SYNNEX's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr. 3.14 | About: SYNNEX Corporation (SNX)

SYNNEX Corporation (NYSE:SNX)

Q1 2014 Earnings Conference Call

April 3, 2014 5:00 PM ET

Executives

Deirdre Skolfield – Director-Investor Relations

Marshall Witt – Chief Financial Officer

Kevin Murai – President and Chief Executive Officer

Christopher Caldwell – President-Concentrix Corporation

Analysts

Jim Suva – Citigroup Global Markets Inc.

Brian G. Alexander – Raymond James & Associates, Inc.

Scott D. Craig – Bank of America Merrill Lynch

Ananda Baruah – Brean Capital, LLC

Osten H. Bernardez – Cross Research LLC

Rich J. Kugele – Needham & Co. LLC

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Operator

Good afternoon. This is Cyndy. I will be your conference coordinator today. At this time, I would like to welcome everyone to the SYNNEX 2014 First Quarter Earnings Conference Call. All lines have been placed on listen-only mode to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect.

At this time, I would like to pass the call over to Deirdre Skolfield, Director of Investor Relations of SYNNEX Corporation. Ms. Skolfield you may begin.

Deirdre Skolfield

Thank you, Cyndy. Good afternoon and welcome to the SYNNEX Corporation fiscal 2014 first quarter conference call for the period ended February 28, 2014. Joining us on today's call are Kevin Murai, President and Chief Executive Officer; Dennis Polk, Chief Operating Officer; Marshall Witt, Chief Financial Officer; and Chris Caldwell, Executive Vice-President and President of Concentrix Corporation.

Before we begin, I'd like to note that statements on today's call, which are not historical facts, maybe forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements include, but are not limited to, statements regarding our strategy, including business, sales and profitability, growth, expenses, market share, investments in and growth of our Concentrix business, business trends, growth in shareholder value, expectation of our revenues, net income and diluted earnings per share for the second quarter of fiscal 2014, margins our expectations of our tax rate, anticipated benefits of the IBM CRM business acquisition, our performance, benefits of our business model, demand expectations and economy and market conditions.

These are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Please refer to today's press release and documents filed with the Securities and Exchange Commission, specifically our most recent Form 10-K, for information on risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements.

Also during this call, we will reference certain non-GAAP financial information. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and presents the reconciliation between the two for the periods reported in the release, which is available on the Investor Relations page of SYNNEX website. Additionally, this conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcast without specific written permission from the Company.

Now, I'd like to turn the call over to Marshall for an update on our financial performance. Marshall?

Marshall Witt

Thank you, Deirdre. Good afternoon, everyone, and thank you for joining our call today. I'll provide some color on the segment changes we made, and then summarize our results of operations and key financial metrics. I'll conclude with guidance for the second quarter of fiscal 2014 before turning the call over to Kevin.

As you saw in the release we have renamed our business segments to better reflect our evolving business model. Our distribution segments, which as you know includes both broad-line and value-added IT services and solutions, it’s now Technology Solutions. Our GBS segment is now called Concentrix. The Concentrix segment included the legacy Concentrix business, and the recently acquired IBM CRM business, and exclude support and IT services, with the technology solution segment which are now included in the Technology Solutions segment.

Additional information will be included in our 10-Q, which we expect to be filed early next week.

Technology Solutions and Concentrix business segments performed very well in Q1. Our Q1 revenues non-GAAP net income and non-GAAP diluted EPS, all came in above the high end of outlook provided in our Q4 call.

Let me share some details behind our fiscal Q1 consolidated performance, starting with revenue. Total revenue was $3.03 billion, up 23% compared to $2.46 billion in the same quarter of the prior year. Technology Solutions segment revenues were strong in U.S. and Japan and continuing to improve in Canada. Revenue was $2.9 billion, up 20% year-over-year, led by strong consumer and commercial demand.

Technology Solutions revenues in the quarter were negatively impacted by the translation effect of foreign currencies, both the yen and the Canadian dollar by $93 million. Q1 Technology Solutions revenues were up 23.8% on a constant currency basis, including Supercom.

