新聚思 (SNX) 2015 Q3 法說會逐字稿

Good afternoon. My name is Cindy and I will be your conference operator today for the SYNNEX 2015 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 Phyllis Proffer, Director of Investor Relations at SYNNEX Corporation.

Thank you, Cindy. Good afternoon, and welcome to the SYNNEX Corporation earnings conference call for the FY15 third quarter which ended August 31, 2015. Joining us on today's call are Kevin Murai, President and CEO; 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 will hear today consists of forward-looking statements within the meaning of the federal securities laws. Such statements may relate to, without limitation, demand, growth, IT markets, profitability, revenue, non-GAAP, net income and EPS, margin, tax costs, shares, currency impact, tax rates, business plans and opportunities, customers, contracts, and dividends. Actual results or trends could differ materially from our expectations. For more information please refer to the risk factors discussed in our Form 10-K for FY14 and the discussion of forward-looking statements in our earnings release and Form 8-K filed with the SEC today. SYNNEX assumes 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. Reconciliation of non-GAAP and GAAP reporting is included in today's earnings release and the related Form 8-K available on our website at www.Synnex.com. 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.

Thank you, Phyllis. But before I begin my prepared remarks, I first want to welcome Phyllis to the SYNNEX team. In Phyllis' role she's going to continue to work closely with the SYNNEX management and the executive management team. Phyllis has over 30 years of extensive experience in investor relations with various industries, including distribution, retail and manufacturing companies. She holds a master's degree in business administration from Duke University, a master's degree in communications from St. Louis and a bachelor degree in journalism from Southern Illinois University. We're very lucky to have such a talented individual as Phyllis. So Phyllis, welcome.

Thank you.

So today what I'll first do is review our results of operations and key financial metrics, and then conclude with guidance for the fourth quarter FY15 before turning the call over to Kevin. On a consolidated basis, total revenue was $3.33 billion, down 5.7% compared with $3.54 billion in the same quarter of the prior year. Adjusting for FX of $126 million, revenue in constant currency decreased 2.2% year over year, which was primarily due to the loss of Beats, which was approximately $180 million.

Our gross profit on Q3 revenues was $291 million, or 8.7% of revenues, compared with $300 million, or 8.5% of revenues, in Q3 of 2014. The decrease in gross profit dollars was due to lower sales in our Technology Solutions business segment, losses related to a certain Concentrix contract, and unfavorable foreign currency exchange impact.

Technology Solutions segment revenues were $2.98 billion, representing a decrease of 7.1% compared to the prior year. Technology Solutions revenues were negatively impacted by approximately $100 million due to FX. On a constant currency basis, Technology Solutions segment revenues decreased approximately 4% year over year. As I mentioned previously, Beats negatively impacted revenue by approximately $180 million. Concentrix segment revenues were $359 million, up from $334 million in the year-ago quarter. Adjusting for a negative impact of FX of $26 million, revenue in constant currency grew 15.5%.

Q3 total selling, general and administrative expenses, excluding one-time acquisition and other integration expenses and amortization costs, increased as a percentage of revenue to 5.82%, or $194 million, compared to 5.48% of revenue, or $194 million, in the third quarter of FY14. The percentage increase was due primarily to lower revenues in Q3 of FY15 and higher pension costs of $2.3 million associated with or drawing from a multi-employer pension plan in Japan.

Q3 non-GAAP operating income was $97 million, or 2.91% of revenue, compared to $106.3 million, or 3.01% of revenue, in the prior year third quarter. At the segment level Q3 Technology Solutions non-GAAP operating income was $71.7 million, or 2.41% of revenue, down 7.9% from the prior-year quarter results of $77.9 million, or 2.43% of revenue, primarily due to lower sales in the US and the Japan pension expense of $2.3 million, or 8 basis points in Q3 of FY15. For Concentrix, non-GAAP operating income in the quarter was $25.2 million, or 7.02% of revenue, down from the prior-year quarter results of $28.3 million, or 8.49% of revenue, primarily due to an approximate $6 million loss associated with one large contract previously mentioned and negative FX impact.

