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SYNNEX Corporation (NYSE:SNX)

Q2 2014 Earnings Conference Call

July 2, 2014 05:00 p.m. ET

Executives

Deirdre Skolfield - Director of IR

Marshall Witt - CFO

Kevin Murai - President and CEO

Christopher Caldwell - President of Concentrix Corporation

Analysts

Scott Craig - Bank of America Merrill Lynch

Jim Suva - Citi

Matt Sheerin - Stifel

Lou Miscioscia - CLSA

Brian Alexander - Raymond James

Ananda Baruah - Brean Capital

Osten Bernardez - Cross Research

Rich Kugele - Needham

Operator

Good afternoon. My name is Sharon, and I will be your conference operator today. At this time, I'd like to welcome everyone to the SYNNEX 2014 Second Quarter Earnings Conference Call. All lines have been placed on a 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.

Thank you. At this time, I'd like to pass the call over to Ms. Deirdre Skolfield, Director of Investor Relations at SYNNEX Corporation. Ms. Skolfield, you may begin your conference.

Deirdre Skolfield

Thank you, Sharon. Good afternoon and welcome to the SYNNEX Corporation fiscal 2014 second quarter conference call for the period ended May 31, 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.

Please note that some of the information you will hear today will consist of forward-looking statement, including without limitation of those regarding revenue, net income, EPS, EBITDA, expenses, tax rate, hiring, cash flows and shareholder value.

Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our Form 10-Q for the fiscal 2014 first quarter and our Form 8-K filed with the SEC today along with the associated press release. We assume no obligation to update any forward-looking statements, which speak as of their respective date.

Also during this call, we will reference certain non-GAAP financial information. Today's earnings release and the related Form 8-K available on our Web site present the reconciliation between our non-GAAP and GAAP reporting. This conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcast without our specific written permission.

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 summarize our results of operations and key financial metrics, and conclude with guidance for the third quarter of fiscal 2014 before turning the call over to Kevin.

Technology Solutions and Concentrix business segments performed very well in quarter two. Our Q2 revenues, non-GAAP net income and non-GAAP diluted EPS all came in above* the high-end of the outlook provided in our Q1 call.

Let me share some details behind our fiscal Q2 consolidated performance. Starting with revenue; total revenue was $3.45 billion, up 33% compared to $2.59 billion in the same quarter of the prior year. Technology Solutions segment revenues were strong in the U.S. and Japan, and continue to improve in Canada. Revenue was $3.2 billion, up 24% year-over-year, and up 26% on a constant currency basis. Concentrix revenues were 293 million, up 528% year-over-year due to the IBM CRM acquisition.

Moving on to profitability, Q2 consolidated gross margin was 8.1% compared to 6.0% in Q2 of 2013. The increase was due largely to the impact of the IBM CRM acquisition.

Q2 total selling, general and administrative expenses excluding one-time acquisition and integration expenses and amortization costs increased as a percentage of revenue to 5.21% or $180 million. This compares with 3.89% of revenues or $100.9 million in the second quarter of fiscal 2013. The increase is due primarily to the significant increase in Concentrix revenues.

One-time acquisition and integration expenses included in selling, general and administrative expenses were 15.7 million for quarter two. Legal consulting, retentions, stamp duty and VAT comprise the majority of these expenses.

With the completion of wave two closings of the IBM CRM acquisition, more than 99% of the overall acquisition has been completed. One-time acquisition and integration expenses during the second half of 2014 are expected to decline.

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

Q2 consolidated GAAP income before non-operating items, income taxes and non-controlling interest increased by over 30% to $68.1 million or 1.97% of revenue, compared to $52 million or 2.01% in the prior year second quarter. Excluding one-time acquisition and integration expenses and amortization costs, non-GAAP operating income increased over 80% to 99 million or 2.87% of revenues.

At the segment level, Q2 Technology Solutions GAAP income before non-operating items, income taxes and non-controlling interest was $70.1 million or 2.2% of revenue, up 44% from the prior year quarter result of $48.7 million or 1.91% of revenues.

For Concentrix, the GAAP loss before non-operating items, income taxes and non-controlling interest was 2.2 million or negative 0.74% of Concentrix revenues compared to operating income of 3.3 million or 6.99% of revenues in the prior year quarter. This Q2 loss includes 15.7 million in charges related to the IBM CRM acquisition and other integration costs, and 14.3 million in amortization expense.

Excluding these charges, non-GAAP operating income for Concentrix in the quarter was 27.8 million or 9.4% of revenue, which is very healthy in light of all the significant headcount and infrastructure investments, beyond the one-time expenses.

Net total interest expense and finance charges for Q2 were 6.2 million, up $1.3 million from the prior year quarter. The Q2 expense reflects debt associated with the acquisition of the IBM CRM business, which was funded towards the end of January of 2014, and higher working capital needs to define our profitable business growth.

