Synnex Q1 Earnings Call: Soft Demand, Contract Delays Caused Missed Goals

Synnex's first quarter missed sales and profit expectations because of weak demand in the consumer market and delays for a major Concentrix division contract, Synnex reported in its quarterly earnings call Tuesday.

The Fremont, Calif.-based distributor saw year-over-year revenue for the quarter ended Feb. 28 grow 5.8 percent, from $3.03 billion to $3.2 billion. This missed FactSet analyst estimates of $3.42 billion. Quarterly non-GAAP earnings grew 21.9 percent, from $47.7 million to $58.2 million, or $1.46 per share, which fell short of analysts' estimates of $1.52 per share.

"I continue to be optimistic on our business and the geographies in which we operate," Synnex CEO Kevin Murai said during the earnings call. "It is always our objective to grow the business, and we will figure out a way to do that."

[Related: Core Networking, Security, New Customer Care Business Drive Monster Q4 for Synnex]

Wall Street responded unfavorably to the figures, with Synnex's stock price falling 3 percent, to $74.91, in after-hours trading Monday. Earnings were announced after the market closed.

Sales in Synnex's technology solutions division grew 1.3 percent when factoring out changes in foreign currency exchange rates, to $2.86 billion, while non-GAAP income was up 11.5 percent, to $71.9 million.

After a robust holiday shopping season, Murai said the new year got off to an unexpectedly slow start, particularly in specialty retail, before returning to more normal demand in February. The lag was pretty widespread among Synnex's consumer offerings.

"It was just a very slow start to the year," Murai said. "We did not meet our stated goal."

Despite that, Murai said Synnex's commercial sales were stable and the public sector was notably strong. Device sales were solid, Murai said, with strength in notebooks, tablets and other mobile devices more than offsetting a slight decline in tablet sales.

The server market was also relatively strong, Murai said, driven both by the end of support for Windows Server 2003 in July and sizable demand in the enterprise sector.

From a vertical standpoint, Murai said the public sector has guided the way, with a recovery in federal government demand over the past couple of months bolstering already existing strong demand in the state and local government sectors over the past 18 months. The commercial market was also solid, Murai said, led by strong demand in the SMB space.

But Murai said the consumer and retail markets dragged the rest of the division down, particularly as the company ends its relationship with audio product producer Beats Electronics.

Synnex signed a contract in January 2013 to be the sole distributor for Beats Electronics in the United States, and that contract wound down last quarter.

Synnex plans to mitigate the loss of Beats by focusing more on light entertainment, consumer IT and consumer electronic products, but Murai said that new product lines didn't fully cover the decline in Beats business.

Murai expects to see a better demand environment for both the consumer and commercial sides of the business in the coming quarter.

For Synnex's Concentrix division, the distributor reported revenue of $341.8 million, up markedly from $127 million the year before, because of the acquisition of IBM's customer care business in October 2013. Non-GAAP income also rose from $11.8 million last year to $25.5 million this year.

A delay in a significant client launch because of lagging systems on both the client and Concentrix side cost Synnex between $6 million and $8 million of gross margin, according to Concentrix President Chris Caldwell. The deal, which was won in late January, contains a significant amount of complexity involving building a platform to manage dispersed databases, Caldwell said in the earnings call.

Though Synnex has at last started to fulfill the contract, Caldwell said, it will also be a drag on the company's finances in the coming quarter.

"We're executing on our new plan as we expected," he said.

Aside from that dust-up, Caldwell said, Concentrix is surging, with the division's headcount up by several thousand people and contract signings quadrupling over the past year.

That's thanks in part to the recent launch of a consulting group, which is expected to drive a multitude of services revenue. Concentrix is also enjoying great growth in both its core verticals of banking, financial services and health care as well as emerging areas such as fraud detection.

"Our message and services are being received well by the market," Caldwell said. "I feel very good about our performance and the positive momentum."

For the next quarter, Synnex said, it expects earnings of $60.2 million to $62.5 million, or $1.50 to $1.56 per share, on revenue of 3.38 billion to $3.48 billion. Analysts from FactSet had projected earnings of $1.59 per share on revenue of $3.57 billion.

PUBLISHED MARCH 31, 2015