新聚思 (SNX) 2012 Q3 法說會逐字稿

Good afternoon. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the SYNNEX 2012 third quarter earnings conference call. All lines have been placed on a listen-only mode to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time. Thank you. At this time, I'd like to pass the call over to Lori Barker, Investor Relations at SYNNEX Corporation. Ms. Lori Barker, you may begin your conference.

Thank you, Sarah. Good afternoon, and welcome to the SYNNEX Corporation Fiscal 2012 third quarter conference call for the period ended August 31, 2012. 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, President of Concentrix Corporation.

Before we begin, I would like to note that 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, investments in growth of our GBS business, profitability and returns, growth in shareholder value, our leadership position, expectations of our revenues, net income and diluted earnings per share for the fourth quarter of Fiscal 2012, our expectations of our tax rate, our performance, general economic recovery, anticipated benefits of our Hyve Solutions business, CLOUDSolv, RENEWsolv, and other platforms and performance in our GBS segment, the transition of certain customer revenue to fee-for-service, the impact and integration of our recent acquisitions, benefits of our business model, our product mix including the launch of new products and services, and relationships with new vendors, IT demand expectations and market conditions, operating expenses and operating margins, and expectations regarding any margin expansion.

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. Thank you for joining our call today. I'll begin with a few highlights and by summarizing our results of operations and key financial metrics. Then, I'll conclude with guidance for the fourth quarter of Fiscal 2012.

Our third quarter of Fiscal 2012 was a solid quarter in which we executed well and gained market share in a challenging macroeconomic environment marked by softer global demand as well as a bit more aggressive pricing by competitors around certain markets and end offerings. Despite the current operational environment, SYNNEX executed well generating normal profit in our Distribution segment and sequentially increasing our profit margin in GBS.

Let me share some of the details behind our consolidated Q3 performance, starting with revenue. In our third quarter, total consolidated revenue was $2.58 billion, slightly higher than we reported in Q3 of 2011. Considering the transition of certain customers' gross revenue business to a fee-for-service logistics relationship in our Distribution business starting in mid-Q4 of 2011, third quarter revenue would have been up by about 4.4% year-over-year.

Looking exclusively at the segment level now, our third quarter revenue from the Distribution segment was $2.54 billion, essentially flat year-over-year due to the aforementioned transition of certain customer revenue to a fee-for-service basis. Adjusting for approximately $105 million related to this transition, year-over-year revenue growth would have been a positive 4.1% which we believe is higher than industry IT growth rates and the overall channel growth.

In our GBS segment, revenue was $49.7 million, or up 22.8% year-over-year due in part to acquisitions which has accounted for roughly three-quarters of the year-over-year growth. Sequentially, revenue was up 4.2%. We are just beginning to see the top line impact of our prior quarter wins in our GBS Concentrix business and we expect to see this trend continue. In fact, the third quarter was yet another record quarter of signing new multi-year service contracts for Concentrix. This quarter, SYNNEX achieved a consolidated gross margin of 5.90% compared to 5.98% in the third quarter of 2011 and 6.3% in Q2 2012. The 2012 third quarter results reflected a more normalized profit profile with some incremental pricing pressure and less favorable mix for our Distribution business. And, specifically, within Japan, certain of our business, which was under a legacy relationship agreement, incurred a pronounced charge as a result of the rapidly changing local consumer market. The terms of this business relationship have since been reset but the results to Q3 was a setback to Japan's gross profit and operating margin.

Third quarter total selling, general, and administrative expenses were $94.9 million or 3.68% of revenues. This compares with $87.2 million, or 3.39% of revenues, in the third quarter of Fiscal 2011, and represents a decline from $97.1 million in Q2 of 2012. As a reminder, the Q3 2011 quarter included a $4.1 million benefit from a credit adjustment to contingent M&A consideration related to the GBS segment. The net comparable year-over-year increase in SG&A is approximately $4.3 million, of which approximately $3.1 million is related to the GBS acquisitions that occurred late in 2011. Consolidated operating income before non-operating items, income taxes, and non-controlling interest was $57.1 million, or 2.21% of revenues, compared to $66.5 million, or 2.59%, in the prior year third quarter and $59.3 million, or 2.39%, in Q2 of 2012.

