Q&A: Synnex CEO Talks Cloud, Lenovo x86 Acquisition, K-12 Market And More
Refresh, Vertical Business Fuel Growth for Synnex
Synnex saw strong financial results in its most recent quarter, with sales for the Fremont, Calif.-based distributor soaring 29.3 percent to $3.54 billion and non-GAAP profits jumping 25.1 percent to $62.5 million. CRN spoke with Synnex CEO Kevin Murai during the distributor's 2014 North American conference Thursday about opportunities stemming from the cloud, new state and federal requirements in the K-12 vertical, Lenovo's acquisition of the x86 server business from IBM and Microsoft's end of support for Windows XP and Microsoft Server 2003.
What is the most significant piece of news to come out of the past quarter?
It was another quarter of really strong growth, led by the U.S. and that growth was really across the board. We still have some benefit from Win XP support expiration, but that drove a lot of other business in other categories beside PCs and notebooks into communications, security, a lot of wireless opportunity as well. One layer down from that, one thing I'm really proud of is the work that we've done in the SLED markets, specifically K-12 education. With the partnerships that we have with Google Chrome, we implemented a Chrome community, and that's really taken off in a big way for K-12 education.
How recent of a development is this?
We were one of the first partners with Google Chrome. That goes back close to a year now, I think, where we really kicked it off, but it's really started to take off the past two quarters … With schools preparing for this school year, which of course started in the beginning of September, they were making their own investments in technology to prepare for the coming school year. Common Core has really been driving a lot of this. Just looking for the technology solution that supports it, enables it and is priced right.
You mentioned as well during the investor call, in terms of the federal market, things appear to be turning around a little bit. Can you give me a little bit more detail about that?
We're starting to see a lot more activity around responding to big opportunities for the federal government. And even though technically the government's year end is in September, that business does drag on for a few weeks after that. As long as these quotes come to fruition and translate into orders, then we'd be cautiously optimistic on having a good federal season this year.
What are some of the most common products or services companies are going into when they upgrade from Windows XP?
When you look at the stuff that's more directly related, it has to do with the infrastructure that supports the overall environment. So networking and upgrading Wi-Fi in particular. Of course, security goes hand-in-hand with all of that. Our overall networking and security business has experienced good growth, along with the growth of PCs and even one step farther back into infrastructure, when you get into some of the enterprise, data center infrastructure … But, indirectly, everything else seemed to increase in demand just as a result of the PC growth driving an increase in overall water level in the entire technology market.
Are we seeing a change in the cycles in terms of what times of year are most popular (for sales)?
Because we had a stronger than normal Q3, if you factor in the incremental business that we believe we did as a result of XP tailwinds, then we're pretty much right on top of what our historically, seasonal uptick would be between Q3 and Q4 … There was a little bit of pull-in on the retail side from Q4 to Q3 in anticipation of the holiday buying season. As you probably know, there is no Black Friday specifically anymore -- buying actually starts happening before that now. So that's changing a little bit of the seasonality.
Are you starting to see much, if any, activity from the Microsoft Server 2003 expiration coming up next year?
The upgrade of server is more complex and takes longer than upgrading your PC environment. So we have our solution providers that are trying to get ahead of the curve on that. What we're also seeing is solution providers that actually did experience the uptick for XP and may not have anticipated it early enough -- they want to be sure that they are ready for the growth opportunity for Server 2003 … We're even transacting some of that refresh business today, but we do expect that that will ramp up as we get into the New Year.
Why did this seem like the right time to introduce a dividend for your shareholders?
The profile of our company has changed quite a bit for the better. We have a technology solutions business today that now includes the U.S., Canada and Japan. And all three are operating very well and growing. We have a scaled services business in Concentrix, a post-acquisition from IBM Customer Care that is also performing on track. The integration is going very well, and so our overall balance sheet is in a very different place today than it was before. We believe it's the right time for us to return cash to shareholders. I view that as a very positive move on our part.
