新聚思 (SNX) 2011 Q1 法說會逐字稿

Good afternoon. My name is Lamont, and I will be your conference operator today. At this time, I would like to welcome everyone to the Synnex 2011 first-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Ms. Lori Barker, you may begin your conference.

Thank you. Good afternoon and welcome to SYNNEX Corporation's fiscal 2011 first-quarter conference call for the period ended February 28, 2011. Joining us on today's call are Kevin Murai, President and Chief Executive Officer; Dennis Polk, Chief Operating Officer; Thomas Ellsberg, Chief Financial Officer; and Chris Caldwell, Senior Vice President and General Manager, Global Business Services.

Before I begin, I would like to note that the statements on today's coal which are not historical facts may be 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, market share, profitability and returns; our leadership position, expectations of our revenues, net income, acquisition, restructuring, integration charges and diluted earnings per share for the second quarter of fiscal 2011.

Our performance, general economic recovery, the impact and integration of our recent acquisitions, the impact of the events in Japan, benefits of our business model, IT demand expectations and market conditions, operating expenses and operating margins. These are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements.

Please refer to today's press release in 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 would like to turn the call over to Thomas Alsborg for an update on our financial performance. Thomas?

Thank you, Lori. Good afternoon, everyone, and thank you for joining our call today. I will begin with a few highlights and by summarizing our results of operations and key financial metrics for the quarter. I will conclude with guidance for the second quarter of fiscal 2011.

First, some highlights on key financial metrics. I'm pleased to report our first-quarter earnings grew 22% year over year to $0.80 per diluted share from continuing operations. We also increased our operating margin and we improved our year-over-year ROIC performance for the 14th consecutive quarter.

So, once again, SYNNEX continues to deliver on our key goals of growing profitability and returns for our investors, even as we make major investments in our business. What is also noteworthy is that all these metrics are before backing out direct acquisition and integration expenses of approximately $730,000.

Let me share some of our details behind the strong performance, starting with revenues. In our first quarter, total consolidated revenues from continuing operations were $2.50 billion, up 29% over Q1 for 2010 and 1% sequentially.

Approximately 13% of the year-over-year growth came from strong organic business performance. The remaining 16% of our year-over-year revenue growth came from our acquisitions of Infotec and the three smaller Global Business Services BPO acquisitions and Jack of All Games and net of the divestitures of the Sun manufacturing platforms and the NDS business late last summer.

At the segment level in the first quarter, revenues from the distribution segment were $2.47 million, up 29% year over year and 1% sequentially. The acquisition of Infotec brought $301 million in revenue and demand remained solid in the US, while improving in Canada, as expected.

In our GBS segment, revenues were $39.2 million, up 51% year over year and up 42% compared to the fiscal fourth quarter 2010. The acquisition of Aspire, Encover and e4e which closed late in the quarter, contributed approximately $11 million to our growth. The year ago quarter included $3.4 million in revenue from NDS which was sold in August of 2010.

In the first quarter, our consolidated gross margin was 5.75%, up 11 basis points as compared to 5.64% in the same quarter of 2010, and slightly up from our Q4 gross margin of 5.71%. Once again, the gross margin in our core distribution business was strong, driven by very good execution and continued traction in our Technical Solutions division and higher-margin growth initiatives, which are driving a favorable mix change towards value-add products and services such as enterprise server and storage networking and consumer electronics, to name a few.

Our gross margin was also benefited from the mix change between our two segments in which GBS played a larger part in our overall gross profit mix in Q1 than in prior periods. First-quarter total selling, general and administrative expense was $92.9 million or 3.72% of revenues compared to $70.2 million or 3.63% in the first quarter of fiscal 2010 and $76.3 million or 3.09% sequentially.

The sequential step in SG&A is due to our new acquisitions and the integration of them. We have identified $729,000 of specific direct acquisition and integration expenses.

They are also indirect costs and expenses due to inefficiencies or redundancies in some near-term higher depreciation and amortization and so forth that we have not called out, but which are temporarily inflating our SG&A run rate. Consistent with our communicated expectations from the January call, the activities and expenses will continue in Q2 after which they will abate in the second half of 2011.

Consolidated operating income from continuing operations before non-operating items, income taxes and noncontrolling interests was $50.9 million or 2.03% of revenues compared to $39.0 million or 2.01% in the prior year first quarter, and $64.6 million or 2.62% of revenues in the fiscal fourth quarter of 2010. We believe these are very good margins considering our four integrations and associated costs.

