新聚思 (SNX) 2015 Q1 法說會逐字稿

Good afternoon. My name is Gabrielle and I will be your conference operator today. At this time, I would like to welcome everyone to the SYNNEX 2015 first-quarter earnings conference call. All lines have been placed on listen-only mode to prevent any background noise. After the speaker's 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. Thank you. At this time, I would like to pass the call over to Dierdre Skolfield, Senior Director of Investor Relations at SYNNEX Corporation. Ms. Skolfield, you may begin your conference.

Thank you, Gabrielle. Good afternoon and welcome to the SYNNEX Corporation FY15 first-quarter conference call for the period ended February 28, 2015. Joining us on today's call are Kevin Murai, President and CEO; Dennis Polk, COO; Marshall Witt, CFO; and Chris Caldwell, EVP 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 and operating income; EPS; expenses; debt repayment; share repurchases; integration; tax rates; ROIC; cash flows; growth and onboarding; vertical focus; consulting capabilities; contributing factors to earnings, 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-K for FY14 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 at SYNNEX.com 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 would like to turn the call over to Kevin for an overview of our results. Kevin?

Thank you, Deirdre. Good afternoon, everyone, and thank you for joining our call today. I'm pleased to report another record quarter of financial results for SYNNEX. Through focused efforts, disciplined investments, and ongoing execution, we continue to deliver revenue growth, increased earnings, and margin expansion.

While our results are very good, we did not meet our stated goals this quarter, primarily due to lighter-than-expected sales in our high solutions business, a slower-than-expected start in the calendar year in our specialty retail distribution business, and a longer rent period than forecasted of a major Concentrix program. Fortunately, we believe these challenges are short-term and our core technology solutions and Concentrix's businesses are solid.

Within our technology solutions segment, overall IT demand was strong in December; however, January had a slow start to the new year. The market returned to normal demand toward the end of February. Within the US, our commercial business was stable, with public sector being notably strong.

Our consumer business was softer as a result of the slow start to the new year and the ramp down of a large vendor. Our high solutions business performed well and grew from a year ago, although sales were lower than our forecast.

Canada was similar to the US, as the commercial business was stable and the consumer business was somewhat softer. The overall IT market in Japan declined from a year ago, although we have seen positive signs that demand has normalized coming off the turbulence through last year, driven by the consumption tax increase.

Profitability in technology solutions was strong and increased to an operating margin of 2.49%. This is about a 30-basis-point improvement from a year ago. We continued to execute well on the core business and managed our portfolio to higher profit category.

Within our Concentrix segment, revenue was strong at $342 million, representing an increase of $215 million from a year ago. Concentrix's non-GAAP operating margin at 7.46% was adversely impacted by about $10 million associated with the ramp-up delay I mentioned earlier, which was about $8 million higher than our expectation.

We are on track with the transformation and performance of our Concentrix business, and we're making good progress on growing the sales pipeline and building out our platforms in our identified high-margin verticals of banking and financial services, insurance, and healthcare. I am pleased to report that sales of new business hit a first-quarter record, both in terms of annual contract value and total contract value.

For more color on Concentrix, I will now turn the call over to Chris Caldwell. Chris?

Thanks, Kevin. I'm very pleased with the operational performance of Concentrix in Q1, despite the delays started to a large contract, which I will go into a little more detail later on. As Kevin mentioned, the sales team had an excellent results in signing new logos, expanding business with current clients, and renewing business with existing clients.

Across the board, we came in on our plan, which represented over four times increase in total contract value signings from over a year ago. As a reminder, these signings could take several months before they produce revenue.

Our message and services are being received well by the market and our overall client satisfaction is high. I am equally pleased that the geographic mix of our business this quarter was well-balanced around the globe, with growth in certain geographies that we purchased from IBM that had not grown in the past. Many of these new business wins leverage both our strength of our high-value offerings as well are contained within our key growth vertical industries.

A few highlights from the past quarter include renewing a multi-year contract for managing a global consumer electronics company's web presence in 54 languages over 61 countries, extending an already impressive seven-year relationship with the client.

