Benchmark Electronics Inc (BHE) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Benchmark Electronics first quarter 2014 earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Lisa Weeks. Please go ahead.

Good morning everyone. I would like to extend a warm welcome to the Benchmark Electronics earnings call for the first quarter of 2014.

I am Lisa Weeks, Benchmark's Vice President of Strategy and Investor Relations. Thank you for joining our call today.

Earlier, Benchmark issued a press release describing our financial performance for the first quarter of 2014. If you did not receive a copy, you may obtain it from the Investor Relations section of our website.

This call is being webcast live and a replay will be available on our website following the call.

Gayla Delly, our President and CEO and Don Adam, our CFO, are with me this morning. After their prepared remarks we will open the call for your questions. For your information, Gayla and Don will be using a slide presentation also available on our website.

The Company has provided a reconciliation of our GAAP to non-GAAP measures in today's press release as well as in the Appendix of the presentation slides.

During our call today we will be discussing forward-looking information. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements and involve certain risks and uncertainties that are disclosed in the Safe Harbor section of our earnings release and SEC filings. Actual results may differ materially from such statements and Benchmark undertakes no obligation to update any forward-looking statements.

Please turn to slide three in the presentation deck and I will turn the call over to Don Adam, Benchmark's CFO.

Thank you Lisa and good morning to everyone. I appreciate you joining us for today's call.

The first quarter was an excellent start to the year for Benchmark. Our continued focus on the growth opportunities in the non-traditional markets and our operational excellence is serving us well and resulted in a good quarter.

We generated revenues of $639 million which were within our guidance of $630 million to $660 million. As expected, revenues were down in the first quarter due to normal seasonality. Also, we saw a level of softness somewhat greater than forecasted in the computing sector.

Quarterly revenues increased $97 million or 18% from the same quarter last year. Organic growth for the first quarter was up 6% year over year.

Our net income was $19 million for the quarter compared to $11 million last year. Our non-GAAP earnings per share were $0.35 versus $0.22 for the first quarter of last year, a 59% increase. Our GAAP earnings per share were $0.35 in the first quarter compared to $0.21 in the same quarter last year.

As planned, SG&A expenses were down $1 million sequentially from last quarter with initial progress made on the integration of our acquired sites.

Our non-GAAP operating margin was 3.6% compared to 2.7% in the first quarter of last year. This increase shows that the leverage in our operating model evidences the improvements we are implementing. Our strong productivity improvements, cost controls and the favorable non-traditional mix contributed to earnings above our guidance.

I would also like to highlight that the net impact of our restructuring and other non-recurring items was not significant in 2013 or 2014.

The first quarter non-GAAP effective income tax rate was 16% which included a $1.2 million discrete tax benefit for China. Our expected tax rate is 20% to 21% for the second quarter.

The diluted weighted average shares outstanding for the first quarter were 54.3 million.

Please turn to slide four to review our revenue by industry sector. Our computing revenues represented 20% of first quarter revenue. Computing typically has the highest level of seasonality when comparing Q4 to Q1. We saw this again with a 47% quarter over quarter decrease which was slightly softer than we expected. Year over year, computing was down 5%.

Revenues from our largest customer were 10% of total revenue in the first quarter compared to 20% in the fourth quarter. This is most impacted significantly by the seasonality and softness in the computing hardware market and is not attributable to share loss.

Industrial control revenues were 29% for the quarter. This was down 7% sequentially from the fourth quarter which is typical for this sector. Year over year, industrial controls were up 19%.

Telecom revenues were down 6% seasonally from the fourth quarter. As we discussed previously, our fourth quarter telecom revenues benefitted from a delayed program ramp. Telecom revenues were up 22% year over year.

Our medical revenues were flat quarter over quarter and up 5% from the first quarter of 2013.

Finally, test and instrumentation revenues were up 36% sequentially and notably, up 96% year over year. Our strong performance in the first quarter was driven by new program ramps.

Note that one customer has been reclassified from industrial controls to the test and instrumentation industry sector for each period presented to better reflect their end market participation.

We are pleased that our focused expansion in the non-traditional markets is working.

Turning to slide five, our cash balance at March 31 was $394 million. $58 million of this was in the U.S. During the quarter we generated $61 million in cash from operations. Capital expenditures were $14.6 million and depreciation and amortization expense was $10.8 million. With our recent and planned capital expenditures, we expect depreciation and amortization expense to increase to approximately $11.5 million in the second quarter.

