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WIKI ANALYSIS
Business Overview
Synnex Corporation is a business process services company, providing resources and services to their retailers, original equipment manufacturers (OEMs) and resellers in a global market. They have numerous segments into their business. The business process services is broken down into distribution and outsourcing of processes, also referred to as global business services. Synnex distributes numerous electronic and software components to manufacturers, resellers and retailers. Some products include IT systems, system components, networking equipment and consumer electronics. Synnex also provides services within their global business services and some services include customer management, back office processing and information technology outsourcing. [1]
Synnex Corporation distributes over 20,000 technology products from more than 100 IT and OEM suppliers to more than 15,000 resellers, system integrators, and retailers throughout the United States, Canada, and Mexico. As of November 30, 2010, Synnex had 8,000 full-time and temporary employees in both segments worldwide. However, approximately 98% of Synnex's total revenue came from North America since fiscal year of 2008. [2]
Business Economics
Market Segmentation
Although there is numerous diversity among the products and services Synnex Corporation provides, they have not established a sufficient global business. Over 98% of the transactions occur in the continent of North America. However, Synnex Corporation is trying to expand their business to the global market by branching into another product segmentation listed as "global business services." The initiative to create another branch of the business is more focused towards capturing a broader global base and asserting a new service to expand their market share.
Sources of Revenue
As stated in the previous passage, the primary source of revenue for Synnex is the distribution services. The rest of the revenue is generated by global business services. Each product/service has different drivers or components that allow it to succeed in the market. The primary component of the distribution service are peripherals which account for over 35% of the distribution services business. A peripheral is a device that is attached to the computer that increases the capability of the computer (i.e. scanner, printer, mouse). These devices are re-sold to the market and received from high-end suppliers such as HP, Acer, Panasonic, Lenovo, and Seagate. Synnex's distribution services manage numerous products and services which allow them to seek high-end suppliers and resell them at a small margin to gain profits. Below is a waterfall chart showing the breakdown of how the revenue is brought in:
According to the waterfall chart, devices and electronics primarily make up the distribution of the revenue. Evidently, distribution services comprise 98% of the business. The variety of products and services always for a successful diversified business in a reselling electronic industry. Expansion, however, needs to be implemented on global business services to create a stronger international brand.
Supply Chain Strategy
Synnex Corporation's business model thrives off of its logistics and supply chain strategy. The management of channels are the explanation to the margins that Synnex Corporation sustains. The distribution services, which Synnex is predominately in, requires a lot of logistics analysis and proper channeling to establish margins and allow for the growth of the business. The distribution process with Synnex Corporation generally has three major steps to achieve profits:
Purchase the product: As discussed in previous analysis for Synnex Corporation, they rely on corporations that create technologies and electronics that consumers want. Synnex positions themselves to the companies as an intermediary so they purchase the products directly from tech companies. Thus, they have hold of numerous products with the risk of inventory becoming obsolete. The transaction that occurs is non-binding, so once the products are purchased, Synnex Corporation has complete liability to reselling those products.
Manage the inventory: Once Synnex Corporation buys the products, they place the products in their inventory. Essentially, they maintain count to figure out how retail orders are fluctuating and adapt to those changes through their excess inventory. Resellers and retailers ask for certain products in specific quantities. Again, there is no set contract which allows a constant stream of inflow and outflow of goods. The demand for consumer electronics and technology can really determine the turnover rate of the inventory. Creating a proper system to manage inventory effectively and efficiently is important for Synnex to maintain profitability.
Selling to retailers/resellers: Finally, Synnex ships the goods to the resellers so that they can give it to the customer. They request certain orders and Synnex charges pricer just a little higher than what was initially purchased to maintain their margins. The deals that are given in bulk are better for retailers and Synnex receives profits from simply being an intermediary.
The supply chain strategy is effective for the distribution services, which account for over 98% of the business. The global business services simply manages IT issues and has help centers to try and manage any conflicts that customers have with the software that was manufactured to them. This supply chain strategy is a general template for distribution services as it is important to note the efficiency is what drives the value in the stock.
