start to see it creeping into our numbers even as early as Q1, but at a very nominal level, and as far as projecting on the rest of the year, I'm really not at a point where I'm prepared to do that.

I think as we give guidance in each quarter that we will be glad to give a little better color on that.

As I think about it right now, as I mentioned in the prepared remarks, some of the existing business that we have would be under consideration though.

Okay, and is this something that you would like to do, or is it something that your vendors are asking you to do or what exactly is the impetus for the change here?

It's really, I don't know that there's a strong preference on our side or the vendor side.

It's really a matter of how you characterize revenue streams in accordance with accounting principles.

There are in some situations we might have a contract with a customer that we choose to do on a fee basis, maybe it makes sense for us economically.

Those are some things that we're considering and those situations obviously we view it as more favorable if not from a profitability perspective perhaps from a risk perspective or from a return on invested capital perspective so these are all variables that we look at as we entertain these decisions, but ultimately, it's the terms of the contracts that you conduct your business under that ultimately you have to apply GAAP to and GAAP pretty much dictates what you would do with that business.

Okay, understood, and then the final question is is this primarily on the retail part of the business or is it broader than that?

Thank you.

The answer is broader than that.

It would, I'd say it's generally within our distribution segment of course but there's several lines of business that are under consideration.

Great, thank you.

Thank you, Rich.

Our next question will come from the line of Richard Kugele with Needham & Company.

Thank you, good afternoon.

The call is running long so I'll just be brief with two quick questions.

I guess first, in your conversations with your VAR community, can you just talk about what you're hearing about the spending priorities that their customers and then by default the business trends that you'll see in 2010 might be and how you're positioning yourself for that?

Yes, a lot of the comments Rich, are pretty much broad spread.

I think for the most part, there's certainly much more positive sense and optimism in the marketplace today.

Obviously, a lot of excitement around things like managed services, managed print, perhaps pent-up demand in certain areas and perhaps some refresh that might be happening through 2010 but just an overall optimism.

In terms of specific categories, specific applications, you hear a number of different things and it's actually hard to pinpoint one over the other right now.

Okay, and then just lastly, Thomas, net of HiChina and some of the other puts and takes in your businesses, can you give us a sense on what you think maybe for 2010 the tax rate might be?

Sure.

Overall for the whole year, I'd be modeling in the range of 35 to 36%.

Okay, so down just a little bit from maybe the August level but consistent with previous years?

Yes.

Okay, and that is subject to change post Jacks?

Yes, it is of course, but--

Maybe up?

The answer is yes.

Jack is primarily a US business so US has a higher tax rate.

Yes, okay.

Thank you very much.

Our next question will come from the line of Matthew Sheerin with Thomas Weisel Partners.

Yes, thank you.

Just if I can just go back to sort of re-ask the questions regarding the big volume business that you saw in the quarter.

So Kevin, it seems like you're starting to see more opportunities for bigger deals with your very big corporate reseller customers including the direct marketers.

Are you getting a sense that they are starting to source more from distribution or are the vendors are pointing them in that direction, am I on the right track in terms of that customer base?

Yes.

That's correct, Matt.

In the cases that in the specific cases that we refer to, it was business that had traditionally been direct from manufacturer to a number of our different customers, where really the more efficient way of getting that into the market and into these customers was through distribution and in particular, in these cases through us, so we have seen more of those opportunities more recently than not.

Okay, and then as a follow-up then, is that business sustainable for you in that the vendors and resellers, those big marketers will consistently buy from you, or is it business that's essentially up forbid between you and Ingraham and Tech Data and others which might lead to sort of some variability or volatility in terms of revenue and gross margin on a quarter to quarter basis?

Yes, from time to time I would expect that this business would be looked at and put out to bid, but what we've seen so far is that as we've looked at these different opportunities, the committment that we have with the business that we've signed up is longer term business.

Now as I said, I do expect that at some point it will be bid out again but I don't expect to see that happen on a quarter to quarter basis.

Okay, so could you give us an idea of how long these contracts are?

You know, without getting specific, I would assume that it's multi quarter.

