新聚思 (SNX) 2011 Q2 法說會逐字稿

Good afternoon. My name is Misty and I will be your conference operator today. At this time, I would like to welcome everyone to the SYNNEX 2011 second-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, Misty. Good afternoon, and welcome to SYNNEX Corporation's fiscal 2011 second-quarter conference call for the period ended May 31, 2011. Joining us on today's call are Kevin Murai, President and Chief Executive Officer; Dennis Polk, Chief Operating Officer; Thomas Alsborg, Chief Financial Officer; and Chris Caldwell, Senior Vice President and General Manager of Global Business Services.

Before we begin, I'd like to note that the statements on today's call, 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 revenue, net income, acquisition, and integration charges; and diluted earnings per share for the third quarter of fiscal 2011.

Our share repurchase program, our performance, general economic recovery, the impact and integration of our recent acquisitions, the impact of events in Japan, benefits of our business model, our product mix, anticipated benefits of our new BPO renewal business, 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 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. 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, 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 in key financial metrics for the quarter. I'll conclude with guidance for the third quarter fiscal 2011.

First, some highlights on key financial metrics. I'm pleased to report our second-quarter earnings grew 21% year-over-year to $0.85 per diluted share from continuing operations. We also increased our operating margin and improved our year-over-year ROIC performance for the 15th consecutive quarter. SYNNEX continues to remain focused on our key goals of growing profitability and growing returns for our investors, even as we make major investments in our business.

Let me share some of our details behind our solid performance, starting with revenues.

In our second quarter, total consolidated revenues from continuing operations were $2.50 billion, up 23% over Q2 2010 and flat sequentially. This is consistent with the expected seasonal trends, given our current mix of business and geographies. Approximately 11% of the year-over-year growth came from strong core organic business performance. The remaining 12% of the year-over-year revenue growth came from our acquisition of Infotec and the three smaller Global Business Services, or BPO acquisitions, net of the divestitures of the Sun manufacturing business and [NDS] business, which occurred late last summer.

At the segment level, in the second quarter, revenues from the distribution segment were $2.46 billion, up 23% year-over-year and flat sequentially. The year-ago quarter included $67 million in revenue from the Sun/MiTAC platform manufacturing business, which was sold on July 31, 2010. The acquisition of Infotec contributed $316 million in revenue to Q2 2011.

Growth in 2011 was moderated from the very strong recession trailing year-over-year 2010 rates to more normal pre-recession growth rates. Demand remains solid and SYNNEX grew even faster than the overall market.

In our GBS segment, revenues were $38.8 million, up 40% year-over-year and flat compared to the fiscal first quarter of 2011. Organically, GBS grew 13% year-over-year. The year-ago quarter includes $3.7 million in revenue from NDS, which was sold in August of 2010.

In the second quarter, our consolidated gross margin was 5.81% compared to 5.74% in the second quarter of 2010, and 5.75% in Q1 2011. Once again, the gross margin in our core distribution business remains strong. We continue to have good traction in our Technology Solutions Division and other high-margin growth initiatives, which are driving favorable mix change towards our value-add products and services.

Second-quarter total selling, general and administrative expense, inclusive of the acquisition and integration-related expenses, was $90.9 million, or 3.64% of revenues compared to $73.2 million or 3.60% in the second quarter of fiscal '10; and $92.9 million or 3.72% in the first quarter of 2011. This sequential step-down in SG&A dollars expense is due in part to the benefit of $1.3 million resulting from the adjustment to contingent M&A consideration.

In Q2, we have specifically identified approximately $400,000 of direct acquisition and integration expenses related to our recent M&A. There were also some indirect transaction costs and other expenses within SG&A during the quarter, that have not been called out, but which impacted our SG&A in the quarter, including notable amounts of warehouse relocation expenses and facilities charges.

