Synnex Earnings Call Insights: End Demand, Operating Margins and Distribution

On Monday, Synnex Corporation (NYSE:SNX) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

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End Demand

Matt Sheerin – Stifel Nicolas: My first question Kevin, if you could elaborate a little bit more on your commentary on end demand, it sounds like consumer is a little softer, enterprise is still sort of chugging along. Could you give us a little bit more color particularly what you’re seeing? We’ve seen some from major vendors and even some resellers about some enterprise push outs, so could you just characterize more detail of the environment right now?

Kevin Murai – President and CEO: Yeah. Overall, when I look at the market environment today, where we saw great strengths by the way is really in our core IP distribution SMB was strong. I would tell you our enterprise though was probably bucking what you’ve heard a little bit, because we did see a good performance in our enterprise business. It was really more in the retail segment where we saw some softness. Part of it I think was driven though by some back-to-school business being pushed a little bit further out likely driven by Windows 8 and really where PC products up until this month had not had any free or low cost upgrade to Windows 8.

Matt Sheerin – Stifel Nicolas: And as you look in terms of your guidance for the August quarter Kevin, I guess the midpoint is just under 5% or 4% or so, does that take into account still muted outlook for retail or are you expecting that back to push for the very reason you just stated?

Kevin Murai – President and CEO: You know, I think we do expect to see a good back-to-school season this year. So, we’re kind of assuming that we’re hitting the bowl down in the middle, in terms of what retail is going to be. I do believe that with the new equipment, the new PC, laptops and ultra-thin that are coming out for back-to-school coupled with Windows 8 at least in terms of upgrade that we should see at least a good back-to-school season.

Matt Sheerin – Stifel Nicolas: And just lastly, on GBS, I know you have a lots of encouraging signs in terms of the pipeline there and you’re making investments. What do you expect – when should we expect to see that that margin expansion start to kick in when the revenue flows through and you don’t have any cost and so, are we talking of this fiscal year or beginning of next year because if you can give a some sort of timeframe?

Kevin Murai – President and CEO: And Matt that’s a – please understand, that’s a bit of a difficult question for us to answer, because, on the one hand you know, when we look at the overall business the core services business is actually performing very, very well. In fact core services does operate at EBITDA into the double digits already. As we have more, more success in winning new business, for a large part of that business, the initial ramp up of that business includes a number of months where we are paying all the cost to do the on boarding of new people, the training in some cases incremental facilities and so, as we bring on more and more new sales. Obviously longer-term as we get them on boarded the profitability does improve as well as the top line. However because we’ve been so successful in winning that, business it’s actually hard to pin point an exact quarter when we’re going to actually see that profit margin get back up to say a double digit number.

Operating Margins and Distribution

Brian Alexander – Raymond James: Can you guys elaborate on what you mean by more normalized operating margins in distribution? I mean do you expect operating margins and distribution to decline over the next few quarters and how does that factor in Japan maybe just give us an update on whether Japan profitability continued to improve. I am just wondering how we should think about distribution operating margins going forward excluding the HDD benefits. I know you got in Q4 and Q1 so kind of normalizing for that are we still expecting margin expansion is the question.

Kevin Murai – President and CEO: Brian there is a few moving parts here I think that over the past few quarters. The benefits from the hard drive shortages, have certainly have provided benefit back to our gross margins and our operating margins as well. If you go back in time and you look at what we’ve delivered in terms of our operating margin, we’ve seen a pretty good trend of increasing profitability. When you factor in the comments that both Thomas and I spoke of, hard drives being one, vendor incentives that we experienced as well for strong incremental growth in certain markets, you’ll actually see that we still continue to improve our margins. Our margins I would tell you have a lot of headroom and continuing to improve because the underlying business strategy that we have, more and more services being wrapped around products we sell, a continued shift of mix of our business to more technical-type products and solutions as well as GBS continuing to grow and that margin profile improving over time. So you can – we do fully believe that our margins will continue to expand but it’s just been a number of few quarters over the past year where we’ve had some I guess out-of-ordinary benefits to our gross profit.

Thomas Alsborg – CFO: This is Thomas. Just to tag on a little bit to that. So in addition to the obvious the last few quarters having some benefit of the hard disk drive shortage, one of the reasons we called that – (made out that) comment too is on a year-over-year comparison as you look at Q3 2012 to Q3 2011, of course Q3 2011 also has the anomaly of the $4 million ear-out that we called out on the call. And then we also wanted to make sure it’s understood that a couple quarter including Q3 of last year but recently other quarters as well have really benefited from normal business operations, but really benefited from some very nice vendor rebates. But as Kevin said, our expectation is that we will continue to see our operating margins moving up (into the right). So we just want to put a little bit of context because there was a few moving pieces in that year-over-year compare.

Brian Alexander – Raymond James: I apologize if you touched on this, I did hop on a little late, but in GBS it sounds like your significant wins continued this quarter. Did you quantify or could you quantify those new wins and maybe give us some perspective of total contract value or backlog kind of relative to the $48 million in revenue run rate that you are on as of this quarter?

Thomas Alsborg – CFO: I’ll start with that and then I’ll invite Chris or Kevin to (byte in). So we shared with you a trailing 12-month annual business win. So to be clear, as an example, if you look at Q2 and you look at the amount of business that we wrote or contracts that we won over the last four quarters, and this is on an annual contract basis, that number as of the end of Q3 was about $34 million worth of business. That’s exceptionally high compared to our normal trend. If you go back just six months ago the same number, again trailing 12-month wins contracts would’ve been about $10 million. So we’ve more than tripled our run rate in terms of wins of business. But I should also point out that some of these wins are not just annual. In fact many of them are multiyear contracts. But the reason we wanted to share this is because we’ve talked a lot in recent quarters about significant investments we’re making in the GBS (mixes) in order to go out and win new business and we thought it would be helpful for you to hear the kind of business we’re winning as a result of those investments. I do want to point out though that this is not necessarily a number you would add to whatever forecast you might have had for us for the next 12 months without also considering there are always puts and takes in the business, and for example, that is only the takes and not puts, there could be going forward sun-setting contracts and business that we may release for one reason or another, so you have to be careful what you do with the number we shared with you. Finally, I do also want to mention to you that this is not a metric we intend to share on a regular basis, simply because we think for competitive purposes it’s not advantageous for us to do that, but we think it’s useful in the context of explaining why the investments we’ve made are weighing on our operating margins.

Brian Alexander – Raymond James: So, what’s kind of the average length of contract would be my follow-up to that, Thomas, so over how many years should we expect that $34 million to be recognized? Part two, does that support double digit growth for GBS for the foreseeable future? And part three is, could you help us understand, if not quantitatively, directionally is that more on the renewal side or the call center side, and then I’ll get back in the queue. Thanks.

Christopher Caldwell – SVP and General Manager, Global Business Services, Concentrix: Hi, Brian. It’s Chris. So, the first question regards to the contract length. Most of the contracts that we’re seeing now are between three and five years. While we’ve still had some annualized, I’d say that we continue to make more and more progress in multiyear deals, which tend to have a higher startup costs just as note, because then you’re amortizing over a longer period of time. Also in terms of supporting double digit growth, our goal is always to go fast in the market, and we continue to see that with the wins we are very confident that will continue along, most of the deals that we are winning have a renewals component to it in utilizing our technology and our investments, which also tends to have a higher drag in regards to the investments we need to build out those platforms prior to them going into production.

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