新聚思 (SNX) 2021 Q2 法說會逐字稿

Good afternoon.

My name is Jeff, and I will be your conference operator today.

I would like to welcome everyone to the SYNNEX Second Quarter Fiscal 2021 Earnings Call.

Today's call is being recorded (Operator Instructions)

At this time, for opening remarks, I would like to pass the call over to Liz Morali, Head of Investor Relations.

Liz, you may begin.

Thank you, Jeff, and good afternoon to everyone.

Thank you for joining us for today's call.

With me today are Dennis Polk, President and CEO; and Marshall Witt, CFO.

Before we continue, let me remind everyone that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections or other statements about future events, including the benefits of the proposed merger to our various stakeholders, timing of the merger, capital structure and growth.

Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release in the Form 8-K we filed today and in the Risk Factors section of our Form 10-K and our other reports and filings with the SEC.

We do not intend to update any forward-looking statements.

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

Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related Form 8-K available on our Investor Relations website, ir.synnex.com.

This conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcasted without our permission.

I will now turn the call over to Marshall.

Marshall?

Thanks, Liz, and thank you to everyone joining us for today's call.

Before getting into the details of the quarter's performance, I would like to remind everyone that the year ago quarter was the first full quarter impacted by the COVID-19 pandemic.

Given the significant negative impact that this had on our fiscal Q2 2020 results, the year-over-year comparisons that we discussed today are greater than normal in magnitude.

Our fiscal Q2 results came in well ahead of our expectations, fueled by continued strong demand environment.

Total revenue for Q2 was up 31% year-over-year to $5.9 billion.

Gross profit increased 20% or $55 million compared to the prior year to $329 million.

Gross margin was 5.6%, down from 6.1% in the prior year, primarily due to product mix.

Total adjusted SG&A expense was $159 million or 2.7% of revenue down $14 million compared to the year ago quarter, primarily due to COVID-related expenses in the prior year.

Non-GAAP operating income was $170 million, improved by $68 million or 67% versus the prior year, and non-GAAP operating margin was 2.9%, up 62 basis points year-over-year.

Q2 interest expense and finance charges were approximately $23 million, and the effective tax rate was 25%, both in line with our expectations.

Total non-GAAP income from continuing operations was $109 million, up $44 million and improved by 68% over the prior year, and non-GAAP diluted EPS from continuing operations was $2.09, up from $1.26 in the prior year.

Now turning to the balance sheet.

We ended the quarter with cash and cash equivalents of $1.7 billion and debt of $1.6 billion.

Accounts receivable totaled $2.5 billion, down 12% year-over-year and inventories totaled $2.7 billion, flat from the prior year.

Our cash conversion cycle for the second quarter was 26 days, 17 days improved from last year.

The decrease was driven by DSO improvements and better inventory terms.

Cash generated from operations was approximately $280 million in the quarter and including our cash and credit facilities, we had approximately $3.1 billion of available liquidity.

We are pleased to report that our Board of Directors have approved a quarterly cash dividend of $0.20 per common share for the current quarter.

The dividend is expected to be paid on July 30, 2021, to stockholders of record as of the close of business on July 16, 2021.

Before moving to our Q3 outlook, let me provide a brief update regarding our proposed merger with Tech Data.

Since our announcement in March, we have established a capital structure for the planned merger through a new $5 billion credit facility and are on track with the debt financing for the merger.

Now moving to our outlook for fiscal Q3.

Revenue is expected to be in the range of $4.95 billion to $5.45 billion.

This estimate does not contemplate any impact related to the customer consignment change that we have previously spoken about.

At this time, we no longer expect the change to occur within our fiscal 2021.

Non-GAAP net income is expected to be in the range of $99.9 million to $110.4 million.

And non-GAAP diluted EPS is expected to be in the range of $1.90 to $2.10 per diluted share based on weighted average shares outstanding of approximately 51.9 million.

Our Q3 non-GAAP net income and non-GAAP diluted EPS guidance excludes the after-tax cost of $7 million or $0.13 per share related to the amortization of intangibles and $5.3 million or $0.10 per share related to share-based compensation.

Please note that these statements of our third quarter and fiscal 2021 expectations are forward-looking and that our actual results may differ materially.

I will now turn the call over to Dennis.

