Flex Ltd (FLEX) 2015 Q2 法說會逐字稿

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

Today's call is being recorded, and all lines have them 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 instructions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics Vice President of Investor Relations.

Sir, you may begin.

Thank you, and welcome to Flextronics' conference call to discuss the results of our FY15 second quarter, ended September 26, 2014.

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

Joining me today 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 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.

I would now like to turn the call over to our Chief Financial Officer, Chris Collier.

Chris?

Thank you, Kevin.

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

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

Flextronics' financial performance for Q2 reflects our steady progress, as we continue to deliver on our commitments.

Revenue grew $118 million, or 2% year over year, to $6.5 billion, which was above the midpoint of our guidance range of $6.2 billion to $6.6 billion.

Almost every business group met or exceeded our expectations, and all but one grew year over year.

As Mike will discuss in further detail, we continue to see strong year-over-year growth in both our industrial and emerging industries group, or IEI, which grew more than $163 million, or 17%, and our high reliability solutions group, which expanded 11% year over year.

Our second-quarter adjusted operating income increased 16% year over year, to $183 million.

This also was above the midpoint of our guidance range, which was $165 million to $190 million.

Adjusted net income was $157 million, increasing 17% year over year.

Our GAAP operating income totaled $172 million, and our net income was $139 million, both of which reflect improving quality of earnings.

Our adjusted earnings per diluted share for Q2 was $0.26, which was at the high end of our adjusted EPS guidance range of $0.22 to $0.26, and represented an 18% year-over-year improvement.

Turning to slide 4, you will see our trended quarterly highlights.

Our second-quarter adjusted gross profit totaled $379 million, which in dollar terms is up modestly 2% year over year.

Our Q2 gross margin was in line with our expectations at 5.8%, which is essentially flat sequentially.

We expect margin to improve from our current levels, as we continue to drive further operational efficiencies and yield improvements over the coming quarters.

We are strategically and consciously shifting our portfolio mix.

Our Industrial, Medical and Automotive businesses continue to grow, and are now representing 30% of our total portfolio.

As we highlighted at our Investor Day, we continue to see our portfolio shifting towards a greater mix of these businesses, which carry longer product life cycles and higher margins.

This shift, together with our focus on driving to a higher margin profile for our consumer technologies group, contributes to our vision for a steady margin expansion.

This quarter, our adjusted operating income increased by $25 million, or 16% year over year, to $183 million.

On a sequential basis, our adjusted operating income remained flat, despite $114 million in lower sales.

Now on an adjusted operating margin basis, we increased 30 basis points year over year to 2.8%, which reflects the sixth consecutive quarter of increasing operating margin.

Aiding in our continuing operating profit and operating margin expansion is our discipline around our operating expenses.

We have reduced our quarterly SG&A expense by over $16 million since a year ago.

And for the second consecutive quarter, we've achieved our targeted level of $200 million or below that we had set in January 2014.

Conscious efforts have been made to retool, to refocus our efforts to drive productivity and efficiency, while simultaneously investing in innovation, design efforts and other strategic initiatives to expand and enhance our platform.

We expect to maintain our cost discipline and operate at the targeted SG&A level of $200 million or below.

Return on invested capital is a key metric that supports and guides our financial decision making and allocation of capital, regardless of the business we are operating.

Our return on invested capital has improved by 33% year over year, or up 580 basis points, to 23.3% for Q2.

This result exceeds our weighted average cost of capital, and reflects improving earnings efficiency in relation to total capital deployed into our business.

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

Net interest and other expense was approximately $10 million in the quarter, which was favorably below our guidance range of $20 million.

This performance was due, in the most part, to our realization of stronger-than-expected foreign currency gains.

For our December 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 second quarter was $17 million, reflecting an adjusted income tax rate of approximately 10%, which is at the high point of our targeted tax rate range of 8% to 10%.

As we move forward throughout FY15, we believe that our income tax rate will remain at the high end of our 8% to 10% range, absent any discrete items.

Now when reconciling between our quarterly GAAP and adjusted EPS, you see a $0.03 impact from stock-based compensation expense and intangible amortization expense, net of tax benefits.

