Flex Ltd (FLEX) 2013 Q4 法說會逐字稿

Good afternoon and welcome to the Flextronics International, fourth-quarter fiscal year 2013 earnings conference call.

Today's call is being recorded and all lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics Vice President of Investor Relations.

Sir, you may begin.

Thanks for joining Flextronics' conference call to discuss the results of our fiscal 2013 fourth quarter ended March 31, 2013.

We have published slides for today's discussion that can be found on the investor section of our website.

With me today on the call is our Chief Financial Officer, Paul Read and our Chief Executive Officer, Mike McNamara.

Today's call is being webcast live and recorded and contains forward-looking statements which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ.

Such information is subject to change, and we undertake no obligation to update you of any changes to the forward-looking statements.

For a discussion of the risks and uncertainties you can review our filings with the Securities and Exchange Commission, specifically our most recent annual and quarterly reports on form 10-K and 10-Q, and our current reports on form 8-K.

If this call references non-GAAP financial measures, you can find them on the investor relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures.

I will now turn the call over to our Chief Financial Officer, Paul Read.

Paul?

Thank you, Kevin.

Please turn to slide 3. We generated $5.3 billion in revenue for our fiscal 2013 fourth quarter ending March 31, 2013, which is at the high end of our guidance range of $5 billion to $5.3 billion.

Revenue declined $1.1 billion or 17% year-over-year.

The majority of the reduction resulting from exiting our assembly business with RIM.

Our fourth-quarter adjusted operating income was $106 million, declining 33% year-over-year.

After recognizing restructuring charges of $125 million during the quarter, our GAAP operating loss amounted to $27 million.

Adjusted net income for the fourth quarter was $86 million.

Our adjusted earnings per diluted share for the fourth quarter was $0.13, which was within our adjusted EPS guidance of $0.11 to $0.15.

Our GAAP EPS for the fourth quarter was a loss of $0.04, and reflects $0.18 impact of the restructuring activities.

Our diluted weighted average shares outstanding or WASO for the quarter was 664 million shares.

This is a reduction of 35 million shares, or 5% from the 699 million shares reported a year ago, reflecting our share repurchase activity.

Last September, our board of directors issued a new authorization permitting the repurchase of the maximum limit of 10% of our outstanding shares.

During the March quarter, we repurchased an additional 19 million shares and we have also repurchased an additional 10 million shares in the month of April.

Therefore, we have repurchased a total of 41 million shares, or 6% of our outstanding shares against our 10% authorization.

Leaving approximately 25 million shares available to repurchase, before our July 29 annual general meeting.

Please turn to slide 4. Our integrated network solutions or INS business group totaled 47% of our sales during the quarter.

Revenue declined sequentially by 10% to $2.5 billion in the quarter, which was slightly worse than our expectations of high single-digit revenue decline.

Our March quarter revenue decline reflected normal seasonality, and the weak economic backdrop affecting the networking, telecom and server and storage markets we serve.

A slight miss from our guidance can be attributed primarily to greater than expected weakness experienced by our service storage business, than originally anticipated.

Industrial and emergent industries or IEI amounted to $895 million and comprised 17% of total sales.

Revenue declined 5% on a sequential basis, which was slightly better than our expected revenue decline of mid to high single digits.

Our high reliability solutions group is comprised of our Medical, Automotive, and Defense and Aerospace businesses, and grew 9% sequentially and rose 20% year-over-year.

Its quarterly revenue totaled $776 million, which established another all-time quarterly high for this group, and also marked the 13th consecutive quarter of double digit year-over-year revenue growth for HRS.

This performance was in line with our March quarter revenue expectations of mid single-digit growth, with a major contributor to its strength coming from our Automotive business.

Our High Velocity Solutions or HVS, quarterly revenue totalled $1.2 billion and comprised 22% of our total sales.

HVS declined 33% sequentially, which is in line with our expectations for a 30% to 35% decline.

Reflecting the seasonality for the underlying markets we serve.

All sub segments of computing, consumer and mobile communications declined, with our mobile communications declining most heavily, over 40%, largely due to the finalization of our production with RIM in our December quarter.

This quarter marks the bottom or trough for this segment as we see significant growth from this quarter forward, driven by new program wins and the start of the Google Motorola partnership.

Please turn to slide 5. Despite significant revenue reduction, adjusted gross margin was 5.9%, increasing sequentially 20 basis points from last quarter, and last March quarter.

Mainly it's the savings from restructuring activities underway.

Savings were forecast to be even greater in the quarter.

