新聚思 (SNX) 2015 Q2 法說會逐字稿

Good afternoon.

My name is Carlos and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the SYNNEX 2015 second 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'd like to pass the call over to Marshall Witt, CFO at SYNNEX Corporation.

Mr. Witt, you may begin your conference.

Thank you, Carlos.

Good afternoon and welcome to the SYNNEX Corporation FY15 second quarter conference call for the period ended May 31, 2015.

Joining us on today's call are; Kevin Murai, President and CEO; Dennis Polk, COO; 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 demand, growth, profitability, infrastructure investment, revenue, non-GAAP net income and EPS, gross margin, after-tax and pretax costs, shares, currency impact, tax rates, and business plans, performance and contracts.

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 had 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 www.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'd like to turn the call over to Kevin.

Kevin?

Thank you, Marshall.

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

I'm pleased to report another quarter of solid profitability for SYNNEX.

Our Concentrix business had a very good quarter and in our Technology Solutions business, we delivered strong profitability despite our revenue falling short of our expectations.

Within our US Technology Solutions business, the overall market demand was stable with some segments, such as public sector, showing strong growth.

Our Hyve Solutions business recovered from the first quarter and performed well, growing both sequentially and year on year.

With that backdrop, we did not meet our overall revenue goal.

Although more business was available to us, we selectively walked away from deals that did not meet our profit thresholds.

We also did not fully replace the Beats business from last year's second quarter which was about $130 million.

But as I mentioned in the past, we have strengthened our portfolio with some recent line card additions such as Dell and Lenovo X Series, among others, and we're optimistic about our growth prospects going forward.

In Canada, sales declined by 3% in local currency.

Our commercial business grew on strength in SMB and corporate markets as our consumer business experienced a softer market.

Our focus on cost controls and operational efficiencies resulted in a strong margin performance.

In Japan, we fell short of our sales expectation by about $30 million.

The market was seasonally softer than normal with the consumer market being notably softer.

Similar to the US, we were selective in the business we wrote and maintained good profitability in Japan.

Looking forward, we are seeing positive signs that demand is beginning to normalize in the second half of this year.

Operating margin in Technology Solutions improved 53 basis points from the previous year quarter.

About three-quarters of this was driven by better than expected profitability in our Hyve Solutions business.

Operational efficiencies within Hyve continued to improve; however our margin was also aided from favorable product mix, strong pricing, and foreign exchange.

We don't anticipate this level of benefit in Q3.

In the broader Technology Solutions business, we continued to be selective in the business we participated in, delivering a solid margin result.

We've managed through changing technology markets over the years and I'm proud of the team for effectively navigating through the dynamic market and delivering strong profitability.

Within our Concentrix segment, our sales momentum continued and we grew our revenue 16% over last year and 10% when adjusting for the staged closings of the IBM acquisition and foreign exchange headwinds.

The investments we've been making in our sales and marketing teams are now paying off and we're ahead of our expectations on growing our business faster than the overall market.

The profitability of our core business remains solid and Concentrix's non-GAAP operating margin was 7% which includes a loss of approximately $7.4 million related to the contract that I had noted last quarter.

Chris Caldwell will provide more color on Concentrix shortly but first, I'll turn the call over to Marshall Witt.

Marshall?

Thanks, Kevin.

First, I'll summarize our results of operations and key financial metrics and then conclude with our guidance for the third quarter of FY15.

On a consolidated basis, total revenue was $3.25 billion, down 5.8% compared to $3.45 billion in the same quarter of the prior year.

Adjusting for FX headwinds, $110 million, revenues in constant currency decreased 2.6% year-over-year.

Also contributing to the year-over-year decline in revenue was the transition of Beats business of approximately $130 million.

Our gross profit on Q2 revenues increased to $300 million or 9.2% of revenues compared to $279 million or 8.1% of revenues in Q2 of 2014.

The increase in gross profit was due to Technology Solutions business mix, including growth in Hyve Solutions and overall Concentrix growth.

Technology Solutions segment revenues decreased by 7.8% year-over-year to $2.9 billion.

Technology Solutions revenues were negatively impacted by approximately $86 million due to FX.