The tax rate for the second quarter of fiscal 2014 was 35.9% compared to 35.4% in the prior year quarter. For the remainder of fiscal 2014, we anticipate the annual tax rate to remain in the 35% to 36% range.

On a GAAP basis, our second quarter net income increased by 29% or $39.6 million or $1.01 per diluted share. On a non-GAAP basis, our second quarter net income increased over 85% to $59.5 million or $1.52 per diluted share.

Turning to the balance sheet; our accounts receivable totaled $1.8 billion at May 31, 2014 for a DSO of 48 days, which was up five days from the prior year quarter. Inventory totaled $1.4 billion or 41 days at the end of the second quarter, up six days from the second quarter of 2013.

Days payable outstanding was 43 days and up seven days from the end of the prior year second quarter. Hence, our overall cash conversion cycle for Q2 of 2014 was 46 days, up four days from Q2 of 2013 due to the strong growth in both of our business segments.

Our debt to capitalization ratio was 38% compared to 18% in the prior year's quarter and consistent with our expectations. At the end of Q2, between our cash and credit facilities, the company had over 400 million available to fund growth. The IBM CRM acquisition is expected to generate substantial cash flow in the future.

Other financial data and metrics of note for the second quarter are as follows: depreciation expense was $9.2 million; amortization expense was $15.2 million; HP at approximately 25% of sales, down from 32% a year ago was the only vendor accounting for more than 10% of sales. The percentage decrease was the effect of the IBM CRM acquisition and other mixed changes. HP revenue grew year-over-year.

Cash capital expenditure for the quarter was approximately $15 million. Annualized ROIC in Q2 of 2014 was 7.2% including the impact of our acquisition-related expenses.

Trailing fourth quarter, ROIC was 8.5% including the impact of our acquisition-related expenses. Excluding the impact of one-time acquisition and integration expenses, the current fiscal quarters trailing ROIC was 10.4%. Preliminary cash flow used in operations was approximately 200 million for the first half of 2014, and was impacted by strong growth in our Technology Solutions business and the impact of the acquisition of the IBM customer care business.

Now, moving to our third quarter 2014 expectations; we expect revenue to be in the range of $3.3 billion to $3.4 billion. For non-GAAP net income, the forecast is expected to be in the range of $56.9 million to $58.9 million. Non-GAAP EPS is anticipated to be in the range of $1.45 to a $1.50. The non-GAAP net income and non-GAAP EPS guidance exclude acquisition and integration-related expenses, and the after-tax cost of approximately $11.3 million or $0.28 per share related to the amortization of intangibles. Weighted average shares estimated for diluted EPS are $39.3 million.

As a remainder, Q3 of 2013 results included 12.3 million of pretax benefit from a class-action legal settlement reported in other income. Please note that these statements, our Q3 expectations are forward-looking and actual results may differ materially.

I'll 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. As Marshall discussed, SYNNEX delivered excellent performance and financial results for our second quarter. And I'm proud of the entire SYNNEX team for their achievements this past quarter.

Our results reflect strong execution in both our Technology Solutions and Concentrix business segments. I'll take you through the highlights of each.

In Technology Solutions, we achieved strong sales and profit performance. Overall, this segment grew 24% year-on-year with all three countries growing sales well into the double-digits on a year-on-year basis.

Two significant tailwinds of Windows XP support expiration and the Japanese consumption tax increase certainly helped, but we believe our sales performance was well above market rate. Equally impressive was our operating margin performance. At 2.2%, we improved our margin by 31 basis points from a year ago, highlighting our disciplined approach to the market and managing our business portfolio despite a larger than normal volume of business and commodity line. In the United States, with few exceptions, the market was strong across all product and market segments.

In our commercial business, we continue to see demand driven by Windows XP support expiration, which seem to raise the water level across the entire business. Beyond PCs, we also saw good strength in tablets, networking and security and peripheral. From a market perspective, SMB was strong as well as state, local and education, and our consumer business.

Our Hyve Solutions business continued its strong sales and profit performance, and was a notable contributor to our overall results in the Technology Solution segment. Our success in Hyve Solutions was one of the drivers of increased working capital investment this past quarter.

In Canada, we continue to see the market strengthen, and in particular, our commercial business experienced strong organic growth consistent with what we saw in the U.S. In Japan, March was exceptionally strong, coming up to the consumption tax increase. And although we experience the impact of the tax increase in April, we continue to experience growth through market focus and share gain. With the robust sales performance, we drove leverage in our business and achieved excellent profit results.

Overall, we had stellar performance in our Technology Solutions segment. Outstanding execution and traction along our strategic path have been the keys to our success.

