Flex Ltd (FLEX) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Flextronics International first-quarter FY15 earnings conference call.

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

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

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

Sir, you may begin.

Thank you, operator, and welcome to Flextronics' conference call to discuss the results of our FY15 first quarter ended June 27, 2014.

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 Financial 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 in the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures.

Before I turn the call over to our Chief Financial Officer, Chris Collier, I want to point out that as of May 21, 2014 Investor and Analyst Day, we renamed and rebranded our high velocity solutions, or HVS, business as the consumer technology group, or CTG.

This updated naming convection is reflected in the slides and will be reflected in Chris and Mike's remarks today.

This change has no associated historical numerical changes, and no business groups or statements are required.

With that, I turn the call over to our Chief Financial Officer, Chris Collier.

Chris?

Thank you, Kevin.

To all joining us today, we appreciate your time and interest in Flextronics.

Let us begin by turning to slide 3 for our first-quarter income statement highlights.

We are pleased with the start of FY15, as our results reflect continued progress that we've carried over from the prior year.

Revenue was $6.6 billion in the first quarter of FY15, which exceeded our guidance range of $6 billion to $6.5 billion.

Every business group exceeded our expectations, with our industrial and emerging industries, or IEI, business leading the way, growing 10% sequentially.

On a year over year basis, our quarterly revenue grew over $850 million, or 15%, which reflected growth in three of our four business groups.

This was led by our consumer technologies group, or CTG, which grew more than $600 million year over year.

Our first-quarter adjusted operating income was $183 million, increasing 34% year over year, and exceeding the high end of our guidance range of $150 million to $180 million.

Adjusted net income was $148 million, increasing 32% year over year.

Our GAAP operating income totaled $172 million, and net income was $174 million.

This included the expected $55-million gain due to the reversal of the contractual obligation charge we recorded last quarter, partially offset by an $11-million loss from the sale of a non-strategic manufacturing operation in Western Europe.

Our adjusted earnings per diluted share for the first quarter was $0.25, which exceeded the high end of our adjusted EPS guidance range of $0.20 to $0.24.

Turning to slide 4, you'll see our trended quarterly income statement highlights.

Our first-quarter adjusted gross profit totaled $382 million.

It was up 10% year over year, while our gross margin was roughly in line with our expectations at 5.8%, which was flat with our prior quarter.

We continue to hold ground on our operating performance, as reflected by our adjusted gross profit decreasing 1% sequentially, in line with our drop in sales.

This quarter, our adjusted operating income increased $46 million, or 34% year over year, to $183 million, and it reflected a modest increase of $1 million on a sequential basis, despite the sequential decline in sales.

On an adjusted operating margin basis, we increased 10 basis points sequentially and 40 basis points year over year to 2.8%.

We reduced our quarterly SG&A expense by over $11 million since a year ago and hit our targeted level of $200 million or below what we had set in January 2014.

For the September quarter, we expect our SG&A expense will remain stable at the $200-million level.

We are pleased with our continued progress in expanding our operating profit and operating margin and are focused on sustaining our operating expense discipline.

I would like to reiterate that a key financial objective for Flextronics remains the expansion of our operating profit dollars, as well as our operating margin.

While we're fundamentally structured to achieve higher operating margin from where we are today, margin will always remain a function of our business mix.

Now let's turn to slide 5 for some color around other income statement highlights.

Net interest and other expense amounted to approximately $19 million in the quarter, which was slightly below our guidance range of $20 million.

For our September quarter, we continue to believe that modeling quarterly net interest and other expense at $20 million is appropriate.

The adjusted income tax expense for the first quarter was $16 million, reflecting an adjusted income tax rate of 9.9%.

This was at the high point of the 8% to 10% tax rate range we had estimated for the quarter.

As we move forward throughout FY15, we continue to believe that our operating effective tax rate will remain in the 8% to 10% range, absent any discrete items.

Now, when reconciling between our quarterly GAAP and adjusted EPS, we had a positive impact of $0.04 on our GAAP EPS.

This was due to the expected reversal of last quarter's contractual obligation charge of $55 million, partially offset by a loss on the sale of a non-strategic Western European manufacturing operation, stock-based compensation expense of $12 million, and $7 million in intangible amortization expense.

Our sales and non-strategic operation was not contemplated in our June quarter guidance, and given its nature, we excluded it from our adjusted earnings.

We are very pleased with the execution of this transaction as we further optimize our operating footprint.

This transaction had a net cash outflow of $9 million during the quarter.

If you turn now to slide 6, I will talk about our cash flows.

As we discussed at our Investor and Analyst Day at the end of May, strong cash flow generation is core to Flextronics.