At the segment level, in Fiscal Q3, Distribution income before non-operating items, income taxes, and non-controlling interest was $52.6 million, or 2.08% of Distribution revenues, compared to $56.4 million, or 2.31% sequentially, and $58.6 million, or 2.31%, in the prior year quarter, primarily reflecting the year-over-year changes in the gross profit profile that I noted earlier. In the GBS segment, income from continuing operations before non-operating items, income taxes, and non-controlling interest was $4.6 million, or 9.21% of GBS revenues, compared to $7.9 million, or 19.58%, in the prior year quarter. Again, it is important to note that the prior year Q3 SG&A included the benefit of a $4.1 million credit adjustment in the GBS segment. This compares to a $700,000 credit adjustment in the fiscal third quarter of 2012. Q2 2012 GBS income from continuing operations before non-operating items, income taxes, and non-controlling interest was 5.4% of revenues and contained no such credit. By comparison, for Q3 2012 and Q3 2011, the comparable operating margins before the effects of credit adjustments for contingent M&A consideration would have been 7.8% and 9.6%, respectively. So, operating margin in GBS saw good sequential growth in operations.

During the quarter, we continued to make investments in SG&A for both ramping new business and driving continued success in winning new business. We continue to believe this segment will provide significant margin upside as our recent new wins continue to ramp. This ramp will increasingly offset such ongoing sales investments helping to drive us back to the double digit operating margins and enhancing SYNNEX consolidated operating margin trend in the future.

Net total interest expense and finance charges for the third quarter of 2012 were $5.8 million, down $0.7 million from the prior year quarter as we reduced our borrowings. Net other income was $0.9 million and is largely made up of gains on deferred compensation plan investments. The effective tax rate for the third quarter of Fiscal 2012 was 33.2%, compared to 33.4% in Q3 2011. Our expectation for the Fiscal 2012 year overall is a tax rate that is in the range of 34% to 35%. Our third quarter net income for SYNNEX was $35.1 million or $0.93 per diluted share. This compares to $39.0 million, or $1.07 per diluted share, in Q3 2011.

Turning to the balance sheet, our accounts receivable totaled $1.2 billion at August 31, 2012, for a DSO of 41 days which was flat from the prior year quarter. Inventory totaled $901 million, or 34 days, at the end of the third quarter which is down 2 days from the third quarter 2011. Days payable outstanding was 34 days and up 2 days from the end of the prior year third quarter. Hence, our overall cash conversion cycle for the third quarter of 2012 is 41 days. This is down 4 days from the same quarter of last year and down 3 days from Q2 2012. Our debt-to-capitalization ratio was 19%, down from 29% in the third quarter of 2011. At the end of Q3, between our cash and our credit facilities, the company had over $750 million available to fund growth and other potential financing needs.

Other financial data and metrics of note for the third quarter are as follows. Depreciation expense was $4.2 million. Amortization expense was $2.1 million. Hewlett Packard, at approximately 37.8% of sales, was the only vendor accounting for more than 10% of sales. Capital expenditure for the quarter was approximately $4.2 million. Preliminary year-to-date cash flow provided by operations was approximately $219 million. Q3 annualized ROIC was 9.7%. And, trailing four quarter ROIC was 11.1%, up from 10.5% as of Q3 2011 marking another quarter in a virtual five year long string of improvements in trailing four quarter ROIC. With a trailing four quarter ROIC of 11.1%, we continued to maintain a good 2% to 3% spread over our weighted average cost of capital on which we can continue to drive growth in earnings and shareholder value.

Now, moving to our fourth quarter 2012 expectations. We expect revenue to be in the range of $2.71 billion to $2.81 billion. This guidance reflects a change of about $70 million to $90 million in revenue from gross distribution to a net fee-for-service basis in Q4 relative to the same quarter of 2011. For net income, the forecast is expected to be in the range of $38.4 million to $40 million and corresponding diluted earnings per share is anticipated to be in the range of $1.02 to $1.06. A few comments about this projection. We are projecting that consumer demand will remain soft and commercial demand will be relatively stable resulting in a less than normal seasonal demand for Q4.

Also, looking back in time to the fourth quarter of last year, the hard drive shortage added a significant gross profit to our business; a P&L benefit that we clearly do not anticipate repeating this year. In addition, as I just alluded, I would remind you that we began the transition of certain customer gross revenue business to a fee-for-service logistics relationship during the fourth quarter of 2011. This year, we will have a complete full quarter in which the business is now running on a fee-for-service basis. As a result, for one to have an apples-to-apples comparison of year-over-year fourth quarter revenue, as I just noted, one would have to gross up our fourth quarter forecast by approximately $70 million to $90 million of business that is currently reported on a net basis in 2012.