Consolidated operating income from continuing operations before non-operating items, income taxes, and non-controlling interest, was $54.2 million, or 2.17% of revenues compared to $43.4 million, or 2.14% in the prior-year second quarter, and $50.9 million or 2.03% of revenues in the fiscal first quarter 2011. Although we believe these are very good margins, considering the four integrations and associated costs, we expect to see much more significant operating margin expansion towards the end of the year, primarily in Q4 after the integrations are completed and our recent new programs are fully ramped.

On a segment basis, distribution income from continuing operations before non-operating items, income taxes, and non-controlling interest was $50.5 million, or 2.05% of distribution revenues compared to $40.5 million or 2.01% in the prior-year quarter. GBS income from continuing operations before non-operating items, income taxes and non-controlling interest, was $3.7 million or 9.56% of GBS revenues compared to $3.0 million, or 10.8% in the prior-year quarter.

We are expanding our BPO renewal's platform business, and in Q3, we are excited that several of our new BPO renewal platform wins are ramping up over the quarter. We will require some additional SG&A investment for the startup costs during Q3, and we expect the benefit of increased operating profitability in the coming quarters.

Net total interest expense and finance charges for the second quarter of 2011 were $6.3 million and essentially flat with the first quarter. The effective tax rate for the second quarter of fiscal 2011 was 34.4% compared to 35.0% in the first quarter of 2011. The decrease is primarily due to the mix of profit contributions from our various tax jurisdictions. Our second-quarter net income from SYNNEX, net of tax, was $31.4 million or $0.85 per diluted shares. This compares to $24.8 million or $0.70 per diluted share in Q2 2010, and $29.7 million, or $0.80 per diluted share in Q1.

Turning to the balance sheet, our accounts receivable totaled $911 million at May 31, 2011 for a DSO of 38 days, which is consistent with the prior-year quarter. Inventory totaled $941 million or 37 days at the end of the second quarter, compared to 38 days in the second quarter of 2010. Days payable outstanding was 33 days compared to 34 days in the end of the prior-year quarter. Hence, our overall cash conversion cycle for the second quarter was 42 days, which is consistent with the same quarter of last year and down two days from Q1 2011.

Our debt to capitalization ratio was 28%, still at a historically low end of our range. Our liquidity and access to cash remains excellent. At the end of Q2, the Company had over $0.5 billion available between cash and working capital lines.

Other financial data and metrics of note for the second quarter are as follows -- depreciation expense was $4.3 million; amortization expense was $1.8 million; Hewlett-Packard, at approximately 34% of sales, was the only vendor accounting for more than 10% of revenues. Q2 cash capital expenditures were $7.4 million. Preliminary cumulative year-to-date cash flows provided by operations was approximately $162 million, and trailing four-quarter ROIC was 10.3%, up from 9.5% as of Q2 2010.

Now moving to third-quarter 2011 expectations. For fiscal Q3 2011, we expect revenue in the range of $2.54 billion to $2.64 billion. Our forecast for net income is expected to be in the range of $32.8 million to $34.2 million. Corresponding diluted earnings per share are anticipated to be in the range of $0.88 to $0.92 per share. This guidance assumes continued stability of the overall demand environment and the return to more pre-recession market growth rates in North America.

The third quarter is seasonally the slowest quarter for our Japan operations, and in addition, we've factored in the current post-earthquake demand environment for Japan. Also, our guidance incorporates startup costs and ramp periods associated with the recent GBS platform wins that I mentioned earlier. As a reminder, all of these statements are forward-looking statements and actual results may differ materially.

Finally, before I hand the call over to Kevin, I would like to inform you that SYNNEX's Board of Directors has authorized an anti-dilution stock buyback program. This program allows SYNNEX to utilize up to $65 million over a period of up to three years to reduce ongoing dilution from the Company's existing employee stock programs. It is to be funded by operating cash flows and proceeds from the issuance of employee stock.

I will now turn the call over to Kevin Murai, President and Chief Executive Officer, for his perspective on the business and our quarterly results. Kevin?