Concentrix revenues included one month of the IBM CRM acquisition were $127 million. Legacy Concentrix revenues were consistent with expectations and up 18% year-over-year on an organic basis. The IBM CRM revenue for February was also consistent with our expectations.

Moving on to profitability, Q1 consolidated gross margin was 6.83% compared to 6.34% in Q1 of 2013. The increase was due primarily to the one month impact of the IBM CRM acquisition.

Technology Solutions segment margins were slightly down from prior year due to business mix and due to the prior year having certain reserve adjustments which favorably impacted our gross profit.

Q1 total selling, general and administrative expenses excluding $8.9 million in acquisition and integration expenses increased as a percentage of revenues to 4.49% or $135.8 million. This compares with 4.07% of revenues or $100.1 million in the first quarter of fiscal 2013.

We continue to effectively manage cost as we drive flexibility and efficiencies within our support structure as our business growth. We also continue to make significant investments in people and infrastructure to support our profitable growth.

Q1 consolidated operating income before non-operating items, income taxes and non-controlling interest was $62.0 million or 2.05% of revenues, compared to $55.9 million or 2.27% in the prior year first quarter, excluding the $8.9 million in IBM CRM acquisition and other integration costs and $5.7 million in amortization expenses. Non-GAAP operating income was $76.6 million or 2.53% of revenues.

At the segment level, Q1 Technology Solutions GAAP income before non-operating items, income taxes and non-controlling interest was $63.5 million or 2.19% of revenues, up 19% from the prior year quarter results of $53.5 million or 2.21%.

For Concentrix, the loss from operations before non-operating items, income taxes and non-controlling interest was $1.8 million or negative 1.4% of Concentrix revenues compared to operating income of $2.4 million or 5.47% of revenues in the prior year quarter. This Q1 loss includes $8.9 million of charges related to the IBM CRM acquisition and other integration costs and $4.7 million in amortization expense. Excluding these charges, non-GAAP operating income for Concentrix in the quarter was $11.8 million or 9.33% of revenue, which is a healthy profit in light of our significant headcount and infrastructure investments, beyond one-time expenses.

Net total interest expense and finance charges for Q1 were $4.5 million, down $1 million from the prior year quarter. The decrease was a result of the settlement of our convertible debt in August of 2013. Q1 expense reflects the debt associated with the acquisition of the IBM CRM business, which was funded towards the end of January of 2014, and higher working capital on these to fund our business growth.

Net other income was $3 million in the first quarter of 2014, up $1.7 million from the prior year quarter, primarily due to a $2.9 million benefit from a class-action legal settlement.

The tax rates for the first quarter of fiscal 2014 was 36.3%, compared to 35.4% in the prior year quarter. The increase on our effective tax rate was primarily due to our increased profitability in higher tax jurisdictions. For the remainder of fiscal 2014, we anticipate the annual tax rate to be in the range of 35% to 36%.

On a GAAP basis, our first quarter net income was $38.4 million or $1.01 per diluted share. On a non-GAAP basis, our first quarter net income was $47.7 million or $1.25 per diluted share.

Turning to the balance sheet; our accounts receivable totaled $1.6 billion at February 28, 2014 for a DSO of 47 days, which was up three days from the prior year quarter. Inventory totaled $1.2 billion or 40days at the end of the fourth quarter, up four days from the first quarter of 2013.

Days payable outstanding was 43 days and up six days from the end of the prior year first quarter. And our overall cash conversion cycle for Q1, 2014 was 44 days, up one day from Q1 of 2013.

Our debt to capitalization ratio was 33% compared to 18% in Q4 of 2013 and consistent with our expectations. At the end of Q1 between our cash and credit facilities, the company had approximately $600 million available to fund growth.

Other financial data and metrics of note for the first quarter are as follows: depreciation expense was $5.7 million; amortization expense was $5.7 million; HP at approximately 28% of sales, down from 31% a year ago was the only vendor accounting for more than 10% of sales. The year-over-year percentage decrease was primarily due to the Supercom and IBM interim acquisitions and other mixed changes. HP revenue grew year-over-year.

Cash capital expenditure for the quarter was approximately $4.3 million, annualized ROIC in Q1 for 2014 was 7.9% including the impact of our acquisition related expenses.

