新聚思 (SNX) 2016 Q4 法說會逐字稿

Good afternoon.

My name is Kate and I will be your conference operator today for the SYNNEX 2016 fourth-quarter and full-year earnings call.

(Operator Instructions)

This 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 Mike Vaishnav, Senior Vice President Corporate Finance and Treasurer at SYNNEX Corporation.

Please go ahead.

Thank you, Kate.

Good afternoon and welcome to the SYNNEX Corporation earnings conference call for the FY16 fourth quarter ended November 30, 2016.

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 will hear today consists of forward-looking statements within the meaning of the federal securities laws.

Such statements may relate to, without limitation, market, demand, sales, growth, non-GAAP net income and EPS, margin, profit, revenue, cost, expense, share, tax rate, seasonality and integration.

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 FY15 and 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 date.

Also during this call we will reference certain non-GAAP financial information.

Reconciliation of the non-GAAP and GAAP reporting is included in today's earnings release and 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 would like to turn the call over to Marshall for an update on our financial performance.

Marshall?

Thanks, Mike.

First I'll review our results of operations and key financial metrics, and then conclude with guidance for the first quarter of FY17 before turning the call over to Kevin.

Our Q4 net income and EPS, both GAAP and non-GAAP, exceeded our expectations while revenue was in line with our expectation.

On a consolidated basis total revenue was $3.9 billion, up 9.5% compared to $3.5 billion in the same quarter of the prior year.

Adjusting for FX of $21.8 million revenue in constant currency was 8.9% higher compared to the prior-year quarter.

For the full fiscal year SYNNEX's revenue was $14.1 billion, an increase of 5% from the prior year.

Adjusting for FX of $37.3 million revenue increased 5.7% compared to the prior year.

Technology Solutions segment revenues were $3.4 billion, representing an increase of 6.6% compared to the prior-year quarter.

The TS revenue increase was mainly due to higher seasonal growth than expected from our Hyve Solutions business and growth in consumer and public sectors, partially offset by Japan.

On a constant currency basis Technology Solutions segment revenue increased approximately 5.9% year over year.

Concentrix revenues were $500.4 million, up 33.9% from $373.6 million in the prior-year quarter.

The Minacs acquisition contributed $120.9 million in revenue.

Adjusting for the acquisition and the negative impact of FX of $0.9 million, revenue in constant currency increased 1.8%.

Now turning to gross profit.

Our gross profit on Q4 revenues was $378.8 million, or 9.7% of revenue, compared to $312.7 million, or 8.8% of revenues in Q4 of 2015.

The increase in gross profit dollars was due to higher sales in both our segments and stronger margins in the Technology Solutions segment.

In addition to seasonally stronger Hyve performance, commercial and our specialty businesses had solid results.

For the full year gross profit dollars improved 7.7% to $1.3 billion, and gross margin was 9.1% compared to 8.9% in the prior year -- in the prior fiscal year.

Q4 total adjusted selling, general and administrative expenses were $223.2 million, or 5.74% of our revenue, compared to 5.44% of revenue, or $193.1 million in the fourth quarter of FY15.

For the full year our adjusted selling, general and administrative expenses increased to $834 million, or 5.93% of revenue in FY16, compared to $773 million, or 5.8% of revenue in FY15.

This increase was primarily due to the Minacs acquisition in August of 2015 and higher depreciation, partially offset by favorable FX impact.

Consolidated non-GAAP operating income was $156.1 million, or 4.02% of revenue, compared to $120 million, or 3.38% of revenue in the prior-year fourth quarter.

At the segment level, Q4 Technology Solutions non-GAAP operating income was $93.3 million, or 2.75% of revenue, up 15.01% from the prior-year quarter results of $81.1 million, or 2.55% of revenue due to higher sales and improved gross margins.

For Concentrix, non-GAAP operating income in the quarter was $52.8 million, or 12.55% of revenue, up from the prior-year quarter result of $38.8 million, or 10.38% of revenue, primarily due to growth in existing customers and new logos, operational efficiencies, and good controls over discretionary spending.

The Minacs acquisition contributed approximately $13.9 million of adjusted EBITDA.

For the full fiscal year non-GAAP operating income grew 7.2% to $449.7 million, or 3.2% of revenues in 2016, compared to $419.4 million, or 3.14% of revenues in 2015.

Net total interest expense and finance charges for Q4 were $8.7 million, up from $7.2 million from the prior-year quarter, due to higher borrowings to fund the Minacs acquisition.

