SYNNEX (SNX) Q1 2018 Earnings Conference Call Transcript

SYNNEX (SNX 1.12%)
Q1 2018 Earnings Conference Call
March 29, 2018 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Synnex First-Quarter Fiscal 2018 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions].

At this time for opening remarks, I would like to pass the call over to Ms. Mary Lai, head of investor relations at Synnex Corporation. Ma'am, you may begin.

Mary Lai -- Head of Investor Relations

Thank you and welcome to the Synnex Corporation earnings conference call for the first quarter fiscal 2018 ended February 28, 2018. Joining me on today's call is our president and CEO, Dennis Polk; our CFO, Marshall Witt; and our EVP and president of Concentrix Corporation, Chris Caldwell. Following their remarks, we will open the call to questions. As a reminder, today's call is being webcast and recorded.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, market, demand, investment, growth, non-GAAP net income and diluted EPS, amortization of intangibles, margin, revenue, costs, expenses, shares, tax rate, seasonality, integration, and overall performance. 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 2017 and the 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 the 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 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.With that, I will turn the call over to our CFO for the financial update. Marshall?

Marshall Witt -- Chief Financial Officer

Thank you, Mary, and first, let's start with welcoming Mary to the Synnex Corporation. Glad to have you on board. First, I'm going to review the results of operations and our key financial metrics and then I'll conclude with guidance for the second quarter of fiscal 2018 before turning the call over to Dennis.Our first-quarter revenue and non-GAAP net income and diluted EPS are in line with our expectations. On a consolidated basis, total revenue was $4.6 billion, up nearly 30% compared to $3.5 billion in the same quarter of the prior year.

Adjusting for FX, revenue increased by 28%. Technology-solutions revenue was $4 billion, representing an increase of 33% compared to the prior-year period. Adjusting for the Westcon-Comstor acquisition and FX, revenue increased by 11%. This increase was primarily driven by broad-based growth across the majority of our portfolio.

Concentrix revenue was $508 million, up 6% from $478 million in the prior-year quarter. Adjusting for FX, revenue increased by 3%. The increase was primarily due to increased volume and the expansion of services to existing customers and the impact of the Tigerspike acquisition.Now turning to gross profit. Our first-quarter gross-profit dollars totaled $414 million, up 21%, or $72 million, versus the year ago, and our gross margin was 9.1%, compared to 9.7% in the prior-year period.

The increase in gross-profit dollars was primarily driven by the acquisition of Westcon-Comstor as well as overall growth in both business segments. The decrease in gross margin was primarily due to the higher mix of technology-solutions business from the Weston-Comstor acquisition and customer and product mix within our system design and integration business solutions.The first-quarter total adjusted SG&A expense was $274 million, or 6% of our revenue, compared to 6.3% of revenue, or $223 million, from a year ago. The increase in SG&A was primarily due to the acquisitions of Weston-Comstor and Tigerspike. First-quarter consolidated non-GAAP operating income was $140 million, an increase of $22 million year over year, while our non-GAAP operating was down nearly 30 basis points from the prior-year period, primarily due to the higher mix of technology-solutions business.At the segment level, first-quarter technology-solutions non-GAAP operating income was $97 million, or 2.4% of revenue, up nearly 20%, or over $15 million from the prior-year period, primarily benefiting from the Weston-Comstor acquisition.

Adjusted operating margin decreased in Q1 primarily as a result of expected margin headwinds and our system design and integration solutions business.For Concentrix, non-GAAP operating income in the quarter was $44 million, or 8.6% of revenue, up from the prior-year quarter of $38 million, or 7.9% of revenue. First-quarter net total interest expense and finance charges were approximately $18 million, up from $8 million in the prior-year quarter. The increase was due to higher borrowing cost to fund acquisitions and ongoing working capital requirements and a higher interest rate environment.The effective tax rate for the first quarter was 29%, compared to 34% in the prior-year period. The tax rate excludes a one-time tax charge of approximately $42 million, or $1.03 per diluted share, related to repatriation tax and remeasurement of our deferred tax accounts.

These adjustments may change in future quarters based on additional guidance issued by regulators and may impact our financial position, as the final measurement date is measured on November 30, 2018.Moving forward, we expect the tax rate to be in the range of 27.5% to 28.5% for the remainder of fiscal 2018, excluding the one-time impact from the tax reform. Our first-quarter non-GAAP net income was $86 million, up $13 million, or 18%, from the prior period. Our first-quarter diluted EPS was $2.14, up from $1.82 from the same period a year ago, or up 18% year over year.Turning to the balance sheet, our accounts receivable totaled $2.6 billion on February 28, 2018, for DSO of 52 days, up eight days from the prior-year quarter, primarily due to the impact of the Weston-Comstor acquisition. Inventories totaled $2.3 billion for 51 days at the end of the first quarter, and improved one day from the prior-year period, primarily benefiting from the Weston-Comstor acquisition but partially offset by growth in our technology-solutions business.