Thank you, Marshall, and thank you to everyone joining our call.

I want to start off with a special thank you, along with much appreciation, to our associates for delivering very strong results in Q2.

With our quarter starting off with the Tech Data merger announcement, there was a potential of this news being a distraction to our daily efforts.

As expected though, our team executed very well, provided exceptional service to our customers and continued to expertly manage through the ongoing dynamics of our industry and the pandemic.

For Q2, our results came in above our internal expectations due to continued demand for remote capability, digital transformation, the ongoing recovery of office and data center IT purchasing and overall above-market growth.

Essentially, every product category we participate in saw strength in the quarter, most notably, notebooks, Chromebooks, cloud, security, services, networking and collaboration.

Our manufacturing business also performed very well, with results above the high end of our internal forecast.

The demand came from across most all our customer segments, with SMB and public sector leading the way.

From a geographical perspective, all regions were at expectations or better.

Regarding our proposed merger with Tech Data, everything is going well.

As Marshall mentioned, we are set up for an effective financing of the transaction.

Our proxy has been filed and our shareholder meeting will be held next week.

And from a regulatory standpoint, we have received clearance from a number of governmental authorities and expect the rest to process through normal course.

As would be expected, the COVID pandemic has led to review delays in some countries.

We still believe our transaction will close in the second half of 2021, reflective of the typical 6 to 8 months announced to close time frame for a deal of this size and complexity.

Since the announcement of the transaction, we have continued to receive internal and external support for the merger.

The integration work we have performed since the announcement, albeit limited due to regulatory rules, further supports the strategic benefits of this deal that we discussed in March.

We look forward to sharing more when the transaction closes later this year.

Moving to our outlook.

Our priority remains on the health and safety of our associates.

As we enter the second half of calendar 2021, we are thankful for the effectiveness of the vaccine and are hopeful that all who desire one will have access as soon as possible.

Overall, we are optimistic about the IT spending environment, given the current strong demand, the expectation of more geographies reopening and the resumption of on-premise enterprise IT projects.

We believe these factors represent potential tailwinds for our business.

Specific to our Q3 guidance, we are planning for continued growth in our distribution business, but have added a bit of conservatism in the forecast this quarter, given the widely reported supply chain component challenges.

Considering our current backlog, still very strong, we know the business is there.

It just remains to be seen when it will transact.

For our manufacturing business, we used the low end of our internal range for forecasting purposes.

This low end for manufacturing would reflect a decline over Q3 last year.

This is a result of the very strong prior year quarter, the over forecast achievement in Q2 of this year and the overall unpredictable nature of this business.

Taking all these factors into account, we believe our Q3 view reflects a balanced outlook, which incorporates all the various puts and takes of the current environment.

Hopefully, a conservative view, and as always, we'll strive to do better.

In closing, I'd like to thank our customers and vendor partners for putting their trust in us to assist in growing their businesses and as always, our outstanding team of associates whose daily efforts are the reason for our success.

I am confident with ongoing execution, we'll continue to progress on our stated strategy of improving our core business, driving organic growth, increasing our value-added services and products and successfully closing our proposed merger with Tech Data.

With that, I'd like to open the call for questions.

(Operator Instructions) First question from the line of Ruplu Bhattacharya of Bank of America.

My first question is on margin performance.

Marshall, can you help us bridge the operating margin between fiscal 1Q and fiscal 2Q sequentially?

It looks like you had a stronger-than-expected revenue performance.

I mean revenues were up $900 million plus sequentially.

Just -- it looks like operating margins were down about 26 bps.

How much of that was FX?

How much of that was mix related?

And how much of that was COVID-related costs?

If you can just help us bridge that margin performance?

Sure.

Will do, Ruplu.

Yes.

Most of it was just mix related in terms of the sequential relationship from Q1 to Q2.

If you look at the underlying performance of the various sectors of our business, they all did very well.

It was a good overall balanced contribution from all locations, and as Dennis said in his remarks, across the spectrum of products and end markets.

Ruplu, I would just add, yes, we performed very well now through Q1 and Q2.

So in Q2, we had some compensation accruals we had to make to recognize that strong performance by the team.

Okay.

Maybe for my follow-up, can you talk a little bit about the higher consignment model transition?

Did I hear correctly that, that transition will not happen in 3Q or 4Q of this year?