But our expectations remain that we will see meaningful expansion of our operating margins in the second half of 2011, after the integrations are completed. On a segment basis, distribution income from continuing operations before non-operating items, income taxes and noncontrolling interest was $47.2 million or 1.91% of distribution revenues compared to $36.0 million or 1.88% in the prior year.

GBS income from continuing operations before nonoperating items, income taxes and noncontrolling interest was $3.6 million or 9.26% of GBS revenues compared to $3.0 million or 11.35% in the prior year quarter. Net total interest expense and finance charges for the first quarter of 2011 were $6.2 million.

This includes interest charges from refinancing the working capital associated with the Infotec acquisition. On December 1, we closed and funded two working capital lines in Japan totaling JPY10 billion or approximately $120 million to be used for funding operations.

The effective tax rate for the first quarter of fiscal 2011 was 35.0% compared to 36.0% in the first quarter of 2010. The decrease was primarily due to the mix of profit contributions from our various tax jurisdictions.

Our first-quarter net income from continuing operations net of tax was $29.7 million or $0.80 per diluted share. This compares to $23.2 million or $0.66 per diluted share in Q1 2010 and $37.5 million or $1.04 per diluted share in Q4, our seasonally strongest quarter.

Turning to the balance sheet, our accounts receivable totaled $1.03 billion at February 28, 2011 for a DSO of 43 days compared to 42 days for the prior year quarter. Inventory totaled $964 million or 37 days at the end of the first quarter compared to 38 days in the first quarter of 2010.

Days payable outstanding was 36 days compared to 35 days at the end of the prior year quarter. Hence our overall cash conversion cycle for the first quarter was 44 days, lower by one day from the same quarter of last year and up two days from the last quarter.

Our debt to capitalization ratio was 33% with the financing of our recent acquisitions, still very manageable. Our liquidity and access to cash remains excellent. At the end of Q1, the Company had over $0.5 billion available between cash and working capital lines.

Other financial data and metrics of note for the first quarter are as follows. Depreciation expense was $4.0 million. Amortization expense was $2.0 million. Hewlett-Packard at approximately 30% of sales was the only vendor accounting for more than 10% of sales.

Q1 cash -- capital expenditures were $8.6 million. Total capital expenditures were $14.6 million. This includes a capitalized lease on the new US facility during the quarter.

Preliminary cumulative year-to-date cash flow provided by operations was approximately $56 million. Trailing four-quarter ROIC was 10.2%, up from 9.1% as of Q1 2010.

Now moving to the second-quarter 2011 expectations, I want to begin by noting that our guidance includes charges of approximately $200,000 to $300,000 associated with known damages and losses sustained primarily to inventory resulting from the events in Japan.

These are initial estimates, and the complete assessment is still underway. Looking forward, we recognize that the situation is yet uncertain, though matters seem to be stabilizing. There could be implications to Japan's near-term demand.

Also, although nothing significant is currently expected, there could be some impact outside of Japan due to potential supply chain concerns. As I mentioned, we have prepared our guidance with these factors in mind and included adjustments for both the sustained damages I mentioned earlier, as well as the reduced short-term expectations for SYNNEX Infotec in Japan.

Also, at the beginning of Q1, we indicated we expected to incur approximately $2 million to $5 million of pretax direct acquisition and integration expenses in the first half of fiscal 2011. Having the benefit of one quarter behind us, we now expect this amount to be smaller and in a range of $1.5 million to $2.5 million pretax for the first half of the year.

We incurred approximately $729,000 of this in our Q1 results come and now we anticipate incurring the remainder of about $0.8 million to $1.8 million pretax in Q2. Consistent with the first quarter, our Q2 guidance does not include these amounts, because analysts have told us they wish to understand the operations of the business before such charges.

With that backdrop, here is our Q2 guidance. For fiscal Q2 2011 we expect revenue to be in the range of $2.44 billion to $2.56 billion.

Our forecast for net income before direct anticipated acquisition, restructuring and integration charges is expected to be in the range of $28.6 million to $29.9 million and corresponding diluted earnings per share are anticipated to be in the range of $0.77 to $0.81 per share.