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

Flextronics continues to be an excellent generator of cash, and again this quarter, we displayed strong cash flow.

We generated $387 million in cash flow from operations, and $322 million in free cash flow.

The $322 million of free cash flow exceeded our expectation of roughly $200 million for the quarter.

A key component of this strong cash flow generation was our disciplined management of networking capital.

Our networking capital decreased by $237 million, to $1.9 billion.

At this level, it represents 7% of our sales, or right at the middle of our targeted range for networking capital, which is 6% to 8% of sales.

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

Another key element is our continued discipline on capital investment.

As expected, our capital expenditures of $65 million were lower than our depreciation for the quarter.

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

We expect that our CapEx investments will be lower than depreciation levels throughout FY15.

And our capital investment target for FY15 remains in the range of $300 million to $350 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, disciplined and on target.

Lastly, we continue to use our strong cash flow generation to consistently return value to our shareholders through repurchasing of our shares.

This quarter, we paid $101 million for the repurchase of over 9 million shares, or roughly 2% of our ordinary shares during the quarter, at an average cost of $10.85 per share.

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

Our financial condition remains strong, with no debt maturities until calendar 2018, with over $3 billion in liquidity, and our total cash of just over $1.5 billion.

Our total debt is slightly above $2 billion, and our debt to EBITDA ratio improved to 1.7 times from the prior quarter.

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 second quarter.

As you can see from our earnings release today, the underlying fundamentals of our business remain intact, and we continue to make steady progress, and we continue to deliver on our commitments.

With that, I will now turn the call over to Mike, who will provide you with his perspective on the performance this past quarter, an overview of the business in current trends, as well as share our next quarter's financial guidance.

Thanks, Chris.

Please turn to Slide 8. Our steady execution in a stable environment continues to pay off, with measured improvement across many areas of our business.

From a revenue perspective, we exceeded our expectations in high reliability solutions, or HRS, put consumer technologies group, or CTG, on our way to posting $6.53 billion in sales, near the high end of our guidance range.

The biggest upside relative to our expectations again came in our CTG business, declining only 1% sequentially, but better than our expectation of a high single-digit decline.

HRS grow over 3% sequentially versus our guidance of flat.

This marked HRS's 19th straight quarter of year-over-year growth.

On a combined basis, our HRS and IEI businesses totaled just over 30% of sales, which displays the real strength of our offering and our ability to engage and grow with customers in these markets.

In just a short three years, we have moved this from under 20% of our total portfolio to 30%.

We continue to find many new ways to partner in these markets, and remain confident in driving growth in both HRS and IEI going forward, and expand their combined revenue share towards 40% over the next few years.

This was the sixth consecutive quarter of operating margin improvement, rising 5 basis points to over 2.8%.

Additionally, operating profit dollars came in at $183 million, toward the high end of our guidance.

Further supporting our operating improvement was continued disciplined cost controls, as SG&A was $196 million versus a target of $200 million.

We remain focused and committed to maintaining steady margin improvement going forward.

Our cash flows and capital structure continue to be pillars of strength for Flextronics.

We are on track for another strong free cash flow year.

As Chris mentioned, free cash flow was $322 million for the quarter, ahead of our expectations of $200 million.

Free cash flow for the fiscal year to date is now $168 million, and we continue to see $600 million or above as an achievable target for FY15.

Our consistent return of value to shareholders continued, with additional 9 million shares retired via our buyback, for just over $101 million.

In the first half of our FY15, we have retired approximately 20 million shares for $207 million.

As you can see, our commitment to return over 50% of our annual free cash flows remains firmly intact, based on where we are at the halfway point of this year.

Our consistency in buying back our shares over the last four plus fiscal years has enabled us to reduce our shares outstanding by over 30%, or 278 million shares, or over $1.9 billion.

Our focus on enabling innovation and differentiation for our customers yields a strong competitive advantage for Flextronics.

We lead the industry in designing innovative supply chain solutions, and won the first place award in the 2014 supply chain innovation competition at the Council of Supply Chain Management Professionals annual global conference.

Many of you saw our customer innovation center in San Jose at our May Investor and Analyst Day.

And how we are enabling new customers to scale, and acting as the marketplace of innovation for new processes and product technologies.