We also expanded the significant relationship with a financial institution where we now manage 90% of their back office, which encompasses over 17 unique functions and 188 -- 108 processes, while also receiving a partnership award for the relationship we have built over the past year.

And last highlight, we signed the largest LOI in our insurance vertical business in the last five years for providing open-book management. This provides us great growth opportunities in this vertical, both from our software and BPO services, as up to this point, we had primarily been focused on closed book business within the insurance companies we target.

In Q1, while foreign exchange impacted our revenue by approximately $17 million on a constant-currency basis year on year, we still grew to our plan. We experienced a significant impact from a delayed launch of one of our clients, as Kevin mentioned, that resulted in some missed revenue and unproductive costs associated with having staff trained and on board with little work to do.

The delay was primarily caused by systems, both on the client and Concentrix side, not being ready in time to transact the business and launch. This delay will run into Q2 within an expected impact of $6 million to $8 million in negative gross margin.

The good news is that we have started to execute against the contract now and we expect it to positively contribute to our earnings within this fiscal year. It is a very strategic client to us and it creates new capabilities for Concentrix in the high-value area of fraud detection.

For the rest of our operations, we continue to execute very well. We continue to win awards and accolades from our clients. In fact in Q1, we received two awards from different clients for being their top service provider consecutively for the last three years, which is an amazing accomplishment.

What makes this even more meaningful is that one of these clients was a legacy IBM client, while the other was a legacy Concentrix client. This exemplifies our efforts in effectively integrating the IBM-CRM business.

Specific to Q2, while revenue is seasonally softer in the second quarter, we do expect to mitigate some of that softness with the onboarding of new clients and processes for existing clients that we have signed in the past few quarters.

Now looking ahead, we will continue to gain traction on our transformation, and I wanted to highlight two key focus areas. First, I'm very excited about our recent launch of our consulting group. These engagements will be focused on transforming and optimizing the business processes related to how our clients engage with their customers.

While revenue from this business unit will be small, we believe that each dollar of consulting revenue has the potential to generate a multitude of related services revenue. This group also is able to provide additional avenues to sell our specialty services, such as analytics and technology assets as part of a broader solution set for our clients.

Second, as I mentioned in the past, we have identified our focus on key verticals of banking and financial services, healthcare, insurance, and technology. And we are making great progress in growing our business in these markets by standing with existing clients while developing a very sold sales pipeline with this -- and this continues to be a priority for our further investments.

In summary, I feel very good about our performance and the positive momentum building across our business as we had planned. We had strong execution in Q1 and the underlying business has solid profitability. I would like to thank our entire staff and Concentrix for yet another great quarter.

Let me now turn over the call to Marshall for further discussion on our financial performance.

Thanks, Chris. First I will summarize our results of operations for the first quarter of FY15 and key financial metrics, and then conclude with guidance for the second quarter of FY15 before turning the call back over to Kevin.

On a consolidated basis, total revenue was $3.2 billion, up 5.8% compared to $3.03 billion in the same quarter of the prior year. Adjusting for FX, revenues in constant currency increased 9% year over year.

Our gross profit on Q1 revenues increased to $288 million, or 9% of revenues compared to $207 million, or 6.8% of revenues in Q1 of 2014. The increase in revenue and gross profit was largely due to the impact of the IBM-CRM acquisition.

Technology solution segment revenues decreased by 1% organically year over year to $2.9 billion. Technology solution revenues were negatively impacted by approximately $77 million due to FX. On a constant-currency basis, technology solution segment revenues increased approximately 1% year over year. Concentrix segment revenues were $342 million, up from $127 million in the year-ago quarter, due primarily to the acquisition of the IBM-CRM business.

Q1 total selling, general, and administrative expenses, excluding one-time acquisition and integration expenses and amortization costs, increased as a percentage of revenues to 5.96%, or $191 million. This compares with 4.3% of revenues, or $130 million in the first quarter of FY14. The increase was primarily due to the impact of the IBM-CRM acquisition.

Q1 non-GAAP income before non-operating items, income taxes, and non-controlling interest increased by 27.4% to $97.5 million, or 3.05% of revenues, compared to $76.6 million, or 2.53% in the prior-year first quarter. At the segment level, Q1 technology solutions, non-GAAP income before non-operating items, income taxes and non-controlling interest was $71.9 million, or 2.51% of revenue, up 11.5% in the prior-year quarter result of $64.5 million, or 2.22% of revenues.