The calculation of diluting earnings per share is based on diluted weighted average common share counts of approximately 37.1 million shares. This guidance assumes continued stability of the overall demand environment and as a reminder, all these statements are forward-looking, and the actual results may differ materially.

Finally, before I turn the call over to Kevin, I just want to express my condolences to the people in Japan who have been affected by the earthquake and the subsequent events in these last two weeks. I will now turn the call over to Kevin Murai for his perspective on the business and our quarterly results. Kevin?

Thank you, Thomas. Good afternoon to everyone and thank you for joining our call today. The year is off to a good start with successful completion of our first quarter. We achieved strong organic growth in all our business units and the integration of our recent acquisitions are all on track.

Today I will share with you some of our first-quarter highlights, our progress to date on our acquisitions, and then our views on IT spending. I will also take some time to touch on the impact to SYNNEX from the recent events in Japan.

Our US IT Distribution business started the year with solid demand as we continued to grow our business in key strategic areas, such as enterprise server and storage, networking and healthcare. On the retail side of the business, our consumer electronics and video game business also showed strong growth, and we were recognized with a number of awards including supplier of the year from one of our major retail customers.

Our experience in Canada was similar as the market continued to show growth over last year and in particular, gained momentum and grew market share in our commercial business. Our Infotec business in Japan performed as expected in Q1.

Sales reflected the normal seasonal strength, leading up to the March fiscal year-end for the Japanese government and many Japanese corporations. Our integration work continues to track to plan.

In our BPO business, we saw solid organic growth, well into the double digits, in particular achieving significant growth in the existing accounts from our Philippines business. During the quarter, much of our efforts were focused on acquisition integration and meeting our newly acquired clients.

These acquisitions have received a positive reception from both acquired and existing customers, and we are well-positioned for revenue growth and margin expansion later in our fiscal year. In summary, for our first quarter, we saw strong topline results in our organic business and solid profitability. We are pleased with our recent acquisitions and view these investments as key drivers to increase long-term profitability for SYNNEX.

I will now provide an update on our recent acquisitions. First, I will begin with the status of our Japanese operations, particularly in light of the earthquake and subsequent events.

As you know, we purchased Infotec on December 1, 2010. SYNNEX Infotec is headquartered in Tokyo, and this is where the vast majority of our Japanese operations reside. Following the earthquake, our first priority was to understand the status of all of our employees and their families and do whatever possible to assist them in their well-being.

I'm very pleased to report that all of our Japanese associates have been accounted for and they are fine. As Thomas noted, we incurred some limited damage to our facilities and inventory and we remain open for business and continue to focus on our business operations and systems integration.

We recognize, however, that some aspects of the Japanese infrastructure, including utilities and roadways, are impacted. We know some customers and vendors have also been impacted and we continue to assess this impact on the supply chain and demand environment.

So with that update, here is what we are doing. Our integration and ERP cutover is progressing fine and as planned. And while we believe the events in recent weeks may have some impact to our business, we still expect the integration to be completed by the summer.

Specifically, with respect to the impact on our business, we remain very confident in our ability to transition the Infotec business to perform in line with our North American Distribution business, although given the current uncertainty the earthquake will have on market demand, our trajectory towards financial goals may be delayed by a number of months.

Now let me turn to our GBS acquisitions. We are pleased with the progress of the integrations and they are on schedule.

As Thomas noted, we will incur integration costs and related inefficiencies as a result of the acquisitions in this current quarter. However, we are excited about the growth and margin improvement impact these investments will bring to the Company long-term.

In fact, we already starting to see the benefits of our expanded global footprint and our investments in renewals technology, as both were key in closing a couple of deals in the quarter. This is a strong signal that our strategy of enhancing our portfolio of lifecycle management services is being well received by the market.

We are now managing an increased pipeline of opportunities, and we remain optimistic about our cross-selling opportunities. So to summarize on this topic, the integration of our acquisitions are on track. We expect to see the financial benefit from these investments late in our fiscal year.

Now turning to the outlook for 2011. As Thomas mentioned, our Q2 guidance includes our current estimate of the impact on our business from the recent events in Japan. The timing of the recovery in Japan is a bit uncertain, but our team at Infotec will be working closely with our customers and vendors to help Japan drive a speedy recovery.

In North America, the economy continues to emerge from the recession. We expect the North American IT and consumer electronics markets will grow in the mid-single digits in 2011 and that SYNNEX will continue to outgrow the overall market.

