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Edited Transcript of SNX earnings conference call or presentation 3-Oct-18 9:00pm GMT

Q3 2018 SYNNEX Corp Earnings Call

Fremont Oct 5, 2018 (Thomson StreetEvents) -- Edited Transcript of SYNNEX Corp earnings conference call or presentation Wednesday, October 3, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Caldwell

SYNNEX Corporation - Executive Vice-President

* Dennis Polk

SYNNEX Corporation - President, CEO & Director

* Marshall W. Witt

SYNNEX Corporation - CFO & Principal Accounting Officer

* Mary Lai

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Conference Call Participants

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* Adam Tyler Tindle

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Francis Carl Atkins

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Jim Suva

Citigroup Inc, Research Division - Director

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Sean Kilian Flanagan Hannan

Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

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Presentation

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Operator [1]

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Good afternoon, and welcome to the SYNNEX Third Quarter Fiscal 2018 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 Ms. Mary Lai, Head of Investor Relations at SYNNEX Corporation. Miss, you may begin.

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Mary Lai, [2]

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Thank you, and welcome to the SYNNEX Corporation's Earnings Call for the Third Quarter Fiscal 2018 Ended August 31, 2018. Joining me on today's call is our President and CEO, Dennis Polk; our CFO, Marshall Witt; and our President of Concentrix, Chris Caldwell.

The executive team will first review third quarter fiscal 2018 financial results followed by an update to our pending acquisition of Convergys, which will close this Friday, October 5. After the prepared remarks, we will open the call to a Q&A session. As a reminder, today's call is being webcast live and will be recorded.

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, production, demand, investment, growth, revenue, non-GAAP operating income, non-GAAP net income and diluted EPS, amortization of intangibles, acquisition-related integration expenses, margin, adjusted operating margin, costs, tax rate, seasonality, synergies, integration, accretion, benefits, timing and other aspects of the proposed acquisition, dividends and overall performance. 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 fiscal 2017 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 the 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 rebroadcasted without our specific written permission.

With that, I will turn the call over to our CFO for the financial update. Marshall?

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Marshall W. Witt, SYNNEX Corporation - CFO & Principal Accounting Officer [3]

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Thank you, Mary, and thank you all for joining us today. Before I walk through our third quarter results, I want to highlight that both SYNNEX and Convergys held our separate shareholder vote meetings this morning and both companies received approval for the acquisition of Convergys. We expect the transaction to close this October 5, and Dennis and Chris will provide additional thoughts on the pending transaction later in the call.

First, I will review our third quarter results and key financial metrics and then conclude with guidance for the fourth quarter of fiscal 2018 before turning the call over to Dennis. Our third quarter revenue beat midpoint of our guidance and both non-GAAP net income and diluted EPS solidly beat the high end of our guidance. On a consolidated basis, total revenue was a third quarter record of $4.9 billion, up 15% compared to $4.3 billion in the same quarter last year.

FX did not have a material impact on consolidated revenue growth. Technology Solutions revenue was $4.4 billion, representing an increase of 17% over the prior year period. Concentrix revenue was $492 million, down 1% from $496 million in the prior year quarter. Adjusted for FX, Concentrix revenue was consistent with the prior year period.

Now turning to gross profit, our third quarter gross profit dollars totaled $433 million, up 16%, or $58 million versus a year ago. The increase in gross profit dollars was primarily driven by positive contribution from the Westcon-Comstor acquisition and year-over-year revenue growth in the Technology Solutions segment.

Our gross margin was 8.8%, an improvement of 6 basis points from the prior year quarter. Technology Solutions and Concentrix both reflected expansions in gross margin. The increase in our Technology Solutions gross margin was driven by the Westcon-Comstor acquisition, and due to product and services mix, Concentrix's gross margins were materially higher than the prior year period.

Total adjusted SG&A expense was $271 million or 5.5% of our revenue, up $35 million over the prior year quarter in absolute dollars and consistent as a percentage of revenue compared to a year ago. The increase in SG&A was primarily due to the acquisition of Westcon-Comstor and supporting the revenue growth in our Technology Solutions segment. On a sequential basis, adjusted SG&A improved by over $6 million.

