Flex Ltd (FLEX) 2014 Q3 法說會逐字稿

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

Today's call is being recorded.

(Operator Instructions)

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

Sir, you may begin.

Thank you and welcome to Flextonics' conference call to discuss results of our fiscal 2014 third-quarter ended December 31, 2013.

We have published slides for today's call 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 measure 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 over to our Chief Financial Officer, Chris Collier.

Chris?

Thank you, Kevin.

For those joining us, we appreciate your time and interest in Flextronics.

Let us start by turning to slide 3 for our third-quarter income statement highlights.

We generated $7.2 billion in revenue, which was well above the high end of our guidance range of $6.5 billion to $6.9 billion, with every business group exceeding our expectations.

Our revenue increased over $770 million or 12% sequentially, driven mostly by a robust 35% sequential growth in our High Velocity Solutions, or HVS business, and further supported by 5% sequential growth in our High Reliability Solutions, or HRS business group.

Looking at our revenue on a year-over-year basis, it rose over $1 billion or 17%, which was mostly driven by strong double-digit growth of 57% in HVS and 15% in HRS, offset by a single-digit decline and our Integrated Network Solutions, or INS business.

We continue to expand our adjusted operating income, increasing it $28 million, or 18% sequentially to $187 million.

This was a the high end of our guidance range of $160 million to $190 million.

After accounting for $13 million of stock-based compensation, our GAAP operating income totaled $174 million.

Our adjusted net income for the third quarter was $164 million, which was up $30 million or 22% sequentially.

This adjusted net income translated into adjusted EPS of $0.26, which reflects a sequential increase of 18%, and it exceeded the high end of our guidance range of $0.21 to $0.25.

Lastly, GAAP EPS was $0.23, up 21% sequentially.

Now turning to slide 4, you'll find our trended quarterly income statement highlights.

Our adjusted gross profit dollars rose $30 million, or 8% sequentially, to $400 million.

There are a few levers behind our gross profit dollar improvement worth highlighting.

First, we saw improved utilization in overhead absorption, driven by the revenue growth across our HVS and HRS segments.

Second, we realized continued operational improvement in Multek, our print circuit board business, which achieved quarterly profitability.

Then, to a lesser extent, we realized the remaining incremental benefit from our restructuring efforts that we concluded last quarter.

However, our gross profit expansion was still burdened by some operational inefficiencies and greater product ramp costs associated with several of the complex programs we've been ramping.

Expanding our operating income remains a key financial objective and focus.

This quarter our adjusted operating income increased $28 million, or 18% sequentially to $187 million.

This increase resulted from our improved gross profits, coupled with our ability to leverage our SG&A expense, which ended the quarter at $213 million.

We are pleased with the increased cost control and discipline this past quarter, as we were able to operate below our expected SG&A level of around $220 million, while we continued to make investments to support our initiatives around innovation.

This quarter our operating earnings expansion resulted in our adjusted operating margin rising 10 basis points to 2.6%.

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

Now let us turn to Slide 5 for some color around our other income statement highlights.

Net interest and other expense amounted to roughly $15 million in the quarter, which was better than our guidance of $20 million, due mainly to 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 adjusted income tax rate was 5% for the quarter, which was below our expected range of 8% to 10%.

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, due to our recognition of $13 million of stock-based compensation and approximately $6 million in intangible amortization.

Our weighted average shares outstanding for the quarter was 619 million shares, which was down from 624 million shares in the prior quarter.

This reduction reflects the impacts from our share repurchase activity.

During the quarter we repurchased 5.9 million shares at an average cost of $7.56.

Please turn to slide 6 to discuss working capital management.

Our inventory increased $96 million or 2.5% sequentially.

When analyzing our inventory, it is important to consider a discrete adjustment that has a meaningful impact.

During the quarter we secured approximately $700 million of advanced payments from a handful of our customers.

In certain instances, the level of inventory reduction or consumption was not at contractual thresholds, causing elevated inventory levels.

In response, we worked with these customers to provide the necessary funding to offset the increased levels of inventory we are carrying for them.

We record these advances as a liability, as a current liability.

And in the future as we produce or sell off the associated inventory, we expect to see a corresponding decrease in our current liabilities, thus a neutral impact on our cash flows.

It is important to understand that we are not taking on any additional risk with this inventory, and that we've secured appropriate compensation for this incremental working capital we are deploying on behalf of certain customers.

For illustrative purposes, I have reflected in the shaded section on slide 6 what our inventory balance would be after netting the incremental $700 million of customer advances during the quarter.

We continue to manage our working capital within our targeted range of 6% to 8% of our net sales, as our December quarter came in at 7.3%.

We expect to continue to manage working capital within this targeted range.

Our cash conversion cycle this quarter was 23 days, which improved one day both sequentially and from the prior year.

We expect our cash conversion cycle to remain within the 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 over $760 million this quarter, and year to date we have now generated over $1.1 billion.