Looking forward, we are optimistic about key demand drivers such as cloud computing, mobility and ubiquitous computing and the strategies we have developed to take advantage of these trends. Our core business remains healthy and demand for our products and services is strong. We have an excellent track record of expanding profitability and we continue to focus our strategies on margin growth.

Also, we are pleased with the performance of our recent acquisitions and we believe we have the right business strategy that will evolve our Company into new lines of business as key technology trends continue to shape the market. So, in closing, I would like to thank our customer and vendor partners for their business and support. And, in particular, I want to acknowledge the hard work and dedication of our associates worldwide.

Also, on behalf of all of our employees, I want to send out my condolences to all those personally affected by the earthquake and tsunami in Japan. Lori, let's now turn the call back to the operator for questions.

Thank you, Kevin. Lamont, we are ready to open up the line for questions.

(Operator Instructions) Brian Alexander, Raymond James.

I wanted to clarify the EPS guidance for the May quarter. You are assuming roughly a $0.01 negative impact due to the known losses that you suffered in Japan.

So just to clarify that, and if you could comment on how much revenue and operating income you are expecting from MIT in the second quarter. Because it looks like your revenue guidance is roughly flat sequentially at the midpoint, and it is typically up a couple of points. So I'm just wondering if that delta between normal seasonality and your guidance is related to MIT. Thanks.

This is Thomas. First, yes, the guidance does include the impact of the $200,000 to $300,000 of damages I referred to.

Second, looking forward for SYNNEX Infotec in Q2, we are expecting close to the same revenue run rate. It is -- as we mentioned, there are certain uncertainties given the events in Japan. So that amount could be slightly lower.

From a profitability perspective, I can't give you too much specifics. I can tell you that we were pretty close to breakeven in Q1.

You should expect us to have continued costs associated with this integration process in Q2. But as we have stated before, our expectations for the second half of the year are for incremental profitability with each quarter that passes.

So then just, I guess, back to the revenue guidance, Thomas, any comments on what you're expecting sequentially? Because it does look to be a little bit below where you have been historically on a sequential basis. Maybe just talk about the puts and takes to your revenue guidance for Q2 given that you expect MIT to be roughly flat sequentially.

Sure. So, puts and takes. First of all, what is different in this year versus prior years is Jack of All Games.

As I think you well know from previous calls, the large part of Jack of All Games revenue takes place in the last three months of the calendar year, which includes our first one month, December of our first fiscal quarter of 2011. So the normal seasonality trends are adjusted slightly from Q1 to Q2 where it is going to be a little bit more flat.

We also have typical seasonality around the February/March timeframe associated with Canadian and now Japanese governments. We are still evaluating exactly how that will flow in Japan, but typically you see some ramp-up in Q1 that continues into March. And again, there are puts and takes around that, depending on how things fall.

I would -- as we look forward what I would suggest you is that in future years, again, still under evaluation, but in future years, we are not going to have a pronounced seasonality between Q1 and Q2, and I think that there could be bigger factors that are really going to affect revenue forecast other than just normal seasonality.

Thomas, one thing I would add to that is New Age Electronics also, of course, has a strong holiday season, and December is captured in our first quarter (inaudible) not in the second quarter. As New Age Electronics in that segment become a bigger part of our business, it has more of an impact on seasonality.

But to sum it all up, Brian, what I would tell you is when I look at the forecast for all of our business units, the underlying theme is that we expect that we're going to grow faster than the market in all of our major business units.

Okay, and then maybe just a couple of quick follow-ups. I know the situation is unpredictable and fluid over in Japan.

For the full year, do you still expect that acquisition to be accretive, including the integration costs? I think you said that last call, and it sounds like the integration costs are actually lower now.

Then the final one was just how much of a drag do you think you're having on operating income from these indirect acquisition costs that you called out? I am just trying to get a sense of what you think normalized distribution margins were in the quarter if you were to exclude those indirect costs.

So our expectation continues to be that for the full year, this acquisition will be accretive. We are very confident in that expectation at this time again, with all the uncertainties caveated before.

One of the points I want to call out is as I stated in my prepared remarks, at the beginning of the year, we said that we expected $2 million to $5 million in charges. Some of those charges were for the ERP system that Infotec uses.

As events have taken place, what happens, and not to get too much into acquisition accounting, but the valuation of those ERP systems at the beginning of the year, once we finalize those numbers with the independent evaluation, end up being slightly lower.