In just our San Jose campus alone, year to date, we have held 424 tours, hosting over 2,700 people, resulting in 30 new customer additions and developing many new process technologies.

Please turn to Slide 9. Before I dive into our performance by business group, I'd like to make a few comments about our largest customer, Motorola Mobility, and its pending acquisition by Lenovo.

At our May Investor and Analyst Day, and again last quarter, 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.

We await the closing of the transaction to receive additional updates, which we will communicate when appropriate.

In terms of macro-environment, we continue to see it as stable.

Our guidance also reflects this.

Moving to our network solutions group, or INS, which was in line with our expectations for a low single-digit decline.

Revenue was $2.4 billion, reflecting a $94 million decrease from last year, and down 7% from a year ago.

In the quarter, our Telecom server and storage and businesses were down mid single digits collectively, while our networking business rose modestly.

For next quarter, we expect INS revenue to be stable, with our core Telecom business being flat, network declining slightly, and service storage increasing slightly as an offset.

Our consumer technology group, or CTG's revenue, declined 1% sequentially to $2.1 billion.

This was better than our expectation for a sequential decline of high-single digits, due mostly to better than expected ramps across a number of customers, in areas such as wearables and consumer, as well as a bit better than the expected demand from our largest customer.

We are guiding to a modest seasonal increase in CTG sales, up low-single digits, which is slightly above our prior expectations of flat.

Our industrial and emerging industries group recorded its second straight quarter of $1.1 billion.

However, it declined slightly, by $31 million or 3% sequentially, due to softer than expected semi cap equipment sales, which comes after multiple quarters of out-performance in that customer set.

As a result, IEI was just below our expectations for flat.

Year over year, IEI remains the strongest performer across all four of our business groups, with sales up 17%.

Next quarter, we expect IEI will be stable, as strength with appliance and energy customers should be offset some softness in semi cap and some industrial customers.

This stable outlook translates into solid double-digit year-over-year growth, and we remain confident in our ability to grow the business 10% plus.

To that point, this quarter was well above average for new IEI bookings, which bodes well for the 12 months ahead, when many of them will begin to ramp.

Our high reliability solutions group, which comprises our Automotive, Medical, and Defense and Aerospace businesses, rose $29 million or 3% sequentially, and 11% year over year, to $875 million.

Next quarter, we expect HRS to be relatively stable, as we see consistent levels of production in both Medical and Automotive.

Similar to IEI, HRS also had an above average quarter of new program bookings, which should continue to provide momentum for double-digit growth in this group.

For the second consecutive quarter, on a combined basis, IEI and HRS had roughly $2 billion in quarterly sales, and grew 15% year over year.

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

Now turning to our December quarter guidance on Slide 10.

For the December quarter, revenue is expected to be $6.4 billion to $6.8 billion.

Our adjusted operating income is forecasted to be in the range of $175 million to $205 million, or $190 million at the midpoint.

This equates to an adjusted EPS guidance range of $0.24 to $0.28 per share, based on weighted average shares outstanding of $590 million.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted EPS guidance that I just provided by approximately $0.04 per share, for intangible amortization and stock-based compensation.

Before I open up the call for Q&A, I would like to thank all of Flextronics' employees worldwide, who are dedicated, day in and day out, to our improvement.

The management team and I recognize the relentless hard work and dedication required to consistently deliver on our commitments, [face] our customers' competitiveness, and return value to our shareholders.

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

Operator?

(Operator Instructions)

Jim Suva, Citi.

Great.

Thank you very much, and congratulations on continual road map of executing.

That's great.

It sounds like from your prepared remarks that CTG was the biggest upside to the quarter.

And if so, can you help us understand a little bit about the dynamics of that?

Because I believe given the size of that, you've got to pinpoint the Motorola -- or I guess not to talk about customers specifically, because you don't like to.

But your biggest customer there probably was the source of that upside, or was the majority of it?

Or was it not that major customer, and just all the other little companies in that?

If you could help us understand?

And I think the reason why that's important is, under their view of the risk of what's going on with the potential closing transaction.

Yes.

Hi, Jim.

Yes, we -- it was kind of a balanced upside.

It wasn't entirely from our largest customer.

