Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2008
Business Overview: SYNNEX is a Fortune 500 business process services company providing IT distribution, supply chain management, contract assembly, and business process outsourcing (BPO) to OEMs and resellers globally. Operations are concentrated in North America (approx. 98% of revenue), with significant presence in the U.S., Canada, and international markets including China, Mexico, Japan, the Philippines, and the UK.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Aug 31, 2008 |
Nine Months Ended Aug 31, 2008 |
Nine Months Ended Aug 31, 2007 |
|---|---|---|---|
| Revenue | $2,045,689 | $5,672,335 | $5,033,444 |
| Gross Profit | $112,899 | $309,554 | $249,895 |
| Gross Margin % | 5.52% | 5.46% | 4.96% |
| Operating Income | $39,505 | $103,957 | $75,277 |
| Net Income | $22,060 | $57,398 | $42,942 |
| Diluted EPS | $0.66 | $1.72 | $1.32 |
| Cash & Equivalents | $59,773 (as of Aug 31, 2008) | ||
| Total Debt (Current + Long-term) | $334,933 (as of Aug 31, 2008) | ||
| Convertible Debt | $143,750 (Issued May 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 16.2% for the quarter and 12.7% for the nine-month period compared to the prior year. Growth was driven primarily by the acquisition of New Age Electronics (NAE) in April 2008, which accounted for more than three-fourths of the U.S. revenue increase in the quarter.
- Profitability Expansion: Net income rose 53.3% for the quarter and 33.7% for the nine-month period. Operating income increased 61.1% for the quarter and 38.1% for the nine-month period.
- Margin Improvement: Gross margin expanded by 34 basis points for the quarter and 50 basis points for the nine-month period, attributed to better variable incentive maximization, cost management, and the higher margin profile of BPO acquisitions.
- Acquisition Activity: The company acquired NAE for a total consideration of approximately $42.8 million (cash and accruals), adding significant consumer electronics distribution capabilities. Other smaller BPO acquisitions totaled approximately $3.0 million in the second quarter.
- Debt Structure: In May 2008, the company issued $143.75 million in 4.0% Convertible Senior Notes due 2018. Proceeds were used for general corporate purposes and to reduce balances under the U.S. securitization arrangement and revolving credit facility.
Guidance, Outlook, and Risks
Management Commentary: Management attributes growth to organic market share gains, strategic acquisitions, and improved execution. The company expects to continue expanding operations through investments or acquisitions, which may require additional capital. The company believes it has sufficient resources to meet working capital requirements for the next 12 months.
Risks and Contingencies:
- Concentration Risk: Hewlett-Packard (HP) accounted for approximately 35% of revenue in the quarter and 32% for the nine-month period. MiTAC International, a controlling shareholder owning ~40% of common stock, is a key supplier and partner; changes in this relationship could materially impact the business.
- Liquidity and Financing: The company relies heavily on accounts receivable securitization and floor plan financing. A downgrade of credit rating agencies or liquidity providers could adversely affect financing capacity.
- Inventory and Obsolescence: The IT industry faces rapid technological changes and declining unit prices. The company is exposed to inventory write-downs if price protection from OEMs is insufficient.
- Accounting Changes: The company is evaluating the impact of new accounting standards (SFAS 141R, SFAS 160, FSP APB 14-1) effective in fiscal 2009/2010. Specifically, FSP APB 14-1 is expected to increase reported interest expense on convertible debt starting in 2009.
- Legal and Tax: The company is undergoing a U.S. IRS audit for 2004 and 2005 tax years. A trademark infringement suit with Seanix Technology Inc. was settled in April 2008 on non-material terms.
Investor Verification Checklist
- Acquisition Integration: Verify the integration progress and revenue contribution of the New Age Electronics (NAE) acquisition, which drove a significant portion of recent growth.
- HP Dependency: Monitor the status of the distribution agreement with Hewlett-Packard, which expires May 31, 2009, and represents over one-third of revenue.
- Convertible Debt Impact: Assess the future impact of FSP APB 14-1 on interest expense and net income starting in fiscal 2009 due to the new accounting treatment for the $143.75 million convertible notes.
- Working Capital Financing: Review the stability of the U.S. and Canadian accounts receivable securitization programs and the potential impact of credit rating downgrades on liquidity.
- Related Party Transactions: Scrutinize the terms of ongoing transactions with MiTAC International, given its 40% ownership stake and role as a primary supplier and contract assembly partner.