There are several key elements to discuss regarding our cash flow this past quarter.

First, we used $81 million in cash flow from operations, which was largely the result of increased investment in net working capital, coupled with a net utilization of cash from other operating items.

Our net working capital increased by $129 million to $2.1 billion, representing 8% of our net sales which is at the high end of our targeted range of 6% to 8% of net sales.

We continue to believe that this range remains valid, given the mix of our business.

Inside of our net working capital, our inventory balance declined by almost $100 million, or 2% sequentially.

This contributed to the favorable improvement of our inventory turns to seven times.

We remain confident in our ability to drive further reductions in our inventory positions as we progress throughout this year, as there are several inventory management levers we are managing.

The other operating cash flow usage of $246 million was predominantly driven by the elimination of the advanced payments we had secured from several customers during FY14, as the underlying incremental working capital we had been deploying for these customers came back in line with the associated contractual terms.

Another key cash flow highlight this quarter was our continued discipline on capital investment.

As expected, our CapEx was lower than our depreciation during the quarter, as our capital expenditures amounted to $73 million, which was $40 million lower than our depreciation expense.

We continue to prudently manage our investment spend, so as to remain well positioned for the future.

And we expect that throughout FY15, our CapEx will continue to be lower than our depreciation levels.

Our capital investment target for FY15 remains in the range of $300 million to $350 million.

Now, putting this all together, we saw free cash flow for the quarter in line with our expectations at a use of $154 million.

Combining our focused working capital management and disciplined capital investment, we believe that our free cash flow generation in our September quarter will be in the range of $200 million.

We maintain our conviction in our ability to achieve our targeted free cash flow generation of $3 billion to $4 billion for the five-year period ending FY17, as we remain fundamentally structured and disciplined to achieve this target.

The last key element to highlight would be our use of cash to repurchase our shares.

This quarter, we continued to return value to our shareholders as we paid $106 million for the repurchase of almost 11 million shares, or roughly 2% of our shares outstanding, at an average cost of $9.69.

Our actions this quarter reflect our commitment to returning over 50% of our annual free cash flow to our shareholders.

Now turning to slide 7, let us review our solid capital structure.

We continue to have no debt maturities for the next four years.

We have over $2.8 billion in liquidity, and our total cash is over $1.3 billion.

Our total debt is slightly above $2 billion, and our debt-to-EBITDA ratio continued to maintain the same healthy level as it had in the prior quarter, at 1.9 times.

Our capital structure is sound and provides us with ample flexibility to support our business.

And that concludes the recap of our financial performance for the first quarter.

Before I turn the call over to Mike, I would like to add that we remain confident in our competitive position and the direction our Company is headed.

The dedication and execution of our employees has provided us with a strong foundation that we are building on as we continue to improve our financial trajectory and consistently deliver on our commitments.

Thank you.

Mike?

Good afternoon.

Thanks, Chris.

Please turn to slide 8.

We have continued to make steady, predictable improvement across most metrics.

We exceeded our expectations in all four of our business groups and set record quarterly sales for both our IEI and HRS businesses, driven by multiple new program ramps, as well as strength amongst our semicap, auto, and energy customers.

The biggest upside relative to our expectations actually came in our CTG business, declining only 11%, less than half the decline we were expecting.

Our CTG upside was driven mostly from increased revenue with our largest customer.

Operationally, we continued to grind out productivity and consistent profit improvements.

We achieved our adjusted SG&A target of $200 million in quarterly expense.

Better-than-expected sales, combined with a leaner cost structure, helped us drive operating profit dollars to $183 million, exceeding the high end of our guidance of $180 million, and also 11% above the midpoint of our guided range of $150 million to $180 million.

We also managed to grow operating profit dollars slightly from our March quarter.

This enabled us to expand our operating margin sequentially for the fifth consecutive quarter.

We are focused on maintaining steady improvement going forward.

Our balance sheet is in great shape, and we continue to expect strong free cash flow for FY15.

Steadily returning value to shareholders remains a consistent part of Flex's shareholder value proposition, and our commitment to return over 50% of our annual free cash flow is intact.

During the quarter, we repurchased 10.5 million shares, or 2% of our outstanding shares for $106 million.

Our consistency in buying back shares over the past four plus fiscal years has enabled us to reduce our share count by 269 million shares, or over $1.8 billion, retiring roughly 28% of our shares outstanding.

Our continuous focus on driving innovation and differentiation remains at the core of what we do.

We lead the industry in enabling innovative supply chain solutions, and our traction in this area accelerated over the last quarter as we added many new customers and saw heavy activity around our product innovation centers.

We are extremely confident that our vision and our capabilities are unmatched, enabling the introduction of many new products and process technologies across multiple industries.

