Q2 2021 SYNNEX Corp Earnings Call
Good afternoon, My name is Jeff and I'll be a conference operator today I would like to welcome everyone to the Phoenix second quarter fiscal 'twenty 'twenty 1 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
It.
At this time for opening remarks, I would like to pass the call over to list Morelli head of Investor Relations Miss you may begin.
Thank you, Jeff and good afternoon to everyone.
Thank you for joining us for today's call with me today are Dennis Polk, President and CEO Marshall Witt CFO.
Before we continue let me remind everyone that today's discussion contains forward looking statements within the meaning of the federal securities laws, including predictions estimates projections or other statements about future events, including the benefits of the proposed merger to our various stakeholders timing of them.
<unk> capital structure and growth.
Actual results may differ materially from those mentioned in these forward looking statements as a result of risks and uncertainties discussed in today's earnings release and the form 8-K, we filed today and in the risk factors section of our form 10-K, and our other reports and filings with the SEC.
We do not intend to update any forward looking statements.
Also during this call we will reference certain non-GAAP financial information reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related form 8-K available on our Investor Relations website, IR Dot dot com.
This conference call is the property of <unk> Corporation, and May not be recorded or rebroadcast without our permission.
I will now turn the call over to Marshall Marshall.
Thanks, Liz and thank you to everyone joining us for today's call before getting into the details of the quarter's performance I would like to remind everyone that the year ago quarter was the first full quarter impacted by the COVID-19 pandemic.
Given the significant negative impact that this had on our fiscal Q2.2020 results the year over year comparisons that we discussed today are greater than normal and magnitude.
Our fiscal Q2 results came in well ahead of our expectations fueled by continued strong demand environment.
Total revenue for Q2 was up 31% year over year to $5.9 billion.
Gross profit increased 20% or $55 million compared to the per year to $329 million.
Gross margin was 5.6% down from 6.1% in the prior year, primarily due to product mix.
Total adjusted SG&A expense was $159 million or 2.7% of revenue down $14 million compared to the year ago quarter, primarily due to COVID-19 related expenses in the prior year.
Non-GAAP operating income was $170 million improved by $68 million or 67% versus the prior year and non-GAAP operating margin was 2.9% up 62 basis points year over year.
Q2 interest expense and finance charges were approximately $23 million and the effective tax rate was 25% both in line with our expectations.
Total non-GAAP income from continuing operations was $109 million up $44 million and improved by 68% over the prior year and non-GAAP diluted EPS from continuing operations was $2.9.
Up from $1.26.
In the prior year now turning to the balance sheet, we ended the quarter with cash and cash equivalents of 1.7 billion and debt of $1.6 billion accounts receivable totaled $2.5 billion down 12% year over year and inventories totaled $2.7 billion flat from the prior year.
Our cash conversion cycle for the second quarter was 26 day 17 days improved from last year. The decrease was driven by DSO improvements and better inventory turns cash generated from operations was approximately $280 million in the quarter.
And including our cash and credit facilities, we had approximately $3.1 billion of available liquidity.
We are pleased to report that our board of directors has approved a quarterly cash dividend of <unk> 20 per common share for the current quarter. The dividend is expected to be paid on July 32021 to stockholders of record as of the close of business on July 16th 2021.
Before moving to our Q3 outlook, let me provide a brief update regarding our proposed merger with tech data since our announcement in March we have established the capital structure for the planned merger through a new 5 billion credit facility and are on track with the debt financing for the merger.
Now moving to our outlook for fiscal Q3 revenue is expected to be in the range of $4.95 billion to 545 billion.
This estimate does not contemplate any impact related to the customer consignment change that we have previously spoken about at this time, we no longer expect to change to occur within our fiscal 2021.
Non-GAAP net income is expected to be in the range of $99.9 million to $110.4 million.
And non-GAAP diluted EPS is expected to be in the range of $1.90 to $2.10 per diluted share based on weighted average shares outstanding of approximately $51.9 million.
Our Q3, non-GAAP net income and non-GAAP diluted EPS guidance exclude the after tax costs of $7 million or <unk> 13 per share related to the amortization of intangibles and $5.3 million per <unk> per share related to share based compensation. Please note that these statements of our third quarter and fiscal 2021 expectations are.
We're looking and that our actual results may differ materially.
I'll now turn the call over to Dennis.