Days payable outstanding was 53 days, up 10 days from the prior-year first quarter, primarily due to the impact of the Weston-Comstor acquisition. Hence, our overall cash-conversion cycle for the first quarter was 50 days, a decrease of three days from the prior-year period.From a financing perspective, our debt-to-capitalization ratio this quarter was 44% and consistent with our expectations. Preliminary cash used in operations was approximately $6 million for the quarter, bringing our 12-month operating cash flow from operations to $357 million. At the end of Q1 between our cash and credit facility, Synnex had over $2 billion available to fund growth.Other financial data and metrics of note for the first quarter are as follows.

Depreciation expense was $22 million, amortization expense was $27 million, CAPEX for the quarter was approximately $22 million, primarily due to continued Concentrix investments, trailing four quarters ROIC was 8%, and trailing four quarters adjusted ROIC was 11%. As described in our earnings release, the board approved a regular quarterly cash dividend of $0.35 per common share to be paid on April 27, 2018, to stockholders of record as of the close of business on April 13, 2018.Now moving to our second-quarter fiscal 2018 outlook, we expect revenue to be in the range of $4.58 billion to $4.78 billion. Non-GAAP net income is expected to be in the range of $91.1 million to $94.9 million. Non-GAAP diluted EPS is expected to be in the range of $2.25 to $2.35 per share based on weighted average shares outstanding of approximately 40.1 million.

Non-GAAP net income and non-GAAP diluted EPS guidance exclude after-tax costs of approximately $19.2 million, or $0.48 per share, related to the amortization of intangibles. Please note that this statement of second-quarter fiscal 2018 expectation are forward-looking and actual results may differ materially.I'll now turn the call over to Dennis.

Dennis Polk -- President and Chief Executive Officer

Thank you, Marshall. One month into my new role as CEO, I can confidently say it has been a seamless transition. I want to thank all our team members for their effort and support since the announcement of Kevin's retirement. Regarding our first-quarter performance, Synnex had a successful start to our fiscal '18.

The momentum that we created in 2017 continued into our first quarter, with revenue of nearly 4.6 billion, representing a year-over-year revenue growth of almost 30%, and with solid execution, we delivered non-GAAP EPS of $2.14 per diluted share, a record for the first quarter.Our technology-solutions segment revenue grew by 33%. Excluding FX and Westcon-Comstor growth was still over 11%, which is significantly better than the overall market. Our strong performance was broad-based, with strength in systems, peripherals, networking, and security. From a customer perspective, all divisions had robust growth with commercial, DMR, public sector, and SMB all performing well.

Our Westcon-Comstor Americas business continued its strong start with another fantastic quarter. We saw revenue growth in the Westcon-Comstor business and both operating profits and margins were above expectations. We're very pleased with the results of this business after the first two quarters post-acquisition and appreciate the efforts of all the Westcon-Comstor team members during the transition into Synnex. Additionally, as we further integrate Westcon-Comstor North America into a single operating platform, we expect that revenue and comp synergies will grow.Turning to our Concentrix segment, we grew revenue by 6% with strong contributions from consumer electronics, banking and financial services, travel and transportation verticals.

Our non-GAAP operating margin increased year over year by nearly 70 basis points to 8.6%, reflecting good progress toward our target of double-digit operating margin for our fiscal 2018.For more input on Concentrix's business, I will turn the call over to Chris.

Christopher Caldwell -- Executive Vice President and President of Concentrix Corporation

Thank you, Dennis. Concentrix is off to a solid start for 2018. First-quarter revenue was $508 million, up 6% year over year. We earned $61 million of adjusted EBITDA in the period, reflecting a double-digit growth from the prior-year quarter, making this a second consecutive quarter of which adjusted EBITDA grew twice as fast as our revenue.

This was helped by some better utilization the period [ph] that was driven by additional volumes from our clients.We have also continued our focus on the right clients and the right services for sustainable growth in the first quarter. As an example, we added some key wins in our Tigerspike business from our existing Concentrix clients in the quarter, helping two banks advance their mobile customer offerings and growing the number of clients who are doing Robotics Process Automation work, or RPA.Our clients in the banking, insurance, and healthcare spaces are seeing the most benefit from RPA. We're seeing these platforms provide better efficiency for our clients and an enhanced end-user experience and reduced cycle times. While this integration and investment may pressure our short-term revenue, we expect this will support our longer-term stickiness with our clients and are aggressively implementing the technology across our client base.With information security being top of mind of all of our clients, I am also very proud that we won an award for best security practices this quarter in addition to receiving eight other awards from industry advisors, with two specifically highlighting our diversity.

