Mike Vaishnav - SVP, Corporate Finance and Treasurer Kevin Murai - President and Chief Executive Officer Dennis Polk - Chief Operating Officer Marshall Witt - Chief Financial Officer Chris Caldwell - EVP; President, Concentrix Corporation.

Matt Sheerin - Stifel Justin Wainwright - Citi Brian Alexander - Raymond James Osten Bernardez - Cross Research Ananda Baruah - Brean Capital David Rold - Needham Lou Miscioscia - CLSA.

Good afternoon. My name is Vince, and I'll be your conference coordinator today for the SYNNEX 2016 first quarter earnings call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to pass the call over to Mr.

Mike Vaishnav, Senior Vice President, Corporate Finance and Treasurer at SYNNEX Corporation. You may now begin..

Thank you, Vince. Good afternoon, and welcome to SYNNEX Corporation earnings conference call for the fiscal 2016 first quarter ended February 29, 2016. Joining us on today's call are Kevin Murai, President and CEO; Dennis Polk, COO; Marshall Witt, CFO; and Chris Caldwell, EVP and President of Concentrix Corporation.

Please note that some of the information you will hear today consists of forward-looking statements within the meaning of the Federal Securities Laws.

Such statements may relate to, without limitation, non-GAAP net income and EPS, growth, margin, demand, profit, revenue, cost, shares, currency impact, tax rates, expenses, IT market, business centers, investments and efficiencies. Actual results or trends could differ materially from our expectations.

For more information, please refer to the risk factors discussed in our Form 10-K for fiscal 2015 and discussion of forward-looking statements in our earnings release and Form 8-K filed with the SEC today. SYNNEX assumes no obligation to update any forward-looking statements, which speak as of their respective dates.

Also during this call, we will reference certain non-GAAP financial information. Reconciliation of non-GAAP and GAAP reporting is included in today's earnings release and related Form 8-K available on our website at www.synnex.com.

This conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcast without our specific written permission. Now I would like to turn our call over to Marshall for an update on our financial performance.

Marshall?.

Thanks, Mike. First I will review our results of operations and key financial metrics and then conclude with guidance for the second quarter of fiscal 2016 before turning the call to Kevin. Technology Solutions and Concentrix delivered solid results in Q1. Revenue was slightly below the low end of our guidance.

However, non-GAAP net income and non-GAAP EPS met our expectations. On a consolidated basis, total revenue was $3.1 billion, down 2.4% compared to $3.2 billion in the same quarter the prior year. Adjusting for FX of $71 million and Beats $67 million, revenue in constant currency was 2% higher compared to the prior year quarter.

Our gross profit on Q1 revenues was $284.2 million or 9.1% of revenues compared to $288.2 million or 9% of revenues in Q1 of 2015. Technology Solutions segment revenues were $2.8 billion, representing a decrease of 2.8% compared to the prior year. The loss of Beats and FX headwinds of approximately $58 million also negatively impacted the quarter.

On a constant currency basis, Technology Solutions segment revenues decreased approximately 0.7% year-over-year. Concentrix revenues were $345 million, up 0.9% from $342 million in the year-ago quarter.

Growth was negatively impacted by the sunsetting of one government contract which we have previously discussed and FX headwinds of approximately $12 million. Adjusting for the negative impact of FX, revenue in constant currency grew 4.5%.

Q1 total selling, general and administrative expenses, excluding acquisition and other integration expenses and the amortization costs, increased as a percentage of revenue to 6.28% or $196 million compared to 5.96% of revenue or $191 million in the first quarter of fiscal 2015.

The increase in operating expense as a percentage of revenue was primarily due to lower revenue in our Technology Solutions business. Consolidated non-GAAP operating income was $88.3 million or 2.83% of revenue compared to $97.5 million or 3.05% of revenue in the prior year first quarter.

At the segment level, Q1 Technology Solutions’ non-GAAP operating income was $68.3 million or 2.45% of revenue, down 5% in the prior year quarter result of $71.9 million or 2.51% of revenue primarily due to lower revenue.

