TD SYNNEX Corporation

Good afternoon, my name is Chantal and I'll be your conference operator today. I would like to welcome everyone to the SYNNEX Second Quarter Fiscal 2020 Earnings Call. Today's call is being recorded and all lines have been placed on each to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Ms. Mary Lai at Investor Relations. Ms. please, you may begin.

Thank you, Chantal. Good afternoon, everyone. Welcome to the SYNNEX second quarter fiscal 2020 earnings call. Joining me today to review our financial results are Dennis Polk, President and CEO, Marshall Witt, CFO, and Chris Caldwell, President of Concentrix. Before we continue, we remind everyone that today's discussion contains forward-looking statements within the meaning of the federal securities laws. which statements include any predictions, estimates, projections, or other statements about future events, including as to COVID-19 and related expenses, sales, CapEx, cash flow, profitability, and the expected separation transaction. 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, in the Form 8K we filed today, and in the risk factors section of our Form 10K. and 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. Reconciliation of non-GAAP and GAAP reporting is included in our earnings press release and the related form 8K available under the IR section of our website. This conference call is a property of SYNNEX Corporation and may not be recorded or rebroadcasted without our permission. And now, I will turn the call over to our CFO, Marshall.

Thanks, Mary. The results I will discuss today reflect the agility and strength of our execution, our disciplined capital management, and strong balance sheet with ample liquidity. At the beginning of our fiscal second quarter in March, very little was known regarding the human and economic impact of COVID-19 around the world. Our focus then was to stand by our associates and conserve capital with an anticipated return to pre-pandemic operating levels when circumstances allow. Consequently, while our performance was directly impacted by COVID-19, our results announced today have not been adjusted for COVID-19 costs. Where appropriate, we will reference the financial impact COVID-19 had on Q2 results. On a consolidated basis, total revenue was $5.5 billion, down 3% compared to $5.7 billion in the same quarter last year. On a constant currency basis, revenue was down 2% compared to the prior year quarter. Our consolidated gross profit dollars totaled $618 million, down 12% or $81 million versus a year ago, and gross margin was 11.2% compared to 12.2% a year ago. Total adjusted SG&A expense was $457 million or 8% of revenue, up $2 million compared to the year-ago quarter. Consolidated non-GAAP operating income was $162 million, down $83 million or 34% year-over-year. Non-GAAP operating margin of 2.9% was lowered by 134 basis points compared to the prior year period. Now shifting gears to Q2 operating performance by business segment. First on technology solutions, revenue was $4.5 billion, down 2% or $96 million lower than the prior year quarter. TS gross margin of 6.1% increased 23 basis points from the prior year quarter, primarily due to favorable product mix. Operating income of $88 million was down $24 million from a year ago. Non-GAAP operating income was $98 million, down 21% or $26 million compared to the prior quarter. Non-GAAP operating margin was 2.2%, 53 basis points lower than a year ago. Technology Solutions COVID-19 related incremental expense was approximately $37 million for the quarter, primarily made up of an increase in allowance for GAAP accounts, and staffing costs. Now to Concentrix. Their revenue was $1.1 billion, a decrease of 8% compared to the prior quarter. FX adversely impacted Concentrix revenue by approximately 2%. Concentrix gross margin was 32.4% compared to 37.1% a year ago. Non-GAAP operating income in the quarter was $63 million, down $57 million in absolute dollars, or 47% year-over-year. Non-GAAP operating margin was 5.9% compared to 10.3% a year ago. Net concentric COVID-19 related incremental expense was approximately $52 million for the quarter. Now let's move back to the consolidated results. Second quarter net other income was $1 million compared to $22 million in the prior year period. This was primarily due to a $19 million benefit recorded in the prior year upon the settlement of contingent consideration Related to our WestCon ComStore Americas acquisition. Total non-GAAP net income was $94 million, down $53 million, or 36% from the prior year period. And non-GAAP diluted EPS was $1.83, down $1.03, or 36% from the same period a year ago. The effective tax rate for the second quarter was 27.7% compared to 25.2% a year ago. For the third quarter of fiscal 2020, we expect the effective tax rate to be approximately 27%. Second quarter net total interest expense and finance charges were $34 million. This was $9 million lower than a year ago quarter, and that was driven by a reduction in our average borrowings compared to the prior year quarter. as well as a lower interest rate environment. For the third quarter, we expect interest expense to be approximately $32 million. Turning to the balance sheet, our accounts receivable totaled $3.2 billion and inventories totaled $3 billion on May 31st of 2020. Our cash conversion cycle for the second quarter was 46 days, seven days lower from a year ago and improved 13 days from last quarter and led to a preliminary cash flow from operations of $1.2 billion. Good collaboration with our partners helped support this improvement. We have a strong customer profile base and the quality of our assets remains strong. And at the end of Q2, including our cash and credit facilities, SYNNEX had about $2.5 billion in total liquidity available to fund operations. Now moving on to thoughts regarding our capital allocation. As described in our press release, our board of directors approved a new three-year $400 million share repurchase program We view this as a first step in the return to the capital allocation program we had in place pre-pandemic. The focus of this new repurchase program will be anti-dilutive, similar to our historical approach, albeit a more measured pace to start given the current environment and opportunistic buying when available. In terms of restarting our dividends, we view this as a second step. and we will revisit this program after a few more quarters of consistent performance and market stability. With respect to the overall capital allocation priorities, we will maintain our prudent and disciplined approach as we continue to navigate through this pandemic. We will continue to be strategic in how we deploy cash and steadily balance what's best for our business and our commitment to deliver long-term shareholder return. I'd like to provide a few high-level comments on the concentric spin-out. As we have stated last quarter, we remain committed to finalize the SPIN. We are encouraged by our ability to have navigated Q2 despite all its challenges. And at this point, we are targeting to complete the SPIN sometime in the calendar fourth quarter of this year. Continued effort on this project and its completion are all preface that overall economic activity continues to grow and there are no major additional shocks like what occurred in Q2. Now, moving to our third quarter outlook, we expect revenue to be in the range of $5.5 billion to $5.9 billion. Non-GAAP net income is expected to be in the range of $103.9 million to $129.9 million. Non-GAAP diluted EPS is expected to be in the range of $2 to $2.50 per diluted share, based on a weighted average share's outstanding of approximately $51.3 million. Non-GAAP net income and non-GAAP diluted EPF guidance excludes after-tax costs of approximately $37 million or $0.71 per share related to the amortization of intangibles and acquisition-related and integration expenses. One final note before I turn the call back to Dennis or over to Dennis. We had previously communicated that one of our HIVE customers anticipated moving to a consignment model towards the end of Q3 or early Q4. We now expect that this will take place late Q4 or possibly early in 2021. As a reminder, we anticipate that this will lower revenue by approximately $600 million per quarter. Please note that these statements of third quarter fiscal 2020 expectations are forward-looking and our actual results may differ materially. Now I'll turn the call over to Dennis.