Third quarter consolidated non-GAAP operating income of $163 million is the ninth consecutive quarter of year-over-year growth, an increase of $23 million or 16% growth. Non-GAAP operating margin of 3.3% was consistent with the prior year period. Quarter-over-quarter, we posted a 25 basis point improvement.

At the segment level, third quarter Technology Solutions non-GAAP operating income was $120 million, up 18%, or $19 million from the prior year period, primarily benefiting from the Westcon-Comstor acquisition and Technology Solutions' operational improvements. Adjusted operating margin was 2.7%, up 24 basis points from the prior quarter and consistent with the prior year period.

For Concentrix, non-GAAP operating income in the quarter was $43 million or 8.7% of revenue, up 11% in operating profit dollars and expanded 92 basis points in margin year-over-year. This came in line with our expectations of operating margin expansion year-over-year and it reflects our continued progress towards our double-digit operating margin target for fiscal 2018.

Third quarter net total interest expense and finance charges were approximately $20 million, up $10 million from the prior year quarter. The increase was due to higher borrowings to fund acquisitions and ongoing working capital requirements and an overall higher interest rate environment. For Q4, we believe a range of $33 million to $34 million is the appropriate level for our quarterly net total interest expense and finance charges.

The effective tax rate of 27.8% for the third quarter came in line with our targeted range of 27.5% to 28.5%, versus 34.3% in the prior year period. We expect the tax rate to be in the targeted range of 28% to 29% for the fourth quarter, which excludes the impact of any true-ups related to the tax reform, but includes the impact of the Convergys acquisition.

Non-GAAP net income was $102 million, up $15 million, or 18% from the prior year period. Our third quarter non-GAAP diluted EPS was $2.57 or $0.41 -- or up $0.41, or 19% over the same period a year ago. This represents the ninth consecutive quarter of year-over-year growth.

Turning to the balance sheet. Our cash receivables totaled $3 billion on August 31, 2018, for a DSO of 55 days, up 15 days from the prior year quarter, primarily due to the impact of the Westcon-Comstor acquisition and timing. Inventories totaled $2 billion or 42 days at the end of the third quarter, improved 11 days year-over-year. This is reflective of inventory management efficiencies, higher stocking requirements in our Hyve business during fiscal 2017 due to component shortages and the impact of the Westcon-Comstor acquisition.

Days payable outstanding was 46 days, up 3 days from the prior year third quarter, primarily due to the impact from the Westcon-Comstor acquisition. Hence, our overall cash conversion cycle for the third quarter was 51 days, an increase of 1 day over the prior year period.

From a financing perspective, our debt-to-capitalization ratio this quarter was 43.9% and consistent with expectations. Preliminary cash used in operations was approximately $103 million for the third quarter, resulting in our trailing 12-months operating cash flow from operations of a positive $217 million. At the end of Q3, between our cash and credit facilities, SYNNEX had over $3.7 billion in liquidity available to fund growth, including term loan commitments of $1.8 billion to fund the Convergys acquisition.

Other financial data and metrics of note for the third quarter are as follows: depreciation expense was $23 million; amortization expense was $26 million; capital expenditures for the quarter was approximately $25 million, primarily due to continued investments and geographic expansion in Concentrix; trailing 4 quarters, ROIC was 8% and 11% for adjusted ROIC.

We repurchased approximately $10 million or approximately 102,000 shares of our stock in the third quarter. At the end of the third quarter, the remaining authorization under our 3-year share repurchase program is approximately $244 million, out of a total of $300 million authorized by our board back in July of 2017.

Fiscal 2018 year-to-date, we have purchased 553,000 shares of our stock or approximately $56 million total. This sets us on pace to have a record year of buybacks. As described in our press release issued on September 25, the Board of Directors approved a regular quarterly cash dividend of $0.35 per common share to be paid on October 26, 2018, to stockholders of record as of the close of business on October 12, 2018. With the anticipation of the CVG close, which is about 11.5 million of additional shares, will also benefit from the dividend.

Now moving to our fourth quarter fiscal 2018 outlook. We expect the Convergys acquisition will close on October 5. And accordingly, our fourth quarter guidance includes Convergys' forecasted financial performance for a period of slightly less than 2 months. Approximately 11.5 million shares are expected to be issued, and for the quarter, represents a weighted 7.2 million shares that impact -- that have an impact on non-GAAP diluted EPS.

