Good afternoon. My name is Chris and I will be your conference operator today. I would like to welcome everyone to the SYNNEX Second Quarter Fiscal 2019 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 Ms. Mary Lai, Head of Investor Relations. Miss, you may begin.

Thank you, Chris. Good afternoon and welcome to the SYNNEX Corporation’s earnings call for the second quarter of fiscal 2019. Joining me today to review our financial results are Dennis Polk, President and CEO, Marshall Witt, CFO; and Chris Caldwell, President, Concentrix. After their prepared remarks, we will open the call to a question-and-answer session. Before we begin, we remind everyone that today’s discussion contains forward-looking statements within the meaning of the federal securities laws. Statements include any predictions, estimates, projections or other statements about future events, including the company’s projected financial results. Actual results may differ materially from those mentioned in the forward-looking statements as a result of risks and uncertainties discussed in today’s earnings release in the Form 8-K we filed today, in the risk factors section of our Form 10-K and other reports and filings with 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 8-K available under the Investor Relations section of our website. This conference call is the 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 for the financial update. Marshall?

Thank you, Mary, and thank you all for joining us today. Our Q2 revenue, non-GAAP net income and diluted EPS all exceeded our expectations. On a consolidated basis, total revenue was the second quarter record of $5.7 billion, up 17% compared to $4.9 billion in the same quarter last year. Adjusting for FX, revenue increased 18%. At the segment level, Technology Solutions revenue was $4.6 billion, an increase of 3% compared to $4.4 billion in the prior quarter, which includes roughly $159 million of gross-to-net revenue headwinds. On a year-over-year basis in constant currency, gross revenue increased by 7%. Concentrix revenue was $1.2 billion, up 136% from $491 million in the prior year quarter, primarily due to the Convergys acquisition, which was concluded in October of 2018. On a pro forma basis and constant currency basis, revenue grew about 3%. Our consolidated gross profit dollars totaled $698 million, up 63% or $259 million versus a year ago. And gross margin was over 12%, an improvement of 346 basis points from the prior year quarter. Several factors contributed to the gross profit dollars and margin increase, most notably the positive contribution from our Convergys acquisition and overall strong revenue growth in the company. Technology Solutions gross margin of 5.9% increased 32 basis points from the prior year quarter, mainly due to mix and balanced growth across our portfolio. Concentrix gross margin was 37.1%, down slightly from the prior year quarter, driven by revenue mix. Total adjusted SG&A expense was $455 million or 8% of revenue, up $178 million in absolute dollars and up 230 basis points as a percentage of revenue compared to the prior year quarter. The increase in SG&A was largely due to the Convergys acquisition and Technology Solutions revenue growth and investment in the business mostly related to…

Thank you, Marshall, and good afternoon. I’m very pleased to report that we completed a strong Q2 and first half of fiscal 2019. For Concentrix, on a pro forma constant currency basis, our Q2 revenue was better than anticipated and we continued in delivering a double-digit operating profit margin profile for this business. For Technology Solutions, we saw reasonable demand trends in IT spend. And coupled with a solid distribution channel and excellent performance by the TS team, revenue and profit growth was better than expected as well. Overall, we set records for the May quarter for both revenue and earnings. Revenue was $5.7 billion, representing 17% growth from the prior year. Non-GAAP EPS of $2.86 per diluted share was 20% higher than Q2 2018. More importantly, these results demonstrate our ability to operate as a differentiated business process services provider with a significant profit contribution from both Concentrix and Technology Solutions. Some additional highlights from Q2, beginning with Concentrix. Our Concentrix business delivered a solid quarter, while making very good progress on the successful integration of the Convergys business. Our thesis supporting the Convergys transaction continues to play out in our excellent results. I would like to now turn over the call to Chris to discuss Q2 results and Q3 outlook. Chris?

