新聚思 (SNX) 2014 Q3 法說會逐字稿

Good afternoon. My name is Al, and I will be your conference operator for today. At this time, I would like to welcome everyone to the SYNNEX 2014 third quarter earnings conference call.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect. Thank you. At this time I would like to pass the call over to Ms. Dierdre Skolfield, Director of Investor Relations at SYNNEX Corporation. Ms. Deirdre Skolfield, you may begin your conference.

Thank you, Al. Good afternoon. Welcome to the SYNNEX Corporation FY14 third quarter conference call for the period ended August 31, 2014. Joining us on today's call are Kevin Murai, President and Chief Executive Officer; Dennis Polk, Chief Operating Officer; Marshall Witt, Chief Financial Officer; and Chris Caldwell, Executive Vice President and President of Concentrix Corporation.

Please note that some of the information you'll hear today will consist of forward-looking statements, including without limitation those regarding revenue, net income, EPS, EBITDA, expenses, tax rates, ROIC, cash flows, growth, demand, and shareholder value. Actual results or trends could differ materially from our forecast. For more information please refer to the risk factors discussed in our Form 10-Q for the FY14 second quarter and our Form 8-K filed with the SEC today, along with the associated press release. We assume no obligation to update any forward-looking statements, which speak as of their respective dates.

Also during this call we will reference certain non-GAAP financial information. Today's earnings release and the related Form 8-K available on our website present the reconciliation between our non-GAAP and GAAP reporting. This conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcast without our specific written permission. Now I'd like to turn the call over to Marshall for an update on our financial performance. Marshall?

Thank you, Deirdre. Good afternoon everyone, and thank you for joining our call today. I will summarize our results of operations and key financial metrics, and conclude with guidance for the fourth quarter of FY14 before turning the call over to Kevin.

Technology Solutions and Concentrix business segments performed very well in Q3. Our Q3 revenues, non-GAAP net income, and non-GAAP diluted EPS all came in above the high end of the outlook provided on our Q2 call. On a consolidated basis, total revenue was $3.54 billion, up 29% compared to $2.73 billion in the same quarter of the prior year. Our gross profit on Q3 revenues increased 82% to $300 million, or 8.5% of revenues, compared to $164 million, or 6% of revenues, in Q3 of 2013. The increase was due largely to the impact of the IBM CRM acquisition and Technology Solutions growth.

Technology Solutions segment revenues grew 19% year over year due to strong organic growth. Concentrix segment revenue were $334 million, up from $46 million in the year ago quarter and consistent with our expectations. Q3 total selling, general, and administrative expenses, excluding one-time acquisition and integration expenses and amortization costs, increased as a percentage of revenue to 5.47%, or $193 million. This compares with 3.52% of revenues, or $96 million, in the third quarter of FY13. The increase is due primarily to the impact of the IBM CRM acquisition.

With over 99% of the overall acquisition closed since May of this year, we continue to effectively manage costs as we drive flexibility and efficiencies within our support structure as our business grows. We also continue to make significant investments in people and infrastructure to support profitable growth in both the Concentrix and Technology Solutions segments. One-time acquisition and integration expenses included in selling, general, and administrative expenses were $9.9 million for Q3, down from $15.7 million in Q2.

Q3 consolidated GAAP income before non-operating items, income taxes, and non-controlling interest increased by 24% to $78.8 million, or 2.3% of revenue, compared to $63.5 million, or 2.32%, in the prior-year third quarter. Excluding one-time acquisition and integration expenses and amortization costs, non-GAAP operating income increased by 56% to $106 million, or 3.01% of revenues, compared to $68.1 million, or 2.49%, in the prior-year third quarter. At the segment level, Q3 Technology Solutions income before non-operating items, income taxes, and non-controlling interest was $76.9 million, or 2.40% of revenues, up 23% from prior-year quarter results of $62.5 million, or 2.32% of revenue.

For Concentrix, income before non-operating items, income taxes, and non-controlling interest was $1.75 million, or 0.52% of Concentrix revenues, compared to operating income of $826,000, or 1.78% of revenues, in the prior year quarter. The Q3 income includes $9.9 million in charges related to the IBM CRM acquisition and other integration costs and $16.7 million in amortization expense. Excluding these charges, non-GAAP operating income for Concentrix in the quarter was $28.3 million, or 8.49% of revenues. Concentrix generated positive cash flow from operations in Q3 of 2014.

