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 Cinex third quarter fiscal 2020 earnings call. 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. At this time, for opening remarks, I would like to pass the call over to Marshall Witt, Cinex Corp CFO. Marshall, you may begin.

Thank you, Chantal, and good afternoon, everyone, and welcome to the Cenex third quarter fiscal 2020 earnings call. Joining me today to review our financial results are Dennis Polk, President and CEO, and Chris Caldwell, President of Concentrix. Before we continue, let me remind everyone that today's discussions 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 as to the expected spinoff, demand, economic recovery, growth, expenses, debt, cash, margin, and liquidity. 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 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. Reconciliation of non-GAAP and GAAP reporting is included in our earnings press release and the related form 8K available under the investor relations section of our website. This conference call is the property of Spinnix Corporation and may not be recorded or rebroadcast without our permission. And so now I'll cover some of the key highlights from Q3 and discuss Q4 guidance. In the face of continuing economic uncertainty in these unprecedented times, our revenue, net income, and diluted EPS all exceeded our expectations, reflecting our resiliency and ability to do what we do best. Our gap results announced today, while continuing to be impacted by COVID, have not been adjusted for COVID-19 costs. Where appropriate, I will reference the financial impact COVID-19 had on Q3 results. On a consolidated basis, total revenue was a third quarter record of $6.5 billion, up 4% compared to $6.2 billion in the same quarter last year. On a constant currency basis, revenue was up 5% compared to the prior year quarter. Our consolidated gross profit dollars totaled $708 million, down 2% or $18 million versus a year ago, And gross margin was 11% compared to 11.7% a year ago. Total adjusted SG&A expense was $448 million, or 7% of revenue, down $8 million compared to the year-ago quarter. Consolidated non-GAAP operating income was $260 million, down $10 million, or 4% compared to a year ago. Non-GAAP operating margin of 4% was lower by 34 basis points compared to the prior year period. Now shifting gears to Q3 operating performance by business segment. First on technology solutions, revenue was $5.3 billion, up 5% for $258 million over the prior year quarter. Technology solutions gross margin was 5.6%, and that was 37 basis points lower than the prior year quarter, primarily due to product mix. Operating income of $132 million was down $6 million compared to a year ago. Non-GAAP operating income was $142 million, down 5% or $7 million compared to the prior year quarter. Non-GAAP operating margin was 2.7%, 29 basis points lower than a year ago. Technology Solutions COVID-19 related net incremental expense was approximately $8 million for the quarter, primarily made up of an increase in allowance for dappable accounts, staffing, and work-from-home costs. Now to Concentrix. Concentrix revenue was $1.2 billion, up 24 basis points over the prior year quarter. Concentrous gross margin was 35.5%, up 308 basis points sequentially, and down 126 basis points compared to the year-ago quarter, primarily due to the impact of COVID-19. Non-GAAP operating income in the quarter was $118 million, down $3 million in absolute dollars, or 2% compared to a year ago. Non-GAAP operating margin was 10.1% compared to 5.9% in fiscal Q2 and 10.4% a year ago. Net concentric COVID-19 related incremental expenses were approximately $13 million for the quarter. Now, moving back to our consolidated results. Third quarter net total interest expense and finance charges were $29 million, a reduction of $14 million compared to a year ago quarter. The decrease was driven by a reduction in our average outstanding borrowings compared to the prior year quarter, as well as a lower interest rate environment. For the fourth quarter, we expect interest expense to be approximately $29 million. Total non-GAAP net income was $173 million, up $3 million, or 2% over the prior year period. And non-GAAP diluted EPS was $3.33, up 3 cents, or 1% over the same period a year ago. The effective tax rate for the third quarter was 25.2%, compared to 25.3% a year ago. For the fourth quarter of fiscal 2020, we expect the effective tax rate to be approximately 25%. Turning to the balance sheet, our accounts receivable totaled $3.6 billion and inventories totaled $2.8 billion on August 31st, 2020. Our cash conversion cycle for the third quarter was 38 days, 11 days lower from a year ago and improved eight days from last quarter and led to a preliminary cash flow from operations of $321 million. The improvement was supported by