On a constant currency basis, Technology Solutions segment revenues decreased approximately 5.1% year-over-year.

As I mentioned previously, Beats negatively impacted revenue by approximately $130 million.

Concentrix's segment revenues were $342 million, up $293 million in the year ago quarter.

In the prior year quarter, our second phase of the IBM CRM acquisition closed at the end of April which was a contributor to the year-over-year growth.

Adjusting for the negative impact of FX of approximately $16 million and Phase II, revenue in constant currency grew approximately 10%.

Q2 total selling, general and administrative expenses, excluding one-time acquisition and other integration expenses and amortization costs, increased as a percentage of revenues to 6.01% or $195 million.

This compares to 5.21% of revenues or $180 million in the second quarter of FY14.

The increase was due primarily to the incremental SG&A associated with Concentrix Phase II.

Q2 non-GAAP income before non-operating items, income taxes and non-controlling interest increased by 5.9% to $104.9 million or 3.22% of revenues compared to $99 million or 2.87% in the prior year's second quarter.

At the segment level, Q2 Technology Solutions non-GAAP income before non-operating items, income taxes and non-controlling interest was $80.9 million or 2.77% of revenues, up 13.9% from the prior year quarter result of $71 million or 2.25% of revenue, primarily due to better than expected profitability in our Hyve Solutions business which Kevin spoke about.

For Concentrix, non-GAAP income before non-operating items, income taxes and non-controlling interest in the quarter was $23.9 million or 6.98% of revenue down from the prior quarter results of $27.8 million or 9.48% of revenue primarily due to $7.4 million of anticipated losses associated with one customer and the impact from FX.

Net total interest expense and finance charges for Q2 were $5.8 million, down from $6.4 million in Q1 and $6.2 million from the prior year quarter.

Net other expense was $1.6 million in the second quarter of 2015, up from $0.2 million in the prior year quarter.

The tax rate for the second quarter of FY15 was 36.7% compared to 35.9% in the prior year period.

For the remainder of FY15, we anticipate the annual tax rate to be in the 35.5% to 36.5% range.

Our second quarter non-GAAP net income attributable to SYNNEX common stockholders was $60.9 million or $1.55 per diluted share representing a 3.3% EPS growth over the prior year quarter.

Turning to the balance sheet, our accounts receivable totaled $1.7 billion on May 31, 2015 for a DSO of 48 days which was consistent with the prior year quarter.

Inventories totaled $1.2 billion or 39 days at the end of the second quarter, down two days from the second quarter 2014.

Days payable outstanding was 38 days, down five days from the prior year second quarter hence our overall cash conversion cycle for Q2 2015 was 49 days.

From a financing perspective, our debt-to-capitalization ratio this quarter was 30% and preliminary cash flows generated from operations were approximately $127 million for the second quarter.

We increased our existing US term loan to $625 million and paid down our AR securitization.

At the end of Q2 between our cash and credit facilities, SYNNEX had over $1.6 billion available to fund growth.

Other financial data and metrics of note for the second quarter are as follows.

Depreciation expense was $11.1 million, amortization expense was $13.5 million, HP, at approximately 24% of sales, was the only vendor accounting for more than 10% of sales.

Cash capital expenditure for the quarter was approximately $22.9 million, which was primarily related to Concentrix facility expansion due to our business growth.

Annualized ROIC in Q2 of 2015 was 9.1% and trailing four quarter ROIC was 8.6%.

Excluding the impact of one-time acquisition and other integration expenses and amortization, the trailing four quarter ROIC was 10.3%.

As described in our press release, the Board of Directors approved a regular quarterly cash dividend of $0.125 cents per common share to be paid on July 31, 2015 to stockholders of record as of the close of business on July 17, 2015.

Now moving to our third quarter 2015 expectations.

We expect revenue to be in the range of $3.3 billion to $3.4 billion.

For non-GAAP net income, the forecast is expected to be in the range of $56.1 million to $58.1 million.

Non-GAAP diluted EPS is anticipated to be in the range of $1.40 to $1.45.

Non-GAAP diluted net income and non-GAAP EPS guidance exclude after-tax costs of approximately $8.6 million or $0.21 per share related to the amortization of intangibles.

