安費諾 (APH) 2017 Q3 法說會逐字稿

Hello, and welcome to the third quarter earnings conference call for Amphenol Corporation.

(Operator Instructions) At the request of the company, today's conference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to introduce today's conference host, Mr. Craig Lampo.

Sir, you may begin.

Thank you.

Good afternoon, everyone.

This is Craig Lampo, Amphenol's CFO; and I'm here together with Adam Norwitt, our CEO.

We would like to welcome you to our third quarter conference call.

Our third quarter 2017 results were released this morning.

I will provide some financial commentary on the quarter, and then Adam will give an overview of the business as well as current trends.

Then we will take some questions.

As a reminder, we may refer in this call to certain non-GAAP financial measures and may make certain forward-looking statements.

So please refer to the relevant disclosures in our press release for further information.

The company closed the third quarter with record sales and diluted EPS of $1,841,000,000 and $0.88, respectively, exceeding the high end of the company's guidance for sales by approximately $101 million and diluted EPS by $0.09.

Sales were up 13% in U.S. dollars and up 12% in local currency as compared to the third quarter of 2016.

From an organic standpoint, excluding both acquisitions and currency, sales in the third quarter increased a strong 8%.

Sequentially, sales were up 10% in U.S. dollars, 9% in local currency and 7% organically.

Breaking down sales into our 2 segments.

Our Cable business, which comprise 6% of our sales, was up 18% from the third quarter of last year, driven primarily by the impact of acquisitions as well as some organic growth.

The Interconnect business, which comprise 94% of our sales, was up 12% in U.S. dollars from last year, driven primarily by organic growth as well as the impact of acquisitions.

Adam will comment further on trends by market in a few minutes.

Operating income was $378 million for the third quarter, and operating margin was a strong 20.5% in the third quarter, which is up 20 basis points compared to the third quarter of '16 and up 10 basis points from the second quarter of '17 adjusted operating margins.

GAAP operating margin was up 60 basis points from the third quarter of '16 and 30 basis points from the second quarter of '17.

From a segment standpoint, in the Cable segment, operating margins were 13.1%, which is down compared to the third quarter of '16 at 14.9%, driven primarily by the significant increases in certain commodity costs.

In the Interconnect segment, operating margins were 22.4% in the third quarter, which is up slightly compared to the third quarter of last year at 22.2%.

This excellent operating performance is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high-performance, action-oriented culture, in which each individual operating unit is able to appropriately adjust to market conditions and thereby maximize both growth and profitability in a challenging market environment.

Due to careful fostering of such culture and the deployment of these strategies to both existing and acquired companies, our management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance in the future.

Interest expense for the quarter was $25 million compared to $18 million last year, reflecting the impact of the higher average interest rates resulting from the senior notes issuance earlier in the year as well as the higher average debt levels, primarily resulting from the company's stock buyback program.

The company's effective tax rate was approximately 22% for the third quarter of '17 compared to our guidance for the quarter of approximately 25% and an effective tax rate of 26.9% in the third quarter of 2016.

The effective tax rate in the third quarter of 2016 was higher by 40 basis points, due primarily to the impact of acquisition-related costs during the quarter.

Excluding the effect of the 2006 acquisition -- the 2016 acquisition-related costs, the decrease in the tax rate was primarily driven by the adoption of the new stock compensation accounting standard that we discussed previously.

As a result of the 2017 adoption of the new standard, option exercise activity had the effect of increasing diluted EPS by approximately $0.05 in the third quarter of '17, which compares to the $0.01 expected effect reflected in our July guidance.

I would also note that our new guidance reflects an effective -- expected effective tax rate for the fourth quarter of approximately 25% and for the full year of approximately 23%.

Net income was a strong 15% of sales in the third quarter of '17.

GAAP and adjusted diluted EPS was $0.88 in the third quarter compared to $0.71 and $0.73, respectively, in the third quarter of '16.

Adjusted diluted EPS grew 21% in the quarter compared to the third quarter of 2016.

This strong growth was supported by excellent operating performance as demonstrated by the company's strong operating margin in the quarter of 20.5%, along with the lower effective tax rate just mentioned.

Orders for the quarter were a record $1,865,000,000, a 10% increase over the third quarter of last year, resulting in a book-to-bill ratio of 1.01:1.

The company continues to be an excellent generator of cash.

Cash flow from operations was $198 million in the third quarter of this year and $716 million for the 9-month period, or approximately 71% and 94% of net income, respectively.

The third quarter cash flow reflects an increase in working capital to support the company's strong sequential sales growth.

The company continues to target cash flow from operations in excess of net income, and we do expect strong fourth quarter and full year 2017 cash flow.

From a working capital standpoint, inventory, accounts receivable and accounts payable were approximately $1.1 billion, $1.6 billion and $827 million, respectively, at the end of September.

And inventory days, days sales outstanding and payable days were 80, 76 and 60 days, respectively, excluding the impact of acquisitions, which were all within our normal range.

The cash flow from operations of $198 million, along with net borrowings of $538 million under the commercial paper program and stock option proceeds of $61 million, were used primarily to repay the 3-year, $375 million note, which matured in the quarter, to purchase approximately $156 million of the company's stock, to fund net capital expenditures of $54 million, to fund dividend payments of $49 million and to fund previously announced acquisitions of $44 million, which resulted in an increase of cash, cash equivalents and short-term investments of approximately $130 million, net of translation.

During the quarter, the company repurchased 2 million shares at an average price of approximately $70.

These repurchases were completed under the company's $1 billion, 2-year stock repurchase program.

To date, the company has repurchased approximately 7.7 million shares or $556 million under the plan.

At September 30, cash and short-term investments were approximately $1.5 billion, the majority of which is held outside the U.S. Also, at the end of the quarter, the company had issued $1.2 billion under its commercial paper program.