For Concentrix, non-GAAP income before non-operating items, income tax with non-controlling interest in the quarter was $25.5 million, or 7.46% of revenue. Results were negatively impacted by approximately $8 million, more than anticipated due to the delayed launch of one client.

Net total interest expense and finance charges for Q1 were $6.4 million, down from $6.9 million in Q4 and up from $4.5 million from the prior-year quarter. The Q1 expense reflects debt associated with the acquisition of the IBM-CRM business.

Net other income was $0.1 million in the first quarter of 2015, down from $3 million in the prior-year quarter. The prior-year reflected a $2.9 million benefit from a class-action legal settlement.

The tax rate for the first quarter of FY15 was 36.2% compared to 36.3% in the prior-year period. For the remainder of FY15, we anticipate the annual tax rate to be in the 35% to 36% range. Our first-quarter non-GAAP net income was $58.2 million, or $1.46 per diluted share, representing 17.7% EPS growth over the prior-year quarter.

Turning to the balance sheet, our accounts receivable totaled $1.6 billion at the end of February for a DSO of 45 days, which was down one day from the prior-year quarter. Inventory totaled $1.3 billion, or 40 days at the end of the first quarter, up one day from the first quarter of 2014.

Days [stable] outstanding was 35 days, down 7 days from the prior-year first quarter. Hence our overall cash conversion cycle for Q1 2015 was 50 days. Our debt to capitalization ratio was 33.3%. Preliminary cash flow generated from our operations was approximately $200 million for the first quarter.

With our good levels of cash flow generated from operations, we paid down a portion of our debt and continued to reinvest back into both segments. At the end of Q1, between cash and credit facilities, SYNNEX had over $700 million available to fund growth.

Other financial data and metrics of note for the first quarter were as follows: depreciation expense was $11.2 million; amortization expense was $14.6 million; HP at approximately 24% of sales was the only vendor accounting for more than 10% of sales; cash capital expenditures for the quarter were approximately $22.4 million, which was primarily related to Concentrix's facility expansion due to our business growth; annualized ROIC in Q1 of 2015 was 7.8%, 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 acquisitions and integration expenses and amortization, the current fiscal quarter's trailing ROIC was 10.5%.

As described in our press release, the Board of Directors approved a regular quarterly cash dividend of 12.5% per common share, or $0.125 per common share, to be paid on May 1, 2015 to stockholders of record as of the close of business on April 17, 2015.

Now moving to our second-quarter 2015 expectations, we expect revenue to be in the range of $3.375 billion to $3.475 billion. For non-GAAP net income, the forecast is expected to be in the range of $60.2 million to $62.5 million. And non-GAAP diluted EPS is anticipated to be in the range of $1.50 to $1.56.

The non-GAAP diluted net income and non-GAAP EPS guidance exclude the after-tax cost of approximately $8.7 million, or $0.22 per share, related to the amortization of intangibles. Weighted average shares estimated for diluted EPS are 39.5 million.

These expectations include an anticipated negative currency impact of approximately $130 million of revenue. Please note that these statements of Q2 expectations are forward-looking and actual results may differ materially. I will now turn the call back over to Kevin.

Thank you, Marshall. Further to the second-quarter guidance Marshall discussed, I continue to be optimistic on our business and the markets in which we operate. We're seeing continued strength and stability in IT demand in all our geographies, and we expect to continue to perform better in the market. We expect that the continued strength of the US dollar will impact our top line in Canada and Japan, and that our specialty retail distribution business will be impacted short-term, as we replace the lost business from [Beats].

We expect to make good process in growing and enhancing our Concentrix business, but also expect a temporary impact to our profit related to the onboarding of the major program, as Chris discussed. Our businesses and technology solutions and Concentrix are solid. We make it our mission to perform well in any market environment. We have talented people, a clear business strategy, and a winning attitude, and I am confident that we will continue to deliver shareholder value that we can all be proud of.

