Flex Ltd (FLEX) 2015 Q3 法說會逐字稿

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

Today's call is being recorded.

(Operator Instructions)

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

Sir, you may begin.

Thank you and welcome to Flextronics' conference call to discuss the results of our FY15 third quarter, ended December 31, 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 report.

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

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

Chris?

Thanks Kevin.

And to everyone on the call, we appreciate your interest in Flextronics.

Let's begin on Slide 3 with our income statement highlights.

Flextronics' financial performance for Q3 reflects our steady progress as we continue to deliver on our commitments.

Revenue increased sequentially by $496 million, or 8% to $7 billion.

Exceeding the high end of our guidance range of $6.4 billion to $6.8 billion for the quarter.

As all four of our business groups exceeded our Q3 guidance.

We continued to see strong year-over-year growth in both our industrial and emerging industries group, or IEI, which grew more than 19%, or $180 million year-over-year.

And our high reliability solutions group, or HRS, which expanded 10% year-over-year.

Our third-quarter adjusted operating income increased 11% year-over-year to $207 million.

This also exceeded the high end of our guidance range of $175 million to $205 million.

Adjusted net income was $175 million, increasing 7% year-over-year.

Our GAAP operating income totaled $193 million, and net income was $153 million.

Both of which reflected our approved quality of earnings.

Lastly, our adjusted earnings per diluted share for Q3 was $0.30.

Which exceeded the high end of our adjusted EPS guidance range of $0.24 to $0.28.

And it represented a 50% year-over-year improvement.

Turning to Slide 4 you will see our trended quarterly financial highlights.

Our third-quarter adjusted gross profit totaled $411 million.

Which in dollar terms is modestly higher by 3% year-over-year.

Our Q3 margin of 5.8% came in line with our expectations and reflected a sequential increase of 5 basis points and improved more than 20 basis points when compared to last year.

Our margin is fundamentally a function of our business mix.

Is our objective to move our long-term portfolio towards a greater mix of businesses which have longer product life cycles and higher margins.

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

We believe there's room for further margin improvement above our current levels, as our execution improves on certain complex programs we've been ramping.

This quarter our adjusted operating income increased by $20 million, or 11% year-over-year to $207 million.

On a sequential basis, our adjusted operating income increased by $24 million, primarily due to the contribution from nearly $0.5 billion increase in our revenues, along with improved execution and leverage.

Our adjusted operating margin was 2.9%, reflecting an increase of almost 15 basis points sequentially and over 30 basis points year-over-year.

Aiding in our continued operating profit and margin expansion has been our discipline around our operating expenses.

Our quarterly SG&A expense has been reduced by nearly $10 million versus a year ago.

We intend to leverage our productivity and efficiency gains to support further investments in our design and innovation efforts, as well as focusing on strategic marketing and selling initiatives to expand and enhance our platform.

We believe that we should be able to operate our business with quarterly SG&A in a range around $200 million.

Return on invested capital is a key metric that supports and guides our financial decision-making as well as our allocation of capital.

This quarter, our return on invested capital improved to 24%.

This result reflects our improving earnings efficiency, combined with our strict discipline around 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 $14.1 million in the quarter, which was favorably below our guidance of $20 million.

This performance was primarily due to stronger foreign currency gains associated with our hedging programs.

For our March quarter we believe that $20 million remains the appropriate guidance for net interest and other expense.

While I'm speaking about currency, I'd like to address an important difference between Flextronics and many other global companies.

Over 90% of our revenue is settled in US dollars.

This means that the strengthening of the US dollar, which can have the effect of lowering revenue and profit projections for many companies has a minimal effect on Flextronics' reported revenue and profit.

Our adjusted income tax expense for the third quarter was $18 million, reflecting adjusted income tax rate of approximately 9.25%.

Which is within our targeted rate range -- tax rate range of 8% to 10%.

We continue to believe that our operating income tax rate will remain in this 8% to 10% range, absent any unforeseen discrete items.

Now when reconciling between our quarterly GAAP and adjusted EPS, you see the impacts of stock-based compensation expense and in intangible amortization expense net of tax.

If you now turn to Slide 6 I'll talk about our cash flows.