Thank you Marshall and thank you to everyone joining our call.
I wanted to start off with a special thank you along with much appreciation to our associates for delivering very strong results in Q2.
With our quarter, starting off with a tech data merger announcement, there was the potential of this news being a distraction to our daily efforts as.
As expected, though our team executed very well provided exceptional service to our customers and continue to expertly manage through the ongoing dynamics of our industry and the pandemic.
For Q2, our results came in above our internal expectations due to continued demand for remote capability digital transformation, the ongoing recovery of office and data center, it purchasing and overall above market growth.
Essentially every product category, we participate in saw strength in the quarter, most notably notebooks Chromebooks cloud security services networking and collaboration.
Our manufacturing business also performed very well with results above the high end of our internal forecast.
The demand came from across most all our customer segments with SMB and public sector, leading the way.
From a geographical perspective, all regions were at expectations or better.
Regarding our proposed merger with Tech data everything is going well as Marshall mentioned, we are setup for an effective financing or other transactions.
Our proxy has been filed and our shareholder meeting will be held next week.
And from a regulatory standpoint, we have received clearance from a number of governmental authorities and expect the rest to process through normal course.
As would be expected the Covid pandemic has led to review delayed in some countries.
Okay.
We still believe our transaction will close in the second half of 2021 reflective of the typical 6 to 8 months announced to close timeframe for a deal of this size and complexity.
Since the announcement of the transaction, we have continued to receive internal and external support for the merger.
The integration work, we have performed since the announcement, albeit limited due to regulatory rules further supports the strategic benefits of this deal that we discussed in March.
We look forward to sharing more when the transaction closes later this year.
Moving to our outlook our priority remains on the health and safety of our associates.
As we enter the second half of calendar 2021, we are thankful for the effectiveness of the vaccines and are hopeful that all who desire 1 will have access as soon as possible.
Overall, we are optimistic about the it spending environment given the current strong demand the.
The expectation of more geographies reopening and the resumption of on premise enterprise projects.
We believe these factors represent potential tailwind for our business.
Specific to our Q3 guidance, we are planning for continued growth in our distribution business.
I have added a bit of conservatism in our forecast this quarter given the widely reported supply chain component challenges.
Considering our current backlog still very strong we know the business is there it just remains to be seen when it will transact.
For our manufacturing business, we use the low end of our internal range for forecasting purposes.
This low end from manufacturing will reflect a decline over Q3 last year.
This is a result of the very strong prior year quarter.
The over forecast achievement in Q2 of this year and the overall unpredictable nature of this business.
Taking all these factors into account, we believe our Q3 view reflect a balanced outlook, which incorporates all of the various puts and takes of the current environment.
Hopefully a conservative view and as always we will strive to do better.
In closing I'd like to thank our customers and vendor partners for putting their trust in us to assist in growing their businesses and as always our outstanding team of associates, whose daily efforts are the reason for our success.
I am confident with ongoing execution will continue to progress on our stated strategy of improving our core business driving organic growth, increasing our value added services and products and successfully closing our proposed merger with tech data.
With that I'd like to open up the call for questions.
We request you to limit yourself to 1 question and 1 follow up.
First question from the line of group Blue, but tayo.
Bank of America. Your line is open.
Hi, Thank you for taking my questions.
My first question is on margin performance Marshall can you help US bridge the operating margin between fiscal <unk> and fiscal <unk> sequentially. It looks like you had a stronger than expected revenue performance I mean revenues were up 900 million plus sequentially.
You know it looks like operating margins were down about 26 bps.
Of that was FX, how much of that was mix related and how much of that was COVID-19 related costs. If you can just help us bridge the.
Margin performance.
Sure, we'll do recruit yes, most of it was just mix related in terms of.
The sequential relationship from Q1 to Q2, if you look at the underlying performance of the various sectors of our business. They all did very well it was a good overall balanced contribution from all locations and as Dennis said in his remarks across the spectrum of products and end markets.
And I would just add.
Performed very well now through Q1 and Q2. So in Q2, we had some compensation accruals, we had to make to recognize that strong performance by the team.
Okay, well, thanks for the details on that.
Maybe from my follow up can.
Can you talk a little bit about the highest consignment model transition did I hear correctly that that transition will not happen in <unk> or <unk> of this year and when it does happen in fiscal 'twenty 2.