As a reminder, these statements of our Q4 expectations are forward-looking statements and actual results may differ materially. 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. I'm proud of our third quarter performance as we delivered another quarter of solid growth and profitability. Within our Distribution segment, while our reported sales were flat year-over-year they increased about 4.1% on an apples-to-apples gross revenue basis. We believe this to be better than market performance, particularly in light of the well documented weak macroeconomic and consumer demand trends. We maintained our disciplined approach to price and margin management while responsibly controlling our cost to deliver strong operating margin at a solid trailing four quarter ROIC of over 11%.

In the United States, excellent execution and market share gains drove relatively strong sales in the commercial market while the consumer market was soft. From a product perspective, storage peripherals, network, and security were strong while notebooks and software were relatively soft. In Canada, overall IT demand continued to be challenging. However, we delivered growth above market rates driven by good share gains within our commercial segment. In Japan, we incurred a non-repeatable charge that Tom spoke of and the overall market remains slow. However, despite the current market softness we remain committed to continued operational improvements that we believe will result in increased profitability in the coming quarters.

Turning to our GBS segment, we continue to invest in our sales process and additional platform development which will enrich our business but will also temporarily mute our financial performance until we get to greater scale. These investments have driven great momentum in signing new business which continued in Q3 with another record in the value of new contracts signed. We improved our operating margin sequentially even as we on-boarded parts of our recently signed business. As I stated previously, we remain committed to growing our overall GBS margins to the double digit level as we maintain our long term focus on that business.

Stepping back now and looking beyond our third quarter consolidated results, I'm excited about the progress we've made in our key strategic investment areas and new partnerships. Our CLOUDSolv platform continues to grain traction and our RENEWsolv platform is progressing nicely. Our team's focus on and investments in emerging technologies and specialty markets has been a key driver in managing our business portfolio to a higher margin mix. One of these emerging technologies is the white box server market. I'll take a moment to highlight for you our Hyve Solutions business as it is another example of what makes SYNNEX unique. Hyve is a good example of why SYNNEX has become known for its thought leadership, innovation, and unique hybrid value add distribution IT offerings. Hyve Solutions provides custom hardware and services to large scale data center operators. I'm pleased to tell you that demand for Hyve hardware and services continues to be quite strong and you'll see a good example of our market leadership tomorrow when we announce some specific benchmarks and our success in providing Orange with an extremely cost effective solution.

And, the market interest goes beyond Web 2.0, Cloud, and social media, and is expanding into online gaming, government, banking, gas and oil, and more. It's a wholesale change in how people view scale computing. Our business strategy is to move into higher margin products such as storage, big data, and services. We're embracing change in the industry and are creating business models around key trends that provide us an opportunity to add value for our customers and get paid for that value add. We are absolutely in the right place at the right time.

Now, turning to our future expectations. Our fourth quarter forecast reflects our expectation that macro market demand will continue to be challenging with muted customer spending and a mixed, but overall, stable demand outlook within the commercial market. This is consistent with recent industry-wide views and data points. In addition, we had significant benefit in Q4 2011 from the hard drive shortage that Thomas described earlier. However, even within the current market environment there are noteworthy demand in growth catalysts in view.

One exciting area is the much anticipated launch of Microsoft's Windows 8. We expect this will initially fuel complimentary new ultra books within the consumer market. Additionally, we have signed new partnerships with some key distribution vendors such as Adobe and Kindle. The difficulty we have is in scoping the timing and size of these various catalysts. For example, Windows 8 launches in late October, so it probably won't have a meaningful effect on our results until our next Fiscal Year which starts in December. So, while our guidance reflects our conservative view of Q4, we remain optimistic about capitalizing on these and other opportunities in the coming months.

Our outlook may prove to be conservative, particularly if the economy starts to incrementally pick up and North American consumer sentiment turns more positive with improving economic stability in the macroeconomic market. Although we would prefer the tail winds of a stronger economic outlook, I am proud of SYNNEX's history of outstanding execution within downturns in the business cycle, which have often resulted in bigger market share gains and stand out financial performance. We remain committed to our goal of increasing shareholder value by driving earnings growth and strong ROIC. Regardless of the economic environment, we will continue to invest wisely to drive profitable long term growth within our Distribution and GBS segments. And, to create business models that capture new value pools around cloud, mobility, and the other technical solutions.

In closing, I'm pleased with our third quarter performance and market share gain. I'd like to once again thank all of our employees around the world for their hard work and dedication in delivering another successful quarter. And, I'd also like to thank our customer and vendor partners for their continued support of our business. And, with that, Lori, let's turn the call over to the operator for questions.

Thanks. Sarah, we're ready to take the first question.

Thank you.

(Operator Instructions)

Matt Sheerin, Stifel Nicolaus.

