Benchmark Electronics Inc (BHE) 2014 Q4 法說會逐字稿

Event ID Good day ladies and gentlemen. Welcome to your Benchmark Electronics fourth quarter 2014 earnings call. At this time all participants are in a listen-only mode. Later we will have a question and answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded, and I would now like to introduce your host for today, Lisa Weeks. You may begin.

Good morning everyone. I would like to welcome you to the Benchmark Electronics earnings call for the fourth quarter of 2014. I'm Lisa Weeks VP of Strategy and Investor Relations, thank you for joining us. Earlier today we issued a press release highlighting our financial performance for the fourth quarter. If you did not receive a copy, you may obtain it from the Investor Relations section of our website at www.bench.com. 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, which also is available on our website.

The Company has provided a reconciliation of our GAAP to non-GAAP measures in the press release, as well as in the Appendix of the presentation slides. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties disclosed in the Safe Harbor section of our earnings release and SEC filings. Actual results may differ materially from these statements. And Benchmark undertakes no obligation to update any forward-looking statements. If you would, please turn to slide three, and I will turn the call over to Gayla Delly, Benchmark's CEO.

Thank you Lisa. Good morning everyone, and thank you all for joining our call. Before Don goes through our financial results for the quarter in detail, I want to thank our teams for their strong performance. All-in-all, 2014 was an excellent year with 12% year-over-year revenue growth, 31% EPS growth, $137 million in operating cash flows, and $575 million in new bookings. As you noted in our earnings release this morning, our fourth quarter results reflected softness in revenue, primarily associated with computing and telecom, and our first quarter guidance continues to reflect weakness in these segments, as well as seasonal impacts from other industries. Our strong level of bookings throughout 2014 fuels the opportunity for growth, as our new programs move into production, and with these ramps occurring in the latter portion of 2015, and approaching their expected revenue run rates in 2016, we believe we are well-positioned for a solid platform of growth following the Q1 level. Now let me turn it over to Don. Don?

Thank you Gayla, and good morning to everyone. In the fourth quarter we generated revenues of $710 million, which was at the low end of our guidance of $710 million to $740 million. We were very pleased to see the continued strength in our industrial and medical markets. As we discussed last quarter we did not expect a computing and telecom upside, based on forecasts from our customers. Unfortunately, not only did we not see an upside, we saw unexpected softness. On a positive note, cash flow from operations was excellent, and we did achieve our operating margin goal of 4% for the quarter and for the second half of 2014. Our non-GAAP net income for the quarter was $23 million, compared to $24 million last year. Net income on a GAAP basis was $24 million for the quarter compared to $67 million last year, which included some significant nonrecurring items, including insurance proceeds received and a discrete tax benefit, which are reflected in today's press release.

Non-GAAP earnings per share were $0.43 for both the fourth quarter this year and last year. Our GAAP EPS was $0.45 compared to $1.24 in 2013, which again was impacted by the nonrecurring items mentioned above. Our non-GAAP operating margin was 4% compared to 4.1% during the fourth quarter of 2013. During the fourth quarter of 2014 we realized a benefit of approximately $1.5 million related to the gain on the sale of our Tianjin China facility, which was partially offset by restructuring and integration related costs of approximately $955,000.

I would also like to highlight that SG&A was moderately lower for the quarter due to lower variable compensation associated with lower revenue. We expect SG&A to return to normal levels in future quarters. The fourth quarter non-GAAP effective income tax rate was 18.5%. Our expected tax rate for the first quarter of 2015 is expected to range from 21% to 22%. The diluted weighted average shares outstanding for the fourth quarter were 53.6 million shares. Moving to slide four. 2014 revenues were $2.8 billion compared to $2.5 billion in 2013. We experienced growth of 12% year-over-year. For the full year, non-GAAP EPS is $1.65 compared to $1.26 for 2013. Non-GAAP operating margin improved to 3.9% for 2014 compared to 3.5% for 2013. These are great results from our team.