Net total interest expense and finance charges for Q3 were $6.8 million, down from $7.6 million from the prior-year quarter. Net other expense was $0.2 million in the third quarter of 2015, down from $0.5 million in the prior-year quarter. The tax rate for the third quarter of FY15 was 35.2% compared to 36.3% in the prior-year period. The reduction in the effective tax rate was primarily due to the reversal of certain tax reserves. We anticipate the annual tax rate to be in the 35.5% to 36.5% range. Our third quarter non-GAAP net income attributable to the SYNNEX Corporation was $58.4 million, or $1.47 per diluted share, representing a 6.6% decrease from the prior-year quarter.

Turning to the balance sheet. Our accounts receivable totaled $1.6 billion on August 31, 2015 for a DSO of 44 days, down 4 days from the prior-year quarter. Inventory totaled $1.3 billion, or 40 days at the end of the third quarter, down 1 day from the third quarter of 2014. Days payable outstanding was 39 days, which was consistent with the prior-year third quarter. Hence, our overall cash conversion cycle for Q3 of 2015 was 45 days, representing an improvement of 5 days from Q3 of 2014.

From a financing perspective our debt-to-capitalization ratio this quarter was 30%. Preliminary cash flows generated from operations were approximately $220 million for the third quarter and approximately $555 million year to date. At the end of Q3 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 third quarter are as follows. Depreciation expense was $13 million. Amortization expense was $14 million. HP at approximately 27% of sales was the only vendor accounting for more than 10% of sales. Capital expenditures for the quarter was approximately $26 million, primarily due to continued Concentrix facility expansion. Trailing four quarters ROIC was 8.7%. Excluding the impact of one-time acquisition and other integration expenses and amortization, the trailing four quarter ROIC was 10.1%.

As described in our earnings release, the Board of Directors approved a regular quarterly cash dividend of $0.20 per common share to be paid on October 30, 2015 to stockholders of record as of the close of business on October 16, 2015. This represents a 60% increase in the quarterly cash dividend from $0.125 cents per share paid in the prior four quarters, and in line with our capital allocation priority of improving shareholder returns.

Now moving onto the fourth quarter of 2015 and our expectations. We expect revenue to be in the range of $3.48 billion to $3.58 billion. For non-GAAP net income, the forecast is expected to be in the range of $69.5 million to $71.5 million. Non-GAAP diluted EPS is anticipated to be in the range of $1.74 to $1.79. Non-GAAP net income and non-GAAP diluted EPS guidance excludes after-tax costs of approximately $8.53 million, or $0.21 per share, related to amortization of intangibles. Weighted average shares are estimated will -- diluted EPS are 39.5 million. These expectations include an anticipated negative currency impact of approximately $110 million on revenue. Please note that these statements of Q4 expectations are forward-looking and actual results may differ materially. I'll now turn the call over to Kevin.

Thank you, Marshall, and good afternoon to everyone on the call. I'm pleased with our third quarter results, which I believe highlights the help of our Technology Solutions and Concentrix business segments. As Marshall stated, our third quarter revenues at $3.3 billion met our expectations, and increased by over 3% from a year ago when normalized for currency and $180 million of Beats business that did not repeat this year. We continued to execute well, and our consolidated non-GAAP operating margin was strong at 2.91%.

During the quarter we generated over $220 million of cash, and I'm happy to report that our Board has approved a 60% increase to our quarterly dividend. As we stated before, it is our intention to review our dividend on an annual basis.

Within the Technology Solutions business, our US business performed well, growing sales by mid-single digit percent when normalized for the Beats headwinds. Our commercial business had strong growth in SMB, and we had double-digit growth in many of our specialty business units, including integrated communications and enterprise mobility. In Canada, our revenue grew by low single digit percent in constant currency with solid growth in the commercial market offsetting softness in the consumer market.

Within North America we continued to achieve good results from our go-to-market strategy of creating relevant technology solutions that solve problems and enhance effectiveness in a number of key vertical industries. Our work with Google, Microsoft and key hardware OEMs in the K-12 education market is a prime example. This strategy is one of the differentiators that helps us grow faster than the overall technology market, and with enhanced stickiness and margins.

Another key differentiator is our Hyve Solutions business in which we provide designs, assembly, test and deployment services for the white box server and storage market. Demand continues to be strong, and we're making headway with the onboarding of new customers. In our third quarter our Hyve business performed well and we made very good progress in attracting new business with two new customers that have potential for higher volumes.