Thanks, Dennis. Concentrix delivered solid results in the second quarter for the business driving constant currency like-for-like revenue growth. Our synergy attainment combined with disciplined cost management has resulted in a nearly 200 basis point expansion in our adjusted profit margin year-over-year with strong free cash flow. These solid results reflect the power of bringing two world class providers together as one business to deliver a strong value proposition to our clients. Second quarter revenue for Concentrix totaled $1.16 billion, an increase of approximately 136% on a reported basis. On a like-for-like constant currency basis, revenues were up approximately 2.8% with currency fluctuations causing nearly a 3% headwind on this measure. We continue to see a very strong pipeline across most of our verticals in general and are pleased that a majority of the opportunities take advantage of a capability or footprint that came from one side of the transaction or the other. I’m particularly pleased that the transaction and integration efforts have not caused a delay in sales efforts. Adjusted operating income for the quarter was $120 million, up from $41 million in the prior year period. Adjusted operating margin was 10.3%, up from 8.5% last year. The improved profit margins are the result of progress on integration synergies, strong cost containment efforts and continuing to improve the profit profile of our offering, footprints and clients. On the transaction synergy front, we exited the quarter at an annualized run-rate for synergies of approximately $85 million, well ahead of our year 1 target of $75 million. We have now entered the last major phase of the integration of the Convergys acquisition, which is now focused on our back-office. In the third quarter, we will migrate most of our back office functions on to a common set of tools, which will…

Thanks, Chris. Moving on to our Technology Solutions business, revenue of $4.6 billion was a second quarter record. Our strong non-GAAP operating margin of 2.7% in Technology Solutions reflects our continued commitment to drive leverage and secure the appropriate returns for our investment. Overall, we delivered strong revenue growth in the TS business, particularly in the U.S. As Marshall indicated, our Q2 non-GAAP gross revenue was up nearly 7% year-over-year at constant currency. Benefiting this growth were ongoing cross-selling efforts in our Westcon-Comstor business and some larger volume project wins. Revenue growth and solid profits were delivered in a majority of our products and services. Turning to our third quarter outlook, for Concentrix, as Chris indicated, we expect all key metrics to track in line to above our expectations, including Convergys integration, revenue growth, new logos, expense management and cash flow generation. We also expect the overall business to perform in line with historical seasonal trends for Q3 and achieve double-digit non-GAAP operating profit margin. In Technology Solutions, we expect Q3 to be consistent with seasonal norms on a gross revenue basis. This should translate to about the same growth on a net revenue basis than we experienced in Q2. But ultimately, will be driven by mix. Within the TS business, we expect the tech sector and its channel to remain healthy with a reasonable demand level. Overall, we are positive about the markets that both Concentrix and Technology Solutions participate in. While we acknowledge there are always macro challenges at play, especially in the current environment, we remain optimistic that our balanced portfolio, geographic reach and the sizable markets of both businesses will support our growth. We are proud to have completed 128 consecutive quarters of profitable results. Our growth has also led us to be recognized as #158 in the latest Fortune 500 ranking, representing an improvement of over 200 positions since our debut on the list in 2007. In closing, I want to thank all our associates around the world for their hard work and commitment to our company, and I want to thank our business partners and shareholders for their continued trust and support. With that, I would like to now open the call up for questions.

[Operator Instructions] Your first question is from Shannon Cross with Cross Research your line is open

Thank you very much for taking my question. I guess the first on – from a TS perspective, there are so many, I don’t know, data points that are roaming around out there, whether it’s Brexit and currency and tariffs and trade and all the macro that you were talking about. Maybe if you could kind of dig down a little bit and if you can give us some idea of what your customers are saying, what they’re wanting to purchase, why they are wanting to purchase? Because clearly, your numbers were better than people had expected, and obviously, the guidance was strong. So it seems like the trajectory is solid from your perspective. And then I have a follow-up. Thank you.