In addition to that, instead of taking a charge for that ERP system and writing it off right away, what we chose to do to facilitate a smooth transition and integration as far as ERP systems is to run that system for the first two quarters of the year while we are bringing up our own CIS system for transition. So because we did choose to actually utilize that ERP system for some months, instead of taking that charge, what you actually see is that there is a higher level of depreciation in our SYNNEX Infotec business for the first half of this year driven by a very rapid amortization of that ERP system, which was valued at just over about $1 million.

So one of the factors you will see in the latter half of the year is that that roughly $500,000 quarterly depreciation of the ERP system will curtail and that will be one of the step function changes in the lower SG&A in the second half of the year.

What would be the total step function change, I guess, is what I am trying to get at from the first half to the second half? If you take all the costs together, all the indirect costs together, how much lower will OpEx be on a run rate basis?

So, frankly, it is difficult to put an exact number on that. But, again, some of the pieces are -- first of all, that which I just described with regards to the ERP system. In addition, we have carved out direct acquisition and integration costs that were about $730,000 this quarter and will be larger in Q2.

Of course, those all, by and large, should go away in the second half of the year. Then what's left, of course, is the more hard-to-break-out costs. There's still duplication of infrastructure in a number of different places and we are talking across both segments right now as we integrate businesses.

All I can tell you without trying to peel the onion too deeply here is that our expectation, as Kevin and I have shared in previous calls, and Kevin said earlier today, is that as we complete the integration in the middle half of this year, and transition the business to normal operations according to the way SYNNEX does business and the way that Concentrix does business, you will see each quarter incremental improvement in our margins to where ultimately we expect to be at higher operating margins in 2012 than you have historically seen in prior years with SYNNEX.

Thanks for all the details. I appreciate it.

Before we take the next question, I want to clarify. I understand that my comments about Hewlett-Packard's percentage of revenue sounded like I said 30%. I want to be clear that Hewlett-Packard represented 33% of our revenue in the current quarter.

Thank you. The next caller please.

Matt Sheerin, Stifel Nicolaus.

Just a quick follow-up on Japan. Do you normally expect it to be flat? Obviously, you are new to the Company, but if you looked at forecaster expectations for that business, say three weeks ago, and from what it is today, how much has changed?

So, I will start with the answer to that, Matt. The one thing I would just tell you is that the business in Japan is very similar type business to the business we do here in the US.

So you're going to have some very similar seasonality trends with one, I think, notable difference is that the government fiscal year in Japan, as I mentioned earlier, ends in March.

And, Matt, any comments I have I will preface with we have brought on this acquisition in the last few months, and so our understanding of the overall seasonality of the market is not as crisp as it is in North America.

That being said, there's other noise in there with other aspects of what we are doing in bringing the business to profitability, including shedding some of the unprofitable business as well. So I think that there's going to continue to be noise. As time goes on, we will also learn more about seasonality, but that is our best estimate at this point.

Okay, I guess what I'm getting at is whether you have seen actual customers or your resellers talk to customers that are saying -- we are going to hold off now, maybe just be cautious for whatever reason. Are you actually seeing order cancellations or push-outs from customers there yet?

Obviously, when the earthquake and tsunami and other events happened, we did see an immediate impact, because many -- much of the country, of course, was not writing any business. That being said, shortly after that happened, we did see a fairly quick recovery on our sales pipeline and our order bookings coming in to the point today where they are not a whole lot different from the pre -- from the pre-earthquake time.

Okay, that is good to hear. Just turning to the BPO business, where there were also some integrations, and, obviously synergies that you're going to get later on, I think you said you did around 9% operating margin. Given that you've got now a much bigger scale and I think you were running in the low teens, 11%, 12% or so, what would the goal be for operating margin in that business over the next few quarters?

This is Thomas. I will start, and then Chris can pipe again. I'm going to reiterate what we have said before, because we want to be very consistent in our message. Everything is tracking.

So the acquisitions that we have made will bring us back to normal pre-acquisition operating margins once the integration is completed. And then beyond that, we have commented that because we are now transitioning in a large part of our business to a platform solution, we actually expect as we grow that business, that the operating margins will increase in the GBS business. Now it represents about one-third of the total revenue for GBS. So we have good expectations exiting 2011, heading into 2012 for margin expansion in that segment.