Net total interest expense and finance charges for Q3 were $7.6 million, up from $3 million from the prior year quarter. The Q3 expense reflects debt associated with the acquisition of the IBM CRM business and higher working capital needs to fund our profitable growth. The tax rate for the third quarter of FY14 was 36.3% compared to 35.8% in the prior-year quarter. For the remainder of FY14 we anticipate the annual tax rate to be in the 36% to 37% range.

On a GAAP basis, our third quarter net income decreased by at least a $45 million, or $1.15 per diluted share. For comparative purposes it's important to note that in Q3 of 2013 we benefited from a pre-tax $12.3 million legal settlement recorded in other income net. On a non-GAAP basis, our third quarter net income increased over 25% to $62.5 million, or $1.59 per diluted share.

Turning to the balance sheet. Our accounts receivable totaled $1.9 billion on August 31, 2014 for a DSO of 48 days, which was up 4 days from the prior-year quarter. Inventory totaled $1.4 billion, or 41 days, at the end of the third quarter, up five days from the third quarter of 2013. Days payable outstanding was 39 days, unchanged from the end of the prior-year third quarter. Hence, our overall cash conversion cycle for Q3 2014 was 50 days, up 9 days from Q3 of 2013, due to the strong growth in TS and the IBM CRM acquisition. Our debt-to-capitalization ratio was 38%, consistent with Q2 of 2014. At the end of Q3 between our cash and credit facilities, the Company had over $400 million available to fund growth.

Other financial data and metrics of note for the third quarter are as follows. Depreciation expense was $10.2 million. Amortization expense was $17.6 million. HP, at approximately 25% of sales, down from 30% a year ago, was the only vendor accounting for more than 10% of sales. The percentage decrease was the effect of the IBM CRM acquisition and other mix changes. HP revenue grew year over year. Cash capital expenditure for the quarter was approximately $20 million.

Annualized ROIC in Q3 of 2014 was 7.7%, including the impact of our acquisition-related expenses. Trailing four-quarter ROIC was 8.2%, including the impact of our acquisition-related expenses. Excluding the impact of one-time acquisition and integration expenses and amortization, the current fiscal quarter's trailing ROIC was 10.6%. Preliminary cash flow use in operations was approximately $47 million for the third quarter and $247 million for the nine months of 2014, due to the strong growth in our Technology Solutions business and the impact of the acquisition of the IBM customer care business.

As described in our press release, the Board of Directors approved the initiation of a quarterly cash dividend of $0.125 cents per common share to be paid on October 31, 2014 to stockholders of record as of close of business on October 17, 2014. We modified our capital allocation strategy to prioritize the dividend as a way to return cash to shareholders. Given our consistent track record of profitable growth and strong balance sheet, we felt it was an appropriate time to incorporate a dividend to complement our share repurchase plan.

Now moving to the fourth quarter of 2014 and our expectations. We expect revenue to be in the range of $3.65 billion to 3.75 billion. For non-GAAP net income, the forecast is expected to be in the range of $65.9 million to $67.9 million. Non-GAAP diluted EPS is anticipated to be in the range of $1.66 to 1.71. The non-GAAP diluted net income and non-GAAP EPS guidance excludes acquisition and integration-related expenses, the after-tax costs of approximately $11 million, or $0.28 per share related to amortization of intangibles. Weighted average shares estimated per diluted EPS are 39.8 million.

Please note that these statements of Q4 expectations are forward-looking 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, Marshall. Good afternoon, everyone. Thank you for joining our call today. As Marshall discussed, SYNNEX delivered another terrific quarter and with stronger than anticipated market demand, we exceeded our own expectation. I'm proud of the outstanding results and performance achieved by both our Technology Solutions and Concentrix teams this past quarter, which resulted in our strongest quarter ever in terms of revenues and adjusted net income.

In Technology Solutions, strength in base business and success in our key strategic initiatives lead to stronger sales than we anticipated, with profit performance reflective of that top-line strength. Revenues grew 19% organically year on year, with the US leading our regions in growth. Japan delivered double digit sales growth resulting in profit improvement from a year ago. On a constant currency basis, Canada grew sales modestly, but with good profit improvement due to mix and cost controls. Equally impressive was our operating margin performance. Operating income in Technology Solutions grew by over 23% from the year-ago quarter, highlighting our disciplined approach to the market and managing our portfolio of business, and also despite a larger than normal volume in commodity lines related to the Win XP tailwind.