The company has cash and availability under its credit facilities totaling approximately $2.3 billion.

Total debt at September 30 was approximately $3.6 billion, and net debt is approximately $2.1 billion.

And the third quarter 2017 EBITDA was approximately $447 million.

From a financial perspective, this is -- this was an excellent quarter.

I will now turn it over to Adam, who will provide an overview of the business and comment on current trends.

Well, thank you very much, Craig, and I'd like to extend my welcome to all of you on the phone here today.

As Craig mentioned, I'm going to highlight some of our achievements here in the third quarter.

I'll then discuss the trends and progress across our various served markets.

And then finally, we'll comment on our outlook for the fourth quarter and for the full year 2017, and of course, we'll have some time at the end for questions and answers.

Let me just say, with respect to the third quarter, that we're very pleased to have delivered yet another record quarter, with results exceeding the high end of guidance.

We reached new record levels of orders, sales and earnings per share and continued to deliver outstanding industry-leading operating margins.

Revenues in the quarter increased by a very strong 13% in U.S. dollars and 8% organically, reaching the new record, $1,841,000,000.

And as Craig mentioned, our order bookings were also very strong, with a positive book-to-bill of 1.01:1.

Our adjusted operating margins in the quarter increased 20 basis points from prior year to 20.5%, which equals our highest level in the history of the company.

We delivered also a new record, $0.88 in EPS, which represented an increase of 21% from prior year's adjusted EPS.

And Craig mentioned the operating cash flow, $198 million, which was healthy given the 10% sequential increase in our sales from the second quarter, which was more than we had expected coming into the quarter.

So just in summary with the quarter, I have to tell you how proud I am of the Amphenol team.

Once again, this team made it happen here in the third quarter with these excellent results.

So turning to our served markets, I just will remind you that our market diversification remains just such a valuable asset for the company, and it was that here in the third quarter as we benefited once again from both breadth and balance across our end markets.

In particular, I'd just highlight that none of our markets in the quarter represented more than 20% of our sales, and this balance across the company remains a real asset for Amphenol, especially given the ongoing dynamics that are ever present within the global electronics market.

The military market represented 9% of our sales in the quarter.

Sales increased from prior year by a greater-than-expected 12% in U.S. dollars and 11% organically, and this growth was really driven across nearly every segment of the military market.

In particular, we saw strong performance in space, naval, ordnance and vehicle applications, but really, it was a pretty much across-the-board growth in military.

Sequentially, our sales were a bit stronger than expected, growing by 2% in what's normally a softer summer quarter.

As we look now into the fourth quarter, we expect sales in the military market to again grow from these levels.

And for the full year, we now expect to achieve growth in the low double digits for this important military market.

I can just tell you we're very proud of the company's team who's working in this market.

They've worked through so many challenges to clearly establish Amphenol as the industry leader in military interconnect.

As the overall defense spending environment improves and as the role of electronics in military equipment grows even more critical, we look forward to building upon our success into the long term.

The commercial aerospace market represented 4% of our sales in the quarter.

Sales in this market increased by a relatively modest 3% compared to prior year as overall demand in commercial air remains stable.

Sequentially, while we were pleased that sales grew by 5% as demand for commercial jetliners normalized from the prior quarter, this was a bit less than we had anticipated coming into the third quarter.

As we now look into the fourth quarter, we do expect volumes to once again increase from these levels on the higher overall production outlooks from customers.

For the full year 2017 though, we now expect a low to mid-single-digit increase from prior year, and that includes the benefit of acquisitions.

We remain very encouraged by Amphenol's strong overall position in the commercial aircraft market, and we continue to work with airplane makers around the world to enable their new platforms with our high-technology interconnect products.

This positions us to benefit long term from the expanded volumes of aircraft that are there to support the continued global expansion of air travel.

The industrial market represented 20% of our sales in the quarter.

I'd just say that we had another excellent quarter in the industrial market.

Sales in industrial grew by a much stronger-than-expected 28% in U.S. dollars and 20% organically as we benefited from very robust performance in heavy equipment, instrumentation, factory automation and alternative energy.

And I'd just highlight that in addition, for the second quarter in a row, we realized very strong growth in the oil and gas market, which, albeit at a still much smaller level than it was at the peak, it is an encouraging sign for the continued recovery of this important segment of the industrial market.

Sequentially, our sales grew by a much more-than-expected 8% in what we had expected to be a seasonally softer third quarter.

Looking to the fourth quarter, we expect sales to moderate slightly from these levels.

For the full year, however, we now expect a high-teens sales increase as we benefit from our increased organic growth here in the second half, together with the contributions from our acquisitions that we completed earlier in the year.

The industrial market continues to be a significant contributor to Amphenol's overall growth.

Our approach of developing unique, high-technology and harsh-environment interconnect sensor and antenna products, all while continuing to identify and close upon complementary acquisitions, has positioned the company extremely well across the many exciting segments of the global industrial market.

We look forward to continuing to realize the long-term benefits from this consistent strategy.

The automotive market represented 18% of our sales in the quarter, and this market also outperformed our expectations in the third quarter.

Sales increased by 18% in U.S. dollars and 10% organically, with strong growth in particular in Europe and Asia.

Sequentially, our automotive sales increased by 6% from the second quarter, supported in particular by our recent acquisitions of several sensor companies that we announced last earnings release.

Looking into the fourth quarter, we expect sales to increase further from these levels.

And for the full year, we now expect sales growth in the mid-teens for the automotive market, supported by contributions from our acquisitions, together with our strengthened outlook for organic growth.

The worldwide automotive market remains an exciting area for Amphenol, as electronic applications continue to proliferate across a wide array of vehicle platforms.