Now, turning to the Concentrix segment; in total we delivered 293 million in sales and a non-GAAP operating margin of 9.5%. I'm proud of this performance, given we're still integrating the businesses and have not fully achieved all of the synergies of this investment.

In addition, we closed our second wave of countries on April 30th and have now closed about 99% of the business. We expect to close a few remaining countries in our current quarter.

As you can see from our sales performance we are now managing the vast majority of legacy IBM CRM contracts. We have been focusing on growing the business through the combined portfolio of services and clients and this past quarter we again achieved excellent sales results.

Some of the new business wins came as a result of the combined capabilities of legacy Concentrix and IBM underlying the benefit of the synergies we expect to gain from this investment. And the post close integration work continues to proceed on plan. As we assume more of the back office work from IBM, we expect to experience a short period of duplicate cost, which will impact our EBITDA performance, but once completed we expect to achieve our cost synergy targets and our first 12 months EBITDA target of 120 million.

For more color on the Concentrix business, I'll turn the call over to Chris Caldwell, but before I do, I want to thank Chris and his management team for their strong leadership throughout this process. I could not be more proud of what they have accomplished. Chris?

Christopher Caldwell

Thank you, Kevin. It has indeed been a productive and exciting quarter as we have executed to our plan. As Kevin and Marshall mentioned, we've had a number of highlights this quarter that we're extremely proud of. The first was a closing of the additional countries. We again executed seamlessly with no interruption to the business. These countries have now been rebranded to Concentrix, the staff have been integrated and migrated to our HR systems and we're starting to see the business development as we had expected.

Now, only a few small countries remain to be closed which we are planning to complete this quarter. I am happy to say the integration is also progressing well in its own schedule. This mainly consist of taking over work currently being supported by IBM, which are primarily back office financial systems and processes and are not client facing.

To-date, we have already assumed a number of these processes across many functional areas. We have a dedicated team planning and executing on the transfer of work while at the same time building out our own infrastructure to support it.

I'd like to remind you that this does create duplicate cost in a few areas as we work through the integration process which we expect to be completed early in the New Year.

We also continue to be extremely pleased with our reception in the marketplace by both new and existing clients. Currently we are in the process of ramping well over 2000 new stock members driven by deals we have signed with existing clients as well as new clients globally, again, validating our thesis for the IBM CRM acquisition. The business now we are signing in terms of margin profile, industry verticals, contract length are substantially similar to the businesses we purchased.

When we closed the transaction we spoke about being focused on 10 key verticals. Within these 10 we are especially focused on four top verticals which are banking, healthcare, insurance and technology. These represent areas of superior margin performance, requirement for technology platforms and analytics as well as higher value processes.

You will see us make additional investments in these verticals. One highlight of the quarter was winning the largest single deal in Concentrix history. More importantly was that this win was only possible because of our scale and capabilities resulting from the IBM CRM acquisition.

Our insurance platform and our renewals platform also continue to gain traction with new deals and installations taking place this quarter. While the new sales cycle is longer than legacy Concentrix business, we are very pleased with our momentum and pipeline.

With the new business, one, as well as our pipeline of business strengthening we are making further investments in our infrastructure in the U.S., India, U.K., Costa Rica, Philippines and Bulgaria. While there is still a significant amount of work to be done, as always we are committed to making the right long-term investments to profitably grow the business.

In summary I would like to thank the well over 45,000 Concentrix team members who have successfully executed this quarter and have been dedicated to building a bigger, stronger and better business for us and for our clients.

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

Kevin Murai

Thanks, Chris. Now, moving to the current market environment, our third quarter guidance reflect strong continued demand and profit performance in our Technology Solution segment and continued execution in the integration of our Concentrix segment.

Specific to Technology Solutions, we expect IT demand will remain string in all our geographies with positive impact from Windows XP support expiration subsiding this quarter. We also expect demand in Japan to normalize in the second half of this year as a positive impact associated with the consumption tax increase is now over. We expect to continue, perform better than the market in all three geographies.

In the Concentrix segment we expect our progress on integrating the legacy Concentrix and IBM CRM business to remain on or ahead of plan and to continue to make good progress in winning new business.

This is an exciting time for SYNNEX and I am confident that the investments we've made on top of our solid business foundation will provide a clear path to continued increases in shareholder value. I'd like to acknowledge the hard work and dedication of all of our associates around the world from both our Technology Solutions and Concentrix businesses. I also want to thank our vendors, customers and shareholders for their continued partnership and support.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Scott Craig of Bank of America Merrill Lynch. Go ahead sir, your line is open.

Scott Craig - Bank of America Merrill Lynch

Thanks. Kevin, with the outlook for the fiscal third quarter, definitely looks like on a relative basis to history, you're being conservative, and I understand the rationale behind it, but can you maybe dive in a little more deeply like how much of an impact do you think the XP and Japan had on the quarter specifically?