Weighted average shares estimated for dilutive EPS are 39.5 million.

These expectations include an anticipated negative currency impact of approximately $120 million on revenue and $3 million pretax costs associated with withdrawing from a multi-employer pension plan in Japan.

Please note that these statements of Q3 expectations are forward-looking and actual results may differ materially.

I will now turn the call over to Chris.

Thank you very much, Marshall.

I am very pleased with our second quarter revenue performance which came in slightly higher than we expected at $342 million.

Our revenue grew in all major geographies and was primarily driven by our ability to turn commitments into revenue faster as well as a few programs that had higher volume than was originally forecasted by our clients.

Despite year-over-year FX headwinds, we grew our business by 16.5%.

In constant currency, our revenue was up 24.6%.

This is a remarkable accomplishment and ahead of our internal growth plans especially when compared to the CRM BPO marketplace of between 5% and 6% growth.

While FX impacted our operating margins for the quarter, our team executed extremely well with our underlying core business producing an operating margin of 9.2% when excluding the contract we mentioned that had a delay in starting last quarter.

The delayed contract did impact within our estimates but did bring our operating margins down to approximately 7%.

In Q2, we also were awarded by nine of our clients for being one of their top service providers globally which is a testament to our execution and client engagement.

Over the past few quarters, we've also had great success in signing new logos, expanding our business organically and renewing existing contracts.

On average, we are signing three new clients per month which speaks to our strong value proposition, execution and messaging and how extremely well we are positioned in the marketplace.

Now turning to Q3 initiatives and updates.

As a reminder, Q3 is traditionally our seasonal softest quarter as we not only ramp for business going into the fall but see lower volumes in many offer our traditional programs globally during the summer months in Europe and the Americas.

We expect the contract that was delayed to impact our margins by approximately $4 million to $5 million in Q3 as we continue to work on optimizing the contract and improving the financial performance.

Because volumes and mix of transactions have not been delivered as expected, we are working with the client collaboratively to resolve this but profitability may be pushed back from what we had previously indicated.

We are in the process of ramping up approximately 3,500 resources globally in this quarter to support a number of our clients preparing for their fall business which will also not generate revenue until Q4.

As a reminder, Q4 is our strongest seasonal quarter with some of these resources only supporting the seasonality.

From an infrastructure investment perspective, we are currently expanding a number of our locations in the US, Latin America, India, Philippines, China, Japan and Europe to house the current contracts that we have in place and the expected volumes that will start to arrive in Q4 through earlier next year.

We continue to differentiate ourselves in the marketplace by creating a superior experience for our clients.

As an example, we continue to drive our COPC certification of our centers.

We have now received COPC certification in New Zealand and Japan during the second quarter and have 10 centers certified to this high standard globally, which is very unique in our marketplace.

Overall, I am very excited with another solid quarter for Concentrix as we have continued to demonstrate strong execution and business fundamentals.

I'd like to thank all of our clients and the Concentrix associates globally for their hard work and dedication to make Concentrix successful.

Now, let me turn over the call to Kevin for closing comments.

Thanks, Chris.

I will provide some further commentary on the third quarter guidance Marshall discussed.

In our Technology Solutions business, we're forecasting sequential growth in line with historical seasonality.

This is despite a strong Beats business in the previous year's third quarter of over $180 million that we won't fully replace with other products.

We expect our Hyve Solutions business to perform well but without some of the benefits we experienced in Q2.

In our Concentrix business, we're confident that we will continue to grow our revenue despite foreign exchange headwinds.

Our core Concentrix profitability remains solid; however, we will incur additional short-term costs as we ramp up approximately 3,500 employees for a seasonally strong fourth quarter, as Chris mentioned.

I continue to be optimistic on our business and the markets in which we operate.

We have been able to effectively navigate through changing markets and we believe we are well-positioned to profitably grow our Technology Solutions business.

And I'm pleased with the performance of our Concentrix business and feel good about the momentum we've created in top line growth.

As you know, we will be hosting our Analyst Day next week on Wednesday.