In the United States, the market was generally strong across all product and market segments. In our commercial business, we continued to see demand in PCs, networking, storage, security, and peripherals. From a market perspective, SMB was strong, as well as state, local, and education. Our retail business, through New Age Electronics, had strong growth with a successful back-to-school season, and also a small amount of pull-forward sales from Q4 in preparation for the holiday season. Our Hyve Solutions business continued to be a notable contributor to our overall results in the Technology Solutions segment. The success of Hyve Solutions, which focuses primarily on large-scale data center build-outs for Web 2.0 and related companies, was one of the drivers of increased inventory and accounts receivable this past quarter as we continue to grow and invest in that business.

In Canada, we continued to execute well in what we see as a stable to improving market environment. Our corporate and commercial businesses experienced solid organic growth while expanding their margins. In Japan, we experienced continued tailwinds from Win XP early in the quarter, but also experienced a seasonally slow August as many in the country took vacations that month. We believe we continued to grow our market share and expect to perform better than the overall market in the coming quarters.

Overall, we had excellent performance in our Technology Solutions segment. We pride ourselves in strong execution and customer focus. We stay ahead of the curve in evolving our business model to the ever-changing technology market in which we operate. We're passionate about adding value by putting our customers first and creating best-of-breed capabilities in the marketplace through knowledge, Technology Solutions, and services.

Now turning to the Concentrix segment. Concentrix delivered $334 million in sales, which was primarily driven by the business we acquired. Although there remains some project-related contracts that we will be winding down in the coming six quarters, we believe our success in signing new logos, baseline expansion, and renewals will create growth opportunities in 2015 and beyond. As we projected on the last call, our non-GAAP operating margin of 8.5% was burdened by the redundant costs related to the integration as well as ramp-up costs associated with sizeable incremental business we are onboarding.

Our integration work is on track and proceeding well. Our ability to attract new clients while retaining and expanding business with our existing clients is excellent. Moving forward, as our integration expenses fall away, we continue to see the ability to increase our operating margins. For more color on the Concentrix business I'll turn the call over to Chris Caldwell, but before I do I want to thank the entire Concentrix leadership team and the entire Concentrix team, now over 50,000 strong, for their hard work and effort throughout this process. Chris?

Thank you, Kevin. This past quarter we continued to execute to our plan across all areas of the business, from operational execution delivering strong sales to the integration work at hand. We are extremely proud of our entire team as they have managed the integration exceptionally well, while also growing the business. It's been an incredibly busy year since we announced our acquisition, and eight months since our initial close. In that time we have seamlessly onboarded over 35,000 IBM staff. We have also added over 5,000 new staff, taking our overall head count to well over 50,000 as we continue to expand our scope of services with existing clients and winning new deals. We have completed tactical hires in high value areas such as analytics and our key verticals. To house all these new staff members, we have expanded and opened over 10 new locations around the world in record time.

Q3 was no less busy for us, and was a very strong quarter for signing expanding deals with our existing clients. Operationally we performed very well, highlighted by the launch of two large programs in Latin America that have already been recognized by the client for producing outstanding results. Turning to Q4, what remains at this point is essentially completing a build-out of our back office functions that have been supported by IBM, as well as closing the remaining countries which represent less than 1% of our revenue. As we mentioned last quarter, the significant duplicate costs of running parallel systems did burden operating margins in Q3, with Q4 being the heaviest quarter of duplicate costs, but we remain on track to migrate off all the remaining IBM systems in early 2015.

With all this activity, we are well on track to deliver the $120 million EBITDA number we stated over a year ago when the deal was first announced. And as Marshall mentioned, Concentrix generated positive cash flow this quarter. It's an exciting time for Concentrix, and I would personally like to thank the over 50,000 team members who have worked so diligently and been so committed to achieving these great results. We are all very focused on building a bigger, stronger, and better Concentrix for all of our stakeholders. I'll turn the call back to you, Kevin.