Hi Shannon. This is Dennis. From an overall standpoint, I’m just off of actually several partner events. The mood is positive. As we’ve always talked about in our discussions with you and with the rest of our investors, technology improves customers’ efficiency and businesses overall and there’s always a desire to improve – excuse me, invest in technology as a result. So in recent conversations with customers, I’m hearing that again and again and again. So that’s one reason why we’re optimistic about our go-forward results. Taking it up one level, if you look at our business over the past couple years, we’ve made some major investments in both side of the business, but specifically on Technology Solutions. We made the Westcon-Comstor acquisition. That brought a significant number of new lines to our company, and with that, we were able to leverage a larger offering to our customer base. I think that’s another reason why we’ve been able to grow maybe more quickly than folks expect. And then lastly, we’re always working on our business as well. We’ve made a lot of improvements in the efficiency of our business, and that’s helped us to attract and win larger deals, as I mentioned in my script, where in the past, maybe we couldn’t compete as well.

Okay, great. And then, I guess, one of the questions I had with – this is the final one. But just with regard to the gross margin improvement in TS which you referred to as mix, how much of that do you think is sustainable or we’ve seen some several pricing come down, and again, I know it’s pass-through for you. But I guess, just – when we think about what products are selling right now and the benefits of netted down revenue in that, do you think you can continue to see strong gross margins within more of the, I don’t want to say commodity business, but it was the TS business?

Hi, Shannon. It’s Dennis here again. So you hit the two high points of why our margin in the TS business improved in Q2. The mix of the business, so higher content of margin rich business where we have a higher service content that led us to improve our margin and also just the gross net aspect that play into our numbers right now, which will start to sunset at the end of the year. Those are the two key reasons why our margins improved. But also go back to what I said before we have been working very hard on the details of our business, improving the operating aspects of our business. That also improved our margin, and it’s our intent to do so going forward. We have a few headwinds or at least one major headwind when it comes to our margins in the next few quarters on the TS side and the Concentrix side as well in that we just went through our annual comp review cycle. As you would expect, we increased our compensation to recognize the good work of our team members. It’s also a more competitive environment out there. So that’s another driver of increased comp. But we typically work through those over a few quarters at a time, but that’s a little bit of a wait in our Q3 and Q4 rest of the year 2019 operating leverage. But we’ll work through that as we always do.

Thank you.

Thank you.

Your next question is from Vincent Colicchio with Barrington Research. Your line is open.

Yes. Thanks for answering my questions. A couple of questions to Chris on Concentrix. Chris, when do you expect the communications vertical to stabilize maybe get flattish and then grow?

Yes. So Vince, from our perspective, we see it to decline, and generally, we said for the foreseeable future, but really that’s till the end of Q4 is what we look at from a public perspective. We are selling net new services into the telecom vertical, but they are fairly small in dollar size to begin with. And I don’t know if I want to project out, but we expect that it won’t be necessarily a drag in 2020. But for 2019, we continue to see it as declining.

And then what industry verticals were important growth drivers year-over-year for Concentrix?

So this quarter, we saw very, very good strong stability within health care. We saw very good strong stability in financial services. And then consumer electronics was also good, strong demand.

Okay. And if you’re able to – if you were able to pull out non-contact center BPO revenue, would you say – did the margins improve year-over-year? I don’t know if you could look at it like that?

Yes. We do look at it like that. Primarily, we have seen better margins in, I’ll call it, additional sort of one-off types of services that are complementary to our contact center services, so whether that be analytics, whether that be our voice of a customer business, our emerging businesses and so forth and so on. That’s primarily driven by just getting more operationally efficient. That’s also where we deploy a lot more technology. So we continue to see good margin expansion and expansion possibilities in that area.

Okay. You had a nice improvement in margins year-over-year. If I look at the sequential change in revenue and adjusted operating income, they changed by about the same gross amount. How should I think about that?

So one of the things that we talked about in Q1 was the fact of us rebalancing the portfolio, and we’ve been in that process. So we’re cleaning up some accounts and kind of getting that cleaned up as well as ramping new accounts. And so those haven’t come to full, I’ll call it, productivity in fruition. But that’s what we commented about seeing additional margin expansion through the course of the year.