We look forward to meeting with many of you and speaking in more detail about our businesses, strategies and growth prospects.

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.

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

(Operator Instructions)

Our first question will be coming from the line of Mr. Jim Suva from Citigroup.

Thank you very much.

A couple clarification questions.

First of all, I think you mentioned that $4 million to $5 million delayed impact on the Concentrix business.

Am I correct that this is the same program that last quarter got off softer than the start of the anticipated for the ramping of that?

And if so, also what's the outlook to when this business should be more normalized?

Hi, Jim.

It's Chris.

You are correct.

That is the same contract and as we had indicated last quarter, our expectations were that it would be more normalized and profitable by the end of the year.

As we updated in sort of the prepared remarks this quarter, we are challenged with some of the volumes and transactions that the client is sending us in terms of volume.

And I do expect it might impact a pushback, although we are pretty confident in working through to get to a resolution pretty quickly.

Great and then my follow-up question is last quarter, you kind of talked a lot about you had some newer Concentrix programs ramping and how exciting it was, whether on the fraud and detection side or just various new wins.

This quarter you really didn't talk a lot about that or I just missed it and didn't hear that.

Has the DX logo slowed down in that business or is it just you're now pivoting and not focusing as much as communicating those wins?

I'm just trying to get a sense on the pipeline of the Concentrix business or the existing portfolio and potentially bringing more things into the future bookings.

So Jim, actually, we're quite bullish at the moment because if you look at the prepared remarks, we're actually getting almost three new logos into our business on a monthly basis when we look at the average over the last two quarters.

Which in our marketplace and you look at our global footprint is very, very high.

So we're quite happy with our quality of pipeline and we're quite happy with the type of business that's coming in, both our banking financial services and insurance, health care, technology, as well as we've been very fortunate to win some new emerging businesses that are quite disruptors in their market places that we see as very high growth profiles within our business segment.

We're quite excited about that and see a lot of potential with the clients that we're bringing in.

As well as expanding our existing client relationships which as I noted, nine awarded us as top service provider, which really helps to drive organic growth from those contracts.

Great.

Thanks so much for the clarity.

Thank you.

Our next question will be coming from the line of Mr. Matt Sheerin from Stifel.

Thanks and good afternoon, guys.

This first question is regarding the tech solutions revenue, the shortfall and the $150 million to $200 million range.

Kevin, you did talk about a $30 million shortfall from Japan and then also the fact that you deselected some business opportunities.

I imagine low margin commodity type of business in North America.

Is that the extent of it and could you be more specific about what kind of deals you're walking away from and does that mean the competitive environment is getting a little bit more intense here because of perhaps lower growth and lower demand?

Yes, thanks, Matt.

So overall, I want to say that we feel good about the overall market demand.

In particular, in the US.

Japan has its own story, as you know, because of the strong growth that we had a year ago.

So, you're correct.

Japan did fall below our own expectations by about $30 million last quarter.

Looking forward though, we do see that demand normalizing.

In the US, it really was exactly as I said, which was there was a lot of opportunity available.

We chose to take the high rode and not actually do the deals on business that fell below our own profit thresholds.

And just in terms of the nature of those deals, probably what you would expect; large volume, more commoditized product, Matt.

Okay, and then in terms of the impact from Beats, you talked about year-over-year.

But I know that last quarter, you were talking about opportunities with other brands to backfill that.

Did that come below your expectations as well and was that part of the miss?

Yes, and I think we even mentioned in Q2 that we have plans to replace that business, both within the consumer segment that we sold Beats in as well as across the rest of the commercial business.

So we do have a number of new line additions.

In particular, in our new age electronics business and also ramping up our new large relationships with Dell and with the incremental Lenovo X Series business.

However, the ramp up and what we're actually experiencing right now is not enough to fully offset the business that we no longer have with Beats.

But as we continue to move forward, we do see big opportunities with those new vendors.

It's just more of a timing aspect.

Okay, and just lastly, concerning the Concentrix business, you talked about the various moving parts and the opportunity for the back half or the last quarter into next year.

In terms of the operating margin, should we expect it to be in the 7% or perhaps lower range for the next quarter or so until the volumes ramp into the resources that you've built up here?