Yes, thanks, and good afternoon. So, just a question regarding the revenue -- not so much the revenue but the EPS guidance. Backing into that, it implies gross margin flattish and I'm just wondering how much has to do with mix. Are you seeing some pricing pressure on any volume deals? I know you also talked a little bit about Japan as a headwind. But, could you just talk about the components of gross margin and how you see that playing out in the next quarter or two?

Hi, Matt, this is Thomas. I'll start off with that.

Hi, Thomas.

Hi, first of all, it's actually both. As we look at the margin profile here, without being specific as to what we forecast for gross profit, we do see that based on our guidance, as you've seen and as we saw in Q3, our gross margin is at the lower end of our normal range. And, as we commented in Q3, it is driven by two primary factors. And, that is the mix of business that we're incurring currently and pricing pressure in the competitive marketplace. And, I would tell you that both of them are, I wouldn't say equal, but both of them are important aspects of the gross profit outlook.

Okay, and then, I know that the focus -- is that primarily on the commodity type of products? Because I know your margins in the enterprise data center related space tends to be higher. Is that true? Is it more on the commodity side or are you seeing it on the enterprise side as well?

No, certainly your comments and observations are correct. And, that's partially where the mix play comes into being. But, the pricing pressure is more pronounced on the more commoditized or more standardized side of our business.

Okay, and then, it looks like the SG&A control obviously was very good in the quarter. Do you have -- do you expect SG&A to be up a little bit sequentially given the higher volume revenue run rate? Or are you expecting to keep it in this area, this range?

Sure, so, there is a variable component of SG&A that does correspond to our revenue. And so, as our revenue goes up by the upper single digits we're going to see some level of SG&A spend related to that. But, we remain very diligent around spending, and we look for opportunities to tighten our belt when the economy gets a little bit tougher as it, in our view, currently is. And so, we'll do our best to try to keep that, any increase in SG&A, from being disproportionate.

Okay. That's it for me. Thanks, so much.

Thank you.

Robbie Wilkins, Goldman Sachs.

Great. Thanks, for taking my call. Just to follow-up on the competitive environment. You mentioned some -- certain markets and offerings are a bit more competitive. I was wondering if you could maybe drill down a bit more than that?

I'm not sure how much more we can drill down. I think, just talking about the more commoditized higher volume product area, is really where we do see that kind of competition. So, specifically that would be in areas like notebook and desktop, also other higher volume peripheral devices.

Okay, so, it's not areas that you're gaining market share, it's more on the service side. So, the comments made earlier on the call on the gains in market share, it's more these white box offerings and service storage where you're gaining share?

We gained share pretty much across-the-board, across all product segments, even in the commoditized space. But, in the areas of focus that offer higher margin -- a higher margin for the products and services that we sell, we don't see the activity on pricing the same way that we do on the commoditized product side.

Okay, thanks. And, secondly, I was wondering if you could give some color on the government vertical and if you have seen much volatility in that market?

So, I assume you're talking more Federal Government?

Yes.

Yes, so, on the federal side, through our past quarter, actually our business was relatively stable. But, I'm sure you've heard, as many others have as well, that the government spending -- Federal Government spending seems to be a little more back end loaded this year than we've typically seen in the past. Also, talk of perhaps overall spending to be a little bit softer. So, we're coming to the tail end of that big spending season. So, we'll see. But, I think the market commentary out there is that it's likely a bit softer.

Great, thanks for the color.

Thank you.

Ananda Baruah, Brean Murray.

Hi, good afternoon, guys. Thanks for taking the question. Kevin, can you just talk about inventory levels that you see for the different products? It seems like your inventory actually feels fine. But, as you look across the industry, and even in your business, if there's certain products that are maybe are a little higher or lower than you like them to be? Just like to get your comments there.

Sure. Actually, a story there. We've done a good job of managing inventory. And, as you can see our inventory is a bit lower, but, certainly in line with where our sales are. Again, and I should remind you that given -- inventory just moves quite a bit back and forth on a day-to-day basis just depending on how much gets shipped out and how much we receive in. So, it's a bit of a moving target on a point and time measure. But, getting to the second part of your question around any shortages or overages, there is really nothing to write home about there.

Okay. And Kevin, do you have, I guess, visibility into what the broader industry inventory would look like?

We're not hearing anything of note that would say that there's any shortage out there across any specific line or category. Certainly not on the opposite side either of any increased inventory level.

Okay, got it, thanks. And, I guess on your consumer business, I didn't hear you guys talk about how it did on a year-over-year basis. Can you just give us some detail around how New Age did? And, I'm assuming that the PC business was one of the softer areas as well. But, were any of the other parts of the business soft too?