For Concentrix, non-GAAP operating income in the quarter was $19.9 million or 5.78% of revenue, down from the prior year quarter results of $25.5 million or 7.46% of revenue, primarily due to the sunsetting of one government contract as previously discussed and continued investment in infrastructure to support our growing network.

Net total interest expense and finance charges for Q1 were $6.2 million, down from $6.4 million from the prior year quarter.

Net other income was $4 million in the first quarter of 2016, up from 0.1 million in the prior year quarter primarily due to a $4.1 million pre-tax benefit from a class action legal settlement related to LCD large screen product in our Canadian Technology Solutions business.

The tax rate for the first quarter of fiscal 2016 was 36.5% compared to 36.2% in the prior year period. For the remainder of fiscal 2016 we anticipate the annual tax rate to be in the range of 35.5% to 36.5%. Our first quarter non-GAAP net income attributable to SYNNEX Corporation was $54.6 million or $1.37 per diluted share.

Now turning to our balance sheet, our accounts receivable totaled $1.5 billion on February 29, 2016 for DSO of 43 days, down two days from the prior year quarter. Inventories totaled $1.3 billion or 41 days at the end of the first quarter, up one day from the first quarter of 2015.

Days payable outstanding was 39 days, up four days from the prior year first quarter, hence our overall cash conversion cycle for Q1 2016 was 45 days, representing an improvement of five days from Q1 of 2015. From a financing perspective, our debt-to-capitalization ratio this quarter was 28%.

Preliminary cash flows generated from operations were approximately $144 million for the first quarter. At the end of Q1, between our cash and credit facilities, SYNNEX had over $1.7 billion available to fund growth. Other financial data and metrics of note for the first quarter are as follows. Depreciation expense was $14 million.

Amortization expense was $12 million. HP, Inc. at approximately 18% of sales was the only vendor accounting for more than 10% of sales. Capital expenditure for the quarter was $36 million, primarily due to continued Concentrix facility expansion.

This represents a peak in our capital expenditures for the year and it should trend down on a quarterly basis for the rest of the year. Trailing four quarters ROIC was 9.5%. Excluding the impact of one-time acquisition and other integration expenses and amortization, the trailing four quarters’ ROIC was 10.5%.

As described in our earnings release, the Board of Directors approved a regular quarterly cash dividend of $0.20 per common share to be paid on April 29, 2016 to stockholders of record as of the close of business on April 15, 2016.

Now moving to our 2016 second quarter expectations, we expect revenue to be in the range of $3.25 billion to $3.35 billion. For non-GAAP net income, the forecast is expected to be in the range of $51 million to $53.1 million and non-GAAP diluted EPS is anticipated to be in the range of $1.27 to $1.33.

Non-GAAP net income and non-GAAP diluted EPS guidance exclude after tax costs of approximately of $7.4 million or $0.18 per share related to the amortization of intangibles. Weighted average shares estimated for diluted EPS are 39.6 million.

These expectations include an anticipated negative currency impact of approximately $30 million on revenue and exclude costs associated with optimizing Concentrix’s North America footprint which Chris will speak to. Please note that these statements of Q2 expectations are forward-looking and actual results may differ materially.

I will now turn the call over to Kevin..

Thank you, Marshall, and good afternoon to everyone on the call. I will begin with comments on our first quarter before turning the call over to Chris Caldwell. I will then discuss our views on the market specific to our second quarter as well as provide an update on our mid-term goal.

In our first quarter of 2016, our revenues at $3.1 billion were slightly below the lower end of our guidance for the quarter. However, margins were in line with our expectation. Concentrix revenue and margin were in line with our expectations with the delta in revenue coming from our distribution business.

Specific to our Technology Solutions segment, by geography, in the US the usual slow start to January extended throughout the month. However, demand did improve to normal levels in February, which we continue to see through March. We navigated the market environment prudently stepping away from low profitability business.