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

In the second quarter, once again, the SYNNEX team delivered excellent results. We're very pleased to deliver 23% topline growth, including 11% organic growth; 21% EPS growth; and continued solid returns on capital. All of our businesses performed well this quarter, so let me comment on the major divisions.

Our North American distribution business again grew faster than the market. Our commercial business was especially positive, including strong demand in technical solutions, such as converged infrastructure, networking and security, pro-AV, and datacenter. From a customer perspective, we also had good growth overall, including solid performance in the government and healthcare markets. Also, our core SMB business remains solid.

Our high-performing commercial business was recognized during the quarter, as Hewlett-Packard awarded us Partner in Excellence for Distributor Growth for the second consecutive year. The strength in our commercial business was somewhat offset by lower than expected growth in our retail business at the end of the quarter. Overall economic pressures on consumers likely contributed to the results. As new mobile devices such as the tablet are launched, we expect to see good growth opportunities in our retail business and a return to our historical growth rates.

In our Japan distribution business, I'm pleased with our overall progress at SYNNEX Infotec. Our integration work is nearly complete and the Infotec team delivered a profitable quarter, despite the market challenges following the earthquake and tsunami. The market is still in recovery mode and is softer than initially expected, but appears to be stabilizing at this point.

As we discussed in our last call, the impact of the disaster in Japan has pushed out our timeline to hit our operating margin goals. However, we remain confident that we will drive the profitability of this business to North American levels.

Lastly, in our BPO business, we achieved double-digit growth for Q2 in our existing business on an apples-to-apples basis, and we completed the integration of our recent acquisitions. We're also pleased that we won several new engagements during the quarter, including several large contracts in our renewals business. These recent wins will ramp in Q3 and drive incremental profits in our fourth quarter. With a solid Q2 and first half of the year on the books, let me turn to our views on the current market, and highlight some of our focus areas for Q3 in the second half of the year.

In North America, IT and consumer spending growth appears to be moderating to pre-recession historical norms. However, we expect this growth rate will still be better than overall GDP growth and allows for SYNNEX to execute on many of our growth initiatives. Within the market, we see higher growth opportunities in datacenter, networking, tablet products, and in our GBS business. Our recent investments in these areas are paying off with high profile wins at a solid run rate business.

Regarding tablets, we are excited about the launch of HP's TouchPad in July and the overall continuing expansion of our tablet offerings. We're also excited that our solutions-focused go-to-market strategy is gaining solid awareness in the market. We have branded many of our solutions under our Solv brand, such as PrintSolv, ServiceSolv, and CloudSolv. Just yesterday, we launched our RenewSolv Renewals HP platform to an initial set of reseller customers. This platform uses the technology and IP from our Aspire and Encover acquisitions.

We believe these solutions platforms provide yet another key differentiator for SYNNEX. This initiative, in addition to our cloud and mobility strategies, which we have outlined in previous quarters, are excellent examples of how we're focused on capturing growth and margin expansion.

In Japan, even as we approach the seasonally-slow time of the year for IT spending, and address overall slower demand due to the earthquake, we're excited about our opportunities in the region. At this point, we have completed the majority of the restructuring of our Japan operation, and we now have a cost structure that can be leveraged for profitable growth. We're also seeing acquisition synergy take hold with existing SYNNEX vendors signing on in Japan. As the Japan economy recovers overall, and as we execute our growth initiatives, including new vendors and customer opportunities, we believe this division of our Company will contribute solidly to the overall results of SYNNEX.

Overall, in all the businesses we operate in, we see continued opportunities to grow faster than the market, as we have historically accomplished, and to continue to improve margins. So with the completion of our second quarter of 2011, SYNNEX achieved our 96th consecutive quarter of profitability.