As you can see Flextronics continues to be an excellent generator of our free cash flow.

For the December quarter we generated $337 million in free cash flow, which exceeded our expectation for the quarter.

We continue to operate with great discipline over working capital management and capital expenditures.

Our net working capital decreased by $53 million sequentially to $1.8 billion.

Net working capital as a percent of our sales was 6.5% this quarter.

Remaining towards the low-end of our targeted range of 6% to 8%.

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

Our net capital expenditures of $26 million were lower than our depreciation for the quarter, as we realized meaningful proceeds of approximately $62 million associated with the selling of certain property, plant and equipment.

We continue to manage our CapEx spend to remain well-positioned for the future.

And our CapEx target for FY15 now is in the range of $300 million.

Which is at the low-end of our prior $300 million to $350 million target.

At this level we will have invested over $900 million in CapEx into our business over the past two years.

With the focus of our investments centered on expanding technology, automation and focused capacity and capability to support the double digit growth of our IEI and HRS businesses.

So when considering our earnings guidance, coupled with our targeted investments in networking capital and CapEx, we anticipate that our free cash flow will be greater than $600 million for FY15.

This targeted achievement further supports our conviction 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 pace to achieve this.

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

This quarter we invested $84 million to purchase just over 1% of our ordinary shares.

Now turning to Slide 7, we will review our capital structure.

Our financial condition remains strong, with over $3.2 billion in liquidity and just over $1.7 billion in cash, compared with a total debt of slightly above $2 billion.

We have no debt maturities until calendar 2018 and our credit metrics are improving.

At this quarter our debt to EBITDA ratio was reduced slightly to 1.7 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 third 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 deliver on our commitments.

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

Thanks, Chris.

Please turn to Slide 8 for our Q3 highlights and key trends.

Our steady execution continues to improve our ability to deliver on our commitments.

From a topline perspective, we exceeded our expectations in all four of our business groups.

With much better than expected demand materializing in CTG, and modestly better than expected demand and our remaining three business groups.

This propelled our top line to over $7 billion in sales, above the high-end of our guidance range of $6.4 billion to $6.8 billion.

Overall our customer relationships, where we are implementing new and innovative supply-chain solutions, continues to expand.

Our CTG business grows 20% sequentially, meaningful above our expectation of low single-digit growth.

HRS grew 4% sequentially, versus our guidance of flat.

Both INS and IEI increased 1% sequentially, slightly ahead of expectations for stable demand.

This was a seventh consecutive quarter of operating margin improvement, rising over 10 basis points to over 2.9%.

This strong performance drove operating profit up to $207 million, also above the high end of our guidance range of $175 million to $205 million.

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

Our continued profit improvement was reflected in our adjusted EPS which reached $0.30, and represented 15% year-over-year growth.

Our ability to generate free cash flow continues to be a differentiating feature of our Company and business model.

As Chris mentioned, free cash flow was $337 million for the quarter, putting year-to-date free cash flow at $505 million.

Our consistent return of value to shareholders continued with approximately 8 million shares retired via buyback, or $84 million.

In the past 12 months we have retired approximately 40 million shares, or $403 million, and remain firmly on pace to deliver on our commitment to return over 50% of our annual free cash flow.

Our consistency in buying back our shares over the last four plus fiscal years has enabled us to reduce our net shares outstanding by 30%, or 286 million shares for $2 billion.

Our continued focus on innovation, design, engineering in both hardware and software remains a cornerstone of Flextronics' sketch to scale value proposition.

Our almost 2000 design engineers in over 20 locations around the world focus on providing unique and differentiated solutions for our customers by providing product innovations, for core underlying technologies or building blocks that enable IOT, or as we say, the intelligence of things.

This further increases our customers' competitiveness in the marketplace.

In the past year we filed over 300 patents worldwide and also saw over 100 patents granted.

This past quarter also brought number of important design wins led by our innovation group that creates new customer relationships, strengthens existing customer relationships and is expected to produce strong manufacturing pull through our revenue.

Please turn to Slide 9 for a look at revenue by business group.

Before coming -- covering our performance by business group, I'd like to make a few comments about our customer Motorola Mobility, which is now owned by Lenovo.