And you're right, I can't get into details about that customer.

But as I mentioned, we also had some pretty good upside from some of the wearables customers.

We're now up to booking probably 25 different wearables deals across a whole variety of different applications, whether they be anything from fabrics to wrist bands to watches, to -- just a whole range of different things.

So we had some upside there, and we had some upside for Motorola.

So I'd call it a reasonably balanced.

And we even had some upside with some of our consumer gaming business.

So I would view it as a balanced view, and not just overwhelmed by the Motorola business.

Great, and then a quick follow-up.

When we think about your visibility today, say versus this time a quarter ago and this time year ago, similar, better, a little more murky?

The reason why I ask is, across the technology supply chain, whether it be EMF companies or distributors or chip companies, it seems like there is a polarizing impact of some companies saying it is normal, and a lot of others saying that we're seeing a big slowdown here in the past few weeks.

If you could help us assess your visibility, that would be great.

Thank you.

Yes, I think our visibility has not changed very much, and I consider it to be reasonably good.

We have not seen a big pullback across the industry.

I know some companies made a lot of noise about it.

We just haven't seen that evidence.

Don't know if we're going to see that later or not.

But just based on what we can see and our expectations, we consider to continue to see a very stable environment.

And we just don't see the evidence of any kind of major pullback.

Thank you very much.

Brian Alexander, Raymond James.

Okay, thanks very much.

If I look at the revenue guidance for December, and I take the midpoint of $6.6 billion, it is down about 8% year-over-year.

But all of that is coming from the consumer business being down, I think, over 20%.

So maybe just give us a sense for how much of that consumer decline is a function of your largest customer in that segment?

I know it is still very uncertain, but what are you factoring into the December quarter?

And then, related to that, if I look at the other three segments, they effectively net out to flat year-over-year revenue growth.

Is that how we should think about those businesses collectively, ex-consumer, going forward?

Or do you think that, with the strong bookings you've seen in HRS and IEI, and perhaps a moderating declines in INS, that you might actually be able to grow the rest of the portfolio?

Thanks.

Yes, Brian, so if we look at the consumer business relative to last year, last year, we had some really, really hot launches.

Microsoft did a very, very significant launch with their Connect products, which was very significant.

On the back of a lot of marketing and a lot of upside.

We had some really big launches with Chromecast and with Google, that hit the marketplace and just took off.

It ended up being Time magazine's number one Product of the Year.

We had a number of launches in -- around this time last year with Motorola that hit.

And they also did really, really well, and we did a lot of channel fill at that time.

So you had three big things, and we even talked about it last year, that the 7.2 is an anomaly, and as a result of three really big consumer launches.

And there are probably bits and pieces of other things.

So when I think about a comp on a year-on-year basis, it's tough to do the comp against those big things.

Because we don't have the same huge launch with Chromecast, we don't have the same huge launch -- or as big a launch as -- with Microsoft.

And we don't have as big a launch with the products hitting on Motorola.

So we knew Motorola is being reasonably flat, and -- but we had a lot -- so we just had a lot of other things that were kicking in.

As far as the other businesses, we just think about those other businesses -- INS has become a very, very stable, on a continuous basis.

There has either been -- it's either been either stable, or maybe even a slight downside on that business.

That business, we've had an objective of keeping it at 0.9%.

And -- so keeping that at 0% on year-on-year basis would be -- we'd consider that to be positive in this particular market environment.

The -- in the industrial business and the HRS business, part of that is just timing.

Industrial in particular, we went two quarters, both March and June quarter, or December and March quarter, where we had double-digit sequential growth.

So we are coming off a real tough comp off the sequential businesses.

And I just think those businesses are fundamentally structured, that we have the bookings in place.

And if we think about it on year-on-year basis, we will be able to drive both of those businesses combined like a 10% level.

And we think between those two, we'll -- so we just think those will be fine.

So we think those are just more quarterly disruptions, timing of the new programs, things like that.

But I think if you look at those other businesses on a year-on-year basis, to be able to get to 10% growth, we think is very workable.

And just related to that, a follow-up for Chris.

I know you focus more on operating income dollars than margins.

You've had four very strong double-digit growth quarters, in terms of operating income.