Net other expense was $0.9 million in the fourth quarter of 2016 compared with $0.6 million in the prior-year quarter.

The tax rate for the fourth quarter of FY16 was 30.5% compared to 36.7% in the prior-year period.

For the fiscal year it was 34% compared to 36.2% in 2015.

This Q4 benefit of $0.17 was due to changes in income mix in various tax jurisdictions, certain tax incentives and tax credits.

For FY17 we anticipate the tax rate to be in the range of 34% to 35%.

Our fourth-quarter non-GAAP net income attributable to SYNNEX Corporation was $102.9 million, or $2.57 per diluted share.

The full-year 2016 non-GAAP net income attributable to SYNNEX Corporation was $281.2 million, or $7.04 per diluted share.

Turning to the balance sheet.

Our accounts receivable totaled $1.8 billion on November 30, 2016 or a DSO of 41 days, down 4 days from the prior-year quarter.

Inventory totalled $1.7 billion, or 45 days at the end of the fourth quarter, up eight days from the fourth quarter of 2015.

Days payable outstanding was 44 days, up three days from the prior-year fourth quarter.

Hence, our overall cash conversion cycle for Q4 2016 was 42 days, an increase of one day from Q4 of 2015.

From a financing perspective our debt to capitalization ratio this quarter was 33%.

Cash flows generated from operations was approximately $51 million for the fourth quarter.

At the end of Q4 between our cash and our credit facilities, SYNNEX had over $1.1 billion available to fund growth.

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

Depreciation expense was $19 million.

Amortization expense was $19 million.

[HPE] at approximately 15% of sales was the only vendor accounting for more than 10% of sales.

Capital expenditures for the quarter were $28 million, primarily due to continued Concentrix facility expansion.

Trailing four quarters ROIC was 10.3%.

Trailing four quarters adjusted ROIC was 11.5%.

As previously announced the Board of Directors approved a regular quarterly cash dividend of [$0.25] per common share to be paid on January 27, 2017 to stockholders of record as of close of business on January 13, 2017.

Now moving to our 2017 first-quarter expectations.

We expect revenue to be in the range of $3.4 billion to $3.6 billion.

For non-GAAP net income, the forecast is expected to be in the range of $64.7 million to $67.9 million.

Non-GAAP diluted EPS is anticipated to be in the range of $1.61 to $1.69.

Non-GAAP net income and non-GAAP diluted EPS guidance excludes after-tax costs of approximately $11.1 million, or $0.28 per share, related to amortization of intangibles and approximately $1 million, or $0.02 per share, related to the acquisition and integration expenses.

Weighted average shares is estimated for diluted EPS are 39.8 million.

Please note that these statements of Q1 expectations are forward-looking and actual results may differ materially.

I will now turn the call over to Kevin.

Thank you Marshall, and good afternoon to everyone on the call.

As you saw in our press release and heard from Marshall, we just completed an incredibly successful year with a very strong fourth quarter finish.

So I will begin my comments with our fourth quarter and discuss our full year 2016 results before turning the call over to Chris.

For our fourth quarter, although I had high expectations regarding our overall performance, our results exceeded my expectations in both our Technology Solutions and Concentrix segments.

Our revenue at $3.9 billion was stronger than the market in most segments.

Our Technology Solutions business turned in another strong performance, growing 6.6% from last year.

By product and market segment, we experienced growth in consumer, public sector and data center, as well as growth in networking, security and software.

Concentrix delivered record adjusted EBITDA of $78 million and achieved non-GAAP operating margin of 12.5%.

The Concentrix team has done an outstanding job executing in our seasonally high quarter, as well as implementing operational improvements that will also enhance our margins going forward.

And during the quarter we made good progress integrating the Minacs business.

On a consolidated basis we achieved a record non-GAAP operating margin of 4.02%, representing a 64 basis point improvement from prior year.

And we have a lot to celebrate with our full year 2016 performance.

Concentrix had a strong year.

Record annual revenue of almost $1.6 billion, which is about 14% growth in constant currency, record contract signings of over $2 billion, with over 30 new logos signed during the year.

And Technology Solutions had many successes as well.

Solid growth in our Hyve Solutions business and meaningful growth in our SMB and public sector businesses, good execution in cloud offerings, our specialty business units, as well as broad-line products led to market share growth.

As a Company we received many accolades from our vendor and customer partners, including Concentrix which received 55 industry awards.

As I look back at 2016, there are so many positives to highlight.

We are clearly gaining momentum as we head into 2017.

Technology Solutions increased market share and margin.