We used our operating cash flow to fund our capital expenditures of $150 million for the quarter, which was generally in line with our expectations.

Our CapEx focus remains on investing in production equipment to support our mechanical's operations, increasing automation, further investing in our innovation strategies and general capacity additions consistent with our revenue growth.

We expect capital expenditures will be below our depreciation levels beginning in our fourth quarter and throughout calendar year 2014.

Free cash flow of $614 million was very strong for the quarter and benefited from our ability to collect customer advances that were necessary to offset the current elevated inventory levels we are carrying.

We are very pleased with our ability to continue to generate strong sustainable free cash flow.

During the quarter we repurchased roughly an additional 6 million of our shares.

And year to date we have spent approximately $363 million repurchasing 7% of our shares, and have already surpassed what had been spent in the entire prior fiscal year.

Our share repurchase plan has been, is, and will continue to be, a key feature of returning value to our shareholders.

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 $3.1 billion, with our cash totaling $1.6 billion.

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

Before I conclude, I'd like to provide some insight on the workforce reduction efforts we have highlighted in the earnings press release today.

We are taking definitive actions focused on realigning our SG&A cost structure.

These actions are intended to optimize our infrastructure and our productivity.

We expect to record charges in our fourth quarter in the range of $30 million to $35 million, comprised primarily of employee severance and benefit-related costs.

Upon the completion of these planned activities, we expect quarterly SG&A savings of $15 million, essentially reflecting a two-quarter payback on this action.

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

This was a strong quarter as we hit our core financial objectives.

We grew our revenue, which came in above the high end of our guidance and up 12% sequentially.

We continue to do expand our adjusted operating profit dollars, growing 18% sequentially.

We drove continued adjusted EPS accretion, which also increased 18% sequentially.

We generated strong free cash flow amounting to over $650 million year to date, and is well past our earlier fiscal-year target of $400 million.

And lastly, we continue to focus on providing shareholder returns, as we repurchased nearly 6 million shares while we invested further in our business.

Now Mike will provide you an overview of the business, current trends, as well as share our next quarter financial guidance.

Thank you, Chris.

The December quarter marked the third consecutive quarter of expansion for the key metrics of our business.

We delivered strong sequential growth and revenue, operating profit dollars, net income and earnings per share.

We also expanded our adjusted operating margin percentage, even with HVS programs responsible for most of our revenue growth this quarter.

Free cash flow was very strong at $614 million, and we are now comfortably going to exceed our fiscal 2014 free cash flow target of approximately $400 million by over 50%.

The overall macro environment remains stable.

But we still see a fair amount of uncertainty and cautiousness across our customer base and we expect this challenging environment to persist in calendar 2014.

We have grown our quarterly revenue over 35% from our March quarter, and this growth has created efficiency challenges for us.

And in some cases, incremental costs as we ramp our system.

As we exited our March quarter, we are largely through these ramps and we anticipate a stable year ahead.

Our focus as a Company in this stable environment will be to drive productivity, cash flow and earnings per share growth.

We are taking targeted actions to realign our corporate overhead.

We will invest $30 million to $35 million to optimize our cost structure, with most of the targeted actions focused on reducing SG&A expenses.

We expect this will allow us to reap significant productivity in the administrative portion of our cost structure without degrading our operational capability.

Much of this productivity is on the back of significant investments in our India Shared Services Center, which added over 1,500 people in the last 12 months.

The underlying payback on these actions is very quick, and we expect to be realizing a quarterly SG&A savings of $15 million effective the June quarter.

Presently, we see our Company fully invested in the working capital and CapEx required for the new programs launched this year.

And as Chris mentioned, we expect to under-spend CapEx relative to depreciation for all of calendar 2014.

This will help generate continued strong free cash flow into next year.

We expected to continue to invest in the programs that we believe are differentiated for the markets we play in.

I would like to share with you several initiatives that serve as proof that our investments are beginning to pay off, and our differentiation is increasingly being acknowledged by customers and other third parties alike.

First, our Milpitas Product Innovation Center, or PIC, was honored with the coveted Industry Week's Best Plant Award.

We have invested over $30 million into our Product Innovation Center strategy, and this PIC in particular is right in the heart of Silicon Valley, and a true showcase site.

Additionally during the past year, we have inaugurated a handful of other PICs throughout the world to support our customers in all key geographies.

We are enabling and scaling innovation for our customers at a time when new disruptive hardware technologies and companies are growing rapidly.

Second, in July we announced the formation of our Lab IX Hardware Accelerator Program.

And in November we released the names of its first four early-stage disruptive hardware technology companies that would be supported.

Lab IX is primarily based in Silicon Valley and Israel, and works hand-in-hand with our Product Innovation Centers.

We are rapidly expanding relationships with component and product innovators through this program.