Thank, Chris. And I also echo Chris' comments on how impressed I am with the strength and talent of the legacy IBM and Concentrix teams, and how well they've come together to become a unified team. Now before I discuss our guidance, and as Marshall noted today, we announced our decision to initiate a dividend during our fourth quarter. With our historical success and confidence in the future in both our Technology Solutions and Concentrix businesses, we believe it is consistent with our focus on shareholder value to provide this element of returning cash to our shareholders at this time. This aspect of shareholder return will not slow down our ability to fund growth through continued investments in our business.

Now moving to our view on the current market environment. Our fourth quarter guidance reflects strong -- continued strong sales and profit performance in our Technology Solutions segment. We believe overall IT demand has returned to a normalized demand profile post the Windows XP upgrade benefit. We expect IT demand to remain stable in the US, Canada, and Japan and we expect to continue to perform better than the market in all three geographies. Concentrix sales will increase seasonally, while we will continue to experience incremental costs associated with our integration work. As Chris mentioned, we are on track for achieving our goal of $120 million of EBITDA for the first 12 months post-close, which commenced in February of this year.

It is important to note that the seasonality of our business is changing, driven by acquisitions over the past few years, shifts in the markets we serve, as well as the success of our Hyve Solutions business, which is a projects-based business. As a result, our fourth quarter guidance reflects strong year-over-year growth, although slightly less than historical sequential growth from our strong results in Q3.

In closing, we are very proud of what we've accomplished and excited about our future, and feel we are just hitting our stride. We believe the strong growth in Technology Solutions and the transformational acquisition for our Concentrix business will result in increased shareholder value through margin expansion, EPS growth, and ROIC improvement. This is an exciting time for SYNNEX, and I would like to acknowledge the hard work and dedication of all of our associates around the world from both our Technology Solutions and Concentrix businesses. I also want to thank our vendors, customers, and shareholders for their continued partnership and support. And with that, let's turn the call over to the operator for questions.

Thank you.

(Operator Instructions)

Our first question comes from Ananda Baruah. Your line is now open.

Hi. Thank guys for taking the question. Congratulations on what was clearly a really solid quarter. Kevin, really a question for you, and I guess the whole team. And I'll keep it to one because it's sort of broad. I'll let you answer it as you see fit. Given the strength that it's so broad, could you guys walk through for us where it was, I guess what the specific drivers were through the business, both top line and margin-wise, that surprised you to the upside? And sort of -- and really lead to the beat and to the optimism that you see for the ongoing strengthen into 2015?

Yes, and really a few key areas that I think are noteworthy. First of all, we continue to get tailwinds from the Windows XP support going away. Now, we had anticipated that early in our third quarter, but it did continue to raise the water level of overall demand in IT, which was a little bit stronger than we had anticipated. Second, certain segments continued to be very strong. In particular some segments in public sector, like state and local education, was strong. And then finally, as I mentioned in my prepared remarks, our Hyve Solutions business did experience what I would call unanticipated demand. It's a projects-based business and we were the beneficiary of some business that was over and above what we had originally thought we would do.

Thanks. And on the margin side as well, particularly in TS it seemed that's where the margin strength came from this quarter.

Yes. I mean pretty much on track with where we came out for Concentrix. And we did certainly get benefit out of our Technology Solutions. I think it really speaks to the leverage we're able to get out of that business when we're able to drive top-line sales.

That's great. Thanks a lot, and congratulations again.

Thanks, Ananda.

Thank you. Our next question comes from Brian Alexander. Your line is now open.

Thanks guys. I just had a follow-up on the margins. So in the Tech Solutions business revenue was up about 1% sequentially, but your operating income was up about 10%. So the incremental margins were very robust this quarter. Was there anything unusual that drove that? Any release of reserves or anything one-time in nature, or was it mix related? You mentioned Hyve was strong, so I don't know if that was a big contributor. The reason I ask is your fourth quarter earnings guidance, if I back into the TS margins, it seems to imply that they're basically flat sequentially. Normally you see a pretty big bump in the fourth quarter. So I'm trying to understand the patterns in Q3 and Q4.

Yes, Brian. I'll tell you nothing unusual in our third quarter. There's always going to be ebbs and flows that we experience and different programs and timing of things, but nothing there. And again, I get back to when we're able to drive top-line growth, we're able to drive leverage into our bottom line.

Okay, but are you anticipating margins to be roughly flattish in Technology Solutions in the fourth quarter? Is that ultimately what's implied by the earnings guidance?

