Q3 2021 SYNNEX Corp Earnings Call
Good morning, My name is Misty and I will be your conference operator today.
I'd like to welcome everyone to the TD. The next third quarter fiscal 2021 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. At this time for opening remarks, I would like to pass the call over to Liz morally head of Investor Relations.
Again.
Thank you and good morning to everyone. Thank you for joining us for today's call with me today are rich him CEO and 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.
<unk> predictions estimates projections or other statements about future events.
<unk> the benefits of the merger to our various stakeholders it spending demand supply expenses 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.
Conciliations 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 <unk> Dot com.
This conference call is the property of <unk> and may not be recorded or rebroadcast without our permission.
Now I'll turn the call over to Marshall Marshall.
Thanks, Liz and thanks to everyone, who has joined US today for the call.
I will begin today by reviewing the legacy <unk> results and drivers for the fiscal third quarter ended August 31.
Given our merger close date of September one.
All discussion and outlook for fiscal Q4 reflects a full quarter combined <unk> and.
And we will continue to use the cynics fiscal year end November 30 going forward.
Moving to the legacy Phenix fiscal Q3 results I'd like to point out that year over year comparisons I will reference today are impacted by both the unusually strong performance, we experienced a year ago, given the rapid adoption of work and learn from home trends during the pandemic and the supply constraints currently impacting our industry.
Revenue came in at $7.0 billion.
Collecting a slight decline from the prior year due to ongoing industry supply chain constraints.
As we indicated during our June earnings call, we expected the impact from these constraints to fiscal Q3 revenue.
It'd be $150 million to $200 million.
While demand in the quarter continued to be very strong the impacts from the industry supply chain shortages were higher than anticipated.
While it's difficult to quantify with precision we believe the impact to our Q3 revenue most likely came in between $500 million.
Demand in the quarter continued to be robust and fairly broad based and we saw particular strength in commercial software networking security and notebooks.
Our manufacturing business results were consistent with expectations.
Gross profit of $313 million increased $15 million or 5% compared to the prior year and gross margin was 6% up from five 6% in the prior year.
Total adjusted SG&A expense was $144 million down 3% year over year and represented two 8% of revenue.
Non-GAAP operating income was $168 million and improved by $20 million or 13% versus the prior year and non-GAAP operating margin was three 3% up 43 basis points year over year.
Q3 interest expense and finance charges were $26 million and effective tax rate was 25% interest expense was higher due to the pre funding of $7.0 billion of bonds on August nine.
Total non-GAAP income from continuing operations was $112 million up $15 million and improved by 15% over the prior year and non-GAAP diluted EPS from continuing operations was $16.0
Up from $89.0 in the prior year now.
Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $9.0 billion and debt of $7.0 billion, which also reflects $7.0 billion of bonds related to merger, which I spoke to you previously.
Accounts receivable totaled approximately $4.0 billion down 20% year over year and inventories totaled approximately $11.0 billion up 7% from the prior year.
Our cash conversion cycle for the third quarter with 32 days and improved by one day from the prior year.
Cash used in operations was approximately $56 million in the quarter.
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 October 29, 2021 to stockholders of record as of the close of business on October 15th 2021.
Now moving to our outlook for fiscal Q4, which is reflective of the combined TD Fedex company.
Revenue is expected to be in the range of $15 billion to $16 billion disc.
Distribution revenue is expected to grow low to mid single digits year over year and in line with historical seasonal trends quarter over quarter, despite supply chain headwind of approximately 4%.
Our manufacturing business is expected to decline year over year due to our strong performance in Q4 of fiscal 2020. This business is lumpy and is also experiencing supply chain constraints. Our approach remains consistent with prior guidance, which is that we guide towards the lower end of expected outcomes for the manufacturing business.
Non-GAAP net income is expected to be in the range of $242 million to $272 million and non-GAAP diluted EPS is expected to be in the range of $52.0
Two $82.0 per diluted share on a weighted average shares outstanding basis of approximately $98.0 million non.
Non-GAAP interest expense is expected to be approximately $40 million and we expect non-GAAP tax rate to be approximately 25%. Please note that these statements regarding our expectations for our fiscal fourth quarter 2021 are forward looking and that our results may differ materially I will now turn the call over to rich.