Third, we discussed back in our May Investor and Analyst Day the importance of real-time information to manage world-class supply chains.

We now have a very strong product offering using the latest generation software architecture to increase visibility and reduce risk in supply chains through the use of real-time information.

Stay tuned for more information around this topic in the next month as it is formally launched.

Please turn to Slide 9, where we will review our revenue performance in more detail.

Now, let me spend a little time on each of our business groups.

Our Integrated Network Solutions, or INS business group, was flat sequentially, slightly better than our expectation for a single-digit reduction.

Revenue was $2.6 billion and reflected a $10 million increase above prior-quarter levels.

Telecom and Networking both declined single-digits sequentially.

Server and Storage, on the other hand, rose double-digits on a sequential basis due to new program ramps and better demand for certain customers' products.

For next quarter we expect INS revenue to decline approximately 10% sequentially, driven by general market weakness and typical seasonality.

Industrial and Emerging Industries, or IEI, revenue was $933 million and declined $7 million, or less than 1% sequentially.

This was better than our expectation for a high single-digit sequential decline, as a small handful of customers saw slightly better-than-expected demand.

Next quarter we expect the ramp of some previously delayed programs to more than offset any IEI seasonality and to enable low single-digit growth.

We continue to see this business group having stable market demand.

Our High Reliability Solutions group, or HRS, which is comprised of our Medical, Automotive, Defense and Aerospace businesses rose 5% sequentially and 15% year over year.

This was above our expectations for a low single-digit sequential decline.

The slight upside was related to a few Medical customers surpassing their previously reduced forecast, and Automotive also seeing slight upside.

Next quarter we expect HRS to decline low single-digits as Medical sees some mild pressure.

But overall, we consider this business group to be operating in a stable environment.

Our High Velocity Solutions business group, or HVS, revenue rose 35% sequentially or $732 million to $2.8 billion.

This was well above our expectations for sequential growth of 15% to 25% due to stronger-than-expected ramps across multiple new programs combined with less component constraints than initially anticipated.

It is growth was broad-based and not just driven by one customer.

That and our HVS revenue was the performance of our high-volume Smartphone customer, Motorola, which was the only 10%-plus customer in the quarter.

It was in line with our expectations in terms of sales and we continued to make steady progress on improved profitability and cash flow generation.

We remain confident and optimistic that our position within Google's hardware ecosystem is strong and can expand.

Going forward we are no longer going to discuss the specifics of this customer, rather it will be addressed within our consolidated HVS results.

For next quarter we expect HVS will encounter normal consumer seasonality and will pressure revenues down 25% to 30%.

As we look into next year we continue to believe this segment will operate at 30% to 40% of our revenue, depending on seasonal fluctuations and some volatility in this space.

Lastly, I'd like to provide an update on our component businesses.

Power recorded its fifth straight quarter of profitability on continued strong double-digit revenue growth and is executing very well.

Our Power business is already recognized as the technology leader in mobile chargers.

And with our new Powermat relationship, we'll be at the forefront of the next generation of wireless charging.

Multek, our printed circuit board operation, was profitable for the entire quarter.

Our Multek restructuring was very successful in reducing our breakeven level, driving increased efficiency and improving productivity.

We anticipate its profitability to improve throughout next fiscal year.

Demand is strong and execution continues to improve.

We're increasingly confident that our component businesses are positioned to earn an above-average corporate average operating margin going forward.

Now turning to our guidance on slide 10.

Guidance for our March quarter revenue is $5.9 billion to $6.3 billion.

Our adjusted operating income is expected to be in the range of $140 million to $170 million, or $155 million at the midpoint.

This equates to an adjusted earnings per share guidance range of $0.18 to $0.22 per share.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted earnings per share guidance that I just provided by $0.05 to $0.06 for the costs associated with SG&A reductions, and approximately $0.03 for intangible amortization expense and stock-based compensation expense.

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

(Operator Instructions) Matt Sheerin with Stifel, your line is now open.

Yes, thanks and good afternoon.

Mike, I'm wondering, I'm hoping that you can comment on reports that just hit the wires on Lenovo acquiring Google's handset in the Motorola handset operations.

How that might impact your relationship with Google in terms of manufacturing, and your relationships with Lenovo.

Yes, so first of all, we don't want to speculate what may happen or may not happen, because obviously this is some news that you've probably just seen recently.

What I can tell you is, our original intent with the whole Motorola deal, which I think we've repeated quite frequently, was to build a broader relationship within the Google ecosystem where we believe that over time we would find a lot of different disruptive hardware products coming out that we would be able to participate in.

We think that's intact.

Our relationship with Google is very good.

We've been ramping programs and we think that remains intact independent of any future direction of Motorola.

We believe that we've been quite successful at making the transition to build a broader relationship.

As it relates to Lenovo, we have very good relationship with Lenovo.

We received a supplier quality of the year award last year.

We do work with them today in Europe, China and the US.