Turning to Japan, the overall market continued to have soft demands, and our revenue decreased almost 20% in constant currency. Over the past couple of years our business in Japan was aided by popular consumer technology products, which are still selling. However, we are in transition of refreshing our line card with new products. We're optimistic that our business in Japan will return to growth in the near term with an improving demand environment and an improved share position. And as Marshall noted, profitability in our Japanese business in our third quarter was impacted by a $2.3 million expense as we move from a multi-employer pension plan to a defined contribution plan.

Concentrix was a star performer, growing revenue over 15% in constant currency which was well above market growth rates of about 5% or 6%. Equally noteworthy is that our sales pipeline continued to grow. And we've been successfully translating these opportunities into contract wins, both with new clients and expansion of business with existing clients. Our adjusted operating margin was 7%, which included operating losses from the contract that Marshall discussed. I am very proud that Concentrix continues to receive accolades from our clients and from the market. Most recently, Horses for Sources named Concentrix into the Winner's Circle for Insurance as a Service and Everest announced Concentrix in CCO delivery.

Our innovation, execution and client satisfaction are key measures of our success. Overall, I'm very pleased with the performance of both our Technology Solutions and Concentrix businesses in our third quarter. We achieved our revenue targets and delivered healthy profitability. And now I'll turn the call over to Chris for more color on the Concentrix business. Chris?

Thanks, Kevin. I'm very pleased to report an excellent quarter for Concentrix. We executed extremely well across the board, achieved revenue above our expectations and continued to build our sales pipeline. Our revenue for the third quarter was $360 million. This represented another quarter of above-market growth, representing 7.7% year-over-year growth while absorbing FX headwinds. In constant currency we grew the business at 15.5%.

In addition to growing double digit year over year, we also reported a sequential quarter growth of about 5.2%. We are seeing the yield of our new clients accelerate with our ability to ramp faster than originally expected. As I mentioned last quarter, we are still working closely with one large contract which had negatively impacted the third quarter profit by approximately $6 million. I'll talk a little more about this contract a little later.

As mentioned, our results exceeded our expectations and reflect growth with strategic Blue Chip customers and continued traction in our key verticals. Excluding the loss associated with the contract I discussed, our adjusted operating margin was around 9% and adjusted EBITDA was nearly 12%, despite FX headwinds. We continue to make great progress in adding new clients with our talent, analytics, technology and strong client base to reference.

This quarter we're pleased to say we added 14 new logo clients, one in every major region we operate in. Some examples include a Fortune 100 client, which strengthens our position in our key insurance vertical. Another, a client being known for being a disruptor in the industry with rapid growth that we will be supporting in four countries around the globe. One of the largest telecom players in the Middle East that we will be transforming to a new engagement model for their customers using our technology also joined our flagship client set.

Now, turning our attention to Q4. We expect to see a number of our programs benefit from seasonal ramps we have been talking about for the last two quarters. We also expect that we will resolve our loss-making program. We are close to a resolution with our client that is expected to be completed by the end of the quarter, consistent with our prior comments that this contract will not adversely affect our business past Q1 of 2016.

All this growth will be partially offset by another contract that we'll be sunsetting this quarter. As we discussed when we purchased the IBM BPO CRM division, we knew there would be two contracts that would not be continuing. One ended many quarters ago, which we replaced with new business seamlessly. The remaining contract will end this quarter and we are now in the final wind-down. The contract represents approximately $125 million in revenue for FY15 with an expected $18 million of that $125 million in Q4 before being complete. We have been very happy with how we have been able to replace the revenue of this contract as it has been winding down, and are on track to replace the entire value of the contract while continuing to grow.

Looking forward, we see a continued healthy pipeline of new opportunities in our key verticals. We plan to add approximately 6,000 staff globally to help our clients through their seasonal peaks this quarter and for the growth they plan for their business expansions.

Concentrix continues to be recognized as a leader by industry analyst firms. We've been recognized for our leadership across our insurance and healthcare verticals this quarter, as Kevin mentioned. These results are a testament to our focus on deep domain expertise, technology and innovation, analytics and process optimization.

In closing. I am very pleased with another terrific quarter for Concentrix as we have continued to demonstrate the strength of our teams' execution and solid business fundamentals. I'd also like to thank all of our clients and for their confidence in us, and all staff around the world for their hard work and dedication to make Concentrix successful. Now I'll turn the call back to Kevin.

Thank you, Chris. Now I will provide some further commentary on the fourth quarter guidance Marshall and Chris discussed. In our Technology Solutions business, we're forecasting sequential growth in line with historical seasonality. For your information, Beats represented approximately $210 million in Q4 of last year. We believe the IT markets in the US and Canada will continue to be stable and growing, and expect some improvement in the overall market in Japan.

