Synnex CEO Talks Ingram-HNA Deal, Concentrix Delivery Changes And New Verizon Program

Disruption Creates Opportunity

Synnex experienced its fourth consecutive quarter in which sales declined, dropping 2.4 percent to $3.13 billion, while non-GAAP earnings fell 6.1 percent, to $54.6 million.

CRN spoke with Synnex CEO Kevin Murai after the earnings call about what caused Synnex to oversteer to profitability at the expense of sales, why the distributor's networking and campus WiFi businesses fared well last quarter, and why the Fremont, Calif.-based distributor will benefit from the disruption created by Tianjin Tianhai's pending acquisition of Ingram Micro, which would result in Ingram Micro being folded into Hainan, China-based HNA Group.

Murai also addressed Synnex's decision to close three of its U.S. customer care delivery centers and shift the work to lower-cost offshore locations, as well as the perks of moving from an agent-based to a managed security-focused relationship with Verizon.

Is the valuation Tianjin Tianhai placed on Ingram Micro a positive sign for distribution?

I don't want to comment specifically on valuation or anything like that, because frankly there's a number of ways to take a look at valuation. However, that being said, it certainly is big news in the distribution space. We've always respected Ingram Micro as a competitor as we do our other major distribution competitors. But through this period, there's going to be disruption, and frankly, through that disruption, I think it does provide opportunity for a company like Synnex to demonstrate its value proposition in the marketplace and show stability.

Where and how do you anticipate the disruption will take place?

Just through any kind of change, there's going to be disruption. It can come out in many different ways, but frankly for us, we have stable relationships. We are a consistent distribution partner, and our customers and our vendors depend on us to continue to be consistent and stable.

Do you feel the Ingram-HNA deal changes the game in the U.S. government space?

It's really hard for me to comment on that right now. The deal is not even close [to being completed].

What caused Synnex to oversteer to profitability at the expense of sales?

We always expect a slow start to January, but it seemed to extend through pretty much the entire month of January. During that period of time, as some larger orders became available, it got to the point where the profitability fell below our own thresholds. Frankly, in retrospect, we probably should have taken some of that business, but we didn't. So it's just really more a matter of ’how do we optimize our own profitability and volume?' So I think we left a little bit of revenue on the table in Q1 in favor of profitability.

Are you planning to adjust the profitability threshold going forward?

We're [now] able to find enough volume at our threshold, but again, lessons learned … In future periods where the same situation might happen, I think we'll take a somewhat different view.

How will the offshoring affect Concentrix's ability to land new clients?

This is what we do on an ongoing basis. We continually modify and mold what our delivery infrastructure looks like to the locations that are best suited to do that work. But in general, what we prefer to do as a company is to identify a number of strategic delivery centers where we could really build up scale. In some cases in the U.S., we had some smaller – in some cases, single-client – centers that weren't providing the type of scale efficiency that we really want to have in our future delivery model. So, as a result, we will have a more cost-efficient model … [And] we're better suited to continue to take on more and more growth and volume.

What prompted Synnex to offshore some of its customer care work?

First of all, this probably took more of a headline than it really should. We were really just trying to explain some changes that we're making in our delivery infrastructure network. By the way, this is all specific to Concentrix, not Technology [Solutions] … The vast majority of our delivery resources are offshore today, but we do have a number of sites that are domestic here in the U.S., and that's for onshore delivery. In working with a handful of our clients, really just because of streamlining of cost and service, we offered a number of different options on how to be more efficient collectively in delivering.

How did that play out?

And the conclusion that we came to was that we wanted to rationalize some of the centers that we had here in the U.S. And, in some cases, the business got offshored to other locations, got consolidated to other locations in the U.S. In some cases, it's work at home. And in other cases, the business just went back to our client. So really, at this point and time, it's really hard to pinpoint exactly what does that mean in terms of number of positions, things like that, but overall for the company, we're going to continue doing the vast majority of that work, just in a different way.

Do you happen to know the locations of the three U.S. delivery centers being closed?

Yes, I do. I think with announcements coming out, we'll probably talk about those at some point in the future.

[Note: Concentrix filed Worker Adjustment and Retraining Notification (WARN) Act notices earlier this year to close facilities in Boulder, Colo. and Bremerton, Wash., laying off 868 workers, and, according to the company, Concentrix is also closing a facility in Atlanta. At the same time, Concentrix is investing in other U.S. locations, such as Greenville, S.C., where the company said Concentrix is expanding its footprint by 36 percent. Concentrix will also be hiring for more than 1,350 new U.S. positions in the next five to six months, the company said.]

How does Synnex benefit from being the first member of Verizon's distribution program?

We've treasured a pretty long relationship with Verizon, and we've done very, very well as a partner. The way that the business has been transacted, mostly on activation, has been through an agent model. This really is a whole different model in how you sell services. We're starting off with what they call their Triple R, which is the Rapid Response Retainer. Think about it as managed security, where it's not being done through an agent. It is being sold as a SKU. Customers can bundle that with some of the other offerings that they're already selling into their customer base.

What does this arrangement mean for solution providers?

It provides not just a security platform, but it also provides assessment. It also provides consulting services should a security incident happen during the course of the commitment period as well. We are exclusive on that. Because of our success with Verizon over the past, they've selected us as their only value-added distributor, and we expect that this is going to really change the way that our resellers are able to sell some of these valuable offerings.

What drove strong networking and security sales last quarter?

As more and more workloads shift to the cloud, mobile computing becomes more and more prevalent. … There continues to be growth of technology as a key enabler of what's happening in these shifts in computing … For example, when you look at eRate and the infrastructure focus that it has on the build-out of communications … For us, a big emphasis there is on Campus WiFi. As you know, we have a strong leadership position in K-12 education with Chromebook deployment and Chrome management console. Of course, the underlying communications infrastructure is a key piece of the growth opportunity. And that's one that we're certainly finding synergy with.

Why were server sales slow in the last quarter?

First of all, I wouldn't necessarily call it broad-based slowness. It was just really our view on what we saw in the marketplace, and it was a short period of time as well. I think it does also speak to, number one, some people are waiting with the end of service for [Microsoft's] SQL Server [database] as well to do their refresh and upgrade, so that could be part of it. There is also shift of workload into more of a hybrid cloud environment as well. So I think collectively you have a number of different things happening that's depressing growth in the server market somewhat.

Why is Synnex doing to gear up for the SQL Server refresh?

There are a lot of things that we're doing. We have a prominent position in the market just in terms of our own growth profile in SQL Server. There are a number of things we are doing with our dedicated team in not just driving standard refresh opportunity, but also driving opportunity to upgrade to more premium-type platforms. The other dimension, of course, is taking a broader view that this is also an opportunity to help our customers transform their end users to more of a hybrid cloud environment as well. So there's really two big opportunities here.

When do you anticipate most of the refresh activity taking place?

That's hard to call. Obviously, there's a lot of activity going on right now, but when we actually see it come to fruition is going to be centered around the time that end of service actually happens [April 12].

Have you gotten a better sense of what the Dell-EMC deal will mean for Synnex?

There's been no update on that merger in any discussions that I've had with Dell. Our current relationship with Dell continues to flourish, and we're doing very well with them. And both Dell and us are very happy with how we've been able to grow our mutual business together.

What consumer technology areas are experiencing limited product introductions?

It was pretty much across the board. Don't just think PCs here. We also do a big business in other types of consumer electronics … In particular in gaming consoles, there was little that was net-new after the holiday season.