I want to thank all our associates around the world for their ongoing hard work and dedication, and our business partners and shareholders for their continued support. With that, let's turn the call over to the operator for questions.

Thank you.

(Operator Instructions)

Brian Alexander, Raymond James.

Okay, thank you. Good evening, guys. I just wanted to go through the revenue shortfall. Kevin, you talked about three issues, I believe, Hyve, specialty retail, and then the Concentrix's customer ramp issue. So if we look at the roughly $220 million revenue shortfall in the first quarter, can you size each of those issues so we can get a sense for what the main drivers were.

And given your revenue outlook for Q2, looks to be well above what would be normal seasonality, 7% versus flattish. What are you assuming for each of these items normalizing, and what gives you the confidence that will occur?

Sure, so thanks, Brian. First of all, looking back on Q1 revenue, really two key drivers of the revenue shortfall to our expectation, first was the slow ramp in the consumer business. And second was our Hyve business. Again, the Hyve business did grow and it is a solid business, but it just didn't meet the internal forecast that we had for the quarter. The Concentrix's contract issue that we discussed really was a profit-related issue and not a rate-revenue related issue.

And then looking at our second quarter, as I said, we continue to be -- we continue to feel good about our overall markets. From a revenue perspective on the distribution side of the business, continued stability pretty much across all three geographies that we operate in. But we do expect that FX is going to play a role on a year-on-year basis. As Marshall had mentioned, $130 million, where the vast majority of that will be on the technical solutions, technology solutions side of the business.

And then, as we -- as you know, we wound down our Beats relationship last quarter. And so as we continue to replace that business with other business, that will be a bit of a headwind, at least in this current quarter.

Was the specialty retail shortfall primarily the Beats issue, or was there more of a broad-based consumer demand issue that you saw in the quarter, maybe around consumer notebooks are other products? I'm just trying to get a sense for whether that was broad-based and why you assume that that's not going to linger.

Yes, and so for Q1, it was really a broad-based market comment. Without even getting into specific product categories, it was just a very slow start to the year. Part of it too, Brian, was driven by a very strong December. Coming off December, we had a lot of optimism that we would continue to see that strength through January and February. And actually what ended up happening was it was a slightly slower than normal seasonality drop in the retail markets, but it was across the entire business.

And then just one clarification just to wrap up here. On the BP - on the Concentrix side, you had 7.5% operating margins. It looks like you would have been closer to 10% if I back out the unanticipated impact of the ramp issue. I know you also had duplicate cost in there as you were finishing the integration. So what I am wondering is, once we get past this ramp issue, what is preventing you from exceeding 10% operating margins consistently in that business, given that you would have been pretty close in the February quarter and you still had duplicate cost?

Brian, the underlying -- the Concentrix business is a solid business. A good chunk of the underlying business that we have there is a very profitable business. But keep in mind that we will continue to make investments in that business and new capabilities as we onboard new contracts. And in addition to that, Q4 is seasonally a stronger quarter for Concentrix, and so that does play a role in enhanced profitability too.

Okay, alright. Thank you, Kevin.

Thank you, Brian

Matt Sheerin from Stifel.

Yes, thank you and good afternoon. Just a couple of follow-ups on Brian's question. Just one, regarding the IT demand environment, it sounds like aside from consumer, that Hyve's issue that you talked about, it sounds like you're seeing fairly normal demand trends. Of course, there's been concern with the Intel preannouncement, just concern about PC slowdown and then some signs that there might be enterprise slowdown. But seems like you're seeing fairly normal trends. Could you be a little bit more specific in which are seeing, Kevin?

Yes, and Matt, that really is our view. Obviously, it's going to be slightly different take on what we saw last quarter category by category. From an overall client perspective, that market still was a market of growth. Desktops were a little bit lower in that category, but notebooks continue to be relatively strong. But other client devices, tablets other mobile devices, I should say, were quite strong.

And then just moving a little bit up from that into enterprise, server was a relatively strong category as well. When you net it all out, the commercial markets are pretty stable. Really what we saw last quarter in softness or at least the slow start to the new year was on the consumer side of the business.