We anticipate a slight decline on a year-over-year basis in our Hyve Solutions business, as our Hyve revenue in Q4 last year was unusually strong from unforecasted demand. As we said in the past, this project-based business tends to be more lumpy, given our concentrated customer set. But as we grow the customer base, we expect the lumpiness to smooth over time. Finally in our Concentrix business, as Chris mentioned, we're expecting another solid quarter as we continue to benefit from the momentum we've established over the past few quarters.

I continue to be optimistic about our business and the markets in which we operate. We believe we are well positioned to profitably grow our business and achieve the long-term goals we discussed during our Analyst Day this past July. Our business foundation is solid, execution is our differentiator. We view partner satisfaction as paramount, and we continue to excel in finding more opportunities to grow.

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. So with that, let's turn the call over to the operator for questions.

(Operator Instructions)

Your first question is coming from Mr. Ananda Baruah from Brean Capital.

Hey, guys. Thanks a lot for the question, appreciate it. I guess, Kevin, just a couple, if I could. The first is with regard to just your last comment about the forecast that you provided at the Analyst Day. And so it sounds like, if I recall, it sounds like you're saying you feel entirely comfortable with the tenor of IT demand. And I remember your comments last quarter, which was essentially the same. So was there -- and you just sort of reiterated your conviction of being able to get -- drive to the 2017 forecast you provided at the Analyst Day.

So the question is, is there anything that you've seen -- or what have you seen, if anything, be it you consider kind of like a tailwind to your headwind throughout this quarter that you would sort of point out to us as you drive to the -- midpoint is something like $15 billion in revenue in 2017? And then I have a follow-up, if I could.

Sure. So Ananda, overall when we look at our overall business, we've got Concentrix that really has a lot of strong momentum behind it right now. We've talked about the long sales cycle in Concentrix in the past where it does take a long time to onboard new clients. But once we're able to get them, then we're able to demonstrate through our quality of service that we can take on more and more business. And frankly, a good part of our growth, both over this past year as well as looking forward, is going to be coming from the combination of signing new logos and then increasing our share of wallet.

So with that momentum we've already started, we feel optimistic about our growth prospects moving forward. And frankly as Chris mentioned, from an overall profitability perspective in Concentrix, the overall base business profitability is quite solid. Understandably, we have the one contract that we're working through right now. But net of that, you can see that our operating margins continue to improve. And with the insight that we provided at Analyst Day on operating margin expansion over the next couple of years in Concentrix, we are aiming for double digit in the foreseeable future.

On the Technology Solutions side of the business, the markets continue to be healthy and steady, in particular in the US and Canada, and we continue to perform very well there. Japan is somewhat of a different story, both with pretty significant headwinds that we've been experiencing since the beginning of the year. We do expect that market to improve as those compares become a little bit better. And in addition to that, with the increased focus that we have on enhancing the line card in Japan we do expect that we're going to start to gain share again.

So overall there are a number of things that we can point to in terms of technologies that are growing. But in particular, we believe that we have a solid strategy on embracing technology growth in areas like cloud with our Hyve Solutions business, with other parts of cloud and enterprise mobility that we have spoken to in the past. So execution has always been one of the key strengths that we had -- we've had, and with the right strategy we're optimistic about being able to hit those targets that we presented.

Thanks, Kevin. And then just with regards to your comments on Japan, you mentioned in the prepared remarks, [or it was] mentioned in the prepared remarks, that you guys are hopeful to return to growth. And I guess I want to get the appropriate context. Sounded like you were saying in the not too tremendously different future. Could you give you some sense of when that might be? Not like a guidance, but like an anecdotal sort of idea of when you think that could happen?

Yes. In Japan, we enjoyed the benefit a year ago of a number of things happening. We had Windows 8 replacing -- sorry Windows XP support going away, being replaced by Windows 7 and Windows 8. That created a lot of tailwind. But probably even more so than that was the increase in consumption taxes. And so with 40% growth for two quarters in a row in Japan, we knew we were facing pretty significant headwinds as we were coming on a year on year.