Please turn to slide 9. Let me make a few comments about Motorola mobility and its pending acquisition by Lenovo.

At our May Investor and Analyst Day, we outlined the original value proposition underpinning our relationship, the strategic value it has created, and our view of the future direction of the relationship.

It is also important to note that while we highlighted our strong existing relationship with Lenovo, this was further affirmed this week when they awarded Flextronics the prestigious Supplier of the Year award for our European operations.

There are no updates to what we have previously aligned at our May Investor and Analyst Day, with the exception of the news that Motorola will be exiting the Dallas/Fort Worth manufacturing facility by the end of the December quarter, for which we expect no negative financial impact or restructuring charges.

Also, our overall expectation of the possible financial impact remains unchanged.

Please turn to slide 10.

Before I discuss our business group, I'd like to preface it with a comment on the macro environment.

The macro-environment continues to be stable, but more recently, it is showing more of a positive bias.

Our integrated network solutions group, or INS, rose 4% sequentially, better than our expectation for stability.

Revenue was $2.5 billion, reflecting an $85 million increase from last quarter and relatively flat with last year.

Our telecom and networking segments were both up single digits sequentially, due to better-than-expected demand across numerous customers, as well as higher-than-expected contributions from certain new program ramps.

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

Our consumer technology group, or CTG's, revenue declined 11% sequentially to $2.2 billion.

This was much better than our expectations for a sequential decline of 20% to 25%, due mostly to better-than-expected sales to our largest customer.

Due to the better-than-expected performance from this customer the past two quarters and the pending acquisition of its business and its related timing, we are being conservative in our go-forward forecast.

As a result, we are guiding to a high single-digit sequential decline in CTG for the September quarter, which includes some positive sequential growth in our core CTG business, due to seasonality, offset by our conservative expectations for our largest customer.

Additionally, we are expecting flat, sequential growth for CTG in our December quarter, which includes a modest sequential growth for our core CTG business, offset by our continued conservative expectation for our largest customer.

Our industrial and emerging industries group, or IEI, recorded another strong quarter of sequential growth, with sales up 10% sequentially, or $107 million to $1.1 billion, or 17% of sales.

Year-over-year IEI sales growth increased 25%.

Our sequential growth was better than our expectation for a high single-digit increase, due to the continued ramp of a few programs and better-than-expected growth in semicap and energy.

Next quarter, we expect IEI will be stable as strength with appliance and energy customers are being offset with some weakness in semicap and office equipment customers.

Our high reliability solutions group, or HRS, which is comprised of our automotive, medical, and defense and aerospace business, rose $3 million or under 1% sequentially and 5% year-over-year to $846 million, or 13% of sales.

Next quarter, we expect HRS to be stable again, as seasonal softness in auto is offset by strength in medical.

As mentioned earlier, both IEI and HRS ended this quarter with record levels of sales and a combined $2 billion in quarterly sales growing 16% year over year.

We continue to expect strong performance from these two businesses, with combined growth anticipating to be approximately 10% for FY15.

Now turning to our guidance on slide 11, guidance for September quarter revenue is $6.2 billion to $6.6 billion.

Our adjusted operating income is expected to be in the range of $165 million to $190 million, or $177.5 million at the midpoint.

This equates to an adjusted EPS guidance range of $0.22 to $0.26 per share, based on weighted average shares outstanding of $595 million.

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

Our focus as a Company in this stable environment remains to strive for continuous improvement, whether it is grinding out productivity improvements, making sure we are disciplined and focused on hitting our free cash flow targets, or driving bottom-line earnings per share growth.

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

Thank you.

We will now open the lines for a question-and-answer session.

(Operator Instructions)

Our first question is from the line of Sean Hannan from Needham & Company.

Your line is open.

Hey, Sean.

Sir, your line is open.

Maybe we should move to the next question.

Thank you.

One moment.

Next question is from the line of Amit Daryanani from RBC Capital Markets.

Sir, your line is open.

Thanks.

Good afternoon, guys.

Couple questions.

One, Mike, you talked about the upside you saw from your large customer within CTG.

And you've been conservative about that on a go-forward basis, given the sale that's happening there.

The strength that you saw, to the extent you can see, was that an inventory build by the customer ahead of that transaction, or do you think they're just having good demand.

And if the demand sustains, do you think there's potential for upside in the September quarter as well?

All the indications that we have is that it's real sell-through.

The products are well accepted in the marketplace, as we understand it.

We don't anticipate it being an inventory build.

If they continue see that sort of upside going into the September quarter, obviously we would have upside for (inaudible).

Got it.

And Chris, when I look at the working capital metrics, it really looks like the AR was the one that drove a lot of net working capital impact for you guys.