Business Strategy
Porter's Five Forces
Threat of New Entry
Low: Even though Synnex Corporation only manages reselling and primarily distribution services, the threat of new entry is extremely high. In the distribution services sector, the contracts and negotiations of reselling products is extremely challenging for new competitors to come into. Synnex and other competitors have established themselves as corporations that can sufficiently buy products from top technology firms (i.e. HP, Panasonic) and resell those products in order to maintain solvency as a corporation. Coming into the market and proposing purchases of products from big technology firms requires a lot of initial capital and a strong basis of proving that the company can re-order from the technology corporations. In the global business services sector, producing new software and technologies to implement into global businesses requires a lot of capital for research and development. It also requires networking an connections created from previous business with distribution suppliers. These factors ultimately create too many barriers to entry for a new corporation in the distribution and global business services.
Buyer Power
Low: Synnex Corporation is an intermediary to the products that consumers want (i.e. computer devices, IT systems). The computer and technology market has drastically increased the past two years after the economic recession. Consumer demand has exponentially increased as the technology market has advanced so efficiently and effectively. Synnex Corporation is simply reselling the products received by technology corporations and the demand of technological equipment has significantly gone up. Therefore, until the suppliers demand decreases, Synnex Corporation will have a proper price adjustment for the demand to maintain their margins.
Supplier Power
High: Synnex Corporation relies on their suppliers to create their profits. Without the suppliers, Synnex Corporation cannot sell any of the products they acquire. Their distribution services are their predominate business as it accounts for most of the revenue. Therefore, the business is vastly dependent on its suppliers to even sustain itself. Furthermore, technology companies have the capabilities of finding competitors to sell through if prices are not sufficient to their standards. Essentially, Synnex Corporation is at the whim of the suppliers that provide them with the capability of reselling, which allows them to maintain profits and grow as a business.
Threat of Substitution
Medium/Low: The possibility of a substitution of Synnex, a supply chain based corporation, is simply to eliminate them as the intermediary to the retailers. The big technology corporations can create deals with the wholesalers and retailers and take Synnex out of the equation for the supply chain strategy. However, this seems to be an unlikely solution for the tech companies as that would increase their transportation costs and force them to shop around for stores that will offer a good price. It is easier and more efficient for the tech corporations to hire an intermediary who will purchase their products and sell them to the retailers without having issues of transporting goods to the wholesalers and retailers.
Competitive Rivalry
Medium: Competition amongst technology supply chain distributors is battling for position to suppliers. However, competitors have their own contracted suppliers and gaining leverage is simply creating more efficient supply chain models. There are a few strong suitors in this specific industry which creates an oligopoly for the sector. Being able to bare with razor sharp margins and still find sufficient funding is an issue to all competitors, which remains the issue amongst these corporations. Thus, pricing schemes cannot fluctuate because of the low margins. However, if companies that are suppliers to Synnex are not happy with their supply chain service, substituting Synnex with a competitor is an easy change. Overall though, the rivalry stays within its restricted boundaries due to the business model's inflexibility in pricing.
SWOT Analysis
Strengths
Supply chain efficiency: The business model of Synnex Corporation is a supply chain and logistics management. In the modern era, business is not determined successful just with an innovative idea and sales. It's measured through the efficiency of cost in transporting and manufacturing products and the effectiveness of reaching the customer as soon as possible. With that said, Synnex Corporation has come into a distribution market that has allowed corporations increase margins while managing higher demands without changing their business model. Synnex is supplemented as the "middle man" in business transactions and that allows them to profit off of the margins in reselling.
Reselling: Synnex does not have to develop products for selling purposes as the business simply buys products and resells them for a higher value. The margins are lower than a regular business but that is sheer profit through turning over products rather than spending on raw materials, labor and finished goods. This allows the costs to be solely focused on the supply chain business model and essentially cuts the costs that come along with research and development.
Suppliers: Another strength that Synnex possesses is the products that are manufactured by the suppliers. The dependence on other businesses can generally hurt a corporation but when the suppliers are HP, Lenovo, Panasonic etc, then Synnex knows that the products that it is receiving will be in great demand for a strong price. The possibility of a "default" or no replenishment in Synnex's inventory is extremely unlikely as these technological corporations are multi-billion dollar companies.
Weaknesses
Margins: Profit margins for Synnex Corporation have been 1.49%, 1.16%, and 1.08% over the past three years. The issue with reselling electronic devices and IT systems is the difficulty in price discrimination. The cost of research and development, manufacturing the product, and creating the product all are higher than numerous industries. Thus, the reselling of such products cannot come at too high of a premium, otherwise retailers and wholesalers will bypass the intermediary and go directly to the source. The efficiency that Synnex Corporation provides for suppliers and retailers cannot be undermined but pricing power cannot be overstated either. Synnex's capabilities of pricing are extremely limited which hinders expansion and growth.