We were able to achieve strong margin performance, but in retrospect we likely over-steered on profitability and did not capture the full revenue opportunity. US consumer sales were also sluggish due to limited product introductions and soft post-Christmas activity.

Our Canadian business was the start performer last quarter growing in the double digits year-on-year in local currency, which we believe was well above market growth rate. And finally, our Japanese business experienced softness in the consumer market but saw strengthening in the commercial business.

Our Hyve Solutions business performed well as we continued to maintain our sales growth momentum including a broadening of our customer base. I will now turn the call over to Chris Caldwell for his discussion on the Concentrix Business.

Chris?.

Thanks, Kevin. I am pleased with our performance in our first quarter results from both the revenue and profit delivering to our expectation. We grew our revenue about 12% from last year in constant currency and when adjusting for the planned sunsetting of a government contract we have talked about in the past.

On this basis, we again outperformed the market growth rates. Our profit in Q1 includes an operating loss of about 5 million from the contract that we renegotiated last year consistent with what we told you two months ago. We did achieve good signings in Q1 and our pipeline remains very solid.

I am pleased with the evolving mix of our business as we further expand our share in our focused verticals and higher value-added services. The investments we’ve been making in additional resources in both our banking and healthcare verticals will better equip us to continue to capitalize on the opportunities we see in front of us.

As we have forged stronger client engagement and partnerships within North America in the second quarter, we have been working with a few clients to move certain of their programs to lower cost locations within our global footprint and with a few to exit delivery network from North America completely.

These changes will ultimately result in additional growth globally over time. This allows us to optimize our footprint in North America which has been built up from multiple acquisitions over the years as we invest in strategic center of excellences.

As part of this, we will be closing three of our US delivery centers and opening and expanding centers in other parts of the world. Specifically, we have opened two new sites in Q1 in Brazil and Nicaragua with additional expansion in Costa Rica, Philippines, India and China in the coming quarters.

We believe these changes will yield a more cost effective North American footprint complementary of our mix in business that has been changing to higher value services. Now, with regards to Q2, we are working through a number of changes that will impact our revenue and margin in the short term.

These include the sunsetted government contract that ended in Q4 and expected operating loss associated with the contract that we renegotiated last year, but as a reminder, it is our belief that this contract will be profitable on a full year basis, the additional depreciation and rental cost associated with the buildup of infrastructure to support our committed business growth that we’ve talked about.

All told, we anticipate these changes to impact our second quarter revenue by approximately $28 million, not including foreign exchange translation headwinds of about an additional $10 million and second quarter operating profit by about $11 million.

On a constant currency basis and also allowing for the sunsetted contract, we believe we will still grow faster than the market in Q2. We continue to focus on our growth strategy to increase our presence in our key focus verticals and higher value added services. Our gross margin is stable and remains strong.

We continue to execute well on on-boarding the business we have signed over the last number of quarters. In this past quarter, we have received even more industry recognition with another placement in the Gartner Magic Quadrant as well as receiving four Stevie awards for our customer engagement services on behalf of our clients.

These accolades speak to our focus on execution and the increasing value of our services that wouldn’t be possible without our great clients and our fantastic staff.

With our clients, we continue to forge long term relationships and as a matter of fact, our top 20 clients have an average tenure with our organization of now over 10 years and with our staff, we continue to strive to build the right culture which has also recently been recognized by being one of the employer of choices by CNBC India and ranked 14 out of 50 for the top places to work in Brazil in Q1, as an example.

I am excited with what is ahead of us over the next few quarters as our client relationships continue to grow. Our team continues to execute with passion and our investments in our business strategy continue to payoff. I will now turn the call back to Kevin..

Thanks, Chris. Our second quarter recorder revenue guidance reflects normal TS seasonal growth and continued above market growth in Concentrix when accounting for the items that Chris discussed.

In our Technology Solutions segment we are expecting a stable demand environment in the US, continued strength in Canada, with a soft but strengthening market in Japan.

Within Concentrix, beyond some things that are outside of our control, including foreign exchange and a sunsetting contract, we are pleased with our performance and our business fundamentals are sound. We continue to invest in the business and we are growing our presence in our focused higher margin verticals.