And the relationship on the executive level is also very, very strong.

As it relates to Lenovo, we'll look forward to working with Lenovo, to the extent that is where the business ends up.

And we'll look to build on that relationship, which is already pretty strong and pretty broad.

I'd almost at the same comments as it relates to the IBM announcements that came out earlier.

We'll look to have this be an opportunity for us to grow.

I think the question's a good one, and on both these companies, both Google and Lenovo, we have very good relationships.

Okay, great.

And as a follow-up, in terms of the restructuring, it looks like it is focused all on SG&A and not any operational reductions and headcount reductions.

Are you happy with the footprint that you have in terms of the people in place and in terms of the leverage going forward where the cost cuttings really just focus on expenses at this point?

Yes, we actually are very happy with it.

We made some adjustments just over a year ago with our footprint.

We think it is the right footprint.

You can see some of the benefits as it rolls off into Multek, where we made some very specific comments around their improved profitability and operating performance, largely on the heels of that restructuring.

As we look forward, we had a very, very, complicated year this last year.

We did have a lot of ramps that we talked about.

We closed some factories.

All those things carry with it double expenses from an administrative standpoint.

We are beyond those expenses now, and it is a time for us, as we look forward we see a much more stable business.

Stability is, we are looking for to and it is a good thing because it allows us to drive productivity.

So we are in a mode of writing that productivity very hard, particularly as it relates to the administrative place.

Because we don't believe we need to take down our operating footprint.

And we don't want to degrade any of our operating capabilities.

We're going to drive hard on administrative efficiency, so you're going to see that.

The other thing I'd like to add is, as you can see the return on investment and how fast that flows through, will be very, very rapid.

Okay, thanks a lot, Mike.

Thank you.

Our next question comes from Shawn Harrison with Longbow Research.

Hi.

I wanted to follow-up on the cash balances for excess inventory.

If you could talk about what market verticals are effecting those cash balances, and any more detail on that.

Because that's the first time I've heard of that large of a number from you guys in a while.

Hi, Sean.

This is Chris.

Let me frame it up in a certain way here.

Probably not going to get into specifics around the segment, or customer that contributed to that.

Inventory is primarily our customers' responsibility and we generally procure based on their demand.

What we saw is a handful of customers that needed to provide us with an appropriate level of compensation, because we are carrying elevated levels of that inventory for them.

Those levels were beyond contractual levels that we had established.

In response we secured around $700 million of economic relief.

We were really pleased with the ability to achieve that and secure that.

We viewed these advances as creating more of an economic consignment of these goods, where we still have title but we've been fully reimbursed economically.

So I think it is important to understand that we don't have any incremental risk with these higher levels of inventory.

Rather, think of it as having us bearing custodial risk associated with this.

As you think about how it impacts cash flows, essentially we super-charged this current quarter with advances.

We played a little bit with some of the timing, capturing some of our future cash flows a little bit in advance here.

So the impact to cash flows going forward is going to be relatively neutral as the release of the liability aligns with the sale of the inventory.

I'd probably expand and just say that we would have expected a greater cash flow in our Q4, but now we are only going to see a modest generation, as we've already received some of that cash flow in this period.

I think, going back, we are seeing modest free cash flow in Q4 well in excess of where we had anticipated free cash flow in the year at $400 million.

We are pleased with the ability to engage with our customers and manage net working capital this way.

Chris, is it one sector or is it multiple sectors?

If you're not willing to elaborate on just --

It is not just one sector, it is multiple sectors, and it is a handful of customers.

It was unusual.

That's why we've called it out.

I think that's the color I can give you.

Okay, a brief follow-up on the Motorola-Google relationship.

Being at a 10% customer, how much did Google represent of that?

Trying to get an idea of how much you've been able to integrate yourself with Google so far, if you can comment.

Yes, so as we stated in the prepared remarks, the Motorola was a 10% customer for the quarter, 10%-plus.

How I would characterize the Google relationship, is that it is continuously emerging, it continuous to expand with them.

It's entering into a top-ten customer for us.

Okay --

On its own.

On it's own, yes.

Got you, very helpful.

Thanks so much, guys.

Thank you.

Our next question comes from Shawn Hannan with Needham and Company.

Yes, can you hear me?

Yes.

Okay, great, thanks.

See if I could follow up a little bit around the PCV and the Power business.

Trying to see if I can get a sense a little bit more on the trajectory that you see this calendar year, and what specifically is driving that.

If you could elaborate on that a little bit, Mike, that would be helpful.

Thanks.

Yes.

We closed two factories, one in Brazil and one in Germany.

Our remaining factories are in Minnesota and in China, with about 80% of that revenue being in China, and the revenue in Minnesota being highly specialized Flex circuit business that's predominantly for Aerospace and Defense, Automotive and a High Reliability group of customers.

So this efficiency allowed us to reduce our G&A pretty substantially.