And then just secondly, with regards to margins, can you discuss the TS margins on a quarter-over-quarter basis? It sounds like even with a bit of a worse mix, if I read that right in your statement, that the margin surprised you guys to the upside, so how much of that volume-related or something else? Thanks.

Kevin Murai

Yeah, thanks, Scott. So, when we look back on Q2, obviously the sales performance in Technology Solutions came in ahead of our own expectations. So we did get I guess more significant tailwinds from both the Windows XP expiration and from Japan than we anticipated to. And that really did drive a lot of leverage in our business.

In particular in Japan, we achieved what I would consider to be North American type operating margins for that quarter. We do see the demand in Japan normalizing, because both of those drivers, Windows XP as well as the consumption tax increase are now over. So we do expect more of a normalized type demand environment there. We do expect by the way to grow faster than market in Japan, but we also don't expect to see the same kind of profit performance in Japan that we saw in Q2. But we also got leverage in our U.S. and Canadian businesses as well. With the tailwinds that we've got in particular from XP and it raised the water level across the board. We did get better margin performance as well.

All that being said though, when you take a look at a normal Q2 to Q3 on the Technology Solution side we do see it coming a little bit down seasonally from what we have seen in the past, but again, what we are seeing is continued strong demand. We do expect that we are going to grow faster than the overall market, and we do expect that we are going to deliver solid margin performance as well.

Scott Craig - Bank of America Merrill Lynch

Thank you.

Operator

Our next question comes from Jim Suva of Citi. Go ahead sir, your line is open.

Jim Suva - Citi

Thanks very much. So you talked a lot about Windows XP expiration in Japan, and you continue to dance around the question or the answer. Your outlook for the next quarter, it's never been down quarter-over-quarter. So you mentioned, you expect to gain share again. So we are just trying to really get our arms around what the impact was this quarter, or why would it be down sequentially quarter-over-quarter next quarter, because history shows that that's a not normal situation. So we are just trying to bridge those comments and just sees it -- just building in a lot of conservatism or help us do the math or it just doesn't jive?

Kevin Murai

Yeah. Jim, Q2 to Q3 is relatively flat. And actually when you look at our guidance, we're not calling it down that much on a sequential basis, but there is no question that the tailwinds that we've got from XP and from a consumption tax certainly did increase our sales. We grow over 25% on the Technology Solutions business in top line last quarter. And that's really speaking more to revenue.

When you look at our overall profitability, keep in mind that Chris noted the investments that we are making in the Concentrix business as well onboarding over 2000 new people to support business that we won recently, which we expect to get the benefits shortly after that. So, we are continuing to invest in profitable growth, but overall what we see is just overall good market, but it's just this dynamics that we saw that we are probably unique to this year and our second quarter.

Jim Suva - Citi

Okay. And if you could help me then as my follow-up will be, you mentioned that normally Q2 to Q3 is flat. But I look back historically to remodel and I see a 4%, 5%, 6% in this past several years sequentially. So was that from acquisitions or why you are saying that normally its flat winds, statistically it's up?

Kevin Murai

Yeah. I am not even sure that there was anything normal over the past few years because we have done a number of acquisitions over the past number of years. Most recently our Supercom acquisition last year, which did actually not have a full impact in second quarter last year was partial to that. So that is one reason for that, but then when you go in year prior to that, our seasonality has changed quite a bit as we brought our new businesses and also increased or changed the overall mix of business between retail and our commercial business.

Jim Suva - Citi

Okay. And since you're an off-quarter company and it's almost July 4th, is it fair to say June that Windows XP expiration continue to be strengthened or we are starting to see it weighing to more normalized, because in your prepared comments, you mentioned in the back half of the year you expect it to normalize. It almost seems like you are still waiting it to normalize or are you actually seeing signs of it normalizing?

Kevin Murai

We are starting to see signs of it normalizing now. We are still today enjoying some of the benefit of it, but for the most part commitments that were made for refresh driven by Windows XP, that's really the business, the incremental business that we are achieving right now, but we do expect that to subside this quarter.

Jim Suva - Citi

Great, very helpful. And again congratulations on great top line and bottom line results, you and your team.

Kevin Murai

Great. Thank you, Jim.

Operator

Our next question comes from Matt Sheerin of Stifel. Go ahead, your line is open.

Matt Sheerin - Stifel

Yes, thanks. Good afternoon, everyone. So a couple of questions, Kevin, on the distribution business obviously you have seen substantial increase in your retail business over the years and I believe that's like 15% to 20% of revenue, right?

Kevin Murai

It's actually a little bit higher than that.