Concentrix increased market share and margins, and has assembled a business portfolio complemented by Minacs' capabilities well positioned to reach double-digit adjusted margins as we exit 2017.

I want to extend a sincere thank you and congratulations to all our leadership and associates around the world for a terrific year.

I'm incredibly proud of what we've all accomplished together.

And on that note, I will turn the call over to one of those terrific leaders, Chris Caldwell.

Chris?

Thanks, Kevin.

2016 continued to be a year of building on a strong foundation while investing for the future.

It was topped off by a very strong Q4 with record revenue of over $500 million and a record adjusted operating income of slightly over 12%, as Marshall had mentioned.

We are very pleased that many things came together as expected to produce these results.

In 2016 we increased our presence in the healthcare, banking and insurance verticals, grew our portfolio of services, adding marketing services to the Minacs acquisition, adding global Fortune 1000 clients, delivery locations and staff around the world to support the organic growth of our business.

Our thought leadership was recognized this year with us winning twice the amount of awards and recognition from analysts and clients as we did in 2015, and placing in the top of many analyst reviews of our business.

On reflection, we were happy with the execution of the underlying business and strength that we continued to build in partnerships with our clients.

Specifically to Q4, we had a lot of initiatives that we executed on that helped deliver the strong quarter.

First, I'm very happy to report we came to a successful conclusion to our loss-making contract in the quarter with the finish in mid-October.

It was slightly profitable for the quarter, including a all costs for closing the contract early.

We look forward to refocusing our efforts on profitable growth now in that region.

Our integration efforts for Minacs are essentially complete and the business operates as one under the Concentrix brand now.

I'm also happy to say that during this period we won two new automotive programs that came from our purchase, while also expanding our presence with other accounts, leveraging the new footprint we acquired.

We added nine new logos in the quarter across our entire Concentrix businesses node.

We were aggressive in removing duplicate costs from the business in Q4, and are currently coming in slightly under our budget for the integration.

The process has gone well, and we are focused on capitalizing on new capabilities.

Things have been in line with our expectations.

The team executed very well around seasonal volume from some of our clients, gaining leverage over our cost base and optimizing as much of the volume as possible.

It's noteworthy to mention that we supported many of our clients through a very successful Black Friday in North America and a very successful Double 11 day in our China business during the quarter.

Overall, a very strong Q4.

Now turning to the first quarter, we continue to have seasonality in our business and will see a sequential decline in revenue and profit for the quarter from our always high Q4.

This is primarily driven by our e-commerce, consumer electronics clients that have less volume during the January, February months which result in less leveraging of our cost base.

The demand environment with the various geopolitical distractions has not meaningfully altered our outlook on our business or our footprint at this time.

After coming off a record high of signings for last year, we expect to see solid demand across our verticals as well as in the new business we acquired.

We also believe we have additional room to align spend from various areas in our existing business into more technology, automation, and domain expertise to further increase our value proposition and drive to a higher operating income, as we have publicly stated.

The value we provide is very multifaceted and is a combination of our footprint, technology, automation with deep domain expertise that we leverage to drive a better experience cost base for our clients.

We believe we are well positioned going into 2017.

We have a diverse client base by industry and geography, a clear focus on higher value markets and robust portfolio services with delivery locations around the globe.

I'd like to close by thanking all of our staff in the 125 delivery locations around the world and six continents for their hard work and commitment to Concentrix for the past year and their dedication to growing the business.

Now I'll pass the call back to Kevin.

Thank you, Chris.

We established our strategy and have made investments in growth and new business models long before 2017 arrived, and I believe they have and will continue to differentiate SYNNEX in our performance and in the markets in which we operate.

I take a significant amount of pride in the incredible SYNNEX team and their proven ability to adapt to changing environments.

We realize that 2017 represents a lot of unknowns.

However, I am optimistic about our ability to execute and to continue to drive shareholder value, as we've successfully demonstrated in 2016.

In our Technology Solutions business I am optimistic about our business and I feel positive about the investments we've made in pursuing growth categories related to cloud and mobility.

We continue to onboard new partners that have differentiated offerings in this space.

Our As-a-Services business platform and our Hyve Solutions business are examples of successful new business models we've created in growth markets.

And legacy IT will continue to be a large market in which we compete effectively with our value-add capability.

With our strong customer focus and execution excellence, we expect to be in a good position to increase our share in leadership in these markets.

Concentrix had another successful year of growth.

The key verticals in high growth/high value spaces such as healthcare, insurance, banking and financial services and technology and automotive, performed well in 2016.

