Q1 2020 Earnings Call
I would like to welcome everyone to the Cynics first quarter fiscal 2020 earnings calls.
Today's call is being recorded and all lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. We ask each participant to limit their question to one question and one follow up.
At this time for opening remarks, I would like to pass the call overtime. This Mary life head of Investor Relations Mr. you may begin.
Thank you David and good afternoon, everyone. Welcome. This first quarter Transco 2020 earnings call.
Joining me today to review our financial results aren't Gonna spoke President CEO, Marshall Witt, CFO and Chris Caldwell precedent that's concentrix.
Oh, we continue we remind everyone that today's discussion contain forward looking statements within the meaning of the federal Securities Law, which statements include any predictions estimates projections or other statements about future events, including asked to covert 19 impacts responses to them and the expected separation transaction.
Actual results may differ materially from those mentioned and these forward looking statements as a result of the risks and uncertainties discussed in todays earnings release in the form 8-K filed today and in their best Dr. section of our form 10-K, and other reports and filings with the FTC, we do not intend to update any forward looking statements also.
During this call reference certain non-GAAP financial information I.
Reconciliation of non-GAAP and GAAP reporting is included in our earnings press release, and the latest form 8-K available under the Investor Relations section of our website.
This conference call is the property of Synnex Corporation that may not be recorded or rebroadcast without our permission.
And now I will turn the call over to our CEO Dan.
Thank you Mary.
Thank you for joining our call today.
As we all know so recently.
Right in October 19 virus.
Dan extraordinary to say the lease.
All of us have been significantly impacted.
Individual communities and organization.
As pandemic.
I will provide additional commentary on the current state of our business in a few minutes.
But first I want to begin by sincerely thanking our teams throughout the globe. We have worked tirelessly around the clock to ensure the safety and wellbeing of our associates.
I also want to extend my sincere appreciation to the team for their efforts to run our business. During this time.
Most oh I've had to deal with significant uncertainty and personal lives and deal with rapid change in the business World. Yes. So they have Concentrix spirit has never shied writer.
And our associates have performed solidly.
Under the circumstances for our customers suppliers and vendors.
Given the current environment, we question the valuable holding a lot call today.
But we believe in challenging times it as best you have transparency.
Accurate information possible silver to all stakeholders.
Since we are are they suddenly different environment.
Altered our traditional format for our call.
For today.
I will briefly comment on our Q1 results and then discuss the current state of Rts business.
And then turn over to call to Chris for Concentrix current environment update.
Marshall will follow with its your financial topics, no clause and transitional secure day.
Our first quarter was very good.
We delivered solid TPS and margin result.
Well the headline revenue growth appears due to.
The underlying fundamentals were strong.
Our Concentrix business grew two expectation and it would have been better likely if not for an initial phases of Kobin 19 in Asia that impacted some of our operations starting in late January.
Our chips distribution business was very solid with above market growth overall.
So more to come such work there were some weakness at the ended the quarter likely due to the disruption in the supply chain related to the initial phases of the virus.
Weighed on T.S. growth was our hard cloud manufacturing business that'd be had a year over year top line the Cline.
We have indicated over the years this can be lumpy business.
As you may recall that was much higher than expected in Q4.
Likely dusted off that in Q1.
Starting off to true.
Very good order backlog.
Inventory, that's part of our T.S. business.
Moving to current quarter thought our top priority the safety and health of our associates, we have implemented that sorry protocols to minimize business disruption.
And we have initiated a business continuity plan.
Like many others, we haven't rapidly moving it team members to work at home environment instituted safety policies for those that can't work from home and manage it in an environment of rapidly changing government requirements across the globe.
Given the uncertainty surrounding the situation the U.S. at around the world, we're not positioned to provide Q2 guidance.
That doesn't get earlier, though I will provide a few thoughts on the T.S. doesn't to fund the turned over to Chris for Concentrix update.
And our T.S. business at this point, we are seeing essentially normal to slightly positive March run rate the math.
This is clearly do as a pandemic and the urgency for products to support work at home learn at home delivery to home and all the health and safety personal assisting in the crisis.
In terms of our high business, our manufacturing operations are active helping to support our main customers what their needs.
Which appeared to have increased with the outbreak as well.
Given the environment so fluid.
We don't have the visibility to know at these rates will continue or if a drop will occur once the initial burst of demand is over and the economy is still working through the effects of the shock.
Either way, we will be supported our marketplace for what it means and be ready for a return to a more traditional business environment.