We have enhanced our market position by continually expanding our range of high-technology interconnect sensor and antenna products.

Those products are enabling fuel-powered, hybrid and electric drive trains, are being incorporated into a wide range of new electronics applications and are supporting advanced development of exciting next-generation capabilities, including things like autonomous driving.

All of this creates an outstanding long-term growth opportunity for Amphenol.

The mobile devices market represented 16% of our sales in the quarter, and I just want to say that I'm extremely proud of our team who works in the always-volatile mobile devices market.

As you all will recall, we entered the third quarter with a more modest view of our outlook in this market for 2017.

But nevertheless, our team was able, in the quarter, to capitalize on several opportunities to allow us to realize significant incremental sales related to new programs.

In the third quarter, our sales in the mobile devices market increased by a very strong 15% from prior year, as sales increases in smartphones, accessories and production-related products more than offset declines in products sold into tablets and laptops.

Sequentially, our sales increased by an outstanding 68% from the second quarter.

And I just want to note that managing such significant growth just in a 1-quarter time period was a truly exceptional accomplishment by our team, and it's just another reflection of their agility in all circumstances.

Looking into the fourth quarter, while we expect sales to moderate from these high levels, we now expect for the full year to achieve low single-digit growth in the mobile devices market, a significantly improved outlook from what we had discussed last quarter.

And this improvement is due in particular to our team's outstanding efforts in capitalizing on a number of near-term incremental opportunities.

We remain confident that our experienced, agile team has positioned us to continue to take advantage of any further opportunities that may arise in the dynamic mobile devices market.

The mobile networks market represented 8% of our sales in the quarter.

Our sales moderated slightly from prior year as overall demand from both the equipment manufacturers and service providers remained muted.

Sequentially, our sales were up slightly from the second quarter.

We expect sales in the fourth quarter to remain at these levels, and we continue to believe that the wireless spending environment is not going to improve this year.

And for the full year 2017, we continue to expect a low- to mid-single-digit decline in sales into mobile networks.

I will just say that despite this year's pause in demand, our position in the mobile networks market remains very strong.

We're continuing to work with equipment manufacturers and operators around the world to enable their next-generation networks with our broad array of interconnect and antenna products.

In particular, our team is working with customers around the world as they prepare for the coming adoption of 5G and other next-generation networks.

And while it remains unclear when meaningful spending on 5G will begin, our position creates an encouraging long-term potential for the company.

The information technology and data communications network represented 20% of our sales in the quarter, and our sales in this market were somewhat stronger than expected, with sales increasing by 2% from prior year.

And sequentially, sales also increased by 2% from the second quarter.

Stronger sales of our products that are incorporated into servers, in particular, more than offset declines in networking-related applications, and storage was relatively consistent with prior year.

In addition, we continue to be pleased with our large position with cloud service providers that remains a real asset for the company.

Looking into the fourth quarter, we expect sales to moderate from these still high levels, and we continue to expect sales growth in the mid- to high single digits for the full year 2017.

I just remain very proud of our team who's working in this important IT datacom market, as they have successfully expanded our industry-leading range of high-speed, power and also fiber-optic products while ensuring that we support the broadest range of customers around the world.

Amphenol's position in this market is stronger than ever, and that creates great opportunities for future performance.

The broadband market represented 5% of our sales in the quarter, and sales increased from prior year by 9%.

And that was driven essentially by the benefits from the All Systems Broadband acquisition that we completed at the end of last year's third quarter.

Organically, sales were down slightly, as cable operators have continued to curtail their overall capital spending.

Sequentially, sales were also a bit worse than expected, reducing by roughly 3% from the second quarter.

For the fourth quarter, we expect a further moderation of sales due to traditional holiday seasonality.

And for the full year 2017, we now expect to achieve only mid- to high single-digit growth in the broadband market, driven by contributions from our acquisitions that have been completed over the recent year.

Operators in the broadband industry continue to restrain their capital spending for a variety of reasons, which includes the ongoing and potential consolidation that we all still see in that market.

But regardless of all of this, our team working in the broadband market continues to focus on developing diversified new products to enable us to expand our position with service providers around the world in this year and beyond.

So just in summary with respect to the third quarter, I'm extremely pleased with our outstanding results here in the quarter.

In particular, we're encouraged by the strengthening organic growth that we have seen across several of our important end markets.

And while we continue to see uncertainty in many pockets of the global economy, the Amphenol organization is executing extraordinarily well in expanding our market position while strengthening the company's financial performance.

And the company's superior performance is a direct reflection of our distinct competitive advantages: Our leading technology, our increasing position with customers across diverse markets, worldwide presence, a lean and flexible cost structure, a highly effective acquisition program and most importantly, our agile, entrepreneurial management team.

Now turning to our outlook, based on a continuation of the current economic environment and assuming constant exchange rates, we now expect for the fourth quarter and the full year 2017 the following results.

For the fourth quarter, we expect sales in the range of $1,760,000,000 to $1,800,000,000 and earnings per share in the range of $0.79 to $0.81, respectively.

This represents a sales and EPS increase versus prior year of 7% to 9% and 5% to 8%, respectively.

For the full year 2017, we expect sales in the range of $6,828,000,000 to $6,868,000,000 and adjusted diluted EPS in the range of $3.19 to $3.21.

For the full year, this now represents sales and adjusted diluted EPS growth of 9% and 17% to 18% over 2016 levels.

On an organic basis, I'll just point out that this new guidance now represents full year sales growth of 6%, and that compares to our prior guidance of 2% to 4% organic sales growth.

We're very encouraged by the company's robust performance thus far in 2017 as well as by our strengthened outlook here for the fourth quarter and full year.

And I remain very confident in the ability of our outstanding management team to build upon these results by continuing to capitalize on the many opportunities to grow our market position and deliver strong financial performance in 2017 and beyond.