Trailing our fourth quarter ROIC was 8.8% including the impact of our acquisition related expenses. Preliminary cash flow used in operations was approximately $35.0 million in Q1 and was impacted by our strong growth in the distribution business.

Now moving to our second quarter 2014 expectations; we expect revenue to be in the range of $3.1 billion to $3.2 billion. For non-GAAP net income, the forecast is expected to be in the range of $52.7 million to $54.0 million. Non-GAAP EPS is anticipated to be in the range of $1.34 to a $1.38. The non-GAAP net income and non-GAAP EPS guidance exclude acquisition and integration related expenses. And the after-tax cost of approximately $8.7 million or $0.22 per share related to the amortization of intangibles.

One thing to note weighted average shares are estimated for Q2 diluted EPS is $39.2 million. As a remainder these statements for Q2 expectations are forward-looking and actual results may differ materially.

I will now turn the call over to Kevin Murai, President and Chief Executive Officer for his perspective on the business and our quarterly results. Kevin?

Kevin Murai

Thank you, Marshall. Good afternoon, everyone and thank you for joining our call today. I’m very proud of our first quarter results and of the momentum we’re seeing across all of our business segments and geographies. All of our legacy business units contributed to impressive year-over-year sales growth of 20% and when including the IBM customer care acquisition, our revenue grew 23%.

Within our Technology Solutions segment, all of our geographies performed well. Sales in the U.S. were strong as overall IT spending continued to improve across all markets and product segments. Our Canadian sales grew organically and we’re also weighted by our Supercom acquisition, which closed in April of last year.

And our Infotec business in Japan grew almost 40% in local currency, up with the tailwinds of the planned increases in the consumption tax in April, but also from enhancements to our go-to-market program. Equally important we continue to improve our margins through continued process improvement. From a profitability perspective, we delivered healthy margin performance even with stronger than normal growth in broad line product categories such as PCs, notebooks and tablets.

Our Infotec business produced meaningful profit as we drove leverage from the significant sales performance.

From a market perspective, we saw strength in both the commercial and consumer segments. Small and midsize business continued to be strong; state, local and education grew and the U.S. federal market was stable.

As I mentioned earlier, we saw a good demand in PCs and notebooks, which we attribute in part to the refresh driven by support of Windows XP going away this month. We also saw solid demand in the consumer markets, particularly in the U.S. and Japan. We continue to focus on key technology growth areas and our investments in platforms, programs and people are paying off in areas like Hyve Solutions, software-as-a-service, enterprise mobility, communications and security.

Now turning to our Concentrix segment, the headline for the quarter was our successful initial close on January 31 of our acquisition of the IBM customer care business. Overall, Concentrix yielded sales of $127 million with a legacy business, growing at an impressive 18% from the same quarter a year ago. The acquisition has been immediately accretive to our non-GAAP operating income. I would like to thank the entire team for an incredibly successful integration so far and welcome all of our new associates to the SYNNEX family.

I will now turn the call over to the President of Concentrix, Chris Caldwell for more color on the Concentrix business. Chris?

Christopher Caldwell

Thank you, Kevin. This is definitely an exciting time in Concentrix’s solutions and we are exceedingly pleased with the progress on the integration work so far. Our primary objective was to ensure that there was no disruption to our new clients and staffs, which we accomplished.

Within the first 30 days, we are already on boarded approximately 30,000 staff members worldwide onto our payroll and HR systems, started the rebranding of all our locations and integrated the senior leadership teams. As we’ve been running the IBM customer care and industry vertical business for over two months now, I’m even more confident that this investment was absolutely the right strategic move. It makes Concentrix the top 10 provider in a large and growing global market. We have a world-class solid leadership team, representing both companies in place now with a rich and deep breadth of offerings.

The talented staff, the technology integrated solutions, the rich analytics practice, the strong industry vertical portfolio that we have in the blue-chip clients that we serve are all being leveraged in the new Concentrix. The feedback from both our clients and staff has been extremely positive. This has allowed us to capture new business, expand our existing business from both organizations through the quarter confirming our thesis on the strategic investment. The majority of our clients that reported initial close have now moved their contracts to Concentrix, while the remainder are progressing as planned.