Our third-quarter guidance reflects continuing investment in our key initiatives, including certain startup costs associated with our recent GBS wins. The performance of our recent acquisitions are on track and we expect incremental profit contribution in our fourth quarter. Most importantly, we continue to operate on all eight cylinders, and I want to thank our SYNNEX associates around the world for delivering another solid quarter.

And with that, Lori, let's turn the call back to the Operator for questions.

Thank you, Kevin. Misty, we would now like to open up the lines for any questions.

(Operator Instructions). Brian Alexander, Raymond James.

Could you guys just talk a little bit more about the demand environment and the revenue guidance for the next quarter on a sequential basis, in the context of what normal seasonality would be? It looks like maybe it's a little bit below seasonal.

And how much of that is really coming from the consumer side versus maybe some additional weakness you might see on the government side? Just a little bit more context on the guidance relative to normal seasonality. And then I have a couple of follow-ups.

Sure, Brian. This is Thomas. I'll start off a little bit about the seasonality and then Kevin can comment on the overall -- the markets.

First, again, as the seasonality of our business has evolved a little bit over time with the various acquisitions we've had, we believe that our normal seasonality going sequentially from Q2 to Q3 would be in the 4% to 6% range. And so the guidance that we gave for Q3 is at the low end of that range indeed.

It does factor in some of the comments that I referred to, particularly the moderating growth in the markets in North America, and the softness in Japan, driven by a couple of reasons which I think Kevin will comment on. Kevin?

Sure. And Brian, you asked specifically about our government business as well. So, through our second quarter, actually, our government business overall was relatively strong. As you might expect, the federal government business was relatively flat year-on-year, but really state, local, and education really did drive most of the growth in that sector.

And what we attribute that to is, I think most -- I think 46 out of 50 states have their year-end around June 30. So there seems to be somewhat of a budget flush, kind of a use-it-or-lose-it philosophy going on with state and local, and with education, as well. But as we look out, at least as far as we can see, into our third quarter, we do anticipate that federal government spending is likely going to be fairly strong through the end of the government buying season.

Okay. And so, as we think about the 4% to 6% sequential growth rate and being kind of at the low end of that, is the primary delta Japan? Or is consumer playing a big role in that?

Both are definitely factors, Brian. Japan, with the softness in the economy following the earthquake and tsunami, is certainly a factor. Also, softness in the consumer markets itself is another factor.

Okay. And then, Kevin, it sounds like you guys have made a lot of progress on the integration of MiT. And I'm just wondering, given that you're -- I think you said you're mostly complete with that integration, what kind of timeline are we now looking at for that business to reach the level of profitability that you're seeing in North America? Is that two to three quarters? Or is it longer than that?

Yes, I think -- really, I think the main variable here is what happens with overall demand in the Japan IT market. Because, as I mentioned in my prepared remarks, the cost work that we had to do initially in integrating the business has been mostly completed. Now we have a cost structure that we believe we can leverage and grow the business. And it's really going to be continual fine-tuning of margins in that business. but equally as important growing our top line.

So part of it is gaining leverage from existing relationships that we have here in North America with some key vendors, but in addition to that, the market also has to help with that too. So, based on what we see right now, I think our timeline in getting to our margin goals have been pushed out from what we had initially expected. I don't know if that's one, two, or three quarters. As I said, the biggest variable here really is when does demand return to the levels that we had initially expected?

Okay. And then just final one for me and then I'll get back in the queue. Just on the GBS side, it sounds like you guys won some new pieces of business there. And I'm just wondering if you could elaborate a little bit more on that? And maybe kind of order of magnitude, how significant those wins are? And how much leverage could that drive to the GPS margin profile, which I think was around 10% this quarter?

So, Brian, it's Chris. In terms of giving you some color around the wins, we won in actually all theaters we operate in, both in EMEA and Asia-Pac, and in North America, with a number of different customers -- mainly vendors that are in the software and hardware space, specifically, more around security.