Yes, so, specific to your question, we don't get into that level of detail category by category. But, our consumer markets and the products contained within that were on the softer side which means they were lower than what our overall company growth was.

Okay, got it. Okay, that's helpful, thanks a lot. I'll get back in the queue.

Thank you, Ananda.

Osten Bernardez, Cross Research.

Good afternoon, and thanks for taking my call. Would you be able to comment, Kevin, on the -- further on your comments regarding share gains? In particular, how you were able to gain market share during the quarter? Was it -- were there any special initiatives on your part? Or would you -- I guess, could it be mis-execution by competitors? What lead to the market share gains during the quarter across the board as you mentioned?

I guess to simplify, really probably three categories. Number one, is just day in and day out execution. Just very reliable, in terms of being in stock and getting product to the right place at the right time. Also, just having very strong relationships with our customers. The second category would be around some focus areas that we have. So, where we've really put focus on some key technology areas, and there are many that we've talked about in the past, say network and security as an example, or wide format print. We continue to gain share in those focus areas. And then, the third category, I guess it's related to out execution really is, some challenges that some of our competitors have had recently in execution where we've been really the reliable partner for our customers to deal with.

Okay, that's helpful. And, would you be able to comment, also, further on with respect to your data center business on linearity during the quarter? At any point did you see any push outs of orders or projects?

Yes, so, from an enterprise data center, so I'm not talking about our white box server, just more traditional enterprise, we have been seeing some level of push out over the past few months. And, in terms of the quarter itself, I wouldn't say that any one month was markedly different over what we've seen in the past, just a little bit more in terms of stagnation of orders. And, that partly, of course, makes up our commentary on what we're seeing in a stable commercial environment but with puts and takes in certain segments.

Thank you, very much. And, lastly for me, would you be able to give a number on the record signings for the quarter? I believe -- you provided number last -- this is for GBS, you provided an analyzed number. I can't get off the top of my head, I want to say maybe $24 million.

Sure.

But, for this particular quarter what was that?

Yes, so Osten, when we gave that number last quarter we also said that we probably won't be giving that number on a regular basis. But, suffice it to say that our traction and our momentum in winning new business in GBS does continue. In fact, that same metric, in this past Q3, was higher than it was in Q2.

Thank you, very much.

Thank you.

Brian Alexander, Raymond James.

Thanks, sorry if some of these were asked, I'm juggling two calls. But, Kevin, maybe just to follow-up on that, I know you're not providing the absolute dollar amount, but just qualitatively, were more of these signings skewed toward renewals like I think they were last quarter? Could you talk about whether these are competitive displacements? Or are these more greenfield outsourcing opportunities that you're winning from companies that might have been doing this in house but not necessarily with a competitor? And, are most of these new logos for SYNNEX? And then, I have a couple follow-ups.

So, Brian, I'll take that, it's Chris. First off, the majority of the deals were in the renewals and sales momentum opportunities. And, again, the majority were in new logos to both SYNNEX and Concentrix as a consolidated entity. And, all of them were taken from competitors. And, none of them were insourced and then we took over an insourced operation. So, they were all, frankly, very good wins that we'd been working through the pipeline for a period of time and were able to show our value and win them from existing competitors.

And, Chris, maybe while you have the floor, just walk us through that value proposition and talk about how maybe the benefit of the whole SYNNEX umbrellas may be leading to some opportunities in cross-selling that's allowing you to win this business? Maybe just remind us of the value proposition that's unique to SYNNEX.

So, I think, Brian, if you've looked at where we've been making investments in technology and building out our own intellectual property, which has somewhat muted our operating income for a number of quarters since we started building out our technology. It's really being able to come to these customers and talk about enriching and driving the highest value they can have from every customer interaction that we perform for them, whether that be adding new product sales or software sales to engagement, whether it be up selling and cross selling or whether it be renewing those relationships with their end customers.

And, we're doing that both with a mix of technology and people. And, from a people perspective, we're able to offer global footprint where we can seamlessly, and frankly, consistently deliver globally for their customer base which is unique and a high value offering to them since they don't have to deal with multiple partners or have to juggle between insourced and outsourced relationships.

Great, and then, maybe back to the Distribution business. Kevin, can you just talk about PC demand in general ahead of Windows 8, consumer versus commercial? And, how much of a catalyst are you thinking Windows 8 could potentially be to SYNNEX in 2013? I think the launch date is October 26. And then, just longer term thoughts on tablet encroachment on notebooks in the non-consumer markets, and whether you think that you're seeing much of that cannibalization occurring today?