Now, referring to the three year goals that we outlined at our Analyst Day in July last year, we remain confident in our ability to achieve our sales growth and margin expansion goals by the end of our fiscal 2017.

Within our TS segment, our business strategy is sound and we have a comprehensive business roadmap to capture more share where growth is happening in the third platform technology. We’ve made investments in our higher value-add businesses such as Hyve Solutions and our CLOUDSolv platform and they all continue to grow at or above our expectation.

And our Japanese business which is underperforming today provides more opportunity for us as the economy improves and as we fine-tune our execution. We have a strong track record of growing faster than the overall distribution market while improving our operating margins over the long term.

Our recent investments in our Concentrix business have been nothing short of transformational. We are now in the final phase of realizing the full benefit of the acquisition of IBM's customer care business. As a reminder, phase 1 was the closing of the deal and maintaining stability in the business. Job well done and completed at the end of 2014.

Phase 2 was integrating the business into Concentrix. Again, job well done and completed in mid-2015. Phase 3 is polishing the business, enhanced go-to-market, accelerated sales growth and back office process efficiency. This is where one plus one is more than two.

We are currently at varying stages within this space but are already demonstrating some of the value creation highlighted by our record sales contract signings in 2015 and solid growth in our base of over 400 clients. Other areas such as process refinement are just getting underway.

Our sales growth and operating margin goals for Concentrix are driven by executing on phase 3 and that gives me confidence that we will achieve our stated goals by the end of 2017. So to reiterate, we are confident that we are on track to achieve the goals that we communicated at our Analyst Day.

We have businesses that have solid foundations, our market leading performers and we have talented people that can execute effectively day in and day out. I want to take this opportunity to again thank all of our employees for their hard work and dedication and also thank our business partners and shareholders for their support.

And with that let's turn the call over to the operator for questions..

[Operator Instructions] Our first question comes from Mr. Matt Sheerin with Stifel. Your line is now open..

Just a question regarding the guidance for the Concentrix business for the May quarter. I think you talked about a $28 million shortfall, some of that is from the business that's sunsetting. Could you elaborate on the rest of that? I know that there's an additional $10 million or so on FX.

I'm just trying to figure out if any of this revenue is tied to the consolidation of some of your operations, or the movement to offshore from the US?.

Hi Matt, it’s Chris. The vast, vast majority of that is actually from the sunsetted contract and sort of the year over year compare. A little bit is from the consolidation and moving the work offshore that will be a little more pronounced in Q3 from a revenue perspective but really that $28 million speaks more to sunsetted contract..

And do you expect then to back fill that, as that goes away next quarter, given the new program wins you've been talking about? Will some of that or in other words, do you expect the revenue to bounce back in your Q3 and Q4?.

Yeah, Matt, we are - I mean in constant currency, we grew 12% this quarter, we are expecting to grow faster than market in Q2. So we are filling that sunsetting contract, it won't be in the next quarter but as we talked about our goal is still to continue to grow the entire business at or above market for the whole year and that is still our focus..

And Kevin, regarding the distribution business, it sounds like there's no major surprises one way or the other, except the fact that you did see that typical sluggishness extend a little bit into the quarter, which competitors have been talking about, and they also talked about some of the pricing pressure, which sounds like you walked away from.

Is that pricing environment, has that carried into this next May quarter, and does that also factor in to your below seasonal guidance for operating margin? In other words, is the operating margin decline that we're seeing all related to Concentrix or is it partly due to the distribution business, because of the environment that we're in right now?.

So Matt, first with regard to Q1, really the slowness was really an extended slow start in January but as we got through the rest of our quarter and certainly what we’re seeing today is good stability in the US market in particular. Overall, we feel good about the overall market demand in technology right now.

I think the next point you spoke of is really on our guidance on operating margin, and really in addition to the items that Chris spoke of, Q2 really does have a bit of a mix change for us, it is one of the periods where there is more software renewal that tends to be at slightly lower gross margin than our overall company average.