Okay, thank you for answering my questions.

Your next question comes from Adam Tindle with Raymond James. Your line is open.

Okay, thanks and good evening. I just wanted to continue on Concentrix on the revenue side. It does look like the combined entity of Concentrix and Convergys grew this quarter on an organic basis. I know you mentioned your intention to approach industry growth by Q4, but it looks like you’re near that ballpark now. And I think guidance for next quarter also implies continued growth on an organic basis year-over-year, so quite a change from trends that we saw like Convergys before you acquired it. I know there were a lot of doubts that it could grow. The first question is for Chris. Maybe just what are the items that are leading to this acceleration in growth? It looks like margins are solid, so can’t attribute it to aggressive pricing. Is it new logos, expansion with the existing customers, the items leading to the acceleration and then the sustainability of growth in that segment?

So, Adam, a few things, if you remember our thesis for the deal, we believe that Convergys had a lot of very rich clients within that 10 to 150 category and being able to kind of grow those and help develop those accounts. And we’re starting to see that fruition. Obviously, we’ve also been very happy with new logo sales, but new logo sales tend to take a little longer in terms of hitting our revenue and also maturing into the right margin mix. So that’s really what we see as kind of contributing to the back half of the year and into next. So those have kind of been some of the contributors to what we’ve seen from a - both a profit and revenue expansion. I think the other thing that we’ve made comments to a number of times is that clients from both sides of the acquisition have found benefit in bringing it together as one and have been able to leverage the larger footprint and larger capabilities that both companies offer that we wouldn’t have been able to participate in as being separate. And that was really a big part of our thesis, and that’s really come out and played through very strongly with what we’ve seen in the quarter since we’ve closed the deal.

Okay. And sustainability of growth in the segment?

Yes, absolutely. We continue to plan to focus on industry growth rates, and then as we’ve talked about, exceed those going into 2020. And from what we’re seeing in the market, from what we’re seeing from our pipeline, we don’t see any reason to differ from that.

Okay, and maybe just as a follow-up, and I’ll first acknowledge, obviously, very solid results in this environment on both sides of the business. But there was maybe one thing to zone in on, on the negative side, it’d be cash flow. It remains pretty subdued. Understand both DSO and days payable can be skewed by the debt in that net revenue treatment. And it looks like the inventory days are still fairly significantly elevated and that’s where the potential improvement is. Has to be TS, given there’s no real inventory in Concentrix. And Marshall, you mentioned in your prepared remarks and attributed the increase in DIO to business growth. But TS revenue growth was, I think, 7% year-over-year adjusted for gross-to-net, but inventory dollars are up like 30% year-over-year. So can you just help us understand why the dislocation is so large? And if you could tie in how we can think about cash flow moving forward in the context of your delevering goals? That would be helpful.

Sure. Yes, Adam, so first just to remind everyone, our first half, we did well in beating our overall metrics and guidance by over $0.25. So I just want to acknowledge that the growth rates and investments we’ve made are paying - are dividends and benefits for us. And clearly, part of that is, there’s a tradeoff in TS working capital. As you know, our goal is to drive better efficiencies in working capital. Our goal is to still get debt leverage down to about 2.5x as we exit 2019. And we’re still optimistic that the goal of $400 million in debt pay down, we can achieve as we exit 2019 as well.

And that factors in the incremental CapEx in the back half of the year for Concentrix, that sounds like it’s happening?

Correct, Adam.

Okay, alright. Thanks. Best of luck

Your next question is from Matt Sheerin with Stifel.

Yes, thank you. Just a question regarding the Hyve business, the cloud business, you didn’t make any comments. I know that, that’s been sort of a work in progress. You’ve had a very big customer, and I know you talked about not a lot of growth there as you sort prune that portfolio. Could you give us an update did you see growth in that quarter? Was that a contributor to the upside in Tech Solutions?