Thank you Marshall and good morning, everyone and thank you for joining us today.
We have certainly accomplished a lot in the last six months I am privileged to join you today on behalf of the new TV Cynics and our more than 22000 co workers around the world.
Since our official day one earlier this month, we've been hard at work rolling out our new organizational structure and laying the groundwork for our future combined company.
We've announced our executive leadership team comprised of seasoned leaders from both legacy companies.
And thanks to our robust planning and integration efforts, we have hit the ground running on post day one.
Goals and objectives. However, we have much to do.
And I look forward to sharing updates with you as we progress.
We are energized by the positive feedback from our customers and vendors that are well positioned to raise the bar on the value we provide to our partners.
Those opportunities are reflected in our new name and logo or new name TD Cynics reflection preserves the long standing legacy of our two great companies are.
Our logo the Nautilus is a symbol of growth expansion and renewal.
For us, we expect growth and expansion will occur in many dimensions, including the growth of our business and our partner relationships.
We also announced our new shared purpose mission vision and values for our co workers, many of whom I have gotten the opportunity to get to know better and this past month.
With each meeting I come away, even more impressed with their collective talent motivation and commitment to excellence.
Although still largely working remotely we are United behind our vision of connecting the global ecosystem and unlocking the potential for all <unk>.
As we enter our fiscal Q4.
We have much to be optimistic about our role in the industry continues to increase in importance.
Our product and services portfolio is.
Tied to some of the highest growth technology markets, such as cloud security Big data and analytics Internet of things mobility and everything as a service.
As TV cynics, we have an incremental opportunity to offer our expanded portfolio to our more than 150000 customers.
Expand globally as we bring our enhanced portfolio to the markets that we serve.
From a macro economic perspective, we are maintaining a sense of cautious optimism as the recovery from our global pandemic continues to be uneven by geography and industry.
For our industry in particular, we believe in the long term drivers for it spending but continue to see a supply constrained environment for at least the next few quarters.
For Q4 as Marshall noted the distribution business is robust and on track for a normal seasonality from a sequential perspective and low to mid single digit growth year over year.
We see strong demand across PC ecosystem products advanced solutions and next generation technologies.
We continue to see a significant backlog level on a combined basis.
We estimate this impact to represent an approximate 4% headwind to revenue, but we still believe in a robust demand picture based on discussions with our vendor partners and customers.
From a merger perspective, we are on track and committed to achieving $100 million of cost synergies and a 25% non-GAAP EPS accretion over the next 12 months.
We are optimistic that we can exceed our year one accretion targets.
As I mentioned at the beginning of my remarks today now the real work begins we are primed and ready for the task of integrating our two great companies and will leverage our wealth of experience in this area.
As we contemplate changes and come to decisions on our integration journey.
Our focus is on establishing and maintaining a superior experience for our customers and vendor partners.
Among our top objective is the harmonization of various it systems applications and tools in the Americas and.
In closing I'd like to thank all my TD <unk> co workers for their dedication and focus during the lead up to our merger close and further spirit of collaboration and participation as we move forward together the.
The opportunities ahead of us are boundless.
I look forward to meeting with our investors and analysts in the coming months sharing our vision of the future of the ecosystem and keeping you updated on our integration progress.
We will now take questions operator.
At this time, if you would like to ask a question press star one on your telephone keypad again that is number one.
First question comes from the line of Adam Tindle with Raymond James.
Okay. Thanks, good morning, and congrats on closing the deal.
Just wanted to start with some of the guidance that we're getting here first on revenue in Q4, if I looked at the 8-K and thanks for giving that historical Tech data information I think tech data was about $11 billion of revenue in Q4 of last year. We know <unk> core was $6 billion. So combined 17 billion, but if we look at the guidance it's $15 five.
And at the midpoint.
Just wondering what I'm missing here I know you talked about some of the changes in hive and tough comps, but it's hard to explain the full delta based on that maybe you can touch on any dis synergies that you're learning about the vendor or customer level if any.