Matt Sheerin - Stifel

Higher, yeah. So could you talk about the seasonality you are seeing there looking at August? I know you are guiding down a little bit, maybe a little bit softer than seasonal. It sounds like that's mostly on the corporate side. So could you talk about what you are seeing on the retail side? And do you see a great cycle in terms of the educational markets and consumer markets on August. And then also in that business, you have been expanding your product lines and I am wondering if that has something to do with your strong growth rate in retail, and I have also noticed the addition of some wearable devices and could you talk about how that might impact your business?

Kevin Murai

Sure. And Matt, your second last comment just in terms of picking the winners, I think that's probably one of the key factors that drives our success in particular in retail. So overall retail business is stable and okay, but out performance in retail, in particular in the U.S. and Japan has been much, much stronger than market. And that really is as a result of having the right products, and really having an eye for what's going to be hot.

We've experienced much higher than market growth in our new age business here in the U.S. over the past year or so because of that, and then the same thing in Japan too. So we continue to look for those new opportunities. And obviously one of the hot new growth areas is going to be in wearable technologies. I think the announcement that you are referring to is the iriver announcement. So that has to do with wearable technology that measures biometrics as you are exercising, so obviously very, very useful. It's a small part of our overall portfolio today. But we do expect it to be one of high growth and hopefully when we are talking again in one and two years from now it's a much bigger part of the portfolio.

Answering your other question around education, in particular the state, local and education segment of our business continue to be very strong. That's been the case over the past few quarters and certainly this past quarter was no exception to that. We are seeing continued investment in education in particular. And we support a number of different platforms. Obviously, the Microsoft platform is very, very important in that segment. But also with our recent partnership with Google we have really been able to leverage incremental share with a Chrome management console in selling that and some Chromebooks as well. So we do see a lot of growth there and other quarters than versus the overall water level around infrastructure including Wi-Fi campus installations as well.

Matt Sheerin - Stifel

Okay. And do you see -- I mean can you give us an idea of sort of what ending you see in terms of that whole upgrade cycle within public schools around the country.

Kevin Murai

To us, it's just a big opportunity. For years we had a dedicated focus on public sector education being a big part of that. We have really doubled on our focus there because we do see that that is one area that is really being focused on to invest in and really, Matt, what is driven by as just higher levels of productivity as dollars are harder to come by in funding education. Most educators are looking to technology to really drive more and more improvements in access and productivity, and that's where I think the whole technology community benefits.

Matt Sheerin - Stifel

Okay, that's helpful. And then on the gross margin, it sounds like mix is working is against -- for the things that you just talked about obviously Chromebooks, desktops and notebooks. So as that begins to moderate or stabilize do you see gross margins start to move in the other direction?

Kevin Murai

Our focus really is around operating margin. The different growth markets that we invest in, in some cases there are going to be higher gross margin and higher OpEx, but the focus for us is how are we able to grow and how do we grow into more profitable businesses. And so kind of looking at our performance in our second quarter we are able to drive leverage in growth, but also through some mix changes in a positive way going forward on higher operating margin categories. That's really where we see the big benefit.

Matt Sheerin - Stifel

Okay, great. And just one last question if I can, just regarding the seasonality in distribution; it sounds like Japan continue to be strong moderating there for the reasons that you are stating. So should we assume that Japan was still growing faster than your overall business in the May quarter. And it may end up decelerating at a greater rate than North America.

Kevin Murai

Yeah, Matt, that's a fair assumption.

Matt Sheerin - Stifel

Okay. Thanks a lot.

Kevin Murai

Thank you.

Operator

Our next question comes from Lou Miscioscia of CLSA. Go ahead sir, your line is open.

Lou Miscioscia - CLSA

Okay, thank you. You talked about one of the biggest wins you had in Concentrix in onboarding 2000 more people. Can you give us the headcount there and just wondering about, if we are getting to the point that your size is large enough now that these new big wins will be more moderate in the sense of let's say not hitting on the operating margin line, which historically win before IBM on occasion did happen?

Kevin Murai

Thanks, Lou. On the top line the actual 2000 people that we are actually ramping right now is not inclusive of the deal that we won, which is our largest deal. That had some technology that needs to get build out and some analytics that need to be done. And that ramp will actually happen further. And it's a significant size as many hundreds of people that will be going into Q4 and beyond. So the 2000 is really deals that we have won with existing customers and new deals within the last quarter outside of that biggest deal.

In terms of these ramps clearly as we gained greater and greater scale, if we are growing at sort of base rate you will see less impact of these ramps within the business. But we have been very fortunate and lucky to continue to win these big deals which we are aggressively ramping and therefore taking the burden of that within our quarter ramp.

Lou Miscioscia - CLSA

Okay, and the headcount there?