We expect revenue to be in the range of $5.2 billion to $5.4 billion. The Convergys portion of this range is expected to be approximately $425 million, with an adjusted operating margin of approximately 10%.

We also wanted you to be aware of some revenue headwinds that relates to net revenue. Our forecast reflects an approximate 5% increase in Technology Solutions' net revenue compared to the prior year quarter, given our continued increase in sales of specialty services and cloud solutions such as software, licenses and hardware and software bundled services.

Non-GAAP net income is expected to be in the range of $137 million to $146 million and non-GAAP diluted EPS is expected to be in the range of $2.90 to $3.10 per share based on weighted average shares outstanding of approximately 46.8 million. Non-GAAP net income and non-GAAP diluted EPS guidance excludes after-tax costs of approximately $88.5 million or $1.87 per share related to the amortization of intangibles and acquisition-related and integration expenses.

Please note that these statements of fourth quarter fiscal 2018 expectations are forward-looking and actual results may differ materially.

Now I'd like to turn the call over to Dennis.

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [4]

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Thank you, Marshall, and thanks to everyone joining our call. We are very pleased with our third quarter results announced today. We saw continued momentum in both of our business segments, resulting in new records for third quarter revenue, adjusted profits and EPS.

We generated third quarter revenue of $4.9 billion, representing 15% growth from the prior year period. Along with this growth came outstanding execution and earnings leverage in our business, resulting in our non-GAAP EPS of $2.57 per diluted share.

We are focused on profitable growth and delivered in Q3. Some highlights from the quarter. Our Technology Solutions segment had a record third quarter revenue of $4.4 billion or a 17% increase from the prior year period. Solid execution in our core business and contribution from Westcon-Comstor drove the year-over-year growth.

From a product standpoint, we saw growth in virtually all of the product and service categories we offer. In terms of customer end markets, we also saw growth in every major division, including SMB, enterprise, consumer and the public sector. From a geographic perspective, the U.S. market led the way with very strong growth and we had solid performance from our Latin America business as well.

Regarding our Westcon-Comstor business, we are very proud to report that the results of this business exceeded our expectations in year one. We accomplished these results while integrating the North American business earlier than initial expectations and completed this with less than $10 million of total integration costs, a relatively small amount when considering the size of this acquisition. We asked a lot from our Westcon-Comstor team members in the first year and they delivered. I want to thank them for their efforts and dedication.

I'm also very pleased that we now have one full quarter completed under a single system in North America and we expect the revenue synergies of this combination to accelerate moving forward.

Lastly, regarding Technology Solutions, our Hyve systems design and integration solutions business performed in line with expectations for the third quarter.

Turning to our Concentrix segment. Concentrix posted third quarter revenue of $492 million. As Marshall indicated, we expanded our adjusted operating margin by nearly 100 basis points year-over-year and the overall performance was in line with our expectations this quarter. This was also the ninth consecutive quarter of growing adjusted EBITDA year-over-year. I'm very pleased with the Concentrix results for the quarter and year-to-date.

Chris has articulated during our calls over the last year that we have been focused on 2 main priorities: first, improving the mix of our business by selectively identifying lower-margin services and replacing it with higher value-added opportunities; second, improving our RPA and digital service offerings and balancing out necessary business investments, while improving our efficiency overall. This has resulted in the expected moderation of our top line growth, which is more than offset by the improvement in our profitability and service capabilities.

I'm also very pleased with the execution of the Concentrix team subsequent to the Convergys announcement. For more on the Concentrix business, I will now turn the call over to Chris.

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [5]

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That you, Dennis. In the third quarter, we continued our focus of driving operating leverage in the business as we deployed RPA, digital and other technology solutions that resulted in some revenue erosion but, ultimately, a better profit profile for our business.

We also saw additional ramps in the quarter in new countries as we built out infrastructure to support the new wins. This resulted in revenues of $492 million and adjusted EBITDA of $60 million. Year-over-year, our revenue growth was essentially flat but our adjusted EBITDA grew nearly 9% year-over-year and our non-GAAP operating income expanded 92 basis points to 8.7%.