And when it does happen in fiscal '22, what is the expectation for revenues per quarter impact?

Ruplu, you're right.

For 2021, as I said in my prepared remarks, we don't anticipate it transacting or taking place this year.

As we think about next year, we'll have to face that when we get there.

As we have said previously, the overall economics on a profit dollar basis, assuming ongoing growth in relationship with this customer, should not change, but the types of services that we provide will change.

And just finally a follow-up, Ruplu, would be, we're just staying flexible and assisting our customer in their needs.

Clearly, the consignment program is taking longer to execute.

And when they desire to do so, be it whatever time in 2021, we'll help them out at that time.

Okay.

Great.

If I can just squeeze in one more.

Just, Marshall, on the -- on your capital allocation plan, I know the transaction is expected to close later this year.

In the meantime, are you -- do you still have share repurchase authorization left?

How much is left on that?

And just your thoughts on your inorganic growth versus spending on buybacks until that transaction happens?

Ruplu, yes.

Right now, as we have said in our March discussion with you in regards to not only our results, but the merger, our overall goal right now is to ensure that we keep our leverage ratios appropriate as we enter into the transaction.

We do have an open repurchase program in place, but we anticipate that to be more anti-dilutive than it is actually going beyond that.

So that will be our intent heading into the merger.

And just in terms of the overall just allocation of dividends, we're happy to announce another $0.20 this quarter.

That won't change as we move forward.

But we really are thinking about keeping the position of strength we have on a real strong current and long-term capital structure, really well laid out as we go into the merger.

Next question from the line of Vincent Colicchio of Barrington Research.

Yes.

In your prepared remarks, you talked about most -- some of the regulatory approvals have occurred already.

Does that -- was that most of the approvals?

What -- to what extent are approval is remaining in the balance?

Vince, this is Dennis.

Yes.

So we have about 20 regulatory approvals to work our way through.

And I'd say at this point, we're more than halfway through.

Okay.

In terms of supply chain constraints, where are the biggest constraints?

Any color would be helpful.

Yes.

Really, Vince, across the board.

It's -- in client devices constraints networking, certainly CPUs, even displays and some print products.

So it wasn't a major product category that we serve that has not been affected by supply chain challenges, certainly over the last quarter, but really, frankly, over the last 15 to 18 months.

Thank you.

Nice quarter.

Thank you.

Next question from the line of Jim Suva of Citigroup Investment.

In your prepared comments, you mentioned about your forecasting and being conservative on the outlook.

My question is regarding that conservatism, is it probably accurate that your lead times and visibility for the demand side is better than expected, but you're being more conservative on the ability to procure supply?

Or are you also discounting the demand to some extent?

No.

I'd say, Jim, thank you for the question, and glad to hear you back covering our account again.

Thank you.

I'd say that it's really more the completion of the product and delivery is what's making us most cautious for the lead times is causing the conservative aspects in our guidance.

I should say I don't want our investors to oversteer too much on this conservatism that we're placing on our forecast.

To put a number around it, it's about $150 million to $200 million that we reduced from what would be our normal forecast for the higher or elevated challenges in the supply chain that we're experiencing right now.

As I responded to Vince a few seconds ago, supply chain challenges have been going on for a good 1.5 years plus, but with just an elevation in the tightness, if you will, of SLAs and everything it takes to get products to our customers, we decided to be a little more conservative this quarter to the tune of about $150 million to $200 million.

Great.

Thank you so much for the detail and additional commentary.

It's greatly appreciated.

Thank you, Jim.

Thanks, Jim.

Next question from the line of Adam Tindle of Raymond James.

Okay.

Dennis, I wanted to start, you talked about getting internal and external feedback since announcing the transaction.

You've had more time to talk to both vendor partners and our customers.

Just wondering if you could double-click on feedback from each of those cohorts and how should we think about potential revenue synergy and dissynergies associated with that?

Yes.

Adam, thank you for the question.

So what I want to first start off with is the positive feedback is from what we classify as our 4 main constituents.

Our associates, our customers, our vendors and our shareholders.

So since our announcement, we have received, again, positive feedback and recognition from all 4 categories, if you will.

Specific to your question regarding our customers and our vendors, so our customers are positive because they see us having a larger platform to service all their needs.