Hey, Adam This is Marshall I'll start and then rich can chime in.
Yes, we're happy to provide that 8-K keep in mind that those quarters legacy Tech data are not our quarters and in regards to November year end measurement, so depending on which quarter you pick you will get a different outcome.
I'd focus on Richard's comments around Q4.
Seasonal discussion and year over year discussions on growth rates I think thats.
That's where you should focus on.
In my prepared remarks, I did discuss.
And its impact on Q3 and Q4.
It's down year over year, that's probably one of the elements that could be skewing. The overall relationship, but fundamentally from a distribution standpoint that the relationships are sound and pretty typical what we've seen in the past.
Yeah.
Rich good morning, I hope Youre doing well a couple of thing and things in the prepared remarks, you heard that.
We stayed at a low to mid single digit for the distribution business. So you should take that as fact.
And then.
In terms of our estimate of the second piece is that we are facing a 4% headwind due to.
The supply challenges.
Year on year or sequentially.
The backlog is getting bigger for sure and then the third piece that I would comment on the tail end of your question.
We are not anticipating nor have we seen negative revenue synergies associated with.
Our merger in fact, we have seen as we had commented at the time of the announcement.
Even from day, one and beyond actually use of the complementary line cards for both sales teams. So we see that.
Those opportunities beginning to emerge.
Got it that's helpful clarification, Thanks, Rich and Marshall, maybe just as a follow up you went over cash and debt levels I just wanted to make sure I'm getting true current leverage levels on a pro forma basis and if you could also.
Such on how you think about normalized free cash flow for the combined entity and capital allocation priorities that would be helpful. Thank you.
Sure that's a mouthful ill try to get all three and leverage standpoint, we still think we're going to be in that that two two and a half to three times leverage.
We're still going through the opening balance sheet review will have better visibility to that once we get through the quarter itself, but no different than what we had said when we were looking at the deal and came out and announced what that looked like back in March when we announced the merger.
From a cash perspective, we also did say that after the fact that your expectation is we'll have a pro forma free cash flow approaching $1 billion.
Clearly a lot of that has to do with the momentum that both organizations bring together and the synergies that we believe we're going to achieve which is the $100 million in first year and $200 million in the second year and Adam Your last point on capital allocation. We are building from the ground up what this organization will look like we're 28 days into the merger.
But trust us as we get through the rest of this quarter, we're going to be a good sense of what that looks like for FY 'twenty, two and we will be able to speak to that and our call post close for Q4.
It sounds like you'll have a lot of options. Thank you.
Your next question is from Shannon Cross with Cross research.
Thank you very much Richard.
Can you talk a bit more about the growth of tech data and what Youre seeing.
Sustainability and and that.
During the last quarter and maybe if you can give us some some background even going back a bit further.
Just in terms of what what the trends you're focused on again on the tech data side as opposed to the Senate side.
Yeah. So.
My reflection would be fairly consistent with what we had seen on the legacy <unk> side. So.
Our industry and distribution in the business partner ecosystem have all benefited from the work from home scenario over the past.
Year in year to year and a half in total so theres been some very positive trends there while at the same time in the early phases of Covid. The data center category up was slower for obvious reasons. There's a lot of project based work that takes place there and then you know the next generation.
<unk> technologies as the service category.
With very robust.
Over the last year and a half times right.
As we look forward I believe that.
Although demand is still exceedingly strong in the PC ecosystem through time that will begin to moderate a bit.
You know based on on.
That whole cycle, but we would anticipate seeing the data center category being more robust in fact, we see it already.
Moving forward as some of that pent up demand.
You know begins to emerge and has to be disposition bye.
Our market and of course.
We will continue to see accelerated growth in the next generation.
<unk> as a service technology is moving forward.
So that's how I would summarize it Shannon.
Okay, and then on the financing business. You recently added can you talk a bit about the magnitude of what you see that growing too or.
This is something that some customers were asking for it. So you decided it was a good use of capital. Thank you.
Shannon. This is Marshall you broke up at the very beginning did you say financing business yes.
Yes, I did.
For TD capital.
Yeah.