continued collaboration with our partners and faster turn on our inventory. At the end of Q3, including our cash and credit facilities, Cinex had approximately $2.8 billion in total liquidity available to fund operations. I also wanted to provide an update regarding the concentric spin. We remain on track for a calendar Q4 spin and believe the most natural date for the spin to be December 1st. as it's consistent with our year-end and is a good clean start for 2020 for both Concentrix and Cenex. As we see it today, the estimated Cenex court gross debt will be approximately $2.6 billion, with Concentrix receiving approximately $1.1 billion and Cenex receiving approximately $1.5 billion. The majority of cash on hand, which we estimate will be approximately $700 million at spin, will be held by Cenex. The use of cash in Q4 will be for normal seasonal uses and debt paydown. As we have previously discussed, we want both companies to be well positioned amongst its peers from a leverage and liquidity standpoint. These debt balances are estimates and could change based on Q4 performance. We are well down the path with our bankers in securing third-party financing for concentrics and are confident in the capital structure of both businesses. Cinex and Concentrix will have the appropriate dry powder to support growth and M&A opportunities. Now, moving to our fourth quarter outlook. We expect revenue to be in the range of $6.45 billion to $6.65 billion. Non-GAAP net income is expected to be in the range of $191 million to $204 million. Non-GAAP diluted EPS is expected to be in the range of $3.68 to $3.93 per diluted share on our weighted average shares of approximately $51.5 million. Non-GAAP net income and non-GAAP diluted EPS guidance excludes after-tax costs of approximately $37.5 million or $0.72 per share related to the amortization of intangibles and acquisition-related and integration expenses. One final note before I turn the call over to Dennis. In previous discussions with you, we've let you know about one of our high customers that will be moving to a consignment model. The transition date remains fluid and will not begin in early 2021. As we learn more and have proper visibility to a start date, we will certainly let you know. Please note that these statements of fourth quarter fiscal 2020 expectations are forward-looking, and our actual results may differ materially. With that, I will now turn the call to Dennis.

Thank you, Marshall, and thank you to everyone for joining our call. I want to start off by expressing my appreciation to all our stakeholders across the globe for their continued commitment and dedication in partnering with us as we have jointly faced a multitude of challenges and economic issues in 2020. Our associates delivered a phenomenal result in Q3, for which I am truly grateful. We're all a bit worn down by the ongoing pandemic, but the cynic spirit and determination continues to inspire me. I see the positive impact we are having on our communities and the strong support our teams are providing to each other, our partners, and customers. Along with executing a great quarter, the team also made significant progress on our proposed spin of Concentrix to a standalone public company. The Concentrix F10 document is available for your review. Third-party financing is in final stages, and most of the remaining spin-related activities are nearing completion. Thus, we believe we are in a solid position to close this transaction in calendar Q4. Now, moving to our third quarter results. In our TS distribution business, better than expected revenue was driven by strong demand in education, state and local, and e-commerce channels. This was driven by ongoing work, learn, and shop-from-home needs. We also experienced a slight improvement from our second quarter in office environment and SMB sales. Consistent with Q2, we saw higher demand in notebooks, Chromebooks, cloud, collaboration, and security products. From a year-over-year perspective, we experienced some softness in products supporting the office environment, such as desktop PCs, printers, supplies, and on-premise data center equipment. From a geographic perspective, North America was the strongest performer, but all geos met or performed better than expectations during the quarter. Overall, TS distribution grew year over year. In our TS Hive business, we delivered a sequential improvement and a year-over-year increase in revenue as we continued to support our largest customers in Q3. The mix of programs delivered was more skewed toward higher volume, lower margin products, but overall, we are pleased with the high results in Q3. Our concentrics business also exceeded our expectations in Q3 despite the known challenges. I'm very pleased with how we have performed, and I will now turn over the call to Chris to discuss Concentrix in more detail.