These awards continue to reflect our culture and our care for our clients.Lastly, while we launched our temporary Jamaican site late in the fourth quarter last year, I'm very pleased to announce that we have completed our move into the permanent facility this first quarter. In addition, we also opened at a new location in Xi'an, China, to fill current demand by our clients in these two markets.Turning to the second quarter, we expect to follow our normal seasonality. We expect to continue our focus on driving a right mix of services into our client base while signing strategic clients in our key verticals. We enter the quarter with a strong pipeline of opportunities.

Overall, I am pleased with the results for this quarter and we want to give thanks all of our clients and Concentrix staff around the world, who day in and day out delivered great innovative results for our clients. Back to you, Dennis.

Dennis Polk -- President and Chief Executive Officer

Thanks, Chris. Now, looking at our second quarter. Within technology solutions, we expect our legacy distribution business to perform in line with historical seasonality. We expect the Westcon-Comstor business to be within historical seasonal norms, which is a modest decrease from Q1 to Q2 given the Westcon-Comstor business has a more pronounced revenue month in December each year.And lastly, we expect our systems designs and integration solutions business to grow slightly both sequentially and year over year.

This is driven by two main reasons: 1) our Q2 '17 was exceptional from a sequential and overall growth perspective; and 2) this business is primarily the base and could be difficult to forecast. Hence we are planning accordingly.While our near-term profit margin is challenging this quarter due to some high-volume business of a few customers, we are still excited about the long-term prospects and are investing for growth. Overall, with regards to technology solutions, our goal of establishing deep and strategic relationships with our partners continues to translate to growth in our business.In Concentrix, as Chris noted, we expect Q2 revenue and non-GAAP operating margins to grow year over year. Concentrix has taken a proactive approach in optimizing its portfolio, reevaluating and in some cases allowing lower-performing contracts to sunset, and being selective with new business.

We're also focused on productivity improvements to offset general wage headwinds and leveraging our systems and global networks to improve scale. Overall demand is stable and growing and our projected signings are strong. We also expect to see incremental growth opportunities with our expanded portfolio of services and the strategic complement Tigerspike provides.One of the key elements of our success which I mentioned in our first-quarter call is that we will continually challenge ourselves to be relevant to all stakeholders including associates, customers, partners, and shareholders. We're focused on making the right investments, integrating strategic acquisitions and skilled resources, and executing our strategies in the complex and rapidly changing markets that we serve.

As we continue to do so, I believe our revenues and margins will improve, which will generate strong cash flows and earnings-per-share growth.In closing, I want to say again that I'm honored to be taking on my new role at Synnex. I want to thank Kevin for his leadership, his contributions over the past 10 years, and ensuring a smooth transition. The strategy developed with Kevin and the other leaders at this company will serve us well moving forward. We are excited to execute on our plan.

Lastly, I want to take this opportunity to thank all our associates around the world for their hard work and dedication and also thank our business partners and shareholders for their support.With that, I'd like to open the call for questions.

Questions and Answers:

Operator

[Operator instructions]. We have our first question and it is coming from Matt Sheerin with Stifel. Your line is now open.

Matt Sheerin -- Stifel Financial Corp. -- Managing Director

Thank you very much and good afternoon, everyone. Actually before I get into some questions, just want to clarify your comments, Dennis, regarding within technology solutions, specifically the cloud, the systems-integration business, I think you said that comps are going to be obviously tough after a strong Q2 of last year and that you expected it to be down slightly year over year and quarter on quarter. Was that right?

Dennis Polk -- President and Chief Executive Officer

Hi, Matt. No, it's going to be slightly up quarter over quarter and sequentially.

Matt Sheerin -- Stifel Financial Corp. -- Managing Director

OK, year over year. But obviously you've been growing that business 50% plus, so pretty dramatic slowdown. Is the visibility in that business getting tougher because you have had very, very strong growth obviously for several quarters in a row now? And I know there's a big customer-concentration issue within that business too. So has anything changed in terms of visibility or what you are seeing from that customer or other customers in that business?

Dennis Polk -- President and Chief Executive Officer

Yes, Matt, from a visibility standpoint no major changes over the past few quarters. As we have talked about it is more of a bid-based business. So every quarter, with each customer we are looking at the various bids and some we push hard to win and some we will pull back from depending on profitability. So that really hasn't changed over the past couple of quarters over the last year.

What is occurring, though, is we are becoming pretty concentrated with a few customers. And when those customers look at us, they obviously want balance their business as well. So it's a little more difficult to grow with them given the size and percentage of the business we are with them today. So that's some of the pressure we have as far as growing the system design-integration business as well.

Matt Sheerin -- Stifel Financial Corp. -- Managing Director

Is that a longer-term challenge? Obviously those customers and one specifically are very big and that market is so dominated by just a few players in the hyperscale space. So what's the strategy to grow that business in that kind of environment?

Dennis Polk -- President and Chief Executive Officer

It's a market with quite a few participants, but the largest of the large do make up the bulk of the revenue. Our revenue is again primarily made up of a few customers but we have a very good pipeline of quite a few other customers that we expect to close fairly quickly and the key thing is once we close them to become a meaningful part of their market share.