Please turn to slide five to review our revenue by industry sector. Industrial Control revenues represented 32% of quarterly revenue up 5% from the third quarter and 16% year-over-year, resulting from the continued success of bookings and new program ramps. Telecom revenues decreased 13% from the third quarter, but increased 11% year-over-year. Telecom demand below our forecasted level for the quarter across several customers and technologies. Computing represented 20% of fourth quarter revenues, which was actually down 8% sequentially, with no change in our customer base, although we anticipated flat demand, the key change in the segment was softer than expected demand from our top customer. Medical revenues increased 11% year-over-year and 6% sequentially, with new program ramps that were launched during the fourth quarter. And finally, test implementation revenues increased quarter-over-quarter and increased 8% quarter-over-quarter, and decreased 8% year-over-year, which is slightly better than we had anticipated.

Turning to slide six, I will highlight a few balance sheet and cash flow items. Our cash balance at December 31 was $427 million, up from $346 million in 2013. Cash available in the US was $79 million. In the fourth quarter we announced that our Board authorized the repurchase of an additional $100 million of our common shares. During the quarter we repurchased 808,000 shares at a cost of $19 million, bringing our total share repurchase investment to $44 million for the full year. We have $103 million available for future repurchases. Our near term capital allocation is focused on executing share buybacks, and investing CapEx in the business for operational excellence. During the quarter we generated $23 million in cash from operations, and $137 million for the full year. Capital Expenditures were $8.8 million, and Depreciation & Amortization expense was $12.5 million for the quarter. Our Accounts Receivable balance was $520 million, a decrease of $14 million from the last quarter, and our Accounts Receivable Days were 66. Inventory at December 31st was $401 million, a decrease of $33 million from last quarter. Inventory turns were 6.5.

Please turn to slide seven to review our guidance. We expect first quarter revenues to range between $615 million and $645 million. Diluted earnings per share excluding restructuring charges and integration costs expected to range from $0.30 to $0.34 per share. At the midpoint this guidance reflects a 3.5% operating margin, due to the impact of deleverage. In addition, our guidance includes a higher expected tax rate for the first quarter associated with the geographic mix. Finally, restructuring and integration charges are expected to range from $4 million to $5 million, as we finalize our integration activities. If you would turn to slide nine, I will turn the call over to Gayla.

Thank you, Don. I would like to provide a backdrop on the dynamics and our traditional and nontraditional industries that we serve. First, looking at the traditional markets, our three year compound annual growth rate was 5%. As the chart on the left of slide nine shows, during that period there has been quite a bit of variability on a quarter-to-quarter basis. There are several drivers for this phenomena in computing and telecom, which we expect will continue in the future. In high performance computing storage and server products, we generally have seen demand being seasonally strong in our second and fourth quarters. In addition to the seasonality, we see variation in project timing associated with new technology introduction. While this cycle is not new, the level and rate of change has increased.

In telecom we see greater nonlinear demand, as our customers feed the market during their new product upgrade cycles. With our traditional markets, we expect program ramps to demonstrate more pronounced but shorter periods of strength, followed by shorter more pronounced softness between cycles, as industry dynamics continue to evolve with the Internet of Things as a key driver for many of our customers' products. This is the new norm, barring any macro economic changes which are not considered here. Importantly, while these cycles may present periods of demand variation, I would like to reiterate that we have maintained and have strong relationships with our key customers and the programs in these markets. We are committed to support our value traditional customers, and to adapt to meet their operating needs and their rapid time to market expectation.

Now looking at the chart on the right, our growth within our nontraditional segments of the markets, industrial, medical and testing has been steady. In fact, in this area we have experienced a compound annual growth rate of 10% for the past three years. Twice the growth rate of our traditional market customer base. Notably for the first time on an annual basis revenues in 2014 from our nontraditional customer base represented 50% of our total revenues. We are growing our nontraditional market where growth and continued outsourcing opportunities are strong. Programs in these markets have greater complexity and the production ramps as well as product life cycles are much longer, with somewhat better visibility than we would see in our traditional markets. Our underlying portfolio strategy is to continue to build upon our steady base and our nontraditional business, while effectively managing and supporting the rapid pace of product mix changes and demand variability with our traditional customers. We have a foundation of operational excellence and cost discipline to continue growing operating margins and free cash flow while we balance this portfolio.