Got you. And in the Hyves business, it sounds like it was little -- in past quarters you talked about growth there. Is -- in terms of how you see that market playing out this year, what do you account for that slowdown lower than expect in the last quarter? And part of that sequential growth as you're forecasting this quarter, is Hyve part of that? Were you expecting that to rebound?

Well, Matt, I wouldn't call it a slow down. First of all, the market that Hyve operates in continues to be an emerging and growth market for us. Hyve is a good business. We did grow our Hyve business in Q1.

But again, coming off a strong first month of the new quarter, we thought that our forecast for Hyve business would be a little stronger when they came in. Keep in mind that Hyve is a project-based business. It is an emerging market, and we have a smaller number of customers in that business than we do in the broader technology business. So it is somewhat more difficult to forecast. Unfortunately, even though we did grow, it is a good business, it just came in below where we thought we would be.

Just if I could just sneak one more in just regarding the consumer retail business and that Beats product line going away, you talked about backfilling that with other products. Could you be more specific about what you're talking about there?

Sure, and so, this is contained within our retail business. So, we were the sole distributor for the US for Beats up until very recently. And as we wound down that contract last quarter, it had been our plan for the past number of months to replace that business with, not only with other like product in the entertainment category, but other related products, both from a consumer IT as well as from a consumer electronics. We are making good progress there. It's just that the growth of those new products didn't ramp up as quickly as we wound down with each relationship.

That is perfect. Thank you very much.

Thank you, Matt.

Operator, could you get the next question.

Bill Shope, Goldman Sachs

Okay, thank you. Could you give us some more color on the stability you mentioned that you were starting to see in Japan? And how are you thinking about the cadence of the Japan business as we progress through the year? Counts are obviously fairly difficult in the early part of the year, but as they ease up, are you expecting growth to pick up considerably? If you could give us some color on that, thank you.

Thank you, Bill. Japan, of course, had probably the most exaggerated growth profile from a year ago, because they had both the impact of Windows XP end of support as well as the consumption tax increase in April. Going back to a year ago, our Japanese business grew in the 40% range in the first half of the year.

Come late summer, we actually saw the overall IT market and the overall economy actually slip down negative. So it's been a bit of turbulence over the Past two to three quarters in Japan. But what we're actually seeing, even though, the overall in Japan most recently, has been negative growth in IT markets, we're actually starting to see it stabilize. I think we will get a return to growth overall in the second half of this year. That's really a market comment, Bill.

Okay, and then on the -- your comments earlier that servers were strong, are you starting to see some of the refresh activity that everybody has been focused on ahead of the Windows server 2003 expiration, or is that still on the cuff?

I think it's a combination of a couple of things: servers have been growing over the past couple of quarters. Part of it is driven by server 2003 and the support, but other part is the enterprise category that is a little bit different than server 2003 as well. In terms of overall enterprise refresh as well as server 2003, we are seeing growth.

Okay, and then one more if I could. On the Hyve business, are you seeing any changes on the competitive dynamics for that business, or is it really just the demand lumpiness from the custom base?

It really is the demand lumpiness. As I said, it's a great business for us. It's a growth business, but it is somewhat difficult to forecast. It just so happens we didn't forecast to what our actual demand was last quarter.

Thank you.

Thank you, Bill.

Ananda Baruah, Brean Capital.

Thank you, guys, for taking the questions. I have a few, if I could. The first is for Kevin. You're actually off to a pretty solid starts, comments with regards to [a soft] is not with notwithstanding versus a soft compare year ago. The compares get a little tougher as you move through year, and I think it's been stated on the call so far what some of the tailwinds that are -- that have rolled off with XP, with Japan consumption, and with Beats. But you are off to a sold start off soft compares.

Is it your expectation, without giving guidance, unless you would like to give guidance, Kevin, that you can grow revenue this year off the self-compares?

We certainly anticipated that there were going to be headwinds this year, but we have a handful of important new relationships that we onboarded late last year. We continue to drive our efforts in growth markets, and either without giving formal guidance, it is always our objective to grow our business, and we will figure out a way to do that.