The focus to only have two operations with 80% in one location allowed us to really focus on efficiency and productivity.

We've changed -- did you ask about Power or Multek?

He asked about both.

Both.

So we changed some of the management team and we reeled both the management team simultaneously and at the same time, our revenue growth has actually been quite impressive.

We are out-performing the average revenue growth in the industry, in the PCV industry we're actually out-performing that.

Part of that out-performance is on the back of our increased revenue that you are seeing in the EMS business, a lot of that has flowed through.

We do a lot of Google business, we do a lot of other customers that have not been ramping.

It's allowed us to get much higher utilization in the factory.

It is just a little bit of everything.

Everything put together has put it into a trajectory that we're very happy with it.

It is very close to achieving even our target profitability at this point.

Okay and I think that a lot of that really was pointing to the profitability and that's helpful.

I think you folks have been really directing us toward that improvement for a bit.

I was more pointed toward the business activity.

It sounds like you answered part of that in terms of you've got flow-through coming through from the EMS side and didn't know if there were any other contributors.

Not really.

I would call it pretty broad-based in terms of what's going in there.

One of the other things, I mentioned a couple of EMS programs that are flowing through like Google and Motorola.

But the other thing that we are getting a lot of traction on is going pretty rapidly is in the wearables business.

We probably have part of the upside to our $7.2 billion, a lot of that was built on the wearable strength.

We are a very, very strong position in multiple industry-leading customers.

Those products make heavy use of Flex Circuit and Rigid Flex, which is exactly what the Multek operations do.

Additionally, as we've added to our Product Innovation Centers here in Silicon Valley, we've also added a whole technology group that's focused on providing solutions using Flex and Rigid Flex, which is somewhat unique to Flextronics.

Very few companies have both the Rigid and the Flexible in one location.

It allows us some additional capabilities and some additional differentiation.

By engineering that into some of these industry-leading wearables companies, it's provided a lot of revenue upside as well.

So there's just a lot of dimensions.

I would call the growth very broad-based.

Even across different kind of product categories, even within Multek.

That's why, I think, we are pretty pleased.

We view the operational restructuring done.

We view the management changes that we made done.

There is a broad base of revenue coming into it.

We would expect to out-perform the industry again this year in terms of revenue growth, based on the forecast we have.

We are pretty pleased with it.

You also asked about Power.

In Power there's not any real new news.

We continue to do very, very well.

We've been satisfied with the performance for well over a year.

We've doubled down in that business by engaging in the Powermat.

Not doubled down, but we've increased our penetration into that business.

We have the highest technology in the mobile charging business today.

We have, by adding the Powermat relationship, we want to make sure that we maintain our technology leadership within mobility.

As it relates to charging mobility, we think mobile charging is an important feature of what the future will -- that we will need for the future.

And we think Powermat's a great partner to take us to the next level.

A lot of dimensions on both those different businesses, and so we are actually bullish on both.

Great, thanks for all the color, Mike.

You're welcome.

Thank you.

Our next question comes from Brian Alexander with Raymond James.

Yes, thanks.

I don't know if you said this specifically before, but I will just ask the question.

Were you actually profitable in the December quarter with your large mobility customer?

And do you still think that you can sustain profitability with that customer, even accounting for seasonality going forward?

If we were to see a big drop-off in March do you think you'll still make money there?

And I have a follow-up.

I think we will have normal seasonality as a relates to profitability of mobile customers with this customer.

One of the comments that I made is we are done with all our ramps.

But I actually don't want to get into specific profitability on the customer.

I actually think it will perform normally.

I think it goes down in the March quarter, it goes way up in the December quarter.

I think we will see that over the course of next year.

I think it will perform normally, and because we don't have a start up charges or excess charges that we have to absorb like we did last year.

But it is actually become uncomfortable talking about their revenue and the profit.

We are actually trying not to talk about their revenue and profit both for them and for us.

But, Sean, one of the highlights though, in the prepared remarks we did highlight that we were in line with our expectations, both in terms of revenue and in terms of the profitability for that customer this quarter.

Got it, that make sense.

Just a follow-up on gross margins.

If I back into the gross margin for the March quarter from your overall revenue and operating income guidance, Chris, it seems like you should be back about 6%,which you haven't been above in several quarters.

And you are doing it with a higher mix of HVS, which we all know is lower margin.

So the question is, do you think you hit a new watermark on gross margin based on all the actions you've taken?

And do you think that you should see gross margin stay above 6% each quarter going forward, with the exception of December when you have the HVS mix perk back up?

You highlighted a couple good things here.

Yes, the implied guidance does represent having a six handle on the gross margin.

It really is going to be a function of the mix.

You see the mix shift in our March quarter shifting back to a heavier concentration of the low-volume, high-mix businesses that we operate.

I think we've taken distinct actions over the last 12 months to drive a different operating cost model and structure.