As we stated at the time of our initial close, some business that is subcontracted from IBM that are government project based contracts will sunset within the first two years of the acquisition as expected. It is hard to put in the words how clear I am about the new Concentrix and so proud of the combined teams’ efforts in what we have accomplished so quickly.

We have built and invested in the solid foundation in business that compete effectively with any global player and we have a strong platform for growth with key capabilities and deep expertise in 10 vertical markets. We are nimble, extremely client focused, pursuing excellence that drives real value for our clients, which is the message that resonate very well in the marketplace. I am looking forward to a very bright future for Concentrix.

I’ll now turn the call back over to Kevin.

Kevin Murai

Thanks, Chris. Now moving on to our second quarter guidance, we expect that the growth we’ve been experiencing in IT demand in the U.S. will continue. IT demand in Canada will continue to improve and that demand in Japan will be strong with some short-term impact in the second half of our quarter following the April increase in consumption tax. Within our Concentrix segment we continue to make good progress in integrating the two businesses and we expect to close the IBM customer care acquisition in the remaining countries in the coming months.

We expect the overall business to be on track with the initial projections we made in February and we look forward to reporting our first full quarter of the combined Concentrix business. This is an exciting time for SYNNEX and I would like to acknowledge the hard work and dedication of all of our associates around the world from both our Technology Solutions and Concentrix businesses and now over 42,000 strong. I also want to thank our vendors, customers and shareholders for their continued partnership and support.

And with that, I’ll now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is coming from Mr. Jim Suva from Citi. Sir, your line is open.

Jim Suva – Citigroup Global Markets Inc.

Thank you and congratulations to you and your team at SYNNEX. My questions are regarding the IBM CRM business. As you know, we’re quite positive on the integration of it, but I kind of wanted to get your response for the push back we often hear about customer concentration, how many customers are like, say, over 10% of that business and how are you retaining them, as well as key employees to make sure that they just – when they see a change in business card from IBM to SYNNEX how do you retain those key talents and those key customers? Thank you.

Chris Caldwell

Hi, Jim, it’s Chris. So let’s talk about the clients first. We’ve been working with the clients since September when we announced the transaction and everything has been going according to plan with moving them across to our business. And frankly, once they start to understand the combination of the two businesses, where they get the leverage of working with us they’re more excited and as proof of that in Q1 we saw some additional expansion from customers coming over, which was fantastic to see.

From a staffing perspective, we’ve also been working with our staff at many councils, working with them in terms of the opportunities with us. They’re very, very excited about being with a company that is now focused solely on growing the services business and investing in the services business for the growth. So frankly we have not seen any disruption to our staff base at this time nor do we expect any.

Jim Suva – Citigroup Global Markets Inc.

And then as a follow-up, on the customer concentration can you help us understand if there are a handful of customers that are 10%, 15%, 20% or how should we think about that?

Chris Caldwell

So, Jim, great question. We actually have a great portfolio of customers and when you combine Concentrix we only have one customer that is marginally over 10% and the rest, some of the top 20 are spread very evenly through our 10 verticals to get us a nice balanced portfolio.

Jim Suva – Citigroup Global Markets Inc.

Great. Thank you. And again congratulations to you and your team at SYNNEX.

Chris Caldwell

Great. Thank you, Jim.

Operator

Thank you. The next question is coming from Mr. Brian Alexander from Raymond James. Sir, your line is open.

Brian G. Alexander – Raymond James & Associates, Inc.

Thanks. Yes, again nice quarter. Just wanted to touch on the Distribution segment. If I look at the revenue was very strong in the quarter, up by 8% to 9%, better than we expected. Maybe, Kevin, just a little bit more color on where you saw the upside in the quarter in terms of customer and product segments, just given how strong it was and also by region. And as far as linearity, was it a fairly normal and linear quarter or was it particularly back-end loaded? And then I have a couple of follow-ups.

Kevin Murai

Sure. I guess starting at the highest level, Brian, overall demand in all three countries in the U.S., Canada and Japan were stronger than we had initially anticipated at the beginning of the quarter. What we saw was a lot of demand driven by, I guess, number one, just improving economies, but also the PC notebook segment was very, very strong as well and probably a little bit unforeseen in terms of the strength from our initial projections.

