Flex Ltd (FLEX) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the Flextronics International second-quarter fiscal year 2014 earnings conference call.

Today's call is being recorded.

(Operator Instructions)

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.

Thank you Gabrielle, and welcome to Flextronics' conference call to discuss the results of our fiscal 2014 second quarter ended September 27, 2013.

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

With me today on our call is our Chief Executive Officer, Mike McNamara, and our Chief Financial Officer, Chris Collier.

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 these forward-looking statements.

For a discussion of the risks and uncertainties, see our most recent filings with the Securities and Exchange Commission, including our current annual and quarterly reports.

If this call references non-GAAP financial measures, these measures are located on the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures.

I will now pass the call to our Chief Financial Officer, Chris Collier.

Chris?

Thank you, Kevin.

And thank you everyone who is joining us today.

We appreciate your interest.

Let us start by turning to Slide 3 for our second-quarter income statement highlights.

In our second quarter, we generated $6.4 billion in revenue, which was at the high end of our guidance range.

Our revenue increased over $600 million, or 11% sequentially, driven by growth in our three largest business groups.

Looking at our revenue on a year-over-year basis, it was up 4%, or $235 million, which was driven by double-digit growth in both our HRS and HVS business groups, helping to offset single-digit declines in our other business groups.

We continued to expand our adjusted operating income, increasing it $22 million, or 16% sequentially, to $159 million, which was within our guidance range of $150 million to $175 million.

After accounting for $9 million in stock-based compensation, our GAAP operating income totaled $150 million.

Our adjusted net income for the second quarter was $134 million, which was up $22 million, or 20% sequentially.

This adjusted net income translated into adjusted EPS of $0.22 for the quarter, which is a sequential increase of 22%, and was at the high end of our guidance range.

Our EPS this quarter reflects $0.01 benefit from a reduction in our interest and other expenses versus our guided range for this line item.

Lastly, GAAP EPS for the second quarter was $0.19, which more than doubled on a sequential basis, as we completed our restructuring programs last quarter and no longer have the associated expenses.

All right.

Now turning to Slide 4, you find our trended quarterly income statement highlights.

Our adjusted gross profit dollars rose $22 million, or 6% sequentially, to $370 million.

There are several key elements behind our gross profit improvement that I would like to highlight.

First, we saw improved utilization in overhead absorption, driven by the revenue growth across three of our four segments.

Second, we realized continued operational improvement in Multek, a printed circuit board business.

And then to a lesser extent, we realized incremental benefits from our restructuring efforts that had commenced in the prior year.

However our gross profit expansion was offset by operational inefficiencies and greater product start-up costs associated with several of our complex programs that we are ramping.

So while we expanded our gross profit dollars sequentially, our adjusted gross margin actually fell 20 basis points to 5.8%.

This decrease in gross margin was also due to a change in the mix of our revenues, resulting in a higher concentration of sales from our high velocity solutions business.

We remain focused on expanding our operating income.

This quarter our adjusted operating income increased by $22 million, or 16% sequentially, to $159 million.

This increase resulted from our improved gross profits and our ability to leverage our SG&A expense, which remained relatively flat sequentially at $212 million.

Looking forward, we now expect a small increase in SG&A from our previous target of $215 million, primarily due to incremental costs from new operating sites, our acquisition of RIWISA, and further investments in certain R&D and innovation initiatives.

As a result, we are modeling quarterly SG&A expense roughly in the range of $220 million next quarter.

This quarter, our operating earnings expansion resulted in our adjusted operating margin rising 10 basis points to 2.5%.

And we remain focused on driving further operating profit dollar growth.

Okay.

Now let's turn to Slide 5 where I will give you color around other income statement highlights.

Net interest and other expense amounted to roughly $14 million in the quarter, which was better than our anticipated range of $20 million to $25 million.

The favorable performance was due to a number of factors, most notably our realization of stronger than expected foreign currency gains.

From a financial modeling perspective, we continue to estimate quarterly net interest and other expense to be in the range of $20 million.

The Company's effective income tax rate was 7.4% for the quarter.

This was slightly below our expected range of 8% to 10%, merely due to geographic mix of our income.

We continue to expect that our operating effective tax rate will be in the 8% to 10% range, absent any discrete one-time items.

Now, when reconciling between our quarterly GAAP and adjusted EPS, we see a negative impact of $0.03 on our adjusted EPS relating to our recognition of $9 million in stock-based compensation and approximately $8 million in intangible amortization.

Our weighted average shares outstanding for the quarter were 624 million shares, which was in line with our guided range and down from 640 million in the prior quarter.

This reduction reflects the impacts from our share repurchase activity.

During the quarter we repurchased 12.2 million shares at an average cost of $8.47.

Regarding our share repurchase program, the Singaporean government recently announced that the annual share repurchasing limitation was extended from a cap of 10% of total outstanding shares to 20%.

So, while this does not imply we'll immediately act on this increase, it is important to understand that it does provide us with greater flexibility around our long-term capital allocation decisions.

Please turn to Slide 6 to discuss working capital management.

We continue to manage our working capital within our targeted range of 6% to 8% of our net sales, as our September quarter came in at 6.7%.

We are confident in our ability to continue to manage working capital within our targeted range.