Is the expectation for revenue per quarter impact.
You're right for 2021 as I said in my prepared remarks, we don't anticipate it transacting or are taking place. This year as we think about next year, we'll have to face that when we get there as we've said previously the overall economics.
On a profit dollar basis, assuming ongoing growth in relationship with this customer should not change, but the types of services that we provide will change.
Okay.
Follow up roughly would be we're just staying flexible and assisting our customer and their needs clearly the consignment program is taking longer to execute and when they desire to do so be it whatever time in 2021.
We'll help them out at that time.
Okay, great. If I can just squeeze in 1.1 more just Marshall on the on the on your capital allocation plan I know the transaction is expected to close later this year.
In the meantime are you do you still have a share repurchase authorization last how much is left on that and you just your thoughts on on on your AR.
Inorganic growth versus spending on buying.
Buybacks until that transaction happens.
Blue yet right now as we've said in our March discussion with you in regards to not only our results, but but the merger. Our overall go right now to ensure that we keep our leverage ratios appropriate as we enter into the transaction. We do have an open.
Repurchase program in place, but we anticipate that to be more anti dilutive than it is actually going beyond that so that would be our intent heading into the into the merger and just in terms of the overall just allocation of of <unk>.
Dividends were happy to announce another 20 this quarter that won't change as we move forward, but we really are thinking about keeping that position of strength, we have on a real strong current and long term capital structure.
Really well laid out as we go into the merger.
Okay. Thanks for all the details appreciate it Youre welcome.
Next question from the line of Vincent Colicchio of Barrington Research.
Your line is open.
Yeah.
In your prepared remarks, you talked about the most some of the regulatory approvals have occurred already does that was that most of the approvals.
What to what extent are removals remaining in the balance.
Hi, Vince this is Dennis yeah. So we had we have about 20 regulatory approvals to work our way through.
And I'd say at this point, we're more than halfway through.
Okay. Thanks for that clarity.
In terms of supply chain constraints.
Where are the biggest constraints and any color would be helpful.
Yeah really.
Vince across the board.
In client devices constraints networking, certainly cpus, even displays and some print products.
It wasn't a major product category that we serve that has not been affected by supply chain challenges certainly over the last quarter, but really frankly over the last 15 to 18 months.
Thank you nice quarter.
Thank you.
Next question from the line of Jim Suva.
Citigroup investment your line is open.
Thank you in your prepared comments, you mentioned about your forecasting and being conservative on the outlook. My question is regarding that conservativism is it.
Probably accurate that your lead times and visibility.
For the demand side is better than expected, but you're being more conservative on their ability to procure supply or are you also discounting the demand to some extent.
No I'd say, Jim Thank you for the question.
Glad to hear you back covering our account again thank you.
Say that.
It's really more the.
Completion of the product and delivery is what's making us most most cautious so the lead times.
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Causing the conservative aspect in our guidance.
Should say I don't want our investors to oversee our too much on this conservatism that we're placing on our forecast to put a number around it it's about $150 million to $200 million that we've reduced from what would be our normal forecast for the higher or elevated challenges in the supply chain.
That we're experiencing right now as I responded to Vince a few seconds ago supply chain challenges have been going on for a good.
Good year, and a half plus but with just.
And elevation.
The tightness, if you will of SLA and everything it takes to get products to our customers, we decided to be a little more conservative this quarter to the tune of about $150 million to $200 million.
Great. Thank you so much for the detail and additional commentary it's greatly appreciated.
Thank you Jim Thanks Kim.
Next question from the line of Adam Tindle of Raymond James Your line is open.
Okay. Thanks, Good afternoon, Dennis I wanted to start you talked about getting internal and external feedback since announcing the transaction you have had more time to talk to both vendor partners and bar customers. Just wondering if you could double click on feedback from each of those cohorts and how should we should we think about potential revenue synergy in dis synergies associated with that.
Yes, Adam Thank you for the question.
So.
But I wanted to first start off with is the positive feedback is from.
We classify as our foreign may constituents, our associates, our customers our vendors and our shareholders. So since our announcement we have received.
Again positive feedback and recognition from from all 4 categories. If you will.
Specific to your your your question regarding our customers and our vendors. So our customers are positive because they see us having a larger platform to service all their needs <unk>.
<unk> prior to the merger more of a niche from a vendor perspective and a <unk>.