Okay, but no specific targets you want to give?

Our pre -- as you know, just to make sure we have a stake in the ground, our historical numbers have been in the low teens, around 11%, 12% for operating margins. So we expect to surpass those numbers.

Next caller please.

Craig Hettenbach, Goldman Sachs.

Kevin, outside of the direct impact in Japan, can you give us a sense of what you're hearing from your vendors from an inventory perspective as they look out over the next quarter or two, what they're bracing for from a supply perspective?

Sure. Obviously, we have been doing a lot of checking and receiving information back in particular from vendors that have all or part of their supply chains in Japan. The answer back really -- and in particular for the North American market -- has been really minimal impact on any inventory availability.

Our understanding is that most supply chains today are outside of Japan I think primarily for cost reasons. Now that being said, we have noticed at least some risk of constraint in certain areas, areas like some hard drives, glass, primarily panel that is 12 inches and smaller and also in NAND memory. But beyond that, we are not hearing of any other notable -- any other notable inventory constraints.

Now that being said, depending on how long some perhaps component level supply shortages may occur, that may at some point in time start to impact other finished goods. But right now, there doesn't seem to be any concern that that is going to happen.

Then the reference to mid-single digit IT demand this year and the Company expects to grow above that, can you talk about what product categories you expect to do the best this year?

I can really talk just in terms of number one what we have seen so far category-wise and then moving forward I guess on a more gross basis, what -- where we think the growth opportunities are going to be as well. Some of those are pretty consistent too.

But overall, I guess we are seeing stronger than average growth on the networking security side, even categories in peripherals like printing and printing supplies have shown strong year-over-year growth. Our business in the data center in particular server and storage has been strong as well. The business that we do in tablets, of course, is growing pretty significantly.

We expect to see anything to do with mobility continue to drive growth and in particular, anything to do with cloud including cloud infrastructure. So when we look at data center, when we look at tablet devices, other mobile devices, and then the network that supports that, those are all key categories of growth that we expect to see.

Last one. Quite a bit of M&A on the services side and the acquisition in Japan last year, can you talk about just what the pipeline looks like today and the appetite for additional M&A going forward?

I think we have been pretty vocal in talking about our own business strategy and what drives our strategy. I can tell you that we continue to be squarely focused on making the right investments to bring on capabilities to address the kind of markets that we know we need to be serving in the future. So we continue to look for opportunities.

We have done a number of acquisitions over the past number of months, as you have mentioned. However, if the right opportunity is out there for us, we certainly have the capacity and capability and resource to be able to do them.

Ananda Baruah, Brean Murray.

Thanks a lot for taking the question. Kevin, Thomas, just -- I guess to start, a point of clarification on MIT.

Sounds like you're saying, okay, expect it to be accretive to this year. But, Thomas, did you also make a comment that said although you expect it to eventually reach I guess (inaudible) operating -- with distribution operating margins that it might take longer than you had originally expected given what is going on in Japan?

That was my comment in the prepared remarks. So in answer to the first part of your question, we are pleased with the investment that we have made in Japan and we absolutely expect that we are going to achieve the financial goals that we set forth when we made this investment.

Given the relative uncertainty right now in the marketplace, we continue to monitor that and of course we learn more as each day goes on. Just saying that, if anything, it could have an impact on the timeline to get to those goals. But we are confident that we are going to get to those goals.

Okay, great, thanks. Kevin, can you just remind us what some of the things are that you're doing or looking at doing or would like to do to actually expand the -- I guess the revenue run rate of MIT? I know that was a big part of what you guys were thinking about when you completed the acquisition.

Well, I think really our priority -- our first priority is driving improved profitability in the business. So from that perspective, one of the key things that we are doing is implementing our own ERP, which also is going to drive enhanced process within that business and make them much more efficient in how they run their business as well as provide a lot more visibility into key information and data that we use every day here in the US and Canada to run our business as well.

So that is probably first priority and one of the key levers that we have. But in going forward and then leveraging higher sales growth, we believe that we bring to the market a step level improvement in service, supply chain efficiency and service.

So being in stock, being able to get the product more quickly to where it needs to go to and then, also, leveraging existing large relationships that we have here in the US and in Canada to enhance their overall line card.