Matt Sheerin -- Stifel Financial Corp. -- Managing Director

OK, that's helpful. And just on the margins in the tech-solutions business, which were down year over year 40 basis points or so, and backing into your net income guidance for next quarter, looks like it's going to be down year over year. I know you had a very strong May quarter last year in that business. Is that primarily due to the cloud, the Hyve business, or there any other issues within the core distribution business because you had Tech Data just a few weeks ago talk about pressures from OEM suppliers and then also competitive pressures from customers? So, is that part of it too? And could you just comment broadly about what you're seeing in terms of the competitive environment?

Dennis Polk -- President and Chief Executive Officer

Sure, Matt. Yes, multiple questions there. As far as kind of year-over-year comparison from the margin standpoint, as you know, we did have a very solid Q2 last year, most of which was driven by our system design-integration business. So that's probably the main reason why the compare is tough year over year.

From a vendor-program perspective, no real major changes to talk about over the past two quarters and even the past year. Obviously, programs change from vendor to vendor, change from quarter to quarter, but we have seen no material changes in the past, again, few quarters and for the past year. As far as overall competitiveness in the marketplace, as we've always said, this market is very competitive. I would say that in the recent few quarters on the higher-volume, larger customer base, it's been a bit more competitive but outside of that, the market has been pretty stable.

Marshall Witt -- Chief Financial Officer

And, Matt, this is Marshall. Just to complement what Dennis said there too. As we look to Q2, there is some margin headwind around the system design-integration business. And as Dennis has said, the rest of the business is right within norms of seasonality.

The other thing just to note, in some of our customers in the systems design-integration business, we have what's called an open book, where we share kind of "Due From, Due To." There were some one-time adjustments in Q1. That represented a few basis points that we don't anticipate occurring again.

Matt Sheerin -- Stifel Financial Corp. -- Managing Director

OK, that's very helpful. Thanks so much.

Operator

Our next question is coming from Adam Tindle from Raymond James. Your line is now open.

Adam Tindle -- Raymond James -- Analyst

Thanks and good evening. I just wanted to maybe continue the conversation on systems design integration. Can you just help us with what has changed in the bid process? Is it that competitors are becoming more rational? Is it that customers are pressuring you more? Just more color there and how do you think about the timeline to see improvement?

Dennis Polk -- President and Chief Executive Officer

This is Dennis. I'll take that. As far as the overall market. I wouldn't say it's gotten any more competitive.

So from a competitor-bid perspective, it's pretty stable over the past few quarters. As far as our business specifically as we talk about, we're fairly concentrated with a few sets of customers. And within that concentration, we are actually somewhat concentrated in a number of SKUs, high-volume run-rate SKUs. So when that occurs with customers, you can expect that pricing negotiations become pretty tough and pretty specific given the high volume, lower level of SKUs that we're servicing for the customers.

So we've experienced that over the past number of quarters and that's the main reason why our margins have come down. As far as improving them, the key thing is what we talked about before. It's diversifying within the existing customers that we have, the number of SKUs that we offer to them and then also expanding our customer base and bringing on new customers and then going to volume with them and offsetting some of this concentration that we have.

Marshall Witt -- Chief Financial Officer

Adam, this is Marshall. Just to reiterate, we see this lasting for a couple of more quarters but we feel very positive about the businesses. And, as Dennis said, our focus is on winning desirable customers. It takes a little bit longer sales cycle for that to happen but we're quite positive about what this area in the business looks like in the next few quarters.

Adam Tindle -- Raymond James -- Analyst

And maybe on just TS growth in general, ex-Westcon, May guidance looks like it suggests that TS is slowing to kind of a low-single-digit year-over-year growth after a number of quarters of double-digit growth, but many of your vendors sound pretty bullish on IT spending. So can you just talk about how your view is different? And could we think about further deceleration in TS year-over-year organic growth as comps get tougher in the back half of the year?

Marshall Witt -- Chief Financial Officer

Yes, I'll start and then let Dennis comment. What I heard your question was is, ex-Westcon what does the seasonality look like? And as we said, it's right in line maybe slightly ahead of seasonality but right in line when you look at the various aspects and elements speaking of the U.S., Canada, Japan. It's right on line. So, it's hard to see that with so many different layers and companies that we brought on board, but we see that in Q2 in terms of just overall relationship from Q1.

Dennis Polk -- President and Chief Executive Officer

And I would just add, Adam, that, back to our script, we tried to point out that our legacy core distribution business is growing nicely from a seasonal perspective and we actually expect to be growing faster than the market this quarter.