Was there any linearity in the quarter that played out?

You had almost implied the quarter was fairly back-end loaded.

Is that a fair assumption?

Hi, Amit.

Yes, I think that there's an element of that.

Due to some timing in some of the revenue charge for the quarter, you'll see some of that collections presenting itself into September.

What we highlighted is that it came in roughly where we expected, in that we see ourselves returning to that strong free cash flow generation, hitting around $200 million in the September quarter.

We also think that there's opportunities and levers within the inventory as we progress throughout this year to also provide further operating cash flow.

Thanks a lot, guys.

Thanks.

Thank you.

Next question is from Mr. Jim Suva from Citigroup.

Sir, your line is open.

Thanks and congratulations.

A quick follow-up from Amit's question about the largest customer.

Are you guys actually trimming your outlook a lot more than they are, or are you guys kind of in harmony with that consumer seasonal decline?

Because normally, one just doesn't see that type of decline for September.

We're just -- Jim, I think we're just looking at the overall demand profile.

We're looking at what could happen.

They're going through a transition with a giant purchase.

We don't know what implications that's going to have in terms of their sell-through into the marketplace.

We don't know what strategies the new owner is going to have as it relates to pricing, and there's just some uncertainties as it relates to demand, I think.

So I think as a result, we've gone in a little bit more conservative, and we just think it's appropriate.

We don't have any particular major ramps going on.

We just think -- the success in the marketplace is actually pretty strong.

But alternatively, there's a lot of uncertainties, and we would just like to stay with a conservative forecast at this time as a result.

That makes sense.

Maybe a big strategic question about capital allocation.

Can you remind us about your stock buyback plans and the laws in Singapore.

I think you guys did a proposal, what the status is, and then also cash for deployment, whether it be through M&A or stock buyback.

I'm sure growing the business organically is the top priority.

Maybe you can talk about the allocation and help remind us who aren't overly familiar with the Singapore buyback laws.

Hi, Jim.

It's Chris.

I'll start with the regulatory or the restrictions that we would have.

Last year, we were granted the waiver, a new authorization to be able to repurchase up to 20%, which historically has been capped at the 10%.

And that 10% threshold was a threshold that we've been bumping into for some time.

If you look back over the last four years, we've actually repurchased roughly 33% of our float, taking 269 million shares and over $1.8 billion spent on that.

In fact, this past quarter as you can see, we continue to do so because the share repurchase program, as we've said before, has been, is, and will continue to be a key feature set for us as we return value to our shareholders.

And it's also following onto the commitment we made, as we went out to the investor base back in May, that we're committed to returning over 50% of our free cash flow generation to the shareholders.

So we've been able to -- we have the increased flexibility, as the threshold moves higher.

We view it more as around our ability and our appetite.

Clearly, we have the ability with our $1.3 billion plus of cash, plus a strong free cash flow generation.

So we have the ability to sustain that, as well as we've had the appetite, which you've seen us over the past four years continue.

So as it relates to capital allocation, not much has changed.

We're making sure that we're investing in this business organically for growth.

We made a heavy level of investment this past year, with over 500 -- over $0.5 billion invested into CapEx into the business.

So you're seeing us able to taper that off and still invest in innovation this current year, but not at the same level.

We're still looking at our niche, strategic M&A activities, so you'll still see us playing in that space there.

And the residual, again, goes back to us with a clear focus of delivering to our shareholders over 50% of our free cash flow.

And then, Mike, strategically are there some tuck-in acquisitions or skill sets or complementary or adjacent things you're looking at?

Because you guys have a good problem of way excess cash.

We have a good problem of cash, and we actually have another good problem, which is our portfolio of capabilities largely across the globe are already built.

So the other thing that we have is we have a very, very well-built portfolio.

So we're not going into the marketplace in a position of weakness.

There aren't specific things that we need to have in order to compete.

We already have all those things.

We have those things across the globe.

So as we look at those things, we don't need to do as much.

It's a great opportunity as a result of cash, and so it's one of the reasons that we did go out and say we wanted to deliver 50% of the cash back to shareholders.

That being said, our double-down segment, as you know, is to keep driving automotive and medical.

And if we do have those M&A opportunities available, it's likely that you'll see them in those two areas, where we can further cement our leading position.

Because we believe both the medical and automotive today we're way in the lead of terms of revenue capability across a broad spectrum of different technology.

So that's the place that we would go and double down on and continue to invest in.

Sounds great.

Congratulations to you and your team at Flextronics.

Thank you.

Thank you.

Next question is from the line of Mr. Brian Alexander from Raymond James.

Sir, your line is open.