Okay, great. Thanks. Just quickly, can you give us an update on how New Age did for the quarter, I guess, ex Jack and maybe what some of the areas of strength were for New Age and if there were any areas of weakness, I guess maybe how consumer PCs did in that business?

So, overall, New Age Electronics did very well. Our consumer business, which pretty much is New Age Electronics, grew faster than the overall average for the distribution segment. Notebook and computing and tablet actually all did fairly well for our business.

So in some cases where we see what is happening in the market, and I would point out that notebooks or laptops overall from a market standpoint are relatively soft, we actually saw pretty good sales growth performance there and a lot of that coming out of the New Age business. New Age was also the segment of our business that brought on a number of tablet computing devices, and they did very well with those too.

Okay, great. Is the expectation -- I know you said sort of mid-single digit for consumer as well as IT Distribution. I guess for New Age itself is the expectation to see continuation of trends that you saw this quarter?

Yes, that would be correct. In fact, I would make that comment for all of our business units, which is to grow faster than the market. That has been our history, by the way, and we certainly expect to continue to do that.

Okay, great. Thanks a lot, guys.

Rich Kugele, Needham & Company.

Just a couple from me. I just wanted to understand a little bit better about the streamlining of Infotec.

Given the obviously dramatic events in Japan, does it make sense to lengthen the time frame for exiting some of those less profitable businesses until the IT spending environment balances itself? Is that what you're kind of hinting at or is it just general expectations of taking longer given the spending?

I wouldn't say it is specific to any kind of streamlining or rationalization of our line card, or any unprofitable parts of our business. That is certainly underway.

Really what I am referring to is having just an underlying stable demand environment so that we can continue on our path to profitability. That is really what I was referring to.

That is helpful. Then in terms of inventory management, you cited a few areas that perhaps there is a market tightness for on the product side. Have you changed any of your inventory practices? Are you -- whether Japan or here domestically -- are you trying to hold a little bit more product just in case?

This is Dennis. Nothing really substantial to say there. We obviously are monitoring the situation very closely.

But with the situation in Japan, it will not dramatically affect our inventory levels over the next three months or over the next quarter, I should say. But we do monitor it very closely, and where we need to make adjustments or take inventory positions as needed, we will.

Okay, then the last one is just how much was Infotec actually shipping outside of Japan and has that been impacted at all?

There is nothing that gets shipped outside of Japan.

Okay, great, thank you very much.

(Operator Instructions) Richard Gardner, Citigroup.

This is Joe Yoo on behalf of Rich. In the spirit of just getting as much information as possible on the Japanese situation, can you provide any color on how the recent events have impacted your reseller base? Maybe the proportion of the reseller base that is located north of Tokyo or around the epicenter.

This is Dennis. My comment on that would be really referencing back to what Kevin said.

Obviously, after the initial earthquake happened, daily run rates slowed down significantly. But we have seen those run rates come back almost to normal levels over the past week. That would suggest to us that the reseller base overall is recovering along with the rest of the market.

Great. Just shifting over to the OpEx side, I just wanted to get some long-term views on your business model.

Some of your larger competitors have said they are comfortable growing OpEx at half the rate of topline growth. I know there's a lot of noise in the P&L right now, because of M&As, but what do you think is the appropriate or normalized rate of growth for OpEx as it relates to revenues?

To be able to make a statement like that I think at least assumes a certain mix of business that is relatively constant. One of the flagship messages that you have been hearing and actually observing in our financial results is that the mix of our business continues to change especially going up to more value-add products and services.

And as a result of that when you look at the type of business and the SG&A required for enterprise-level distribution services rather than broad line distribution services, the SG&A profile does look different. This is one of the reasons why we continue to focus on growing operating margins and don't get too hung up on SG&A, because it is very much relative to gross margin.

So that said, what I would tell you is we do not use the metrics that that grows SG&A at a certain level of sales. Rather our focus is, again, growing operating margins, always trying to reduce and be lean with regards to SG&A, always trying to grow gross margin to add value to customers and at the end of the day, drive operating margins and ROIC.

Thank you very much.

Thank you. I believe we have one more caller on the line.

Ananda Baruah, Brean Murray.

Kevin, just wondering if you could give us a quick update on I guess sort of the overall tenor of what you're seeing in enterprise. How are you seeing -- what are kind of customers sort of looking for these days in terms of configurations?

Has that changed at all as you sort of continue to get more and more months under your belt with a pretty attractive portfolio? What are you guys doing sort of differently, if anything, lessons learned and things of that nature?