And with that, operator, we'd be very happy to take any questions that there may be.

(Operator Instructions) And our first question comes from Craig Hettenbach from Morgan Stanley.

Yes, Adam, can you just talk to the current environment?

I mean, coming in much above the high end, 8% organic growth, certainly an acceleration.

Anything you're hearing from customers or kind of inflections would be helpful.

Well, thanks very much, Craig.

Look, I think we had a very strong quarter here, and the strength was across a number of different markets.

And I would tell you, in those markets, our teams have just done a wonderful job, and I think there are, in some of those markets, also good -- there are good trends that are there.

If you take, for example, the military market, I mean, here we are growing really organically by 11% on a year-over-year basis, on a quarter that last year, we also grew organically.

And you'll remember 5%, 6% organic growth last year, so that really had nothing to do even with the DLA that was really last year Q2.

And I think we're both expanding our market share, but the defense environment is a bit more of a hospitable environment that we've started to see evolve here over the last year, 1.5 years.

And I think industrial would be another example where I think it's not a terrible environment whatsoever, and our team is incrementally doing, we would say, even a little bit better than that with 20% organic growth.

So I'd say just overall, it was a strong quarter, strong organic quarter, certainly an acceleration in its totality.

Now acceleration for us, our team in mobile devices just did a fabulous job, and I don't know that that's necessarily a reflection of sort of an overall macro trend as opposed to their ability to really capitalize on some opportunities that presented themselves.

But I think it's a robust environment, and our team is really outperforming even that level.

Got it.

And then just as a quick follow-up, you mentioned in terms of automotive growth drivers, in particular as we look at electric vehicles, and anything you can share in terms of content opportunities that differ from conventional vehicles?

Yes, look, I think overall in the automotive market, we're just seeing a lot more electronic systems, a lot of new opportunities, which are not really necessarily share gains.

It's not like we're taking money from other people's pockets here.

It is that there's just so much more electronics being embedded into cars.

And when you get to electronic vehicles or electric vehicles, once again, you have just new systems that are being in place, whether that's battery management, whether that's the driving of all the accessories.

And what we've always said about the EV and the hybrid world is you have a totally different power interconnect that goes into those systems, and that creates an opportunity for a company that has a really strong high-technology legacy in power interconnect, which we do.

And I think our teams, who have worked both in the military and industrial world developing over many, many, many decades those high-power interconnect technologies, together with our automotive team who really has the access into the vehicle manufacturers, I think we've done just a really strong, strong effort with great results in taking those technologies and applying those into EVs.

So the opportunities are very significant.

Obviously, there are some things that go away in an electric vehicle, and I'm not going to be the one to tell you whether an EV in total has more content or less content.

It's different content, though.

And so whenever there's changes, new innovations, different applications in the car, that can create a really wonderful opportunity in our industry in general and I think for Amphenol specifically.

Our next question comes from Mark Delaney from Goldman Sachs.

I was hoping to better understand the upside in mobile devices that was particularly robust this past quarter.

Can you just give a sense for maybe the breadth of programs that drove that, just given it came in so much better than what had been guided for, just kind of a sense for was it 1 or 2 large programs or more of a collection of programs?

And then give us any sense on the sustainability of some of those platforms that you have picked up here.

Yes, I mean, look, it's not -- the market itself, as you know, Mark, is a very concentrated market, but it's also not the case that it was just 1 or 2 things.

So I think our team is always on the hunt for opportunities, and those opportunities can come in a variety of ways.

They come early on as we work with our customers in the design process.

They also sometimes come when competitors or -- cannot support certain demands from customers, or when designs change in the products or there's a lot of other things that can happen.

As we all know, it's a very dynamic market.

There's always a lot of change.

And whenever you see that change, that creates intersections of opportunities.

And it's up to our team to, number one, be sensitized and sensitive to when they see those.

So always being interacting with customers, regardless of the fact that we came into the quarter with a much less optimistic view of the overall market.

It didn't mean that our team was not highly sensitive to looking for any incremental opportunities.

And then when you spot those opportunities, it's all about then quickly executing and being able to execute better and faster than competition can.

And I would just say that the upside that we're seeing, both -- all here in the second half, is a combination of all of the above.

Now what does sustainable mean in the mobile devices market?

That, I have a hard time to tell you.

I mean, we certainly feel that we have once again proven to all of our customers the value of partnering with Amphenol and the fact that we can be there in a pinch when they need us.

But that doesn't -- nothing is ever assured in mobile devices.

And I think it's still too early to say what does that mean for the long term.

But we certainly feel much better here in the second half and for the full year in terms of our progress in that market.

That's helpful, Adam.

And a follow-up question was on margins.

I know EBIT margins are obviously up to, I think, you're tying the record high.

But in the face of some of those copper headwinds and commodity headwinds that, Craig, you pointed out on the call, just assuming maybe commodities stay at similar rates, how much more incremental headwinds should we maybe be thinking about maybe on the gross margin line as we go forward, as you -- I'd imagine there's some delay before some of those commodity prices are really felt in the model.

Sure.

Thanks for the question.

Yes, I mean, I think, certainly, we're very pleased with the performance in the quarter.

We achieved a record sales and EPS, continuing to achieve our industry-leading profitability of 20.5%.

Now this actually is a fifth consecutive quarter, over 20% ROS, and we kind of implicitly have guided towards a sixth consecutive quarter in the fourth quarter.

So certainly, we're very proud of that.

Now I did mention we did have some headwinds specifically in the Cable segment on -- related to commodities, and certainly, we did see that as you saw in the reduction in the profitability there.

That segment, we have always said, has more sensitivity to commodities than even our Interconnect segment, just because of the types of products that we have in that market.

So I don't foresee any favorable tailwinds certainly coming from commodities.