Matt, this is Marshall.

As you know, we're not putting any mark in terms of when we'll get there.

But certainly, the investments in the businesses that Chris has referred to and the headwinds associated with this one contract, we're still very optimistic about moving this up into double digits.

We just aren't putting a stake in the ground in terms of the quarter that that is achieved.

Okay, thanks a lot.

Thank you.

Our next question comes from the line of Mr. Kevin McVeigh from Macquarie.

Great, thank you.

I wonder if you could just at a little more of a higher level help us bridge the EPS guidance?

So $1.45 to -- the $1.40 to $1.45 to the street at $1.67, just kind of three broad buckets.

Is it the incremental investments in Concentrix, the pension and the balance FX?

Just to give us a sense of where the shortfall was?

And then, just how we should think about the step up seasonally in Q4?

Kevin, this is Marshall.

So you hit the elements there.

Basically, it's the revenue shortfall in regards to the replacement of Beats and call it the delta on that.

The second, was the headwinds associated with the one large contract referenced by Chris in Concentrix.

And then you're right, the last piece is the Japan costs associated with exiting the multi-employer plan.

And is that round number $0.07 a piece?

Is that the way to think about it in terms of getting to where the street was just from an EPS perspective?

Yes, in that order, it probably ramps down.

So $0.07 might be a midpoint but it might be a little higher for revenue and a little bit lower for the pension.

Okay and then, I know you're not guiding the Q4, but just any thoughts on the seasonal uptick given what's happened here in the third quarter?

We have no -- as we kind of look out into Q4, we believe that it will probably be about seasonally up from what we've had in the past if you kind of use our Q3 as a base.

Got it.

Okay, thank you.

Thank you.

Our next question will be coming from the line of Ananda Baruah from Brean Capital.

Hi guys, thanks for the question.

I have a couple.

If I could?

Kind of sticking with that topic of the guidance, can you and Marshall walk us through each of those components?

Maybe a little bit more detail around the magnitude?

Because if I'm not mistaken it sounded like in Kevin's remarks at the end there that the Beats revenue for the August quarter last year was about the same as the May quarter last year.

And in Japan, it's only I think it's only $3 million pre-tax costs.

And then, the one large contract was also an issue this quarter but the margins were much better.

So I guess what I'm saying is it seems to me, and correct me if I'm wrong please, that the two big items that you're saying impact the margins in the August quarter also impact, also were present in the May quarter but you guys put up really good margins.

Just a little more context around that would be great and I have a follow-up.

Thanks.

Okay, now pretty much what I shared with Kevin is, I'll reiterate that again about revenue being probably the primary driver and just in terms of trying to bridge the starting at any point EPS with the Concentrix contract being the second one and then the final one being the pension impact that we've called out around $3 million and pretax.

Those are really the key drivers that connect those two points, Ananda.

And how does that manifest differently in the August quarter P&L than it did in May?

Because the revs are guiding actually up Q-over-Q.

Straight dollar volume is actually greater.

And then, for the $3 million with the pension, if that's really the $3 million that's not secret material.

So I guess what am I missing in this whole mosaic as to why the margins would be so much dramatically softer in August than they are in May?

Ananda, if I understand your question, we are looking at a seasonal uptick in revenue from Q3 over Q2.

However, if you're looking at where we're guiding from a net income perspective, which is a little bit lower than Q2, as I had mentioned in my own prepared remarks, we did receive benefit in our high solutions business through pricing and mix and FX that is not repeatable in Q3.

Got it.

Okay, that's great.

So the mix of the revenue is a little bit lower margin this quarter than it was last quarter.

I guess also in that same vein, for Chris, is the margin impact going to be greater from the new contract ramping in the August quarter than it was in the May quarter?

It will be, Ananda.

Primarily just because of the amount of staff that we're bringing on and when those actually start to produce revenue.

Got it.

And then just last one for me, guys.

Kevin, you mentioned on the call that you're seeing -- I guess two things related.

You mentioned that you're seeing signs that demand is normalizing in the tech business in the second half of the year.

Yet you also talked about -- I guess when you address the reasons for the tech miss, it wasn't exactly clear to me what was different relative to your expectations in the May quarter.