Kevin Murai

In terms of the new deal, largest deal, it's above 500.

Lou Miscioscia - CLSA

What was your headcount, let's say, at the start of or the end of the quarter?

Kevin Murai

It's a little over 45,000.

Lou Miscioscia - CLSA

Okay. And then maybe talk a little bit that how you expect the operating margins to play out. You mentioned that you are going to have some double expenses, I guess, through the end of the year. So did the operating margin that you all achieved here stabilizing in flat going forward and you pull out these charges or how do you expect to communicate that to us?

Kevin Murai

So we have now reached our peak of investment to bring across the migration. The IBM systems that will actually hop in within the next quarter, quarter and a half, and then phase down until the end of Q1 is a way we are looking at it, seeing it right now as we execute to our plan. Those investments are not being called out as one time cost. Those are just being run as OpEx within the business and are compressing our operating income margin. So if you think of where we are right now, do we have some additional investments to make, then you can extrapolate from there in terms of the operating margin.

Lou Miscioscia - CLSA

So I guess the 9.47 I think you had this quarter, it looks like that's -- or 9.48 that would actually have to drop somewhat?

Kevin Murai

We see it being compressed both with the ramp as well as with the investment we need to make over the next quarter in a bit.

Lou Miscioscia - CLSA

And I guess final one, could you size that for us by chance?

Kevin Murai

I don't think we are going to size it at this point in time. You will start to see it in next quarter and then you can take your data points from there. But we are sort of been very effective at managing and moving it across and trying to get off the systems as quickly and control this as possible which we have been quite successful with a number of the systems prior up until now.

Lou Miscioscia - CLSA

Okay, thank you.

Operator

Our next question comes from Brian Alexander of Raymond James. Go ahead sir, your line is open.

Brian Alexander - Raymond James

Okay, thanks. Sticking with Concentrix, Chris, can you guys just ballpark for us what the IBM contribution was in the quarter to revenue and operating income. It looks like the revenue was well south of the 300 million a quarter that they were running at previously. But I know you didn't have the whole thing closed and I know there is a lot of revenue recognition issue. So I am just trying to get a sense for where that business is now versus where it was before. And then I have a couple of follow ups.

Christopher Caldwell

Yeah. Brian, we are not going to break it out. And part of that is just because we are selling as one team now. We had some shared customers that we are seeing growth within those customers. And so it's hard to breakout to a granular level. I can tell you it's executing to what our expectations were and what our plan was with the base of customers, and so we are quite happy from that perspective.

Brian Alexander - Raymond James

And then, are there any major contracts that we should be thinking of that have the potential to get renewed in the next few quarter or I guess how can investors gain confidence that the company is achieving its targets on renewal rates on pricing activity on new contracts etcetera, things that we would want to watch over time. What are the sign posts that we could look for that suggests that the business is performing as you expected?

Christopher Caldwell

So Brian, I pointed two data points. One is we went through this process, all the major customers had to consent in order for the contracts to come over to Concentrix, which we talked about. And in last quarter and the quarter before as it has gone as planned and done, during that process any terms and conditions or changes or whatever the case may done for those consensus would have had to been dealt with at that point in time. So I think that gives you confidence that we got a good understanding of the business and how it's performing and where it is right at the moment.

The only contracts that I will call out is ones that we mentioned that are declining in lower margins that will end and we are just working through that right now as we talked about last quarter in terms of sizing because there is some residual business we may or may not keep providing what the margin profile is. But I think as we get closer to when those are expiring we will give some more color and indication around that. Right now it's a little too early to discuss it based on where we are. There is no large contracts that are in the renewable process right now that have come across because they were all sort of dealt with the consent process that happened.

I think when you look at our sales growth over the next coming quarters and you are looking at the ramp, we are clearly getting that from existing customers and new logos and being successful in the marketplace. And that's we will continue to derive our success.

Brian Alexander - Raymond James

Okay. And then maybe just a couple on the Technology Solution side, Kevin, I think last quarter you quantified how much Japan was up, it was around 40% as I remember. So can you just give us a sense for how strong it was this quarter? And then is it the right way to think about tech solutions growth for the August quarter is that it decelerates, but it's still up double digits, maybe low double digits as opposed to 25% plus which obviously is not sustainable.

Kevin Murai

So, Japan's growth last quarter was consistent with where it was in Q1. And that's in local currency of course. And we do expect that number as I said to come down and normalize. But we are still looking at growth and certainly above where we see the overall market performing. And you are correct, without getting too specific we are still following for double-digit growth in Technology Solutions, but at a bit more muted level than where we saw in Q2 and for the reasons that we talked about already.

Brian Alexander - Raymond James

Great. And then final one; and I know you don't like to comment on supplier relationships, but given the acquisition of Beats by Apple, and I think Beats is one of your larger consumer brands. Is there any change anticipated in that relationship going forward or is it business as usual?