To meet the increasing demand in the Americas we have expanded the capacity of our Guadalajara operations. A portion of our CapEx in the first quarter as well our planned capital spending is to support this expansion. We anticipate capital expenditures for the full year of 2014 to range between $40 million to $50 million.

Our accounts receivable balance was $465 million, a decrease of $95 million from the last quarter and our accounts receivables days were 65.

Inventory at March 31 was $443 million, an increase of $47 million from the last quarter. Inventory turns were 5.3 times. Inventory has increased as we have invested to support new program ramps expected in Q2 and into Q3.

In the first quarter we repurchased 196,000 common shares at a cost of $4.5 million and have $42 million remaining in our authorized share repurchase program which we expect to complete over the next 12 to 18 months. Our share repurchases for the quarter were somewhat tempered based on working capital and CapEx investments to support our organic growth.

Please turn to slide six to review our guidance. We expect revenues to range between $665 million and $700 million. At the midpoint this represents an approximate $75 million increase over the same period last year.

Diluted earnings per share excluding restructuring and integration costs are expected to range from $0.35 to $0.40. Estimated integration costs of approximately $2.5 million are excluded from our guidance. At this midpoint, the guidance reflects a 3.8% margin as we continue along the path to achieve a 4% margin target in the second half of 2014.

Now if you will go to slide eight, I will turn the call over to Gayla.

Thank you Don and good morning everyone. In addition to our strong operational performance, I am pleased to share with you another quarter of strong bookings.

During the first quarter of 2014 our bookings included 38 new programs with eight of these being engineering projects. These programs have an estimated annual revenue run rate between $135 million and $165 million. Our bookings come from new outsourcing opportunities as well as new program wins with existing customers. Many of these have come from our targeted non-traditional market efforts. We are continuing to fill our pipeline with new opportunities resulting from the strong design and manufacturing positions that we offer to our customers.

Now let's turn to slide nine where we will discuss our perspective on the markets we serve. Beginning with computing, we expect to see low single digit growth for the next quarter. Within this sector we see a mixed outlook across server, storage and high performance computing with softness in existing products being offset primarily by new program ramp.

We currently expect computing to remain around the 20% level of our revenues for 2014. We see over 20% growth in industrial controls for the upcoming quarter. We have new programs ramping in industrial automation and controls for the transportation, refining, and building infrastructure industries. We also see strength in commercial aerospace.

In medical, we expect Q2 and the subsequent quarters of 2014 to remain stable and see a return to growth in early 2015 based on the estimated timing of regulatory approval being received for some of our new program ramp.

In test and instrumentation, for the second quarter we expect revenues to be down in the high single digits after we ramp several new programs in Q1. Overall in test and instrumentation we see some level of moderation in new order patterns.

In telecom, we expect mid-single digit increases in demand. Again in this sector, growth is coming primarily from new product introductions and new program wins supporting the cellular infrastructure and networking space.

In summary, please turn with me to slide ten. As Don indicated, Q1 was an excellent start to what we expect to be a very good year for Benchmark. We are maintaining and growing our share in our targeted market while continuing to improve on our overall profitability. In fact, we expect year over year growth in four of the five segments we serve.

Our operating margin results evidence the improvements we are making. We expect to benefit from further leverage in our operational excellence activities and from the integration of our recently acquired sites in the implementation of our operating systems.

We have been through some very important transformational periods while achieving great strides in the diversification of our revenues and maintaining the focus on profitability. For Benchmark, this is our time. Growth opportunities in the non-traditional markets are outpacing that of traditional markets. Our heritage and our expertise developed over the years uniquely positions us to win in these markets. We have the infrastructure, the talent base, and the business systems to be the solutions provider of choice.

To reiterate, our top three priorities remain portfolio management, operational excellence, and customer focus. We have refined our focus on portfolio management. In this regard we have intensified efforts in higher growth areas and outsourcing sectors in the non-traditional markets of industrial, medical, test and instrumentation and certain segments within the telecom market while continuing our long term commitment to serve the more complex needs of computing customers.

Some of our customers in this sector were in essence the sponsors and pioneers of the outsourcing industry. For the last several years we have increased our investment and expanded our capabilities in design services, precision machining and complex assembly as well as increased our microelectronics capabilities.