Hopefully in some cases maybe even multi-year.

That being said, and I think one other comment I should make on this is that it was one of the reasons that our gross margin was affected yet at the same time understand that because of the cost effective, cost efficient engine that we have, we're actually able to make very good profit in return on doing this business, and it truly is the right answer for us to entertain this type of business as well.

So there's not much if any incremental expenses then to support that?

Yes, I mean, apart from your typical variable costs and inventory and doing the pick, pack and ship, that's correct.

It's very efficient from a cost standpoint.

Okay, that's very helpful, and then Thomas, on the SG&A question, which I know you've got a lot of those, could you tell us exactly what the benefit of the bad debt reversal or allowance reversal was in the quarter?

I mean, was that $1 million or $2 million in terms of the difference between the August quarter and the November quarter?

I don't have that difference between the two quarters at my finger tips and I wouldn't necessarily characterize it as a reversal as much as a comparative expense from one year to the next but that was the $5 million I referred to earlier.

Matt, I would--

So the $5 million was year-over-year, right?

That's right.

Okay, but you don't know what it was on a quarterly basis, okay.

And then I know that folks asked about the SG&A in February and I guess I was confused as to the answer whether or not on an apples-to-apples basis expenses would be actual expenses would be flat, up, or down in February.

Right and so all of us sharing is variables.

Again, when we give guidance we're giving guidance only on certain lines of the P & L and the actual results of what we see in a particular line is going to be impacted by the nature of the business during that quarter, so all we're doing was sharing some of the major pieces and from Q4 to Q1 and what you should expect to see.

Okay, and then on gross margin again then, given that it sounds like you still have some of those large volume opportunities which again is good for on the gross profit dollar basis but brings down gross margin, but I also if I recall correctly, you do get some year-end rebate benefits et cetera from certain vendors depending on what their fiscal close and book the quarter and the year, so would we expect then that gross margin should be up at all in the February quarter?

Again, Matt, I appreciate the question, but I don't want to be guiding on a gross margin level.

Well, okay, maybe the follow-up question then is, do you have enough visibility in the quarter to really know, and maybe that's why you're reluctant to talk or you just don't want to give the number.

Frankly it's more the latter.

We have pretty decent visibility, especially given that we're in the first week of January.

What I would want to emphasize to you and the other folks who have asked the question is, and I've tried to call this out in my script, is that the major focus for us, we think, and for our investors ought to be around the operating margin and the operating profit dollar growth that this Company is able to achieve, so as we commented whether it's regardless of the mix which is the biggest driver of what's happening at the gross margin level, the operating margin continues to be very strong.

We continue to expand and deliver good operating profit dollars, and that's what's driving our EPS growth and ROIC growth so we don't want to distract the issue by focusing folks too much on gross margin.

Okay, fair enough, and then just lastly if I can, Kevin, just on the general demand environment, looks like you obviously had better than expected revenue.

You talked about some of the reasons but are you starting to see more normal return to seasonality in most of your businesses now, and is that encouraging and do you have a general optimistic view of 2010?

Yes, Matt, we are, and in fact I will tell you that our first quarter guidance really does reflect more normal seasonality in our business as well.

As I commented before, we do hear a lot more optimism both from our customers as well as from our vendors as well, and we do believe that 2010 of course is going to be a much better year than what we saw in 2009 from a demand standpoint.

As I made a comment I made in my prepared remarks was, an IDC projection of around 2% growth in North America, there are some that believe that could be a little bit higher as well.

Okay, that's it for me.

Thanks very much.

Thanks, Matt.

Lisa, since we're running a little bit over on the call we have time for one more question, please.

Thank you.

Our last question will come from the line of Ananda Baruah with Brean Murray.

I'm actually all set.

We can take care of it off line.

Okay.

All right, great.

Well this concludes our fourth quarter earnings conference call.

Thank you for joining us today.

As a note, we will have a replay of this call available for two weeks beginning today at approximately 5 p.m.

Pacific Time through January 19, 2010.

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

Thank you for your participation today.

This does conclude today's conference call.

You may now disconnect.