Kevin Murai

Yeah. We expect it to be business as usual. We got a great relationship with Beats, and like anything, Brian, as long as we continue to help them grow and be successful we are going to be an important partner and that's really been our MO with all of our vendor relationships.

Brian Alexander - Raymond James

Okay. All right, thanks a lot. Nice job.

Kevin Murai

Thank you.

Christopher Caldwell

Thank you.

Operator

Our next question comes from Ananda Baruah of Brean Capital. Go ahead, your line is open.

Ananda Baruah - Brean Capital

Hi, thanks, guys. Good afternoon. Thanks for taking the questions. Hey, just two if I could. On the August operating margin guide, I think Kevin you referred to incremental costs related to the integration as a reason for the margins being a little bit softer, but I just want to clarify that. And I guess if that's the case, can you just walk through what some of those initiatives are? And if there is anything else, I'd love to hear about it as well. Thanks.

Kevin Murai

Yeah. The two main reasons that we talked about certainly do factor in. And in particular, one thing to remember is that in our third quarter of last year we did get benefit from two different areas. One was benefit from the LCD settlement, which we called out specifically. We also had benefit from what we called larger than normal reserve changes. And that I think was -- Marshall, you can help me here with …

Marshall Witt

Ten basis points.

Kevin Murai

Ten basis points for so. So, just keep that in mind as you're looking at our comparisons year-on-year.

Ananda Baruah - Brean Capital

Okay, guys. I guess I was just sort of more referring to the Q-on-Q. I know you've got some leverage this quarter. From the overall demand, from IT demand, just trying to -- I guess it's really -- it sounds like there is an incremental cost in BPO. And I guess you're saying that you still expect to execute to the EBITDA synergies over the 12-month period. But I just want to make sure there is nothing else in there with regards to …

Kevin Murai

No. In fact, talking to the performance -- I couldn't be happier with our performance in integrating the two businesses so far, and it's still very early in the process. And there are so many puts and takes, but so far, we are a bit ahead of plan on our EBITDA performance to our plan. As we mentioned, we do expect to be -- some incremental cost over the coming, let's say, next two quarters or so, but we're still confident that we're on track to get to 120 million in the first year after the acquisition.

Ananda Baruah - Brean Capital

Excellent. And then just a quick follow-up on the Concentrix margins; what's the right framework for us to think about where the margins can ultimately go? I mean any anecdotal long-term view of what are you guys' strategies around the margins and the leverage to go along with that strategy?

Kevin Murai

Sure. I think our second quarter margin gives you a sense of what is possible in the business. And our long-term goal of double-digit operating margins in Concentrix has not changed. We're just going through a period of integration where there is going to be so many puts and takes through the quarters. And really that's why we're focused more on here is what we expect after the full year, here are just kind of the categorical costs that we expect to incur over the next, say, two to six months. But overall, our focus on driving that level of margin has not changed.

Ananda Baruah - Brean Capital

Excellent. Thanks a lot.

Kevin Murai

Thanks, Ananda.

Operator

Our next question comes from Osten Bernardez of Cross Research. Go ahead, your line is open.

Osten Bernardez – Cross Research

Hi, good afternoon, and thanks for taking my questions. To begin, I just want to follow-up on some of the Concentrix questions. It seems that the IBM business just before you had -- or just as you were acquiring it was already running close to -- according to filings put out by yourself and IBM close to around $120 million in EBITDA and that's inclusive of what they called out in 80 million to 90 million in allocated expenses. So, I was just trying to get a sense for how much of that $80 million to $90 million in expenses for that basically the company was paying to back office support from IBM, do you view as an opportunity to expand that EBITDA margin from a longer term perspective, let's say, at least in year two?

Christopher Caldwell

So, Osten, it's Chris. As we've talked about, we actually have some more duplicated costs as we bring those across. Obviously, we think we can be more efficient, and are seeing that in some of the processes we brought across. So, we do see that declining, but I hesitate to give you a target on that until we had gone through the complete process.

Osten Bernardez – Cross Research

Okay. And then separately with respect to TS, your inventory levels were up about 16% quarter-over-quarter versus TS sales of 9%. And I wanted to know how much of that pace differential is due to, say, Hyve or other segments, or is it just the timing of purchases?

Marshall Witt

This is Marshall, it's more of just timing.

Osten Bernardez – Cross Research

Thank you. Would you be able to give any additional color as to what's happening, what's trending with respect to Hyve?

Marshall Witt

Osten; Hyve, what I can tell you is it continues on its strong growth path, successful business for us and strategically plays right now in one of the key growth areas and scale down as datacenter build out. As you know, we don't provide a lot of detail around that. But again just to say that it is successful, it's been -- it was a good contributor in second quarter, and we expect it to continue going forward.