Each of these areas have allowed us to expand the service model we offer in support of the growing needs for outsourcing solutions for our customers in targeted markets. We are pleased with the results of our efforts to date to grow the non-traditional portion of our portfolio. In fact, for the first time, this portion of our portfolio exceeded 50% of our quarterly revenues.

Our second strategic priority is operational excellence. Achieving the growth in our markets is made possible because of this priority. Operational excellence is the key to driving consistent results in operating margin improvements. Last year we supported a record number of successful new program ramps and I am challenging our teams to exceed that number again this year.

Another aspect of our operational excellence involves ensuring our acquisition integration plans are effective and efficient. We are on plan with our integration activities and in some areas we have accelerated our integration plans.

Against a backdrop of many, many parts, our teams are continuing to execute on our initiatives, gain efficiencies, and identify yet further opportunities for improvement, true evidence of having that continuous improvement culture.

Benchmark has always been a strong operator with a keen attentiveness to cost management. Our teams remain committed to this aspect of our culture. This is simply a part of our DNA.

Importantly, our teams vest for operational excellence is driven by a passion and commitment to the best customers, our customers, which brings us to our third strategic priority -- customer focus.

When I meet with customer and hear their story, I hear consistency in the challenges and opportunities they face in their diverse and dynamic end markets. These very diverse and dynamic end markets have a common ground of cost headwinds, stringent quality and delivery requirements. To manage these, our customers are seeking partners who can assist them in managing the complexity of their ever changing business models and we are excited about helping our customers win in their chosen markets.

We remain committed to delivering solid outsource manufacturing and design solutions to our customers. The investments in our enhanced customer focus programs continue to manifest results in increased bookings and improved reliance on possible growth.

Simply stated, our strategy is working and we remain well on path to achieving our near term 4% operating margins for [reaching] the second half of 2014. Benchmark continues to deliver consistent and reliable results and we are well positioned to meet the challenges in our industry.

We currently have an impressive pipeline of opportunities and look forward to the upcoming launches to support our new customers.

In closing, I want to recognize and thank our Benchmark employees who are dedicated to our customers and our success. Our team is invigorated and ready to move forward with our customers jointly aligned to meet the challenges ahead. We remain steadfast in our commitment to them and thank our customers for putting their trust in our solutions and we also want to say thank you to our shareholders for their continued trust and investment in Benchmark.

And now Operator, I would like to open the floor to questions.

(Operator Instructions) We have a question from the line of Jim Suva with Citi. Please go ahead.

A couple questions for you, if I read your press release and your financials in the presentation correctly, I think it looks like you've got about $58 million or $60 million of cash in the U.S. and the rest of it would be international.

Benchmark has always had the situation of a lot of extra cash or a lot of cushion. Can you help us understand the planned allocation or use? It seemed like a lot of it was international. Will you be looking to repatriate that back to do more things in the U.S. or I guess the tax implications may make it less favorable so would you be looking at a lot of the international cash for acquisitions or how should we think about it because it seems like it tempered the amount of stock buyback you could do this quarter because you didn't want to repatriate it back into the U.S. or am I just reading that wrong?

So Jim, our first and ultimate goal is to continue to invest in our operations and our profitable growth initiative internally and that is in support of growth.

Second, we continue to look at M&A opportunities. Clearly, putting that cash to use overseas in an overseas acquisition would be very advantageous and third, as you said, the opportunity to, in a most cash efficient manner, repatriate or have funds available to do additional buybacks would be the third area we would look at.

We do have $42 million remaining and we do have cash in the U.S. and this past quarter we were really focused on, as you saw we spent over $14 million on CapEx supporting growth as well as our investment in inventory so we were really focused on the organic growth opportunities we had in front of us this quarter and will continue to execute on our buyback and then look at the next level plan that we need to put in place accordingly but to your point, we would look for the most advantageous method to repatriate cash if we were to bring cash back.

Great, and then my follow up question would be regarding your organic expansion, it sounds like these are going quite well from your bookings rates and things like that. I assume that a lot of your expansion would be outside the U.S. such as Guadalajara and so (inaudible) I assume in Guadalajara, I don't know tax rules but you able to use international cash in places like that as opposed to the need to take cash from the U.S. out. Is that correct?

Yes sir, you are correct.

We now have a question from Amit Daryanani at RBC Capital Markets. Please go ahead.

Starting off, just looking at the working capital metrics, looking at the inventory numbers, it was up quite a bit I think sequentially and year over year. Could you start with what drove that inventory spike and if we should actually, or we should see that inventory dial down over the next few quarters which would actually help your cash flow generation for the rest of the year.