Okay, Yeah, I'll start and then rich can chime and certainly that's a growing aspect of both organizations coming together. We believe we have to be prepared to address the way the demand in the market is going to go and we clearly know that we can take a portion of that risk on our balance sheet. We also know that we need to partner with others.
As we see that the economic solution continue to be a meaningful part of what we need to do to satisfy our customers' needs.
So.
Okay go ahead sorry.
No go ahead please.
I was just saying is this a response to the shifts more and more to cloud and as a service and subscription and all of that or was it something.
The hardware companies and your partners in that type of financing businesses for years. So I'm just wondering thought process. Thank you.
Yes, so Shannon I would I would comment bolt obviously.
This is something that provides advantage to the core but as we look forward to cloud and the as a service that becomes a meaningful part of the entire value proposition.
You know that that.
Customers are looking for so they are looking for sort of an end to end solution kind of think of it as almost a lifecycle type of thing.
We do believe that the financing is a critical element to our go forward strategy.
Sharon I'd, just add one more thing to that.
Talking about early days in the merger.
Legacy Tech data has a very robust solution that.
We're planning to deploy globally. So there's a lot of momentum potential behind this offering.
Great. Thank you very much.
Your next question is from Jim Suva with Citigroup.
Thank you.
In your prepared comments, you mentioned, a 4% headwind.
I just want make sure that's solely due to component.
Constraints and shortages and that's a year over year number as opposed to quarter over quarter, just help me clarify and understand if I'm off on that.
Yes, Jim this is rich good morning to you.
A couple of things. So first it is a year over year number.
Second.
When we take a look at the backlog of the business it continues to grow.
Third it's fairly pervasive, it's not limited to one technology or another.
We have backlog in what I would call the PC ecosystem segment, the advanced solutions segment as well as.
As well as our components business so.
I think it's it's our best Port Trail right now of.
You know how we are.
Yeah.
Okay.
Your next question is from the line of Matt Sheerin with Stifel.
Yes, Thank you and good morning.
Just again.
Regarding the constraints that you're seeing.
Rich.
It sounds like it is across the board, but have you seen that gotten worse and as you look.
Into as you get into fiscal 'twenty two.
Anticipating that to remain the same or you are seeing any signs of easing there.
Yes, so Matt obviously our intelligence.
As good as it is as we work with our vendor partners to get that insight.
I would say that anecdotally that the statements run from yes, there will be an impact to the first half of the year and could continue to.
Ill provide some level of impact in the back half of the year. So I believe that.
They're improving upon the situation in my my Crystal ball would be that they will continue to sort of improve on the situation as we move through time, but this will not be a light switch flip, but rather sort of a gradual.
A gradual hopefully reduction in the backlog as as we move forward.
Again, we're working very closely with each of the vendors to make sure that.
Providing clarity in terms of our demands.
Where we're short in and working with them to help alleviate that as we move through time.
Okay. Thank you and then a couple of modeling questions. Marshall looking forward. One is just on gross margin it looks like just from the tech data.
Financials that you provided it looks like gross margin is similar but I know theres a lot of mix shifts seasonally for both companies. So how should we be thinking about gross margin and SG&A and as you.
Proceed into fiscal 'twenty, two can we get an idea of the cadence of that $100 million in synergies cuts.
We expect to see that.
Sure Matt as you know, we don't guide to GM, but I will say that the results from legacy Fedex for Q3 was positive. So we were happy to see the result, we think that there is some confidence that that could continue going forward.
And as you can see from the 8-K, we filed with the historical PD.
Quarterly data is that the margin profile between the two company from a gross margin perspective, historically is pretty consistent.
In regards to SG&A, it's a good question.
A lot of our investments that both companies have been done historically have increased SG&A, but for the purpose of having good outcomes and returns going forward in the.
Subsequent quarters.
Would you use a three 5% to 4% range if youre just thinking about what that might look like for the rest of 'twenty one into 'twenty two and then in regards to the cadence and how the 100 million plays out we will work to build that out we do expect some lumpiness throughout the year there could be some some backend synergy momentum and some.