Osten Bernardez – Cross Research

Thank you.

Marshall Witt

Thank you.

Operator

Our next question comes from Rich Kugele of Needham. Go ahead, your line is open.

Rich Kugele – Needham

Thank you, good afternoon. A couple of questions and clarification/observation; just on the question side, let's look at Japan for a second, competitively, can you just talk about how you view your position right now as the business has been streamlined the way you like, especially in light of one of your major competitors having an Analyst Day recently, where they were talking specifically about Japan, where it looked like they may wind up actually trying to directly engage? And then, I have a follow-up.

Kevin Murai

Okay. I'm sorry, Rich. I don't understand your question on Japan.

Rich Kugele – Needham

Sure. I'm just trying to understand where competitively are you positioned in Japan right now? Are you now the largest player, and if an entrant were to come in whether through M&A or organic, your ability to go and withhold them and maintain your position. I believe if you're not number one, you maybe number two in the geography, but any comments on competitive positions there?

Kevin Murai

Sure. Rich, we are probably number three or number four, but the Japan channel is -- the makeup of that channel is not quite as clear as you would find here in North America or even in Europe for that matter, because Japan tends to be more vertically integrated as an industry. You find a lot of other players that have captive distribution capability. And so, you can't really get a real good take on what a pure distribution market looks like.

We're certainly scaled up in Japan. We're big enough to be able to drive the cost efficiencies and profitability that we need. Again, it comes down to what we've been working on, which is continued enhancement of how we go to market, as well as continued enhancement of our processes. We're making very good progress along that path. I think the fact that we were able to leverage such good profitability, a strong top line is the testament to that, but still more work to go on that.

I'd tell you that with the opportunities we see in front of us, and in particular, when you look at the relatively small share of that, at least the pure play distributors have in the overall IT market in Japan, there is ample room to continue to grow organically, and that really has been our focus so far.

Rich Kugele – Needham

Interesting. Okay, that's helpful. And then, certainly we're seeing what happens with expirations of technologies with Windows XP, now we've got Windows server next year, are any of your VARs and resellers coming back to you and already discussing that as a potential catalyst? Or is it still too early?

Kevin Murai

Now, we're hearing a lot of questions right now, coming from the reseller community. It's interesting, because if I turn the clock back, say, to mid last year, the only place that we ever heard any talk around growth in demand resulting from that was in Japan. We didn't hear it in the U.S. and Canada. Coming now, as we came much closer to that date, we actually did see what the tailwinds could provide from that. I think because of that we now have the reseller community quite excited about where the growth opportunities are going to be on Windows server expiring. So, we are even more coordinated now with, not just with Microsoft, but with our server OEMs in preparing for that, and hopefully driving some good tailwinds from that too.

Rich Kugele – Needham

Okay. And then, my last comment, if you go and look at where the Street was for last quarter and for this quarter, and then your actual performance and your guide, you still are in aggregate up about $0.10 versus where the Street was. So, I'm trying to understand if I can parse out -- some of it's just timing, some of it obviously was seen better than expected, HP, etcetera, but some of this also could be just getting Concentrix further along earlier, the IBM business further along earlier than perhaps where the Street had. Some element of this just that dynamic, where -- you did mention in the Q&A here that EBITDA was perhaps a little bit ahead of plan. Is that part of this?

Kevin Murai

Yes, I think that is part of it. I think there are many other things there too, Rich, in some ways, and it's hard -- obviously I don't know what is behind some of the estimates that come out. But as I mentioned, when I think it was Ananda, who was on the phone asking the question; you do have to remember that especially when you take a look at our year-on-year comparison that we did benefit pretty significantly in Q3 of last year from some one-time type benefits that we had, which we don't expect to recur on an ongoing basis. So that is part of it. And perhaps on year-on-year, not everybody took that into account. But overall, yes, I'd say that the tailwinds that we saw in Q1 and Q2 were much stronger than we had anticipated they would be.

With Concentrix, we're not able to plan our timing on everything that we do perfectly. And we do know that we have some more significant cost that we need to incur as we continue through the integration, but bottom line is very, very happy that at least in the first few months of doing the first and second wave close that our overall EBITDA performance is ahead of where we thought it would be.

Rich Kugele – Needham

Okay, well done. Thank you very much.

Kevin Murai

Thank you, Rich.

Operator

And I'm showing no further questions at this time. So I'd like to turn the call back over to Ms. Deirdre Skolfield to go ahead for closing comments.

Deirdre Skolfield

Thank you, Sharon. And thank you everyone for joining our call today. This concludes our call. Thank you.

Operator

This concludes today's conference. Thank you for participation. You may now disconnect.

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