Yes, hi, guys, this is Jeff Koche in for Brian.

Back to the first question, it does seem like the last few quarters you guys have been upsiding the top end of your guidance by something like 2% to 6%.

Is this really a change in the timing of customer orders?

And because it definitely seems like the back-end loaded, this isn't the first quarter.

So can you give us some color on that?

I think there's some back-end loading.

If you're wondering did some of the revenue come out of Q2 and go into Q1 as a result of pull-ins or back-end orders or something, maybe a little bit.

\We did see some good upside, because we view the macro-economy as being okay.

We did get some -- all the upside that we saw going up to $6.6 billion last quarter was not just Motorola.

It was a broad section of customers.

But we don't see really a lot of pull-ins, or we don't really see a lot with the exception of maybe semicap.

Semicap was very, very heavy last quarter.

That drove some upside in revenue, and a lot more of that semicap I think will fall away this quarter.

The other thing we saw a lot of is telecom pushed pretty hard last quarter.

And we saw some upsides there, and customers were struggling to get parts that they needed to in order to get the upsides.

And a lot of that revenue push came through in the June quarter.

So I'd say not a lot of it, but if I was to pick two places, I'd think about telecom and I'd think about semicap.

And then we just had general strength from our largest customer.

Jeff, the only thing I'd add to that is in fact the last three quarters, the last couple weeks of each of these quarters has been much stronger than historically for us.

And so, we've been able to in the last two weeks, each of these last three periods seen a much heavier lift in our demand profile there.

Got it.

Great, guys.

One follow-up: so the midpoint of guide is roughly equal to your September quarter last year, and yet the midpoint of your op income is closer to $180 million, up like $25 million year over year.

Can you walk us through that accretion?

How much of it is restructuring, and maybe how much, if you could allocate it to some of the other businesses, that would be very helpful?

Thanks.

As you note, the midpoint of our September guide is relatively flat at the top end, and we grow 12% in the middle, and earnings is almost 10%.

If you look back over the past year, we continue to make progress and are heading in the right direction.

We've been making a very focused and disciplined effort around our cost structure.

It took place last year with the restructuring efforts that we undertook.

A large share of that was within our Motech business.

Later in the year, we actually, in our December quarter, we announced that we were taking a focused rationalization on our SG&A.

So the combination of those two has provided some of that benefit or that uplift year over year, as well as the growth.

If you look year over year, you're starting to see our higher margin businesses become more significant in our mix.

So they're helping to contribute to a better, richer profitability.

Thank you.

Next question is from the line of Mr. Shawn Harrison from Longbow Research.

Your line is open.

Hi.

Just wanted to delve into the feeling a bit better on the macro and the INS business seeing upside this quarter but being down into the September quarter.

Is there anything other than seasonality affecting the business in the September quarter, be it customer weakness or anything like that in there?

No, I think the -- I don't think there's very much seasonality really.

I think you've got a little bit of a pick-up, so when you do a sequential comp, it makes it a little bit more difficult.

It was actually reasonably strong in the June quarter for a lot of the telecom customers, so we actually saw some unexpected upside.

We were anticipating it being flat, and it ended up being a little bit better.

So it exceeded our original expectations for the June quarter, and now you're doing a comp against that little pop that we got in the June quarter.

So it just makes it for a more difficult pop.

If I was to think about it, we don't see much seasonality around this time of the year.

We normally see a little bit of seasonality in the March quarter in the INS business.

But we continue to -- we made some comments about Investor and Analyst Day that we would like to see -- or expect to see INS roughly flat for the year.

We continue to see that on a rough-cut basis.

Obviously, there's three quarters left, so it's hard to say.

We continue to believe that despite the upside that we saw last quarter, we'll probably end up with a pretty flat year on an overall basis.

Then as a follow-up, Multech and Flex Power heading into the back half of this calendar year, maybe you could talk about what you're seeing in terms of new program wins and whether the business in the June quarter was profitable as well.

So we continued to be profitable in those -- in our components business.

We would actually expect that profitability and the revenue to pick up as we go through the next few quarters, because these guys do have some seasonality.

Both these two divisions have some seasonality associated with it.

So we'll expect to end the year certainly with operating profit above our corporate average, and but we would actually expect it to get stronger over the next quarter.

Multech in particular, it's been around really a long time.

It just has a massively diversified portfolio across both high-end products and low-end products.

We've made a number of investments like into our ITC, which is our Internet technology, or our interconnect technology center, which is something you may have seen during the Analyst Day, which is providing a lot of Flex capability into Multech and feeding it with some new business.

So in summary, we're positive on the operations.

We'll expect them to grow revenue over the course of the next few quarters.