With our talent and experience combined with the new capabilities brought on with the Minacs acquisition, our expanded global footprint enables us to serve even more customers and provide new offerings to our existing customer base, which now stands at about 450.

Over the past five years we've made meaningful progress in evolving our business, which has created significant shareholder value.

We are proud of our business results, which we believe will position us well going forward.

Consolidated five-year revenue compounded annual growth rate of 6.2%, Solid growth in adjusted operating margin, 64 basis points over the last five years, a Concentrix global workforce with over 100,000 associates delivering outstanding high value services.

Net income growing faster than revenue.

ROIC consistently higher than our weighted average cost of capital.

And strong shareholder returns.

Now turning to our guidance for the first quarter of 2017.

We expect to maintain our sales momentum in both our business segments and to maintain our strong profitability in Technology Solutions.

In Concentrix, as Chris noted, we expect to return to normal Q1 seasonality with some profit tailwinds now that the loss-making contract is behind us.

Our Concentrix pipeline, breadth of services and new logos serves as a great foundation for market share growth in Q1 2017 and beyond.

In Technology Solutions we expect a stable market in the US and Canada, with growth opportunities driven by cloud and other third platform based demand.

Our guidance reflects above market performance across both our business segments.

Once again, we raised the bar in 2016.

We expect nothing less than to increase our market share and create new pools of value that our customers demand.

We exist in a no-excuses culture and our associates are innovative, dedicated and passionate.

Again, I want to thank all our associates around the world for their individual and collective accomplishments.

I also want to thank our business partners and shareholders for their continued support.

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

Okay, thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question is from the line of Matt Sheerin of Stifel.

Your line is open now.

Yes, thanks.

And good afternoon, and happy new year everyone.

Just a couple of questions from me.

Regarding the Technology Solutions, obviously very strong margins there.

On revenue that looks like sequentially was below seasonal -- seasonality, if you go back and look at the last few years.

And I know that you had a very strong August quarter, but it looked like the mix certainly helped you in terms of margins and execution there.

Could you just give us more color on what drove the margins?

And was it that more transactional or commodity business that was weaker, which was a reason there?

And was the Hyve Solution business better than expected, and was that a big contributor there?

Thanks.

Hi Matt, it's Kevin.

Yes, overall in terms of our margin performance, we usually do have a stronger performance on the TS side of the business in fourth quarter as we're able to leverage the seasonally higher revenue in that quarter.

But in this quarter, really we had a lot come together.

Number one, it was just continued focus on profitable business, and we had growth in some of the higher value-added components of our business.

As I said in my prepared remarks, we continue to see good traction in areas such as network com, security, software and of course related to software is cloud.

These are higher value product areas where we're able to drive a higher margin component.

And that was certainly a big contributor to that.

In addition to that, as we've said in the past, there are always going to be puts and takes to margin.

In the case of fourth quarter, we certainly did have more takes than we had puts.

Just any color on why the non-so-called value-add business was weaker than seasonal?

Are there any signs of overall demand weakness, or was it just a very strong August quarter and tough comps?

In answering that question, I'd say the overall technology market is pretty solid and stable.

You can't paint the overall market with one brush.

There are a number of different areas of the market that have very strong growth.

Those are markets that we've been investing in for the past number of years.

And I think that we're making very good progress there.

The overall, say, broad-line part of the business, that demand is still stable.

But we're very selective in the business that we take.

Okay, great.

And just regarding Concentrix, you talked about seasonality there.

And it looks like sort of backing into your operating profit guidance, it looks like margins there will be back below 10%.

Just in terms of the revenue declines there, last year you were down high single digits.

Is that sort of a ballpark, given the Minacs business?

Trying to figure out the seasonality there.

Hey, Matt.

It's Chris.

The seasonality is relatively in line to what we saw last year.

So that would be a correct assumption.

Okay.

And then just regarding the profitability there, obviously you came off of record profits in the November quarter.

And I know you've been targeting 10%-plus EBITDA margin targets.

Do you think you can get there this year if you've got another strong second half, as you did last year?

So Matt, just for clarity, we're targeting strong operating income, double-digit margins and that is the goal and we continue to execute along that path.

And as Kevin mentioned in his prepared remarks, as we exit 2017 that is our focus.

Okay.

All right.

Thanks very much.

Thanks, Matt.

Thank you.

Our next question is from the line of Adam Tindle of Raymond James.

Your line is open.

Thank you guys, and congrats on a strong year.

Just want to build on the TS question from a revenue standpoint, in particular, on the February guide.