Well as you know we don't guide to margins. We do expect to perform well against all the different programs that we have. And so again, it really depends on where we're able to benefit from and how we're able to drive top-line growth, and again drive leverage out of that. But when you look at the -- when you look at our overall performance on a year-on-year basis as well as sequential, you kind of triangulate into performance that, from my perspective, you would expect out of that business.

Okay. And then maybe just on the Concentrix side, if I heard your comments correctly it sounds like maybe we'll see additional margin degradation in the fourth quarter before rebounding in the first quarter. And I was just wondering if there's any way you can help us size the duplicative cost so we can get a better sense for how the underlying business is performing from a profitability perspective currently and beyond Q4. If you could talk at all about what the margin expansion opportunity is for this business. Is it closer to 10% operating margin, is it 12%? Just help us think about it relative to how other competitors are operating in this space? Thank you.

Thanks, Brian. It's Chris. So there will be some additional costs within Q4. We are not going to spell it out or guide to it, but there will be some additional weight within the quarter as we go through, and as we talk about those costs will start to diminish in Q1. So you'll see some expansion from that perspective. I think what we've talked about publicly is that our goal is to get this business back to double digit operating income. We haven't provided a timeline to it, but based on our belief of the business and what we've seen, we obviously think that's an achievable goal over a period of time.

Okay, I'll get back in the queue.

Thanks, Brian.

Thank you. Our next question here comes from Matt Sheerin. Your line is now open.

Yes, thank you. Just another question regarding Concentrix, if I may. Kevin, in your opening comments you talked about some projects at Concentrix winding down. Could you quantify that? And you also talked about the ramping new business opportunities. So do you expect in FY15 to actually grow that business year over year?

Matt, why don't I take it? It is Chris. In regards to your first one, we haven't sized those contracts. We talked about that in the last earnings call is that we're working with them now because there is some residual business that may well continue. And so we're unsure about what that is, but we bought the business knowing that these contracts were going away and talked about that at the original announcement date. And as we get better visibility, we'll provide that along. In terms of our expectations, we also talk about the fact that we would like to see this business go back to growing, and growing at market, which is that 4.5% to 5% growth rate within sort of the first 12 months, and we still continue to see that being possible.

And is that based on the pipeline that you see now?

It's based on the pipeline that we see now. It's based on what we're ramping for at the moment. And provided that we continue to execute, we see it as being achievable.

Okay and just two other questions. One is just regarding the PC refresh. It sounds, Kevin, like slowing a little bit but still seeing -- sounds like you're guiding to seasonal, if not a little bit lighter than seasonal, demand which seems to be better than what some investors have been expecting lately. So maybe a little bit more color there. And then also within the Hyve Solutions, that's growing. Could you give us an idea of what contribution in terms of your operating profit or revenue Hyve now represents? And could you give us an idea of that business in terms of pipeline and number of customers?

Yes, thanks for the questions, Matt. So first on Q4, and talking through the PC growth. So strong. If you kind of lock at our guidance where we're looking at for Q4, we're still expecting strong growth in overall Technical Solutions, which really speaks to a continued strong demand environment, and pretty much across all of the geos that we operate in. When you consider the incremental strength that we had, in particular at the beginning of Q3, as well as some benefit that we got in Hyve, those are the two primary reasons why we're at the lower end of what we would normally see as a seasonal increase Q3 to Q4. But obviously we benefited from that and we still expect to have very strong growth year on year in Q4.

With regards to Hyve solutions, as you know we don't break out those numbers. It's strategically important business for us, and when we do get the ebbs and flows of that business it does play a little bit into our sequential growth by 1% or 2%.

And when we think about the margins in that business, it would be fair to say it's sort of like assembly or EMS kind of margins, mid to high single digits?

We don't break out margins either, and we do view our margins in overall Technical Solutions on a consolidated basis. It's just one of the factors in our strategy to continue to proactively manage our overall business mix and drive to higher margin.

Got it. Okay. Thanks a lot, Kevin.

Thank you. Our next question comes from Jim Suva. Your line is now open.

Thanks very much, and congratulations to you and your team at SYNNEX. A couple of questions. First of all, on the next quarter outlook, unless my model is wrong or whatever, it looks like you're guiding below seasonal. It looks like you're guiding midpoint to around 5%, but it looks like in the past it's been closer to 10%. So if you could address that, that would be great.