SYNNEX, prior to the merger, more of a niche from a vendor perspective and a geography perspective.

But combined with Tech Data, we're able to service customers with all product sets in all geographies.

So very, very positive and consistent feedback from that customer set as a result.

From a vendor side, again, positive feedback from the fact that we'll have again, a global platform to service vendor needs, wherever they want to sell their product.

And as important, we'll be combined and able to consolidate our investments to invest where their business is going, either in as a service, cloud or any other next-gen IT product.

Okay.

And I guess I just asked because when Tech Data acquired Avnet TS, one of their main competitors talked about $300 million or so of more share shift as more customer proceeding to diversify.

I'm just wondering if your -- if the investors should expect -- obviously, the long term makes a lot of sense, but near term, any expectations for dissynergies to the tune of that sort of magnitude?

Adam, our expectation is to grow the combined business.

And we know through every acquisition prior, and we expect through this acquisition, when you service your customer and your vendor partners well, you get more business, not less.

And that's our expectation for this transaction.

Got it.

And just as a follow-up, you talked about how a little bit of the integration work that you've been able to do so far supports the strategic rationale behind this.

Just wondering if you can also maybe double click on that comment, particularly, any color on -- from a system standpoint, how you're potentially going to decide which will go on a SYNNEX home phone system versus Tech Data's SAP.

What kind of integration would be helpful?

Sure, Adam.

Thanks.

So I want to emphasize, during this period, there's only so much we can do.

But the discussions we've been able to have, again, reiterate and support our thesis for this transaction, again, for the 4 constituents I talked about before.

We also talked about how culturally it was important for the 2 teams to come together.

That's been solidified as we've had discussions with our coworkers at Tech Data going forward.

So very, very happy about the cultural aspects that are going forward.

And also to your point about the benefits of the merger from potential cross-sell and other aspects, good ideas are coming out from those discussions as well.

But I have to emphasize, all preliminary.

We need to close this transaction and get together.

And at that point in time, I know we'll see all the benefits that we talked about back in March.

Next question from the line of Matt Sheerin of Stifel.

I wanted to drill down a little bit more on your commentary regarding the demand picture.

It sounds like it's fairly robust across the board, specifically in client devices and PCs.

Could you talk about the strength you're seeing, the SMB?

And is there -- is education market continuing to be strong, do you still see legs to that PC cycle?

And then on the infrastructure side, I know last quarter, you started to see a little bit of a pickup in on-prem infrastructure spending.

Are you continuing to see that?

And is that factored into your guidance?

Matt, thanks for the question.

Yes.

So you talked about 3 categories there of our business, and all 3 are positive, which is great to be experiencing right now.

Specifically, you called out SMB, certainly, that was one of the more challenged areas of our business this time last year as a result of the pandemic.

And it was, frankly, from our perspective, a slower recovery.

But in the past few quarters, especially Q2, we really saw a real strong comeback for the SMB environment.

So very encouraged by that, and we're hopeful that it continues throughout the rest of the year and beyond.

Regarding state and local and Fed business and specific to your educational comment, I called out in our prepared remarks, public sector was very strong.

That includes the education part of our business.

And we don't see that business really changing too much in the coming months and quarters.

It is affected by the supply chain challenges.

So we have to factor that.

But overall, our public sector business is very good.

And then your last point was about enterprise spending, again, another area that was hit very hard.

Q2 of this year was another quarter that was better than the last quarter.

We're still not year-over-year growth across all of our enterprise products, but we're starting to see growth in some of them.

And overall, just the -- that sector of our business had another positive incremental growth than the prior quarters from the pandemic time.

Okay.

Great.

That was very helpful.

And then on my follow-up regarding your guidance on revenue and in income, backing into the gross and operating margin, it looks like both will be up sequentially and back to or near the levels they were a couple of quarters ago.

Is that a function of mix issues as well, Maybe a benefit of mix?

Or anything else going on there?

Yes.

Matt, you're exactly right.

We see mix played a part in Q2.

And we also see mix probably benefiting some of those margin improvements heading into Q3.

Yes.

And Matt, I would just add, we're still not at point where everything is normal in our business and obviously normal in the -- from a pandemic standpoint.

But as Marshall said, the mix and the business is definitely on the pathway towards that, our Q3 guidance is another step forward.