I guess just any sort of texture around what you guys are doing and what you're seeing and maybe what your customers are thinking and feeling today would be great. Thanks.

So, a great question. But really the answer is it's been relatively consistent over the past couple of years. The enterprise in datacenter continues to be a strong growth area for us and a growth opportunity not just because of some of the underlying drivers in terms of virtualization, but also because it is a relatively -- we're a relatively smaller player to some of the traditional enterprise distributors in that space. And so, of course, our piece of the pie is smaller and the growth opportunity for us is much greater there.

But, again, driven by the same things that we have been talking about all along which is trying to drive much more efficiency in the data center, both through virtualization as well as through power savings.

Got it, great. Thanks a lot, guys.

I think we have one more caller and then that will be it.

Brian Alexander, Raymond James.

Just to expand on your comment earlier on tablets, I think it was more of a consumer comment. But if you can talk about to what extent you are seeing cannibalization of notebooks, because I think you mentioned notebooks were also strong, Kevin. Then in the enterprise, what kind of -- enterprise and/or SMB, what kind of interest level are you seeing for a tablets?

Sure. Okay, so starting off with more of a market comment, I do believe what we are seeing is strength in tablets really driving much of the softness that we see in the overall notebook category. Within certain segments of our business -- and I did highlight our consumer business -- we still continue to sell a lot of notebooks and even grow that business year on year.

I would make the same comment, by the way, for our Canadian business. But overall with tablets, we are seeing at least some level of cannibalization there, certainly a lot of adoption in the Android-based tablets that we have been selling in the retail and consumer markets.

And there is definitely a lot of interest when we get to the consumer markets. But I think that there are a number of hurdles that most businesses are going to have to clear before you're going to see very rapid adoption of tablets beyond just some of the simple, unintegrated applications that you have today. That has to do with security and tighter integration into actual workflow in commercial.

But there's a lot of things that are happening there. In fact, with the development capabilities that we have, we are also trying to break through on some of those and actually help enable that growth to happen. I think that we are going to start to see even more growth in commercial on tablets as some of the Tier 1 OEMs launch their tablet offerings as well which is starting to happen now and certainly we will see a lot more of that happen over the next six months.

Okay, and then on the GBS margins, Thomas, I know you said that the leverage should pick up in the second half of the year due to these platform acquisitions. What kind of difference in margins would you expect to see from the platform companies -- maybe Chris could chime in -- than you would see with the traditional tech support related businesses? Just so we could get a sense for the disparity there.

Brian, the first thing it is important to understand is that generally speaking, the margin profiles of these businesses given their current size was not a lot and different from SYNNEX. And what drives the margin expansion is being able to leverage the fixed investments in these platforms so they will -- the expansion we will see will be very much related to the revenue expansion on that part of the business.

I would add a comment that when we look at the margins, operating margins right now, it is hardly being affected by our integration expenses and as we build the business out. And not -- the expansion that is going to come in the latter part of the year is actually based on cleaning that up and building our foundation where the enhanced margin expansion that's going to be more closer to the end of the year will be based off of the platform sales that we are looking at.

Okay, but over time as the platform businesses grow, I guess I'm trying to get a sense for what is the margin potential for that model as it grows and achieves the leverage that you're looking for?

I think it is premature to say that given the recent acquisitions. I think that as we progress through the year, we could have a little more color around what those expectations might be without setting forward-looking guidance. We understand the nature of what you're after. But again, I would say it's premature right now to be setting those kind of goals publicly.

Okay, and then just final, I guess modeling question, Thomas, the tax rate, it was lower than I was looking for for the quarter, 35%. Going forward is 35% the right way to think about tax rate? I know it depends on mix a little bit, but maybe just update us on the range there?

I would say that as you look at into the rest of the year, in the 35% to 36% range, Brian, is what to expect.

Okay, and as MIT grows to be a bigger percentage of the total and maybe as GBS becomes a bigger percentage of total profits, did both of those dynamics have a lowering effect on the tax rate or not necessarily?

In the near term, Brian, you should expect the same kind of range. So I'm talking for the rest of the year, 35%, 36%.

Thanks.

Okay, this concludes our first-quarter fiscal 2011 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. As always, it if you have any further questions, please feel free to give us a call. Thanks for your participation.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.