We believe a big part of that is due to XP support going away. Certainly we saw that in the U.S. and we saw that in Japan as well. But even when we take a look at other product segments really that will strength across the entire business. There is always going to be some that are stronger and some little bit weaker than what our average was, but segment by segment every category actually performed very, very well.

Looking at markets within those countries S&P continue to be very, very strong. We also saw good strength in our overall public sector business. Federal, I said, was stable, really a lot of strength driven out of state, local and education as well. And then, in addition to that within our consumer business, I do believe that we performed much better than where the overall consumer market had been. We saw good strength in both our Japanese and our U.S. retail segment.

Brian G. Alexander – Raymond James & Associates, Inc.

Speaking about the revenue guidance, $3.1 billion to $3.2 billion, up about 4% sequentially at the midpoint, I think normally you’re about flattish in the May quarter. Is that entire delta the incremental IBM revenue that you bring on in the May quarter? You’ll get like two months extra in the May quarter. So if we kind of extract the IBM acquisition that you're basically expecting normal seasonality on a sequential basis, is that the right way to think about it?

Kevin Murai

Yes, really for the most part, Brian. Yes, we do expect normal seasonal trends between Q1 and Q2.

Brian G. Alexander – Raymond James & Associates, Inc.

So, Kevin, the final one is just on the earnings guidance. So $1.34 to $1.38, it’s up about $0.11 sequentially at the midpoint versus the $1.25 you just did. But I think you should be getting at least $0.20 incremental from the IBM acquisition in the May quarter versus the February quarter. So can you just help us break the EPS guidance on a sequential basis? And are you expecting the earnings contribution from, I guess your legacy business, with your non-IBM businesses to decline? I guess that's what I'm ultimately trying to ask and if so, is that really related to some of the benefits you had in February like the XP support, the Japan consumption tax or is there something flawed in the analysis?

Kevin Murai

I think there is a couple of things to point out first. First of all, like I said, we do expect normal seasonality. And obviously in terms of profitability for our Distribution business, we expect to continue deliver normal and strong results. That being said, we did call out. Specifically there was a benefit to our overall earnings in Q1 due to the final payment of the LCD class-action suit settlement.

Also, the other thing to point out is our Japanese business in local currency in Q1 grew 40% and when we grow 40%, we obviously benefited from that short-term tailwind, a lot of that demand really driven by the increase in consumption tax happening right about now. But we’re able to leverage that type of strong top-line growth into very, very strong profit and certainly as the consumption tax does increase this quarter we certainly don’t expect that we’re going to see the same kind of levels of profitability because we probably won’t see the same levels of top-line growth there.

Brian G. Alexander – Raymond James & Associates, Inc.

Got it, okay. That makes sense. Thank you.

Kevin Murai

Thank you.

Operator

Thank you. Our next question is coming from Scott Craig from Bank of America. Sir, your line is open.

Scott D. Craig – Bank of America Merrill Lynch

Hey, thank. Good afternoon, everyone. Kevin, with the IBM integration, it just certainly seems like you’re a little bit ahead of plan and understanding that you want to keep sort of expectation down a bit and reiterating where you kind of saw it coming out for the full year. I’d like to just kind of get a sense for, do you think you’re ahead of plan and sort of why, if you were? And then secondly, it’s a business that IBM seem to struggle with from a profitability standpoint in sort of first quarter out of that gate. It seems like you guys definitely are not struggling with it like they were. So can you help us understand what sort of changes you’ve made to that business since acquiring them that they would help profitability relative to where it was with the prior owner? Thanks.

Chris Caldwell

Hi, Scott, it’s Chris. Well, I’ll take those two questions. So from the first question, we’re actually executing exactly on plan and where we thought we’d be at this time. As we’ve talked about in last conference call around the IBM acquisition, we expected it to be about 12 months to be fully separated from IBM and that’s still on goal and we’re executing towards that. And primarily there are some legacy IT systems in the back office that need to be moved off, which is what will be the long tail of the distraction from IBM.