Adam Tindle -- Raymond James -- Analyst

And maybe if I could just get one quick clarification from Chris, the comment on pressure on revenue in Concentrix, I just want, it looked like Concentrix grew 6% or so year over year this quarter. Seasonal guidance for next quarter suggests that sort of level would continue. So could just maybe help clarify the pressure on short-term revenue? Does that mean beyond the next quarter we're going to see, that's when we'll see the pressure because I wouldn't think 6%-type growth is much of a deceleration there?

Christopher Caldwell -- Executive Vice President and President of Concentrix Corporation

So we saw that in the last sort of two quarters and we see it in the next couple of quarters, where we're actually eroding our revenue by putting in RPA in some of our clients and then kind of building it back up. So clearly, frankly, we'd like to grow faster but at 6%, that includes some of the kind of headwinds we've seen by replacing some of our existing revenue with lower revenue using RPA tools.

Adam Tindle -- Raymond James -- Analyst

So 6% would be the type of growth rate that you would suggest is kind of exhibiting the pressure that you're talking about?

Christopher Caldwell -- Executive Vice President and President of Concentrix Corporation

Adam, as we've talked about before, we want to definitely grow sort of at-markets to a bit faster. The market is 3.5% to 4%. So I kind of view those numbers versus a 6% number, but in theory yes, we want to continue to grow at that market while we are implementing all this new technology for our clients.

Adam Tindle -- Raymond James -- Analyst

OK, thank you.

Operator

Our next question is coming from Frank Atkins with SunTrust. Your line is now open.

Frank Atkins -- SunTrust Robinson Humphrey -- Managing Director

Maybe following up on that last question on Concentrix a little bit, some nice margin improvement there. What are drivers of margin improvement going forward going to be? Is that more RPA work? Tigerspike? What can you do to continue to drive that margin?

Marshall Witt -- Chief Financial Officer

So, Frank, it's really a couple of problems that we look at. One is as we continue to increase our revenue coming from our strategic verticals like insurance and healthcare and banking, that has a higher margin profile just because of the complexity of work and sort of what we'll do in that space. So we continue to focus on growing in those areas. The second thing is the technology, which you've talked about.

The more RPA solutions we put in, the more mobility solutions we put in from Tigerspike and the more sort of technology that the client uses that we've developed in-house, we continue to see margin-expansion opportunities from that. And then really the last, third part is better utilization of our footprint. As you've noticed, we've launched a new, number of new geographies lately. And we continue to ramp up.

As we mentioned, they're not accretive to our business as of yet, but as we expect to exit this year, when they're fully ramped, they'll be accretive to our business and continue to expand our margin. So, we've got a number of levers that we're pulling on and ensuring to drive up and to the right, as you say, from a margin-expansion perspective.

Frank Atkins -- SunTrust Robinson Humphrey -- Managing Director

And then I'd like to ask a little bit about the use of cash going forward. Can you talk a little bit about kind of your comfort level with the debt? Where it is and where you might allocate the dollars in terms of as you look at your ROIC? And then real quickly, if you can comment on DSOs that would be wonderful, too.

Marshall Witt -- Chief Financial Officer

OK, Frank. Let me first hit the DSO and then I'll do cap and then turn it over to Dennis. So our cash conversion, which, of course, Concentrix gets woven into that and buried somewhat, was slightly better than last year. Is it where I want it to be? No.

We certainly have improvements on the inventory side that we can do. On the overall capital allocation and, we'll call it dry powder, as I mentioned, we've got over $2 billion in liquidity available. And as we look at our opportunities, you heard us say that we're clearly focused on looking at our debt, looking at paying that down. We paid down debt, $100 million in the last three months.

Really happy about that to see interest expense come down accordingly. We expect cash flow to continue to be positive as we head up for the rest of fiscal year and then I'll let Dennis comment just on a rough thought [ph] on M&A.

Dennis Polk -- President and Chief Executive Officer

Yes as far as just to add on to what Marshall was saying. We are comfortable with where we're at right now. And as Marshall noted, we have some improvements to make, and that'll bring us to even a more positive capital position. But the overall M&A market in all of our segments continues to be a place where we want to be opportunistic.

And M&A has been a key part of our growth and building out our platform over the years. And nothing has changed as far as our thoughts going forward. With respect to continued investment in M&A-type opportunities. And that's our plan going forward.

Operator

Our next question is coming from Shannon Cross with Cross Research. Your line is now open.

Ashley Ellis -- Cross Research -- Analyst

Hi, thank you. This is Ashley Ellis on for Shannon today. My first question, just around EPS guidance, I was wondering if you could walk us through the puts and takes. You've commented that Concentrix operating income should grow year over year, but it looks like you've also lowered the range for tax for the year.

So what's kind of driving EPS to be down or below what we were expecting? And then I have a follow-up.

Marshall Witt -- Chief Financial Officer

All right, Ashley, I'll go short and then I'll go longer as you need it. The short answer is the biggest, we'll call it adjustment or headwind, associated with EPS for Q2 is what Dennis spoke to, which is the margin depression that we're temporarily feeling in our systems design and integration business. All other aspects of our business are performing very well and are healthy. But with that said, you've referenced tax, we did provide in our prepared remarks comments of what the tax rate was for the quarter, which is 29 and then we provided what the rest of the year looks like, which is 27.5 to 28.