We won these from incumbents in some places and we won them from in-house delivery where we were going to be taking over the delivery of them. They do require some startup costs in terms of bringing on the staff and training them before it turns into revenue, so we don't really see that revenue coming in until Q4 and really being in full swing in Q1. So you'll see that as it trails in. I think that's in terms of the clarity we can provide on those deals right now.

Are these -- I mean, are these big deals? I'm just trying to get a sense of the materiality of the deals that we're talking about, if there's any way to put that into context.

At this time, we prefer not to size them for you. As Kevin -- Chris mentioned, they are multi-year contracts, three to five-year contracts, and the profitability expectation that we had around this renewal platforms continues to be in place, Brian. So these are what we think are margin-enhancing platforms for the BPO side of the business, both at the gross margin level and from an operating margin. But as far as the size of them, we're going to have to wait a little bit and see how that plays out in terms of disclosure.

Okay. All right, fair enough. Thanks, guys.

Craig Hettenbach, Goldman Sachs & Company.

Yes, if I could just follow-up on the Q3 outlook, the comment that Japan is typically seasonally weak. Can you put any band around that, in terms of a range of what Japan typically would be in the August quarter on a sequential basis?

Craig, this is Thomas. I'll start and maybe Dennis might want to jump in there. We were going to talk about Japan initially in our business, but Japan is going to become a part of our overall segment, so we're not going to carve out revenue numbers over the long-term. So I just wanted to set the stage for that in the coming quarters. That said, we shared what the revenue was this quarter.

And our revenue for Q3 is actually -- for Japan, is actually going down. Seasonally speaking, the first quarter tends to be the strongest quarter, because it's heading right up into the fiscal year-end for the government. And many of the companies in Japan follow that same year-end, so that tends to be their stronger quarter. From a seasonal perspective, we expect some softening. But again, as we've commented earlier today on this call, the softening is a little more pronounced than we expected because of the overall macro environment post-earthquake.

Okay. And if I could follow-up, Kevin, just any positive or negative surprises versus beginning of the year, as things are playing out? And then as you look out into the back half of the year, maybe you can point to a couple of categories in that light?

Yes. I don't think there's any real surprises. I think anticipation of where we see certain opportunities that we've invested and taking advantage of are starting to come. We invested early on in the mobile market, as an example, specifically on tablet devices. And going back a couple of quarters, we did see some good incremental growth, in particular in the retail part of our business, with some of the tablets that we've had.

Now that many of our Tier 1 OEM partners are starting to launch their own products and, in particular, Hewlett-Packard with their TouchPad coming out actually later this week, we do anticipate good growth opportunity there as well. From a commercial perspective in mobility, I think our position is going to be enhanced by some of the capabilities that we've invested in over the past year, specifically mobile apps capabilities, where we can help to drive deeper integration of some of these mobile devices into business workflow and ERP.

So, I do anticipate that that's going to be a good growth opportunity. I think the cloud continues to move very quickly as well, both in terms of traditional enterprise, but also with the launch of some new platforms, some that we've actually created and designed as solutions, such as our UC offering, but others around other vendor offerings like Microsoft. We do see some growth opportunity there as well -- starting to gain traction this year, in particular in SMB, and probably continuing to take off as well.

The only other thing I can offer is that where I think part of the key to success is in some of these trends going forward, these opportunities going forward, is our ability and our partners' abilities to wrap services around the products that we sell. And I think the more we're able to do that in a meaningful way, the more value we're able to create in the marketplace, the better growth we're going to have. And certainly, the more enhanced margin we're going to be able to drive as well.

Okay. And last one, just the comment of demand getting back to pre-recession levels -- can you just talk about what that means, whether it's linearity in the quarter just completed or as we go forward? Has that been a gradual kind of phase-in that you're returning to normal? Or any kind of sudden shifts in buying patterns?

When we look at market data, we have a number of different sources. One that we do look for the channel is NPD. And if you do track the NPD data, what you'll see is that the growth was very, very positive through 2010. Started to slow down somewhat through the last part of calendar 2010, and certainly, we saw a return to what I would call more normal growth patterns, starting at about the first three to four months of the year.