Now during the quarter, our inventory had increased $724 million, or 22%.

This increase supported multiple new programs ramping over the course of the September quarter and into our December quarter, which resulted in greater p re-positioning of raw materials to support this growth.

Our cash conversion cycle this quarter was 24 days, which improved 1 day sequentially and improved 3 days from the prior year.

We continue to see ourselves operating our cash conversion cycle within a 20 to 25 day range.

If you turn now to Slide 7, I will talk about our cash flows.

We generated cash from operations of $155 million this quarter, and year to date we have now generated $353 million.

On a trailing 12-month basis, we have generated roughly $950 million of operating cash flow.

We have used our operating cash flow to fund our capital expenditures of $170 million for the quarter, which was generally in line with our expectations.

Our CapEx continues to be focused on investing in production equipment to support our revenue growth, increasing automation, and further investing in our innovation strategies.

Reducing our operating cash flow by our net capital expenditures results in negative free cash flow of $15 million for the quarter, which is roughly in line with our planned usage level.

For fiscal 2014, our free cash flow estimate remains unchanged at approximately $400 million.

Additionally, during the quarter we paid $109 million for the repurchase of our ordinary shares.

And over the past 12 months, we have spent approximately $513 million repurchasing 11% of our shares.

Now turning to Slide 8, we are providing some insight into our current capital structure.

As you can see, we continue to operate with a strong capital structure.

Our total liquidity remains healthy at just over $2.6 billion, with our cash totaling $1.1 billion.

Our total debt remains slightly above $2 billion, and our debt-to-EBITDA ratio remained consistent with the prior quarter at 2 times.

I'd like to highlight that during the quarter, we successfully closed our refinancing of $600 million of various term loans with a new term loan that matures in 2018.

As a result of this refinancing, we have reduced our weighted average interest rate by 20 basis points since the start of our fiscal year.

And our debt maturity profile has been optimized, with no near-term maturities and a balanced maturity schedule.

All right.

With that, I've concluded the recap of our second quarter performance.

This was a solid quarter from a financial perspective, as we hit many of our financial objectives.

We grew our revenues, which came in at the high end of guidance.

We continued to expand our operating profit, growing at 16% sequentially.

We drove continued EPS accretion, which increased 22% sequentially.

And we used our cash flows and cash on hand to invest further in the business, as well as repurchasing an additional 2%, or 12 million shares, of our stock.

Thanks, Chris.

We are pleased that we continue to expand our revenue, operating profit, operating profit percent, and earnings per share.

We are expecting to realize a full targeted level of cost savings from our prior restructuring efforts in our December quarter.

Likewise, we are hitting an important inflection point in our Multek business, which we expect to be profitable in our December quarter, as a result of the structural changes we undertook over the past few quarters.

We are improving our cost structure, while at the same time we continue to invest in our business to strengthen our position as a supply chain solutions company.

We've been talking about our expectation for a muted seasonality for the past few quarters.

Despite more positive data point a quarter ago, we remain cautious in our outlook and our views.

It turns out that our cautiousness was not only prudent, but that many of our customer suppliers underestimated just how muted seasonality would ultimately be, as evidenced by the earnings reported so far this quarter.

We are seeing impacts ranging from more gradual ramps for new programs to some softness in end markets.

Despite these challenges, we continue to grow revenue and operating profit sequentially for the third straight quarter.

Over the last quarter, we saw healthy broad-based growth across three of our four business groups, as expected.

It is important to note that the vast majority of the growth across all three of these business groups was the result of ramping multiple new programs, many of which were complex in nature.

We're experiencing a number of start-up costs as we ramp these programs to targeted profitability.

In line with the past several years, we will continue to focus our M&A activities on markets and technologies that realize longer product life cycles, less volatility, and higher margins.

Our recent RIWISA acquisition, which is closing this quarter, is a great example of this, as it increases our exposure to more predictable, sustainable, higher-margin businesses.

RIWISA provides us with a state-of-the-art, highly automated, precision plastic solution for the medical industry, and adds some new key medical customers.

Please turn to Slide 9 where we'll review our revenue performance.

Our integrated network solutions, or INS business group, rose 2% sequentially, in line with our expectation for modest low single digit growth.

Revenue rounded up to the $2.6 billion for the quarter, $56 million above prior quarter levels.

Networking grew sequentially in the low double-digit, propelled by market share gains and increased MPI activity.

Service storage rose [modely] on a sequential basis as well.

Telecom offset most of this growth with single-digit decline.

For next quarter, we expect INS revenue to decline single digits.

Industrial and emerging industries, or IEI, revenue totaled $940 million, or 15% of total sales.

Revenue rose 4% on a sequential basis, which is also in line with our expectations for low single-digit growth as new programs with new customers began to ramp.

Next quarter we expect a high single-digit decline due to weakness in semiconductor capital equipment and other customers that are exhibiting more muted seasonality than previous forecast.

Our high reliability solutions group, or HRS, is comprised of our medical, automotive, defense, and aerospace business and declined 3% sequentially, but grew 19% year-over-year.

Much of this was in medical, which was off 4%, putting HRS below our expectations of flat sequential sales.