This time is definitely show how critical are placed it in the I.T. supply chain and how important IP and our business model will be going forward.
I will now turn over the call to Chris.
Thanks Dennis.
Despite being impacted with our China operations late in January from the co. Good night team virus, we delivered solid results in the quarter they met expectations with Concentrix, continuing its trend up year over year constant currency revenue growth and margin expansion.
We also continue to achieve synergy target ahead of schedule see a strong pipeline and we're happy with our execution in the marketplace.
With the current worldwide environment changing dramatically in the last few weeks I would like to turned out to our thoughts on the business and what we're doing to ensure we execute as well as we can despite the current headwinds.
As Dennis mentioned it was not completely clear how the global pandemic may affect our clients and our business volumes in both the short or long term, nor our ability for operations to capture the volume that is currently being given to us.
Our primary operational issue to date has been where the response to the virus by certain cities states and countries have made it impossible for our stuff to get to our officers.
Sure varying degree we have seen this type of disruption for every region in which we operate.
Presently we have 230000 staff in the Concentrix business, which over 150000 are living within restricted movement and work situations. There in in indicated last a few days to a few more weeks, but most likely will be extended.
The 150000 stock unrestricted movement location approximately 70000 are unable to work currently at all.
As governments continue to refine their strategy to deal with the Cobot 19 virus. Our expectations are further restrictions will be put in place affecting many more of our stop.
While we believe the majority of this business impact to be temporary as the world deals with the outbreak certain verticals such as our travel and transportation vertical which represent approximately 300 million annually. We believe will be impacted about 75% and take many quarters to recover.
The work that our team is doing everyday to support our clients and staff is consistent with emerging from the situation stronger. So that we can achieve our long term growth and margin expansion objectives.
Bid on a longer horizon.
We're working on a multi prong strategy to support our clients.
Within the past two weeks, we've been able to over 45000 stop to work from home and we intend to roll that thousands more over the next few weeks as long as logistics are not inhibited by walk down orders and we gained quite consent.
In our sites, we have reduced density greatly increased sanitation cleaning and splitting teams for business continuity.
We're also as quickly as possible offering other technology solutions to our clients that would handle volumes in a more automated way.
Many agencies the praised us for going above and beyond the documented recommendation to keep staff say well quiet the greatly appreciate their support when other partners for our own or their own captives couldn't execute.
Some very generous clients have offered assistance to help us support our non working staff. During this time underscoring the mission critical nature of the work, we perform and the strength of our relationships.
While we're seeing success with our initiatives doing this at scale requires tremendous effort both in terms of resources and time.
To reiterate what I said earlier, our focus remains on delivering for our clients and protecting our style to position the company to exit the situation stronger, but I'm confident that our team will make it happen.
As I conclude I would like to thank all the Concentrix team members for working to meet our clients' needs under these very difficult circumstances.
Effort resourcefulness and dedication to our staff and our quiet it's been an inspiration we simply have amazing so an incredible clients around the globe.
Thank you very much but where do you Marshall.
Thank you Chris given the current environment My prepared comments today will focus on a few key items related to liquidity our capital return program. The status of our form 10 filing associated with the concentric span.
And it's statement on our income statement for Q2.
Regarding our liquidity position, we believe we are well positioned to cover the currently expected impacts connected with cobot 19.
We also have additional alone capabilities to activate if required.
As part of impact assessments are estimates, we're forecasting or do you have so to increase over the coming quarters, primarily due to the major verticals affected in concentrix and the nature of our tech solutions portfolio.
For our stock buyback portion of the capital program, we had no buybacks in Q1 and terminated our repurchase program in early March.
Incrementally as you've already seen in our press release, we suspended our quarterly cash dividend effective immediately given the significant sudden shock to the worldwide economy, We believe our capital as best you over the near term to support our business associates customers partners and related strategic priorities.
Regarding the concentric span that we announced the started the year until our priorities change with the virus escalation. We were far ahead of our execution plan.
We filed our form 10 in February on a confidential basis for speed and efficiency purposes, with our banking partners. We made significant progress on on the final spend financing for Concentrix and completed most of the internal administration related to the spend.
As a result, we were planning to announce on this call at the spend would occur more likely than not at the start of our Q3 or June 1st of this year. We're still currently committed to doing that fan, but it will be delayed as our primary focus will continue to be on managing our business on a day to day basis.
As a reminder, details of this previously announced separation can be found on our IR website.