Looks like a return to more normal seasonality.

Could you comment on trends that you're seeing in December that give you confidence in a return to more normal seasonal patterns?

Have you seen any changing in buying patterns post election or year-end budget flush?

I guess the best way to describe it, Adam, is that it's relatively strong.

It certainly is stable out there.

If anything we've seen I guess, slightly enhanced optimism in particular in the US market since the election.

And with that, that probably does translate short term into at least a little bit stronger demand.

But even some of the broader macro signals that we're seeing out there, whether it be in public sector spending or in commercial spending especially in new technologies, gives us optimism that we're going to continue to see a pretty stable market, especially in the US which is the biggest market for us, with Canada following very closely behind that.

Overall, it's positive.

Okay.

And I just wanted to ask a question on margins.

It looks like guidance implies that total operating margins are going to be down 80 basis points sequentially.

That looks like the largest sequential decline in at least a decade.

The loss-making contract is gone from Concentrix and shouldn't be a headwind to operating profit dollars sequentially like it was in the past.

So I'm just trying to get a handle on how much of that abnormal decline is Concentrix versus TS, and more color on the drivers of the sequential margin decline.

Adam, so we don't view it as abnormal.

If anything we see adjusted margins growing from same period last year in terms of Q1.

So in terms of the thoughts and comments that Kevin made about where we plan to be and hitting our margin targets as we exit 2017, we still feel good about those.

And Kevin, I don't know if you want to add anything to that?

Chris had already spoken to the seasonal aspect of Concentrix, which every year is a new year, and if anything our Concentrix business is getting a little more seasonal, in particular with fourth quarter.

As you can see, we're able to really leverage that seasonally high Q4 where we have investment coming in Q3, but then we have a seasonal reduction in business in Concentrix in Q1.

So as we continue to grow that business and it becomes a bigger component of our overall results, I think what you're seeing is a bit more of a change Q4 to Q1.

Okay.

So maybe just clarifying.

So when taking out the loss-making contract doesn't necessarily impact linearity to Concentrix margins.

I think the thought was much of what drove the first half to second half swing was losing money on that contract and then making money in the back half of the year.

But what I'm hearing here is that's not -- we shouldn't be thinking of a more linear pace of 2017 just because that loss-making contract is gone?

In 2016 we did give you the numbers on what the impact of the loss-making contract was in Q1, actually every quarter.

So you know what that impact is.

But on top of that, there is seasonality in the Concentrix business, and that's actually what we're seeing here.

But as Marshall said, on a year-on-year basis we are expecting that our margins are going to be significantly better Q1 in 2017 over a year ago.

Okay.

Thanks and congrats.

Thank you, Adam.

Thank you.

Our next question is from the line of Ananda Baruah from Brean Capital.

Your line is open.

Hey, guys.

Congratulations on another solid quarter.

Happy new year as well.

I hope the holidays were great.

I guess a few for us, if we could.

Start out with Chris and Concentrix.

Chris, could you -- you talked to some of the dynamics in the prepared remarks, but I guess specifically on both the top line, which jumped up pretty meaningfully, both Q over Q and year over year, could you speak to what the most, I guess, poignant incremental contributors were to the revenue?

And then same question to the margin.

So totally get that the loss-making contract, sounds like you said actually turned positive on, sort of on a net basis for the quarter.

Can you talk about sort of all the margin dynamics in that business as well?

Was it all just loss-making contracts going off?

And then this is more of a clarification.

I thought I remembered you guys originally thinking that Feb Q would really be the Q where loss-making contract kind of did what it did in the November Q. Am I misremembering that, or did you guys actually kind of get to where you want to be a quarter early?

Thanks.

Hey, Ananda.

I hope I got your list of questions here.

From a revenue standpoint, there's a couple of things that are driving our revenue growth.

Clearly we obviously acquired the new business, but we've had very strong organic growth with our existing clients.

And to Kevin's point, a lot of our signings, we had record signings this year and a lot of new logos coming into our business this year.

We started to see that growth towards the back half of the year, as we mentioned in prior calls.

A number of dynamics that went into sort of the increase of revenue that we saw within the business.

Specific to Q4, we did call out seasonality.

We do support a number of clients that have their own seasonality to their businesses where we support them both in North America and China where we're able to get, and this ties to your earnings question, we're able to get more leverage out of the revenue because we're able to run our centers with more occupancy and more utilization through those periods of time, our technology that we get paid on a per-click mechanism, there's more clicks that go through.