Sure, and Jim we had talked about that just before you asked your question as well. So don't want to repeat all of the detail, but when you factor in the strength, the incremental strength that we had in Q3, driven still by some Windows XP tailwind as well as some benefit that we got in our Hyve Solutions business, that really accounts for the difference between what you're seeing in our sequential seasonal guide and what you would expect as an average seasonal guide.

Then when we think about--

Jim, I want to point out as well that the Q4 guide, when you look at it on a year-on-year basis, is very strong growth.

What about if we look at it year on year organic? Same answer or different answer?

Yes, all of the growth that we had in Q3 and all of the growth that we are guiding to in Q4 is organic growth.

Okay, great. And then when we think about your capital allocation, is the cadence going to be you're going to reassess the dividend kind of on a annual basis, or how should we think about how often you're going to reassess it?

We're going to be assessing it on a quarterly basis.

Okay, great. And then last question. On your tax rate, am I right it's coming up a little bit, and is that due to the integration? It looked like you've been trending kind of 35% to 36%, and then you guided in your prepared comments 36% to 37%?

Jim, this is Marshall. It's just to the locations from which the income is being generated.

And is there anything to cause us to believe that should change, or it should kind of keep running at 36% to 37%?

Well, our goal is to continue to bring that down in the out quarters, if you will.

Okay, great. Thanks, and again congratulations, guys.

Great. Thank you, Jim.

Thank you. Our next question comes from Bill Shope. Your line is now open.

Okay, great. Thanks. As we look beyond the near term and look to next year and think about your potential for continued margin leverage, would you think that would be primarily coming from your efforts in Concentrix? And overall if not or if so, what are the key swing factors in the model as you think about the opportunity for margin leverage today?

Hey, Bill. Well, I think the great news is that we see margin expansion opportunities across the entire business. Concentrix obviously with its scale, and provides a step-level improvement in our margins. And then with continued work as we get through the integration and then really capturing the value of the combined business, we see continued expansion opportunity beyond the post-integration phase. Technology Solutions has always been a story of expanding margins, and just as we continue to invest in different strategic areas, the technology market is moving into different places, in particular with cloud and mobility. And we're investing in different business models that help us to gain a more services-rich type business, really driving much more to a full-solution sale. And as a result of that it's our goal to continue to expand margins in Technology Solutions as well.

Okay, great. I guess a related question on the demand side. Obviously broader IT spending continues to improve at a fairly steady pace, but I'd say the sources of upside for you guys have moved around a bit, and probably will continue to do so. As you look beyond the next quarter and think about the next few quarters after that, which end markets are you most encouraged by, most confident, and which markets do you think could be a bit more volatile and maybe give you more concern?

Yes, it's going to be a slightly different story depending on which geo we're talking about. But within the US market, the commercial market just feels good right now, and I think that's going to continue to be the case for the foreseeable future. We're also seeing good strength in public sector. I've talked about SLED being a strong market for the past number of quarters now, but we're also hearing more positive things on the federal market, and let's just say we're cautiously optimistic about what we'll see in federal going forward. The retail market for us in the US is also a strong market. Biggest factor there I believe is just that we have the right products and we're in the right segments and we have the right customers that are growing.

In Canada we see continued improvement, really starting in the commercial side. But we see opportunity in retail as well. And then our Japanese business, it's probably -- our opportunities in Japan are probably more driven by our ability to perform and gain share than the underlying markets, which as you know have been very, very strong.

Okay, great. Thank you.

Thanks.

Thank you. Our next question comes from Osten Bernandez. Your line is now open.

Good afternoon. Thanks for taking my questions. I guess to begin, would you be able to sort of give us some kind of color as to how much of the benefit you saw this quarter from the Win XP expiration? And given the [feet] several quarters that you've gone through with this benefit, what can you tell us from, I guess, from a relative performance standpoint, and how should we be thinking about the rest of your TS business outside of that?