Next quarter further weakness around medical, predominantly due to the weaker diabetes market, is weighing on the HRS revenue outlook, which is expected to be down low single digits sequentially.

Our high velocity solutions, or HVS, revenue rose 36% sequentially, or $550 million to $2.1 billion.

This performance was above our expeditions for 25% to 30% sequential growth, due to multiple ramping new programs.

For next quarter, HVS is forecasted to grow 15% to 20% sequentially.

Continued growth in our Motorola partnership is expected to account for roughly two-thirds of the sequential growth.

The remaining growth is from new customer program ramps and seasonality.

Lastly I'd like to provide an update on our components business.

Power reported its fourth straight quarter of profitability on strong double-digit revenue growth, and is performing very well.

Turning to Multek, we ceased operations in our PCB factories in Germany and Brazil towards the end of September quarter as planned.

This activity was critical in reducing Multek's fixed costs and breakeven point, to put it on its path to be modestly profitable in the December quarter.

Multek is where power was a year ago with its restructuring and (inaudible) are now complete.

It has been building a strong and diversified book of business.

We have significantly enhance its management team, and are very encouraged by the progress.

We believe that Multek's improved volumes and operating efficiencies, combined with reduced volatility will drive better and more predictable profits over the coming quarters.

Now turning to guidance on Slide 10.

Although we continue to make positive progress in our transformation, our trajectories a bit short of where we'd be anticipating as we look at our December guidance.

Recall that we have laid forward the framework of revenue and earnings expansion, taking us from trough levels this past March quarter to our targeted levels in our December quarter.

So while we've been continuing to display strong growth on our top line and expanding our earnings, we are seeing some near-term pressure from the broader demand environment.

This is resulting in some unfavorable mix changes and some slippage in new product ramps.

However, we continue to believe that the Flextronics platform is fundamentally structured to continue to drive revenue growth, operating earnings expansion, free cash flow generation, and EPS accretion.

Guidance for our December quarter revenue is $6.5 billion to $6.9 billion.

This reflects sequential growth of 4.5% at the midpoint.

Our adjusted operating income is expected to be in the range of $160 million to $190 million, which is 10% higher at the midpoint than the $159 million reported this past quarter.

This equates to an unadjusted earnings per share guidance rate of $0.21 to $0.25 per share.

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

With that, I would like to open up the call and hold the Q&A.

Operator?

(Operator Instructions)

Sherri Scribner, Deutsche Bank.

I wanted to get a little more detail on the December quarter guidance.

I guess I would have thought you would be closer to your 3% operating margin number.

And it looks like the guidance is for operating margins to be up about 10 basis points.

I was hoping you could give us a little more detail on why, if the restructurings are going to be all complete in December, we won't be closer to the 3%.

Thanks.

So let me just break down December.

It definitely has multiple moving parts.

So as you look at December, if you roll back to where we were, we've been setting a framework for the entire year, there's multiple levers that were being played.

We had the restructuring lever that you just mentioned, which is on track and we're seeing by the end of that December quarter achieving a full $30 million benefit.

So that is one contributing factor as we move forward.

Multek is on track, and is moving to modest profitability.

The other two main drivers for the quarter center around our volume and our mix.

And as you can see from the guidance where we're sitting at the $6.7 billion at the midpoint, we are definitely impacted, as Mike alluded to in the prepared remarks, to various more muted seasonality, as well as delayed ramps where some of these are slower and some of them have been pushing out.

So that, combined with the fact that three of our four higher-margin businesses, where we had been looking to have those up modestly are now down modestly.

So that mix impact is putting incremental pressure on that margin profile, as well as the operating profit dollars.

And then lastly, we have the Motorola ramp that's underway.

And we're just not achieving the targeted level margin profile for Motorola at this stage.

So all in all, we're growing revenue again this quarter.

We're expanding operating profit again this quarter.

We're moving up midpoint of the guidance range will be within 10% to 15% to 20% margin improvement, and EPS is accreting.

It's just not at the desired levels, and it can be greater.

Okay.

So thinking -- thank you.

Thinking about that going forward, how do we get closer to the 3%?

The restructurings are done, Multek is going to be profitable next quarter.

Clearly you'll have ramps on an ongoing basis, but I assume those would go away over time, and then the Motorola ramp, I assume would happen.

So when can we get to that 3% margin?

Thanks.

So again, margin is not the specific focus but will be a byproduct.

We're going to continue to grow our operating profit dollars, and for the various reasons you just alluded to.

We have multiple levers that are allowing us to continue to grow, but the mix of our business is going to be the deciding factor in whether or not you're at 3% or plus or minus 10 or 20 basis points to that.

But we're growing the business.

The ramps will be behind us.

We have a big mix change this current quarter again.

The three of our four higher-margin businesses are actually sequentially down where we had anticipated those being up.

So those will return to growth, and when those two we're going to have higher margin profile, higher margin accretion from them.

As well as we continue to manage the Motorola transaction, we continue to target achieving the target profile in the near future.

And Sherry, I would just add a little bit to that.

We're growing revenue quite a bit.

As you know, we're going up from $5.3 billion at the beginning of year to $6.7 billion in the middle of the range.

That's creating a tremendous amount of challenges as we go ramp that business, and you can imagine the amount of people we have to bring on, and the new products that we have to go do to make that happen.