In terms of certain profitability, also we’re executing on plan. I will caution you by saying we are continuing to invest in the business fairly, heavily as we build out more sales and more marketing within the organization as well as investing technology that’s coming across as we’re picking up a large portfolio of intellectual property that coming up. We need to continue to develop and that is in process of being done at the same time.

And lastly, in terms of sort of the overall business and client, there is some seasonality in this business as well that tend to go up and down as the historical Concentrix business is going up and down through the seasonality. So there’s things like that that you need to factor into your assumptions.

Scott D. Craig – Bank of America Merrill Lynch

Okay. Thank you.

Chris Caldwell

Thank you, Scott.

Operator

Thank you. Next question is from Ananda Baruah from Brean Capital. Your line is open.

Ananda P. Baruah – Brean Capital, LLC

Hey, thanks, guys. Heck of a quarter. I guess following-up on the Distribution business to start, Kevin, why would there be such a hard stop in some of the momentum, I guess sort of this quarter versus next quarter and some of what you’re seeing with regards to XP Support and what are some of the other product categories. I know you’ve kind of highlighted your PC, but what are some of the other product categories that caught you guys by surprise as well?

Kevin Murai

Yes, so Ananda, I hope I didn’t give the impression that we expect the momentum to come to a stop this quarter. In fact, if anything we expect a lot of that momentum to continue. Even on the demand that we saw more recently driven by XP support going away, we do expect that to continue into this quarter, as well. So I just wanted to be clear on that.

I think the point I was making on what we do expect to be perhaps a little bit different is, really just the dynamics in spend in Japan because of the tax increase coming in. I mean, apart from that it’s actually this quarter, it’s hard to break down by product category, because as I said we grew pretty much across the board. All of our categories and it’s difficult to actually pinpoint one that could have been really that weak, apart from the obvious ones.

Obviously things like printers and the consumables that go with that, we were a little bit softer than our average, but I think really the one that was a bit of a surprise on the positive side was the PC, notebooks and overall our mobility practice including tablets and other devices did very, very well relatively.

Ananda P. Baruah – Brean Capital, LLC

Yes, that’s helpful. And I guess if you expect the momentum to continue at least somewhat, why would the view these for seasonal guys not a little bit. I mean, yes, seasonal trends in that business and that a little bit better.

Kevin Murai

Well, I think because just the way my map is working is, we came up a very strong Q1 which was very strong from a year-on-year basis. And if you just kind of extrapolate or do the midpoint, interpolate the midpoint of where we are, we’re still looking at double-digit growth in our distribution segment.

Ananda P. Baruah – Brean Capital, LLC

Got it, got it. And then I guess the last one from me for now, when should we expect the rest of the IBM deal to close?

Kevin Murai

So for the wave two, what we call wave two for the remaining countries that we have left, we expect them to close in the next few months in the coming months.

Ananda P. Baruah – Brean Capital, LLC

So in the coming quarter?

Kevin Murai

Yes in the coming quarter.

Ananda P. Baruah – Brean Capital, LLC

In the current quarter. Yes and is that closing date into the guidance?

Kevin Murai

Well, Ananda we have – we do extract the benefit, the economic benefit from the entire business in one way or another. And so yes, the benefit itself is facing the quarter, however, treatment of revenue was somewhat different, just because of how contract gets signed to us and how long that takes.

Ananda P. Baruah – Brean Capital, LLC

I got it. So, the revenue benefit will be in the quarter already, you’re already recognizing it?

Kevin Murai

From a revenue perspective, we’re not recognizing revenue of business we have not closed. But we are recognizing the economic benefit of the overall business.

Ananda P. Baruah – Brean Capital, LLC

I just want to make sure that I understand that, does that mean that for revenue that’s being booked for the business that has not closed that you get that shows up in your P&L, or does that not show up until? Or does that shows some other way, or does that not show up until after the deal is closed?

Kevin Murai

So I guess the simplest thing is you’ve got to separate the revenue treatment from the actual profitability. What I have been referring to economic benefit is really the profitability piece.

Ananda P. Baruah – Brean Capital, LLC

Yes.

Kevin Murai

Okay, so the revenue piece does not get recognized on any countries or any contracts that have not either closed or has been signed to us.