Next question from the line of Ananda Baruah of Loop Capital.

Congrats on the strong execution and solid results.

Yes, I guess, for the first one of my two, it sounds like you guys are anticipating the IT spending environment to continue to strengthen.

And so I guess the first question is, are you seeing the component environment tightened further as well?

And then I have a quick follow-up.

Sure, Ananda.

This is Dennis.

So yes, we -- as we talked about in the prepared remarks, we are encouraged by IT demand overall.

We talk about a lot that in companies and businesses and even individuals invest in technology products, they often get strong returns, and we think that's only going to continue going forward as digital transformation and other investments are made by businesses.

So we're definitely positive about the marketplace that we're in right now.

Specific to your question about components, and are they part of the supply chain challenges and timing that we talked about, yes, we definitely include components in that category.

Okay.

And then just the PC business in general, it sounds like you guys are continuing to get really good demand and you sound sort of ongoingly optimistic about it.

Some of the monthly data that's come out of Taiwan, the ODM data, has been choppy, April to May.

Do you see any -- I guess the question is, are you seeing any change sort of in the cadence of demand from PCs in general?

That's it.

I appreciate it.

Sure.

Thank you.

At this point in time, really nothing significant to call out from a cadence perspective.

We're obviously balancing our comments today against the supply chain challenges we talked about and obviously receiving product and getting it to our customers.

So that's a factor.

But if you're talking about just overall demand, no, we feel good about overall demand right now and don't expect any change, certainly in the quarter that we're guiding to today.

Next question from the line of Shannon Cross of Cross Research.

I was curious, pricing.

I realize you passed through pricing, but I'm wondering what you're seeing in terms of price increases from some of your partners, and if you're seeing any hesitancy from a customer perspective due to elasticity of demand.

And I'm thinking more on the IT hardware side.

And then I'm curious, like from a component perspective, just are there any timing issues we need to think about within Hyve that might impact you, given some of the expected increases in commodity prices?

And then I have a follow-up.

Shannon, this is Dennis.

So I'll take it in reverse order.

From a Hyve standpoint, no, I do not see any challenges necessarily from a pricing standpoint that will affect any aspect of the demand in our business for that segment of our business.

As far as your overall question, certainly, we're in an environment where pricing is increasing more than not.

But we have not seen any major issues as far as the continuation of our sales cycles and working with our reseller customers with their end customers, such that it would hurt demand, if you will, in any way.

Okay.

And then maybe a bigger picture question.

I know we've talked a lot about revenue guidance and how you're thinking about it.

But I'm -- and I know you gave us the parameters of what to think about with regard to supply chain challenges.

But given how much you have exceeded expectations for the last few quarters, maybe if you could just walk through some of the puts and takes that you're thinking about as you put together your guidance for the quarter that are beyond the -- I think you said $150 million, $200 million (sic) [$150 million to $200 million] on the supply chain side, just so we can have an idea of things to look for that could potentially lead to upside, given you mentioned conservative several times in the script?

Thanks, Shannon.

So I'd start off with number one, what you just talked about.

We have about $150 million to $200 million of reduction in our forecast because of our conservatism on the supply chain challenges.

That's number one.

Number two, we talk about the fact that for our manufacturing business, internally, we have a forecast that has a low and high.

We always take the low end and factor that into the numbers we guide to today with you, because of the fact that, that business is very unpredictable.

We used the term lumpy, hard to predict.

So it always makes sense to guide to the low end and enjoy any benefit of performance above that.

So that's a factor that I think is important for investors to know, and that's something we've been calling out for some time now.

The third is just overall conservatism in our business.

We want to make sure we perform well and hit our metrics.

And so whenever we look at our numbers before we bring in to you and our investors, we obviously put a little bit of a discount on that just to make sure that when we produce our numbers at the end of the quarter, we meet them.

Okay.

And at this time, there are no more questions.

I will turn the call back to Dennis Polk for closing remarks.

Very good.

Thank you.

In closing, I want to thank the SYNNEX team for their dedication and efforts.

We have ongoing confidence in our business and look forward to the eventual combination with Tech Data.

Stay well.

Thank you.

Thank you.

And that concludes today's conference.

Thank you, everyone, for participating.

You may now disconnect.