We did have a significant level of inventory increase associated with supporting our new program ramp and are currently flowing the ramp through the revenue now and you see the increased revenue outlook that we have provided. That is the primary reason for increase currently. As we go through the remainder of the year we would expect that the increase would not be at that level but I do expect that as revenue increases we would continue to have investment in inventory to support it.

Clearly, going from the first quarter to the second quarter is our largest step up of last year.

But the inventory tone should improve and get back to that six times, seven times range which is a five that happened that you guys did in March now.

Absolutely. Clearly, it is impacted not only by the ramp that we have coming in Q2 but also by clearly the calculation given the one quarter reduced level of revenue that we see in Q1.

Just as a follow up, the computing segment was down a lot more than even what you guys saw last quarter, last year in Q1 and we are seeing historical trends. It seems like it was really driven more so by your biggest customer versus the rest of it. Could you just maybe talk about what do you see is going on there and what is the comfort that -- I realize you guys aren't losing share as you guys mentioned, with the largest customer but what is the comfort that you will hit some of this stability and you won't see those revenues consistently decline for the rest of the year?

We had, as announced last quarter an end of life program, that impacted us in a year over year comparison so we had a program that was about $30 million and so that is a significant impact in the numbers comparison. Outside of that, we do say that the general marketplace in computing is challenged but we believe based on the programs we support, the customer relationships we have and the outlook that they have that we will continue to see overall computing at about a 20% level.

We now have a question from the line of Brian Alexander with Raymond James. Please go ahead.

Your test and instrumentation business was particularly strong this quarter, effectively doubling year over year and I know you are guiding for high single digits down sequentially but again year over year, it should be double and I'm just curious I guess if you could dig into that a little bit. What specifically is driving that and how much of that is organic because I think CTS is probably influencing that to a degree.

Most of it is organic and as you recall, we have been investing in that market space and making sure that we had the capabilities and the geographic footprint to support that marketplace and have seen the benefits of those investments really begin to ring through so we do and as well it is a stronger marketplace in test and instrumentation so I believe our investments are paying off.

And then just on the new wins, you guys have been pretty consistently in that $150 million range per quarter give or take which is comfortable up from the last couple years. It sounds like you are pretty confident that you can sort of sustain that level of wins. I was just curious if that is the case if you are still confident you can maintain at these levels.

Yes, I am pretty confident of that although I do want to note that it does ebb and flow. It's not always quarter on quarter a level of stability or up and to the right. It is impacted by timing of decisions and therefore, we would expect it from time to time have variability but in general, the funnel size we see and the focus we have on our business development efforts is really keeping us around that $150 million and as you noted, that is a good level of increases compared to some of our prior year win levels.

And just a final one on computing, I know you said you expect it to be around 20% of revenue for the year. What would you sort of anticipate your largest customer would be within the context of that 20%?

I don't have guidance specifically on that, Brian, simply because I don't just think that we get a full year credible guidance that I would want to lend to, for any given customer not just our top customer but any customer. We see the blend overall but I don't think in that space specifically, anyone would feel very comfortable giving guidance for a full year out or three more quarter, if you will.

We now have a question from the line of Todd Schwartzman from Sidoti and Company. Please go ahead.

Given the recent weakness in computing, maybe if you would discuss other factors too. What are the gross margins puts and takes to consider when modeling Q2 and the rest of the year in fact, relative to that 8% number in the first quarter?

Generally speaking Todd, what you typically see is the computing sector will generally have an overall margin less than the average and then the non-traditional markets are typically a little bit higher. You saw that benefit this quarter in terms of the overall operating margin. If you look at our guide, we were probably, midpoint was around 3.3%. With the favorable mix in computing only being 20% we were at 3.6% so it should drive the margins up with less computing.

As you see in our Q2 guidance, our midpoint of guidance is about 3.8% for our next quarter of our operating margin.

Are there additional cost synergies to be realized with respect to CTS, just kind of looking at the OpEx number?

Yes, and those synergies are incorporated into our guidance.

And what was the earnings contribution from CTS for the quarter?

In terms of the overall margins for the CTS, the acquisition, it was pretty consistent with our base level of existing operations. It was not a drag on the margins for the quarter.

What about new outsourcing opportunities? Could you maybe give some color on the industries, if there has been any or you expect to see any concentration where these might be clustered?