Okay. Thank you.

Matt Sheerin, Stifel Nicolaus.

Just had questions around the -- some of the expense line numbers that you talked about, Thomas. You talked about some incremental expenses related to the GBS integration and some other post-acquisition-related expenses. And it sounds like some of those are going to go up; after, of course, you've got some more startup costs related to some new projects. So can we get an idea of sort of what run rate we're talking about in the May quarter for those incremental expenses that may go away? And what kind of investments you're looking at in the August quarter?

Sure. So we've been -- since the beginning of the year, we've been tracking discreet expenses. We reported that on a separate line item on our P&L within SG&A for Q1 and Q2. That's a little over $1 million in total. I expect that that may go up to $1.5 million by the time we're done, but those numbers are trailing off. So we expect Q3 numbers to be a little bit less than Q2 with regards to the integration, the residual integration costs and so forth.

Really beyond that now, as we have won a number of nice programs in the BPO side of the business that Chris referred to earlier, there's -- because these are platform programs -- and again, these are three to five-year programs -- there is a greater amount of upfront startup cost investment that we do have to take to the P&L, as these things all ramp kind of over the last couple of months and coming into the next couple of months. And so, you're going to see some more of that carry into Q3, especially as these programs are ramping. Again, we characterize these as startup costs. They're costs associated with training folks and costs associated with some IT work associated with the programs and so forth.

The magnitude of this is probably in the range of $750,000 to $1 million in Q3. So that's the additional burden associated with ramping those up. Again, they will contribute good profitability as we ramp them up towards the end of the quarter, and especially going into Q4.

Okay. Once you put those people in place and do the training, is that relatively fixed? Or is there another variable component as the business ramps up, whether it be commissions or other things that we could see, for instance, in the November or February quarters?

Relating to these programs -- and I'd like Chris to jump in and add -- relating to these programs, once they ramp, they are more fixed in nature. That was one of the attractive aspects of the platform approach to us, is there's a lot more leverage in the financial model for each program than there would be, for example, on a core classic, tech support BPO side of the business.

Okay. That was helpful. And then in terms of Japan, I know you pushed out some profitability targets and that certainly makes sense, but could you give us any of sort of what the profitability is at now? And given the fact that things are soft or maybe a little bit softer than seasonal, is that going to be a drag, an incremental drag in your earnings next quarter?

So, just as a refresher here, when we acquired the Company, it was underperforming. We commented on in Q1 that it was struggling to break even. We are profitable now, so we're on a good track in growing that profitability. We expect that track to continue into Q3, but it will be, again, because of primarily topline demand generation and the effects of the market that we conversed on earlier, it will be muted profit growth relative to our original expectations.

That said, it's important to note that we remain very confident about the acquisition and the end goal of achieving the higher level of profitability that you'd expect from the counterpart here in the US. And those expectations are 100% intact.

Okay. Great. And my last question -- Kevin, you commented about tablets being an important product category for you going forward. You talked about the new HP product. But what have you had in terms of product exposure? I don't think you have Apple; so has that been significant at all? Or is there really sort of forward-looking in terms of what you're seeing from vendors and what your VAR customers are telling you about what their customers and clients want?

Right. So if you kind of single out the iPad, that's really one of the only categories that we have -- or products that we haven't had in that category. I think I shared some numbers one or two quarters ago, but through the holiday season up to early in 2011, we had already sold more than 100,000 tablets, primarily into the retail markets. So, we did have a number of different specific products from some Tier 2 manufacturers and from the usual Tier 1 OEMs. I do call out HP, but of course, Acer and ASUS, in addition to Motorola, we have all of those products as well.

Okay. Thanks very much.

(Operator Instructions). Shaw Wu, Sterne, Agee.