I think you are seeing benefits of that as we progress this next year.

We also highlighted we are tacking on the SG&A line.

Going back to gross margin, I would anticipate seeing us continue.

As long as that mix stays in that same balance, seeing the handle over the six going forward.

Great.

Thanks a lot.

Thank you.

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

Your line is now open.

Thanks a lot, good afternoon, guys.

A couple questions for you.

One, your OpEx line, it's been fairly resilient on a sequential basis, we hear.

Help us think how do we think about OpEx beyond the March quarter when some of these cost-cutting benefits come in?

Do you think it is going to get back to us, up $200 million, like a $195 million run rate in June and beyond?

Or are there any offsets that we should be aware of as you get to the back half of this calendar year?

Hi, Amit, it's Chris.

In the framework that we've laid out, we're going to spend around $30 million to $35 million on these targeted SG&A activities.

We will be, upon completion of those actions, we will be achieving a quarterly savings of around $15 million.

So you naturally will see that line item coming back down to the $200 million and below.

Once we get to completing those activities.

Got it.

If I look at your operating margin performance, especially by staking it up against the May Analyst Day data that you guys provided, and I think at that point the hope was $6.9 million sales, 3% op margins.

You're still well ahead of that, at least on the December quarter run rate that you had.

Op margins are still about 30, 40 basis below what you guys were hoping for back in May.

If you step back and talk to us about what is the gap for that 30 to 40 basis points of operating margin, versus what you guys were expecting back in May when you didn't know what the Motorola ramps, I think.

Good question.

That road map we laid out and we've continued to notch it throughout the year.

When you see the quarter performance we just excluded upon, I think there's a couple drivers that came into play.

One was that one customer that we are really not going to be talking a lot about going forward, we identified early on a higher level of profitability.

While we were profitable this past quarter, we're not achieving that level of profitability.

So that is a contributant to the profit erosion there.

Additionally, from a margin perspective, you need to consider the mix of business that we sit.

Today at the end of this quarter nearing more a 60/40 than what it was implied when you did that model before.

Then again, we highlighted that.

Even in this current quarter we still were succumbing to some operational inefficiencies in ramp challenges, some of the complex programs that we continue to ramp.

So I think if you play those three elements out, you see us naturally extend from the 187 up past the 200 we had set.

But going back from that trough of 105 to the 187, that 78% of an increase in this short period of time.

So while we like the trajectory, it can be greater and we are still working on that.

Fair enough.

Thanks a lot and congrats on a nice quarter.

Thank you.

Thank you.

Our next question comes from Sherri Scribner with Deutsche Bank.

I have two questions.

One, I just wanted to ask about the components business.

I know you talked about that being above the corporate average.

Was it above the corporate average this quarter?

And when do you expect it to be above the corporate average?

Yes, it was above the corporate average this quarter.

And we anticipate that it stays at that level that.

Based on a lot of the color that Mike had given you, you can understand the fuel behind that confidence.

Okay.

And then, looking at the INS segment, I appreciate that you telling that.

I'm a little surprised you did well in Server and Storage, considering this Company's have not seen a lot of upside there.

I was hoping to get a little more detail on what you are seeing specifically in the networking segment.

And also INS has been declining on a year-over-year basis for the past eight quarters.

Guidance suggests it declines again.

What turns that business around?

Thanks.

Yes, I think if I think about the macro-environment for INS, I think it is going to be challenged for the foreseeable future.

It's been soft for, I think for a couple years.

I think, on average the growth in the industry, if you take out Yahweh, is even flat to down, perhaps, in terms of hardware growth.

I think that will continue to remain a challenged segment.

Our upside in Server and Storage is probably more from new programs that we've brought in, as opposed to industry dynamics and the industry sell-through going up.

It is more a Flextronics unique thing, it is not that Server and Storage got better.

But I think if I look at the overall INS revenue going forward, we do expect it to be relatively flat growth for the foreseeable future.

Except for this quarter.

The March quarter it always goes down.

If you look at the March quarter, 10% of our businesses -- it usually goes down 10% in the March quarter.

So that's actually pretty normal seasonality.

If I think about it structurally, that business is really pretty flat and I think even keeping at zero is positive.

So what we are focused on is, as you know, we focus a lot on some of these new disruptive technologies and we go after these new companies.

We are doing work with companies like with FireEye and PowerOff and NetWorks and InfoBlox and Ruckus and Cyan.

If you look at the amount of hardware disruptors or maybe hardware/software disruptors in this market, we have a very, very strong market position with them.

So what we are trying to do is to be able to augment some of that weakness that you see in the core businesses with some of those new disruptors.

And hopefully we will be able to keep this at a -- and I think the result of that ends up being a reasonably flat market for us.

Thank you.

You're welcome.

Thank you.

Our next which comes from Jim Suva with Citi.

Thank you and congratulations to you and your team.