Shortly after the consumption tax increase, Japan's economy did shrink a little bit. And frankly, IT demand has been a bit sluggish in returning back to even normal -- into normal levels. But in addition to that, I think with that all being said, the market outlook is one that should be improving starting about now, but that's probably the major factor in our ability to actually grow on a year-on-year basis, is having a market that is either stable or -- stable, flat or growing.

So that's useful context. Do you think you can -- is there a possibility you could grow in FY16, or is this really, let's get into FY17 and really lap all the compares and the macro stuff?

No. I mean, Ananda, of course we don't provide guidance specifically beyond the current quarter. But our goal, of course, is to grow our business in Japan in 2016.

Got it, thanks. And then just one last one, if I could. Chris, you made mention last quarter that you're onramping, I believe it was 3500 [folks] in the August quarter for a contract that was going to begin to revenue in the November quarter. I was just hoping you could update us on that? And then that's it for me, thanks.

Yes. Hi, Ananda. You are correct. As we mentioned, we are a bit faster in our ramp so we did capture some of that revenue within the third quarter, a very small amount but unexpected at the beginning of the quarter. And we'll have those in full production this quarter.

Awesome. Thanks a lot guys.

Thank you.

Thank you. Our next question is coming from Mr. Brian Alexander from Raymond James.

All right, thanks. Good evening, guys. Maybe just with the revenue guidance, Kevin. It implies somewhere around 6% to 8% sequential growth for the Tech Solutions business if I back into Tech Solutions from the overall revenue guidance. That seems to me to be a little bit below seasonal. I understand some of the year-over-year headwinds with Beats and currency, et cetera, but sequentially it looks to be a bit below seasonal. And I noticed your DSOs were down quite a bit at the end of the August quarter. So I'm not sure if the quarter ended on weakness or how to reconcile that with your overall comments that you're expecting normal seasonality in the fourth quarter.

Yes, Brian. There's just a couple of other moving parts. And so your calculations are pretty much there, but if you add in more weakness in Japan, and even though Japan is not the biggest business we have, last quarter, as I said, in local currency we did decline 20%. So that does have an impact on our sequential number. In addition to that, as I mentioned, we're also expecting a slight decline in our Hyve Solutions business. So when you add those two together you kind of get back up to that seasonal increase in Q4.

Just to follow-up on Hyve, and then I have one on Concentrix. I think you said two new customers sounded like they could be sizeable. Just any context relative to the overall size of Hyve today, how material those could potentially be?

Yes, Brian. As you know, we don't break that out separately. Hyve obviously a very strategic business to us, and certainly a differentiator for us when you look at our business model in the cloud space, but it's a very important business. We don't give the size on it. But the clients there in that space that we address are predominantly the large data center operators among a few different industries. And so any clients that we're able to entertain, and again very long sales cycle in that business too, obviously have a pretty large spend. And so if we're able to get our foot in the door and start doing business with some of these clients, it could spell out much larger business going forward.

And then on Concentrix, on this customer contract of $125 million that's winding down, Chris, anymore context on kind of the nature of the work that you were performing for that customer? Are they going with another BPO provider, are they insourcing, was this price driven, was it capability driven? Shame on me if I didn't hear you telegraph this before, but it sounded like it was new information and I'm just trying to understand, did you all expect this all along or is this more recent?

Hi, Brian. Actually, we actually called it out on the initial conference call when we did the IBM deal. The client had been with IBM for a significant period of time and it's a government contract that has a very defined time frame. And they were actually finishing up the services as well as bringing some of it in-house, and that was disclosed to us as part of the transaction. So we knew that it was going away.

What our expectations had been was that we would retain some of it. But what we thought we were retaining through the course of the contract, we realized that probably that was not going to happen since those services wouldn't need to be delivered anymore. So didn't lose it, didn't go anywhere else. It sort of wrapped up a procurement cycle within a government body.

So when do you think we'll start to see margins expand in Concentrix? I know the three-year goal is 9% to 11%. I know, Kevin, you alluded to double digits in the foreseeable future. But even if I adjust for the one-time customer issue of $6 million, which I think was a little bit above what you guys had forecasted at $4 million to $5 million for the quarter, still looks like margins are tracking below the low end of your goal. So any help on when you'll start to see margins improve, and when do you think we can get into that double digit range? Thanks. That's it.