Yes, Osten, great question but hard to break down. If you look at how our TS segment has grown Q1, Q2, Q3, you can kind of take a look overall and say, well the overall markets were up, obviously a lot of that driven by Win XP, but it just raised the water level of overall IT demand. But you've seen it go from greater than 20% growth, we were 19% this past quarter in Technical Solutions. But you can't just split out the Win XP effect because I would be looking at maybe one or two categories. Really, there's a lot of other drag-along product that happens when there's an acceleration of refresh at the client level, and because we're also selling a lot of networking and security and other things that support those client devices. So it's hard to split out. Let's say that it was a big factor through our first three quarters of this year. But we still expect to see a strong market in Q4.

Got it. And then with respect to Hyve, you mentioned it being project-based and being able to garner some wins that you weren't expecting earlier in quarter. My question is, with respect to the rest of FY14, or just FY14 as a whole, what kind of growth do you think Hyve can generate, given that it doubled, or at least doubled last year?

Yes, as I said, it's one of our strategic business units and that's really why we don't break out those numbers separately. It has been a good growth engine for us, in addition to strong organic growth in the overall business too, because I want to be clear our organic growth in Technology Solutions outside of Hyve has been very, very strong. But it's also a very good complement to the rest of our business too. And even though sometimes we talk about it separately, really that business goes hand in hand with other parts of our Technology Solutions business, too. And I think that helps also raise the water level, at least for us in what we see in overall demand too. So I can't answer your question directly, Osten, in terms of what the growth numbers are, but it helps our business beyond just the specific Hyve number into our overall TS build.

Got it. And then one final question from me. With respect to Concentrix, can you confirm for me, so I understand it correctly, the businesses that you're expecting to wind down, that had not begun, meaning no revenue, quote unquote, has gone away? Is that accurate? And secondly, I think you're saying that you're still working on it. So you haven't provided us specific timing either as to no size, but no timing either as to when we might see that.

So Osten, it's Chris. The business actually has started to decline. It actually started before the purchase was complete, so back in the fall of last year, and is on a sort of a steady decline through the next six quarters to where it would be complete. It is not fully -- with full visibility about what's going to be left at the end of six quarters. So that's really why we haven't provided as much visibility to it. But it has sort of impacted margins as well as impacted revenue that we knew about as we made the purchase.

Got it. And so from an OpEx standpoint, when you say that we're going to see the OpEx sort of slow down a bit, are you saying you're going to grow into that OpEx, or will we see OpEx come down some more?

So two points to that, Osten. I would say as we talked about, in both Q4 and Q3 we're saying there's a heavier OpEx because of the integration work that we're doing and completing. And then in the beginning of 2015 we'll start to see that diminish as we get off the IBM systems. But there is a baseline OpEx that we expect, and then we continue to look at leveraging the business as we always have, and add more revenue while trying to manage that OpEx as efficiently as possible. That being said, we always are investing in the business and making longer-term decisions, and we'll continue to do that as we go forward.

Thank you very much.

I'm sorry. Our next question comes from Rich Kugele. Your line's now open.

Thank you. Good afternoon. Just a few questions. First on Concentrix, can you describe a little bit about how you view the drivers of that business? Do you see -- you do have the benefit of seeing what's going on on the Technology Solution side. So do you see customers that are on both sides of that business engaging with you more when business is getting better from an IT spending perspective, or are they more likely to go and engage Concentrix when business is softer and they're looking for ways of reducing their own costs? So just understanding what might be the demand drivers. And then I have some follow-ups.

So Rich, two data points. One is we support sort of 10 verticals that obviously cover a lot more than just technology. So we get to see things across the whole economy from obviously bank and financial services, insurance, healthcare, technology, consumer electronics and therefore get the impact of both micro- and macro-economics that go along with it. In terms of our growth drivers, clearly in this industry we saw there being a lot of consolidation with clients looking at having fewer service providers that were going to take on more complicated and engaged tasks, and also wanted to perform these tasks on a global scale. And that's what was driving Concentrix's growth prior to the IBM acquisition. And we've really been able to take the IBM client base that came across and offer the same sort of engagement and level of expertise, as well as with the great strength of expertise that came along with the IBM acquisition to go back to them and take more share within those accounts so that we can grow our business. So that's a fairly significant driver within the overall business services area.

The second part that's driving the business services is just the ability to be more cost effective around a number of processes when we manage the whole process end to end we can be more efficient, more cost effective, driving a higher value and lower cost of operation than what they can do internally. And that's just driven by scale and some tools and technology that we have, and obviously our strength in analytics to drive that performance within a client's processes. And clearly, the good part is, is that once those types of projects come across they stay with us for an incredibly long time because they are complex. The challenges that the sales cycle is a little longer for those, and their upfront costs for onboarding those types of processes where we're taking over something from start to finish, are a little heavier than what you might have seen historically.