And your guidance suggests low single-digit growth in profitability in December, some of that related to the tough comps that Mike just alluded to.

I guess my question is, what's your confidence that once we get past these tough comps, that you can re-accelerate profit growth?

(technical difficulty) it back to double digits in [op] income growth?

Thanks.

Thanks for the question, Brian.

So maybe it is a great way to re-calibrate to our vision.

In my prepared remarks, I specifically identified that we expect margin to improve from the current levels, as we continue to drive further operational efficiencies, as well as yield improvements, in the next coming quarters.

As we think about margin, and as we said it before, the promises that margin is fundamentally the result of the mix of our business.

But we continue to lay forth a plan to grow these higher-margin longer product life cycle businesses meaningfully into the future.

We actually have many ways in which we are partnering and penetrating in each of those spaces, essentially creating a [tam], if you will, for those markets.

So we see great, solid double-digit growth, which is going to help push that margin.

But in the interim, if you were to take the vision we had laid fourth back on the Investor Day, where we had defined growth rates, as well as the margin profiles, for each of those business groups.

You blended yourself in that target portfolio to see a range of 3.4% to around 4.8% at the high end of an OP margin range.

If you take that same framework and put that in on the current print that we just did for Q2, you actually see an operating profit margin range that's more like the 3.1% at the low end, up to 4.3%.

So level setting on the Q2 print, you actually start thinking about where are we today, versus even the low-end, and we're in spitting distance of getting there.

We are just shy of about $18 million from the low end.

And as I said before, to get inside that range, it is all about driving further productivity -- further productivity improvements, yield improvements.

And we're aggressively working our way through that.

We're identifying root cause problems, defining action plans that will then accelerate those operational improvements and execution.

So we see ourselves, in the current state, moving our way into that range.

And then as the mix changes and we get some more uplift and some revenue, all of which continues to help us lay firmly convicted about that vision up into that margin range.

Thanks very much.

Nice job.

Amit Daryanani, RBC Capital.

Thanks a lot.

Good afternoon, guys.

Two questions for me.

Maybe just to pick up on what you were talking about, Chris.

If I play with the target model that you guys talked about Analyst Day with the numbers you have now, when I (inaudible) I get something like 3.5% op margins at the midpoint of those ranges.

Where is that 70 basis point delta to which you're doing or you should be doing?

Is it just under-performance in each of those segments where you have a higher cost structure?

Or is it all essentially isolated in the CTT segment where you have more challenges?

And really maybe the part I'm trying to get to is, if IEI and HRS keep growing the way they are, and those margin structures should be 4% to 6% and 5% to 7%, that alone should give you a nice tailwind, from a mix perspective.

So I'm just trying to understand, are those segments running where they should be?

And the delta then isn't CTG?

Or is it more broad-based headwind that you have?

Amit, that's a great question.

Let me paint it a couple of different ways.

First, you actually mentioned the tail winds that we get for those growing businesses that are at the higher-margin profiles.

In each of those, we have room to improve, as we are launching within that, within those spaces.

And we continue to find and hone our operational excellence around some of the more complicated elements of those businesses.

So there's room to improve within those.

But right now, where we sit, we like where we're positioned inside those businesses, with regards to their return profiles.

The other thing we are doing is, we are changing the way we get after CR -- consumer technologies business.

And we are moving that to a richer mix.

And so we are not at that target margin profile for that business.

So that's improving.

We've seen a lot of dialogue we've had around the innovative, the connected home, and other disruptive plays and ability to partner with new technology companies in that space.

That's taking time.

And in every one of those, whether it is in wearables or [connected], we actually get a much greater margin profile than what historically has been in CTG.

So that mix shift is going to help propel us forward.

But as I just talked a second ago to Brian, I could find an easy 30 basis points of [uplift] just in our own execution around our business, as we actually transition some programs from development into production.

And as we keep getting after the root cause and action plans around some of the operational excellence that we need.

So it is a multitude of levers.

We just continue to push forward, focused around continuous improvement.

We're focused around continuing to expand both operating profit dollars and margin.

And at the end of the day, the way we laid out that vision will fundamentally structured to achieve that range.

It's just upon us to execute and keep pushing ourselves to that level.