So we just generally see more leverage within the business within Q4 driven by those e-commerce consumer electronics types of clients, and even service provider types of clients that we have within those spaces.

So a number of dynamics went into it.

In terms of the loss-making contract, just for clarity, we talked about this contract losing money generally for the whole year except for Q4 where we tend to make up a chunk of money, but then it would revert back to a loss in Q1.

And we called out last quarter that the contract was up in Q1 of 2017 regardless.

And really what we did was we forfeited some profit in Q4 to wind up everything in Q4 earlier versus taking a loss in Q1 just to be done with it and move on and refocus our resources.

So you are right that it does help us in Q1 from not having that drag.

But in theory we've got a lot of other stuff going on in the business that continues to drive to a better margin, better performance and more revenue growth within our business.

Okay.

That's actually really helpful.

Congrats on getting that whole thing wrapped up and on getting some of the new contracts ramping.

And it sounds like Minacs is actually off to a really good start.

Actually, I have two follow-ups.

Let me stay there for a second.

How much potential does Minacs have?

It sounds like you guys highlighted new wins off the bat and new contract wins.

It sounds like greater penetration in existing contracts.

How should we think about the right way to dimension what the potential there is over time?

So, what we've always talked about, and we haven't changed since the Minacs acquisition, is that our expectation is to grow twice as fast as the market in the business that we perform at.

With Minacs, there's two components to the business.

Some of the business we share with clients and the clients have been very, very happy with the acquisition and have supported it with more business coming into the combined organization, which we've been very happy with.

And to your point, we've also won expansion of programs from the existing Minacs client base that now are able to leverage the bigger footprint and some expertise that we bring to the table.

We don't see it wildly changing our growth trajectory, that we still are focused on sort of growing twice as fast as the marketplace.

And continue to drive margin expansion by sort of optimizing the programs and revenue that we have.

The Minacs acquisition does bring a lot of automotive expertise to our portfolio, which we're able to capitalize on, as well as I mentioned the marketing services organization that came with it that's really focused on driving revenue for the automotive industry.

And our goal is obviously over multiple quarters to extend that into other areas of our business.

So we see some good synergies from that perspective as well.

And Chris, just to clarify, the 2 times market growth comment.

I'm familiar with that -- actually let me ask you this, is that specific in Minacs' case to the automotive BPO industry, or is that still kind of consistent with the overall SYNNEX target as well?

Ananda, if you look at the BPO CRM market space, which we track in terms of growth indicators, the analysts will tell you anywhere it's from 3.5% to 4.5% to some say as high as 5% on a blended portfolio of services across multiple different verticals and multiple different geographies.

So we kind of take the middle line and say we should be growing double that in terms of our portfolio of services and our geographic diversity within our portfolio of clients.

Chris, just to add to that as well.

No question that in particular we acquire a great company like Minacs with their capabilities, but certainly much smaller than we are with the global footprint we have, the brand we have around the world.

That really does enhance the Company's ability to really leverage that portfolio and get into opportunities that would not have been available to them without the strength on Concentrix.

On that, we're going to have to let you go.

We can follow up with you one on one.

We just need to let others have an opportunity to ask questions.

You got it.

Thanks a lot, guys.

Thank, Ananda.

Thank you.

Our next question is interest the line of Shannon Cross of Cross Research.

Your line is open now.

Hi, good afternoon.

Ananda's a tough act to follow but I'll try here.

Anyway, my first question is with regard to the pipeline for Concentrix.

I know you talked about it being strong.

I'm curious if you can give any more details on what it looks like as we look at 2017, and if you can talk at all if you're expecting any changes with obviously Xerox spinning off Conduent and just any of the competitive landscape within the end markets that Concentrix looks at?

I think from a pipeline perspective, we don't generally kind of update frequently on a pipeline.

I'll say that we are seeing sort of stronger strength than we saw at the beginning of 2016 in our pipeline across our verticals and geographies.

And we're seeing some regions outside of North America that are stronger than what we saw a year ago, primarily based on the investments we made in some of those emerging markets which is fantastic and was part of our plan to execute on.

Quite happy with the diversity of the portfolio pipeline and the client segments that they're coming from.

In terms of sort of the general competitive marketplace, we see a few things.

We continue to see consolidation in the market.

We have a very, very good reputation with our clients for doing acquisition, integrating businesses and supporting their growth through those with our history with not only the IBM acquisition but subsequently the feedback we've gotten from some of the clients we've done with the Minacs acquisition.

So they see that as a lot of stability and our ability to go out and grow both organically and inorganically as well open to us.