As Denis noted, we will not be providing Q2 guidance given the global uncertainties, the unpredictability of supply and demand our ability to maintain adequate inventory and our delivery capabilities as a substantial amount of work has migrated to work from home or is on pot. These disruptions were discussed today.
And whats ahead of us are expected to negatively impact our profitability.
Based on what we see today, our estimated that non-GAAP operating profits earned in Q1 will be substantially given back in Q2, keeping in mind that our precision around Q2 results has a high level of uncertainty.
This is primarily due to the restricted staff movements noted by Chris the investments we have made and we'll continue to make to ensure our physical environments are safe for our associates.
And then expected overall slowing economic environment.
We believe Q3 will be a recovery period, and Q4 is expected to be closer traditional expectation should the pandemic start to subside over the next two quarters.
I must emphasize that these are very preliminary estimates at this point and couldn't materially change.
Overall, we are disciplined and our expense and balance sheet management approach as such we believe we are positioned to withstand this rapid change and economic activity and have the experience from previous episodes to drop on the current expectations that we returned to a more stable environment at the end of the year.
Just like everyone else, we're learning new information and ours and get any more clarity everyday in the meantime, we're committed to investing for long term growth and creating consistent and sustainable shareholder value I will now turn the call back to Dennis.
Thank you Marshall.
As Marshall indicated our focus is fully on all of Fedex and not to spend right. Now we were very pleased by the market reaction and support from our investors when we announced the transaction.
Hey, real validation of the concentric team and its business.
The reality at this point is that we can bring this business to the market and independent company when the focus will be on the virus pandemic response and recovery.
We will break concentrix the market when the focus will be back on the strategies and prospects of the business.
As I wrap up our prepared remarks I want to thank again, all our dedicated associates for doing everything possible to navigate these extraordinary circumstances.
Most specifically as Chris noted as well I want to sincerely. Thank all our associates around the globe, who cannot work at home given their responsibilities.
It is impossible to put in warrant the entire companies appreciation.
Lastly, we are grateful for the support of our business partners and shareholders.
Our thought our with those who have been affected by Cobot 19, please stay safe and healthy.
With that we will turn the call back the operator for questions. Please note that as you would expect the management team is in multiple geographies. So we may see a little slower to respond in the normal.
That's a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question pressed the founder hash key.
Yes, we ask participants to limit themselves to one question and one follow up please standby, what we compiled acuity roster.
Your first question comes from the line of Matt Sheerin with Stifel. Your line is open.
Yes, thanks, and good afternoon, and I'll start by saying that we appreciate you holding this call and taking questions.
In spite of the the lack of.
Visibility uncertainty here.
Just a first a couple of questions regarding the Concentrix business.
Chris you talked about the impact from the travel business I think you said, that's a 300 million dollar.
Revenue run rate or a year what other segments are you seeing a big impact in terms of about a drop off in demand.
So is primarily might be travel and transportation vertical that we mentioned so not traditional airline bookings size vacation types of planning sites.
Other industries that we're seeing what impact as some of the newer fin tech that might not necessarily have the market share that.
Traditional financial institutions that we are seeing though higher volume and health care.
Additional financial companies that you're you're you can imagine as well as.
Some of the insurance vertical as well so it's a bit of about but that particular verticals is one that is marginally impacted with we feel the.
Like the recovery being significantly longer than any others.
Got it in and in terms of the the number of employees that are unable to work are you paying them or are there.
Some government mandates in certain areas, where you have to pay the employees.
So so Matt by principle as a company we pay the stuff. There are some government mandates that are publicly out there where they have requested that.
There'll be continued payments for a period of time and or inability to do any change I'm staffing levels that really is a jurisdictional by jurisdictional conversation, but currently right now we are paying the individuals who are.
In the.
In the period of not not working due to restricted but then on travel or restricted movement.
Your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.
Yeah, Chris Thanks for taking the questions. How many just to give us respected how many at home agents did you have before the crisis I think you said your 45000 now just to cover comparison.
Yeah. So prior to the crisis, we had about 5000 work at home agent globally, and so we've rolled out additional 45000. So we're supposed to about 50000 right now.
Agents working at home processing work clearly you know we have other support services and shared services are working from home, but just from a revenue producing you can think about little over 50000.
And any sense for you know capacity like how many you could ramp up in the next month for example.
Yes, so Vince its an interesting conversation it really is a couple of different parts, we want to have to make sure that we operate in the countries that have the infrastructure and that our staff at the appropriate infrastructure to support that sort of high speed Internet clearly we've been doing a very good job of.
Rolling it out in those different geography.