I'd say that our guidance in the fourth quarter does anticipate kind of the current environment from a commodity perspective.

So I wouldn't tell you that we foresee additional headwinds from that perspective or additional tailwinds into the fourth quarter.

What's happening in 2018, I guess, is yet to be seen.

But as you can imagine, our team continues to do everything that they can to offset the current cost environment that we're in, which clearly is a higher cost environment than we've seen over the last couple of years, just from a foreign exchange perspective as well as a commodity perspective.

And I think we've done an excellent job in managing that thus far.

But you do see some of that right now in the Cable segment specifically, and we'll do everything we can to ensure that we can offset that.

And maybe I'll just add, Mark, with respect to the Cable segment.

I mean, Craig said it very well, that there was no doubt an impact from commodities in the Cable segment this quarter.

You know, for many years, I mean, we remained very disciplined in that area.

But it is also a market, and so we are in tune, very closely, to make sure that we are going to be disciplined on price and we would certainly look for others in the industry to be the same.

Our next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Craig, the cash flow in the quarter was a little bit weaker, and you noted working capital ended being transitory and recovering fourth quarter.

I was wondering, is this largely driven by the performance in mobile devices?

Or was -- is there something else you can point to more specifically that was driving that higher working capital and just comment on the overall linearity in the quarter?

Sure, Wamsi.

Yes, the company, as you know, Wamsi, has historically been and continues to be a very strong generator of cash.

We certainly believe this financial strength is really a strategic advantage for the company and allows us to respond to opportunities.

We've consistently stated that our goal is to drive operating cash flow at a higher level than net income, and we have achieved this, certainly for many years, continue to expect to achieve those levels.

I would note that, certainly, cash flow from quarter-to-quarter does vary and depending on working capital needs and to support current and future quarters.

As I did mention in my prepared remarks, we did have a significant but expected normal increase in our working capital to support the strong sequential sales growth that we achieved in the quarter, which at 10%, actually, is the highest sequential growth we've seen in probably half a decade, I think, as I look back.

So not surprisingly, this did consume more cash than normal in the quarter.

I would say it isn't specific to any particular market growth, or as you can imagine, a 68% increase in the market is certainly a consumer of cash.

But we did have sequential increases in some of our other markets as well that certainly did consume some cash as well.

So I would expect that for the full year, and as I mentioned in my prepared remarks, that we should have some very good cash generation as well as very strong fourth quarter.

And we continue to believe that the company's strength is its ability to generate significant cash, which we are very proud of, and we certainly don't see anything changing from that perspective.

And Adam, if I could follow up on mobile devices.

The full year guidance would suggest that, I think if I'm doing the math right here, 5% to 10% quarter-on-quarter decline sequentially into the fourth quarter.

We've heard from a lot of other companies that have exposure to some of the large mobile customers of continued strength sort of going into the December quarter.

So I'm wondering did you have -- you went through a very strong sequential increase clearly, and I mean, I understand that sustaining those sort of rates for a longer period of time is pretty tough, but just given the product introduction cadence of some of the larger mobile customers, the 5% to 10% sequentially down seems awfully conservative.

So I'm just trying to understand how much of that increase was like largely one-program-driven versus more broadly in the 5% to 10%, if you could comment if that's the right number that I'm thinking about sequentially here.

Yes -- no, I think that you're sort of in the ballpark.

I think I've already addressed the question of the concentration of platforms or not.

I would just tell you that in the mobile devices market, customers buy from different parties at different times.

And so I wouldn't draw any conclusions based on our timing being one and another company's timing being something different.

I mean, you know that there's a lot of volatility in the supply chain.

There are lots of differences about who supplies what, when.

And I think that when we look at our performance here overall in the second half, it's extraordinarily strong, and I think our guidance would imply a north of 60% second half to first half in total.

And whether that's all third quarter or a little more third and a little less fourth or vice versa, I personally wouldn't get too hung up on that.

The next question comes from Matt Sheerin from Stifel.

Just a question regarding the IT datacom markets, Adam, which has been very strong.

It looks like it slowed down a little bit in terms of year-over-year growth.

You talked about some drivers there, and I know the cloud infrastructure market has been a big driver.

I also know it's fairly lumpy.

But could you talk about your positioning there?

How diverse is your customer base?

And what's your outlook for that market?

Yes, well, thanks very much, Matt.

I mean, I think when we came into the quarter, I remember we had a question about the second half in IT datacom, and I talked about the fact that in 2016, we had really outstanding, outstanding second half in IT datacom.

I think you'll remember, I mean, having organic growth in the kind of 27% in Q4, 19%, 20% in Q3.

And so we talked about the fact that, that second half last year was just a really, really strong comparison vis-a-vis the second half this year.

And we'd actually come into the quarter really expecting to be even a little bit down on a year-over-year basis.

And so when I say that we felt very positive about the growth of just a couple of percent, and I really do mean that, I think the team did an outstanding job to do better than we had thought coming into the quarter, no doubt about it, our position in IT datacom is extraordinarily broad.

I mean, this is a market where we're working with essentially every player from an OEM, every player from a cloud infrastructure perspective, other service providers.

There's not really one or another that is moving, overall, the needle for us.

Our position with cloud infrastructure players is really strong, stronger than it's ever been before.

And this is something we've been talking about here.

I think we're running on 3 years of talking about the shift of our focus in resources towards those cloud infrastructure, towards the data center, which has paid really great dividends for us here last year and also this year.

And I couple that with just the wonderful acquisitions that we've made over the last 2 years, whether that was FCI, which brought us just a substantially broader product offering across the board in IT datacom, or some of the other companies that we've acquired, companies like AUXEL and busbars, companies like Telect just recently, companies like Custom Cable, who have really brought us into different corners and segments of the IT datacom market, whereby today, we have really one of the broadest, if not the broadest position in that market in our industry.