Now turn to slide 10 with me. I would like to highlight that our bookings for the quarter were once again well-aligned with our strategy. We won 46 new programs, including 11 engineering projects which have an estimated annual revenue run rate between $120 million and $160 million. We enjoyed new bookings across all of our industries, and for nine consecutive quarters the industrial segment reflects the highest number of new booking wins. The use of technology in electronic solutions for automation and machine to machine communications is driving growth opportunities in this area. New design and manufacturing opportunities are increasing, as those industrial and medical companies are looking for services and solutions to better serve their customers. We are capturing these opportunities to serve these customers, and we are pleased to be a leader in the industrial and medical manufacturing markets. With that framework of demand variability and our new booking trends, I will discuss our outlook for the industries we serve.

Please turn to slide 11. While we do not typically provide financial guidance beyond one quarter, I would like to discuss our outlook for the full year 2015. As you know, Q1 is typically a fairly weak quarter with the impacts of seasonality in our business. Looking at industrial controls, we experienced slightly better than expected demand from our top two industrial customers in Q4, and expect a mid-single digit decline in Q1, which is typical for customers in this segment. For the full year 2015, we expect year-over-year growth. After the first quarter and throughout the year, we expect sequential quarterly growth, primarily associated with new business wins converting to revenue, as we manage outsourcing transitions from our customers. Our pipeline of new business opportunities remain strong, and supporting industrial automation, transportation, building and construction, and commercial aerospace.

In medical, we had a good fourth quarter driven by new program ramps. We expect stable demand in Q1 with some programs that are in the final stages of regulatory approval. We also expect further growth in the full year 2015 for medical. Now moving to test and instrumentation. We expect demand in Q1 to be flat compared to the Q4 levels. For the full year we expect T&I to show stability and slight growth from Q1, as our new program ramps begin to ramp in late Q2. In telecom after four quarters of growth, as well as double-digit growth in the past several years, we saw a pause in demand in the fourth quarter. In fact, demand was even softer than we expected. And we believe this is driven by a reduction in carrier spending with our customers. Looking to Q1 and based on the current forecasts from our customers, we see another sequential decline of approximately 15%. While we expect a decline in telco for the full year 2015, we see strong R&D activities with our customers which we expect will fuel growth in late 2015, and into 2016 with their new product introductions.

Now, looking at computing. As we indicated last quarter, we did not expect strong seasonal upside in Q4, following the revenue strength we saw in Q3. In fact Q4 was down more than we anticipated. Some of our customers have seen some slowing in their international sales, levels associated with FX impacts, and have also been impacted by business transitions. Historically, computing declines of approximately 40% between December and March quarters have occurred. For the first quarter of 2015, we expect the demand to be down by approximately 20% off slower of the than expected results. And for the full year 2015, we do expect computing to remain a bit soft.

If you will turn to slide 12. In summary, 2014 was an excellent year for Benchmark. I want to thank our employees for their hard work and dedication to help deliver these results. We enjoyed year-over-year revenue growth of 12%, EPS growth of 31%, and achieved our operating margin milestone of 4% as we planned in the second half of 2014, while continuing to integrate our earlier acquisitions. We also had exceptionally strong operating cash flow generation of $137 million.

Our results for 2014 and our future results are driven by our three ongoing strategic imperatives at Benchmark. First, our portfolio management. We have been successfully building a steady cadence of growth in industrial and medical, where we have deep technical expertise. In addition, we participate in selected telecom and computing markets, where our solutions are highly valued. We support strong product sets associated with traditional markets, and are committed to supporting the rapid flexibility required for customers in this space. We continue to prioritize our go to market activities, and align our resources with the growth opportunities which are promising.