If you could talk about, number one, what was different from your expectations in the May quarter?

And then, what is it that's giving you -- having you feel better that things actually are firming up and normalizing for the August quarter?

That would be great.

Sure.

So to start off with, the comment that I made on normalization of demand in the second half, that was specific to Japan.

That was really coming off of my comment on the overall market being much softer in Japan than anticipated.

But in addition to that and I guess to answer the second question what you have, the markets are stable in the US.

We feel good about overall market demand in the US.

Within the markets, we gained a lot of share a year ago and share does shift back and forth overall for us.

The trend line is that we continue to gain share but Q2 was a quarter where we probably lost a little bit because we were more selective on profitability.

We don't expect those kind of dynamics to continue long-term.

I've got it.

That's helpful.

Thanks a lot, guys.

Thank you.

Our next question will be coming from Mr. Brian Alexander from Raymond James.

Okay, thanks, and good evening, guys.

So Kevin, this is the second straight quarter that SYNNEX came in light on your revenue expectations for tech solutions by at least 5% which is very different than how you've performed versus your guidance historically.

Can you comment maybe on why you think the business has become less predictable?

And then, I have a couple follow-ups.

Brian, I wouldn't say the business is less predictable.

Frankly, when I look at the reasons for the revenue shortfall in Q2 and the reasons that we have a shortfall in Q1 there, they're of different nature.

Q1 was really driven by a couple of different things.

One was, the high business performed below our expectation on revenue which was not the case in Q2.

And we also had a much slower start to the year in our consumer business in Q1.

Really, what happened in our second quarter was just below expectation performance in Japan and number two, what I talked about already, which was the business is good but we were much more selective in what we took.

So if I could follow-up on that?

When you say that you're more selective and you're walking from deals, I wonder where those deals are going.

Because if I look at your top two competitors in North America, they're not growing, at least based on their reported results and what they've guided for the next quarter.

So is the market getting weaker in the US or how would you explain the dynamic of none of the top three distributors growing in North America?

I wonder if this is cannibalization from cloud or is distribution losing market share?

I can't remember the last time that all three of you collectively did not grow.

Brian, just first putting things into perspective.

We're talking about a revenue mix.

I understand you can slice and dice it so many ways but we're really talking about $100 million off of over a $3 billion quarter.

It's not a big, big number.

As I said, when I look at the overall market dynamics, when I look at where the opportunities are for business for us to earn, I continue to feel good that the demand is actually there.

Okay, I guess maybe one last one.

If I try to back into the operating margins for the August quarter based on your revenue and EPS guidance, it looks like the tech solutions operating margins fall back to the 2.3% range, somewhere there about, which is actually down year-over-year.

I know you don't guide margins specifically by quarter, but can you just talk about the put and takes to the TS margins and if they are declining year-over-year, why?

And related to the high profitability boost that you had in the second quarter, what was driving that?

Was it volume related or were there some one-time benefits?

The high level comment, Brian, is that overall, we do have a trend of margins that continue to improve in TS.

And a lot of that is really driven by our mix of business, not just products, but also services and customer segments that we are growing faster than others.

But each quarter is very different and any quarter there's going to be a number of different puts or takes that impact our gross margin.

It's hard to go down a ledger and say specifically here is why this quarter was better than the other if you try to compare the average.

But in Q2, we did have a number of things go our way in our high business that we don't expect to happen again.

But the fundamentals of what we're seeing in the marketplace in terms of what we're able to get in price and the way that we manage any back end rebates from our vendors continues to be strong.

Just on Hyve specifically though, because you called that out and I think it contributed almost 40 basis points year-over-year to the TS margins.

I might have missed your comments on what drove that big boost in profitability in Hyve and why does that not continue into the next quarter?

Brian, this is Dennis.

I can jump in on that one.

As Kevin said in the prepared remarks, a couple of things drove the better margins in Hyve in the second quarter.

One was just a leverage in the business and more efficiencies.

We talked about in Q1 the revenue being a little less than we expected, In Q2, a little better.

So you can determine the leverage we got there was pretty good for our quarter in Q2.