However, there were some delays in the timing of the restructuring activities, due to some jurisdictional requirements and other considerations.

Adjusted operating income decreased 27% sequentially to $106 million in our March quarter.

Our adjusted operating margin declined 40 basis points to 2%.

The sequential decline in revenues drove the margin decline as our utilization rates were lower, and overhead absorption was negatively impacted.

Additionally, SG&A expenses were driven higher by increased investments in our corporate infrastructure, supporting IT, HR, and sales and account management.

Our adjusted EBITDA declined to $229 million in the fourth quarter, and totalled over approximately $1.1 billion over the last 12 months.

Our adjusted EBITDA margin decreased 4.3%, which is a direct correlation to my previous comments on operating income.

Adjusted EPS from continuing operations was $0.13, and amounted to $0.84 for our fiscal 2013.

Please turn to slide 6. Net interest and other expense amounted to approximately $8 million in the quarter.

That included a net gain on our investments of approximately $7 million, primarily as the result of the fair value adjustment related to our work day warrants.

After excluding the net impact of the $7 million gain, the interest and other expense was at the low end of the guidance range of $15 million to $20 million.

Subsequent to year-end and the expiration of a lockup period, we sold our work day investment and realized $67 million of cash proceeds.

However, the sale resulted in a $7 million loss from our quarter-end fair value position that will be recognized in the current June quarter.

Our June quarter a range of $27 million to $30 million for a quarterly net interest and other expense is appropriate, which includes the $7 million realized loss on the fair value adjustment of our work day investment.

Adjusted tax expense for the fourth quarter was $11 million, reflecting an adjusted tax rate of 11.7%, which was slightly higher than the 8% to 10% tax rate range we had estimated for the quarter.

We continue to believe that our operating effective tax rate will be in the range of 8% to 10%, absent any discrete items.

Now turning to the reconciling items between our GAAP and adjusted EPS stock-based compensation amounting to $8 million in the quarter, and intangible amortization of $8 million in the quarter.

The two combined items represent $0.02 to $0.03 impact -- sorry $0.02 impact.

This quarter we also recognized $125 million of pre-tax restructuring related charges which resulted in an $0.18 reduction of our GAAP EPS.

Lastly, we realized a $28 million tax benefit that is comprised of approximately a $6 million tax benefit from the restructuring charges, and the recognition of a $22 million benefit from a discrete item associated with our finalization of tax positions related to one of our acquisitions we closed in fiscal 2013.

Please refer to the investor section of our website for a detailed reconciliation of our GAAP to non-GAAP financial measures.

Please turn to slide 7. As discussed last quarter, we have undertaken actions to right size and reduce our manufacturing footprint, in order to position us for improved operational efficiency and profitability in the future.

During the March quarter, we recorded charges totaling $125 million, which consisted of $102 million of cash charges related to employee severance costs and $23 million of non-cash asset impairment costs.

Approximately 95% of the restructuring costs were included in cost of sales.

As we progress on our planned actions, we encountered some minor delays and elongated timing for various closing and transition activities associated with our restructuring.

We now expect to complete our restructuring in the June fiscal '14 quarter, and estimate that we will recognize remaining charges in the $25 million to $30 million range.

On completion of the restructuring activities, we believe the savings through reduced employee expenses and lower operating costs will yield annualized savings of over $150 million.

We estimate that we will be realizing a full quarterly run rate of these savings in our third quarter of fiscal 2014.

Please turn to slide 8. We continue to manage our working capital very well.

Again this quarter we drove further inventory reductions as our inventory balance declined by almost $200 million or 7%.

However, as our quarterly revenue climbed by 14%, we experienced erosion in our inventory turns down to 7.1 turns.

This equates to an increase in our inventory days by 4 days to 52 days.

A cash conversion cycle crept up 2 days sequentially to 26 days and remains within the 25 to 30 day range we target to manage our business.

The entire two day increase came as the result of expansion of our DSO by four days coupled with the four day increase in our accounts -- in our inventory days, offset by an expansion of six days for our accounts payable.

We continue to operate our networking capital as a percentage of sales, within in the targeted range of 6% to 8%, as seen from the networking capital chart on the top right of this slide.

A couple days increase in our cash conversion cycle resulted in the increase of 70 basis points in our networking capital as a percentage of sales.

ROIC for the quarter declined to 19%, strictly due to the lower earnings but still remains very healthy at these lower earnings levels.

Please turn to slide 9. We generated $109 million in cash flow from operations this quarter, which also marked our 9th consecutive quarter of positive operating cash flow generation, and boosted our operating cash flow for the fiscal year to over $1.1 billion.