Okay. I like your resiliency. And then just with regards to -- and this is probably for Chris, with regards to the Concentrix's project stand-up dynamic, I guess how confident, Chris, are you guys that this is one-offish in nature? Or should we expect it to be one-offish in nature, so if there's any additional context around that, that would be great.

The reason I'm asking is now that you are fully in to having your arms around the IBM business, I would think that the dynamics of a lot of the deals you begin to stand off will be different from what you're used to. So just trying to get a sense of what mechanisms are in place to try to handicap the potential for this dynamic not happening again or happening again. How should we think about it philosophically?

Andanda, it is Chris. I think two points, if you look over the past year, we've increased our headcount by many thousands of people and successfully executed and grown the revenue and grown our relationships with clients.

In regards to this specific contract, there's a significant amount of complexity, which we knew going into this contract just in regards to the technology being developed, which we are part of as well as working with our client to develop, as sort of the interoperability between a number of different systems. Really it came in late January where we sat down and said, look this is -- to do this successfully, we are going to have to ramp this a little differently than what we originally expected and came to a mutual agreement with the client on how we wanted to do it.

It was very controlled. We could have rushed it, but we didn't think that was frankly prudent, and we took the right decision to do what we did and continue to ramp it. We are executing to our new plan as we expected. So frankly, we feel pretty confident that we know where things are and we know where they will get to over the course of the year.

As we talked about in the prepared remarks, our expectation is that it's going to positively contribute to our performance this year. A number of the programs over the course of the last year that we've ramped had the same sort of level of complexity, if not more, than the business we purchased from IBM. We executed exceedingly well with those programs, as a result to our growth in our numbers.

While there could always be hiccups, we have a lot of systems in place to ensure that they don't happen and that we execute for our clients.

That is helpful. Thanks a lot. So that would suggest that this is more one-offish in nature, and I appreciate the context. I guess one for Marshall, don't want to leave him out. The distribution operating margins, the classic tech business, it looks like they actually were pretty solid.

Could you just talk to the dynamics, even though the revenue was maybe a little bit softer than you guys thought, can you talk to the dynamics there? Was there anything that went on with mix? Maybe is the retail being softer, any of the context there would be useful. Thanks

Ananda, across the board just good strength on the margins in many categories. Mix was part of it, strength and growth was part of it. And Kevin, I don't know if maybe you want to add to it just some flavor of product.

Sure, and really Ananda, it's the same two things we've been talking about. Number one is overall, we are growing; as we evolve our business to higher margin markets, we do have a natural expansion of margin. But number two, where we perform for our vendors we do get paid for it. Our performance in the IT commercial space was solid and we got rewarded for that.

Operator, next question.

Austin Bernardez, Cross Research

Good afternoon and thanks for taking my questions. The first question I have is with respect to the comments on the new consulting business that you're growing within Concentrix. I wanted to know whether the experts you have within that business are individuals that you onboarded when you acquired IBM? Or are you seeking to hire new people to build out that business?

Hi Osten, it's Chris. It's actually a combination of both. We've actually been doing some of this consulting over the past year, although not in a formal group capability. A lot of that DNA came from PWC staff and IBM staff who came with the acquisition. And now we have more formalized the growth.

As part of the growth and as part of the clients that we have won with some of the consulting that we've done over the last little while, we actually are bringing in new individuals to the organization who have the background and subject matter expertise that we are looking for to continue to grow that group.

Got it. And then, Marshall, how should I be thinking about your cash trued up this quarter as expected, even though your cash cycle days were up a little bit. How should we I be thinking about, how should we be thinking about the cash flow generation throughout the year as you ramp up the three key businesses that you discussed during the call?

Osten, as we spoke last quarter, we are confident about our cash flow generation for all of FY15 and certainly off to a good start with Q1 and expect continued progress on cash flow generation. Of course, coming with that will be to grow out the business and making sure that we manage the need for working capital growth. But I felt good about the rest of the year.

Thank you.

Jim Suva, Citi.

Thank you very much. On the business that you said that was ramping up slower, can you give us a little bit of history on -- is this basically SYNNEX Concentrix business or was this from IBM? Were there discussions, legacy SYNNEX or were they preacquisition of IBM. I'm just trying to get some history about the ramping, the timing of contract and the discussions.