That's helpful, thank you. And then I know you don't give specifics on Hyve, but just conceptually you talked about inventory being up at the end of the quarter because of Hyve and some project-oriented stuff. So that -- does that imply that those projects were coming in at the end of the quarter? Were you working on them all quarter, and is it just going to get fulfilled in the next quarter? If you could just talk about the dynamics and how often these big, big projects come up would be helpful to know, too.

Yes, so number one is I understand that our inventory AR, and AP for that matter, they are all point in time measures, right? That's what it was at the end of the quarter. All of those numbers move by tens, if not hundreds of millions of dollars week to week. So it's not -- part of it is just timing of when we get in shipments or ship out product, things like that. Hyve, yes I mentioned as one of the drivers because it is a different model than the traditional distribution model, but in addition to that, growing our overall Technology Solutions business well into the double digits also does require working capital to do it. So I don't want you to think that Hyve was the only driver. It was just one of the drivers.

Okay. Then lastly, Kevin or Marshall, I don't know which of you might want to answer this. Just does the Board have a philosophy regarding the dividend, like some companies talk about we want it to be X% of free cash flow, and in that way people can do their own modeling on cash flow and figure out where the dividend might go over time, or is it just this is what we can afford at this point, and whatever the percent is that's what it works out. Can you just comment on it?

Yes. Well, I mean the highest level objective and philosophy that not only the Board but all of us in management share is delivering what I would say is best-of-breed shareholder return. And with the different profile that we have in our business now, especially with the growth in TS historically and in the acquisition in Concentrix, that really changes the profile and in fact our ability to increase the ways that we're able to return back to shareholders. So it's a start. And I think our thinking is going to continue to change as time goes on, but really, Rich, it starts with a philosophy that we want to return value back to our shareholders. So we'll continue to look at that. But again, we do believe it was the right time to start it and it just adds another great dimension to what we do.

Okay, great. Thank you very much, and well done.

Thank you.

Thank you. Our next question comes from Lou Miscioscia. Your line is now open.

Hi. This is good. So with the open compute concept for it, Just wondering if you could help us out with the mix of customers in the sense of do you have a very small number of very large customers, or is it spread? And then also what's your go-to-market strategy? Do you have a sales force hitting up some of the mega data centers, or is it mostly just stuff actually that's inbound coming in, maybe over your website?

Well, Lou, it's a going to be a smaller number of customers, obviously with a number that are very important to us. Well, they are all important, but some that are a little bit larger than others. The focus has really been more on custom solutions, and as you know we started this business with our partnership with the open compute project. And really the community of these large-scale data center operators is a really small community. Although we have our own sales organization, a lot of the opportunity really does come to us through word of mouth. And the sales piece of it, by the way, is very highly technical sales, a lot of engineering and consulting work that gets done as we look at different opportunities. So it does touch the very highest end of the market in terms of scale and size. And as you know, when you look at those companies that do operate large-scale data centers, there are fewer of them than more.

Okay that's helpful. And then on Concentrix, you mentioned I think last quarter ramping up, I believe 5,000 people, and then I know you gave a headcount of over 50,000 people. I'm wondering, now have you ramped up the vast majority of those, and now do you see an additional increase coming in the next quarter or two of that size, or is it really ramping up the business for those hires that you have already been added?

Hey, Lou. It is Chris. So last quarter we talked about 2,500 being ramped and those are all ramped and in production, just starting to actually frankly create billables for our clients. We also are currently ramping now additional, a few thousand people and that's generally driven by seasonal volume that will kind of peak around December/January timeframe for some of our customers that are more retail focused. And so really, its really been driven by new logo wins as well as expansion of our existing client base across the board that's allowed us to drive this growth.

Okay. Thank you, guys. Good luck.

Thanks, Lou.

That ends our question and answer. I'm turning the call over back to Ms. Skolfield.

Thank you, Al. Thank you everyone for your participation. We look forward to speaking with you through the quarter. This concludes today's call.

That concludes today's conference. Thank you for joining, and you may now disconnect.