Our net capital expenditures were minus $107 million for the March quarter, resulting in nominal free cash flow generation for the quarter.

We ended fiscal 2013 with free cash flow generation of $680 million, which is well above the targeted range of $500 million for this fiscal year.

During the quarter, we paid $140 million for the repurchase of our ordinary shares for fiscal 2013.

We spent approximately $322 million repurchasing 8% of our shares.

Please turn to slide 10.

During the quarter, we successfully refinanced $1 billion of our term loan due in 2014, through the issuance of two $500 million tranches of senior notes due in 2020 and 2023.

We closed out fiscal year with almost $17 million more cash after supporting our strategic acquisitions costing $184 million, reducing our total debt by $121 million, and repurchasing $322 million of our shares.

Our debt to EBITDA level is at a very healthy 1.9 times.

Our strong free cash flow generation, coupled with the strength and Flexibility of our balance sheet and liquidity, positions us very well to support the business growth ahead of us this year.

That concludes my remarks.

I will now pass the call over to our CEO, Mike McNamara.

Thanks, Paul.

I'll start providing our perspective on the general business environment, and how we are responding.

We continue to operate in a weak macro environment, which is broadly displayed across many markets we serve.

Globally, demand trends remain challenging, and the hardware sales of many of our customers this earnings season have been disappointing.

While most customers point to a better second half, we have not yet seen this in our orders except for consumer customers.

However, we are encouraged to see some signs of stability emerging in our business, as evidenced by three of our four business groups performing inline to slightly better than our forecast entering the March quarter.

In addition, the past two months our monthly forecast roll ups have remained very stable as compared to the previous three quarters, where demand reductions were continuous.

We are encouraged by this stabilization of demand.

Nevertheless, to combat the general overall flattish business environment, we are intent on layering on revenues from new markets, new customers, and new programs.

Throughout this year we have focused on transformational outsourcing solutions for our customers and it has been paying off.

We believe we are uniquely positioned to provide our customers with solutions that improve their cost structures, increase their supply chain velocity, and reduce supply chain risks, through the breadth and depth of our global service offering.

This is particularly important as the world's demand trend towards being built more regionally and will be distributed across more geographies.

Fiscal 2013 was an exceptional year in terms of bookings because we secured new business both broadly distributed across our portfolio businesses.

In addition, we also booked multi-billion dollars of Google Motorola business.

These bookings are starting to manifest themselves in revenues for us, as the underlying programs begin to ramp in fiscal 2014, as we had anticipated, and we expect the associated revenue to be the real driver behind our growth this coming year.

There continues to be a strong pipeline of outsourcing opportunities, and we are confident in our ability to convert these into strong bookings just as we have done throughout fiscal 2013.

We closed the partnership with Google's Motorola Mobility on April 16.

This multi-billion dollar relationship will aid this customer in streamlining their supply chain operations, and position us as a key supply chain partner for current and future internally designed hardware products within their ecosystem.

This partnership also strengthens our manufacturing footprint and capabilities in both China and Brazil.

We spend less than $75 million for the related fixed assets and equipment required to run it.

Our total consideration for the transaction is expected to be less than $200 million, including the inventory required to support the work in process that we took over.

We believe this partnership is structured to be EPS and operating income accretive for fiscal 2014.

Throughout fiscal 2013, we were focused on transforming our business.

The revenue and profitability headwinds from disengaging from RIM and exiting ODMPC are now permanently behind us.

As discussed last quarter, we have been operating in a challenging transitional phase.

We were experiencing significant revenue deterioration, and the associated worsening impacts on our margin, while simultaneously being required to invest differently in our business to support the healthy new customers and program wins, which are more complicated and diverse than typical.

Additionally, in light of the challenging economic backdrop we have invested in our technology road maps, manufacturing capabilities, as well as our corporate infrastructure for long term growth.

This quarter we took important steps to strengthen our business, as we emerged from the transition period.

We are taking advantage of a trough revenue quarter to direct targeted restructuring activities aimed at improving our operations, and achieving margin expansion.

We are firmly underway in these actions, and we expect to generate greater than $150 million in annual savings upon completion.

These actions provide for a quick and meaningful margin expansion.

I want to provide you with a bit more insight into the breadth and depth of these actions.

Restructure activities require considerable coordination with our employees, [worker counsels], local governments and customers.

We're in the process of closing seven factories, we have aggressive cost reduction efforts going on at 40 other sites, spanning multiple countries.

Including these actions is the closing of the Multek factories in Germany and Brazil.