And then also, Kevin mentioned we had several one-time benefits in pricing and product mix and some foreign currency that went our way in Q2 that we don't expect to continue on in Q3 and beyond.

That was specific to Hyve itself?

I wasn't sure if that was a broader TS comment, the pricing and mix.

That was specific to Hyve, yes.

Thanks very much.

Thanks, Brian.

Thank you.

Our next question will be coming from Mr. Osten Bernardez from Cross Research.

Yes, thanks for taking my questions.

I just wanted to touch base real quick with respect to your TS sales and some of the market commentary that you've provided.

Kevin, do you believe that you're still positioned such that SYNNEX over time can still grow at a premium to the market in the US or in general with respect to IT spending?

Or are you beginning to think that perhaps you might have to settle for just growing at market rate over the long run?

I'm very confident that we will continue to grow above market rates and you just take a look at the way that we go to market and how we operate our business.

First of all, we don't have 100% share with any vendor that we deal with and if we don't have 100% share, there's share gain opportunity there.

And we always strive to do that but we do it not through pricing down.

We do it because we earn that business.

There's a number of services and capabilities that we do on behalf of our reseller customers.

And frankly, in many cases we're the go to distributer for key vendors.

So when they're looking for growth opportunity, we're always there to answer that question.

But in addition to that, and as you take a look at the longer term, obviously the overall IT environment is changing and we're making our select, and what we believe to be our smart and right investments, in areas of cloud and mobility.

We do believe that as we start to get traction on those, that those investments will continue to pay off too.

I'll just hold out Hyve as a great example of investment that we've made a number of years ago that certainly is a key driver of our growth today.

So we continue to evolve our business.

We continue to modify what we do and change what we do to address ever changing market needs.

And that's why I have the confidence that we're going to continue to grow faster.

Got it.

And then with respect to the ramping of business on the service side with Lenovo and Dell, could you just touch on how those businesses are growing?

Whether you're adding new customers or are you introducing these products to some of your existing customers?

And within the data center space, could you also touch on how you're, what your traction is with respect to software and security in that realm?

Sure.

So from a Dell and Lenovo X Series perspective, I would say for both those relationships, we were at or ahead of plan in ramping up that business.

And by the way, we do expect big things coming out of both.

But I do want to clarify that although X Series is obviously server, Dell goes beyond server and enterprise.

Our Dell relationship now is very, very broad.

It includes the client business as well as the communications business with Dell as well.

So we certainly expect to continue to broaden that.

And frankly, those that we sell to, it's a combination of some existing customers where we can do a better job servicing them.

It's also customers, in Dell's case, that have been dealing direct with Dell that Dell sees it to be more efficient and effective to move through a distributer like that.

And also, we get paid well when we bring up net new customers that haven't bought those products before.

So it really is a combination of all of those, Osten.

Got it.

And then just lastly for me if I can?

Either Chris or Marshall, when we think about Concentrix and the timing of the margin improvement in your overall goal of eventually getting that business back to double digit margins, should we be thinking that the pace would be slow and steady?

Or is there opportunity -- obviously, my thinking is not past, maybe not in this fiscal year, but for there to be an inflection point at some point after say you get that program up and running, the financial services program, that you had to throttle back.

And let's say post fourth quarter this year, you onboard those new resources and you meet your service agreements.

How do we think about the pace of essentially of margins improving beyond say this fiscal year?

Osten, this is Chris.

The way I look at it is if you look over the course of the year and obviously take out FX, we've made margin improvement in our core business probably from a slow and steady perspective.

And our goal is obviously to continue to grow relatively rapidly.

We're growing significantly faster than the market and if we were to tone down some of that growth you'd probably see some of that margin expansion quicker.

But honestly, we're more focused on growing our business, supporting our clients and onboarding new clients and so we're going to continue to probably be more of a slow and steady pace as we continue to gain scale and keep our growth rates up.

Thank you.

Thank you.

Our next question will be coming from Mr. Lou Miscioscia from CLSA.

Okay, thank you.

Going back to the problem customer and Concentrix, you estimated I guess I believe it was $6 million to $8 million gross margin hit and you came in at $7.4 million.

