Sales Fall, Stock Plummets As Synnex Passes On Low-Margin Deals

Synnex walked away from several low-margin deals in the most recent quarter, the company said in its earnings call Thursday, leading to a drop in sales and a steep decline in stock price.

The Fremont, Calif.-based distributor saw year-over-year revenue for the quarter ended May 31 drop 2.6 percent, to $3.25 billion, after factoring out changes in foreign currency exchange rates. That fell well below Seeking Alpha's estimate of $3.42 billion.

Quarterly non-GAAP earnings, however, climbed 3.7 percent, to $61.7 million, or $1.55 per share, beating Seeking Alpha's projection of $1.53 per share.

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

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"We chose to take the high road and not do deals that fell below our profitability threshold," Synnex CEO Kevin Murai said during the earnings call. "We continue to evolve our biz and modify and change what we do to address ever-changing market needs."

Wall Street responded very unfavorably to the figures, with Synnex's stock price plummeting 9.8 percent, to $74.30 per share, in after-hours trading Thursday. Earnings were announced after the market closed.

Sales in Synnex's technology solutions division declined 5.1 percent, to $2.9 billion, on a constant currency basis. Non-GAAP income, though, was up 14.4 percent, to $80.2 million.

Opportunities existed to grow sales last quarter in the United States, Murai said, but many of the proposals were large-volume deals for more commoditized products that didn't meet the distributor's margin standards. Murai admitted that the distributor lost some market share by being more selective on profitability.

Murai expects larger opportunities in the coming quarter to offer more reasonable profits, making it likely that Synnex won't have to walk away from as many offers.

"The markets are stable in the U.S.," Murai said. "We feel good about overall market demand."

Synnex remains committed to growing its market share based on the services and capabilities it offers rather than lowering its prices, Murai said. The distributor also expects the investments it has made in cloud and mobility to pay off as those segments gain additional traction in the market, Murai said.

The distributor also took a $130 million hit last quarter because of the loss of the business from audio product producer Beats Electronics. Synnex's agreement to be the sole distributor for Beats wound down in late 2014.

Japanese sales also came in $30 million below expectations because of softness in the market, particularly on the consumer side. Murai expects demand in Japan to normalize in the next quarter.

Those losses will be partially offset by new relationships with Dell and Lenovo, Murai said. Synnex's relationship with Dell has included client, communication and enterprise business since November, when the distributor added PCs, servers, storage, networking, converged infrastructure, software and Wyse virtual desktop to its portfolio.

Murai said Synnex has benefited from Dell's moving some customers that previously bought direct to a distribution model. The distributor has also been paid handsomely when it brings customers on board that haven't previously purchased Dell, Murai said. Synnex's relationship with Lenovo began in October with the vendor's purchase of IBM's x86 server business.

"We do expect big things coming out of both vendors," Murai said.

For Synnex's Concentrix division, the distributor reported revenue of $341.8 million, up 24.6 percent on a constant currency basis from $293.5 million last year. The acquisition of IBM's customer care business closed in April 2014, or midday through the second quarter last year.

The distributor took an additional $4 million to $5 million hit on gross margins because of continued delays on a significant client launch, according to Concentrix President Chris Caldwell.

Caldwell expected the deal, which was won in late January, to be more normalized and profitable by the end of the year, but acknowledged that Synnex continues to be challenged by the volumes and transactions the client is sending along. Synnex is going back and forth with the client to get predictable volume information, Caldwell said, and expects the drag to decrease with each successive quarter.

The Concentrix business is signing roughly three new clients each month, Caldwell said, and is gaining significant traction in the banking, financial services, insurance and health-care verticals.

For the next quarter, Synnex said it expects earnings of $56.1 million to $58.1 million, or $1.40 to $1.45 per share, on revenue of $3.3 billion to $3.4 billion. Analysts from Thomson Reuters had projected earnings of $1.66 per share on revenue of $3.5 billion.