We are consolidating Multek's footprint and rationalizing its operations in the similar fashion of how we attacked our Power business this past year, which is now profitable and expanding into new Power products.

We are confident the steps we are taking will drive operating efficiencies, and result in an optimization of our system, which will lower the revenue level required to achieve better margins.

Before we go into guidance I want to share with you several highlights as we exit fiscal 2013.

Please turn to slide 11.

We closed on two strategic acquisitions of Stellar Microelectronics and Saturn Electronics.

Both of these acquisitions expanded our available market, enhanced our capabilities in the areas of cable, solenoid and microelectronics, broadened important new customers and are making a positive impact on our higher margin HRS business.

We will continue to focus our M&A dollars on capabilities for high margin, longer product life cycle products.

We restructured our Power business by consolidating operations to achieve profitability, and continued to realize a strong rate of growth.

We are employing the same consolidation play-book to meaningfully restructure Multek, through the closure of two high cost sites in Germany and Brazil.

We generated over $1.1 billion in cash flow from operations and $680 million in free cash flow, spending $322 million to repurchase another 8% of our outstanding shares.

Our capital structure is in excellent shape as we reduced debt by $121 million, and also improved our debt structure with new bonds that extend the maturities of our debt to 2023.

So while fiscal 2013 was a challenging year, much was accomplished and we emerged with an improved supply chain solution and offering highly valuable operating system, a stronger balance sheet and capital structure and meaningful reduction to our shares outstanding.

And we are strategically positioned to grow business despite the macro environment.

Now turning to guidance on slide 12.

Based on the current visibility, we continue to believe that this past March quarter will mark our revenue and margin trough.

For the first quarter of fiscal 2014, revenue is expected to be in the range of $5.3 billion to $5.6 billion.

This reflects an increase of approximately 3% at the midpoint.

At the midpoint of our guidance range we are forecasting INS to be flat, showing some stabilization after a 10% decline in March.

HRS is also expected to be flat sequentially after two straight quarters of strong sequential growth.

We'll see modest growth in the June quarter in IEI as new program ramps drive low single-digit growth.

HVS is also expected to rise in low double digits, as we get partial quarter contribution from Google Motorola, and we experience some muted seasonality.

Our adjusted EPS guidance is $0.12 to $0.16 per share and is based on an estimated weighted average shares outstanding of $650 million and a tax rate of 8% to 10%.

Our adjusted EPS guidance excludes restructuring expense and includes approximately $7 million loss we realized on the sale of our Workday investment.

Quarterly GAAP earnings per share are expected to be lower than the adjusted EPS that I just provided, by approximately $0.03 for intangible amortization expense and stock based compensation expense.

Another $0.04 to $0.05 for restructuring expense.

With that, I would like to open the call for Q&A.

Please limit yourself to one question and one follow-up to allow time for as many questions as possible.

So, operator if you could please begin.

(Operator Instructions)

Amitabh Passi, UBS.

My question for you was, I was a little surprised or confused by the guidance, given the fact that you closed MMI, you probably have over two months of MMI in your numbers.

I'm just trying to understand the low double-digit guidance for HVS.

It almost seems to imply MMI may be contributing to a $200 million in the quarter.

So I wanted to see if you can clarify what's going on with MMI?

And then I had a follow-up.

Yes, I think, first of all, MMI is a pretty significant transitional period this quarter, as it seeks to begin rolling out its new products for the second half, and wind down some of the products in the first half.

So it, itself, is in a pretty significant transitional period.

So I don't want to comment on what those revenues are, except what we're trying to do is until we see real evidence of moving our -- that we see any of the macro we are going to be conservative on the rest of the businesses.

We continue to see a very muted economy.

Like I mentioned, we saw that the -- our forecast started coming in flat the last couple quarters, which we considered to be good.

But until we see any kind of meaningful rebound of any kind of seasonality, which tends to typically start happening in the June quarter, unless we actually see that in our order base, we are going to be a little bit conservative on the rest of it.

Okay, understood.

And then just as my follow-up, Paul, perhaps for you, $150 million of analyzed cost savings.

If I assume top line is $23 billion to $24 billion, seems like the implied benefit to operating margin will be 60 basis points to 70 basis points.

But in the back half of this year I think consumer will be significantly stronger.

I am just trying to get a sense, how do we look at the margin dilutive impact of HVS probably being a greater portion of your mix versus the 60 to 70 bips of benefit from cost savings?

Should we expect operating margin to maybe approach the 2.5% range in the back half?

Do you think it can do better, lower?

I think you're right.