Underneath the flat revenue, there is also a lot going on to position us for further growth. We have been very selective about the opportunities we're engaging in, but more importantly, evaluating the portfolio of programs we intend to continue. On a year-over-year basis, that equates to about 9% of new revenue growth to stay flat.

While we don't guide further than one quarter out, we are coming to an end of replacing some of the business and believe that we will again see revenues growing shortly on top of the acquisition of Convergys. As an example, year-to-date, we have signed 59 new clients, which is already ahead of where we were for all of fiscal 2017. We are very fortunate to be partnering with leading companies across all industries, and this past quarter in particular, to be able to strengthen our position in key industries of automotive, banking and insurance.

We were recognized in the quarter with many industry and client awards, but 2 awards in particular I'm very proud of. First, our team in India was recognized for Best Inclusion and Diversity Strategy. Having over 100,000 staff in 5 continents, it's important to attract, retain and develop the best talent in every market.

The second has to do with innovation we provided to a client as recognized by an industry group as the best omnichannel experience in our travel and transportation vertical. It's great to see that the industry recognizes the differentiation we bring to the table here.

Now turning to our Convergys acquisition, which we mentioned in today's press release we expect to close on October 5. We're incredibly excited about now starting to work on the integration and growth of the organization. Since the announcement of the acquisition, we have been able to spend more time with clients and staff of Convergys, which has given us greater confidence that this transaction is the right move for Concentrix to further differentiate ourselves in the marketplace.

As noted in our September 13 press release, we have accelerated our first year net cost savings to $75 million and believe we will overachieve $150 million over the next 3 years. We expect the vast majority of integration work to be completed within 12 months and the rebranding of Convergys to Concentrix to be completed by the end of January 2019.

We have very, very clear focus on diversifying the revenue, similar to what we have done at Concentrix, which is improving the mix as well as driving growth as a combined organization within 12 months. We will keep you updated on achieving our synergy targets over the next coming quarters.

Looking forward to the fourth quarter, we expect to capture almost 2 months of Convergys revenue and expect to see the same uptick from our traditional clients' seasonal cycle, as we've seen in the past. We will continue to make smart investments for the future of our business, as we have done all throughout this year, and drive towards double-digit non-GAAP operating income for the Concentrix business.

Finally, I'd like to say thank you to all our dedicated staff around the world who make us proud every day for what they accomplish for our clients and a very big welcome to all the new Convergys staff, who will be joining us shortly.

I'll turn the call back to Dennis.

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [6]

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Thanks, Chris. Now looking at our fourth quarter outlook. Within the Technology Solutions distribution business, we expect to continue to benefit from the positive market conditions and, as always, we will attempt to grow faster than our marketplace. The technology sector remains healthy and we are seeing solid demand for the technology products and solutions we offer.

The IT channel is in a positive position as well. Specifically, according to NPD industry data, U.S. distribution revenue reported its ninth consecutive quarter of channel growth year-over-year at the end of this calendar June quarter.

For our Technology Solutions' Hyve business, revenue will be down year-over-year. This is partially due to last year's Q4 being a very strong quarter where we had pull-ins occur and partially due to our focus to ensure we are taking profitable business with solid working capital returns.

We are still focused on diversifying the customer base of Hyve and recorded a nice win in the quarter, but we will still have a concentration with our top customers. We continue to reiterate that this business has a project-based profile and remains difficult to forecast. This is not a reflection of the health of the business as we continue to have a strong customer relationship and also continue to invest in the business for long-term growth.

Lastly, as Marshall indicated, we have experienced a shift in our business over the past year where more products we sell qualify for net revenue treatment. While a headwind to our top line growth for Technology Solutions, there is no effect to our operating profit or bottom line.

For Concentrix, as Chris indicated, our fourth quarter guidance reflects approximately 2 months of contributions from Convergys. Q4 will be an obvious quarter of transition and integration for the Concentrix business, but we do expect that the legacy Concentrix business to perform in line with historical seasonal trends for Q4, and we are still focused on delivering double-digit operating margin for fiscal 2018.