Second, operational excellence. We are able to balance our portfolio based on our strong operational excellence foundation. Our teams are executing industry Best Practices for manufacturing efficiency, and are focused on continuous improvements to drive further productivity. Finally and importantly, customer focus. We continue to engage early and assist in bringing our customers' new products to market quickly and efficiently. Another strong quarter of engineering wins highlights the increasing level of opportunities to assist our customers in accelerating their design to production strategies. Our customers are investing in winning in their chosen markets, and our new bookings reflect their confidence in Benchmark as their solutions provider of choice.

As we look ahead, we believe 2015 as an important pivotal year, as our program ramps in nontraditional markets continue to outpace the growth rate of our traditional markets. We will continue to experience variability in computing and telecom markets during 2015, as a result of product refresh cycles, with these product refresh cycles providing strength in 2016. We expect that our Q1 will be weak for 2015. We see revenue and margin increasing later in the year from Q1 levels, and expect to exit the December quarter at a 4.2% operating margin. As trends in outsourcing increase our investments continue to position us well to meet our longer term operating margin of 4.5%. Our strategy of supporting profitably growing our nontraditional markets, coupled with our continued pursuit of operational excellence and cost management, are well aligned with our commitment to create shareholders value. In closing, I want to thank our customers, our shareholders, and our employees for their continued support. With that, Operator, I would like to open it for Q&A.

Thank you. (Operator Instructions). Our first question is from the line of Steven Fox from Cross Research. Your line is open.

Thanks, good morning. First question. Can you just maybe expand on the new bookings for the year? Looks like it was about 20% of your revenues. I think you mentioned timing-wise that a lot of that ramps as you get later into this calendar year. Can you talk about what we should expect in terms of the pace, and what kind of mix it should look like? And then the effect on profitability as we go through the year? Thanks.

So on our bookings as we are booking a number of our programs in the nontraditional markets, as we have indicated, the ramp to production is longer, is a longer cycle in those markets. While I would hesitate to call it a norm, it typically would be more of a three to five quarter ramp, excepting for medical, which of course can be impacted by the regulatory environment, and the even longer, or in some cases they can be fortunate to have it within that range. But typically, we would see these to be a longer ramp than what we would see in telco and computing, which can be in a couple of quarters. I don't have a specific guidance as to say the cadence, or the layering in of these, and as always we do not provide financial guidance for the year, but we wanted to provide an indication that we feel comfortable and confident that the level of bookings that we have will have a favorable impact on the latter half of 2015, and moving into 2016.

Great, that's helpful. And then just as a follow-up, Gayla, you talked about the variability in the telecom revenues this year, and I guess more pronounced strength was the wording you used. Can you just sort of maybe compare how that is going to look as you exit this year versus exiting 2014? Are we looking at a business that recovers the year-over-year growth? Are we looking at a different type of mix? Any color around how the telecom business is going to change during course of this year would be helpful? Thanks.

On the ramp for telecom I don't have clarity out that far, as to what I would expect for Q4 versus Q1, except to say that there does seem to be some pause in infrastructure spending currently, which could last a couple quarters. I don't have a guidance as to whether that is two or three quarters, how long that impact may be seen. But, as the spending resumes and then with the introduction of new products, I expect those to have a favorable impact, whether it is Q4 or Q1, I don't have clarity on timing of that. But I do expect that the infrastructure spend pause will last for a couple to three quarters would be my estimate.

Great. That is very helpful. Thanks very much.

Our next question comes from the line of Sean Hannan of Needham & Company. Your line is open.

Yes, thanks for taking my question here. Just want to see if I could get a better sense of how you are thinking about 2015. Almost seems like from the directional guidance that you are providing, you might be looking for flattest revenue years. Is that how to think about this based on the segment outlook? I realize there are a few puts and takes here, but just want to see if we can get some clarity on that? Thanks.