And there is probably a little bit of conservatism built into that as well..

Thank you. Our next question comes from Mr. Jim Suva with Citi. Your line is open..

This is Justin on for Jim Suva. Thank you for taking the question. I just want to go back to Concentrix, again. I know you had talked about achieving the revenue goals and operating margin goals by 2017.

I was just curious if you could elaborate a little bit more on how exactly you're going to go about doing it moving forward, judging by the sunsetting contract, not being able to fill for next quarter.

So what are some of the ways that revenue's going to be filled?.

I think it's two points Justin. First off, we continue to fill the revenue gap from that contract as it has sunsetted for a couple of quarters, so that the full impact, we haven't been negatively growing, we’ve been growing faster than the market to make that up and that will continue.

The second thing from an operating margin perspective is that we do have some duplicate costs within our business as we have expanded footprint, consolidated some properties much like we're talking about doing in North America and that filters out over the next couple of quarters to Kevin's stated point about the end of 2017 being within our both growth and operating margin desire profile.

So a number of things are working along the way that make that happen. We also as you remember had sort of a record year for signings last year and many of those contracts are now just starting to be implemented and so they also will continue to build to the next preceding quarters..

I was also wondering about the verticals. You had spoken that banking and healthcare verticals were some of the stronger ones.

I was just wondering approximately what growth rate are you seeing those verticals expand for Concentrix?.

We don't break them out in terms of separate growth verticals but I will tell you that they are growing faster than sort of our core business because of the type of focus we're putting on them. And actually we have an insurance vertical as well that is also growing within - better growth rates than our standard business..

Thank you, sir. Our next question comes from Mr. Brian Alexander with Raymond James. Your line is open..

Chris, just on Concentrix, so what changed that led to the re-evaluation of the footprint versus when you acquired the business? I know it's been a couple of years. I'm just curious, what changed? Was any of this related to any unexpected contract losses? Just some color on how things have progressed that led you to this decision.

And then on the $11 million profit impact that you talked about, I think that's what you said for the May quarter, when you roll up all of these items for Concentrix.

How does that break down into some of the key contributors of that, duplicative infrastructure, the lingering contract issue, et cetera?.

So, let's answer your first question Brian, in terms of the decision-making process, frankly first of all there was no loss of any client relationships, in fact we have very, very good client relationships with the clients we work through whether we mutually decided not to continue the business in North America completely or whether we decided to move it offshore.

One was really around the pricing environment and some were frankly very long and we've been talking to them about needing to change the price and frankly the economics just work out better for both parties to move that offshore to a lower cost jurisdiction. And so we’re executing on that.

And then some frankly the process were just highly mature and the client could actually absorb it within their infrastructure already, so tends to go away. But from our perspective, we have these conversations on an ongoing basis.

I think to Kevin's point phase 1 was stability, phase 2 was sort of getting everything integrated, phase 3 is now the polishing and we're having those conversations with some of our clients of what makes the best sense for them from a service perspective and obviously from our growth in profit perspective, what we want to see happen with some of that work.

So we’re very happy with how we put it together and see how we’ve performed. In terms of your second question around the breakdown of $11 million, I believe last quarter we gave you an indication around the increase and sort of depreciation and some [reso] [ph] cost that’s a good half of the $11 million.

And the $11 million is to sort of the other points in terms of the sunsetting and the government contracts that has happened..

And just on duplicative infrastructure, as you move from here to offshore, is that a major contributor?.

Yes, it’s about half of that – it’s about half of the half Brian to put it in an easy way but if you think of the $11 million and half of it is depreciation and additional reso cost, half of that is additional reso cost or duplicative reso costs of is moving the work to other locations..

When you're done with this work, what percentage of your footprint would you consider to be in low cost regions, and is that optimal, or might this be more of a continuous process in future quarters?.

So Brian, really we look at it differently from where work is generated to where work is delivered and in some markets we deliver work in the same region we generate it from such as obviously North America, Japan, Brazil and some countries within Europe.