Simultaneously, as we've gone under this restructuring, we targeted closing 11 factories.

We have 7 of those closed and we have 4 left, which will be completed over the next few quarters.

So that's occurring exactly at the same time, which is also occurring at the same time of bringing on the Motorola ramp and some other things.

There is a tremendous amount in play here and a lot of changes.

And managing that, managing the 11 factories shutdown simultaneously with managing all the ramps is a stress on the system in terms of the incremental costs that we have to do to manage it down, but also the costs that we have to do to manage it up.

We are a little bit disappointed about the $6.7 billion target range that we are calling for.

We certainly thought we would have been much higher.

It changed a lot in the last four weeks.

Even in our business we had very, very stable six months of the first six months of our two quarters.

And we saw a lot of down side.

So trying to chase down your higher-margin business when they have decreasing revenue when you're expecting them to have increasing revenue is very, very challenging from an operating standpoint.

Simultaneously have that with the start-up costs associated with new ramps and getting Motorola to where we need it simultaneously with closing the factories is a super-challenging environment.

And so getting back to the question about when are we getting the 3%.

Well, while our objective is to drive operating margin dollars, earnings per share, and return on invested capital, we would expect that as these margins -- as these ramps mature, and some of these have been delayed, part of our $6.7 billion which is away from our target revenue, part of that is delayed ramps.

So it's not like the revenue went away.

It just means it's a little bit later.

So we just need to be able to get through those big ramps.

Some of them are more complicated than others.

And we need to be able to get our Motorola operation to its targeted profile, which we continue to believe is in our sights.

And we're just not there yet.

And once we hit that, then I think we'll likely be at the margin and operating profits dollar targets that we would expect.

We would have a much more stable operation that would be quite a bit more predictable.

Okay.

Thank you for all the detail.

Osten Bernardez, Cross Research.

To start off Mike, I was just wondering if you could comment on other expansions, particularly in Texas, specifically in Austin where it looks like you may be considering on-shoring another high-volume customer?

Yes.

So we have a big operation in Austin.

We've been there for many, many years.

It's the highest competent center that we have in the Americas, certainly.

It's a couple thousand people.

So it's been around for a long time.

As far as any specific program ramps or anything else, I don't have any comment about those except to say this is a super high competent site.

It's been around a while.

It's large.

It's almost a million square feet, and we continue to grow the business there.

Okay.

And could you provide some color with respect to why the business is not necessarily operating at target?

Is it a matter of unexpected expenses?

Volume not being what you expected?

Anything you could provide there?

Well, first of all, we don't -- Motorola is somewhat challenging to try to predict when actually it's going to hit target margins.

We've been in it now for five months or six months.

We took it over in mid-April.

We had to take over two factories.

We had to put in our computer systems.

We had to put in our lean manufacturing.

We had changed the weight and the flow, and prepare for new products.

Mentally we take over people.

We added -- we've been in process of adding several thousand.

At the same time, we put up a mass customization factory in Texas.

So all this -- and that Texas factory opened in, I think about eight weeks ago.

So there's a tremendous amount of change and churn associated with bringing on this business, absorbing these people into our system.

Some of the SG&A associated with hooking up these computer systems and interfacing into mass customizations that are coming in from the carrier, and it is -- so it's just a challenging.

So the question is, we know we have all the start-up expenses.

Our kind of rule of thumb is that when we take on a new program, it's going to take about six months to get to target profit.

We're not there yet.

As we've now worked with the customer for the last six months and understand the progress we've made in the factories, which we think is pretty stunning, we continue to see that target in sight.

It's just that the question is how much time does it take?

Does it take 6 months, does it take 9 months, does it take 12 months?

And what rate, do you there linearly, or does this just step function in?

So we continue to see that target in sight.

We're not the least bit uncomfortable with that.

We continue to believe that, knowing what we know about the customer and the performance of our sites, that we think we'll be there.

It's just we're going to need more time to get there.

And it's hard for us to assess exactly what that timeframe is, because we now have a March quarter coming in where we are actually ramping multiple new projects right now as we speak, and it's still a system that's somewhat in flux for us.

So we're getting more stable.

But we're just not ready to declare we are completely done yet.

And we are (multiple speakers)

Thank you very much.

Brian Alexander, Raymond James.

Just to follow up on that, Mike.

How much below the expected 2% margin are you for that business?

And I just want to know if it's losing money?

And would you say that your other large program ramp in HVS is meeting your profitability goals at this point?

And then I assume that both these of these programs peak in the December quarter, and they probably decline in the first half of the calendar year.

So how should we think about the profitability for HVS once we get beyond the seasonal ramp?

Thanks.

All good questions.

So last quarter we ran our big program slightly below profit.

I'll call it like a mid-single-digit kind of dollar range.

For this quarter, we expected modest profitability as it starts stepping into being a more profitable business and more stability.

The amount of start-up charges we had over the last two quarters had been pretty stunning, if you really saw what we did.

So we would expect it to start being more stable in the December quarter.

As we look out into the March quarter, boy, it's really, really hard for us to predict what that's going to look like.

It's hard -- we have new programs.

Our customer has new programs.

There's new ramps.

I mean, how they choose to manage their business and pricing and success of new products, we can't predict.