One of the key words cut out, so I'm not sure of the descriptor you used for the 2015 revenue. As you can see with the areas of growth that we have being the nontraditional markets, and some softness in the computing and telco, which remain sizeable markets, there is a bit of headwind that we are facing. I guess importantly, we do not see as we enter the first quarter, or in fact as we would indicate for 2015 at this point that we would have a greater than 10% customer. So while I believe we are continuing to see some headwinds in those marketplaces, we do see diversification, and do not see the headwind that would be associated with concentration. So I don't have clarity on where we would expect telco and computing, specifically for the reason associated with a prior question, as to timing when spending returns on telco. So, I do believe that we see headwinds in our 2015 associated with the 49% of revenue associated with telco and computing, and we see growth as the spending resumes on those.

Okay. So I suppose as that kind of nets out, are you looking at least at this point perhaps more of a flattish revenue year?

Again, I am hesitant to give guidance and not give guidance. We are really providing the guidance for Q1, and expect to see positive opportunities for growth beyond that. But I'm not giving a specific guidance for 2015.

Okay. Then at least in terms of margin commentary, I think that I heard expectations we might be able to get to a 4.2% margin by 4Q. Just want to confirm if that was accurate. And then what are the expectations that allow us to get there? Is that a measure of the mix and what you have with those growth expectations in those nontraditional markets, or is this also a big picture of by getting to that quarter at the back end of the year, we have much greater overall revenue leverage, and it is that leverage function that allows us to achieve that? Thanks.

I guess as in all cases it is a combination not as much expected from volumetric level increases in leverage. Although we would expect some improvement by Q4 in some of the traditional markets, but we do see strong growth in the new programs that we expect to come in by the fourth quarter and the end of the year. So you are correct, 4.2% is what we would expect to exit the year based on what we see. So some growth in telco and computing resuming, but I would say clearly not the volumetric increases that we have seen in prior years. And as we indicated in the comments, in many years we have seen a pretty significant swing upward in Q4, and we don't see that occurring in the current environment.

Okay. Thanks very much for taking my questions.

Thank you.

The next question comes from the line of Brian Alexander of Raymond James. Your line is open.

I just want to follow-up on Sean's question. So on that 4.2% exit margin, Gayla, what would be the minimum level of revenue you think you would need to achieve for the Company to be comfortable with that? Is this something that if revenue were flat year-over-year in the fourth quarter, which I know you are not shooting for that, but if that occurred, do you think that is still possible?

Yes, again, it is so dependent on mix. But generally I would say as you can see with the productivity improvements and operational excellence initiatives, we continue to drive improvement in that, and I would like to have a line to get that range to 7.25% to 7.50% to be able to achieve that generally. And actually I would like to see us drive even further than that. That is generally where I would expect us to be able to achieve that.

Okay. That is helpful. And then if I look at the guidance for Q1 and look at what is implied for operating margins, I think it is around 3.5%, and that is on revenue of $630 million. And I think if I go back like the last two to three years, you were able to do better than that on similar revenue levels, so higher than 3.5% operating margin on similar revenue levels, and your mix is a lot better now. I don't know if you are seeing more margin pressure in certain aspects of the business, or if it is really just a function of the severity of the revenue decline and the abruptness of that decline. I just wanted to see if you could comment on that?

I think a couple of things. I think if you look at Q1 last year we did, you are correct we did 3.6%. But that was also on a slightly higher revenue base. I think the other key thing you just mentioned, is the abruptness of the decline, between those two factors that is really where the margins are kind of coming out right now.

And additionally, Brian, I guess the one thing that we have in there as well is at the lower watermark if you will, the significance of impacts associated with a number of new programs, does have a downward pressure on our margins.

Right. Okay. And then just a final clarification, Don. You talked about the buyback I think as kind of your number one investment priority when you talked about cash use. And if you have said that in prior quarters, maybe I didn't catch it. Is that a change? And do you think we might see the buyback this year kind of north of what we have seen over the last few years, which has been $40 million to $50 million, given where the stock is trading and what you have left on the authorization? Thanks.