Fair enough.

And if I could just follow up on the free cash flow generation.

It was obviously very impressive this quarter.

But what struck me a bit was maybe the accounts receivables were down fairly substantially, almost seems like you had a very front-end loaded quarter.

Which I'm not sure if that was the case?

Or if you just have some securitization that happened that helped you?

Just maybe walk through the free cash flow to working capital?

What happened in the AR side this quarter?

Yes, another good question.

And so when you look at the free cash flow, it was -- we were really pleased, $322 million of free cash flow, well above where we had thought, around $200 million.

Very focused on driving to our $3 billion to $4 billion of free cash flow that we've set and committed to by 2017.

If you peel back how this is being developed, it is from consistent, steady earnings improvement, coupled with a discipline around working capital management.

And a discipline around our capital investment, where we've been under-spending depreciation.

Going to the working capital aspect, the point you highlighted, receivables actually came down $410 million, sequentially.

That was actually part of the problem last quarter.

So we reversed the hurt that we had in Q1, which is all centered around timing and collections.

There's really nothing -- we did not change, accelerate or increase any level of securitization or factoring.

So it really is a sense of timing.

If you look last quarter, we actually had been a user of cash, to the extent we had better collections that period.

It would have been better in line.

So it is really a timing.

If you'd look at it on a year-to-date basis, we are right on where we should be.

We are following our target range of networking capital of 6% to 8%.

We are right smack in the middle at 7% right now, and we see clearly many levers to play to improve our networking capital management, and to continue to drive to this cash flow generation that we are targeting.

Perfect, that's really helpful, and congrats on a nice quarter, guys.

Thank you.

Mark Delaney, Goldman Sachs.

Good afternoon, and thanks very much for taking the questions.

I think it had been about a year and half now that Flex has had the Motorola Mobility assets.

And I understand the comments that the Company made earlier in the year around the Analyst Day, that because the profitability with Motorola was very low, that even if Lenovo eventually does enter some of that production, that the EPS -- the potential EPS headwind to Flextronics would be pretty low.

I think you'd got it $0.02 to $0.03 to the full-year earnings.

I'm hoping you could just give us an update on what the potential impact might be, just given that I imagine the company is, now that you've had this business for a while, you've had time to improve the yield.

And I'm wondering if that changes how much profit is being generated from that business?

And what the potential downside risk may be if you do, in fact, lose some of that business?

Yes.

So if you remember what we outlined at Investor and Analyst Day, we did a what-if there was a complete in-sourcing of China, and there was also some uncertainty around the whole Dallas-Fort Worth project.

And as you know, the Dallas-Fort Worth project is completely out of our -- basically out of our system, in terms of any financial risk.

We concluded with the customer about a quarter ago.

As we mentioned, we will continue to run the business, but we concluded a deal about a quarter ago where those costs to shut down that factory were absorbed by our customer.

So we've taken a risk element out of our system.

The other thing we talked about Analyst Day is, what happens if China gets in-sourced.

And we basically said, by the time you take the working capital and convert it back into cash, and you take the depreciation, and you put that -- or you take the equipment and you move that back into another sites and move -- reduce the amount of CapEx you spend in the following periods, you end up with like a $0.02, $0.03 impact, including charges that we would expect.

So we continue to see that relatively just about the same as we do today.

Obviously, on Analyst Day, we had a lot less risk, because we don't have the Dallas-Fort Worth thing hanging over us.

But we do continue to make improvements in yields and productivity.

And if you notice, we've had the Motorola business for six quarters, and we've actually had six straight quarters of increasing operating profit margins.

And we have had five quarters of increasing our ROIC.

So we've been managing to run this thing very effectively.

But in any low-margin program, if it goes away, our operating profit percent goes up, our work in process converts to dollars.

And as you know, we like to buy back shares on a pretty frequent basis.

So between all that, we are not concerned about it too much.

As you know, it gave us a great position in with Google to do other projects.

As you know, Google is becoming more and more of a hardware manufacturer, as evidenced by what they did with Dropcam and then the Nest and then other projects that are frequently in the newspaper.

And rumored in Google Glass.

And at the same time, it gives us a stronger position into Lenovo, quite frankly, which is one of the largest electronics manufacturers in the world today.