Now you're guiding to $4 million to $5 million.

When we look to third quarter and fourth quarter and now you said that fourth quarter I assume which was originally breakeven was pushed out.

Can we still expect a linear fall off in that as we go forward?

Or is it flat line to third quarter given the lower volumes and then drop down, but again, not to breakeven in fourth quarter and then hopefully hits breakeven in first?

So right now, we're going back and forth with our client to kind of get to consensus in terms of what predictable volumes and transaction types they can provide since it's less than what was originally forecasted from them.

Obviously, we are continuing to optimize the business and you've seen the drag continue to decrease.

Really our comment was about pushing that out was around getting a better handle on what they can predictably do and then we'll size the business accordingly to that flow.

We don't think that will probably happen in the next two quarters as we originally indicated last quarter.

But you should see that linear progression in terms of improvement as we go forward because we will do what we need to for the business to turn this into a profitable contract sooner than later.

Okay then going to Kevin's comment.

Just to be clear, one of the things he said that it's not repeatable.

I think you were mostly referring to the Hyve business.

Was there anything else that was not more or less repeatable taken into consideration the answer to the other questions you've already answered?

No, you've got it right.

I was referring to the benefits that we got in the Hyve business.

Okay, great.

Thanks guys.

Thank you.

Carlos, we'll take one more question.

Certainly, sir.

Our last question will be coming from Mr. Rich Kugele from Needham & Company.

Thank you.

Good afternoon.

Just a few questions here.

On Concentrix, what recourse do you have in these types of situations where either your own forecast for the timing was offered the customer I guess in this case was far too optimistic about what it felt was going to be the timing and can you get out of this deal if you need to if the ultimate profitability is materially impaired?

And then secondly, on the guidance front, can you talk about whether you're assuming additional business that you're going to need to walk away from because of profitability in the guidance?

Thanks.

So why don't I take the first question.

You know, clearly we're working collaboratively with the client to make sure that we're driving the right returns for them and we're obviously getting the right return from us.

And with any contract that we have generally we enter into, there's clauses that allow both of us to get relief as we go through this process provided we can come to a collaborative conclusion.

At this point we aren't there.

At this point we believe that we can get to a happy place and continue to drive it albeit behind the time frame of both what we are after and what our clients are after.

But progression is going well and as you've seen, we continue to guide down from a cost perspective on this project.

That being said again, we believe that it will be a little further out than Q4 but are working hard to make sure that we can bring it in as quickly as possible.

Generally when we work collaboratively with clients, the forecasts are quite on.

But if you remember last quarter, we talked about this being sort of a new initiative with a lot of new buildup around it and the acceptance of that has not been to at the level of the clients thought originally.

Could any of those employees that you had originally devoted to it be moved over to the Q4 seasonal uptick?

Yes, we often move stock around programs depending on how we need them and where we need them provided they have the same skill set.

The staff on this program are in demand in other programs and we've already moved some within Q2 and we'll do so in Q3 to other programs to offset costs from other ramps.

Okay.

And then Kevin, the guidance?

Yes, so on your question on the guidance, when I look at where the market is right now and what the market is doing right now primarily on the US, it appears that these larger opportunities are becoming more reasonable in terms of profitability.

We don't assume that we're going to be walking away from as many deals this current quarter as we did last quarter.

However, we're always cautious when we take a lock at what the overall market activity is and where we see the demand.

It's kind of down the middle I guess in terms of my answer.

Okay.

Thank you very much.

Thank you, Rich.

Thank you.

Just one thing Carlos before I turn the call over to you to close out.

I just want to remind everyone again, as Kevin said, the SYNNEX Corporation will be hosting an Analyst Day next Wednesday, July 1, 2015 at the NYSE.

Presentations will begin at 8.30.

There will be a live webcast of the presentations that will be available at our ir.

SYNNEX.com website.

On the day of the event, please log on to the website 15 minutes prior to the start of the event to register.

Thank you for joining our call today and we look forward to speaking with you during the quarter.

And that concludes our call.

Thank you.

Thank you.

That concludes today's conference call.

Thank you all for participating.

You may now disconnect.