With $150 million plus of savings, we're going to be getting 60 basis points to 70 basis points of margin accretion off the base of where we're at today.

And then the other factor going is the increased revenues for the rest of the year will also give greater absorption.

And that's together for us will take us over 3% by the end of the year.

And so that's how I would look at it.

It's probably going to step change through the quarters for that.

But both revenue and restructuring will contribute towards that.

Okay.

Thanks.

I think just one thing I would add, too, on that, is I think there is a little bit of uncertainty with us in terms of how the revenue will flow through the rest of the year in the whole Google Motorola deal.

Like I said, there is going to be a lot of new products coming out and I think you guys probably will see -- will start seeing announcements soon enough and have your own opinion on it.

But there is somewhat of a degree of uncertainty as to exactly what that revenue is going to be, and how much it's going to impact our overall margins.

But the one thing that we were very confident in is the restructuring that we are doing has a very strong ROI, and we will realize that.

And then we'll have to see how much of -- what percent of the business is going to end up being HVS.

Okay.

Thanks, Mike.

Amit Daryanani, RBC Capital Markets.

Two questions from me.

One, I think, Mike, on the last call you talked about December revenues been 30% to 40% higher versus the March run rate that you guided for.

Could you maybe talk about if you still hold that view?

And maybe then you could also just talk about how much of the growth from March or December is going to be driven by seasonality versus maybe new product ramps, not Google specifically but the entire bucket of it?

Yes.

So do I still hold the view of 30% to 40% growth for December?

The answer is, yes, I do.

Second of all, how much is going to be distributed across Google versus new program ramps versus seasonality, and I would have to say -- I think we will see a little bit of everything.

One of the things that I'm not so sure about that I mentioned in my prepared remarks, is that some of the base business we don't see a lot of seasonal uptick on.

So, I would call the core base as being somewhat weak in terms of seasonality.

I would almost call it muted.

When I think about that I think about a lot of the industrial business or a lot of the telecom or data com or server storage.

Until we see evidence of that, we're going to assume that's going to be reasonably flat.

We have heard a lot of commentary from some of our customers in those spaces that have been positive on the second half.

But until we see that we're going to assume it's going to be pretty flat.

We do have other programs that will begin to kick in at the end of the year.

I would expect those to start hitting in the December quarter and actually carry on into the March quarter.

And then of course we have the big Google thing, which hard to say exactly what that's going to be.

But we just, one of the comments that we made last year is we had a lot of bookings that would begin to hit through -- over the course of FY '14 which are not Google Motorola bookings.

So we're kind of anticipating all our growth at this time is going to come from new bookings, Google Motorola or it's going to come from some seasonality, because we obviously are going to get some seasonality.

You have some products like Xbox that has a refresh that's going to kick up some incremental seasonality for us.

So I would say it's a bundle of those three things.

But we are anticipating in that number, that the core business is going to be pretty -- have pretty muted seasonality.

Fair enough.

That's really helpful.

And then maybe if you just touch on your component business, and I know you guys touched on this a little bit but was Multek still a 25, 30 basis point drag on your overall operating margins in the March quarter, and do you expect that to remain that kind of a drag in June as well?

I am just trying to get a sense of when you can get to a breakeven level with Multek.

Yes.

I'll take that, Amit.

Multek performed in line with the December quarter that we had, where it had lost roughly kind of $15 million, $18 million.

And the restructuring that's going to kick in here with the closure of the two factories, we should be at profitability by the end of the year and, we think we have all the plans in place.

Now, of course, with that we're anticipating some revenue increases with Multek, the back-end of the year with some new programs that we have been booking with the new technologies that we have invested in and, we are starting to see the orders flow-through for that.

So it's a combination of restructuring and some revenues for the existing or continuing Multek business.

But I guess Paul, breakeven would be more December quarter from what you guys see right now, versus September, I assume?

Yes, for sure December.

It should be slightly profitable in the December quarter.

In the September quarter, we would be approaching that as well.

Perfect.

Thanks a lot, guys.

We'll be done with restructuring charges in the June quarter that will be hitting the Multek business.

So, if we get some of that revenue bookings that we're talking about, we'll hope to be above breakeven by September.

Shawn Harrison, Longbow Research.

Just more clarification first on the restructuring.

Were there any savings in the numbers for the March quarter?

And I guess what is the exact dollar amount you expect for the savings in the June quarter?

Yes, for the March quarter we had roughly $10 million of savings on the quarter.

So $40 million annualized.

And then the June quarter is roughly the same.

Another $10 million.

