Revenue Dips Again for Synnex; Windows 10 Yet to Deliver Sales Boost

Synnex's sales fell for the second consecutive quarter as tepid commercial demand for Windows 10 failed to offset the loss in business from Beats Electronics.

The Fremont, Calif.-based distributor saw year-over-year revenue for the quarter ended Aug. 31 drop 2.2 percent, to $3.33 billion, after factoring out changes in foreign currency exchange rates. That fell below Seeking Alpha's estimate of $3.38 billion.

Quarterly non-GAAP earnings declined 6.6 percent, to $58.4 million, or $1.47 per share, edging out Seeking Alpha's projection of $1.43 per share.

[Related: Sales Fall, Stock Plummets As Synnex Passes On Low-Margin Deals]

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"I continue to be optimistic about our business and the markets in which we operate," Kevin Murai, Synnex president and CEO, said during the earnings call Monday.

Wall Street responded unfavorably to the news, with Synnex's stock price sinking 2.8 percent, to $80.25, in after-hours trading Monday. Earnings were announced after the market closed.

Sales in Synnex's technology solutions division fell 4 percent, to $2.98 billion, on a constant currency basis. The division's non-GAAP income fell 7.9 percent, to $71.7 million.

Japan was the source of much of the division's problems, with year-over-year sales falling 20 percent because of soft macroeconomic demand and waning interest in longstanding consumer technology products, Murai said. Japan made up just under 10 percent of Synnex's overall technology solutions business.

The distributor is in the process of trying to refresh its Japanese line card with new products, Murai said, and hopes to grow its business in the country in 2016.

Technology solutions sales have been rosier in North America, with Synnex enjoying mid-single-digit sales growth in the United States after factoring out $180 million of lost business last quarter from Beats Electronics. Synnex's agreement to be the sole distributor for Beats concluded after Apple (which doesn't do any business with Synnex) acquired the audio product producer in August 2014.

Synnex will face two more quarters of sales headwinds because of the loss of the Beats business, Murai said, including a $210 million hole to fill next quarter.

Double-digit sales growth in Synnex's integrated communications and enterprise mobility space in the United States last quarter partially offset the loss of the Beats business. The distributor also enjoyed high growth and increased stickiness for small and midsized customers and in the U.S. K-12 space, thanks to partnerships with Google, Microsoft and other original equipment manufacturers, Murai said.

Windows 10 has not been a salvation in the commercial space thus far, as most businesses are taking a wait-and-see approach until the operating system is more broadly deployed and tested, Murai said. Adoption and backing of Windows 10 in the consumer space, though, has been very good, according to Murai.

Canadian technology solutions are enjoying low single-digit growth on a constant currency basis, Murai said, with success in the commercial market offsetting softness in the consumer market. Notebooks, software and networking all showed good strength in Canada in the past quarter, Murai said, with Synnex performing a little better than the overall market because of its increased focus on enterprise firms.

Significant changes in the Canadian retail landscape over the past 18 months, though, have resulted in some instability on that side of the business, Murai said.

For Synnex's Concentrix division, the distributor reported revenue of $359.5 million, up 15.5 percent on a constant currency basis from $333.8 million last year. Non-GAAP income for the division, though, fell 11 percent on a year-over-year basis, to $25.2 million.

The distributor took an additional $6 million hit to its bottom line because of continued delays on a significant client launch, according to Concentrix President Chris Caldwell.

Caldwell said problems with the deal, which was won in January, should be resolved by the end of November, and he expects negative effects associated with the delay to cease by February 2016. The division is also on track to replace a $125 million government contract carried over from IBM that is expected to wind down by the end of November, Caldwell said.

Furthermore, Concentrix plans to add 6,000 employees over the next quarter -- the majority of whom will stay on permanently -- to support heightened demand and the division's global expansion.

For the next quarter, Synnex said it expects earnings of $69.5 million to $71.5 million, or $1.74 to $1.79 per share, on revenue of $3.48 billion to $3.58 billion. Analysts from Seeking Alpha had projected earnings of $1.78 per share on revenue of $3.72 billion.

PUBLISHED SEPT. 28, 2015