But the one thing we do have is we have ramping programs going into March.

So hopefully that will reduce any kind of traditional seasonality.

Doesn't mean it will eliminate, but hopefully it will reduce it.

But we don't know, is the bottom line.

It's too difficult for us to tell because we just don't have enough history, and I think there's too many new products that are coming out.

Okay.

Fair enough.

And just to follow up.

Are the new program ramps, particularly in HVS, are they more working capital intensive than you expected as well, or was the inventory increase of 22% what you were expecting?

I know you guys focus a lot on returns on capital.

So I'm just curious about the returns on working capital in the HVS segment versus your expectations, even if we adjust for the start-up costs.

Are they delivering on that?

Thanks.

Brian, this is Chris.

Obviously the 22% increase in inventory definitely had an impact based on the delays in the period around these ramps.

So specifically around the HVS business, there's no incrementally higher net working capital requirements for these programs versus what you've seen historically.

So really the function of this increase has been the pre-positioning for some of the ramps as well as some of the delay impacts that have come to play here.

And then as a return profile, we potentially targeted 20% ROIC on our businesses as we manage the diversified portfolio.

As it relates to HVS specifically, when you're underperforming on this profit side, it is going to be putting pressure on that return profile.

So presently we're not achieving that return profile until we start getting back up into those target margin profiles.

Getting back to inventory, just to give you some more color on that.

This thing is up $724 million, 22% as Chris said.

Our revenue is not up 22% going into this next quarter, you'll notice.

And which means we just have too much inventory, and the reason we have too much inventory is because a lot of what we've received over the last 30 days is slowdowns and push-outs or ramps and some other things.

So that's one of the reasons that we are challenged right now with operating profit.

We actually were anticipating numbers that were well in excess of $6.7 billion just a month ago.

That's why you see the inventory position there.

Inventory's usually positioned for, as long as it's raw material, which most this is, it's positioned for the next quarter's revenue.

So we know we have too much.

We'll get it out.

It will get delayed a little bit, but there's nothing we can see in any of these new programs that would cause us to think that our return on capital profile would be deteriorated or that our working capital assumptions, that we like to run between 6% and 8%, would be challenged.

So we think we're right on the mark.

We just have too much because we just get a little too many push-outs these last 30 days.

Great.

Thanks for the detail.

Amit Daryanani, RBC Capital Markets.

Couple of questions for me.

One, I guess when I look at the December quarter guide, maybe you could walk me through math, but it looks like sales are up $219 million sequentially, operating income is up $16 million.

But my understanding is restructuring alone should add $8 million of benefits sequentially, and then Multek getting to breakeven would add another $8 million, $9 million of profits sequentially.

So I guess my take is, the math this implies all the $290 million revenues are coming at 0% conversion margins, maybe you could talk about what the offsets are there and quantify the start-up headwinds that you have had in September and December so far?

Let me try to bridge you from the quarter two $159 million up to the midpoint of our range.

So we definitely are getting restructuring benefits.

That's going to be roughly in the range of around $8 million.

As well as the Multek improving profitability to a modest profit.

That's going to increment, say, around $7 million.

Offsetting some of this, again, is the SG&A increase that I highlighted in my prepared remarks.

It was centered around new operating sites, some incremental costs associated with the acquisition of RIWISA, as well as further investments in R&D, and some of the innovation initiatives.

So that's roughly around $8 million.

The rest of the business is seeing contribution.

However, again I want to highlight that three out of our four high-margin businesses are trending sequentially down modestly in our December quarter.

So that's putting some of that pressure on that incremental OP.

Got it.

That's helpful.

And then could you either of you, or maybe both you, talk about what would lead Flextronics to get more aggressive on the buyback program, given that you do have approval to do 20% of the buyback today?

And I'm curious, do you have to seek this approval on an annual basis, or going forward can you automatically buyback 20% of your shares outstanding every year now?

Great questions.

So obviously management's been committed to increasing shareholder value, and we've been doing so through the share repurchase plan.

If you look back, we've been purchasing our shares up to the 10% threshold over the past couple years.

And we didn't like having the restriction in place.

So now this provides us increased flexibility.

Essentially we've eliminated that constraint.

That constraint is now intact.

We don't have to go seek that each year.

So our share repurchase plan has been, is, and will continue to be an important feature of returning value to shareholders.

And so we're just going to end up continuously evaluating that allocation pursuant to those guidelines.

Fair enough.

Thank you.

Jim Suva, Citi.

Mike and Chris, if we just take a step back from investors, and when they look at their year-end financials, they see year-over-year sales which are growing, which is great.

But earnings per share not growing, and in fact actually being helped, the majority of it from stock buyback.

Can you help us understand, is that kind of what we should expect for the next few quarters, given these program ramps?

Because one would think you guys have been in the cellphone business very much for several, several years.

I guess people are kind of surprised you haven't been able to mitigate some of these program ramps.

Or did you price too aggressively?

Or are the complexity more than what you anticipated, because high velocity's definitely not new to your Company.

But taking a step back, all the EPS is being saved, really, by stock buyback, or maybe I'm missing something.

Yes.

I think you need to think about this here, Jim, as a transformational year.