What relationship, if any, do you feel there is between the stock buybacks and the dividend in terms of delivering shareholder value?
It's really a portfolio of a number of different things that we do, just starting off with overall performance. If we're able to grow as a company and leverage the businesses that we're in and perform well, that is by far number one. But in addition to that, the combination of controlling our share count through stock buybacks and also returning cash directly to shareholders through the dividend makes a more complete portfolio of how we create value for our shareholders.
How does introducing the dividend affect existing operations or money spent on R&D?
It has no impact on that at all. Where our business is at today, we can certainly comfortably pay out dividends on a quarterly basis in addition to continuing our investments in R&D as well as being prepared for any other types of investments, whether they be acquisitions or green field investments that we choose to make in either side of our business … We intend on paying a dividend in every quarter going forward.
Has the higher consumption tax (in Japan) been a bit of a drag on sales since that went up in April?
We have had very strong growth through our second quarter that included April. We grew our business 40 percent year-on-year during that quarter, when half of it experienced the tailwind and half of it didn't. And again, this past quarter … even though we were not specific on what exactly our business growth was, we're still in the double digits in growth year-on-year. So even though that tailwind has certainly gone away, the overall demand environment, I think, driven a lot by macroeconomic conditions, which are positive, has continued to drive good demand growth just in the overall market.
Are there any challenges or opportunities for Q4 that solution providers should be aware of?
We talked about Server 2003, and we have a number of solution providers that are really getting ready to capture that opportunity, and those that are not doing that. I would suggest that they get on board and do that because, again, I believe it's not only a server opportunity itself, but there is going to be a lot of pull on products and services that will go with that … The overall market may be growing at X percent, but if you want to grow faster than that, you really got to focus on those areas that are growing much faster.
Were there particular technological areas that were strong independent of the end of service for Windows XP?
The overall market is still very strong. There are pockets, of course, where we did do better. ProAV is actually one other technology category, a lot of that is also being deployed in K-12 education … When you set up an electronic classroom where you either deploy Windows 8-based tablets and Chromebook-based tablets, you also want to have an environment where you can project and have an interactive classroom environment. And that's really where the ProAV piece comes in is in what the teacher would use, the projector piece.
Is there anything I didn't ask you about that you feel your channel partners should be aware of?
Well I guess a couple of things. Number one, just to reiterate, we feel very good about the overall IT demand market. We haven't seen this in a long time, because the recovery from 2009 has been relatively slow. But we're starting to see businesses spend more money. So really, my advice is focus on what you do well, and focus on those key areas where you find growth. And then you're going to do well in this kind of environment.
What does the closing of the x86 acquisition by Lenovo mean for Synnex?
It's a great enhancement to our enterprise portfolio. The X series product line -- we actually used to represent a number of years ago, and so, we still have a lot of knowledge in the X series business itself. And, obviously, those that had partnered with IBM now partner with Lenovo. It's a great enhancement to the line card, good incremental growth opportunity for us.
What do you feel Synnex is going to be able to do with the x86?
Probably the immediate opportunity in front of us is the Windows Server 2003 refresh. We've worked very well with HP as our enterprise partner, and now we have a broader offering to take to the market. I think what's very important is the X series business does have a good following in the marketplace, and it's something that a lot of customers that we've been dealing with do represent. So that allows us to better service our existing customers.
Why do you feel the PC is still hanging in there? What types of opportunities do your partners still have with PCs?
Specific to PCs, the significant innovation over the past year or so in processing power, starting with Haswell chips about a year ago, bringing more processing power and also less power consumption, better user experience, touch screen, and of course, Windows 8. There's a lot of reasons beyond just the XP support expiration that's been driving a lot more refresh and consumption because the experience is much better.
How should resellers be approaching the decision between staying with traditional products and moving to off-premise, cloud-type stuff?