And then the second one is Theres also dependence on client I T systems.
So we're in that working through with their clients right. Now we expect that we continue to grow that number pretty significantly as you can see in two weeks.
45000 is a.
Significant and our expectation is provided there is no logistical impacts we continue to grow probably not supposed to another 45002 weeks, but certainly we continue to grow that number.
Your next question comes from the line of Tim Yang with Citi. Your line is open.
Hi, Thanks for taking my question can you talk about your stops principal payment schedule I believe Youre annual filings you have roughly 300.
Due within one year down 1.2 billion Q3 years can you maybe just to elaborate into bill how much a series of next 12 to 24 miles.
Hello.
Hi, Tim This is Marshall we have to term loans, we have one for 1.1 billion that matures in September 2022.
And the second term loan for 1.7 billion matures in October 2023.
So basically 300 million of Dedup recruitment for the principal within one year in stats that you are just one.
That youre going jewel payback for within 12 12 months, what you think about it.
We have normal revolvers that flux coming down as we need them.
Got it Okay, and then Youre SMB activities in the U.S. youre selling to a body ratably. Each others was this on certain involvement how should we think about the receivables write off and risk and that you have customers benefits in Ventura bankruptcy.
Yes. It today, we've seen very little customer risk, but clearly and the environment. We're in one thing that's very encouraging is what I'll, just say a great kinda by collaborative partner vendor.
Connection or there's a lot of interest right collaboration underway with both the var channel and our vendors.
Clearly understanding the importance of the vital role, we play and the supply chain. So today it other than my prepared comments about expecting some extensions of of D.S.. So we don't expect there to be significant more risks as we see it today.
Your next question comes from the line of Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good afternoon, Dennis I, just wanted to start with since you asked questions and maybe it's possible in the interest of transparency. Some help with the virus related impact since that was primarily in the month of February what are you tracking right, where we are tracking relative to guidance entering February. So we can have no some sense of the impact.
And I think you mentioned that it has.
Gone to a slightly positive run rate and demand in March I was trying to understand is that a year over year gross coffee and tea.
Yes, sure Adam So two things there one with regards to Ts distribution in the Q1, we performed better than our internal exceeded expectations and grew very well year over year what.
Occurred in the quarter was though the Ts business as I said in the prepared remarks, but was down year over year.
To your question about the end of the quarter, even with the challenges as I said, yes, it very well, but it didn't suffer a little bit of.
A decline in volume right at the end of February again likely due to the challenges coming out of Asia and the supply chain.
Regarding the month of March and our start yes that was a year over your comment we are running at a slightly higher rate year over year through today's numbers.
Okay. That's helpful. Thanks, and maybe just as a follow up just a potential upstate if possible on that type customer shift that you talked about in the back half of 2020 on the previous call. That's supposed to lower Q3 in Q4 revenue by about 600 million a quarter, but had no material change to earnings potential should the volumes with the customer continue at existing levels.
I guess, where is the both existing customer how can we think about earnings potential as a result.
Yes, Adam this is Marshall so.
No change in those comments other than to start date for that consignment program was pushed out a couple of months. So now we're thinking it's going to be towards the end of August call. It Q4 is one we'll see that number that we described is about 600 million a quarter move.
Out of revenue, but as you just a read from our script last quarter, we still expect I continue to grow and that relationship.
Your next question comes from the line of fund and Peru listen capital. Your line is open.
Hi, guys, yes, yes, good that's when you take state you doing the college while it.
Much like it will be much better from the stock then did not doing I doubt I guess I have two if I could Marshall just a clarification.
You said you believe the op profit that you earned in the game in the February quarter will be.
Given back in the May quarter, and so is that how we should think about you know just whenever you didn't use in Jan any signs that.
The loss will be that much more and we'll do that about that in May I. Just wanted to clarify that and then I have they ask a follow up question. Thanks.
Yeah, I know you're right that that's our best estimate right now as we look at Q2, but you know you you heard my prepared remarks lot of and uncertainty around that but that's our best guess again framing out what we believed to be a recovery in Q3, and then back to normal business.
In Q4.
And just real quick and I could sneak decisions through December I said Q4, <unk> November quarter, we say back to normal.
Can you put in context normal.
For us.
Hey under the data.
Again, we're do given our best estimate as we see things today clearly, we do not know how things are going to play out over the coming weeks months and quarters. We're just making an assumption that there's going to be two quarters of a shock to the business and we get back to a more normalized environment in Q.