We went down to a trough in the March quarter and we've been rebuilding pretty aggressively since then.

And the rebuilding is both from a restructuring standpoint as well as a pretty significant revenue ramp standpoint.

So I think what you're seeing is, when you're doing trough comparisons year over year it doesn't look very good this quarter.

When you start getting into next quarter and the quarter after that and quarter after that, you'll see huge revenue year-on-year increases.

So I think need to look at this more of as of a trough period.

And then I think what you'll see is significant earnings per share expansion year on year as a result of not only buybacks, but one of the other things that we had last year, if you go back and analyze it, we had a tremendous amount of foreign exchange gains, and our whole interest and other line item was actually pretty to negative for the entire year.

These earnings per share gains are coming with those total charges for the year being more along the range of $20 million to $25 million a quarter.

So we are absorbing that as well in the earnings per share, and still expanding -- still would hope to expand earnings this entire year.

So there is some anomalies, both in the interest and other lines that you have to look at on a year-on-year comparison.

What you'll see is this trough is going to go away.

I mean, this trough's been going away.

We did 11% growth last quarter.

We've actually gone up a lot.

We went from $5.3 billion to $5.8 billion to $6.4 billion in September.

We are now targeting $6.7 billion, signaling some delayed ramps which should lead for some strength into next year, but also causing us to have start-up costs.

And the start-up costs are absolutely never going to go away, because to start a program you have to first have a facility, you have to first buy equipment, and you have to hire people and train them before you touch your first product.

So the concept of start-up costs is not -- going away doesn't exist.

If we are a company that has -- is very, very stable and has $7 billion a year, or a quarter every year for the next five quarters, you'll find us having -- being really stable.

And we'll just absorb, and what that means is we don't have a lot of start-up charges, so profitability is better.

And this is one of the features that you look for as we go to next year, is that some of these ramps and such are very significant.

We don't see the same amount of ramps coming in next year.

But we see stability out of the programs that were ramping this year and a full-year run rate from the programs this year.

So we actually do expect more stability next year.

But as we go through this transitionary period, as we climbed down to $5.3 billion and then climb back up to $6.7 billion, it's going to be super rocky.

And like I said, at the same time you're going to -- we're absorbing all the costs associated with these facilities and things like that.

So it's just a very, very rocky year, but we're still hoping -- we would have hoped to have put this behind us by the December quarter, quite frankly, as we looked at this in March.

We would have said boy, we're going to be done with all this stuff and should have a pretty good December.

The reality is, is some customers slip programs, maybe we're off in terms of the complexity of some of the programs.

We got a little bit weaker macro, you've got some things happening.

But I think you have to think about this being very, very transitional quarter and think about what we're trying to accomplish this year -- or this is a very transitional year.

Think about what we're trying to accomplish and the challenges associated with it, and then kind of do a look-forward to next year around what's likely to be a lot more stability.

Great.

(Multiple speakers).

Thanks a lot for the details and clarifications, guys.

Matt Sheerin, Stifel.

Mike, I just want to get back to the issue of these product or program ramp push-outs because there's, I guess, $200 million to $300 million gap between what you had talked about your target $6.9 billion to $7 billion or so.

I'm trying to understand, is it coming across all your business?

You talked about, well, several of the programs from different end markets.

How much of it is from HVS versus the infrastructure business and the other businesses?

Yes.

That's a little bit hard to tell, but if I think about the ramps that got pushed out, they are in IEI, they're in INF, they're in HVS, what I'd consider to be different HVS programs.

And I think it's actually a bundle of all of them.

So the program ramp that's not getting pushed out is really Motorola.

Motorola has actually more revenues than we would have anticipated.

As part of that $6.7 billion, if we laid it out at the beginning of the year, we mentioned that we thought revenue would be more along the $750 million range, and in fact it's probably going to be a couple hundred million more than that.

And that's one of the reasons that we're having some pressures on the operating margin this December quarter.

So we're seeing a push-out in a lot of the other programs, but at the same time we're seeing a lot of strength with Motorola program, and like I said, it carries lower margins at this point.

We don't think it will in the future, but it just does until we get it completely up and running and the learning curve [asserted].

That's helpful.

And did you have a 10% customer in the quarter?

Was it Motorola?

Yes we did.

And it was Motorola.

Okay.

And then Chris, on SG&A, I understand the reasons for the increase there.

But looking into the March quarter and then fiscal 2015, do you think you can keep it in that range that you talked about?

Or the $220 million range or so, or due to the investments and increased R&D, will that go up?

Yes, Matt.

Thanks.

I think you should be considering that $220 million as a stable position.

Again, going back to where we are sitting at the $215 million mark where I'd been referencing us to, the only way we're going to be stepping up from there was going to be around investments around our R&D, as well as other innovation activities, and any time that we have acquisitions.

So those are the only levers that will make us change from that $220 million.

It's structured such that it should be stable at that level.

Okay.

And lastly, on the factories that you're still in the process of closing, what's the timeline there and expected savings?

The savings have already baked into what Chris talked about in terms of his expected restructuring savings.

He's laid out some pretty good data on that.

We have four factories left, and they'll all be done this quarter.

It's possible one of them lingers on into March, but would be minor impact.

But all of them will be done this fiscal year.

Okay.