And a geography perspective, but combined with tech data be able to service.
<unk> with all products in all geographies, so very very positive and consistent feedback from that customer set as a result.
From a vendor side.
Net positive feedback from the fact that we will have again, a global platform to service vendor needs wherever they want to sell their product and as important will be combined and able to consolidate our investments.
To invest where their business is going either an as a service cloud already other nextgen product.
Okay.
Yes, I just asked because when when tech data acquired Avnet to yes, 1 of their main competitors talked about 300 million or so of more share shift as bonds customer from seeking to diversify I'm. Just wondering if you're you know what the investors should expect obviously long term makes a lot of sense, but near term so any expectations for synergies to the tune them.
Sort of a magnitude.
Yeah.
Adam <unk>, our expectation is to grow the combined business and we know.
Every acquisition prior and we expect this acquisition.
Your service your customer and your vendor partners, well, you get more business not less and that's where our expectation for this transaction.
Got it and just as a follow up you talked about how a little bit of the integration work that you've been able to do so or supports the strategic.
Our rationale behind this just wondering if you can also maybe double click on that comment and particularly any color on from a system standpoint, how you're potentially going to decide which will go on us and ex homegrown system or system SAP.
We'll pull on integration would be helpful. Thank you.
Sure Adam Thanks, So 1 emphasize during this period there is only so much we can do.
The discussions we've been able to have.
Again reiterate and support our thesis for this transaction again for that for constituents I talked about before we.
We also talked about how culturally it was important for the teams to come together that's been solidified as we've had discussions with.
Our.
Co workers at Tech data going forward, so very very happy about the.
Cultural aspects that are going forward and also to your point about the.
The benefits of the merger from potential cross sell and other aspects. Good ideas are coming out from those discussions as well, but I have to emphasize all preliminary.
Need to close this transaction and get together at that point in time, I know, we will see all the benefits.
We talked about back in March.
Got it thank you very much.
Thank you.
Next question from the line of Matt Sheerin of Stifel.
Your line is open.
Hey, Thank you good afternoon.
Wanted to drill down a little bit more on your commentary regarding the demand picture it sounds like its fairly robust across the board specifically in client devices and Pcs could you talk about.
The strength Youre seeing.
And B is there an education market continuing to be strong do you still see legs to that PC cycle.
And then on the infrastructure side I know last quarter, you started to see a little bit of a pickup in on Prem infrastructure spending are you continuing to see that and is that factored into your guidance.
Hi, Matt Thanks for the question yes.
So you talked about 3 categories there of our business at all.
All 3 are positive, which is which is great to be experiencing right now.
Specifically you called out SMB.
Certainly that was 1 of the more challenged areas of our business. This time last year as a result of the pandemic and it was frankly from our perspective, a slower recovery, but in the past few quarters, especially Q2, we really saw a real strong comeback for the SMB environment. So very encouraged by that Ed.
We're hopeful that it continues throughout the rest of the year and beyond.
Regarding.
State and local and fed business and specific to your educational comment.
I called out in our.
Prepared remarks.
Public sector was very strong that includes the education part of our business and we don't see that business really changing too much.
The coming months and quarters. It is affected by the supply chain challenges. So we have to factor that but overall our public sector business is very good.
And then your last point was about.
Enterprise spending again, another area that was hit very hard.
Q2 of this year with another quarter that was better than the last quarter, we're still not year over year growth across all of our enterprise products, but we're starting to see growth in some of them and overall just the that sector of our business.
We had another positive incremental growth than the prior quarters from the pandemic time.
Okay, Great that was very helpful. And then on my follow up regarding your guidance on revenue and net income backing into the gross and operating margin. It looks like both will be up sequentially in back to near the levels. They were a couple of quarters ago is that a function of mix issues as well.
Benefit or mix or anything else going on there.
Yes, Matt you're exactly right.
We see mixed.
<unk> played a part in Q2, and we also see mix probably benefiting some of those margin improvements heading into Q3.
Yes, Matt I would just add yes.
Still not at a point, where everything is normal in our business and obviously normal.
And from a pandemic standpoint, but as Marshall said, the mix and the businesses definitely on the pathway towards that at all.
Q3 guidance is another step forward.
Understood. Okay. Thanks, so much.
Next question from the line of Ananda Baruah of loop capital.
<unk>.
Your line is open.