So we're going to be positive about how we can work this and use the rest of our system to create value.

But it is kind of a long answer.

But I wanted to give you enough context around it.

But the short answer is, is we expect to be pretty close to where we were on the Analyst Day.

That's helpful context.

I appreciate that.

And then for a follow-up question, I'm hoping you can help us think about potential seasonality for the March quarter.

By my math, the median sequential decline over the last five years is down 13% sequentially, and I get an average of down 11%.

But I know base effect can always move things around from year-to-year.

And then of course, your mix of business has changed over time, too.

So maybe you can just help us think about what seasonality for the March quarter could be on -- for revenues on a quarter-to-quarter basis?

Yes.

March is always hard to predict.

But what we've been trying to do is, we move our portfolio and move the kind of businesses that we have in CTG, we actually expect less seasonalities as result of the structural change in the portfolio.

So what that means is both in the December quarter, we should have less going up, and on the March quarter, we should have less downside.

So structurally, if we think about going forward, we think we are in the mid to high single digits decline in the March quarter.

And we think about that not only this year, but maybe that's -- we're hoping that could be a more structural change as a result of our portfolio metric.

Thank you very much.

Osten Bernardez, Cross Research.

Yes, good afternoon.

Thanks for taking the questions.

I guess just to jump into, from a segment perspective, looking at INS, and you commented that you are expecting your networking business to increase quarter-over-quarter for December.

I was wondering if you could provide some color as to what the order patterns were during the September quarter?

And how we should be thinking about the INS business going forward, from the seasonality standpoint?

Yes, usually the seasonality in INS is -- it doesn't have that much seasonality.

It usually has a little bit of a downside in the March quarter.

But on average, seasonality is plus or minus like 1% or 2%, most likely on a continuous basis -- during the year, and then the March quarter ends up being down like a 6%, if we were to look at our five-year average.

So I think in all these things, we just think about the INS business -- so we think those -- that order pattern might be typical, again, of this year.

But we have to wait and see.

What we are trying to focus on the INS business is, we know that we have a tough -- our customers have a tough revenue level that they are trying to achieve in their hardware groups.

We see the group somewhat down, like at 0% to 5% kind of thing on an annual basis, in terms of the data we see in the marketplace.

We are trying to offset that by really going after more customers in China, where we already have a pretty good position.

We're trying to offset it by going into the appliance manufacturers.

We've got a great position with the Next Generation technology guys.

Guys like Arista and Palo Alto and FireEye, and a lot of others.

We looked at the last 10 IPOs, and we are in like 8 of them.

So we do expect that group of business to start to grow, and to create a meaningfully -- a more meaningfully impact, in terms of offsetting any declines in the more traditional base.

So on average, we see not too much seasonality.

A normal seasonality for the March quarter is 6% -- down 6%.

And -- but we are trying to offset that with the opportunity that we see in China and in new appliance manufacturer.

And even in the Converge 3.0 infrastructure space, with really integrating full systems.

Thank you for that.

And then lastly for me.

Chris, if you could comment on how we should be thinking about OpEx from a more longer-term perspective?

In terms of what type of revenue do you think you can support with this -- with a sub $200 million OpEx?

And at what point should we be thinking about that figure potentially growing?

Hey, Osten.

So with regards to the SG&A or OpEx, we're really happy with where we are performing right now.

Clearly, operating was a good, strong discipline and control.

Our target was to get down to the $200 million level or below by the September quarter.

We actually beat that by hitting that earlier in June, sustaining that into this current quarter.

We should be able to operate in this range for a while here.

It is our objective to offset merit or inflationary increases with productivity and efficiency gains.

This is a clear lever for us to be played -- we get a lot of leverage off of this -- and to move forward from here.

You're going to see us continue to invest a bit in innovation, and especially in the S part of the SG&A, the selling side.

But all of that together, I still think we will be right around this level.

It is our target to stay here.

And I don't see it kicking up any higher.

The one thing I would highlight, also, is that inside of our SG&A is our research and development spend, our R&D.

It does have some minor variations, so it may kick us up or down a couple million dollars, period to period.

So my be episodic, but nothing significant.