In the almost 30 years I've been in technology, I haven't seen any other type of more rapid change than we're seeing right now. That's something we're all embracing together, because we see traditional IT -- non-cloud based IT -- as continuing to be a good core of business, and it will likely continue to grow. But the incremental growth opportunities are going to come from cloud-based technologies. The way that you win in the marketplace is by focusing on where the growth is, and a lot of the growth is going to be in cloud-based solutions and enterprise mobility.
Where do you feel the biggest cloud-specific opportunities are right now for solution providers?
I think we're still in the early stages right now, and it's so broad that it's hard to pinpoint one specific area. It's also going to be a different answer based on the different markets we all set IT into, whether it's small or midsized business, [or] enterprise. But some of the near-end opportunities that we and our partners have really been embracing are things like Office 365 and looking for ways to add value to their end-user customers by helping them mobilize their enterprise environment.
What does Microsoft's new cloud-based Office 365 SMB offering mean for Synnex?
Office 365 is not new. We've established our own practice. We have a dedicated team that actually holds the hand of our customers [in] identifying and capturing their first sale and then helping to support then through developing that cloud-based business. It's a near-end opportunity because most commercial users are using some form of office productivity solution, and Office 365 is a very easy way for our partners to start selling in the cloud. And from that, there's natural add-ons to it like backup.
How much know-how from end users are you seeing around the cloud?
I think understanding of cloud for SMB is still very much in its infancy … We all say SMB, but the truth is that that market is as broad as the entire market itself, where you have some early adopters, business owners that are highly technical that probably the owners make all of the decisions themselves. [And then] to the opposite extreme, where there's full dependency on any kind of IT decision on the solution provider, where the solution provider is the trusted advisor. So the real opportunity in SMB, though is ... helping to bring those businesses along and help to get them into cloud and help to mobilize their businesses.
Have you seen much movement from the K-12 sector into the cloud?
K-12 education has been a big growth area for us. There's a real requirement to be [as] cost effective as possible in delivering higher-quality education and also being compliant with Common Core. Really technology is the way that you get there. We've partnered with Google for their Chrome environment, starting off with the Chromebook device, Chrome management console. We've also partnered with Microsoft on their ecosystem to do the same thing. So really what it is is using technology in a very cost-effective way to deliver a better experience in the classroom. And that experience, for the most part, is a cloud-based experience.
What do you feel are the sweetest spots for the channel in IoT?
I think it's very broad-based, again. When you look at an opportunity where, in the coming years, there's going to be 30 times the number of connected devices there are today, and ultimately that result in tens of billions of devices connected. You've got obvious opportunities in selling those sensors and devices. There's opportunities in upgrading and implementing the communications infrastructure to support all of that data coming in. But there's big opportunities in services as well, where you actually help with the analytics of that data and translate that information that can be used to take action on what those sensors are doing.
What types of plays is Synnex making in UCC and convergence?
Our communications practice has undergone very high growth over the past couple of years. It's really been focused against the increase requirement for bandwidth and security around that. And as a result of that success, we've also been able to enhance our line card … We have what we consider to be best-of-breed security partners. We have what we consider to be best-of-breed wireless partners as well. One of the announcements we had today really was an enabling tool that helps our reseller to not only design and configure a solution on the Avaya platform, but also then translate that into a quote.
What do you feel will be the biggest thing differentiating Synnex from some of the other distributors in the marketplace?
We're very intimate with our partners. We understand their business, but we're also flexible in how we work with them, not just the technology piece but also helping them in driving growth to capture business opportunities. Some of that could be help in the financial piece … Where I think we do excel and differentiate is in our understanding of what's happening in technology and what the implications of those changes are, and to be first to market in creating new business models and new programs that capture these growth opportunities resulting from these technology changes like cloud.
Can you give me one or two example or somewhere where you feel like you did a good job of being first to market?
Our CloudSolv business and our strategy around SMB cloud, I believe today, is the most extensive and broad view on how we enable our solution partners to get educated on but also be able to identify and sell cloud-based solutions. We were the first to say that it's our role to be more than just a cloud services aggregator. We need to deploy the tools and we need to deploy the service-level capabilities to provide an end-to-end product experience.