So Brian, a few data points to this. I think we talked a little bit about this in the last call. One is, we onboarded a little over 3,500 people last quarter. Depending on how long it takes for them to ramp up, we cover all of the payroll costs, the infrastructure buildout costs well before they go into production. This quarter we're bringing on 6,000 more individuals. So frankly, what we look at is when we bring on these deals, when they are in full production, are they accretive and meet our margin goal targets? And the answer is yes. So we're not going to sacrifice our growth to hit these goals sooner.

Our preference is continue to win business at the right target margins, and we're being successful doing that, and continue to grow and then see that slow increment as we get more and more scale within our business. We're just growing quite rapidly at the moment, and that is compressing some of our margin business. And then certainly with the contract that's been a challenge this year, but as we talk about that, we'll be resolved in the next quarter.

Okay. All right, thank you very much.

Thanks, Brian.

Thank you. Our next question is coming from Mr. Matt Sheerin from Stifel.

Yes. Thanks and good afternoon, guys. Just a couple of quick follow-ups from me, following up the other questions. On the Japan situation in terms of the weak demand, has that also been a drag on margins? And what's the margin profile of the Japan operation now relative to Tech Solutions? And are there things that you can do to improve profitability, despite the fact that you don't have much growth there?

Yes, so the Japan profitability in this past quarter was a little bit of a drag on our overall margins, but just also understand the overall size of the business is less than 10% of the overall. So it has a measured but small impact on the business. Certainly the revenue decline had a bigger impact on our overall number. But we were profitable in Japan net of the expense that we had to take for the defined pension plan. However that being said, we did enjoy good profitability when we had significant growth from a year ago. And we know that we can get back up to those profitability levels as revenue returns in the right areas of the business, but there are always things that we can do and we are doing to continue to fine-tune profitability.

Number one, of course Matt, is just our overall portfolio of business. So we do put more emphasis on pursuing higher margin, more sticky business, just as we do here in North America. And then overall just continuing to focus on much more cost efficiency in the overall business. But the business as it is right now is a profitable business. We have more opportunity to improve that as we grow it.

Okay, that's helpful. And on the consumer business, with Beats, are you having any success in backfilling that with other products? And then along the same lines, I know you sell a lot of notebooks and desktops through your consumer business. Are you seeing Windows 10 as a positive catalyst at all this quarter, or going into the end of the year? Or do you think that's going to be pushed out to next year?

So for Beats, yes, we are having success in backfilling it. We have not fully backfilled the hole that it's created, but we're backfilling it not just with like product, Matt, but with other products as well, including some new relationships that we have, even with traditional consumer technology, other manufacturers on the notebook space as well. So that is a continuing story of success and we're going to continue to grow that business net of Beats.

However, keep in mind that we have this current quarter and then of the headwinds of compare, in Q1 of 2015 we also had some level of Beats business, it was just under $70 million worth. Frankly, because I know you guys are going to ask, in Q1 we also expect seasonal trends in our overall core distribution business. That tends to be about a high single digit, low double digit decline from Q4. So we are right on track in terms of filling that business and growing out a [built] market.

With regard to your question on Windows 10, in consumer the take-up has been good. I think the acceptance has been very good. From a commercial perspective, we're expecting the very typical and traditional adoption of a new Windows operating system, which is a bit more of a delayed wait-and-see once the operating system is deployed and tested for a good six to eight months.

Okay, great. Thank you very much.

Thanks, Matt.

Thank you. Next question is coming from Mr. Jim Suva of Citi.

Thank you, and congratulations. Good results to your team there at SYNNEX. Can you just help us understand a little bit about, you said you've got some Japan line cards that you're replacing. Is that kind of a one quarter wind-down? And then you also mentioned the customer [one] Concentrix, the government-related one. That one I assume, is it completely out of the equation for the February quarters?

So I'll start off with that your question on Japan. I don't want you to think about what I discussed as a situation similar to Beats where we had a large franchise and then through sort of the sale of that business that franchise went away. This is different. We've enjoyed good success in Japan where we have a very broad selection of technology-related products that we sell into retail. Some of these products have enjoyed pretty significant success in sell-through over the past couple of years.

We are still selling that product, but demand seems to be saturating a little bit there. So we're not seeing the same levels of sales that we saw even six or eight months ago. However we do have a good pipeline of new products that we are starting to onboard. And so through that, what I'd call a transition of hot products, that just takes a little bit of time. Really, my comment on Japan was intended to talk through the 20% decline that we saw in local currency and how we expect to grow. And it was a combination, really, of my line card comment on products in addition to the overall market improving.