Our ability to apply a broad platform of supply-chain solutions further enabled Lenovo to confident -- confidently access new markets, deliver outstanding operational execution and will provide access to new technology through our innovation initiatives.

These capabilities will position us well for a long-term relationship.

We have had time to meet with many of the key Lenovo executives frequently since the acquisition closed.

The timing is good, as we have never had a stronger execution from our factories which uniquely serve the key carriers in both North and South America.

We expect to have a very positive relationship going forward, as Lenovo forecast to grow its market share significantly throughout the world.

Longer-term, this business will be a function of our ability to demonstrate value to their total supply chain.

As a result we believe this business has now evolved into a very standard customer relationship.

The terms of the macro environment -- in terms of the macro environment, we haven't seen much change from the stable backdrop we have previously discussed, with the exception of INS where we have seen incremental softness, driven by reduced CapEx spending.

And this is reflected in our guidance.

Let's start our business group review with INS, which was slightly ahead of our expectations for stable demand.

Revenue was $2.4 billion, reflecting a $26 million increase from last quarter, but down 6% from a year ago.

In the quarter, our storage and appliance business were very strong, up double digits and both reached record levels.

However, our telecom and networking businesses both declined modestly, and were an offset.

Our competitive strength in INS continues to display itself in improving win rate, and the addition of new customers and disruptive areas of the market.

Unfortunately general weakness in core telecom and networking continues to offset positives elsewhere.

For next quarter we expect INS revenues to be down high-single digits, which is in line with normal INS seasonality.

CTG's revenue shot up 20% sequentially to $2.6 billion.

This was better than our expectations for single digit growth, due mostly to better demand for mobile products and new product introduction and program ramps and focused categories such as wearables.

We are guiding CTG to a seasonal decline of 20% to 25%, which is slightly better than its five-year historical average of down 26%.

IEI recorded third straight quarter of $1.1 billion and rose slightly by $10 million or 1% sequentially, due primarily to strength in energy and household industrial that was just enough to offset weakness in semiconductor equipment.

IEI slight increase put ahead of our expectations for stable demand.

Year-over-year, IEI remains the strongest performer for us with sales up 19%.

Next quarter we expect IEI will be stable sequentially, but will show solid year-over-year growth.

Our HRS group, which comprises our automotive, medical and defense and aerospace businesses, rose $32 million, or 4% sequentially and 10% year-over-year to $907 million.

The better-than-expected demand was primarily inside our medical business which saw broad increases across customers and products, from drug delivery to diagnostic equipment.

This mark HRS' 20th straight quarter of year-over-year growth as it exceeded $900 million quarterly revenue level for the first time.

Exceeding $900 million is quite an achievement when you consider that this group had quarterly sales of less than $400 million post our Solectron acquisition.

Next quarter we expect HRS to be stable, as we see consistent level of production in both medical and automotive.

Now turning to our March quarter guidance on Slide 10.

For the March quarter revenue is expected to be between $6 billion and $6.4 billion.

This range reflects a normal seasonal decline.

Our adjusted operating income is forecasted to be in the range of $165 million to $190 million.

This equates to an adjusted earnings-per-share guidance range of $0.23 per share, based on weighted average shares outstanding of $585 million.

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

Before I open up the call for Q&A, I would like to take this opportunity to thank all Flextronics employees worldwide for their hard work and for driving improvements to enable us to consistently deliver on our commitments, increase 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)

Matt Sheerin, Stifel.

Yes, thanks, and good afternoon, everyone; a couple questions for me.

First, your comments regarding Motorola -- it sounds like that relationship seems pretty solid.

Does that mean that you don't expect to lose any of that business this year?

You've talked about the China facility perhaps going away.

So, do you have more confidence in your relationship there?

I think, Matt, we have a better idea of what's going to happen into the future.

The transition happened just -- probably 8 or 10 weeks ago.

We've had quite a few meetings.

We've been able to understand what their strategy are as a company -- what the growth rates are going to be, coming into the coming year.

So, we have quite a bit of certainty certainly into the short term.