We would expect them to actually improve their operating profit over the next few quarters.

But overall, we'll end up the year certainly above the corporate averages in profit.

Thanks so much and congrats on the quarter.

Thanks.

Thank you.

Next question is from the line of Mr. Mark Delaney from Goldman Sachs.

Your line is open.

Great.

Thanks very much for taking the questions.

I have a few.

So first, I wanted to follow up on the prior question on the outlook for INS.

I think it was down 1% year over year in June, and the guidance for September is down about 5% year over year.

I know, Mike, you just commented about you think it could be flat roughly for the full fiscal year.

If I look at the sequential changes in FY13 and FY14, it was roughly flat in December and then down in March.

And so I was wondering if you could just elaborate a little bit more.

Do you have the orders in hand that give you the confidence that there's a pickup in the back half?

Or elaborate on what the expectations are there.

It's pretty big business.

It's multiple billions, as you know.

And the pickup we're talking about is a few percent.

So we don't -- do we have orders in hand?

Whether we have orders in hand or not, it actually doesn't matter.

What really matters is our customer's sell-through into their customer base.

We actually have a hard time making projections of what our customers and sell-through would actually be for the next three quarters.

So no, it's just we've run this business for a long time.

This is our best guess at what it might look like.

This is what we're driving to.

It's what we think we're hearing from our customers, and but again, what we're talking about is a few percents here or there, the numbers you just mentioned.

Okay.

That's helpful.

And then I think you said in your prepared remarks, Mike, that you expect the combination of IEI and high reliability to grow, in total, 10% for the full year.

Did I understand that correctly?

Correct.

Okay.

And so if I do the math on that, I think in the first half of the year, if my quick math here is right, it was up 15% in the first half of the year.

It seems like there's a deceleration.

Even if I -- assuming that the midpoint of your guidance for September.

And so even if I run those, both those groups is flat in both December and March, I'm coming up with up 12%.

So it seems like you're trying to imply that there might be some down tick in the second half of the fiscal year on a sequential basis in either industrial or high reliability.

Is that the right way to be thinking about that?

Hi, Mark, it's Chris.

I think you might be reading into it a little too much right there.

If you look at June and then you look at September for us on a year-over-year basis, it's 15%, 16% year-over-year growth.

We spent a fair amount of time at our Investor Day trying to elaborate on how we're winning in both of those markets and how we continue to find opportunities to further penetrate existing customers, plus a whole host of new customers.

We're continuously finding new logos to come in from small to medium to large global conglomerates on the IEI side, as well as a lot of opportunity to expand relationships with the medical side.

So as we think about the rest of this year, we're saying double-digit, 10% plus growth.

We're just not getting into the back end of the year with such fine granularity.

Okay.

That's helpful.

And then if I could just ask one last question, then I'll requested if I have additional after this.

But so on the buybacks, I think you spent a little over $100 million on repurchases for this quarter.

My understanding is your guidance is to return over 50% of free cash flow.

I think it was a use of $154 million in June, and I think, Chris, your guidance was about $200 million for September.

So net $50 million of free cash flow in the first half, and you already spent $100 million in the first fiscal quarter.

Maybe you could help me think about what the trajectory of the potential buybacks is over the rest of the year?

No problem, Mark.

So for us, our commitment is to return to our shareholders over 50% of our annual free cash flow.

So I also tried to paint a picture that while we had a use of free cash flow of $154 million at this first quarter, year todate, we will be plus $50 million plus in free cash flow through the Q2.

And we went on to, in my prepared remarks, went on to indicate with conviction that we maintain our $3 billion to $4 billion free cash flow generation target over the next five years, ending FY17, which has an implied free cash flow of $600 million plus.

And so as you think about the share repurchase program, we continue to be committed to that program.

It has been, is, and will continue to be the key way we're returning value to our shareholders.

And you're seeing us this past quarter again repurchasing about $106 million, roughly 2% of the float at $9.69.

And it's just going to continue to be that way.

I don't get -- I don't measure it on a quarterly basis.

I'm viewing this on our return on an annual basis.

That's helpful, Chris.

Thank you very much.

Hopefully that helps.

It is.

Thank you very much.

Thank you.

Thank you.

Next question is from the line of Osten Bernardez from Cross Research.

Your line is open.

Steve Fox pinch hitting for Osten.

Mike, one question on your comments about the macro-environment showing some positive bias recently.

I know you mentioned that it's manifesting itself somewhat with better end-of-quarter volumes.

Can you talk about how else you're seeing it, whether it's in new program ramps or any particular markets that are showing those trends more than others?

One of your smaller competitors was talking about better new program ramps or faster ramp; I don't know if you guys are seeing as much of that.