And so we feel really good about IT datacom.

I mean, coming into next quarter,

as I talked about, we would expect our sales to be down a little bit in the quarter.

But again, we're talking about versus the comparison last year that was truly second to none, 27% organic growth last year Q4.

Okay, great.

That's helpful, and then I'm just looking at your product portfolio, you've added -- obviously done some key acquisitions in the sensor space, and that's given you some strong portfolio in both the industrial and auto sectors.

Industrial, obviously growing very strongly for you here.

How much of that is due to leveraging your expertise in things like sensors and other technologies where you're doing full complete solutions and subsystems for customers?

Yes, I think you characterized it exactly right.

I think we've broadened our products and we've created the capability for us to go to customers, especially in those 2 markets, industrial and automotive, with more of a system proposition to them.

Now I will tell you, that still, that system proportion of our sales remains relatively small.

But if I look out over the coming years, no doubt about it, we see a great pipeline of opportunities there, and it is already starting to move the needle.

So we've seen that, in particular, in areas like new energy applications, heavy equipment applications and where we're really talking to customers about a combined solution of sensors together with the interconnect.

I mean, you look at some of this new industrial equipment.

I mean, you take a tractor, mowing the field with GPS and with all the subsystems that go into it, all the sensors, even autonomous driving that goes into sometimes these heavy agricultural machines or earthmoving machines.

I mean, just a phenomenal range of opportunities that comes into some of those.

And that's an opportunity that presents itself for interconnect, for sensors and even also for antennas.

And so I think that the sensor business that we have continues to make great progress, and it continues to be a real asset to us, not just from a sensor growth purely, but also from an overall growth for the company.

Our next question comes from Sherri Scribner from Deutsche Bank.

If I think about your guidance for the full year, it implies about 9% revenue growth at the midpoint.

I assume there's a couple of points of acquisition growth on there, so maybe mid-single digits, slightly above mid-single-digit organic growth.

Is that a reasonable number to think about going forward when we think about growth for the business?

Or do you see some other positives in the connector market and in your markets that make you think you can grow faster than that?

Yes, well, I think the math, Sherri, is essentially as you said.

I mean -- and I think I even mentioned that we now see this year being an organic growth of 6%.

We think that's a very strong organic growth for the year.

I think how that is with respect to the market, I mean, we'll have to wait and see.

But I think if you compare that to overall economic growth, I think it's a very, very strong performance by our team here in the year.

And obviously, that's not with every market growing.

We continue to have that diversity, and you continue to see there are some markets which are not growing, a market, for example, like mobile networks, or a market like the commercial air, where we don't see quite as much organic growth this year.

So I think that the diversification that we have has really served us very well.

And the overall growth that ultimately results from that diverse portfolio is very strong.

What does it mean going ahead and in the future?

I think we'll be talking to you in 3 months, and we'll give you our best guess at that time as to what that means for 2018 and beyond.

The next question comes from Shawn Harrison from Longbow Research.

Two questions, if I may, one on devices, one on the mobile networks business.

You're pretty sanguine in terms of how you view mobile networks this year.

Is there anything you see over the next 12 to 18 months that could accelerate growth in that business globally?

I know 5G is still a ways out.

And then secondarily, on devices, there is a device that you can preorder in a couple of days that will be launched, I guess, later than typical.

Does that affect in any way how seasonality for your mobile devices business could be as you enter the new year?

I know it's typically a pretty down quarter, but maybe it's a little bit less this year or next year.

Yes, well, look, let me talk first on mobile networks.

I think I did mention that we're doing a lot of work with customers, both equipment manufacturers and also service providers, to work with them on next-generation programs and products and networks, and that all -- primarily, let me say, under the auspices of whatever 5G ends up to be, but I think you know probably better than I do, that, that whole 5G, the plans have not fully been crystallized.

For one, a lot of companies don't even know who their shareholder is going to be in 12 months, let alone what network they're going to be building.

So I think there is still a fair degree of uncertainty around the timing of 5G.

But no doubt about it, there will be a next-generation network.

There will be.

There is an enormous demand for mobile data.

There's an enormous demand for increased coverage.

There's an enormous demand for lower latency, all the things that a 5G network ultimately, in whatever form that it becomes, are going to satisfy.

And so it's our job at this point, even in a not such a great year for our business that works in mobile devices, it's our job to work really, really hard with customers to make sure that we're presenting them with the highest-technology solutions to help them enable these next-generation networks.

And then you just have to sort of build it and they will come one day.

And when that one day is going to be will remain to be seen.

Over time, as having followed this market for so long, you build this kind of pent-up demand for the networks, whereby the consumers and the data consumption, that never stops.

It never slows down.

In fact, it appears to be continuing to grow exponentially, the amount of data being consumed.

It's just a question of when do the stars align for the carriers to make that sort of next-step function investment, and it's just our job to be ready when it comes.

Relative to mobile devices, I'm not going to talk about one or another different program.

I think we've talked about the kind of makeup of how we see this year so far and what is it going to be next year.

Look, I've changed my guidance here twice in 90 days.

I'm certainly not going to try to do it a third time.

So we'll see when we see in the first quarter.

But again, we're very pleased with the position that we have, and I'm sure, if there are opportunities that are going to present themselves to us next year, that same team who's working on it today is going to be working on it then, and they're going to do their best to capitalize on everything that comes our way.

The next question comes from William Stein from SunTrust.

I'm going to beat the mobile device drum a little bit again, so pardon me for doing that.

But I did have a question about the pattern or the timing of design wins relative to revenue ramping.

We're all well aware that these have very short design cycles, but I think our expectation is that when you enter a quarter, you know what devices you're designed into.