So $20 million total for June annualized at $80 million.

So roughly 50% of the way through the -- in savings coming through June.

There is a follow-up, Paul.

I guess with a lot of the program ramps expected for the year, could you maybe walk us through both how you expect working capital to move, and then also just the capital spending forecast?

Yes, we'll address more of this in our Investor Day, for the whole year.

But really the business model is not going to change that much.

Our capital spending, like this year is very much equivalent to our depreciation.

So kind of $420 million, $430 million.

We have a working capital charge that's roughly 6% to 8%.

And we'll see running the business in that range, as well, for the growth that we have.

And so, those two together should still generate substantial free cash flow for the year.

Probably not as high as what we have just come off with $680 million.

That was really a bumper year for us.

But, $500 million plus, and I would expect the CapEx to be more front loaded, as it normally is in the June or September quarters.

Thanks so much.

Sherri Scribner, Deutsche Bank.

Paul, I think you made the comment or maybe Mike made the comment about the Power business now being profitable.

Can you just remind me, I think in terms of the components business you only have the Power and Multek now.

The rest of the businesses are at least small or you've sold them off.

Can you give us a sense of how profitable the Power business is, and moving forward what would be your expectation for profitability longer term for the Multek business?

Thanks.

Yes.

Certainly.

You know, the Power business really turned around in the December quarter of last year.

It really ran very well and made the kind of target operating margins roughly around 5%.

The revenues were lower in March.

So the absorption was less.

But nevertheless, it was still profitable.

Kind of low single-digits profitable in the March quarter.

Going forward, we expect to run that business in that 5% operating margin range.

The revenues are growing.

It's on some great new programs, diversifying the business into many other different products.

We are very pleased with this business, and the way it's operating for us, very EPS accretive and margin accretive kind of business.

The Multek business, like I just talked about, has gone through, obviously, significant -- or is going through significant restructuring.

We will have the footprint really down to two locations.

One here in the US and one in Asia.

And, we have some good bookings that are coming through for the new technologies that we had invested in over the last 18 months, that we're seeing to come through for the second half of this year.

So with the restructuring and the bookings, we'll see Multek be profitable here in the second half of the year.

The target range is going to be within whatever, is running in the industry.

It's a very competitive business.

But to crawl out of losing, $18 million a quarter to breakeven, to profitability by the end of the year of, low single-digit kind of numbers, I think we will be pretty pleased with the turnaround this year.

Okay.

Great.

Thank you.

Brian Alexander, Raymond James.

I know you said MMI is in a transition period for the June quarter and you didn't want to get specific on revenue.

But beyond the June quarter if we look two to four quarters out, what are we thinking in terms of quarterly revenue, as well as what is the margin profile for that business?

And then also, what is your confidence that the relationship could expand beyond PCBA into higher margin services and component offerings?

So, I think I'll just take the second question first.

We actually believe that this is a partnership that we can grow into a lot of different product categories over time.

So we view it as a relationship with not only Motorola, but also with Google.

So that's how we think about the business.

It's one of the reasons we got into the business.

And it is something that we're hopeful for in the future and I think our relationship with them right now is actually pretty strong.

As far as -- so I'd say of kind of an enthusiastic yes on that one.

The second piece, what do we think it's going to look like over time, we think the next 12 months gives us $2 billion plus of revenue.

How exactly it's structures over the course of a quarter, I think normally you'll find that new product launches start pretty aggressively in the September quarter and the December quarter, and then it's hard to say in March.

So I think it's fair to say that we would see a pretty significant ramp, but it's highly dependent on their success in the marketplace, which is still a little bit of an unknown for us.

But we're pretty bullish.

We are starting to see some of those products today.

We are excited about what the future might be this quarter for sure.

A trough quarter for them and for us.

But I would expect maybe to think about it, you have kind of a trough quarter, then over the next three quarters we'd like to see all four quarters run well over $2 billion.

And what would be the right way to think about margins associated with that on kind of an annualized basis?

Yes.

In margins, I think we will have a little bit of a transition this quarter and next quarter, and then I think we would expect to run those as our HVS target, which is roughly 2% -- 2% margins but, and then pretty flat.

It would stay there.

But very high work in process throughput.

So, Paul, just a last follow-up, it looks like you are expecting operating margins to be around 2.3% to 2.4% in the June quarter.

And beyond that I think you would get another 30 basis points of savings given that you are halfway through that program.

So kind of a 2.7% operating margin post-restructuring.

If that's the right math, maybe if you could confirm that?