Expansion: As previously stated, the pricing inflexibility causes constriction. Since Synnex Corporation does not create its own products (although they are pushing for global business services which do), they have no inner growth potential. Their dependence on suppliers and manufacturers forces them to only grow when the number of orders grow or when the demand for certain products increase. This hindrance really affects the growth potential of Synnex and can only be fixed internally.
Opportunities
Global Business Services: A segment that can be within Synnex Corporation is their global business services. These services encompass customer management, renewal management, back office processing and information technology outsourcing. Synnex Corporation creates its own services in order to produce some independent revenue. However, it only accounts for about 1% of Synnex Corporation's revenue. To grow on this segment of their business would be critical for their expansion. An issue with this project would be their margins and their incapability to fund development of business services. But with the growth in cloud computing demand alongside the importance of technology, Synnex could see this opportunity to push forward with their global business services to capture a bigger portion of the market share. Ultimately, this allows Synnex Corporation to be more diversified and less reliant on other suppliers to fund their revenue stream.
Threats
Dependence on suppliers: With Synnex Corporation's supply chain business model, the dependence on suppliers is evidently noticeable. This leverages a high supplier power to dictate terms and measures for how products will be purchased. The restricted positioning for Synnex Corporation can create a conflict for their revenue and then lower its opportunity for growth. An alarming example is their relationship with HP. HP accounts for 38% of their revenue, in which their agreement ends on May 31, 2011 which is merely a month away. After that agreement ends, they either can hope to reach another agreement or have the source that provides around 40% of their business move elsewhere. That is the primary problem with this business model and it's constriction for the company that has implemented it. [4]
Variance in demand: The method that Synnex Corporation sells their products and services to resellers is through purchase orders. This can create some hedging against higher order demand but it can also create a downside if demand diminishes. In addition, there are no contracts or long term agreements to establish a long term relationship with the client. If Synnex cannot anticipate proper demand, their business can be extremely damaged through excess inventory or lack of inventory. Variance in market demand and variance in supply can drastically affect operations and finances of Synnex.
Competitors
Ingram Micro
Ingram Micro Inc. (Ticker: IM) is a wholesale IT distributor that markets and does logistics services for tech companies. Certain technology products that they provide are hardware suppliers, networking equipment suppliers, software publishers, and other computer electronics (i.e. peripherals and consumer electronics). [5]
Ingram Micro Inc. product segmentation is broken down in the following manner: IT peripherals 35-40%, Systems 30-35%, Software 15-20%, and Networking 10-15%. They resemble their competitor Synnex corporation but seem to have implemented global business services to serve as a higher revenue stream. The focus on independence through global business hedges the risk of consumer demand and supplier power compared to Synnex Corporation. Furthermore, the peripherals that Ingram Micro manufactures are received from HP and result in 24% of their net sales. Dependence is a risk factor in a distribution industry, but Ingram Micro has developed another segment of the business to assess that issue. [6]
Overall, Ingram Micro Inc. is a direct competitor with Synnex Corporation. They manage similar electronics and devices, distribution around the same region (predominately North America), and providing global business services to expand their business internationally (i.e. call management centers, software development, tech centers). Thus, Ingram Micro and Synnex Corporation have little flexibility in their business models and have adapted to competing for the same suppliers and customers.
Tech Data
Tech Data Corporation (Ticker: TECD) is another distributor of IT products, logistic management and corporate resellers. They are located in more than 100 countries throughout North America, Latin America and Europe. This allows them to diversify and grow international recognition for their business. Furthermore, Tech Data has created two business divisions: HP Solutions Division and Networking Solutions Group. The divisions allow the growth of their "global business services" and it would allow their independent growth to establish itself as an international corporation. [7]
Tech Data Corporation's product segment breakdown is the following: Systems 33%, Peripherals 32%, Networking 18%, and Software 17%. The products and services that Tech Data provide are extremely similar to Synnex Corporation but the way they expend each product segment is different. Tech Data emphasizes IT systems more than peripherals which indicates a higher focus on services rather than product distribution. Moreover, they balance all of their product segments evenly compared to Synnex Corporation.This allows them to develop a stronger services segment and allow them to take on the risk of the distribution services arena. Another issue that all of these corporations face are the similarity of their sales. Again, similar to Ingram Micro Inc., Tech Data generates 28% of their net sales from products purchased through HP. All of these corporations manage products and peripherals from HP and resell them at a higher value, which can be a positive with a higher demand but also a negative when products are deemed obsolete. [8]
Overall, Tech Data has an integration of IT distribution services and computer services that allows them to hedge against their dependence on the primary supplier of HP. Synnex Corporation is in a similar position with almost the exact business model. Although they manage similar products and similar industries, Tech Data focuses more on global business services than Synnex and shows a higher independence from demand of distribution products.