Ananda P. Baruah – Brean Capital, LLC

Yes.

Kevin Murai

However the benefit, the profit from all of that business does come to us, some in the form, some does go through our P&L, but some does not, some will actually flow onto the balance sheet.

Ananda P. Baruah – Brean Capital, LLC

I got it. So if the deal were to close, so – got it, so the last part, I apologize for taking the follow-up. So maybe deal close in sort of a month from now, you may have revenue upside to your guidance, but you would not have any profit upside for the guidance. is that correct?

Kevin Murai

We’ve, based on what we know today in terms of our plans on when we intend on closing, the remaining countries. We’ve already baked that into our guidance, so that really is our best view on what we think we’re going to see.

Ananda P. Baruah – Brean Capital, LLC

I got it. Okay, got it. That’s very helpful, thanks a lot.

Kevin Murai

All right, thanks Ananda.

Operator

Thank you. The next question is coming from Mr. Osten Bernardez from Cross Research. Sir, your line is open.

Osten H. Bernardez – Cross Research LLC

Hi, good afternoon. thanks for taking my questions. To begin with respect to the IBM assets, you mentioned on that in the past, integrating the business be obviously the initial focus. So, how should we consider that aim your $120 million first year EBITDA target, potential investments or new programs in the year to come, and whether you gave your ability to make that to achieve that goal. And also, could you clarify what the size of those contracts is government contracts or that you mentioned that will be some setting over the next couple of years? And lastly, how effectively, can you integrate those assets in the closed regions?

Kevin Murai

I guess, I’ll start off, Chris; you can kind of take the other some of the follow-up questions. but we’re on track, Osten, as Christian said, both operationally, as well as on track to achieve what we have laid out back in February $120 million EBITDA benefit within the first 12 months after we did the initial close.

Christopher Caldwell

And Osten, in terms of hitting the investments, the investments we talked about are kind of baked into that $120 million number for the end of the 12 months. So we feel very good about that and very confident about that. And in terms of the government contracts, we’re not breaking up the revenue at this point in time and we’ll provide more clarity to add, at a later point, as we’re just kind of going through in segments in some of the – get some thesis to it.

This project works so, some may linger on, but I just want to provide visibility to that at this point. In terms of integrating a wave two – what we call wave two countries in terms of the last countries to close. We are actually already selling services from those countries right now and marking them and having very strong integration plan, as we did with the first close to get the folks onto our payroll rebranding centers, footmarks of our systems within sort of the day of close. And so the expectation is, we’ll just replicate the plan that we’ve already executed on and that’s been in place.

But, as it stands right now, we look at the business as one internally. We manage it in terms of those locations being available to deliver services for, and the teams are working well together despite some still being within the IBM organization.

Osten H. Bernardez – Cross Research LLC

Got it, that’s it for me. Thanks.

Kevin Murai

Thank you.

Operator

Our next question is coming from Mr. Rich Kugele from Needham & Company. Your line is open.

Rich J. Kugele – Needham & Co. LLC

Thank you, good afternoon. Just a few questions, I also want to ask about the Concentrix side. Have you seen the competitive landscape change for you in an anyway, now that you have IBM behind you, and then I’ve got a couple of follow-ups?

Marshall Witt

So, Rich, our competitors have changed slightly clearly, we work in all of the same verticals that we are in now, such as banking, financial services and insurance and healthcare, which are not part of our portfolio. So the competitors in that mix have changed, also because our client base is significantly more blue-chip, the companies have services and clients, we compete exceedingly well with and those will move into the mix as we go to market.

Rich J. Kugele – Needham & Co. LLC

Okay. And then I was interested in your comments about how you’re now signing over these contracts under your name. Had that led to any discussions on the customer’s part or your part for that matter of changing the pricing or is it assumed that you just transfer everything as it was negotiated and all the contract terms are unchanged and you have the chance later to change them?

Kevin Murai

So the vast vast majority it is a complete movement of the exactly as is in terms of terms, contract lines, metrics, performance indicators, nothing else has been very, very seamless for few, there has been discussions around changing some of the metrics or equations. But at the end of the day, it’s really about driving the value and provided the clients getting the same economic returns, we’re getting the same economic return, then we’ve been able to move them and getting sort of upside for both clients as well as us.