And then if it is, what gets you to 3% beyond that, given that a lot of the incremental revenue is coming from MMI, which we just established was dilutive to the overall margins?

I think you have to build in the revenue increase in the absorption that's going to bring a couple of things.

It's not just Google Motorola.

We have other programs that we booked last year that are starting to layer in this year.

And that will bring accretion for us.

Then also I talked about Multek getting healthy.

That's a swing as well by the September quarter, coming off on $18 million loss.

We will have some accretion from that as well.

So I think when you take the restructuring, the revenue increase, Multek health, you will get up really getting up close to that 3% target that we have for the back end of the year.

Okay.

All right.

Thank you very much.

Jim Suva, CitiGroup.

When we start thinking about folding in Motorola, which now is closed, can you help us out a little bit about the SG&A?

I assume a lot of that goes away, or maybe I'm wrong on that, and kind of a gross margin profile.

Could we look at your SG&A for this quarter?

Just trying to figure out going forward what your SG&A should look like.

And it sounds like, if I'm correct, you're not giving Motorola revenues for us to compare apples-to-apples?

Hi, Jim, it's Paul.

So, SG&A will probably run around $215 million per quarter, and we see that fairly flat throughout the rest of the year as we have taken on the Motorola two facilities that we have.

We now have a full quarter of Saturn Electronics SG&A.

So all bundled in, we're roughly running around $215 million for the -- as we go forward.

Gross margin really does pick up because, 90% of -- 95% of the restructuring is all, a cost of sales related.

So that will really help gross margins go up.

It's fair to say that, obviously, when there is a big program $2 billion plus of Google Motorola with high velocity margins coming into play this year.

But we really think that it's having a dilutive effect of maybe of 10 to 20 basis points on overall Company margins.

Not any more than that.

And then as a quick follow-up then, again it sounds like you are not, if I'm correct, giving Motorola revenues?

And I'm wondering if at some point in the future you will, so we can see Flextronics' organic growth rate.

But is the restructuring going forward including that you see no need for Motorola restructuring, or would that be incremental?

Or have you kind of tested the business now that it has been closed and just don't see the need for additional restructuring since you said you should be done in June?

Thanks.

Yes, the restructuring we're talking about is purely the core business, prior to the Google Motorola business.

There is restructuring going on in the Motorola business, but that is being done in partnership with Google Motorola, and we have this first quarter to work that out with them, and right size that business for us.

So, there are two independent activities.

The restructuring we talk about is the core going forward.

So, yes, that's -- and so we would have a right size factory to run, two factories to run thereafter.

Okay.

Thank you.

Osten Bernardez, Cross Research.

I guess to start, would you be able to comment on within Flex, Power and Multek whether there is any significant design wins during the quarter?

I believe you commented on some Multek design wins but I believe those were prior wins that should benefit you later on in the year?

No.

Both -- so I'll just take them one at a time.

Power design wins I'd call really pretty exceptional.

And across a broad range of product categories, both additional charger business, and all the way up to things like 3,000 watt Power splice.

So I'd call that a broad range of design wins across networking storage like I said, cell phones, tablets, whatever.

So I'd call that significant and a lot and we would expect that business to grow pretty substantially this year.

In Multek, we almost have the same -- we also have a high level of bookings, and enough to consume a significant amount of our underutilized capacity, and I would call them wins.

But, I would like to see those things actually run through the factory loaded up before we call it a success at this point, but I would say the amount of wins that we've had on the Multek side has been quite high.

Okay.

Thank you for that.

And then to follow up on Multek and then another quick question, do you see a path for Multek to eventually reach a run rate of at least over the $800 million that it has done in the past, maybe closer to $900 million to $1 billion sometime within the next year or two?

And then a separate question would be if you could comment on the progress of the integration of Saturn and whether there has been any sort of -- I know it's early, but whether there has been any sales leverage with your preexisting Automotive business?

Thank you.

Right.

Yes.

So as far as Multek goes, we would expect to -- despite what we consider to be a reasonably flat economy, we are actually quite bullish on the revenue prospects of Multek just because of all the bookings we have had.

So, could it go back up there?

Maybe.

But let's just take one step at a time here and park a few wins under our belts before we call victory here.

And so I would say, yes, it has potential.

Yes, we are working on that.

Yes, we're expanding, we should expand the revenue this year, and we're certainly hopeful.

But, like I said, one step at a time.

That has been a disappointing result for us for several years now, and we're being extremely aggressive about how we approach the problem and we have been extremely fortunate in terms of being able to book some of the new business.

But let's give that a chance.

But, yes, we expect this to be a growing business making normal profitability.