Scan Source
Scan Source (Ticker: SCSC) is a distributor of specialty technology products by reselling to the technology consumers. ScanSource functions in two geographic segments: North America and international. Each segment provides different products and services. North American segment provides products for identification and scanning purposes. These products are generally sold to retailers and manufacturers who need these products for inventory purposes. Specific barcoding products are resold with data and communications equipment integrated into the distribution segment for ScanSource. [9]
ScanSource Inc vendors consists of the following: Cisco, Datalogic, Elo, Epson America, Honeywell, IBM, Intermec, Motorola, NCR, and Zebra Technologies. The specific products that ScanSource provides in the North America region are Catalyst Telecom Sales Unit, Communications Sales Unit, and Security Sales Unit. Essentially, they are distributions for retailers and wholesalers for the purpose of efficiently moving inventories. The international distribution segment is primarily focused in Latin America and Europe. The same suppliers provide the primary products that are offered by ScanSource Inc in North America. [10]
In conclusion, ScanSource Inc has a different business model compared to Synnex Corporation. The focus of reselling products that are received from manufacturers remains the same, but ScanSource primarily focuses on specialty technology products compared to the typical peripherals and electronics that Synnex offers. The margins should be around the same for both companies because the process of reselling. All in all, ScanSource is a competitor with Synnex because it is in the distribution of technology industry and provide overlapping products which can affect Synnex's revenue streams.
Financial Comparison Analysis
Overview
Synnex Corporation has built its financial strength by finding discrepancies in distribution pricing and exploiting intermediary reselling. The financials that correspond indicates their stability in this industry and in this sector. Some influential financial metrics that Synnex Corporation performs above industry standards are Interest Coverage ratio (SNX: 9.25%, Sector: 0.60%) and Current Ratio (SNX: 1.68, Sector: 2.68). The justification for a lower current ratio is that there is excess cash reserves for other distribution corporations and they are not appropriately allocating their funds to provide the highest return on their equity. Some metrics which Synnex fall short on are Profit Margin (SNX: 1.34%, Industry: 2.87%) and Return on Assets (SNX: 5.11%, Industry: 7.20%). The financials indicate that Synnex has a positive business model, but it doesn't seem to be as strong as other companies that are in the same sectors. [11]
Valuation
The driver to the value of Synnex Corporation is the effectiveness of their inventory levels in respect to the sales volume. The following ratios indicate patterns between the price levels compared to the frequency in revenue streams that have grown Synnex.
According to Price-to-Sales ratio, Synnex Corporation is undervalued significantly. The amount of sales that are incoming do not efficiently match the current price of the company on the stock market. However, the Price-to-Book ratio indicates that the stock is overvalued. Based off of its debts, equities and liabilities, Synnex should have some downside to the sales which has pushed the price down and should technically go down further. And finally, the Price-to-Earnings ratio has fluctuated over the past couple of years. With a lower P/E ratio, analysts are expecting the earnings to out pace the growth of the stock, hence it being considered undervalued. Overall, the stock has underperformed due to the recession but has steadily gone up since then. The stock has upsides of value but also have indicators that show its overvalue. Ultimately, the stock can be considered both undervalued or overvalued, pending on the ratios that the investor gives more importance to.
Solvency and Leverage
Synnex Corporation needs to maintain its inventory through supplemental cash or other assets which can fund the products. Otherwise, Synnex would be insolvent very quickly. Another issue that resides in funding inventory levels is the management of debt and how to apply it to their inventory management. The following ratios compare Synnex with it's direct competitors in their maintenance of debt and focus of remaining solvent.
Synnex Corporation manages its debt at a sufficient level in comparison to its direct rival Ingram Micro. Since Ingram Micro and Synnex Corporation distribute extremely similar products and management of their inventory can be analyzed to see which corporation is more effective and efficient in their business model. Although both are consistent in how much of assets they have compared to their equity but Synnex Corporation finances their inventory with more debt than Ingram Micro. The solvency expectancy of Synnex is lower than Ingram Micro and has higher debt ratios than its other competitors. However, that indicates a different method of financing and Synnex can still manage their funds and remain solvent.