Sure. So, I'll try to segment my answer. So, first, starting with Windows 8 and any current impact on the commercial market. We really haven't seen any. And, I think Windows 8 is going to follow the same kind of uptake pattern that we've seen with previous Windows releases which is the commercial market is going to do a wait and see and then slowly transition and likely coordinate that with a normal hardware refresh anyway. On the consumer side of the business, there's a lot of excitement out there. I think Microsoft has done a good job in articulating why the interconnectivity between devices is a huge value add and ease-of-use. But, what that has had is a bit of a dampening effect on current notebook and ultra book sales. So -- and that's part of the reason why the back-to-school season was somewhat muted this year as well.

So, as we start moving into the launch of Windows 8, I expect that we're going to continue to operate in that kind of environment with what we all both expect and hope to be a very successful launch that's going to include a lot of hardware that goes with that too, primarily in the ultra book segment. As I had noted earlier, though, because of our fiscal quarter end -- actually fiscal year end being November, we're only going to have a limited number of selling days from the launch to the end of our quarter. So, we do expect that a lot of the success that will come out of the Windows 8 launch is going to be reflected partly in our Q4 but perhaps, to a larger extent, in our first quarter of next year.

Longer term, when we take a look at different mobile devices, tablet included, on the overall enterprise in commercial markets, we're already starting to see a lot of transition. But, I think the same thing that's happening, in addition to a higher level trend of the type of computing device moving more to mobile, is that the computing devices themselves are changing and the lines are blurring between what will actually be identified as a tablet, a notebook, and an ultra book. So, and even today there are products on the market that are ultra books but they have a removable screen that becomes a tablet too. So, I do think that there's a good opportunity in commercial for incremental sales. The good news is that these devices are priced somewhat higher than what a typical commoditized notebook would be. So, I think there's a good opportunity there in terms of raising average selling price. And, I think that with enough increase in demand for new products that could, to a certain extent, offset some of the cannibalization that might also happen longer term as well.

I think what's really important to focus on, especially in the enterprise though, is security and device management. And, where we're putting a lot of focus in our own company is on the software and the tools that we believe enterprises are going to require to manage these mobile devices effectively and appropriately for their business.

So, just to follow-up on that. At the end of the day, how do you think SYNNEX is positioned in the context of this transition and the blurring of the lines between these devices given that you have very strong relationships with most of the traditional laptop players, ultra book, et cetera. But, with the stronger tablet vendors, to the extent that they're more successful in cannibalizing these products, those are vendors that historically you haven't been as tied to. So, I'm just wondering do you view this as a net neutral, as a net opportunity? And, just help me understand that, thanks.

I do view it as a net opportunity for SYNNEX. On the commercial side of the business, we do sell a lot of mobile devices and tablet devices. As you know, in the United States, we are not an Apple distributor. We are in other parts of the world, so we're able to leverage the huge success that Apple has had there. However, with much lower cost tier 2 tablets, more for the consumer market, we've actually had excellent success in being able to identify, sign on those vendors. And so, a heck of a lot of volume through the retail channels that we have. And, that's been the case over the past 18 months.

As we look at the commercial space, I do believe that from an enterprise hardware perspective, we do have a very good assortment of the OEMs that are bringing these new mobile devices to market. And as I said, it's not just going to be about the device itself, I think some of the higher value pools that we want to attack and take advantage of are those in the services around mobile device management and around security.

Okay, thank you, so much.

Thanks, Brian.

Lou Miscioscia, CLSA.

Okay, thank you. Kevin, if you could just go back to one of the comments that you had about that commercial was stable, but then you also talked about stagnation and things getting pushed out. I guess, if you look at it from a revenue standpoint, though, it seems like it came in where expected. So, was it just a little sloppy as it ran through the quarter? Or are you suggesting that it's actually maybe getting weaker into August or into September here?

Sure, so yes, in our Q3 we did come in exactly where we thought we would be. But, of course, you can put all your dots on a paper and draw your lines on where you think you'll end up, and you still end up in the same place but you get there in a slightly different way. Just another way of saying that there's always going to be different puts and takes in any given market. So, there were good pockets of strength, both by market as well as by product category, and there were certain pockets that were a little bit softer than anticipated too.

My comments on some projects being pushed out was one specific market that I was asked about, which was more of the data center, the enterprise data center market. But, as I said, there were other pockets of relative strength as well that did offset that. But, looking forward, we actually expect, in the commercial market, that that's actually going to continue. We do see a stable outlook for commercial, where, again, we're going to see some markets that are going to continue to grow and see others that are probably going to be a little bit softer.

Okay. Did you actually say a put in the good category of peripherals?