As we announced last quarter what that benefit meant from tax reform, it is a benefit for us and so that we get a share in that for the rest of this year but, Dennis, I'll let you comment on anything else from an overall EPS perspective.

Dennis Polk -- President and Chief Executive Officer

No, I think Marshall covered the highlights well. The key is the core business is performing quite well we do have opportunity in our SG&A to bring a few more dollars to the bottom line as we work through the integration of Westcon Comstor and just execute better in a few places in our business, but the main factor right now that we are working on from a headwind perspective is profitability of the systems design-integration business but as we talked about before as we diversify that business and grow outside of our few core customers, we'll see profitability return there as well.

Ashley Ellis -- Cross Research -- Analyst

OK, thank you. And my second question is just regarding server demand. It's been a few months since you last spoke about the vulnerabilities. So, I'm just wondering if conversations have started to pick up with customers, if you've seen any pickup in demand or any change around those vulnerabilities?

Dennis Polk -- President and Chief Executive Officer

Yes, since the last call really nothing to call out for us. Our server demand was very stable throughout the quarter, and based on our projections today we don't see that changing at all, so really nothing to call out on that topic at this point in time.

Operator

Thank you. Our next question is coming from Louis Miscioscia with Pivotal Research Group. Your line is now open.

Louis Miscioscia -- Pivotal Research Group -- Managing Director

OK, great. Thanks. Just to the tailgate on some of the prior questions. So on servers, when you say stable, do you mean that it grew? And could you mention, was it mid-singles? High single? Low single? And then I guess I can get into a couple Concentrix questions, please.

Dennis Polk -- President and Chief Executive Officer

Sure. Yes, specific to our server business, not giving out exact percentages, but we did grow the server business fairly healthily in the quarter but pretty consistent, if you will, with the rest of our core TS business.

Louis Miscioscia -- Pivotal Research Group -- Managing Director

OK, great. I guess switching over to Concentrix. Could you help us out with RPA, in the sense, where do you think we are with this whole process, in the senses of, still in the first or second innings, or are we further along? And then tie into that, please, when you look at your Concentrix business, how much of it do you think is RPA-able if you take the whole whatever the revenue line was, $2 billion, what percent of that do you think could be RPA'd?

Marshall Witt -- Chief Financial Officer

So, Lou, to be quite honest, you'd have to go by industry because some industries are little more advanced. As we mentioned, sort of financial services and specifically in that sort of retail banking, there's a lot of opportunities, including insurance, lots of opportunities, and I have to say we're probably in the fourth inning, we're out of prototyping and proof of concepts, and we're into sort of good implementations that are driving real returns for our clients and seeing good traction with that. Some other industries are probably in the first and second inning and just kind of looking at it in proof of concepts, but overall a long sort of runway, as in years of continued improvements and betterment using the technology of businesses, so it's not something that's going to be overnight but it is something that we see as a competitive advantage to take share from our competitors and improve our relationships with our clients by offering them higher-value sort of services. In terms of sort of RPA-able, I'd hate to call out a number cause it would be a little misleading.

I think what people are seeing is anywhere from 20% to 40% improvements on processes that can be RPA-able, but then generally what's happening is that what's left is becoming a higher-value, higher-chargeable service and generally commanding additional revenue from that as well. So our expectation is we're forecasting internally set headwind of cannibalization of our own revenue and we still want to grow past that, at market. And so that's how I would look at our revenue flow for the business.

Louis Miscioscia -- Pivotal Research Group -- Managing Director

OK, great. And then one of the things that came up on the Tech Data call was this specific comment that there were lower OEM payouts pretty much across the board. Obviously, you had mentioned that most of your margin degradation was in the system-design business. So were you not seeing I guess lower OEM payouts in general?

Marshall Witt -- Chief Financial Officer

Lou, this is Marshall. We feel really good about our partnership, about the programs we have in place. And again evidenced by commentary made about seasonality, embedded in that is also our confidence on our ability to continue to hit the various thresholds that we have with our partner. So we're seeing a strong market.

We're seeing, call it, good partner commitments. And other than the comment around system design integration, we feel good about the rest of business. And we do feel good about system too. It's just a headwind right now.

Louis Miscioscia -- Pivotal Research Group -- Managing Director

OK, great. That's helpful, guys. Thank you.

Operator

Our next question is coming from Sean Hannan with Needham & Company. Your line is now open.

Sean Hannan -- Needham & Company -- Managing Director

Thanks for taking the question, here. I think a number of them have been addressed, but just at least in terms of looking at the Westcon business, where are you folks in terms of cutting over, looking at system integration, effectively being able to get to, say, single invoicing? If I recall correctly, I think that was one of the key enablers in order to be able to see some revenue acceleration in that combined entity and one of the key aspects of the synergy. So just trying to get an understanding of what perspective can you share around timing for that and how would you expect that to be an enabler and shape some improvement here through the year?