And as we looked at the relationship, which we view as very strong, a lot of it on the back of really strong operations execution -- we think -- they're going to end up having a blend of internal and external manufacturing, and we believe we're probably the best positioned to be an external manufacturing partner, just because of our position, supply and carriers into the North and South American marketplace.

So, we're just comfortable the way the Business is running today.

It's obviously -- continues -- the fact that it is short product lifecycles is not going to change, as you know.

But we're actually quite pleased that -- we're quite pleased the way the relationship is -- the visibility that we have into the near term, and we just think it has evolved into a very standard business relationship.

Okay, great.

Looking at the IEI and HRS businesses -- a lot of growth there, and obviously better margin potential.

I know you've been making investments as you're ramping new programs there.

You seem poised to really look at pretty strong leverage as you get into FY16.

Is that your goal to start to see the margins in those businesses expand into next year?

Yes, it's definitely a cornerstone of how we see margin expansion going forward.

We believe that as we continue to move the portfolio a little bit into more and more HRS and IEI businesses, we'll be able to move the margin.

It's hard to just flip a switch, as you know, with a $26-billion company, and that's going to take time.

And I think what you're seeing from us with the comments we made earlier about the operating margin expansion over the last seven quarters consistently, is we just expect to continually move it to a little bit better position, a little bit better portfolio mix, and the longer product life cycles and higher margins that we would expect out of these business groups.

This is where we'll continue to march forward.

As we do M&A, we will do M&A in those product categories.

So, we'll actually try to accelerate any portfolio shifts that we can -- that make sense.

But this is a cornerstone of margin improvement, is to move the portfolio.

Okay, thanks very much.

Amit Daryanani, RBC Capital Markets.

Thanks a lot; good afternoon, guys.

Two questions from me: One, given the update on the Lenovo relationship, sounds like you're more comfortable having it, at least in the foreseeable future.

How does it change the long-term mix of your Business?

The analysis that you guys have laid down on top of the targets -- 40% non-tech -- does that have to trend lower as we go forward, given the Lenovo relationship?

And how does the operating margin potential, which I think at that point was 3.7%, if you hit the optimal mix, how does that change then?

Yes, I think how fast that margin moves is going to be a function of mix, as you just described.

If we had our druthers, we'd try to move the growth rate of IEI and HRS substantially faster, rather than just cutting back on the CTG rate.

The CTG rate is hard to estimate because, as you know, on average, these are one, one-and-a-half year product lifecycles, sometimes even nine months.

And it's an $8-billion business for us, so I don't want to underestimate the challenge of keeping that $8-billion funnel full as well.

But our objective is to move HRS and IEI at accelerated rates.

This year, as a bundle, we'll move them 10%.

We would expect -- we believe we have enough in the pipeline already to move them another 10% next year without any acquisitions.

So, we'll just keep focusing our resources on those business units.

We'll focus our M&A dollars on those business units.

And our vision won't change to continually work the margins and work the mix in a consistent, predictable way.

And no matter what mix it is, we'll expect -- and the shareholders should expect -- that we will earn a good return on capital on the dollars that are invested in all our businesses.

Got it.

I guess, sticking to the IEI, the HRS segments, to your point, it's $8-billion business today -- I think it's crossed north of $2 billion quarterly for the first time.

What sort of pipeline -- what sort of bookings are you having in those segments right now?

And how much comfort do you have that this thing can sustain 10% to 15% growth for the next four, six, eight quarters?

In order to get 10% growth rate -- and again, when I think about 10% growth rate, I don't think about every single quarter being 2.5%; I think about the year being 10%.

So, you're going to have ups and downs, as you know.

But we have very good visibility.

So, one of the challenges with IEI and HRS is that, while they have longer product lifecycles, at the same time, any time you book products, it takes longer to ramp those products and longer to win the business.

So, ramping products in those categories over the next 12 or 18 months -- many of the bookings are already complete.

So, I would say, we probably have more visibility to those two product categories than any of our other product categories.

We actually view it as being pretty strong.

That's why we were pretty comfortable last year talking about doing 10% with both of them, and that's why we're comfortable -- as we go forward, we expect to also hit 10%, as we move forward.

Got it.

Thanks a lot, and congrats on the quarter, guys.

Thanks.