Then I had a quick follow-up.

Thanks.

Part of what we try to do and try to understand what the future looks like for us is we maintain this massively diversified portfolio and try as best we can to understand what are the trends in the macro that will either drive that positively or negatively.

We actually can't forecast our customers end consumption, of course.

Obviously, it's hard for them to do that.

So when we think about it, we see strength in auto.

We see strength in what I call almost general industrial across the board.

Year to date, we've had a lot of strength in semiconductor cap.

I think it was more of a bubble, and I think it will come off that later in the year.

We've mentioned some of the strength that we've seen in telecom, and but at the same time, we also talked about growing 10% in automotive and industrial in general, and automotive and industrial is not growing 10%.

So those are on the back of new program ramps, and just general strength in terms of bookings, as opposed to just waiting for the economy to do better.

So in general, we see a strengthening economy.

Obviously you guys see all the macro data so you can make your own judgment as to that.

We see some real strengths in some of the industries, and at the same time, we believe we're winning our pace of new business in the areas that are important to us, like IEI or HRS.

Thanks.

And then just a follow-up question: you mentioned heavy activity in your innovation centers.

Beyond what you talked about at the Analyst Day, I don't know if this is an incremental change since then, or just more of the same.

But how much of that is related to your own activities versus the economy?

And if there's any notable examples recently that you could share, that would be helpful.

Thanks.

So the economic indicator of this is just about the amount of innovation, the fact that product life cycles actually are quicker in -- the whole world and all product categories are embracing technology as a solution, whether it's an automobile or whether it's a washing machine.

Or whether it's the connected home or just broadly going through that, it's really built around a lot of technology acceptance across many, many product categories.

So independent of economic growth, that's just a trend of the world.

It is creating opportunities for us, being somewhat of a leader of providing these kind of innovations, and we're seeing a lot of strength.

So whether it's new companies starting up or it's just companies looking for innovative solutions that are big companies but actually want to find ways to embrace innovation, all of these things are what we consider to be the activity is going through the roof.

Some of the steps that we've talked about, even at Innovation Day, we've had like 3,000 people go through the innovation center in Silicon Valley here.

And we've seen no letup of any of that.

Really what we're trying to do there is not just take on new companies and look for more volumes in new companies, but it's actually to try to be the intersection of all these new ideas and seeing all these different technologies and being able to distribute these ideas and technologies and innovations into the channels.

Which helps the small guy and the small innovator, and it helps the big guy that owns the channel.

We're actually trying to be the centerpiece of all this -- much of this innovation.

All I can say is you saw a lot of it when we were here on Analyst Day.

We continue to see an accelerated level of activity and new customers, and more and more where we're able to connect the dots.

We've build process around connecting these dots to drive innovations, and we're seeing more and more adoptions with the customers.

Great.

Thank you very much.

Thank you.

Next question is from the line of Wamsi Mohan from Bank of America Merrill Lynch.

Your line is open.

Good afternoon.

Mike, in your comments around Motorola, you highlighted the strategic value that it created.

I was wondering how the non-Motorola Google business is tracking.

Any updates that you could share there in terms of how large that business is now and how fast it's growing?

I don't exactly have that number, and probably wouldn't quantify it.

That one's difficult to estimate.

We have so many different programs that we're working on at the moment that it's hard to really know -- the very, very innovative program, it's very, very different, it's hard to know how many of these programs are going to turn out, so it's hard to quantify it.

We've talked about some that we've gone public with, things like the Chromecast, which ended up winning 2013 Time magazine's product of the year.

A lot of it we can't talk about it, so all I can say is that the original premise of getting into the ecosystems of these really, really big guys continues to be very, very valid.

We continue to work very, very hard at getting deeper into those ecosystems, and the original premise of this continues to be very, very valid today.

Thanks, Mike.

And Chris, you noted the sale of that non-strategic Western European manufacturing facility.

Do you see any additional opportunities for footprint rationalization?

Thank you.

At this point in time, there's really nothing more from a facility sale type of aspect.

We're just really focused right now on really getting after our productivity and our operations and further advancing on lean initiatives and really focused on driving that operating profit dollar and operating margin expansion.

So as it relates to any distinct one-off operational footprint rationalizations, I don't see anything further.

Okay.

Thanks, Chris.

And last one from me: Mike, any chance to quantify the magnitude of that pull-in that you said potentially happened to some degree in telecom and semicap?

Thanks.

If I think about the $2 billion dollars of revenue that we have across INS, it's still very, very small, call it $50 million to $100 million kind of number.

So it's still not extremely meaningful and -- but it's nice to see some upside.

Okay.

Thanks a lot.

Thank you.