So long story short, we're operating with discipline, stay at this level, even with growing revenue, and focused around the S part, really focused around selling now.

Thank you very much.

(Operator Instructions)

Sherri Scribner, Deutsche Bank.

Hi, thanks.

Just with the growth that you are seeing in the CTG business, I'm curious if there's any capabilities that you think you are missing, in terms of that manufacturing capabilities?

And if there's any opportunities for acquisitions in that business?

And then secondly, it appears to generate a decent amount of cash.

Have you reconsidered introducing a dividend?

Thanks.

I will take the first question, and I will let Chris talk about the second one.

As far as CTG capabilities, we view them as actually pretty strong for the product mixes that we are going after.

And I will give you a couple of examples.

In the connected home, we have a whole range of technologies and wireless technologies that we're now taking and putting into a number of different customers' products, in order to get them smart and connected, into the whole Internet of things.

So from that standpoint, we just view our capabilities.

We have 1,500 design engineers around the world.

We have a huge amount of capability as it relates to anything from display interfaces and software and wireless modules.

And really the kind of things that you really need to go connect a consumer smart device into that new connected infrastructure.

The wearables were probably even stronger.

I think I mentioned earlier, we probably have about 25 customers in wearables.

We do everything from sensors to glasses to fabrics to wrist bands to watches, to a variety of different product categories.

And what we are focused on in that place, because you mentioned the capabilities, that's actually what's important in wearables, in our view.

We -- I don't think anybody really knows what the consumer preferences are going to be on consumers -- wearables in the future.

What we are very, very focused on is the underlying core technologies associated with wearables.

And these are things like -- and we probably have 30 patents in materials and methods and advanced manufacturing processes and technologies over the last 12 months.

So what we are actually focused on is not the customer acquisition part of wearables.

We are trying to focus on the underlying core technologies that enable, and are required, for wearable technologies.

And the -- we are building a chest of capabilities that are very differentiating.

And the reason they are differentiating is, you actually have to solve plastics problems.

You have to solve flex circuit problems.

You have to solve very traditional electronics problems, all simultaneously.

And the fact that we have Multek, the fact that we have a big mechanicals operation, and the fact that we have a really, really broad electronics ecosystem, really gives us the tools that we need.

So we're not -- when we think about those two very, very important technologies, we are in great shape.

So I think about some of the other online technologies that we need, it is really just to be able to access the new disruptors and the new innovators.

And we just have a whole range of technologies, or I would say initiatives, that allow us to attach into these new disruptors.

Whether they are our lab nine, or whether it is our innovation platform, or whether it is the customer innovation centers, all of these.

And the fact that we have this really strong regional footprint where new innovation occurs, both in Silicon Valley and -- Israel is probably where we are strongest.

That's probably where a huge percentage of that mobile connectivity innovation happens.

So -- and we are tapping into other places.

So we just view the structural capabilities, as we evolve into what is the new CTG, as being very, very robust (technical difficulty) for a long time (technical difficulty).

And Sherri, for the second part of your question there, thank you for recognizing our strong cash flow.

We continue to evaluate and consider all capital allocation options, as we look for the best return for our shareholders.

That rolls from share repurchases to M&A to deleveraging, and even to dividends.

As a reminder, we have had a history of consistently returning value to shareholders on the back of our consistent free cash flow generation.

And over the past 4.5 years now, we generated over $2.5 billion in free cash flow, and have bought back over $1.9 billion of our stock.

So we've been consistently returning greater than 50% of our free cash flow to the shareholders, and actually it is more like 75%, as you look backwards.

So today, we continue to believe that the -- that a consistent approach to share repurchase, which is grounded in our strong cash flow generation, is what is appropriate.

So that's where we are living today.

But again, we continuously evaluate and consider all of our capital options, as we move forward, to maximize the return for our shareholders.

Thank you.

At this time, we don't have any questions on the queue.

And I'm turning the call back to Mr. Kevin Kessel.

Thank you.

And thank you, everyone, for joining us on our call today.

We know there were a lot of other companies reporting, and we appreciate your time and attention.

For more information, please see our IR website or contact us directly.

This concludes our conference call.

Thank you.

That concludes today's conference call.

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