And in those countries, North America was primarily the only place that because we've done a number of acquisitions had more of an overhang of a footprint and dispersed footprint that made sense for us. And so this allows us to kind of really go down to some centers of excellence.

We are actually expanding those centers to put in more business in and so it's worked out well. In most of the other locations, we've actually been doing this cleanup over the last year and a half, two years relatively seamlessly to clients and to the market..

Then just last one from me is more of a clarification for Marshall or Kevin. The targets from the Analyst Day that were originally for fiscal ‘15 to ‘17, are those now exit rates for 2017? I just wasn't sure what you were implying when you said that you should still achieve these targets by the end of next year.

Is that something you think you can achieve for all of next year or exiting next year?.

Brain it really you know first of all I think the -- I think the short answer is they’re exit – sort of exit of 2017.

However, as we talked through those targets last July, we did point out that it's not going to be a linear progression between mid-last year through the end of 2017 in some cases with some of the ramp up of benefit from the investments that we’re getting both in the Concentrix business as well as on the TS business, they come a little bit later on in the period.

Then add-in any seasonal fluctuations that we have to it. So, in particular for margin those are exit rates, for compounded annual growth rate obviously we are a little bit behind right now, in particular of the TS side because of the overall market environment but we do intent on catching up through the next year and a half..

Thank you. Our next question comes from Mr. Osten Bernardez with Cross Research. Your line is open..

I had a question with respect to your high business, Kevin, if you could just highlight for us what we should be thinking about the opening of new markets for you guys in 2016? There seems to be a lot of activity there both competitive and just in terms of other entities being interested in that space.

What's your take on the spending environment there, and what are your expectations as it relates to customers you might have in the pipeline?.

Osten, I'll start then maybe Dennis you can add some detail later but the good news is that I think there has been a lot more press and interest in Open Compute. But also keep in mind that when we talk about our overall Hyve business, only a portion of that is really directly related to Open Compute.

A good chunk of the work that we do although somewhat touches on OCP, really are more custom configurations specific to our clients, but collectively when we look at the trend of large-scale datacenter build-out and in particular, moving to more custom-build, whether it be OCP based or not, that's really where the big growth in the market is and that's what we addressed directly with our Hyve Solutions business..

And Osten, I would just add like any market, there is competition, but we think we’re faring quite well. Revenues for Q1 were in line with our expectations. Kevin mentioned some customer wins during the quarter, which we’re very happy with.

We’ll start out with modest revenue amounts in the coming months and quarters, but we think if we execute well, we can turn those into larger businesses in the long-term. So in a good space in Hyve and looking to grow the business..

Got it. And then switching gears over to the TS side, specifically as it relates to Japan, understandably that -- the end market there has been weak, but historically, if I'm correct, your business has been more heavily weighted on the consumer electronics, or personal side, than the rest of your traditional business.

And I was just wondering if you could speak to whether there have been increased initiatives to improve the mix there? Where are you in that process, because I know that's been something that you've been working towards?.

Yeah. Osten, your view on Japan is accurate. It is much more of a broadline based business and we do have a larger than North American footprint in the retail space than we have here. That said, when -- we try to describe what's happening in the underlying market and what's been going on for the past two years.

The Japan economy as you know, has been under stress, it is recovering at this point and we’re actually seeing positive signs now two quarters in a row that there is stability and certainly growth is starting to return in certain segments. That is absolutely true in the commercial segment.

Consumer is still somewhat lagging behind, and because of the bigger footprint that we have in consumer, that is weighing down a little bit on our overall growth for the business.

So that said, we put double and triple effort into driving more and more presence and breadths in the commercial side of our business, starting with the product side, but also expanding market presence in other areas of Japan that we feel that we’re underserved in the commercial part of the business, and that's been an investment that we've been making over the past year, that continues to happen and we’re starting to see good results come out of that..

Thank you very much..

Thank you. Our next question comes from Mr. Ananda Baruah with Brean Capital. Your line is open..

