Synnex To Offshore Some Customer Care Work, Close 3 U.S. Delivery Centers

Synnex is laying off at least 868 customer care workers -- roughly 1 percent of the company's 70,000 employees -- as it closes three of its U.S. delivery centers and offshores the work to lower-cost locations.

The Fremont, Calif.-based distributor saw revenue fall year over year for the fourth consecutive quarter, recording a quarterly decline of 2.4 percent, to $3.13 billion, the company reported Monday. That fell well below Seeking Alpha’s estimate of $3.26 billion.

Quarterly non-GAAP earnings sunk for the third consecutive quarter, with Synnex reporting a 6.1 percent drop in profitability -- to $54.6 million, or $1.37 per share -- for the quarter ended Feb. 29. That was exactly in line with Seeking Alpha's estimate.

[Related: Verizon Launches First-Ever Distributor Program, Helps Partners Deepen Security Offerings]

"In retrospect, we likely oversteered on profitability [in our broadline Technology Solutions business] and did not capture the full revenue opportunity," CEO Kevin Murai said during the company’s earnings call.

Wall Street reacted unfavorably to the numbers: Synnex’s stock plunged 8.8 percent in after-hours trading, to $88.25 per share. Earnings were released after the market closed Monday.

Synnex is in the process of closing three Concentrix delivery centers acquired through the 2014 purchase of IBM's customer care business and relocating the work to lower-cost locations in Central America, South America and Asia, said Chris Caldwell, president of Concentrix, during the earnings call.

No specifics about the closures were revealed during the earnings call; however, the company filed Worker Adjustment and Retraining Notification (WARN) Act notices with Colorado and Washington earlier this year.

Concentrix reported Jan. 18 that it would be laying off 348 employees in Boulder, Colo., on or around April 18 as it closes a facility there. And the company indicated Feb. 3 that it would be laying off 520 workers in Bremerton, Wash., beginning March 4 as it closes a facility there.

Caldwell said the work is being relocated to strategic centers of excellence in other parts of the world, with new facilities opening in Brazil and Nicaragua last quarter and expansion slated at existing facilities in Costa Rica, the Philippines, India and China in the coming quarters.

Two of the relevant facilities had leases that were set to expire, Caldwell said, meaning that the longtime client work being done there would become more expensive if the lease were renewed. Based on conversations with the clients, he said, Concentrix determined it would make the most sense to avoid any price increases by moving the work elsewhere.

"Frankly, the economics worked out better for both parties to move it offshore to a lower-cost location," Caldwell said. "This will allow us to be more profitable."

In the most recent quarter, Synnex’s technology solution sales fell 0.7 percent, to $2.78 billion, after factoring out changes in foreign currency exchange rates. The division’s non-GAAP operating income sunk 5 percent, to $68.3 million.

On the enterprise side of the business, Murai said, Synnex’s communication and security businesses delivered the strongest results, with networking and campus Wi-Fi sales leading the pack. But hardware enterprise sales -- particularly around servers -- came in a little soft, Murai said.

Sales in the United States got off to a sluggish start in 2016, with soft broadline revenue persisting throughout January before improving to normal levels in February and March, Murai said. U.S. consumer sales came in weaker than expected because of post-Christmas slowness and limited introduction of new products.

Canada was the star of the show, Murai said, with sales growing by double digits in local currency. Japan experienced some improvements in the commercial market but saw continued softness in the consumer market, Murai said.

Palo Alto, Calif.-based HP Inc. accounted for 18 percent of Synnex’s overall sales, the same as the quarter before. No other vendor accounted for more than 10 percent of Synnex's sales.

For Synnex's Concentrix division, the company reported revenue of $344.7 million, up 4.5 percent on a constant currency basis. Non-GAAP operating income for the division plummeted 21.9 percent, to $19.9 million.

The banking, health care and insurance verticals grew faster than Concentrix's core business and helped drive sales growth, Caldwell said.

For the next quarter, Synnex said it expects earnings of $51 million to $53.1 million, or $1.27 to $1.33 per share, on revenue of $3.25 billion to $3.35 billion. Analysts from Thomas Reuters have projected earnings of $1.59 per share on revenue of $3.39 billion.