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Text: This conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcast without our prior 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 GAAP 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% or $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 doubtful 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.
Concentrix 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 Concentrix 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 earnings per share was $3.33, up $0.03 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 31, 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 churn on our inventory.
At the end of Q3, including our cash and credit facilities, SYNNEX had approximately $2.8 billion in total liquidity available to fund operations.
I also wanted to provide an update regarding the Concentrix spin.
We remain on track for a calendar Q4 spin, and believe the most natural date for the spin to be December 1.
As is consistent with our year-end, and as a good clean start for 2020, for both Concentrix and SYNNEX.
As we see it today, the estimated the SYNNEX Corp gross debt will be approximately $2.6 billion with Concentrix receiving approximately $1.1 billion and SYNNEX 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 SYNNEX.
The use of cash in Q4 will be for normal seasonal use and debt pay down.
As we have previously discussed, we want both companies to be well positioned among 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 Concentrix, and are confident in the capital structure of both businesses.
SYNNEX 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 earnings per share is expected to be in the range of $3.68 to $3.93 per diluted share, on weighted average shares of approximately $51.5 million.
Non-GAAP net income and non-GAAP diluted earnings per share 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.
In previous discussions with you, we've let you know about one of our valued [Phonetic] 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.
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 are all a bit worn down by the ongoing pandemic, but the SYNNEX 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 stand-alone public company.
The Concentrix F-10 document is available for your review.
Third party financing is in final stages, and most of the remaining spend 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 product support in the office environment, such as desktop, PCs, printers, supplies, and on-premise datacenter equipment.
From a geographic perspective, North America was the strongest performer, but all geos net 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 continue 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 Concentrix 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.
We are very pleased with our continued momentum, both on our business execution and on being ready to spin, as Marshall indicated early December.
We delivered very solid results, returning to a pre-COVID revenue growth trajectory and double digit adjusted operating margin.
The third quarter revenue for Concentrix totaled $1.16 billion, slightly higher than the same quarter last year.
On a sequential basis, third quarter revenue increased across all our delivery regions.
This would not have been possible, without addressing COVID-19 challenges across three separate areas aggressively.
First, providing a flexible safe workplace that incorporates both at home and at-office elements, to nimbly meet our clients' demands.
Second, our strong technology solutions, that support clients regardless of the channels they choose.
And third, driving a culture of security and integrity, backed up by innovations like our recently announced SecureCX offering.
SecureCX is a proprietary platform that incorporates advanced technology, to ensure close to the same level of security at home, as available in an office.
This is just the latest innovation from our staff of well over 1,000 skilled engineers and developers.
Concentrix has been enabling technology in few solutions like this, for well over a decade, and we will continue to lead by investing in this space.
We continue to be happy with our execution also around vertical mix.
The communication vertical is now approximately 21% of revenue, representing an impact of 4% to our year-over-year growth rate, but giving us a much more balanced portfolio.
As expected, our travel, transportation and tourism clients during the quarter have been impacted by COVID-19, resulting in an additional 2% impact on growth.
More than offsetting these headwinds was strong growth with clients in our technology, healthcare, financial services and e-commerce verticals, which represent about two-thirds of our business on a combined basis.
New business signings were very encouraging in the quarter, coming in at a record level of expected annualized contract revenue.
This heightened demand is based on the values that our clients place in the strengths of our best-in-class CX platform, and our ability to meet their evolving needs.
We continue to take share with strong signings across our strategic verticals, and win new business that has historically not been outsourced.
Even with our record signings, our pipeline remains strong and growing.
We continue to watch the COVID developments daily, and are ready to recalibrate with our clients, as their needs change.
Now moving to profitability; adjusted operating income for the quarter was $118 million or 10.1%, nearly reaching the year-ago level.
The return to double-digit operating margin reflects revenue over performance, with lower variable spend, despite $13 million of additional net COVID-19 cost impacts.
Cash flow from operations in the third quarter totaled approximately $91 million.