Yes, Thanks, a lot I appreciate it thanks, guys for taking the question and congrats on this on the on the strong execution and solid results.
I guess for the first 1 of my kids.
It sounds like you guys are anticipating the it spending environment continues to strengthen and so I guess the first question is.
<unk> seen the component environment tightened further.
As well then.
I have a quick follow up thanks.
Sure Ananda this is Dennis so yes, we as we talked about in the prepared remarks, we are encouraged by demand overall.
We talk about a lot debt when companies and businesses and even individuals invest in technology product. They often get strong returns and we think that's only going to continue going forward is as digital transformation and other investments are made by by businesses. So were definitely positive about the marketplace.
That we're in right now specific to your question about.
Our components and are they part of the supply chain challenges and tightening that we talked about yes, we definitely include <unk>.
Components in that category.
Okay, and then just the PC business in general it sounds like you guys.
Our continuing.
Really good demand and you sound sort of ongoing Lee optimistic about it some of the monthly data that's come out.
Taiwan. The ODM data has been has been choppy April to May.
Do you see any I guess I get the question is are you seeing any any change.
And the cadence of demand.
From from Pcs and Gambro.
That said I can see this thing.
Sure. Thank you.
At this point in time really nothing significant to call out from a cadence perspective, we're obviously balancing our comments today against the supply chain challenges, we talked about and obviously receiving product and get into our customers.
So thats a factor, but if you're talking about just overall demand no. We are we feel good about overall demand right now and don't expect any change certainly in the quarter that we're guiding to today.
Okay.
That's really helpful. Thank you guys I appreciate it.
Thank you.
Next question from the line of Shannon Cross.
Of Cross research.
Your line is open.
Thank you very much I was curious pricing I realize you pass through pricing.
But im wondering what youre seeing in terms of price increases from some of your partners and if you're seeing any hesitancy from a customer perspective.
Elasticity of demand and I'm thinking more on the hardware side, and then I'm curious like from a component perspective.
Just are there any timing issues, we need to think about within hives that that might impact you given some of the expected increases in commodity prices and then I have a follow up thank you.
Hi, Shannon this is Dennis so I'll take a reverse order from our highest standpoint.
No did not see any challenges necessarily from a pricing standpoint that will affect any aspect of the demand in our business for that segment of our business.
As far as your overall question.
Certainly we're in an environment, where pricing is increasing more than not.
But.
We have not seen any major issues.
As far as.
The continuation of our sales cycles and are working with our reseller customers with their own customers.
Such that it would.
I hurt demand if you will in any way.
Okay, and then maybe a bigger picture question I know, we've talked a lot about revenue guidance and how youre thinking about it but and I know you gave us the parameters of what to think about with regard to supply chain challenges, but given how much you have exceeded expectations for last few quarters.
Maybe if you could just walk through some of the puts and takes that you're thinking about.
As you put together your guidance for the quarter.
That you know are beyond that I think you said $150 million $200 million on the supply chain side. Just so we can have an idea of things to look forward that could potentially lead to upside given you mentioned conservative several times in the script. Thank you.
Thanks, Shannon so I'd start off with number 1 what you just talked about we have about $150 million to $200 million of Av.
Reduction in our forecast because of our conservatism on the supply chain challenges.
Number 1 number 2.
We talk about the fact that for our manufacturing business.
While we have a forecast that has a low and a high we always take the low end and factor that into.
The numbers, we guide to today with you.
The fact that that business is very unpredictable, we use the term lumpy hard to predict and so it always makes sense to 2 <unk>.
<unk> to the low end.
Enjoying the benefit of.
Performance above that so that's a factor.
I think it's important for investors to know and that's something we've been calling out for some time now the third is just overall conservatism in our in our business, we want to make sure we perform well and hit our metrics and so whenever we.
Look at our numbers before we bring them to you and our investors.
Obviously.
But a little bit of a discount on that just to make sure that.
When we produce our numbers at the end of the quarter, we meet them.
Okay. Thank you.
Thank you.
Okay.
And at this time there are no more question I will turn the call back to Dennis Polk for closing remarks.
Very good. Thank you in closing I want to thank the <unk> team for their dedication and efforts we.
We have ongoing confidence in our business and look forward to the eventual combination with tech data stay well. Thank you.
Thank you and that concludes today's conference. Thank you everyone for participating you may now disconnect.
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