Just to clarify, Kevin, your consumer comments, over the last couple of quarters, you've actually outperformed the market quite a bit in terms of consumer. And it seems like -- it sounds like that this quarter, sounds like it had an impact. And I just wanted some clarification around that. And I don't know if you -- is it -- why were you able to, I guess, execute in the previous quarters -- out-execute? And it sounds like this quarter maybe not as much; is the market too weak?

And then just your comments on these new tablets, particularly from HP, the TouchPad. I guess, do you expect that to improve your overall consumer business? Just wanted some clarification around that. Thanks.

Sure. So, we did mention softness in the retail market, in the consumer market, as having some level of impact in our Q2 and in our Q3 guidance. That said, we actually did perform much better than the market in Q2 as well. Our growth in retail and in consumer markets was only slightly down year-on-year, and the underlying markets are down significantly more than that. It really has to do with our ability to be in the right categories and serve the right kind of customers that are experiencing growth rates that are better than the overall market.

That being said, in Q2 as well, there was at least some level of some product constraints. I guess a better way of saying that is, in some categories, if we had more product, we would have sold more stuff. So that was one small factor that I'm not specifically calling out -- or didn't specifically call out, but that certainly was a factor.

Going forward, as we continue to see the launch of more and more of these mobile devices, in particular, we're quite excited about the HP TouchPad coming out. In addition to that, in our third quarter, we also have back-to-school included in that timeframe. So, we are anticipating a better performance in our retail business in Q3.

Okay. Thanks. And then just another question. On the gross margin -- this is probably maybe more for Thomas -- it looks like you had both sequential and year-over-year improvements. Now, with, I guess, GBS becoming -- it sounds like you have some new opportunities coming up there. Do you expect -- [does] this trend to continue where you can make both year-over-year and sequential improvements? Thanks.

Thanks, Shaw. First of all, with regards to gross margin, as we always say, two things -- one is there's always going to be puts and takes from quarter to quarter, and there's always going to be some levels of noise. So, to see a fluctuation of as much as 5 or 10 basis points when you're at gross margins as high as we are, is part of the business.

That said, it remains strong and our expectation is we'll continue to expand going forward. And certainly, one of the big drivers of our margin in recent quarters has been the change in our business mix, both within the distribution and also between our two segments, GBS and the distribution segment. And going forward, we are also going to see some nice mix change within the GBS segment because of these platforms. So when I look out into 2012, we're very positive about margin expansion.

The other thing that we're always careful to call out is that the most important margin to us is our operating margin. So that's for us the name of the game. That's the driver of our earnings and that's the driver of our returns on invested capital. So, wanted to make sure that you knew that our focus was there, not just making sure that we get good gross profit.

Okay, thanks.

Richard Gardner, Citigroup Global.

This is [Joe Yuan] on behalf of Rich. Kevin, you mentioned about the -- some constraints on products. And you did mention in the last quarter as well, that there were some constraints on products such as glass, drives, and panels, maybe. But I was wondering if those constraints are easing? What's the status right now?

Sure. And so I just want to be clear that what I had mentioned last quarter directly related to the disaster in Japan, was around some products that do use the glass that's produced in Northern Japan -- you know, some categories of product in our pro-AV business as an example. We're also seeing some constraints in toner. But in addition -- and that we continue to see; I'm not sure when that situation is quite going to ease up yet.

But putting things into perspective, it's a relatively small piece of our overall business. But that constraint certainly is there. The constraint that I referred to for second quarter on our retail business actually didn't have anything to do with the earthquake and tsunami in Japan. I think it was just more of a forecasting issue on products that were selling through more quickly than some had anticipated.

Thanks for all that clarification, Kevin. The second question is on the consumer side. The recent data points, especially the NPD number for May actually indicates that US retail PCs are actually growing again -- the first time it grew in seven months on a year-over-year basis. So I was wondering what -- how we can reconcile that? You're actually implying that there's a slowdown in consumer spending or at least IT on the retail side, where it seems like there's a little more optimism, at least the data points are indicating that way.