We believe that the industrial sector is the one that is showing the most growth opportunities. This industry as a group is probably newer to outsourcing and as they see the cost pressures, the success factors of the traditional markets as well as affording them the benefit of a geographic footprint that allows them to gain access to new customer bases, I believe those are the factors that are driving the growth in industrial outsourcing opportunities and we do see that. I don't know that that is a cluster because clearly that is a very diverse industry in and of itself and as I spoke to in my prepared comments, it runs the gamut from oil and gas, infrastructure, transportation. It really has a very broad spectrum of industries within industrial that is served and clearly we are seeing the focus on outsourcing being an important area for them to drive some of the synergies and support the profitable growth initiatives that many of those customers have.

We now have a question from Sherri Scribner from Deutsche Bank. Please go ahead.

This is [Kirti Shetty] calling on behalf of Sherri Scribner. I actually just wanted to get an understanding again going back to compute. Last quarter the company saw an upside from compute whereas this quarter you noted some softness driven mostly by seasonality but you also mentioned the computing hardware market so I just wanted to get an understanding of what are you seeing in the hardware market, what kind of trends, customer confidence and things like that?

I would say we see consistent with what you read in the marketplace that there are some good opportunities with some new product introductions and there are also challenges likely brought about by things such as cloud computing and data rooms that are really providing alternatives to some of the traditional computing solutions that large entities selected so I believe that the marketplace demonstrates some challenges probably on, specifically on the hardware side and there are obviously some software solutions being brought to the market that probably further challenge the hardware but given that, I believe the focus on driving a very strong solution and identifying opportunities for growth within our computing customer base is very strong and they are investing heavily in R&D to ensure that they have very good participation in the space going forward.

Okay great, thank you. A follow up question, in the past you have indicated long term plans to reach a 5% Op margin. Is this still your goal and if so, then what revenue levels do you consider necessary to attain that goal?

We have always committed to gaining the 4% as our near term goal. We believe that committing to a goal that far exceeds what we are currently achieving just is not relevant so our near term goal has been 4%. As we achieve that, we would tick it up once again in the vein of continuous improvement but I would say that we would first move towards a goal of 4.5%. I don't believe we have held it out there. Clearly, internally we want to drive to 5% but to guide to expectations of that in a near term when we haven't yet solidified our 4% doesn't seem like a real expectation to set forth so our expectation that we provided is to get to 4% first by the second half of this year and after we achieve that, we will be looking towards guiding and looking towards moving that needle forward.

We now have a question from the line of Sean Hannum from Needham and Company. Please go ahead.

Just from a very broad high level perspective, I want to see if I can get your perspective here, Gayla. I think over the course of the last week or so we have heard some fairly decent reports from some of your competitors and there have been some aspects of encouraging commentary that we have received from some of the management teams in terms of characterizing the state of the environment for their business and EMS right now. It seems that there are a number that are feeling that there is some cautious optimism and also slightly modestly improving tone from customer bases. Can you lend your perspective on that, not only what you are seeing within your business but your perspective on what you are seeing within the EMS space?

Thank you, Sean. I think that is an excellent question. Basically, we do see some modest improvements in overall demand and outlook with some nice, stable improvements and the messaging and the forecasts that customers are giving. As you indicated, I think that that is being put in moderation. It isn't a level of exuberance but it is some forward movement and some greater confidence. As customers introduce new products and new solutions they are gaining some ground and are meeting and in some cases exceeding their expectations but it is still mixed, as we said.

In some industries you are seeing more strength and yet you are still seeing challenges as we noted in computing so I would say it is clearly not across the board but overall I would say it's more positive than negative at this point in time.

Okay and just kind of to follow up on an aspect of that, you have mentioned and talked to some of the challenges related to computing. Some of those are environmental. However, from your viewpoint you guys are still looking at maintaining kind of 20% as a piece of your mix so if you are growing your business from a dollar perspective you are still going to have perhaps an opportunity to grow that business so it shouldn't be a major headwind. Is there anything that I am missing there?

You are correct. Every Q1 -- not every -- unless there are new program ramps that stand against the headwinds of a normalized seasonal Q1 impact, computing is down and down dramatically over Q4. The only time we have seen that not be the case is when there has been a new program launched in Q1 so we do believe Q1 is kind of the seasonal low point in the year and expect to see the return to a more normalized pace of revenue for the remainder of the year, as well we do have some new programs in that area so we do see that coming back to a more normalized level.