Yes.

And, maybe, if you could just slice that. Was that maybe Inkjet, lasers, or something else?

We don't break down peripherals beyond that. But, let's just call it peripherals was a strong category for us last quarter.

And then, maybe, just following up on the Japan. I'm not sure if I heard a comment, I think you said something that there was a charge there. And, was that in your GAAP and non-GAAP -- or non-GAAP numbers?

So, what Thomas had referred to was there was a charge in Q3 that we took to honor a legacy relationship. I do want to point out, though, that we're comfortable we've addressed that issue. And, it's not a challenge that we're going to have to face anymore. I'll just talk a little bit more about Japan because my comments, I think, on Japan were quite limited in the prepared remarks. But, the overall market in Japan, like what we're seeing in the US and Canada, has some headwinds, in particular in consumer but also commercial is a bit soft. Overall, though, we're very happy with our Japanese business. And, we're happy with the progress that we've made in installing our own ERP and improving processes within that business. So, the outlook that we have internally on Japan is that very committed to that business, committed to that market. And, we do see that business as a net opportunity for the company as we improve margins to take our margins as a company to a higher level.

And Lou, with regards to your question about GAAP and non-GAAP, that was a GAAP charge. We did not carve it out. We absorbed it in the operating results of the company.

And, did you mention how much -- how big it was?

We did not.

And can you, or --?

I knew that was coming. We typically, as you know, we don't break out our profitability by geography. So, I'd prefer not to. I would tell you this, I would tell you that for the growing business that we have in Japan it was certainly significant enough that we felt that disclosing it and sharing that with you is the right thing to do. But, from an overall consolidated standpoint, it was just another put or take that we deal with on a day-to-day basis in the business. And, again, as Kevin said, the particular circumstance that we're dealing with is now changed, the terms have changed and we do not anticipate dealing with that again.

Okay, great. Thanks guys, good luck on the new quarter.

Thank you.

Rich Kugele, Needham & Company.

Thank you, just two follow-up questions. One is HP did increase sequentially as a customer. And, I'm just wondering if there's a level where you start to get uncomfortable tied to one particular guy even if it is a broad solution provider like an HP?

Yes, and actually when you take a look at our -- the share of our business with HP, it does move up and down. In fact, the longer term trend lines, I think, we might even be down a little bit. But, we have a very strong relationship with HP. They have, as you said, the most complete portfolio of IT products and services. And, during the quarter we also gained share within the HP channel business as well. So, I think part of that is reflected in the slight increase that we had in our overall business with HP.

All of that being said, though, we've also had very good success in growing business with vendors beyond HP. And, many of those vendors are highlighted in some of the technical solutions areas that we have a key focus around. And, in addition to that, we've had a lot of success over the past two years in signing on some new vendors, again, related to the technical solutions division space. And, as we continue to grow those over time, we want to continue to grow HP. But, as we grow other vendors more quickly and grow our line card, we should start to see that overall mix perhaps soften a bit.

Okay. And then, just lastly, on Windows 8. In terms of the notebook inventory that's out there today, is there enough Windows 8 loaded product out there or is it all Windows 7 based today? There is some investor concern that the mix that's out there in the market today, because of the timing of Windows 8, may be screwed up relative to demand.

From a consumer perspective, there is a sufficient amount, more than a sufficient amount I'd say, of Windows 8 product already available today. My comments earlier on commercial adoption of Windows 8, because it's probably going to take a little bit longer, is probably a little bit less relevant in terms of what is pre-loaded on the system.

Okay, and would you expect that, should Windows 8 start to be adopted or see Windows 8 based tablets be adopted in the commercial segment, do you expect to be involved in any of the configurations of those machines, share images or security around that? Is that what you're referring to by the security element?

Really, it's a multi-faceted thing. Starting off, I guess, at the highest level of having the right vendors on board that do have software and other appliances that do mobile device management. But, then second to that, we do have a number of services that are legacy within our Distribution business, where we do things like imaging. And, over the past two years, we've also invested in development capability as well, where we do custom coding for enterprise with a focus area of being in integrating mobile devices.

Okay, thank you, very much.

Thank you.

Shaw Wu, Sterne, Agee.

Okay, thanks. I also have a Windows 8 question as well. Just tied in -- you talked about excitement around Windows 8. In terms of what do you see as -- what's the early feedback that what's going to do better? Is it the convertibles in terms of hybrid tablet PCs? Or are they more pure tablets? Just any color you can share there. And, just also, I don't know if there are any margin implications from your end? Thanks.