Some of our competitors have not necessarily had that strength, and so we've been able to take share from those areas.

But clearly it's a competitive marketplace and we see other providers also looking at consolidating out of the business or into the business as they grow.

That we just see as opportunity to grow our share.

Great.

Thank you.

I have a question from a cloud perspective and pricing and competition as well.

We've heard some of the sort of -- some cloud services are starting to get a bit more competitive in terms of pricing.

People are looking for incremental ways to support customers.

It's clearly a huge growth opportunity, but I'm curious if you're starting to see some more pressure there?

What the offset could be in terms of pushing further into cloud services or software services, depending on what's available to offset any potential pressure?

Overall cloud is certainly a growth area and a great place for us to be.

We do play in a number of different aspects of it.

Your question, I assume, is related to specifically to the resale of cloud services on infrastructure as well as software.

So we certainly do support cloud, the whole shift to cloud along a number of our different business units.

Specific to software as a service and those service providers, that continues to be a growing business.

It's an annuity business and there's a lot of go-to-market capability that we need to invest in to bring the market to continue to mine new customers and grow them.

So we do demand from our vendor partners that we get paid fairly for what we do, and that certainly has been the case so far.

As other services get commoditized, which tends to be a bit of a smaller part of our portfolio, more on the infrastructure side, those ones, even though our own pricing environment has been relatively stable, I do acknowledge the comment that that part of the market could be under a little more competitive pressure.

But overall in the markets that we address, we seem relatively isolated from that right now.

Okay, great.

Just one last question.

On legacy technology, having been at CES and then talking to a number of vendors, it seems as if there's reason to believe that PCs and at least servers will be flattish, storage who knows, but it seems and I think to your comments that in North America at least, you're expecting relatively stable environment.

Based on what we've heard from some people I'd almost argue that certainly on a year-over-year basis it's an improving environment.

Is that a fair way to look at it?

And perhaps you're taking a more conservative approach, or is it just given the election and all the things that are going on, that there's too many uncertainties at this point?

First of all, I think especially when you talk about client devices, despite what you see in the headlines over the past couple of years, that it's been much more of a stable environment than not, especially in the commercial space.

The consumer market does fluctuate up and down but it does tend to be a smaller part of our business.

For us the legacy IT market continues to be an opportunity, and even an opportunity for growth because the way that you sell it is very, very different today than it was only a few years ago.

Whether you subscribe to buzz words like IoT or other types of solutions, we've invested pretty heavily in a very small number of solutions and in some key vertical markets where we have unique offerings that we take into, and commodity products are certainly part of that offering.

So we're not selling commodity products as commodity.

We're selling commodity products as part of an overall solution.

And that really is our opportunity to continue to grow and gain share.

But in addition to that, even for the larger commoditized business, say the broad-line business, we have inherent competitive advantages in that market.

We are more cost effective than most of our larger peers.

And we provide services that help our vendors actually grow and enable them to do business in markets that they're not able to effectively perform those services in.

So as a result of both of those, we've been able to execute effectively and continue to grow parts of that business over time and gain share.

Thank you.

Thanks, Shannon.

Thank you.

Our next question is from James Suva of Citi.

Your line is open.

Thank you very much.

It's Jim Suva from Citi.

Regarding your Concentrix business, you mentioned the turnaround of that on the challenged contract, or the lapping of it.

Looking forward, are there any other contracts or areas of improvement we should think of?

Or is this type of profitability, given the seasonality of the strength, kind of what we should expect going forward and then the core seasonality build on top of that?

It's Chris.

I think that contract we've been discussing is frankly very, very unique and hence why we called it out for multiple quarters.

We've always working within our portfolio of our clients and accounts to increase profitability by offering new services, optimizing our staff and by driving better results for our clients, which generally result in higher payments to us.

So in theory we are on that road path to driving to a double-digit operating income perspective on a consistent quarterly basis through exiting 2017.

And our goal is to hit that, and we're on track with where we expect it to be on that path right now.

So we're quite confident along that way.

Okay.

Thanks for the details.

And then my follow up is, switching gears to Hyve.

You made comments earlier in the call that I couldn't quite hear, might have been the call quality on my end.

But can you remind us, was your Hyve performance better than expected, in line with expected?

Because I know, if I remember right, the past history of the Company, sometimes there's been some quarters that have materially outperformed or some shifts in that business.

If you can just get us up to speed of how Hyve was versus expectations.

Thank you.

Hi Jim, this is Dennis.

Marshall noted in the prepared remarks that Hyve had a solid quarter, and the business did turn out to be a little bit better than we expected, than we forecasted.