Hi, Jim. It's Chris. The contract is actually a net new contract to Concentrix's organization. There was no history with either the IBM portion of the business or the legacy Concentrix portion of the business. We won it as actually a combined business and as a go-forward Company in the prior year. There was a high level of complexity to it, as I had mentioned earlier, with a lot of system work, and we're building a platform in order to manage a lot of dispersed databases and do some fairly sophisticated fraud protection and fraud analysis and then collection of monies that were driven from fraudulent use of systems.

Frankly, we knew going into it, it was going to be a long process, but subsequent delays on both the client side and our side pushed us off a few months. But now we have started to execute against the contract, and we are executing to our new plan, and it is going quite well.

Great. And then a quick follow-up. You had mentioned $6 million to $8 million gross margin costs. I assume that that all falls through after taxes to the bottom line, which would be about a $0.10 to $0.12 quarterly impact. And you said Q2.

Does that mean that then completely goes away after Q2 and we are looking at Q3 on apples-to-apple, the step up in earnings, $0.10 to $0.13 just considering that one standalone item plus you get the benefits of the program ramping up profitability. Am I thinking of it right, or are there additional costs beyond Q2 we need to account for there, standup or recurring?

Jim, it's Chris. Without providing guidance, really we are looking at Q2, there's an additional drag on it. You'll notice that it is much less than Q1, and you can expect that when we talk about this contributing profitably to our business by the end of the fiscal year, that there will be additional costs in subsequent quarters to some amount to get to there.

The guidance we gave at $6 million to $8 million is at the gross margin range, so it does fall through to the bottom line. And Marshall, I don't know if there's anything else that you want to --

No, you captured it, and Jim, you got right.

Finally, on this contract, when we think about the long-term return on invested capital or return investment or whatever, am I correct to say this is a very long-term, multiple-year contract? Because it seems like starting out on year one, it's quite detrimental to what you view as strategically financially worthwhile.

Jim, it is a multiple-year contract with additional opportunities to extend that contract at both the mutual decision of ourselves and the client. It also builds up some capabilities that we can use in other areas, so there's some side benefit to it from that perspective.

As we go into these types of contracts and these bigger contracts, which we frankly have executed against within the last year with other clients, they do have to measure up to our financial return metrics and our return on capital metrics, and this deal is no different and would fall within that regardless of the upfront cost that you're seeing right at the moment.

Great, and my last question on Hyve. You mentioned you missed your [in-trial] business targets. Was that purely due to just you felt some business was going to come in or you are forecasting a few numbers didn't come in right? Or do you think there was some shifts, maybe with some white-box makers or something like that?

We don't believe there were share shifts, certainly not a major factor. Really it was just I guess listening to the key clients that we had. In some cases, we were used to actuals coming in higher than what they had forecasted. In this case, we were just off, but we don't expect to be off the current quarter.

Thank you very much. Congratulations.

Great, thank you, Jim.

Rich Kugele, Needham.

Thank you, good afternoon. Just a few questions. First, just to follow-up on that last one on Hyve, when you go and you look at your new guidance for revenue, taking into account currency relative to where consensus is, really the entire currency is the entire delta versus the midpoint. So clearly, you are expecting business to improve sequentially in a few areas. And would you attribute part of that Hyve business coming back, and then you backfilling some of the specialty retail, with the rest of the businesses being stable?

That would be a good view on that. Yes. We do expect our Hyve business to grow sequentially. We do expect to see a better demand environment on the consumer side of the business, and we expect to see continued stability in commercial.

Excellent, okay. And then on the $130 million of currency impact, since we're all watching it with a magnifying glass now, can you give us a sense on what your expectations are for the relative currencies? I suppose that that's the Canadian dollar and the yen?

Rich, this is Marshall. The guide we provided is real time; it's as of what we know this week. So the reflection point (inaudible) reflects that in the various countries we operate in.

Okay, so it's based on the current exchange rate?

Yes.

Okay. And then lastly, the cash conversion cycle, how much of the year-over-year delta is just the IBM acquisition? Is that the bulk of it?