Hi, Matt. This is Dennis. Regarding Hyve, overall was a good quarter. We hit our revenue goals for the quarter. I’m not going to break out any percentage because we don’t break out Technology Solutions segment. But we did hit our goals for the quarter for Hyve from a revenue standpoint. More importantly, we improved our profitability in the quarter for Hyve. Something that we’ve been talking about over several quarters now that was an imperative for us was to improve the returns on our Hyve business. And I mentioned in prior quarters, we are making progress on that. And in Q2, we got to a level that we’re more satisfied with. Still work to do, but good progress on our goals there. From a customer standpoint, we still are concentrated in our Hyve business. But in the quarter, we did improve some mix with the customers that we have. In the Hyve solutions part of our TS business, we sold additional offerings to our main customers, and that’s helped improve the diversity with that customer and round our portfolio. It’s a good progress overall in the Hyve business in Q2.

Okay. And on the Westcon-Comstor, which sounds like that’s been a great success so far for you, including the cross-selling opportunities. How far along are you? I know you’re on the same ERP system, which has helped, but how much is left in terms of that opportunity to cross-sell into your legacy, if you will, of our network of customers versus the Comstor-Westcon?

Yes. As far as Westcon-Comstor is concerned, agree, we are very pleased with the transaction and we’re very happy that we’re making real progress in the cross-selling efforts. We’re a year out from the initial system cutover that really allowed us to take advantage of the cross-selling efforts. But by no means are we at a point where we’re satisfied. It does take time after system conversion to get the sales team fully trained on, on how to sell the products. It takes time to get the customers engaged and to buy from us in a different cadence. We definitely made progress in the last year and really took it up a step in Q2 2019, but now we think we have a lot of room to run in this area going forward.

Okay. And just lastly, in past quarters, you’ve commented on target for fiscal ‘19. I think the last time you said it was going to be above the previous range of $11.40 to $11.90. It looks like you’re obviously well on your way there now, any comments about that outlook for the year?

At this point in time, Matt, we still stand behind our guidance of $11.40 to $11.90 for 2019. That was the guidance we gave at the beginning of the year. And then in the recent quarter, we talked about the fact that we believe we can achieve at the high end of that range or even greater than that as the year plays out. Clearly, with 2 solid quarters behind us and we think a very solid guide for Q3, we’re equally confident in our ability to achieve the comments regarding the guidance for 2019.

And Matt, this is Marshall. As you probably are aware, we did that primarily just for clarity around the Convergys acquisition. We’ve achieved that. So as we get ready for Q4 and it will provide our normal directional guidance on growth rates, economic growth, IT spend, channel functions, etcetera.

Got it, okay thanks a lot

Your next question is from Ananda Baruah with Loop Capital.

Hey, congratulations, guys. Thank you for taking the question here I guess the first one for me is with regards to just the synergies and just some context around the Convergys synergies. Is it – you’re tracking ahead and you gave us a metric, I think, $85 million exiting the quarter, and that’s well ahead of the year 1 target. And then you guys said that you expect to exceed the $150 million 3-year target as well. What are the – like, what is the different vectors around which sort of tracking ahead and then potentially exceeding are that would help us frame what perhaps kind of longer-term synergy potential might be, just given what a strong start you are off to in integrating Convergys? And I have a follow-up as well.

Yes, Ananda, this is Chris. I would look at it slightly differently. From my perspective, I would look at the fact that I’m very confident in the $150 million, we’re going to achieve that. After that, it’s just in our DNA to continue to manage costs and drive leverage in the business. But we’re also entering phases of reinvesting in the business to continue to support the growth. So it gets a little more murky after that $150 million. From my perspective, that’s – what is important to look at is our business case, our analysis looked at, what we think we can achieve. We’re overachieving that. We’re going to hit the $150 million and overachieve that and then, after that, just continuing to have it within our DNA of managing and growing a profitable business.