I also want to provide some commentary as we look ahead to fiscal 2019. We are aware that near-term changes in our business will cause challenges to understand the coming period, including: the Convergys transaction; revenue mix shifting, resulting in more net revenue accounting; and Hyve revenue fluctuations. With this in mind, and assuming no major macro change in the business environments we operate in or specific challenges in the IT industry that are out of our control, we believe in fiscal 2019 we can achieve non-GAAP EPS of $11.40 to $11.90 per diluted share.

We believe this can be accomplished as a result of the combination of organic earnings growth in our legacy business and the expected mid- to high single digit in accretion expected from the Convergys deal. We do not plan to update this range regularly moving forward, but hope that this provides a helpful view into our near-term prospects.

In closing, I would like provide some additional thoughts pertaining to the Convergys acquisition. We are very excited that our respective shareholders approved this transaction today and we have been granted all regulatory approvals needed. We will formally close on October 5. The combination of Concentrix and Convergys will be very beneficial to all our constituents, including associates, customers and shareholders.

As we have discussed at the time of the announcement of this transaction, this combination creates a clear leader in the customer relationship management BPO space. Our combined offering, geographic footprint, scale and team of industry leaders will resonate with the customers we serve and our joint prospects. The efficiencies and savings gained from this merger will not only deliver positive financial returns but will also drive improved customer satisfaction and service.

I've had the pleasure to meet many leaders of Convergys over the past few months and I want to formally welcome them and the rest of the Convergys team, to the SYNNEX and Concentrix family. I know Chris will be a great leader of the new Concentrix business and he will ensure that the values and cultures we strive for are delivered.

As we transition to Q&A, I want to take this opportunity to thank all our associates around the world for their hard work and dedication, and thank our business partners and shareholders for their trust and support in us every day.

With that, I would like to open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Frank Atkins with SunTrust.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]

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Wanted to ask first, can you highlight what drove the margin improvement on the Concentrix side? And what are your expectations as you move into 2019 for margins with the combined entity, including Convergys?

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [3]

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Frank, it's Chris. So a couple of things drove our margin expansion. One, as we mentioned, we've been putting in more RPA into our business and some more automation, which has generally resulted in uptick in margin. We've also been getting more leverage out of the infrastructure that we've been building within the deals that we've launched back in last September. So we're starting to see some good margin additions from that. And then the last part of the margin has just been really the focus on the high-value strategic verticals, getting the wins, and they tend to have longer ramp times as you know. And so we're starting to see them become sort of at a maturity level where we're getting that consistent margin out of those that we started 7, 8, 9 months ago. Our expectation is this trend is going to continue into 2019. And as we bring the Convergys business together, clearly, we've got the synergy numbers of about $75 million to take out, which will help our margin profile as well. And the similar things that we're doing in the Concentrix business and have been doing this last year will be what we are doing with the Convergys business as that comes together with the existing Concentrix business.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [4]

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Okay, great. And for my follow-up, what was the impact from Westcon in the quarter? And can you talk a little bit more about some of the net revenue shifting and the impact on revenue as we look forward to '19 in the Technology Solutions business?

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Marshall W. Witt, SYNNEX Corporation - CFO & Principal Accounting Officer [5]

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Yes, Frank. This is Marshall. So we don't break out the absolute dollars for Westcon-Comstor bid, and Dennis's comments, certainly delighted with the results, exceeded our expectations. The full year, which, of course, concluded for us at the end of August, also exceeded our expectations for the collective year. The cross-sell opportunities, now that we're on one system in North America, puts us in a great position as we enter 2019. And then, to answer your question on the net revenue, just to make sure I understood that, what we're seeing is a continued uptick in some of those sales-related areas where net revenue is required. Frank, you probably appreciate this. In the IT sector, it's a lot more prevalent than in the BPO customer care space, where you serve as an agent, but you still handle a lot more of the transactions. But it's only the speed that you're allowed to record rather than the total revenue and the total cost.

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Operator [6]

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Your next question comes from Adam Tindle with Raymond James.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [7]

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I just wanted to start on Concentrix margins. I was surprised to hear that you're still targeting the double-digit margin in fiscal '18 based on the EPS guidance, and I think Concentrix's operating margin would need to be near 14% in Q4 for that math to work. So if you could just help us understand why that uptick would happen to keep the 10% goal for the year intact. And I've just got a follow-up on that too.