We did expect a solid seasonally strong Q4, but it looks like we took a little share during the quarter and that allowed us to outperform.

We also had -- brought on a couple of new customers this time last year into Q1, so we had our first Q4 with them and those individual customers performed a little bit better than expectations.

And overall just the business is starting to mature and perform better each quarter.

All of those added up to a little bit better revenue than expected.

Thank you so much for the details.

I appreciate it.

Thank you, Jim.

Thank you.

Our last question is from the line of Louis Miscioscia of CLSA.

Your line is open.

Okay, great.

Thank you.

Sticking with Hyve for a second, obviously the move to the cloud has been monstrous, and we're hearing it's actually even going to accelerate more.

Should we think of the business that you have with Hyve growing at that same kind of pace, call it maybe 40% or 50%?

Or as you look out on 2017 is there some reason why it would not grow that fast?

Jim, I'll start and maybe Kevin can jump in.

As far as the growth rate, obviously we don't break out the business.

We don't talk about growth rates per business.

Clearly the cloud space is growing quite quickly.

For us to continue to grow the business, we need to add additional customers.

This business is somewhat similar to the Concentrix business in that it has a relatively small amount of customers.

In fact, Hyve has a fraction of what Concentrix does as far as customers in the business.

So it's key to us to continue to grow that business.

And again like Concentrix, it's a very long sales cycle to bring on a new customer.

We're very happy with our pipeline right now with Hyve, and we expect to transition the pipeline into customers going forward.

But to continue the growth rate at a high rate, that's what has to occur is conversion of pipeline and also growing with our existing base.

Okay.

Maybe a question for Chris.

I asked this last time, but hopefully we could maybe get a deeper answer from you.

In covering IT services and BPO, here RPA, Robotic Process Automation, is really starting to hit an inflection point which means maybe you all need less people but are able to actually deploy more solutions using automation.

Can you maybe mention how much it's penetrated, is it much of your work?

And how fast it's starting to grow within your own base if you think that you guys are leaders in RPA and automation and the extensions that are possibly a bit of AI and machine learning?

So Lou, a couple of things.

We've been working with RPA and chat bots and a number of other mechanisms to drive sort of that whole automation category within our client base for a couple of years now.

And we tend to see traction in certain verticals more so than other verticals.

So for instance e-commerce providers tend to be on the cutting edge, some of the financial institutions tend to be pushing a little further, and then we have some laggards who are just addressing it now.

We see it as a big area.

It certainly helped within our margin profile as we kind of drive some of those processes in place.

I will tell you it's not as simple as what some of the sales material is out there in terms of implementing, and because you're dealing with a lot of legacy systems, a lot of proof of concepts.

It's almost reselling the whole program over again by migrating to some of these technologies.

But we have a fairly large team in our organization that is working with clients to do that.

That's part of the reason we started the consulting practice over a year ago.

So we're seeing very, very good traction and expect to see even more of it over the coming years.

Our goal is certainly not to grow our headcount linearly with our revenue as part of our margin expansion focus.

Great.

Very nice profit in the quarter, so congratulations to you all.

Last question, again maybe back to you, Chris.

Whenever anyone is starting with a new customer, obviously expectations are always high.

What did happen with the problem contract that maybe you all didn't all foresee?

Obviously trying to implement that broadly, and just say geez, we wouldn't do that again.

We don't want to take a one-off situation and not extrapolate it to a best of practice.

Yes, to put something in perspective.

If you look at all the client programs we've launched, new clients we've onboarded over the last two years, and our success rate it's like 5.9 outside out of this one contract, which clearly this was a large contract that caused some loss.

I think really what happened was the volume sizing by the client that was given to us and the data that the client thought they could deliver to us turned out not to be accurate.

And the contract didn't necessarily have the right provisions in calibrating as quickly as it needed to on what the economic model should be.

So while we got it to where we needed it to do, it was just much smaller than both the client and we felt was worth the time and attention needed on this contract.

So lots of learnings from it.

But to put it in perspective, we've had tens of other launches with clients that have grown very, very rapidly, very, very successfully over the last two years.

So we do see it as sort of a one-off case.

Okay.

Great.

Good luck on the new year.

Thank you.

Thank you.

At this time there are no more questions in the queue.

I'll turn the call over to our speakers for any additional remarks.

Okay.

Well listen, thank you and happy new year to everybody.

Thank you for being on the call.

That concludes today's conference.

Thank you all for joining.

All participants, you may disconnect at this point.