For how that plays to our numbers remains to be seen but that's our best estimate today.
Your next question comes from the line Ruplu Bhattacharya with Bank of America. Your line is open.
Hi, Thanks for taking my questions and congrats on the quarter given the difficult environment. It was good result.
Maybe Marshall just start off with you talked about Dsos, probably expanding given the environment can you talk about what do you think what you're thinking of in terms of working capital management, how do you see the cash conversion cycle, extending and how should we think about cash flows.
Sure for this year. Thanks, Yeah, Yeah, I'll try my best as you know within distribution, there's a there's a partner customer relationship there. So to some extent, we're able to manage inflow and outflow, but with that said, we still expect there to be an extension to the so on my comments around adequate liquidity from.
From a cash perspective, and additional lines that we can draw we feel very comfortable being able to weather the storm.
On the concentric side, they're dsos will extend so that also is part of our thoughts of what that might look like over the next call a couple of quarters.
Okay. Thanks for that and then as we approach the split any thoughts on how you see the capital structure for each of the entities.
At the time in the split.
Yes, so the thought right now are and what we shared last quarter was that it's going to be a 50 50 split so thinking about our total debt of around 3 billion.
Translate that to one of the happened one and a half debt now that fluid and could change a little bit as we move forward, but that was our thought and then keeping in mind. That's what presented are represented in the up 10 that will be coming up shortly.
I'll just follow up on that are on both those costs questions or in that everything we're trying to do today is offer you are most conservative view possible I guess I said earlier things change rapidly everyday and we do not know what's going to happen over the coming weeks in quarters, but.
In preparing everything per day for today and all of our comments, we're doing our best to be that's conservative as possible and we hope to come in better than these expectations that we call them out today.
Your next question comes from the line of Shannon Cross with Cross Research. Your line is open.
Oh, Thank you very much Dennis can you talk a bit about what you're seeing in terms of demand within key S. I know you said work from home solutions and and learn from home solutions, but can you be a little bit more specific I'm just trying to figure out you know.
But the link this benefit will happen I know nobody really knows but maybe if we know a little bit more about where you're really seeing the demand. We can make some gases and then I have I follow that thank you.
Yes, it's really all the areas I talked about in the prepared remarks, Shannon, there's obviously a from a product standpoint, there's a high demand for pretty much everything that we're selling a and that's going into enabling people to work or service their business remotely and.
That seems to be the consistent methods, we receive from all the customers that are reaching out to us now with their with their product demand.
Are you finding shortages of any of the products that that you you want to be shipping out at this point in time, because you mentioned an issue at the end of the last quarter with regard to supply chain. So has that sort of alleviated itself.
When I say is.
He did itself at the start of our quarter again really three weeks into a three and half weeks.
But since the.
Pandemic has really ramped up I'd say that has started to go away and now we're starting to see.
More shortages.
And more deliberate satellite lengthened out on a pretty regular daily basis.
And so we're planning for the quarter that I'm pretty much anything we order will be or it will take longer than normal to receive at this point in time.
Okay. If he would like to ask the question Press Star one on your telephone you ask participants to limit themselves to one question and one follow up.
Your next question comes from the line of Finance for rule with loop capital. Your line is open.
Hey, Thanks, guys going to follow up.
Yes. It just following up on Shannon's question So is Ah.
With regards to the op profit you know sort of color for for the May quarter is that largely due to concentrix right now I mean, I know that demand could slow MPS I and if it guys.
Perhaps you've you could change but is that the op profit color that may quarter is that.
Largely entirely due to what you're seeing in Concentrix.
Yeah no into this data yeah. That's an assumption you can make it clearly from a Christmas comments, we have a lot of folks who are unable to to come to work and if there aren't able to come to work its difficult for us to bill. So we'll have a more of an expense drag if you will in that business first.
Yes.
The only thing I'd say on T.S. is back to the commentary has had a few seconds ago as long as product continues to flow as I said, it's getting tighter and there's some shortages here and there, but we are seeing product flow, but as I said earlier as well. All these comments are based on what we know today. So if the the product flows in a consistent.
Matter is today than T.S. should play through reasonably well this quarter, if a product flow changes.
Then obviously our comments are different.
At this time there are no more questions I will turn the call back to the CEO Dennis for closing remarks.
Okay and closing I just want to thank the entire Synodex, hi, and Concentrix team for their incredible efforts once again.
And to everyone I really have high confidence will emerge from this crisis, better and stronger I wish everyone to stay well. Thank you everyone. Good night.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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