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [8]

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Yes, sure, Adam. So if you look at our business through the course of the year, we've added to our non-GAAP op income pretty significantly, including this quarter, sort of almost 92 basis points. And if you look back at our last 2 Q4s, you'd seen us in the 12 -- mid-12 range. And so our expectation is that we're going to continue that trend through to Q4. And to your point, math is relatively easy to do that, it's within our expectations to be able to hit that double digit for the whole year that we've been working on.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Okay, maybe just sticking on the BPO subject. Can you just talk about why you increased the synergy targets for Convergys? I would have thought that you still need the deal to close to get a better look at the cost structure and opportunity there. So what led to increasing the synergy targets? And how can we think about the accretion thereafter?

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [10]

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Yes. So for sure, Adam. So clearly, we go through the due diligence process. We have our own opinions around what we think we can do from leveraging our infrastructure and getting rid of duplicate infrastructure. I think in the past period of time, we've now had sort of planning sessions with the Convergys team. The Convergys team have been really outstanding at coming forward with ideas of what they can leverage from our infrastructure and what additional ideas we can leverage from theirs. And that really gave us the confidence to come forward and say, "Hey, we believe that we can increase this not only to $75 million in the first year, but also overachieve the $150 million over 3 years." So it's really been that combine of the 2 teams working together to make that happen.

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Operator [11]

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Your next question comes from Jim Suva with Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [12]

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Can you remind us of what the Concentrix year-over-year growth rate was in this past quarter and kind of what is attributed to that? And then I have a follow-up, please.

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [13]

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Jim, you're slightly garbled. It's Chris. I think your question was what was the growth rate sort of year-over-year? Effectively, it was flat. The comment that we made in our -- or my prepared remarks was that underneath that flat, we actually replaced 9% of our revenue that was net new business coming in as well as expansion of clients within our -- in our portfolio that replaced business that we'd either automated or moved away. And the other further comments I made was that we expect this to be coming to an end at the end of Q4 where we're seeing net revenue growth within Concentrix in line with the marketplace that we participate in.

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Jim Suva, Citigroup Inc, Research Division - Director [14]

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Okay. So the difference between the markets and you were some of these transitions, is that the best way to think of it, that should be coming to the end kind of in the next quarter?

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [15]

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Yes, correct, Jim. So we made a comment back in sort of Q1 of 2018, talking about this year, we're going to replace a significant amount of business that was either low margin where we would automate it and drive a better margin profile for our business and/or end those relationships. And we've been doing that through the course of the year and seen our increase in our non-GAAP op income fairly significantly through the course of the year to get to our double-digit goal by the end of Q4.

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Jim Suva, Citigroup Inc, Research Division - Director [16]

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Okay. And my last question. On your total company sales outlook, if we exclude the acquisition, what's the organic growth rate year-over-year?

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Marshall W. Witt, SYNNEX Corporation - CFO & Principal Accounting Officer [17]

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Jim, let me try to take that in chunks. And I think you said total consolidated SYNNEX Corporation. When you assess the impact associated with Q4, Hyve impact and also the net revenue which I spoke to, we're right in within seasonal norms.

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Jim Suva, Citigroup Inc, Research Division - Director [18]

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No, year-over-year. I'm talking about year-over-year.

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Marshall W. Witt, SYNNEX Corporation - CFO & Principal Accounting Officer [19]

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Yes. So taking that out, we still are in seasonable norms for TS. On Concentrix, that's, to Chris's comment, of being relatively flat.

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Operator [20]

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Your next question comes from Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [21]

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Yes. A couple of questions from me. Just first on the distribution business. You talked about the headwinds on Hyve and then the netted down of revenue, which I think is around $220 million or so impact. And if you take that out, you're still going to be, it looks like, down year-over-year. Is that primarily from Hyve? And what is the ballpark growth rate in the core IT business, not including Hyve for the component side?

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [22]

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Matt, this is Dennis. Yes, there is some -- there's a couple of headwinds we're facing, you listed them. They're -- it's the Hyve business and this net revenue accounting, let's call it. In total, that headwind is well north of $400 million year-over-year. So if you back that out, call it the core distribution business, without the net revenue accounting, is growing quite well, as Marshall indicated earlier.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [23]

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Is that -- what does that mean, "quite well"; at mid-single digits or high single digits?