Thanks.

Amitabh Passi, UBS.

Mike, I apologize if you covered this.

I was on another call.

I guess I'm still a little confused, what's changed in the last four to five weeks because I believe up until about four weeks ago you were feeling pretty good about hitting the December quarter guidance.

I apologize if you covered this, but if you could just summarize it again, I'm a little perplexed in terms what's changed in last few weeks?

Yes.

We did hit it.

If we look back four weeks ago, we were probably expecting all of our segments to be having growth.

It wasn't huge growth, but it was once again sequential growth.

We had three or four of our segments with sequential growth this quarter.

We would have expected -- we were actually expecting four out of four of those segments to have growth going into that last quarter.

And we were there just until probably 30 days ago, and then we got some program slowdowns, or we had some just maybe what we'd call muted seasonality.

And as a result of that, three out of four of the segments actually went down over the last few weeks.

And I don't know if you got the comment on the inventory, but our inventory went up $724 million.

We were positioned to do much more revenue just a little while ago, and even positioned inventory.

So what you guys also -- it's not just inventory, but we also have to position people and make sure the facilities are ready.

So it's actually a challenge for us when there's a big change.

But that's predominantly it.

We just got new forecasts in.

I think the seasonality was a little bit more muted than anticipated or expected.

And we weren't expecting that much.

But it's a challenge for us that we have to then go react to.

And when you react to it, it costs money.

So that put pressure on things.

Is there a sense, was this a fallout of all the drama out in Washington, or do you think it was independent of that?

No.

I think it's independent of that.

If we deep dive into things like medical, the diabetes market's actually a little bit stressed if you go in and look at the big diabetes manufacturers.

That's probably the biggest impact that we have from an operating profit dollar standpoint, because medical business tends to be a little bit more profitable than the rest of the business.

So when that gets a surprise downside, then that's a big challenge for us.

A lot of noise about the government and about the slowdown.

We hear some noise about it from our customers, but I don't think that's played through the system yet.

The issue is, is whether or not we'll see any of that happening this quarter I think, and we don't know for sure.

It's a better question for the OEMs.

And just final one.

What is your expectation for inventory in the December quarter?

We would expect that comes down roughly 10%-ish, or even more.

Okay.

All right.

Thank you.

Sean Hannan, Needham and Company.

Also wanted to see if I could get a little bit more clarification on December guidance.

If I look at the sequential guide for both INS and then the IEI groups, when I come out with my numbers here and I compare them to last year, both of those segments are down probably upper single digits year over year, on a year-over-year basis.

And last fourth quarter it wasn't a particularly strong quarter.

So I'm trying to see if I can reconcile.

What's the disconnect here as we look year to year?

I don't think it's all program, new program ramps slippage.

I know you did talk about semi cap equipment as, at least as it relates to the IEI group.

But that's really hasn't been gangbusters for a while.

So can you help to explain where this business is really sitting versus a year ago, and why?

Yes.

So let me take, particularly focus on INS and IEI.

So what we have is we'll have HVS that's growing rapidly, so I don't need to talk about that.

And we have HRS, which is probably going to be up 15% to 20% on a year-on-year basis.

So we have good strong growth -- I mean, those things are pretty well sorted out.

The INS, the business is very difficult to get a year-on-year growth story out of, in my view.

This, if you go back and look at the hardware sales of the networking guys and the server guys and the storage guys, and all of them as a bundle and you strip out the servers -- the services and the software, it's a challenging market.

It's probably like a 0% growth market.

And so we view that we're competing in a very, very challenging market.

And part of that market tends to go, even if you look at the China awards went into -- in telecom, it went into Huawei and ZTE pretty heavily.

And about 70% of it was picked up with those guys, and we have business with those guys, but it tends to be a different kind of business, but generates lower operating profit dollars for us.

So I think that market is just a little bit strained.

I think it's very difficult to see any kind of growth in that market.

So year on year, we're not going to see -- it is difficult to see growth.

In the IEI market, I actually feel we've all been pretty excited about the growth, the potential growth of that market.

That market also has not grown very much, but I think we have not positioned ourselves well in that market.

Some time ago we've repositioned our management team to be much more highly focused on sales.

Part of our sales expense was to beef up the IEI sales force.

We've added quite a few people in that model.

We actually think this is a place, even though it's down year on year, some of it down because of a lot of capital equipment and similar reasons, but I just think we have underpenetrated that market, and the potential of that market, and the amount of companies that are available to go penetrate in IEI.

I think we've underpenetrated them, and I don't think we're getting the story out to them about the value creation that we can do for them.

And so I think what you'll see from the IEI standpoint, I actually -- while we're disappointed this quarter, and it's a surprise to us, I actually think next year you'll see a pretty reasonable growth story, and that's based on bookings that we've already won as opposed to -- and some of the IEI, by the way, are delayed ramps that we've not yet realized and have been delayed.

So I actually think the summary of that is INS I think is a slow, tough, flat market which is continues to get heavily penetrated by the Chinese guys.

Which is not as good for the EMS guys.

And I think on the IEI side, I just don't think we've created enough value statements for those customers to move enough business into our Company.

And we've invested over the last year to make that happen.

But I think you'll see the turnaround.

Thank you for the color.