No, very little. You wouldn't break it out, but no, very little impact. Again, we're happy with the quality of the portfolio on all fronts. And the DPO, just more of a timing and mismatch out at quarter end anything else.

Excellent. Thank you very much.

Thank you, Rich.

Kevin McVeigh, Macquarie.

Great, thank you. Hey, can you give us a sense of the $130-million impact of revenue from the FX, what is the earnings impact related to that?

Kevin, roughly consider it the same normal fall through of margin for the respective businesses. That's the way to look at it.

Okay. And then was there any weather-related impact to the revenue in the quarter? Obviously, I know there's been certain parts of the country seeing some pressure from a weather perspective. Any weather impact in the business?

There was very little impact. Where may have had shifts from day to day, but certainly all contained within our quarter.

Okay. And then on the concentric side, it sounds like you're doing a nice job scaling up in terms of contracts. Any in terms of pipeline that you can talk about in terms of sign revenue just to give us a sense at how that's been trending quarter to quarter? And ultimately how that should come in, very generally if you could?

So Kevin, this is Chris. Occasionally we will comment on contract signings, but we don't make a habit of it. I will tell you we've been very pleased, obviously, for the last year, and we've made a couple of mentions within the calls, including today where we talk about year over year our pipeline signings were 4 times as high as last year.

And so, we are, quite frankly, happy with where we are executing from a pipeline perspective. And also frankly, the quality of the deals that we are getting and in the verticals and the pricing that we are getting we are quite happy with as well. Outside of that, I don't think we really can provide much more color.

Got it. And then, just last thing, on state budgets, it's still a little too early, but any sense of as the economy improves, how state budgets have been trending as you think about the business?

I guess maybe a comment on overall public sector first. Public sector for us, and I even called out it has been certainly a notable market for us in terms of strength last quarter. State and local had been very, very strong through the last year and a half, or so. Federal certainly picking up over the last number of months.

I haven't heard anything more specific than that kind of looking out. But our expectation is that public sector overall, including state, local, and education will continue to be a pretty robust market.

Great, thanks so much.

Lou Miscioscia, CLSA.

Thank you. I guess I'll just continue on the comment of state and local. Any additional differentiation on any industry verticals? I assume the small- medium business (inaudible) very well, but maybe if you can just give me any more color or comments that you have there.

In terms of relative market growth and strength, Lou?

Yes.

Overall, public sector was strong. SMB -- well commercial overall was a good market. SMB, in particular, was also very, very good. Actually, the only submarket to point out was retail, which was again, because of the slow start to the new year was below our expectation. Again, we do expect that to continue to improve this quarter.

Great. On the Hyve business, if that gets to 5% or 10% of TS revenue, would you start to break that up separately?

Lou, there are a number of factors that would go into -- frankly, that business is integrated into our overall technology solutions business. And the way that we manage it is really consistent with other parts of our business. So likely not. But again, it really depends on how that business continues to evolve over the next year or so.

On the concentric side are the concentric contracts in US dollars and really the FX is more to do with the yen and the Canadian dollar?

This is Chris. Some of our contracts are in other currencies. We do do contracts in yen, Australian dollar, Canadian sterling and euro. So we do have a mix of different currencies within our portfolio, but the largest chunk is US dollar.

And then looking at the total $130 million, first of all, just on a revenue-ratio basis, the majority of that will come from -- of the $130 million will come from technical solution, and yes Japan and Canada.

Okay. Last question for me, on FX and even if you do the math there, is that -- should we expect that same kind of [hit] as we go through the whole year, if we are assuming to deflect currency for the dollar going forward?

Lou, it's very hard for us to forecast what FX rates are going to be going forward. As Marshall mentioned earlier, our view on Q2 right now is really based on what the current currency landscape looks like today.

Sure. I was implying a flat dollar going forward and just extrapolating that out through the rest of the year.

I would have to go back and take a look at where the currencies were.

Okay thanks and good luck in the year.

Great, thank you, Lou.

This concludes the question-and-answer session. I will now turn the conference back to Deirdre Skolfield for closing remarks.

Thank you, Gabrielle, and thank you, everyone for joining our call. We look forward to speaking with you during the quarter. This concludes the call.

Again, that will conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.