Hey, guys. Good afternoon and thanks for taking the question. I guess just a couple from me, if I could. Chris, going back to services, how much of what you're speaking to, both the rev impact and the margin impact, would you consider to be incremental to your view kind of versus 90 days ago? And then I have a couple follow-ups on that. Thanks..

So Ananda, the sunsetted government contract, frankly, we've been calling out for 2.5, 3 years, because we bought it from IBM and identified it from the first call and kind of tracking to our -- in fact, at the time, we actually had two contracts within the government space that we are ending that we had to replace and one was gosh, almost $100 million and we replaced it without ever calling it out.

The second one as we talked about was larger than this originally, but in the last 12 months was a little over $120 million. So we have been replacing this and our view 90 days ago was similar to what it is and has been right now in terms of that contract.

In terms of some of the other movement from site consolidation exercise in the US, this is something that we've been having conversations with for last number of months and had discussions, had there been price increases, well might have stayed within North America, but frankly we are comfortable with what the outcome is because it will allow us to be more profitable once we make the switches and moves to this different revenue business.

And actually to follow up on one point, two of the centers actually had their leases up within this period of time as well. So timing frankly worked out well with that as well, as we did our view of the consolidation. So nothing has really changed and new within the last 90 days..

Got it. And Chris, you made mention that I think the rev impact from shifting the centers will be actually greater in the May quarter than it will -- sorry, in the August quarter, than it will in the May quarter.

Can you give us some sense -- when we get to the August -- I guess, what I'd love to get a sense of is what's the impact to the August quarter, how much more meaningful will it be than the May quarter, and then how long should we expect that tail to last? And I understand that there is sort of a netting against that as you ramp new contracts, and kind of fill that up as well.

But I just want to get -- make sure that we appropriately are sort of dimensioning what at least that offshoring impact may be, and how long it may take?.

So, Ananda, as I mentioned in Q1, sorry in Q2, the $28 million, the vast and vast majority of that is the contract that sunsetted. In Q3, that sunsetted contract year-over-year compare was at the highest amount and will be about $35 million impact just for that contract.

The offshoring will be significantly less than that and we don't want to call out the file number because we are just doing that kind of transition plans and everything else that goes along with it, but I will tell you it’s not as much as Q2 and Q3 as the sunsetted contract in terms of annual revenues. So put it in a size for you in that way..

Okay. Got it. And then on the operating margin impact, is it -- do you guys feel comfortable enough to say that the operating margins are at the low point for the year in the Feb quarter? And just wondering if we should expect margins to improve to some degree as we move through this year? There's a handful of moving parts.

If you could just help us with that, that would be great. Thanks..

Yeah. Ananda, I think your assumption is correct.

I mean, Q2 is what we see as our lower operating margin for the year and then we see progression as it goes through the rest of the year, primarily driven by obviously moving some of the work to lower cost centers, reshaping our US footprint as well as some of the onboarding of new business that we have within our bookings that we're onboarding..

Got it. And I'm going to sneak one more in here, Chris.

Do you think you can get -- I think the expectation, Street expectations coming into this call was that the services margins could probably get up to sort of like I'm going to say high single digit, but use that loosely, whether that's like a 7% to 9%, by the end of the year, is that still in the potential outcome set? And why I'm asking is, what I don't want to have happen is folks to over-model your margins for this year.

So if it's really more of a mid-single digit versus anything that resembles a high single digit, I'd rather get that out there now, than have that linger into next quarter..

Yes. Ananda, I don't want to get into providing future guidance. I think what I'll tell you is this. I mean, clearly we have one contract that has lost money for Q1 that we are calling out as losing money for Q2, but we've said that we will be profitable for a full-year basis is our belief and so, that obviously will show up in one of the quarters.

In the preceding two quarters, that will be quite a big impact and therefore will drive operating margin much higher than what you will see seasonally for the first two quarters.

I think also, you will see the general improvement within our cost structure as we take up some of the costs out of the US and consolidate and move some of the work to lower cost jurisdictions.