Thanks, that is helpful. Last question here for a moment, can you maybe discuss a little bit with us what you have learned so far in terms of the CTS acquisition, what this is perhaps doing to your visibility model versus what you anticipated when you entered the deal and then also, I think you have indicated this is now margin neutral with the rest of Benchmark and want to get a better understanding of how that can continue to progress through the year, thanks.

We are very pleased with how our acquisition integration activities are progressing. We are very excited about some of the team members we added as well as the expansion of the footprint into some geographies that we were not represented in previously and the industries they serve that are very complementary to the industry that we see huge growth opportunities in so overall, very excited and pleased to have them on board and clearly, part of our overall Benchmark family now and working towards supporting our profitable growth initiatives. The integration has gone very well.

We now have a question from the line of Wamsi Mohan from Bank of America. Please go ahead.

Gayla, I was sort of struck by your comment on increased outsourcing in the industrial space. Maybe you could share some color in terms of what you are seeing. Is it sort of increased confidence at existing customers and they are outsourcing more deals or is it sort of more outsourcing from folks who haven't done it before? Are the sizes of these deals, if you look over the last few years, are the sizes increasing or is it the number of deals increasing but the size is actually of those deals getting smaller?

Great question, Wamsi. We are seeing more and more sizeable opportunities in these marketplaces and what I believe and I found really has to do with two or three factors.

One has to do with the growth opportunities that they see in the global marketplace that they may not have the right manufacturing footprint to support.

Two, the cost pressures that are out there in marketplaces that may have been able to enjoy margins heretofore that did not compel them to outsource which again is exacerbated now by the need to be in a different geographic footprint so it compels them to put brick and mortar in the ground in locations where they may not exist today.

And then third, it is absolutely witnessing the success that others have had in outsourcing that kind of puts them over what I would consider the fear factor of not being able to outsource and that has to do with the systems, the tools, the processes that we have in place that are supportive of these more complex businesses, more complex industries being successful in outsourcing.

So yes, we see more opportunities. Yes, they are larger in size and it has to do with kind of arising from the infancy and sticking your toe in the water of outsourcing, if you will, but it is becoming more common in some of those industries to entertain outsourcing.

Thanks, Gayla. Don, I was looking at the historical restatements here on the revenue re-class and it looks like there was maybe some movement between the -- which you alluded to -- between the industrial control and test and instrumentation in the $5 million to maybe $8 million range or so. Was it a similar amount in this quarter as well?

Yes, the net impact of the movement didn't really have any -- the net change as a result of the movement was basically the same with or without the change.

The negligible impact, we see it as a growth opportunity so we wanted to reposition it currently because we do see it as a growth opportunity and something that we wanted to get in what we believe is a more appropriate category currently.

Okay thanks and how many 10% customers did you have in the quarter?

One.

One.

(Operator Instructions) At this time we have a follow up question from the line of Jim Suva with Citi. Please go ahead.

Can you help us out with the organic versus total company sales growth? I know that CTS I'm sure influenced the year over year growth rate for Q1. Can you help us with what the organic growth would have been for Q1 and then also for the full year? Now that you have some visibility can you help us understand kind of what you are looking at so people don't get too ahead of themselves for this year, for either company-wide and/or organic for this year? Thank you.

Jim, for the first quarter the organic growth was 6% and keep in mind, last quarter it was 8% so I think generally for the year, that is probably a pretty good average, organic growth.

We now have a follow up question from the line of Sean Hannum with Needham and Company. Please go ahead.

Just to clarify some thoughts on the 4% operating margin target, I just wanted to make sure, is that for a 4Q result or is that simply in position exiting 4Q? I know that generically you have talked about this as kind of second half so if I look at how you have been progressing and then gave guidance for the June quarter, it seems you should also be in position to do that in the September quarter or is that a stretch based on what you are seeing today? Thanks.

Sean, that is correct. We anticipate to be in a position to have 4% operating margin in Q3.

Okay, great. Alright, that's very helpful so basically we have a scenario of healthy wins, you've got an improving environment, we're on good track for 4% operating margin in the back end of the year. I guess you guys are probably pretty surprised to see the stock down but I guess we will leave that to the rest of us. Thanks.

We thank you everyone, and Operator. We will be in our office today and have follow up calls with any questions and thank you very much for joining our call today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using ATT&T Executive Teleconference. You may now disconnect.