Some lighter synergies earlier on in the year, but we'll figure that out and when we talked to you at the at the end of our Q4 and part of our discussion on earnings we'll give you a little more sense of what that looks like for fiscal 'twenty two by quarter.
Okay, Great and just lastly, rich if I could just talk.
Could talk about what Youre seeing by region. You did say earlier that you know there is I mean.
Uneven.
Demand trends by region, and obviously, you're much global a bigger global company and how that you are combined.
<unk> forward will we be able to see.
The results by region, and perhaps operating results by region as well.
Yeah.
Yes, so we will be publishing the results by region as we move forward Matt.
What I would tell you is this global picture of of you know.
Our work from home and at filling up pretty good opportunity that continues is a global theme and this this idea of.
The data center.
Having.
Bit of a pent up view, it's also a global piece I mean, obviously COVID-19 took the world's home.
Now.
There are a lot of a lot of that data center capability, either is requiring more capacity or as requiring a refresh and you know arguably there is a big big pause on that for the first year of Covid, albeit that it is now recovering as I had said earlier, what I would tell you.
Where do you see a little bit of unevenness is when you run into pockets of of pandemic concentrated issues.
I guess, a great example of that might be like in India, we're not now but in previous months you'll.
You'll see.
A big big pause or in some of the other Asian countries. So.
I would say that the overall global picture is fairly consistent but the short.
Or lungs might be dictated by where a specific country is within the evolution of the pandemic.
Okay, great. Thanks, a lot Scott.
But it's clear Matt that we have growth in backlog everywhere.
Got it.
Your next question is from the line of Ananda Baruah with loop capital.
Hey, guys.
Congrats on congrats on everything and thanks for taking the questions I got two quick ones if I could.
First rich you mentioned.
I think it was doing canned remarks actually made into it given the answer in Q&A.
With regard to the sales team.
You're already starting to.
You get value added combined you can combine line cards do you also think is there an expectation or belief that that you guys can also gain suppliers share from key suppliers.
And what might that dynamic look like and I have a quick follow up for Marshall.
Okay.
So.
Yeah.
I hope I understand your question correctly, but I think.
What we've seen is that very early early on is that customers of legacy cynics.
And customers of legacy Tech data are interested in us supporting line cards that we historically haven't had it literally showed on day, one where we had requests for.
Things that.
That legacy Cynics carried that we did not and vice versa. So.
I think that Thats, a early indicator that we'll be able to.
With the extension of the line card to be able to bring better service to our customers, which in turn should should lead to.
A good sales opportunity and revenue opportunity for us as we move through time.
Just realize that.
Right now these requests are coming while we arent fully system capable with each others line card certainly we will get there in a short period of time, but you know customer awareness is pretty good relative to things that.
The other one or the other side has so I would I would suggest that that should lead to a good opportunity for us moving forward.
That sounds exciting and I guess.
Just to clarify Mike where my question was is I remember at one point in time.
<unk> here.
To some extent with the dynamic where suppliers.
A portion.
Certain certain amounts of supply kind of across the board in various proportions and that sort.
So the CTO distributions over performer so they can they consistently over Brazil performed as targets.
Yes of course, you're more supply and so that was really the question.
In that regard is that a dynamic that.
That still exists or was I misinterpreting it sort of from the time.
He was aware of it.
So I'm going to my vendor had on back when I was working with the vendor and the only time that.
Perhaps supply would be a portion is to the extent you were in a constrained environment than usually what you tried to do is to be fair to your to all of your customers.
Yeah.
I would anticipate that if we have real demand.
Steady state environment that will get strong support from our vendors to fulfill that requirement.
Confidence in that.
That's really helpful. Thanks for clearing that up and Marshall just just real quick anything with regard to.
Debt pay down.
Cadence the Wuxi calibrate expectations too.
Yes.
Coming back on the question that Adam had same answer here. We are <unk> rated so with that we're going to be mindful of the balance and they need to make sure that leverage stays.
I'll call it properly balanced.
And as we had committed to that two two to two five times leverage in the next 12 months to 18 months is our is our goal clearly with that depending on growth and free cash flow and working capital needs and other investments and part of our business that will all get balanced but ultimately that's our that's our thought is that the free cash flow. We spent out you know we're going to.