In terms of priority it was just first in the sentence. The priorities will be both stock buyback and reinvesting in the business. In terms of share repurchases, we were a little bit higher in the second half, so what I would say is I would expect our share buybacks, we will continue to evaluate our needs from a CapEx standpoint, and I would say I wouldn't anticipate any significant change.

Okay.

Maybe a little variability from quarter to quarter but overall no significant change.

Okay.

Brian, I guess the message there is that we expect that to continue on pace. Nothing dramatic on the buyback, so that is just kind of a steady path there and investing in the business is an ongoing priority. But, with that I think it is important to note that we have a strong footprint. We don't have a critical view right now of needing an extraordinary level of CapEx, so both of those we expect to be investments and share buybacks at a steady pace, not with an extraordinary level of investment required to do that. And then beyond that what we didn't mention is, of course, we will continue to look at opportunities to invest in our business, and strengthen the capabilities and skills that are needed to support the growth in the industries where we see growth opportunities for outsourcing, as well as potential adjacencies.

Okay. Thank you very much.

Our next question comes from the line of Amit Daryanani of RBC Capital Markets. Your line is open.

Hi, thanks a lot. Good afternoon guys. Couple of questions. One on the hind computing segment. The sequential decline that you saw, it was all related to your largest customers so ex-that trends were essentially flattish. Is that fair?

Say that again. I didn't catch all that, Amit.

On the compute segment, the revenue declines that you saw on a sequential basis, was that largely related to your largest customer there? I.e., ex that large customer, business was essentially flattish?

I would say the expectation that we had, Amit was from our top customer.

Two things there, yes the most significant decline was associated with the largest customer, and excluding that we did see strength in computing. I think kind of both of those statements are correct.

Got it. And then just on the telco side, the abrupt softness ha you guys saw, are you fairly certain there wasn't some market share shift that happened against you potentially in the quarter, and that is what impacted the numbers? I'm curious to know how much of this was--?

Absolutely certain. In conversations with customers that is not the impact. We do see other impacts of course, as transitions are made from site to site, there may additional throughput that is done, and we don't have any transitions, going on, so we wouldn't get impacts from that, but there is no share shift.

When I look at nontech segments, and especially I look at all of the wins you guys have had in the last six to eight quarters, maybe longer, is it reasonable to think that you would expect these segments to be up north of 10% in 2015?

Barring any macro environment changes, and to the extent that they aren't associated with FX impact, we do see some potential for that.

Perfect. Thank you very much.

The next question comes from the line of Todd Schwartzman of Sidoti & Company. Your line is open.

Good morning folks. Gayla, I'm curious about FX. What did the strength of the US dollar cost you in EPS in the fourth quarter?

To be clear, the FX impact is not with us. We use natural hedging, and we don't have any significant impact from that directly. It would be more of an indirect impact associated with the sell-through of our customers' products, especially as they are competing in US dollars in a global market.

Is it safe to say that impact has intensified in Q1?

I believe that is what is demonstrated and seen through the forecast that we have provided, yes.

Okay. And just wanted to get some clarification not to beat a dead horse, but with regard to the 2015 guidance or outlook if you will, on the traditional market side, you pretty clearly kind of telegraphed an expected decline full year revenue whereas in terms of the full year outlook for compute, you have got in the slide a stable, and I think in your opening remarks you said that you expect it to remain a bit soft. And I understand that there is variability, but is it that you just have better visibility that leads you to call for, or to from where you sit now expect a full year decline in telecom, but just not really clear on directionally what you are looking for from computing for the full year, up, down, sideways?

So computing I would say pretty close to sideways, based on the visibility I have. I would say computing has the highest level of ability to support transitions up or down in a most rapid pace, that we don't get extended visibility there. And so you are clear, as we have given lack of visibility which is what we had from our customers in that space. And again, because of the product life cycles, and because of the supply chain, we are able to act and react very quickly in those markets, and the visibility isn't required. In the longer life cycle products we clearly get a stronger visibility.