While our revenue is muted a little bit by moving into offshore, obviously we generally tend to have a better margin profile of business offshore than onshore. So all of that will contribute to a better operating margin as we go forward in the course of the year..

Got it. That's helpful. Appreciate it, guys. Thanks. .

Thank you. Our next question comes from Mr. David Rold with Needham. Your line is open..

Hey, thank you.

Just on the distribution side, I was wondering if you could give a little more color on the US, both product and customer standpoint?.

Sure. For US specifically, I think going back to Q1, again, the slowness was pretty much in what I call the broadline or commodity part of the business, so obviously higher volume, but that is more the lower margin part of the business. In addition to that, the consumer market was a little bit soft.

In particular, coming off of the post-holiday season and there was not as many new product introductions that we'd seen in prior years as well.

So just kind of calling out where the softness was, it was broadline in January specific and the consumer market, but as I said, as we continued on into our quarter, we saw the market really restore to more normal demand levels..

And was broadline and consumer also where you thought you were perhaps overly selective? Or is that separate areas?.

In broadline in particular, yes..

Okay.

And then on Concentrix, I just wanted to clarify the footprint consolidation, was that -- is that what's necessary to get you to your margin targets by the end of '17, or does that perhaps create some incremental upside beyond the time frame? I realize you're not going to give longer term guidance than you already have, but would you have reached the targets without this consolidation, I guess is the question..

Yes. We would have reached these without the consolidation..

Okay. All right. Thank you..

Thank you. Our next question comes from Mr. Lou Miscioscia with CLSA. Your line is open..

Thanks.

Just I guess hitting again on the different products, anything on the enterprise side that you might want to pull out, that was either stronger than expected or strong, or weaker than expected?.

Just categorically, what continues to be strong is anything communication security related.

So within specific produce lines that we have, within networking in particular, wireless -- campus Wi-Fi, and pretty much all of our security lines, that was pretty strong, but some of the hardware parts of enterprise were a little bit soft or in particular, some server category..

Okay, great. Going back to, I guess Concentrix and looking at how well you did with that problem contract in the November quarter, would that be the normal seasonality we could think about? Because obviously it looks like obviously February, May and likely August all seem to be running into major transitions for Concentrix.

So it seems like it's more of a bit of a hockey stick to November?.

Actually Lou, I bridge it more between Q3 and Q4. If you remember, we talked about renegotiating it in Q4 and so there is a bit of catch-up that was Q3 pulled in to Q4 with the renegotiation. But I would bridge it more between Q3 and Q4..

Okay. You had mentioned for the contracts that you're moving south, obviously revenue will be a little bit more muted, margins better.

So from an absolute operating margin dollar perspective, is it about flat, or is it going to be actually up or down?.

From an absolute operating margin dollar perspective, it will be down, just because of the gross revenue will be muted and down from it, but from a margin profile perspective, at a gross and at an operating income margin perspective, it will be higher..

Okay.

And then after you get this one done, obviously the shift to lower cost in offshore has been ongoing for years and years, how much more -- when you look out more into the future, without giving forward guidance, is there a potential that obviously you're going to have to do this again on a continuous basis?.

No. I mean, we do, do this on a continuous basis. We’re always working with our clients to move things around. Specifically what was driving these discussions was I mentioned two of the facilities had their leases up and so before we re-renewed and they were sort of single use facilities I guess is the best way of putting it.

Before we renewed, we wanted to make sure that the client was as committed as we were, and when we started going through some of the new pricing model with the increases and other things, the reality was -- is that, it just didn't make sense for the clients and it was a better decision for them to move the work elsewhere and us to support that and work with them.

And these had been long-term contracts that have come across from IBM that had not seen increases for sometimes.

So the reality is that affectively cleanup because these two came at the same time, we’re calling it out, but we’ve actually had moved things back and forth as well as moved some things onshore for whatever the client strategic initiatives are that we need to support..

Okay. Thank you, guys..

Thanks, Lou..

Thank you. So that concludes today's conference call. Thank you all for participating. You may now disconnect..