We allocate a portion to that.
A portion of reinvesting back in the business M&A opportunities and then the dividend that we announced today clearly as a part of that and then are open.
Repurchase program.
So thanks.
Thanks, a lot tweaking it.
Youre welcome from the line of Brooklyn.
<unk> with bank of America.
Hi, Thanks for taking my questions. Congrats on the quarter I have two questions and I apologize if they have been asked I just joined the call late.
But rich you know you've talked about cross selling opportunities between <unk> and tech data, but I don't think at least I don't know if you've quantified any revenue synergy target.
Between the two companies I think you've talked about $100 million in cost synergies, but I would think.
Two big organizations, you must have some revenue synergies that are possible.
Any thoughts on that.
Yes, so first.
I agree with you that.
I believe we're going to have the opportunity to have a positive.
Revenue synergies as we move forward second as a matter of.
Form when you create a business case as.
As we had for our combined TD cynics going forward, we didn't rely upon positive revenue synergies in that business case.
I think that's a typical market paradigm, because they're always hard.
Quantify so we see them as sort of incremental opportunity as we move forward.
And most important to US right now is to make sure that we're serving those needs.
And as Marshall had indicated maybe it will get closer to quantifying those as we look at our full year 'twenty two.
Moving forward.
But as I said earlier, it's a it's a it's a great opportunity that we hadn't relied upon in the business case.
Got it thanks for that essentially that.
For my second question can I ask you about the highest business I mean, it's.
It's a great business, it's more on the EMS side manufacturing side, I mean understanding it was a very significant business, but given the size of the revenues where the combined <unk>.
It's probably less significant now, but still it's a significant business. What is your long term Todd on that business is this something that you think is an integral part of <unk> or do you think that this is a business that potentially you could have some kind of a spin off or it could be divested at some point or spun off but.
So just your thoughts on how integrated those businesses into the combined company.
Long term thoughts for that.
Briefly this is Marshall, yes, it continues to be a meaningful part of our strategy today and going forward as you know we're.
We're still building out and diversifying the customer base and building out and creating new solutions to help diversify our portfolio of what we provide to our customers and then going forward, it's still going to be an important aspect of our go to market strategy in a very critical part of our success as an overall PD Phenix organization.
Okay. Okay. Thanks for that and if I can just.
Sneak one more in rich before the merger when you before you went private actually you know you had laid out a certain digital transformation plan for tech data now that the two companies have merged I mean is that plan still in place in terms of the expenditure on that and in terms of the different steps in that process.
Or has that changed somewhat.
So first.
We're fully committed to providing an outstanding customer and co worker experience at customer vendor and co worker experience with transforming our business digitally through time. So that's a given the second piece is we have now relative to our R. T D.
Our legacy we have a whole new pool of assets to consider so the answer is that the initiative will be maintained.
The solutions of of the tools and process and capabilities that we've put forward will likely get mixed a bit differently as we leverage all of the assets from our two legacy companies. So we're very excited about our customer experience.
<unk> going forward and no debt.
We can unlock a lot of value by making sure that we're providing an industry leading experience.
Through digital means.
Thanks for all the details and congrats again on the quarter.
Thank you.
There are no further questions at this time I'd like to turn the call back over to rich for closing remarks.
Well first thanks to all of you for.
Joining this morning, very encouraged with our engagement.
Hi.
I would tell you that.
We're arguably now 28 days in <unk>.
And as I look at our business moving forward I could not be more excited about the opportunities.
That we have in front of us.
Promise of.
Being able to serve the business partner ecosystem with more value that the promise of being able to drive mean.
Meaningful returns for our investors and shareholders are.
Our insight and becoming clearer to me as we had stated in the prepared remarks.
We had committed in the business case to a 25% accretion and as we kind of look at our Crystal ball right. Now we believe that we will overachieve that goal moving forward.
So our future from a overall customer vendor co worker and Investor perspective is quite bright and I'm very excited about the opportunities. So thanks for your time.
And we'll be talking to you soon.
Yeah.
This concludes today's conference call you may now disconnect.
Yes.
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