Next question is from the line of Amitabh Passi from UBS.

Your line is open.

Hi, thank you.

Mike, I wanted to clarify a comment I thought you made for CTG.

Did you imply or say that for the December quarter you expect sales to be flattish versus a normal seasonal pattern of another sequential uptick?

I think what we said for CTG is that it would be -- okay, so let's talk about it in two different places, Motorola and CTG.

What we said is on Motorola, we would be guiding that conservatively, not a reflection of Motorola's necessarily, forecast.

And what we said is we'd have modest seasonality in CTG, same as always.

But if you put them into a bundle, what it probably means is the December quarter is more of a flat quarter relative to where we expect September to be today.

Okay.

Excellent.

I wanted to -- so maybe then by extension, does that mean in March you would also expect to see muted seasonality?

Or again, because typically March, we tend to see high single-digit, low double-digit type declines.

I think the March -- we've historically had pretty significant seasonal declines in double digits.

Last year we had less.

I expect this year we're going to have less of a decline than we've had in the past, and I think probably those declines are starting to be a little bit more structural at Flextronics.

Okay.

Going forward, as we [move] the portfolio.

We're getting out pretty far here.

We just really wanted to stress also the conservatism around our largest customer.

And with the transaction that's under way with them, we have -- we're getting out several, several quarters here.

But the point is that we're seeing a conservative approach plus some seasonality impacts as we move forward.

I appreciate that.

The motivation for the question was if I flat line CTG, INS looks flat.

Then, even if I assume INI and HRS grow low double digits, it basically seemed like the June quarter might be a peak quarter in terms of sales, which is why I was trying to understand sort of the ebb and flows over the next couple quarters.

Okay.

What we can do is we can work with your model team offline later.

But we're just trying to give you enough indication of what we're see in the near term, put in our guidance.

And then we're probably getting out a little too far ahead, given the broader environment.

Perfect.

Then just one final one.

On HRS, Mike, again, peak sales, but if I look at just the year-over-year trend over the last four, five quarters, it's been decelerating.

Is there anything in the pipeline where we should expect to see maybe an inflection and for the year-over-year growth to reaccelerate over the next four, five quarters?

Any help you can give there for HRS?

Yes, we're actually exceptionally bullish on the pipeline, particularly for HRS.

If we think about some really interesting programs that carry with it some reasonable margins, we're really excited about the HRS portfolio.

We've been building that portfolio for many, many years, as you know.

We're now up to probably close to $2 billion, and to start calling that hopefully a double-digit growth going forward adds some significant contribution to Flex.

So we have a great portfolio; maybe we're in a little bit of a pause the last two quarters.

As you know, this quarter was only 5% growth year over year.

Alternatively, it's like the 18th straight quarter sequential growth.

We've done like 18 straight sequential-growth quarters, so we're not going to feel too bad about it just yet.

As we look forward, we actually think it's a very, very strong portfolio.

We're really positioned well with the set of businesses that we have and with the capabilities we have.

And we're actually quite bullish, and that's the reason we talk about -- and the same comments with IEI.

That's why we've been pretty bullish about really trying to drive those segments' double digits.

Thank you.

I appreciate it.

Operator, I think we're starting to bump up against our time limit here.

We have time for one more question, please.

Thank you, sir.

The last question is from Mr. Sean Hannan from Needham & Company.

Your line is open, sir.

Thanks for squeezing me in here.

Apologies on the phone issue earlier.

So just wanted to see if I could ask, if we could break down a little bit the components of INS contributing to your guidance for next quarter.

There's certainly been some mixed data points out there in computing, some have actually been slightly encouraging.

That's been interesting, although not entirely consistent.

Obviously there have been some thoughts around some regional slowdowns when it comes to telecom infrastructure pause, et cetera.

Can you help to walk through for us what you're seeing a little bit more in detail and the makeup on that piece of the business?

Thanks.

That's kind of hard to do.

Remember, our portfolio is different than the industry's portfolio.

We have -- we continue to see -- communications, as I mentioned, was pretty strong this last quarter.

We expect it to pull back a little bit on this quarter on a sequential basis.

Our server and storage business, we expect to be relatively flat.

If I look at the entire portfolio, it's hard to dissect which one's up, which one's down and relate that to the macro.

All I can say is as I look at an overall basis, again, I think we're getting super granular.

And all I can say is on an overall basis, we actually expect it to be -- go through the balance of the year reasonably flat.

Okay.

Thanks.

Most of my other questions have been answered, and thanks very much for pulling me back into the queue.

You're welcome.

Thank you.

Thank you everyone for joining us on our call today.

A replay will be available on our website.

This concludes our conference call.

Thank you.

That concludes today's conference.

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