Dennis Polk -- President and Chief Executive Officer

Hi Sean. Dennis here. Regarding the synergy benefit, you're absolutely right. Once we combine systems, we do expect to get revenue synergies from this business.

We are getting some today, but it's a little difficult, as you can imagine, working with two systems. It's very manual and just not efficient at all but still getting benefit, so that's a positive despite the headwind of two systems.As far as when we plan to combine systems, we said that we want to get system-combination done in the first half of this year and that would be a calendar comment, so that's by the end of June. I can say at this point, I think we're going to beat that deadline pretty well. So in the very short term, you'll see or you'll hear about us doing a successful system-integration.

Sean Hannan -- Needham & Company -- Managing Director

OK, great. And then as a follow-up here is kind of the high-level question, I'm not sure what ability you'll be able to have in terms of insight. But is there anything that you're seeing or sensing in terms of budgets opening or potentially opening more as a result of tax reform and perhaps allowing for another revenue contributor later on in the year? Or what perspective can you share around how this recent tax reform could ultimately help your business in that regard? Thanks.

Dennis Polk -- President and Chief Executive Officer

The overall answer is we haven't seen anything material to date affecting our business. We do expect when companies have more cash available to them due to a lower tax rate that they'll invest them back in their business and those investments will include technology spend. So it is our expectation that will start to occur, but we have not seen anything material to date, though.

Sean Hannan -- Needham & Company -- Managing Director

OK, very good. Thank you so much.

Operator

Our next question is coming from Jim Suva with Citi. Your line is now open.

Jim Suva -- Citi -- Managing Director

I know a lot of time has been focused a little bit on the challenges of operating profit margin on the system designing and integration business. Can you just help us better understand -- is this due to Synnex's desire to expand its customer base or due to increased competition in its existing customer base?

Dennis Polk -- President and Chief Executive Officer

Hi Jim. It's Dennis. I'd say it's in no particular order here, it's due to competition in our customer base, it's also due to the fact that we've been investing in the business to scale it out to ensure we can not only handle existing business with current customers but also to take on new business with new customers. And then the last aspect would be, again, just a high volume of low amount of SKUs, which has allowed for lower pricing overall and then lower margin accordingly in our business.

Jim Suva -- Citi -- Managing Director

And then were there any vendors over 10% representing your sell-through?

Marshall Witt -- Chief Financial Officer

In total, we typically have one or two. We disclose them in our Q. It's the same ones, Jim, that you've seen in the past in the Qs and Ks.

Jim Suva -- Citi -- Managing Director

OK. So I'll wait for that. And then finally there's been a lot of talk in the media about privacy impacts from some of the social media companies about using personal data. Has that impacted your order rates or anything, for example, accelerate them or pause them or any impact from the social media privacy?

Dennis Polk -- President and Chief Executive Officer

Hi Jim. This is Dennis. Good question. It's something we've thought about, but to date we have not seen any spike, if you will, from anything related to that.

Is our general business up or is part of that increase up, I should say, because of potentially related to what you're talking about? That is possible, but we have not seen anything specific that we would call it out and say this is a factor in why business is up.

Jim Suva -- Citi -- Managing Director

And my final thing is more of a housekeeping. What type of tax rate should we look at now with tax reform's have been finalized and your integration is progressing well?

Marshall Witt -- Chief Financial Officer

Jim, I would use 27.5% to 28.5% for the rest of the fiscal '18 for your model.

Jim Suva -- Citi -- Managing Director

Great. Thank you so much for the detail. It's great. We appreciate it.

Operator

Our next question is coming from Ananda Baruah with Loop Capital. Your line is now open.

Ananda Baruah -- Loop Capital -- Analyst

Hi. Good afternoon, guys. Appreciate your taking the questions here. A few from me, if I could.

Just going back to the Hyve ASP compression, Dennis, I believe and I heard you comment that you thought it would persist for a couple more quarters. Did I hear that accurately and if so what's the visibility that you have that it could flatten out in the next couple of quarters?

Marshall Witt -- Chief Financial Officer

Ananda, I'll take the first part. You did hear that correctly. We expect it to last for a couple more quarters, and then I think at that point, I would say margins we believe will begin to expand again. And Dennis?

Dennis Polk -- President and Chief Executive Officer

Just adding on to that, Ananda, the key for us is to diversify the business, as we talked about a few times now today. And that's with new customers but also to bring on new solutions and new offerings to the existing customers to further diversify the business that has caused our margins to come down a bit, which again is a result of concentration of small amount of SKUs at high volumes.