And I would think diversification on the telecom side with respect to the customer base gives you a little bit better clarity vis-a-vis computers, is that a fair assessment?

Yes.

Okay. Thanks. That is helpful. On industrial control, want to kind of get my arms around the timing of a pickup that you seem to be looking for throughout the year. So you are looking for a down Q1, but growth for the year. Could you maybe speak to the timing of any particular ramps that make you more bullish as the year plays out, whether it is each quarter sequentially, or just where you expect to wind up the full year? Thanks.

Generally, I expect it to be sequential, but I think it clearly gains momentum in the back half as the programs ramp. So as you might imagine as we ramp these programs, they really gain momentum after you get through, kind of the first couple of months. So I would expect that the most significant impact is in the back half of 2015.

That is really just a function of those nine consecutive quarters of that sector leading your growth in wins?

Absolutely.

Okay. And what is your free cash flow goal for 2015?

Free cash flow is going be dependent on ultimately where sales are, but kind of given where we are at now I would expect $100 million.

Got it. Thanks Don. Appreciate it.

(Operator Instructions). Our next question comes from the line of Sherri Scribner of Deutsche Bank. Your line is open.

I just wanted to dig a little bit into the compute segment again, once again. I know a lot of people have asked questions on this. But you saw softness this quarter, and guided to a flat demand for the next quarter. But I just wanted to think of how should we look into the compute segment going into the rest of 2015, given the headwinds in the industry and also into 2016?

So as I just mentioned on computing, and as is indicated in our slide deck, we see Q1 of 2015 down approximately 20%. And then for 2015 overall, we expect it to be stable outlook. So I don't have a further insight or visibility to provide than that. But that is kind of our outlook overall for the compute sector.

Okay. And then Gayla you did highlight and even in the slides I think the traditional market seeing quite a bit of variability on a seasonal basis. Trying to understand should we think of seasonality for the different segments being quite different going forward, as to what we have typically seen in prior history?

What I was trying to impart in the discussions in our prepared remarks is that the cycles are getting tighter in computing as the new products and programs are brought to the marketplace, and we would expect those to continue. But I do not expect overall for Benchmark that our revenues as the composition of revenues changes, and we have more significant growth in the nontraditional markets, I do not expect the overall revenue to see as much impact by the seasonality as we have seen in periods where computing and telco, as we show in some of our slides I believe last quarter represented three-quarters or two-thirds of our revenue. So I guess two points that we are trying to make there. Yes, we expect seasonality in computing and telco to continue, and in fact be probably even stronger. And then second, the impact to Benchmark we expect will be somewhat dampened or lessened by the fact that our overall revenue composition is more balanced, and not tilted significantly as much as it has been in the past to the computing and telco markets.

Thank you for the clarification.

And we will take our last question from the line of Jim Suva of Citigroup. Your line is open.

Great. Thank you very much. Can you help me better understand again the reason for the year-over-year EPS decline? If I look at it looks like tax rates may be (inaudible)?And then when I look at your, you mentioned ramps. When I actually look at your ramps including year-over-year for the December quarter, and year-over-year for the September quarter actually declining. So I kind of need to understand the reason for the year-over-year EPS decline?

You are talking Q1 to Q1, Jim?

Yes. The March quarter outlook versus the March quarter last year actual results, because sales don't look like it is that far off?

A big piece of it, you are correct is the tax rate, in the first quarter of 2014 we had a discrete tax benefit. I believe our tax rate in the first quarter of last year was 16%, because of the geographic mix we are now forecasting 21% to 22%. So that certainly is a big impact, and then alluding to the question earlier, there is a slight degradation in the operating margin from if you look at last year's 3.6%, and this year the midpoint of the guidance is 3.5%.

Great. Thank you so much for the clarity. It is much appreciated.

Thank you, operator and everyone for joining us today, and we will be in the office today for any follow-ups, and appreciate your time this morning.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect. Everyone have a wonderful day.

Thank you.