Rich J. Kugele – Needham & Co. LLC

Okay. The last question is actually just on, it has IBM continued to sell, my understanding was that early on, you had said that they would be continuing to sell the service with U.S. the fulfillment?

Kevin Murai

That’s correct. IBM has been an exceedingly great partner for us in the last couple of months, and we [run out] altogether with their teams on a global basis and new opportunity creation as well as sort of farming the opportunities that were already in place and have seen at least one win within Q1 from that partnership. So very excited about continuing that on.

Rich J. Kugele – Needham & Co. LLC

Great. And congratulations again on the quarter.

Kevin Murai

Great.

Marshall Witt

Thanks. Thank you, Rich.

Operator

Thank you. And the last question is coming from Mr. Matt Sheerin from Stifel. Sir, your line is open.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Yes, thanks. So a couple more questions regarding IBM, trying to get a sense of the revenue contribution in the May quarter. Assuming that your core distribution typically is flat, just a little bit seasonally that would put IBM in the range of $200 million or so. Does that make sense?

Marshall Witt

Hey, Matt. This is Marshall. So again, as Kevin has said with the wave two in the non-core countries it’s hard to – first of all we can’t recognize, you need that revenue so they do close. So it’s difficult for us to carve out specifically to we’ll call it the IBM CRM pieces , how much is attributable to that, as Chris have said, we are fully integrating both legacy and CRM going forward and we’ll be focused more providing that guidance rather than a carve out.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay, fair enough. And also, and as you – the revenue recognition changes, I’m trying to figure out whether the gross margin attributable to the services that has changed, because it look like, it’s at a run rate as in the mid-20s or so, and I’m trying to figure out whether revenue recognition changes would impact the gross margin both for Concentrix, and then in turn the company as we model going forward?

Christopher Caldwell

Matt, let me take a shot at answering that. No, revenue recognition will not change. Concentrix’s definition of how revenues recognized will be consistently applied prior and going forward.

Kevin Murai

And Matt, in terms of the margin question, the margins are in line with both our businesses as they come together and we don’t see any the distribution factors between either of it. So we’re quite comfortable that we’ll continue to execute along those margin lines.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. and then same thing goes for the amortization of intangibles, which I think you said was $13 million, is that basically the number to be looking at as we go forward through the rest of the fiscal year?

Marshall Witt

Yes, Matt. This is Marshall again; preliminary purchase price subject to change going forward. but I would use, we provided some guidance right at the time of the close of the press release on Feb 3 of about $4 million a month I think that’s a good number to use for the incremental intangible.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. and just lastly, if I may just regarding a lot of questions around the demand in sound – quite positive, just two things, one, did you see any disruptions at all during the quarter due to weather issues within North America. And then as this pent-up demand from the being driven by the XP expiration, are you expecting a headwind if you will in terms of demand as we go into the summer?

Marshall Witt

Yes. So on your first question, there were depending on, I guess, I’m going to call it just smaller pockets of geography within the U.S. we did see some impact to our customers actually being able to get to work. And so we saw some impact on a daily basis. however, overall, we believe that revenue was not lost when you consider the entire quarter. And then going forward, it’s really hard to call; I do believe that there was certainly some pent-up demand in refresh.

And so I think in some ways, the expiration of support for XP, kind of help to release some of the pent-up demand. I’m not sure how much of the acceleration of a normal refresh would have been, I think it remains to be seen, frankly though from what we can tell in particular for this quarter. We do expect, so that the demand picture is going to remain as it was, which is strong.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay, all right. thanks a lot.

Marshall Witt

Thank you.

Operator

Thank you. At this time, there are no further questions. I would now like to hand the call back to Ms. Deirdre Skolfield for closing remarks.

Deirdre Skolfield

Thank you, Cyndy. And thank you everyone for joining our call today. We look forward to speaking with you further during the quarter. This concludes our call.

Operator

Thank you. that concludes today’s conference. thank you for participating. you may now disconnect.

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SYNNEX (SNX): FQ1 EPS of $1.25 beats by $0.31. Revenue of $3.02B (+22.8% Y/Y) beats by $250M.