Ananda Baruah -- Loop Capital -- Analyst

I got it. That's super helpful. So I guess the visibility that you guys have that leads you to say a couple more quarters is, you've laid out some investible costs, you think you'll have new customers coming on in a reasonable time frame, so that gets you some fixed-cost absorption. And then secondarily to the new product the new SKUs of the existing customers, do you think that when that occurs, they would diminish some of the pricing pressure on the original SKUs, the existing SKUs, or do you think that continues but you just get some lift from the incremental SKUs?

Dennis Polk -- President and Chief Executive Officer

It's the latter part of what you said. The goal is to bring on new offerings and new SKUs to lift the operating profit but that will not change the profile of the existing bids that we've won.

Ananda Baruah -- Loop Capital -- Analyst

I got it. OK, that's helpful. And then to the extent that you guys can, does the amplified investment from Google hyperscale from Azure hyperscale, does that impact you at all or are you hopeful that you can benefit from that? I guess, any context there, I think would probably be helpful collectively to us.

Dennis Polk -- President and Chief Executive Officer

Well, we love to be in growing markets and that's one of the reasons why we invested in this business five or six, seven years ago now. So the fact that the market is growing and there are several players who are increasing their spend we think is a good thing and is an opportunity for us.

Ananda Baruah -- Loop Capital -- Analyst

And, Dennis, I believe the comment made last quarter that the Hyve business had been impacted by some pull-forward. Was that material? And to the extent [Inaudible] material, does it kind of matter? And then to the extent that it did, do you think that impacted, is that impacting the guide as well?

Dennis Polk -- President and Chief Executive Officer

As far as our current quarter and our current-quarter guide, notwithstanding that we've always said this is a very lumpy business and hard to predict. But there really isn't any pull-forward aspect going on that's factoring into our guide for Q2 or from the results we posted in Q1.

Marshall Witt -- Chief Financial Officer

Ananda, you might be thinking about last year Quarter 2, where we did see some pull-in, if you will. And that's making the year-on-year comparison little bit harder.

Ananda Baruah -- Loop Capital -- Analyst

I bet that's what it is, Marshall. I bet that's exactly what it is. I appreciate the clarification and the reminder. And then, finally, I didn't hear, can you just talk to how Westcon synergies are tracking? If it was mentioned on the call, I totally missed it and that's on me but I'd love just an update there?

Dennis Polk -- President and Chief Executive Officer

Overall, again we're very pleased with the Westcon-Comstor business for the first two quarters. The business is performing well, meeting and exceeding the goals, which is fantastic. As far as synergies on the top line, we're still working through the system integration, like we talked about before. So we haven't achieved all the revenue synergies that we would hope for to date, but we do see significant opportunity to achieve the expected revenue synergies once we consolidate the systems in North America.From an expense standpoint, we didn't really call out expense being a major synergistic area in this transaction.

But the reality is we are starting to see some benefits that weren't anticipated and we do expect to see more as we consolidate the systems. So that's an added benefit to the transaction.

Ananda Baruah -- Loop Capital -- Analyst

And if I recall, the guide upon deal closure was $0.70 for the 12 months. Is that accurate?

Marshall Witt -- Chief Financial Officer

Ananda, that was what we had upon announcement.

Ananda Baruah -- Loop Capital -- Analyst

And, Marshall and Dennis, when you are saying that you're tracking in line, in-line-ish, in line-plus, let's call it, it's that $0.70? Whatever track you have to that $0.70, you're in line plus with that from an overall perspective?

Marshall Witt -- Chief Financial Officer

Last question here, but I'll answer it a different way. First of all, we're pleased with the performance of Westcon all-in North America, pleased with the margins. But we also have operation and sales teams that are now fully integrated from a North American perspective, so it becomes very difficult to now to begin to bifurcate and figure out what's Westcon North America, or U.S. versus what [Inaudible].

So very pleased with the performance, exceeding expectations, leave it at that.

Ananda Baruah -- Loop Capital -- Analyst

OK, perfect. Thanks, guys, really appreciate it.

Mary Lai -- Head of Investor Relations

Thank you. And this concludes our call.

Operator

Thank you. And that concludes today's conference. Thank you for your participation. You may disconnect at this time.

Duration: 49 minutes

Call Participants:

Mary Lai -- Head of Investor Relations

Marshall Witt -- Chief Financial Officer

Dennis Polk -- President and Chief Executive Officer

Christopher Caldwell -- Executive Vice President and President of Concentrix Corporation

Matt Sheerin -- Stifel Financial Corp. -- Managing Director

Adam Tindle -- Raymond James -- Analyst

Frank Atkins -- SunTrust Robinson Humphrey -- Managing Director

Ashley Ellis -- Cross Research -- Analyst

Louis Miscioscia -- Pivotal Research Group -- Managing Director

Sean Hannan -- Needham & Company -- Managing Director

Jim Suva -- Citi -- Managing Director

Ananda Baruah -- Loop Capital -- Analyst

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