Jim, it's Chris. In terms of the contract from Concentrix side, this will be the last quarter that we have it. And as mentioned in the prepared remarks, it will contribute about $18 million this quarter.

Great. And then my last question, as you mentioned that you're onboarding, I think you said around 6,000 staff this quarter; how is that compared to maybe last year? And are you telling this because there's an operational learning curve there that we could build into our models and be prepared of, so it's a little bit softer margins this quarter and then a lot stronger the next? I'm just trying to context the 6,000, because I'm sure there's seasonality in this business all the time when you're bringing in people and bringing them out. And so if you can just help us understand your comment around quantifying the staff coming in?

So, Jim, good question. To give you a compare over compare, 6,000 is probably roughly around double what it was last year in terms of bringing on new headcount into the organization to the quarter. It's primarily driven by obviously the new ramps, new business that we've been winning as well as expansion of existing clients that we have. While some of it is seasonal, we tend to call that out versus sort of the vast majority of these are more permanent into the business.

We call it out for two reasons. One is to give you an idea of some of the costs that's flow into our business as we ramp, because obviously all these people come in, we need to train them, build the facilities around them and everything else that goes along with it. So it does give some softness to margins. But also, really as specifically this quarter, also gives you an indication of the pipeline of business that's replacing the contract that's going away, that will continue to allow us to grow sort of above market.

Thank you. And the timing of the profitability of these big contracts, are they normal? Are they looking at a couple of quarters of investment or losses, or how should we think about [we want to be] prepared for any near-term speed bumps, if there are any, or are they just coming on profitable from day one?

So Jim, is sometimes our expectations is they don't turn profitable until six to seven months out, just with a number of different uniquenesses within the contracts and client sets that we have and the different geographies that we work. But generally after six months they are profitable. For the most part, though, they start to produce revenue within 90 to 120 days. So you'll start to see that as we onboard this group of staff within this quarter, it will be Q1/Q2 that you start to see the benefit of this increase.

Great. Thank you very much, and congratulations to you and your team at SYNNEX.

Thank you, Jim.

Thank you. Our next question is coming from Osten Bernardez from Cross Research.

Hi. Yes, thanks for taking my call. So just had a quick question with respect to Canada. You mentioned improved commercial demand there. Could you just sort of break down any particular verticals or end solutions that sort of supported that growth there?

Overall in Canada the trend that we've been seeing at high level first is the commercial part of the business has been more stable and growing than the retail side of the business. And if you've been following Canada, you've probably seen over the past 18 months there's been some significant changes in the overall retail landscape. But all that said, really the strength in commercial was pretty broad-based. For us, though, I do believe we did a little better than the market with the increased focus that we put on, say, the enterprise business in Canada, as an example. But the core commercial business that we do in the key categories like notebook and also in software and networking, those all showed good strength this past quarter.

Got it. And then following up on Hyve, with respect to the two new customers you mentioned who could potentially grow in volume in terms of how meaningful they are to the overall business, is that a function of these two new customers perhaps testing your Hyve solutions against other solutions? Or is that a prediction potentially based on their need for increased capacity over time? And how long would it take theoretically for that to sort of come to fruition for you?

Yes, Osten, it's probably a longer answer than we have time for on the call, but it's more the former, where, as I said, it's a very long sales cycle and involved in the sales cycle is not just conversation, there's a lot of [vies] on our technical capability and things that we need to build as pilot. So once we do get approved and certified as a supplier, then from there we see more and more opportunity to become one of the more consistent supplier on a very large piece of business, and that's really what I'm speaking to.

Got it. Thank you very much.

Thanks, Osten.

Thank you. Last in queue is coming from Mr. David Rold from Needham & Company.

Understand that the Concentrix contract was known to be sunsetting for some time. Just want to understand, would you typically have that much advanced notice with other contracts? Just trying to get a sense going forward whether we should incorporate any near term run-off?

So David, generally you don't get that much visibility, because this was years of visibility. But normally with the types of projects and work that we do, it's quite complicated and quite sticky. So if there's an ebb or flow in the business, it tends to be seen a number of quarters to a year in advance with the work that we do.

Okay, that's all for me. Thank you.

Thanks, David.

Thank you. At this time there are no further questions.

Great. Well, thank you everybody for joining our conference call. And we look forward to seeing you in the coming weeks.

Thank you. As that concludes today's conference, thank you for participating. You may now disconnect.