As far as the Saturn, we've already actually had some good bookings with Saturn as well.

So we actually had a certain business case that we thought would come in both in terms of revenue and operating profit.

We've now had the asset for maybe five months, and we are at our target or maybe even slightly ahead.

So we're pleased with how it's performing.

And we certainly expect it to be able to add synergies.

I am not sure it's led to other bookings yet.

I mean, they've had bookings, but it hasn't necessarily added to other EMS bookings yet, and that's just because it takes time in that automotive business to really be able to get those wins in.

But the amount that we've actually added a significant amount of new relationships as a result of Saturn, and that's something that we expect to leverage pretty significantly.

So we're very pleased with the acquisition.

We think it will hit all our targets and, but this one will take time just because of the product category that it's in.

Thank you.

Sean Hannan, Needham & Company.

Actually most of my questions have been addressed.

Mike, if I could just have you follow up on that last comment or set of comments you made on Saturn.

The more that, that folds into the mix, it sounds like that business is very much on track for organic growth based on what you're looking at this fiscal year.

Is that correct?

Correct.

Okay.

And then if we were to step back and we were to actually strip out the recent acquisitions or -- well, if we were to strip out, say, Stellar, Saturn, if we were to pull the Motorola piece out of the equation, what is the outlook right now for the legacy Flex business?

And I don't want to have this seem like an unfair question.

I'm assuming it's obviously going to be down in some manner, but I just wanted to get some context around that.

Thanks.

And you're talking overall Flex, not just automotive Flex, correct?

Correct.

Yes.

The way we look at the legacy business is we're coming in with our revenue.

As you know, it's roughly $23 billion and some, $23.6 billion.

Now, in that $23.6 billion we have probably $800 million or $900 million of RIM.

When we think what is our core base business, we go and we take the $800 million or $900 million out of that and then go rebuild from there.

So, the question is what is -- I think your question is, is what is the organic revenue growth associated with that base.

And I think, it's probably -- in terms of the way we look at it today, we've talked about the base business being flat.

We're not going to adjust that up for any kind of seasonality in a lot of the different core businesses.

So we view it as quite stable.

Maybe it goes up a few percent.

But it's -- I'd say it's a low piece of business, not counting all the incremental add-on's.

So I'd call it zero to 5%.

Okay.

All right.

Thank you very much.

Wamsi Mohan, Bank of America Merrill Lynch.

Mike, just curious on the comment on the back half on consumer ramps but not having seen other areas pick up.

Are you referring to the ramps that are expected from the Google Motorola business, or were you referring to something else?

No, we see the back half ramps on products like, like an Xbox, like a -- obviously, Motorola is a heavily weighted back half consumer product pickup as a result of the timing.

What I was saying is what we don't see and what we're not contemplating at this time -- what we don't see is networking server storage, computing, the industrial business, any of the telecom, all of these categories which I'd call a big core part of our business.

We've seen a lot of commentary from other EMS companies, we've seen a lot of commentary from the OEMs and the subs about a second half recovery.

And all we're saying is we haven't seen that in our order stream yet.

Until that shows up in our order stream when we're doing our order forecast we will be conservative, call it stable at this point.

We are hopeful it matures into a seasonal uptick for that group of customers.

But so far, we don't see it in our order book.

Okay.

Thanks for the clarification.

And I had a follow-up for Paul.

Paul, 37% of restructuring charges were impairment.

Can you address what exactly was impaired when these assets were acquired and what end markets the customers these assets were serving?

Thanks.

Yes, mostly machine and equipment assets, that with product changes, whether that was in the Multek business or in some of our other more component mechanical businesses.

These are the kinds of things that we have been impairing.

And I think 25% of the overall charge is actually Multek.

So it's a significant portion of that.

Thank you.

Kim, we have time for one more question.

Amitabh Passi, UBS.

I had a quick follow-up.

What is the implied share count for the June quarter embedded in your guidance?

And then I wanted to confirm the $7 million loss from Workday.

Is that included in your non-GAAP or adjusted EPS guidance?

Yes.

In my script I said that you should assume roughly 650 million share count for the June quarter and the Workday $7 million is included in the non-GAAP guidance that we gave.

Okay.

Thank you.

Sorry I missed that.

Appreciate it.

Okay.

Thank you everybody for joining us on our call today.

We'd like to remind everyone that our Investor and Analyst Day will take May 30 in New York City.

Details and registration are available in the investor section of our website and we look forward to a good turnout and seeing many of you in person.

This concludes our call.

Thank you.

This concludes today's conference.

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