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [24]

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Yes, not going to break out an exact percentage. But we think we're growing faster than the market and the market generally grows in the low to mid-single digits and we think we're growing faster than that.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25]

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Okay, okay. So normal seasonal trends. And then, on the -- just a question -- well, a, on memory prices, we saw -- and I guess this would apply both to the Hyve business and to the core business, the hardware business, where we've seen price hikes early this year because the memory component price is going up. Now memory is going the other way. Are you expecting that to be a revenue headwind as well where there might be some pass-through of those lower memory costs?

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [26]

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Matt, this is Dennis, again. Yes, right now, the reductions from the peak have been relatively modest. So the effect to our business should be similar, shouldn't be very much in the coming quarter. Obviously, if the price has moved dramatically lower, then we may see some headwinds from that. But at this point in time, we're not factoring anything major from a change in memory prices into our revenue guidance.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [27]

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And on tariffs, what could you tell us about what you're seeing there in terms of potential headwind? Are your suppliers asking you to take some inventory ahead of, particularly, the next tariffs, which would be the 25% number? Could you just tell us what you know about that and the impact on business?

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [28]

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Sure, Matt. A couple of things on tariffs. Overall, we've seen most major vendors increase their pricing over the past few weeks since the announcement in one way or another. Obviously, in the end, it's an increased cost, and similar to any rising component costs, like memory that we just discussed, over the past year that's increased, it will we passed on to the market. So we expect that to be continued. Short term, it will drive some inefficiency in the market when it comes to deal negotiation, closing deals and the ultimate shipment, and long term, to be determined, especially if the next rate increase occurs. We'll have to play that out as it occurs later this year. As far as current actions on inventory, there has been some movement there, but nothing significant to note at this point in time.

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Operator [29]

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Your next question comes from the line of Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [30]

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Just 2 for me. The first is just with regards to Hyve. Dennis, you mentioned that what you're seeing continues to be just sort of normal course of business. Just wondering, at this point, if what you're seeing and the timing -- I guess, the sort of the time to sort of work through these normal courses of business is still aligned with what your expectations were in the spring when you first began to speak to them in a way that impacted your expectations. And then I have a follow-up also.

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [31]

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Okay. Ananda, as far as our expectations for the Hyve business in Q4, they are playing out pretty much in line with what we expected, call it the middle of Q3 when we started to get visibility to it. As we've talked about many times, this is a project-based business, a bid business, if you will. And when we go through the process to win bids, they can come up and go away very quickly. So the visibility is not too far forward. But as far as what we saw beginning of Q4, it's played out -- or excuse me, beginning of Q3 through the start of our Q4, it's playing out to our expectations.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [32]

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Okay, great. And so I guess, what would be inherent in that view is that you guys aren't either anticipating at this point a material change in just the -- in the market outlook in the immediate term either. Is that a safe assumption, accurate assumption?

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [33]

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As far as the market that we see, I think that's an accurate assumption. I think the key thing to point out is that, as we've been stating, we're very focused on driving a profitable business within Hyve, overall. There is, as we've talked about before, some level of business that's higher volume, low profit. We've tended to move away from that in recent periods to ensure we're driving the right profitability for our business, and most important, driving the right asset returns as well. But overall, to answer your direct question, day-to-day, the market seems pretty consistent now versus the past few quarters.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [34]

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Got it, got it. That's great. That's helpful. And then just a follow-up. This is super high-level analysis. So I hesitate to even call it that, but that's kind of the spirit of it. Are there any margin dynamics, November quarter, kind of fourth quarter versus third quarter, that would serve as headwinds, be it mix or anything else to your margins? And I'm just asking, as you're guiding -- you guided revenue in line with where Street is, the midpoint of your EPS guidance is slightly below where Street is. And so that's fairly unscientific analysis, but I thought it's worth asking just to make sure that we're not missing anything on the margin side.

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Marshall W. Witt, SYNNEX Corporation - CFO & Principal Accounting Officer [35]

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Yes, Ananda, just to remind you that in that guide is also $425 million of Convergys revenue. So you need to pull that out, and I think then your relationship would show a margin enhancement.