Liquidity
Liquidity is another important factor for Synnex Corporation. If the company purchases the distribution products, it has to make sure to sell that inventory off to resellers and retailers. If they cannot be liquid with their products, then they will have excessive inventory and a lack of sales. This inevitably will cause numerous problems for Synnex Corporation. Below are the comparison amongst competitors and how they manage their assets to make them more liquid:
The primary cause for concern is the inventory to cash days for Synnex Corporation. They manage to turn their inventory over approximately five times a year compared to Ingram Micro who does it approximately eleven times a year. Although size of orders matter, Synnex has a difficult time replenishing their inventory with newer technologies which could be the downfall of their corporation. However, Synnex has maintained their current assets well to balance out their current liabilities. They establish themselves well in comparison to their competitors in hedging their liabilities.
Profitability
The margins are the key element to creating a distribution industry. Reselling at a higher price is basically the business model that Synnex Corporation makes profits on. The following shows how each competitor prices their products to provide each margin.
Synnex measures up to it's profits compared to Ingram Micro and Tech Data. The structure of the business model should purchase similar products and reselling them to various retailers and resellers. This establishes that Synnex manages their assets appropriately to match their competitors. They have also sustained success which indicates that Synnex corporation will remain profitable as long as demand for consumer electronics and IT systems sustains.
Human Resource
Management is evidently the key to any successful business. Below is a quick synopsis of each of the directors that run the operations of Synnex Corp:
Kevin Murai, President and Chief Executive Officer and a Director, joined in March 2008. He served as Co-Chief Executive Officer until Robert Huang’s retirement in December 2008. Prior to SYNNEX, Mr. Murai was employed for 19 years at Ingram Micro, Inc. where he served in several executive management positions, including President and Chief Operating Officer. He holds a Bachelor of Applied Science degree in Electrical Engineering from the University of Waterloo in Ontario, Canada.
Peter Larocque is the President, U.S. Distribution since July 2006 and previously served as Executive Vice President of Distribution since June 2001 and Senior Vice President of Sales and Marketing from September 1997 until June 2001. Mr. Larocque is responsible for the U.S. distribution business. Mr. Larocque received a Bachelor of Science degree in Economics from the University of Western Ontario, Canada.
Dennis Polk is Chief Operating Officer and has served in this capacity since July 2006. He previously served as Chief Financial Officer and Senior Vice President of Corporate Finance since joining Synnex in February 2002. Mr. Polk received a Bachelor of Science degree in Accounting from Santa Clara University.
Thomas Alsborg is Chief Financial Officer. He joined in March 2007. Prior to SYNNEX, Mr. Alsborg was with Solectron Corporation where he served in various accounting and finance capacities over his ten-year tenure including Vice President and Chief Financial Officer of Solectron Global Services and Vice President of Finance and Vice President, Investor Relations. Prior to Solectron, Mr. Alsborg was with McDonald’s Corporation and a CPA with Ernst & Young LLP. Mr. Alsborg received a Bachelor of Science degree in Accounting from the Oral Roberts University, a Master in Business Administration, Finance and International Business from Santa Clara University.
Simon Leung is Senior Vice President, General Counsel and Corporate Secretary and has served in this capacity since May 2001. Mr. Leung joined in November 2000 as Corporate Counsel. Prior to SYNNEX, Mr. Leung was an attorney at the law firm of Paul, Hastings, Janofsky & Walker LLP. Mr. Leung received a Bachelor of Arts degree from the University of California, Davis and his Juris Doctor degree from the University of Minnesota Law School. [12]
References
- ↑ SYNNEX Corp Reuters Overview
- ↑ SYNNEX 10-K "Business Overview"
- ↑ SYNNEX Corp 10-K "Products" and "Suppliers"
- ↑ SYNNEX Corp 10-K "Risk Factors"
- ↑ Ingram Micro- Google Finance
- ↑ Ingram Micro 10-K "Competition"
- ↑ Tech Data Google Finance
- ↑ Tech Data 10-K "Products and Vendors"
- ↑ ScanSource Google Finance
- ↑ ScanSource Inc 10-K "Products and Markets"
- ↑ SYNNEX Corporation "Reuters Financials"
- ↑ SYNNEX Corp 10-K
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