It's more sort of the pacing of the ramp.

Is that the dynamic that offered the upside surprise this quarter?

Or were there actually sort of drop-in design wins that happened intra-quarter that surprised you?

I think it's a combination of what you just said, together with something I alluded to earlier and maybe not clear enough, which is that sometimes, and we've seen this over the years, during the course of some new projects, competitors ultimately get out over their skis and they cannot always satisfy exactly what the customers want.

And so we're always waiting for those kind of opportunities, to very quickly pounce into action and support the customer.

And so I would just say that it's kind of a combination of the 2 things you mentioned, plus the thing that I just mentioned.

Okay, that's helpful.

One other question if I can.

Great results overall, but I do want to focus on one area that was a little bit weaker than expected, commercial air.

We think of it as a much slower-moving end market, and maybe it's just that, because of the big buffer in distribution that maybe sort of causes some difference in timing with results relative to original expectations.

Is that perhaps why you're not seeing as strong results in that end market as you might have expected?

Or is there something else with the pace of newbuilds or something else?

Any clarification would be helpful there.

No, absolutely.

I mean, look, it is, in the quarter, as I mentioned, we did grow by a relatively modest amount.

I think next quarter, we expect to be up from these levels, and we expect for the full year to be a kind of a low single-digit level.

I don't think that that's materially different from the overall demand, especially when you factor in that early in the year, we did see some sort of supply chain corrections that came in the commercial air market.

We did see as well continued weakness in areas like helicopters and business jets.

But our business overall, especially on the large jetliners, continues to be a very strong business in terms of our design-in and our position with customers.

But the ultimate demand from those customers, I'd say today, really when you talk about the growth in the -- whether that is from a production or from a delivery or from an order, it's a relatively muted growth environment.

And it just behooves our team to continue to strive for all those areas where we can somehow unleash incremental growth to that, and the team's doing a lot of work there, doing a lot of work on areas that aren't necessarily as long of cycle, things like mid-cycle upgrades of planes, things like onboard electronics in planes.

And so as we think about the future of the airplanes, it's a little bit analogous to that of automotive in that it's all about finding those new systems that are ultimately going to be put into play and so then making sure that we maximize our content on those new systems.

And I think our team is doing fabulous work to make sure that, that is the case, that we are getting a strong presence on these new systems.

And we will continue to focus very heavily on that important commercial air market.

Our next question comes from Steven Fox from Cross Research.

Just following up on some of the comments you made about the cloud service provider market.

Given the growth you cited in IT datacom, is it fair to say that the market was slower this quarter, not what you would have thought?

How are you looking at it for the rest of the year?

And then can you just sort of give us a little bit of a sense what -- maybe where technically you're having the most success recently with those types of customers?

Yes, I'd tell you that even if our growth was slower this quarter than it had been in prior quarters, it was a little better than we thought it was going to be coming into the quarter.

So I think that was a positive for us, that IT datacom did -- little bit outperform where we thought it was going to be.

I think in terms of where we are present, I mentioned that for us, it's all about these high-technology products, whether that's high-speed products, which are enabling the transmission of extraordinary amounts of data, ultimately being driven by IP video, which is the real sort of killer app that is happening, together with areas like the expansion of Internet-connected devices, or if you want to call it the Internet of Things, and the data that's being created from all of these cameras and other sensors that are around the world.

I mean, there's a lot of work going on there.

In addition, power products for us are a really important area.

It's one where we strengthened significantly our portfolio of products with the acquisition of FCI as well with the recent acquisition of Telect as well with the acquisition last year of AUXEL.

So we now have just a much broader suite of power interconnect that gets used in the data center.

And the operating expenses of these data centers, after salaries, it's all about electricity.

So if you can go to customers, whether those be equipment manufacturers who are selling the boxes, or the service providers who are really operating those, and you can present them with a power solution that is safer and more efficient, ultimately, that creates a lot of value for everybody in the chain.

I mentioned as well fiber optics, where we'd made just great progress, both organically with our long-standing business that we have in fiber optics, but also with some of the acquisitions that we've made over the recent couple of years, companies like Custom Cable, All Systems Broadband, Telect.

I mean, these companies have provided us just a very -- a much more expanded range of fiber-optic products that ultimately allow us to participate, again, in -- more broadly in that cloud service provider area.

So it's a part of the market that we're very excited about.

I will tell you, it is a part of the market that has a little bit more the properties of service providers as opposed to OEMs.

So service providers have a little bit more volatility to when they buy things.

OEMs, as you know, they've got to keep the factories running, so they tend to be a little bit more stable.

But service providers, as we know well in our broadband market and our mobile networks market, there can be ups and downs based on when they decide to build and when they decide not to build.

And so if we look at on a year-over-year basis, the strength that I talked about in the second half last year and that tougher comparison, we certainly saw very strong performance in the second half last year.

And I think we've sustained that strong level this year, and we feel very good going into the future with our position in the IT datacom market.

Our next question comes from Amit Daryanani from RBC Capital Markets.

This is Irvin Liu calling in for Amit.

I had a question on the industrial side.

Your strong year-over-year momentum continued in the September quarter.

What are your thoughts on the recent trajectory sustaining going forward and whether you could attribute any of your outperformance to any cyclical end-market trends?

Yes, look, I think we had, like you said, a very strong quarter.

I think our guidance for next quarter, while maybe a little bit down sequentially, would still be, on a year-over-year basis, a very strong fourth quarter.

And for the full year, to have that kind of high-teens growth for the full year, which is a nice increase from where we thought it was going to be, we really thought coming into the quarter that we were looking more towards the mid-teens here.

And so I think we feel very, very positive about that.

When I look at the drivers, and I mentioned a few of them before, that we had really strong performance in oil and gas, very strong performance in heavy equipment, really strong in instrumentation, factory automation, alternative energy, medical, I mean, you go down the list, just really outstanding performance across many of the segments.