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Mary Lai, [36]

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Thanks, Ananda. And operator, we have time for one more question.

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Operator [37]

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Your next question comes from Sean Hannan with Needham & Company.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components [38]

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So just coming back to Concentrix business. If I look at the fourth quarter and interpret the commentary correctly that we have really what should be the end of managing and improving that mix and then we're also taking on here what had been, at least, a known scenario in terms of a revenue situation, a specific set of customers at Convergys, when are we looking forward at the combined entity, in terms of high confidence? We've got an inflection point for year-on-year growth on a pro forma basis. And given that you're then the #2 player, when do you reflect the growth of the market from there more consistently?

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [39]

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Yes, so Sean, I think what we mentioned at the beginning of when we announced the deal was that we expect that the combined business to grow next year at market, and then the year after, exceed. And I think our inflection point is coming pretty quickly where you'll start to see that growth in the early quarters of 2019 to get us to the market growth for the end of the year. And we're seeing that. If you look at the commentary from the last press release of Convergys, they talked about having sort of marginal growth in Q4. We're talking about it as well. So coming together, we're both coming together with strength to start that growth path.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components [40]

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Okay. So that confidence is in place beginning of '19 year and effectively, you should be seeing some degree of acceleration as you progress sequentially through the year in a general logic fashion?

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Christopher Caldwell, SYNNEX Corporation - Executive Vice-President [41]

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Correct.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components [42]

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Okay. And then -- and second question here, coming back to Hyve. Where do we stand in terms of getting more SKUs available for really into that Tier 1 customer base? And what feedback do we have from them as a part of that effort at design, test acceptance? Don't know if there's any color that can be provided in terms of when we get a reflection around that as well as a return to growth. We're obviously -- we're trying to resolve that SKU problem as well as recognize you folks are building business with the Tier 2s, but progress from around that SKU broadening and design and acceptance would be helpful.

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [43]

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Sure, this is Dennis. I think we're making very good progress in broadening our offerings to all of our customer base, including the larger ones. The headwind, though, is the fact that, as we talked about, we do have essentially 2 customers that make up the bulk of our business. So to diversify our overall business be it through SKU or within the overall customer base, we need to ensure that the existing customers that we're doing business with, as you indicated, expand with our new offerings. But also, more importantly, we bring on new customers to expand with our offerings or we'll still stay too overindexed on a few customers and we'll probably end up in the same pricing dynamics that we're at today, which has led to the lower profitability. So the goal is to drive customer diversity, first and foremost, with the new offerings that we're bringing to the market every day.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components [44]

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Okay. Well, that's helpful, although -- and I'm sorry to push a little bit more here about. But I think a lot of us outside of SYNNEX are really trying to get a better understanding of timing. And I realize that there's going to be some sensitivity in being able to provide that to us from your end. But as we started down this path earlier in '18, there were some perceptions of this could potentially be a 12-month resolution process. And my gut feeling, it might be the wrong take, is that it sounds like it's maybe a little bit longer than that. So can you help to -- just in some manner, help to round out how should we be thinking about timing here, what's realistic, what's unrealistic?

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Dennis Polk, SYNNEX Corporation - President, CEO & Director [45]

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As far as timing, obviously, we're almost through all of 2018 and we're still working through the customer concentration issues that have driven some of our profitability challenges in Hyve. The effort is there on a daily basis to drive additional business with new customers that will diversify us from our concentrated point right now. The fact that we have a couple of large customers is the major challenge and to -- we have brought on recent customers with -- came with the new wins, the new design wins that we've been talking about. But to diversify away from the concentration that we have means that we have to drive a lot more business with those customers. And it does take time to get volume business with new customers, especially at an amount that will diversify the overall concentration that we have today. So the effort is there and we believe we have a pathway to gain the diversity in this business that we're looking for, but it's just taking a little longer than we expected, again due to the size of the customers that make up the top end of our business.

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Operator [46]

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There are no further questions at this time. I will now turn the call back over to Ms. Mary Lai.

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Mary Lai, [47]

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Thank you, everyone, for joining us today, and we appreciate your time and we look forward to speaking with you next quarter. This concludes our call. Thank you.

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Operator [48]

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This concludes today's conference call. You may now disconnect.