It's really hard to call right now. If you just take a snapshot of the products that are available on the market today and that are already announced to be launching at the time of the launch of Windows 8, all of the hype is around the ultra book. There's -- and then there's a couple of, I guess, options around that too. Number one being, does it have a removable screen that becomes a tablet. The other being around touch.

So, what we're hearing right now, though, is because of the relative cost of some of those features, the sweet spot still likely is going to be in the ultra book with non-touch. But, I do believe that touch is really going to be the game changer going forward. And, as new products roll out, probably shortly after the launch, that's when we'll likely see touch and some of these other new features like removable screen really start to take off.

Okay. And, any, I guess, any -- in terms of the margin profile for you, is there any difference with these different platforms? Or is it going to be similar to your, I guess, traditional PC business?

Our expectation is that the margin profiles are going to be similar to the same types of products that we've sold in the past. Difference being that for a lot of this product, the average selling price, the price point is higher. So, we're able to earn more absolute gross profit dollars on the products that we sell.

Okay, thanks for the color.

Thanks, Shaw.

We have time for one more caller.

Ananda Baruah, Brean Murray.

Hi, guys. Thanks for sneaking in the follow-up. Maybe for both Thomas and Kevin. I just wanted to get a sense about how we should think about, I guess, the levers on gross margin going into next year. And, this gets, Kevin, to your comments about mix. I mean, if consumer is going to stay soft and if Windows 8 -- let's call Windows 8 consumer part of consumer and if commercial isn't going to really get adopted it's going to follow a typical adoption curve. It feels like maybe the mix will stay about what it is or has the opportunity to stay about what it is, not really meaningfully change for the next couple of quarters. And, if that's the case, are there other levers you can pull on the gross margin? I just want to make sure that we're thinking about what's going to influence gross margin appropriately as we move forward here in the software side.

Okay, I'll take that initially from a higher level. And, Ananda, I know you're asking specifically about gross margin. I'm going to answer it first, though, from an operating margin perspective, which is really what our focus is and always has been. To start off with, before we even get into product mix, there are two key opportunities within SYNNEX that we're already on the improvement path of. And, as we continue to see traction in margin improvement in our GBS business, as well as margin improvement in our Japanese business, everything else staying the same in how we run core Distribution, we're going to see nice improvement in our overall results. So, that, I think, is one of the most important levers that we have.

Number two is we manage our core Distribution business day in and day out, in my opinion, better than anybody. And, with the focus that we have on these higher margin technology segments as that mix continues to shift, and even though we saw a slight change in our product mix this past quarter, the overall trend over a longer term has been more towards these higher margin product categories. As we continue to see that shift that provides yet another longer term back drop to higher operating margin. And, that one, in particular, does also impact higher gross margin too.

That's helpful, thanks. So, I've got you. So, near term, PCs will do what PCs will do. But, the mix shift in the business is a tail wind longer term. And then, aside from that, you have the operating margin expansion opportunities inside some of those businesses like Japan and GBS as well.

That's correct.

Ananda, this is Thomas, I'd just like to add a couple of comments to that too. First of all, we did not talk about the current environment where, as we shared in our introductory remarks, there is some pricing pressure. So, assuming that in 2013 we see some more stabilization or returning to the norm in terms of the pricing environment that certainly represents an upside opportunity.

The other thing, back on Kevin's comments, which I think are very, very important, when you think about the opportunity in Japan and the opportunity in GBS, two things. Number one, the segment in which GBS operates, particularly the Concentrix market, is actually growing at a very nice rate. So, from a very macro mix perspective, that segment stands to outgrow the Distribution segment, and obviously be one of the several drivers that we have for continuing to drive both gross margin improvement and operating margin improvement.

And then, also, I would just point out for the benefit of the listeners, just to put a very, very rough handle on this, if you were -- we've shared that our expectation is, again, that we'll be back up into the double digit operating margin profile with GBS over time. And, we've shared also that we expect that in Japan that our operating margins will continue to rise to levels that are similar to the same kind of business that we have in North America. Without getting into the specific details, if you just factor what that could look like into our operating margin on a go forward basis, assuming, for example, current types of mix today, you're talking about a consolidated operating margin that is in the 2.5% to 3% range for this company. So, I think Kevin is right in pointing out that we have two very big upside opportunities here putting aside all of the other development of some of the special investments we're making on the value add side of the business.

Thanks, a lot guys. Yes, that's really helpful. I appreciate it.

All right, thank you.

Thank you, Ananda. So, in closing, I just want to say I'm very pleased with our third quarter execution and market share gains and I do look forward to speaking with all of you in upcoming investor conferences. Thank you.

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect your lines at this time.