Gausia Chowdhury, Longbow Research.

This is Gausia calling on behalf of Shawn Harrison.

I had one question, and then just two quick clarifications.

My first question is just about the March quarter.

Given the push-outs for all the segments ex-HVS, what does March quarter seasonality really look like now for those businesses?

And then for HVS, given the strong Motorola ramps, and then what does seasonality look like now for that business as well?

Yes, that's a good question.

So if you go back, our normal seasonality runs about negative 16% from December quarter, so March to December.

I've talked about a number of these different programs that kick in.

I've also noted some new products that we don't know how they're going to perform that are also hitting in this quarter that should ramp on through next quarter.

So if we were to look at it today, we would certainly view that it would be substantially better, or substantially less than the 16%.

Alternatively, we've had such a hard time, I mean even 30 days ago we thought we had this quarter in the bag and now we don't.

So I think it's too difficult to sit here in October and predict what March will be, and that's especially considering we do have new customers, new products, new ramps, new products hitting the marketplace that we don't know how they'll perform, so structurally we're set up.

The good thing about delaying some ramps is you should have more of an upside coming in the March quarter.

That's what we see today.

But I don't think we can -- we're good enough to forecast what that might look like, especially in some of the challenges we have like the macroeconomics, some of the challenges we have with the government programs which may come across.

There's still too much uncertainty for us to say what March will look like with any confidence, except to say we sure think it's a lot better in 2016.

Okay.

Thanks.

And then the clarifications.

The first one is, in terms of the run rate for restructuring, I thought you had originally said $40 million.

Is the $30 million off from that target?

So we have not moved off.

We are identifying a quarterly run rate of $40 million upon completion.

We had captured $10 million in our first -- our last quarter of last year.

So in the current year rolling out off of March to this December, we're recapturing another $30 million of benefit.

The final amount of that, roughly $8 million or so, will be achieved in this December quarter.

Okay.

Thank you.

And then in terms of the buyback authorization, with the 20% approval this year, is that something that you would implement after the current program expires?

Or is that something you could implement right away?

So that is a permanently established position now.

They've removed that 10% threshold limitation and now moved it up to 20%.

Again, it provides us the increased flexibility to purchase up to those thresholds.

And as you know, our share repurchase plan continues to be a key feature for us in returning value to shareholders.

And we've hit into those levels in the past.

The past several years you've seen us pressing into that 10%.

So it's something that allows us that increased flexibility, and we'll continue to evaluate that as we move forward.

Okay.

Thank you.

Operator, we have time for one final question.

Mark Delaney, Goldman Sachs.

First, if you guys could help me understand on the recent order push-outs, which sounds like it's common really in the last month, are you guys still seeing push-outs in your orders, or are the orders starting to firm up now?

Mark, every month's a new month in terms of getting new data from the marketplace.

And you know what that looks like.

So we obviously, to buy all these parts, we need forecasts for six months to really get these parts in, or maybe four months.

So we work to long-term schedules.

But the reality is, is there's adjustments to those schedules basically every month.

So from what we can see now, we've accounted for as much as we can see.

We've taken the negative view of the macro when we've done our forecasts.

And we've done our best job at trying to forecast what that looks like for you guys and provide as much transparency as possible.

But each month's a different month, and we're a little bit concerned about some of the slowdowns, especially as we went through the earnings releases of many companies.

It seems to be a pretty common theme that people hit their September quarter and guided low in December.

So that seems to be a pretty common theme across the industry, which is certainly concerning.

We're a little bit more comforted in that we know we have a lot of start-up costs in this thing.

We know we have a lot of transition costs with these factories coming out.

We know we are confident that we get Motorola to a better profitability position, and we know we can get ramps behind us.

So we actually have a lot of things that can set us up for next year that we're comfortable with, even in a bad environment.

But we don't know what next month is really going to be able to do, what we're really going to do, and we could get more slowdown next month, we could get upturn next month.

Thank you for the color on that.

For my follow-up, I know one of the reasons for engaging with Google and doing the Motorola X program, which has lower than corporate average operating margins, was that you thought Google was a good partner to be aligned with, and that you saw potential new business opportunities beyond just doing the Moto X longer term.

And I'm hoping you can help us understand now that you're working with Google and Motorola specifically more hand-in-hand as you ramp the Moto X, are you starting to see some of those new opportunities materialize?

Yes, that was one of the cornerstones of doing the Motorola deal, is that we thought it would carry across to a better relationship with Google and put us in a position there, especially given our proximity and the fact that we have a million square feet here in Silicon Valley and do a lot with new startups and new technologies and those kind of things.

So we would say that that's gone great.

That was a premise for us doing the deal, is to think about the broader relationship and buying into that ecosystem.

And we think that's the most -- the only thing that's really been announced that many of you that we've talked about before is the Chromecast, which we would expect to be just a fabulous product, where we are built building it,and now we're building that but also (technical difficulties) Multek in that product line.

So good penetration.

We're excited about it.

We're very comfortable that we made the right decision moving into this relationship.

And disappointed we're not at the margins yet, but very confident that we'll get there.

Great.

Thank you very much.

Thank you everybody for joining us today on our call.

This concludes our conference call.

Thank you.

This does conclude the conference.

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