Capital expenditures totaled approximately $37 million.
We generated positive free cash flow, despite the impact of prior quarter revenue reductions that reduced our collections in the third quarter.
Capital expenditures we see trending slightly higher than historical norms to support growth and reconfiguring some of our facilities due to COVID-19.
Turning to our outlook for the fourth quarter; we remain focused on keeping our staff safe, overdelivering for our clients, so that we remain their partner of choice, and emerging from the pandemic stronger, so that we can drive sequential improvement in both revenue and profitability.
In the fourth quarter, we expect more sequential revenue growth than last year, resulting from the strong new business signings in the third quarter, in addition to seasonal increases.
As a result, we expect fourth quarter revenue to increase by at least 2% year-over-year on a constant currency basis, and we expect our adjusted operating margin to be above 12.5%.
We continue to feel confident in our ability to achieve and exceed industry growth rates, while increasing our adjusted operating margin over time.
Now turning to our spin from SYNNEX, estimated to be on December 1, we believe that we are ready to go.
We intend to announce our Board of Directors in an updated Form 10 Registration Statement in early October.
We are very proud, that the Board will reflect the diversity we have in our business.
As Marshall indicated, we will have less than approximately two times debt to EBITDA when we separate, giving a strong liquidity and meaningful flexibility to invest in organic and inorganic growth.
As always, we have a disciplined approach to both.
We believe the spin-off would result in benefits for the shareholders, our team members and our clients.
A pre spin event will be held for analysts early November, with one-on-one meetings with investors shortly thereafter.
I look forward to updating you in the coming weeks on the incredible opportunity and our superior ability to lead in the customer experience industry.
The effort, resourcefulness and dedication are a tribute to our people, our culture and our diversity that we'll be able to take advantage of, as we enter this new chapter of Concentrix.
Turning to our fourth quarter outlook.
Our priority continues to be on the safety and health of our associates.
For our business, in general, we see positive signs of continued recovery, as economies open further.
However, we are still cautious, as there are many differences from geo to geo and within geos.
For Technology Solutions, we expect an overall seasonal improvement for Q4.
We anticipate TS distribution will be up sequentially, partially offset by a decline in TS Hive.
TS distribution will be driven by continued strength in remote enablement, the federal buying season, improvement in delayed on-premise projects, and overall continued investment in digital transformation.
We expect a solid quarter for TS Hive, though we will be comparing to an exceptional Q4 last year.
As well, given the unpredictability of this business, we tend to use the low end of internal expectations in our guidance calculations.
As Marshall indicated, COVID related expenses declined in Q3 and are expected to decline in Q4.
As we stated in our last call, a portion of these costs will be part of our normal TS run rate going forward.
Over time, we expect to find ways to offset these amounts, while running in the most effective and efficient business possible.
For Concentrix, as Chris indicated, we expect to have a seasonally strong Q4.
Our return to growth, positive cash flow, and a solid pipeline, are among many aspects that I am pleased about, as Concentrix moves toward becoming an independent business.
I'm also pleased and excited for the independent TS as well, our ongoing opportunities to improve our core operation, the many investments we have in place to organically grow our business, and the opportunities that exist for inorganic investments, give me confidence in our business, and the services we provide to our partners.
As well, our goal of growing faster than the market and increasing our profit at a higher rate will continue.
We appreciate everything you have done for SYNNEX during this challenging period.
Our thoughts continue to be with those who have been affected by COVID-19, please stay safe and healthy.
As well, we are, with all those who are working for positive change on social issues.
I appreciate the SYNNEX team members, who have been of service in these and other important areas.

user
compname reports q3 adjusted earnings per share of $3.33.
sees q4 2020 non-gaap earnings per share $3.68 to $3.93.
sees q4 2020 revenue $6.45 billion to $6.65 billion.
qtrly adjusted earnings per share $3.33.
qtrly technology solutions revenue was $5.3 billion, up 5.1%.
qtrly concentrix revenue was $1.2 billion, up 0.2%.

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