What does that mean from a secular long-term perspective?

That I have a harder time to predict, except to tell you that the growth of content in industrial applications, that continues unabated.

Our position and breadth of our position, with the variety of products from interconnect to sensor to antennas, that has continued to expand and will continue to expand both organically and through acquisitions in the coming quarters and years.

And so I think that we're set up very nicely to participate when the opportunities are there for growth.

And I think we did that this quarter, and we expect to continue to do that in Q4, and I have no reason to believe that we won't continue to have a strong industrial business long into the future.

That's helpful.

And shifting to IT datacom, can you provide more color on the economics of sales to some of your cloud service provider customers versus your more traditional OEM customers?

And how has the trend -- I mean, how has the mix of cloud service provider versus OEM trended in recent quarters?

Yes, well, I would just tell you that cloud service and that whole whatever -- however you want to term it, that has clearly been very helpful to our growth over the last 2 years.

So I guess, by definition, it's a little bit bigger as a proportion than it was, say, 2 years ago.

In terms of the economics, I'm not sure if you mean -- would it be income or what, money, or what is that?

I would just tell you that we have a really strong business economically across the board in our IT datacom business.

And that strong economics, to use your word, really comes from the fact that we are providing leading-edge technologies that solve problems for our customers regardless of whether they are OEMs or service providers in IT datacom.

It's all about enabling their systems, enabling their networks to perform at a higher level, to ultimately create for them a higher price -- sorry, a higher performance, either for the same or lower price, but ultimately, to create value for them.

And if we can create value for them through their systems, then that will allow us to also enjoy some of that economic value.

Our next question comes from Jim Suva from Citi.

Craig and Adam, when one looks at the December sale outlook in total and the December EPS outlook in total, unless my math is wrong, it looks like the EPS growth year-over-year isn't seeing the type of multiplier effect of additional leverage as it normally does see.

Is my math wrong?

Or can you speak to help us understand about why that is?

And should we expect that to continue or go back towards earnings growing much, much faster than sales growth year-over-year?

Sure, Jim.

I think if you do look at it, I think your math isn't totally wrong from a, just a conversion margin target perspective.

We continue to target our conversion margin out to 25% long term.

But if you look at our year-over-year in the fourth quarter, I think what you would see is obviously, there's some impact certainly from Cable segment margins, which we continue to see at the kind of level we're at, at this point in time.

In addition, there are certain impacts related to certain acquired companies that haven't really gotten up to the company average and since they haven't fully adopted kind of those Amphenol operating principles.

And so I think both of those factors have some bit of an impact.

But to be honest, I mean, you see any one quarter could go up or down from a conversion perspective, and I think if you look at the whole year as a whole, we have a very strong conversion for the year and we're certainly very happy with our operating margin levels.

And I think the math of whether or not it's low 20s or high 20s or 30s, I think that the couple percentage points here or there isn't going to really move the needle so much from an overall messaging perspective, I think.

Okay.

So it seems like the fourth quarter is more of a one-off isolated quarter and the additional leverage or drop-through, flow-through, should continue going forward over the long term?

I would say, long term, we still have this 25% conversion margin target, and that's how I would view our -- that has -- nothing's changed from that perspective.

Our last question comes from Joseph Giordano from Cowen.

Just to follow up on the conversion margin discussion, one, like on FCI, is that business now -- I think I want to say it was something like 500 basis points below the company average on profitability when you acquired it.

At this point, have you kind of been able to bring that up to the company average?

Yes, I think we talked about that as we came into the end of last year, that we're very pleased with the team and its work in FCI and that, indeed, they did a fantastic job, faster than we had expected to bring the company up to our corporate average.

And then when we think about like a conversion target long term, relative to your gross margins inching up here, is there like a reason structurally we shouldn't expect like a longer-term target to be more reflective of a gross margin, ex headwinds from incremental M&A that you do?

Yes, we don't really talk about gross margins, certainly as from a target perspective.

But we have, certainly, diverse margins move and SG&A moves from one quarter to the next for a variety of reasons.

We measure ourselves kind of on an operating margin level, and I think the way I would think about it again is this 25% conversion margin on the operating margin level.

We wouldn't necessarily guide or even talk to targets other than that.

Right, fair enough.

And then just last, when do the comps -- I know we talked about headwinds from laptops and tablets and things like this for a while now.

Like when do those -- do you feel like those -- that business on those products is at a point where you lap the comps and that's like at a more sustainable, at least trough kind of level?

Yes, I mean, look, I'm not going to try to get too far ahead of myself in terms of a prognosis on any component of mobile devices, except to say that we grew this quarter by 15% regardless of the various ups and downs.

I think that's a very, very strong growth on a year-over-year basis.

I think our guidance in the fourth quarter would also imply a very strong double-digit year-over-year growth.

And so regardless of whether we've lapped a certain comp in one or another of the pieces of mobile device, I think the overall mobile device performance, certainly here in the second half, and -- has been very strong on a year-over-year basis.

And then we'll see going into next year ultimately how that sets up for our outlook.

I will try my best to give a guidance next year when we all come together 90 days from now.

I thought I was going to be pretty wrong this year 90 days ago.

Now it looks like actually our expectation coming into the year, we may do a little bit better, when all is said and done, than what we thought coming into the year, which was flat, and we'll see how we come into next year.

And speakers, that was our last question.

Well, thank you very much, and I'd like to just once again thank all of you who have taken the time today to join our call.

And we will look forward to speaking to you all again, crazy enough to say it, in the new year.

Thank you again, and I wish you all a pleasant continuation of the day.

Bye-bye.

Thank you.

Thank you for attending today's conference.

You have a nice day.