Absolutely great results, and outlook very strong too.

First just a housekeeping question and then a more strategy question.

On the housekeeping question, for your EPS guidance, does it include stock buyback?

Or is that more the run rate of the stock buyback that you have done?

Then on the strategy question, you've got some very big parts of your business where the customers are potentially changing.

Specifically the Motorola-Google, as well as the IBM assets, but then Lenovo is also a current customer of yours.

Are you able to, for lack of a better word, secure or negotiate or come upon a agreement upon that business staying with the Flex before the transactions happen?

Or is it all after the transactions happen?

Because the fear is in a year from now, are we looking at, I'm just going to pick a number here, 18% of your company's business could potentially be in-sourced?

So 18% would be Motorola plus IBM?

Or how would you describe the 18%?

Yes.

We don't know what the world looks like going forward.

What we do know is we have a fabulous relationship with Lenovo.

We know that we provide some very strategic services for Motorola and for IBM.

We would work to try to build and use this as an opportunity to leverage that relationship that we have with Lenovo to do more work for them.

Maybe they are going to in-source it some day.

I don't mean to say that they won't ever do it, but, boy, it would take a long time.

And they don't even in-source everything that they have today.

I would look at this as an opportunity to build on our relationship.

I think we talked about being supplier of the year last year.

I think at an Analyst Day, two Analyst Days ago, we actually showed you guys a video of Lenovo, and what we view as to be the most advanced supply chain and world, which is in Europe.

It is on Lenovo products and it goes all the way through the manufacturing and distribution, into end customers that we do for Lenovo.

I'd like to think of that is an opportunity for us to build on that relationship.

I think if someone was going to buy the assets, I think Lenovo would be a great choice for Flextronics.

And we would look to just build on it.

But where it goes year from now, who knows.

It is going to take a lot of time.

It will probably take them six months to get antitrust approval.

It is going to take time to work its way out, and we just have a lot of time to work a lot of different things between now and then.

We are super happy that we are in a position with the buying customer that we have a very, very good relationship.

And they think we are a very high-quality manufacturer.

Jim, back to your first question, the weighted average share count that we provide in the guidance of 615 million, reflects the benefit from last quarter's purchases.

Our guidance will never reflect any forecasted or anticipated share repurchase activity.

Okay.

Great, thank you very much, gentlemen.

Again, congratulations again on the great margins and profitability and sales.

Thanks.

Thank you.

Our next question comes from [Austin Benardos] with Cross Research.

Hi, good afternoon.

Thanks for taking my questions.

To begin, with respect to Google, Motorola and Lenovo, hypothetically if we were to assume that given your relationships with all three companies, that you are able to continue manufacturing those devices, would you foresee see any changes in pricing as it relates to the view?

It is actually hard to say.

What I can tell you is that the pricing that we already do for this kind of HVS business is very aggressive.

It is always competitively bid.

I think it is at market.

As a result of being at market, I think we can be pretty comfortable that there's not going to be a significant change in pricing.

Thank you for that.

And then with respect to your comments on the ramp costs that you experienced during the quarter, would you be able to point to any specific server markets where those expenses were higher than you expected?

Or consistent over a large portion of those expenses?

Excuse me.

Hi, Austin.

We actually had several ramps that we've talked about previously that span multiple segments.

Primarily what I'm alluding to here is more in the INS and IEI businesses this past quarter that had a more meaningful impact on our performance.

Got it.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Mark Delaney with Goldman Sachs.

Thanks very much for taking the question.

I was hoping first you could elaborate a little bit more on impact of Motorola on your business, and potentially any impact that the proposed sale to Lenovo is having.

Maybe you can help us understand if you think any of the current strength in your revenue in this current quarter of Motorola products is potentially related to Google pre-building inventory ahead of a potential sale.

Specifically I want to make sure I understand if your guidance for the March quarter is assuming any negative impact on the Motorola products related to the proposed sale.

Yes, so I don't know if there's that much to add.

We are not ready to speculate on what may or may not happen over time.

Like I said, it is going to take six months to get, probably get through all the regulatory approvals, and all those sorts of things.

And who knows what their operating strategy is going to be on a go forward basis.

We just know we are positioned well with them.

We've got a capability that they need.

I think we will just go build the relationship over at Lenovo and continue building it, and see how it works out.

I don't expect anything to change in the near-term.

Regarding your last question about is there a negative impact, or is anything contemplated as a result of this news in our forecast.

And the answer is no.

We are just assuming it is a steady-state, go forward kind of basis.

So we don't anticipate, we don't foresee a negative impact in the near term.

Okay.

That's helpful.

Then in terms of the restructuring actions that you guys talked about, is any of that related to the Motorola products right now?

No, really that is not factory specific.

It is really focused on a lot of our, what I call, corporate overhead and administrative overhead, that we use to run the Company.