Yes, and keeping in mind that when we talk about the relative softness in consumer, it's more of a broad comment, number one. And the data point -- it's actually multiple data points over a longer period of time than just one month. But we're also optimistic about the growth opportunity in retail PCs, in particular as we start moving into the summer or late summer in the back-to-school season, because that certainly is one of the categories that we do well in.

So all that being said, historically, or at least over the past nine months or so, we have seen certainly a softening of overall demand in retail PCs, driven by mobile devices, but we are starting to see, I think, more of an equilibrium now, and a return to what perhaps more normal demand between mobile devices and traditional computing devices would be.

And to that point, I mean, is there any indication from your customers about back-to-school expectations about back-to-school?

Yes, I think it's -- the best way to describe it is cautiously optimistic. I think there's a lot of neat products and new features that are coming out for the back-to-school season. So, again, I think we have all the right categories; I think we're in the right places in retail to sell them as well. So we are anticipating a fairly good back-to-school season.

Great. Thank you.

Brian Alexander, Raymond James.

I guess just a couple of follow-ups. Kevin, since the Japanese profitability, I might see profitability as very revenue-dependent at this point. Can you kind of give us a range for what kind of annual revenue you might need to see, to feel confident that the operating margins in that business can get to the North American margin levels? Is it $1.5 billion annual? Is it $2 billion? I'm just trying to get a sense for where that needs to ramp to.

Yes, I think it's -- well, you know, it's -- I don't want to lead you to believe that the only factor in terms of driving profitability is going to be on topline growth. That certainly is an important factor.

The other piece to it, as I think I had mentioned before, is now that we have better processes in place to manage the business, we now have more levers that we can adjust to better manage pricing and other components of margin as well. It's hard to actually give you a scientific answer on exactly how much revenue growth is going to drive certain levels of margin improvement, but revenue growth does certainly need to be positive in order to get there. And the more topline growth we get, the more quickly we'll be able to get there.

All that being said, Brian, I don't want you to think that if the market doesn't strengthen in the foreseeable future, that we won't reach our goals. We're confident we're going to get there.

Helpful. And then just on HP, it looks like the mix of HP dropped to 34% from 38% last year, and the year-over-year growth rate for HP was about 10%, which was a pretty notable deceleration. Is that mostly driven by the broad-based consumer weakness that you saw, where HP might have a bigger share at SYNNEX, as well as maybe the lower HP content in your Japanese subsidiary? Or is there something else going on with either their momentum in the market or your relationship with them?

Yes, that mix change is pretty much all driven by the mix change because of our Japan Infotec business. They had a lower percentage of HP than our US and Canadian businesses did.

Brian, that was consistent with the first quarter as well, when we were about 33% of revenue.

Right. Okay. And then, finally, on that M&A credit you called out for $1.3 million, what was that for? And was that all in the distribution segment?

So, Brian, some of our recent M&A has -- that we have purchased has continued payouts for above-base plan performance over a designated period of time. And at the time that we made these acquisitions, we booked those continued payouts for the acquisitions. Again, they were in the purchase price that we reported to you.

Each quarter, in accordance with GAAP, we need to evaluate the value of those continued payouts and make any adjustments up or down, in accordance with what we anticipate will actually end up being paid out, according to those agreements. And this was our adjustment to accomplish that.

Can you tie that to a specific acquisition or a specific segment, just so we have a better sense?

Sure. It's -- I can tie it to the GBS segment, but I don't want to get any more specific for business reasons.

Okay. Thanks a lot.

Okay.

At this time, there are no further questions. Lori Barker, are there any closing remarks?

Thank you. This concludes our second-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 5.00 p.m. As always, should you have any follow-up questions, both Thomas and I are available to take your calls. Thanks for your participation today.

This concludes today's conference call. You may now disconnect.