And Chris, let me ask a follow on to that then. Is it more useful to think about given that you’re achieving synergies more quickly, you’re then more able to reinvest back in growth more quickly? And is that the better way to think of it? The more – I guess the more useful way to think about, more accurate way to think about it? And then the answer to that is yes, might that also be part of the reason that it seems like you’re tracking to see your revenue goals a little bit – build a bit more quickly as well?

Yes, Ananda, we’re not tapering growth to try and focus on synergies. We’re investing in growth and we were investing in growth sort of day 1 of closing the deal and continuing to be very opportunistic, investing in what we need to do to drive the business going forward. I think really where the growth has come from, as we’ve talked about is, driving sort of the benefits of the acquisition through to the client base, which has been very, very well received and we’ve seen much quicker uptake on some of that than we originally anticipated, hitting sort of the growth of where we are right now. I think we’ve also focused our efforts more and we’ve talked about cleaning up the portfolio to drive a better margin profile. That’s allowed us to put more focus on sort of clients that are wanting to consume more services from us. So all of these things are just really what we kind of planned and focused on in our preplanning and then subsequently have been executing on once the deal was closed.

That’s really helpful. And just a quick clarification here. Just with regard to comments on high profitability, is that a year-over – sorry, a quarter-over-quarter sequential profitability improvement comment? And that’s it from me.

Ananda, this is Dennis. My comment was a year-over-year.

Is that – and Dennis, is that the most appropriate way to think about it given the seasonality in the business?

Well, specifically to Hyve, that’s something – again, we’ve been talking about for some time as far working on the profitability. So I would take that as a continual comment, not just a year-over-year investment in the business as far as trying to improve it going forward. We’ve been working on it for continual year and half now. And again, I think we’re reaching a point that we’re very pleased with. But by no means we’ll stop here, we’re going to keep going.

Okay, so structurally, you’re very pleased. Definitely, you saw structural move forward and you continued to. That sounds like it’s the overarching message.

Yes. We saw a structural move forward, but now we’ve got to keep that going.

Okay, great. Thank you.

Thank you.

Thank you

Your next question comes from Tim Yang with Citi.

Your TS operating margins have been up at 30 to 40 basis point year-over-year in the past 2 quarters. Can you talk about how much is that from the top line leverage and how sustainable this margin expansion could be? Do you have a margin target for the TS segment given the current – and exposure and investment you have made in the segment?

Tim, this is Marshall. Okay. Tim, this is Marshall. I hope I understood your question. The majority of the growth in – it’s a Q1, Q2 comment, year-over-year has been strong. There’s been some basis point attribution to gross versus net, 8 to 9, 10 bps. But generally said, the portfolio stuff from a Technology Solutions standpoint has been broadly based and equal in contribution.

Got you, and do you have a target for the TS segment margins given the current exposure and also the [indiscernible]?

Yes. Tim, you know that we’re always going to have a goal to improve that.

Got it, thanks. And then on seasonality, if we assume Concentrix to be flat sequentially in August quarter, it appears that your TS in the August quarter would be down slightly on quarter-over-quarter basis. I think last year, you had a similar seasonality, but we normally see August quarter to be up sequentially in the past few years. Should we expect that current cadence to be the seasonality going forward or are you seeing any like demand pulling forward in the TS segment in May quarter?

Yes Tim, good question. As we stated over the last couple of years, our business is a lot different today. You think about – that’s why we highlight gross revenue from a build perspective because that gives a better sense of how we’re growing year-over-year. A couple of things we might look to. We have 1 less day this quarter than last. So that makes the sequential comparisons a little bit different. We’re also mindful of the fact that we’re going to be conservative in our guidance. That always resets things to some extent. And then also be aware of just some of the headwinds on FX and how that plays into our Q3 guidance.

Got it. Thank you.

Thank you.

Thank you.

At this time, I will now turn it back over to Mary Lai for any closing remarks.

Thank you everyone for joining us today and appreciate your time. And we look forward to speaking with you next time.

This concludes today’s conference. You may now disconnect.