Like I said, a lot of that overhead is almost, we had a double bang in this last year just because of the amount of work we are doing and the new ramps.

It just takes a lot more effort and cost.

As I mentioned, by the time we get through the March quarter, we believe we are done with those.

So we still have a little bit of a residual ramp-up cost coming in the March quarter, but then it flows out.

So we are getting ahead of the game and we are, as rapidly as possible, going to take out some of that redundancy.

We see a very stable year next year.

We have the right physical asset set-up for our facility, so we are pretty pleased with that.

It is a great opportunity for us to drive productivity and cash flow.

That's what we're going to do and we are going to get out ahead of it and we are going to be aggressive about it.

Thank you very much.

You're welcome.

Thank you.

Our next which comes from Amitabh Passi with UBS.

Mike, sorry to beat a dead horse.

I just wanted to try this one other way.

Can you remind us what the scope of your relationship is today with Lenovo?

Are you predominately on the computing side with them?

Are you also doing mobile devices for them?

I just wanted to get a reminder and a refresher on the scope of your relationship today.

Yes, we do a variety of different things.

We do not do any mobile phones with them today.

We do do a variety of different computing products and repair and logistics operations around the world, in a variety of different locations.

But we do not do any mobile manufacturing of any kind.

Okay, thanks.

And then, Chris, I apologize.

Just a clarification of the $60 million of annualized savings in SG&A, did you say by the June quarter you will actually realize, or get to the $15 million per quarter run rate?

Or will that take longer?

No, upon completion, so maybe this lags a little bit, we are going to be at that $15 million a quarter.

You should see as roughly in that range around that June period.

Really, as soon as that is fully complete, and we are making our best efforts to tackle those measures quickly.

Okay.

All right, thanks, that's all I had.

Appreciate it.

Operator, we have time for one more question.

Thank you.

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

Yes, thank you.

Mike, could you tell us a large your business with Lenovo is currently?

And also could you size the wearables business, how large it was this past quarter?

And how large you think it could be in annual revenues?

And I have a follow-up.

Yes, Lenovo, it is probably, I'd say roughly, around a $500 million business for us today.

I don't know exactly that number.

And obviously it moves around a little bit by quarter.

But it is about $500 million.

As far as the wearables go, boy, that's ramping rapidly.

On the wearables business, the question is what is it this quarter?

And what is it next quarter?

We are close to a $500 million run rate with wearables.

We actually think that can accelerate going on into FY14.

Okay, thanks.

As a follow-up, there is some talk about Foxconn talking with various states here in US to set up some manufacturing operations.

How worried should investors be about the risk of Foxconn starting to target some of the higher emerging markets?

As it relates to Flextronics?

Zero.

And that's because?

First of all, part of what they talk about is LCD displays and set up an LCD manufacturing operation.

And they talk about automation, building robots and all that kind of stuff.

First of all, we don't do LCD displays.

We aren't going to build our own robots.

There's no market that I know of in the United States that we participate in where putting up a fully automated factory with robots is going to service any of our customers.

If that's a direction and activity that they are going to go on, I actually don't think it conflicts with any business that we see in the United States.

Second of all, we've already got a huge position in the United States.

We're already in 10 sites.

We've got 5 million square feet.

We've got 10,000 employees.

We've got know-how experience.

We've got already set-up operations.

We don't have greenfields.

We have Product Introduction Centers.

We have Lab IXs.

We've got Innovation Centers.

The amount of things we have is pretty overwhelming.

Come into Silicon Valley, we have a million square feet.

If they want to -- in Texas we have probably a 1.5 million, almost 2 million, we probably have 2 million square feet in Texas.

If you go into the Carolinas, we probably have 800,000 square feet.

Been doing distribution repair operations for 15 years in the United States.

And we have the customer base.

And to do low-volume, high-mix work takes patience and time.

It is just hard, I think, to have that patience and time when you are a $130 billion company.

So I think that the impact is, for all those reasons, is actually pretty low.

It doesn't mean they won't come in and do some things, but it probably won't be within our core business.

Okay, thanks.

Appreciate the color.

And lastly, Chris, what caused the lower tax rate this past quarter?

And why do you see that reverting back to 8% to 10%?

Thanks.

I'm sorry, I didn't hear that, can you repeat that please?

Yes, sure.

I was asking about the lower tax rate this past quarter, what caused it.

Why do see the rate reverting back to 8% to 10%?

Our guidance is to stay in that same range of 8% to 10%.

This past quarter you saw us slightly below that.

It is really a mixed bag driven by a whole host of different items.

From the amount of earnings in different jurisdictions, to changes in the valuation allowances, to even changes in certain tax positions.

So it is all around the place, but a lot of moving parts.

I would say going forward it is anticipated staying within that 8% to 10% range.

Okay, thank you.

Okay, thank you, everybody for joining us on our call today.

This concludes the call.

Thank you.

That concludes today's call.

You may disconnect at this time.