Jim Suva, Citi.

Thank you, and congratulations to you and your team there at Flextronics.

You made some comments in your prepared remarks about increasing your capital for -- I believe it was the wearables or the internet of things or that area.

Can you help us understand a little bit about that sector, as it appears to be a very high-growth sector for you -- the wearables.

Some things such as the capital commitment -- is it the material is very unique to that sector?

Is it easily deployable?

I assume there's lots of small companies in this, or maybe it's a small amount of very large companies, and maybe you can help us understand -- and the margin profile of this -- because it looks like it's a newer area for Flextronics.

Yes, sure, Jim.

It is a new area.

We participated with a number of different customers last year, as you know.

FY15 over FY14, we'll certainly probably double the revenue associated with that.

And I would expect this next year we would grow it again substantially, at least in the area of somewhere around 50%, just from what we can see relative to the growth rate of these businesses.

As far as being capital-intensive, we don't find them to be capital-intensive -- really, anything more than anywhere else.

We tend to find these businesses being more technology-driven than capital-intensive.

So, a lot of what we have to do there is a lot of miniaturization.

We have to do different things with materials, just to enable the signals to come through, and there's just a lot more complexity that you have to drive into a consolidated product.

It's a huge -- we use a lot of the intellect and the know-how of Multek to leverage alongside of Flextronics to create some differentiating advantage.

As you know, Multek has a very, very strong Flex circuit capability, as well as a rigid Flex or just rigid boards.

And we're leveraging a lot of those technologies into wearables.

So, I don't find them to be particularly capital-intensive.

I find them to be very technology-intensive.

You know, we talked about these 300 patents that we applied for.

A lot of those are in the wearable space, because these are the places where a lot of the invention actually has to occur to bring a new product category to market.

So, we're just very comfortable with the know-how that we built.

We're comfortable with some of the IP that we're developing.

We're happy that we're able to integrate Multek into a flex solution simultaneously; and as a result, I think we're going to see very steady growth.

But it does not take an abnormal amount of capital at all.

Great.

And then my follow-up question is -- you actually touched on a little bit -- is the patents.

I don't recall, having covered your Company for quite a long time, about you guys talking a lot about patents.

So, is this also a new area of focus?

And does Flextronics own the patent, or the customer, or do you co-own it?

Is this something you can monetize, or is it more of a patent for the way you manufacture it?

Thank you.

Mostly it's our processes, methods or materials.

These are Flextronics patents.

We're not talking about customer patents here; we're talking about Flex patents.

Sometimes -- occasionally we may do deals where the customer has a license to -- exclusive license for that patent, or that we can use as well, but they have a license to use for their products.

But on average, these are all Flextronics patents.

We look to protect the know-how that we have associated with our -- with these new process technologies.

A lot of these patents are really focused -- as products become smarter.

And I made the comment about -- as I think about IOT, we talk about it being the intelligence of things.

As these new devices get intelligent -- a good example is wearables, which I already described.

But as these new devices get intelligent, they need different technologies to enable that intelligence.

So, it might be it needs different ways to power it, it might need different miniaturizations, it may need different kind of materials, and all these things may require invention.

A lot of what we're doing is helping customers move into that intelligence-of-thing mode.

And a lot of it, as a result, we're focusing on investing in the underlying core technologies that actually enable those products to become intelligent in the first place.

Thank you, and congratulations again to you and your team.

Thank you.

Appreciate it.

Shawn Harrison, Longbow.

Hi, good evening.

This is Gausia Chowdhury calling on behalf of Shawn.

I was wondering if you could provide some color -- you mentioned that the wearables were ramping at CTG.

How do you reconcile that with prior comments around changing seasonality?

How do you still see seasonality going forward and -- expand a little bit on how wearables are going to ramp?

Yes, so, wearables will still be a very seasonal category.

I don't think that's going to change.

They continue to be something people look for around holidays as gift giving, and so I don't think -- and a lot of the guys doing wearables are trying to launch it around the holidays.

So, I think the seasonality of that product category is probably not going to change.

It is just that every year it's probably going to be a significantly higher amount of revenue.

Okay.

And then, the seasonality of CTG, just in general, ex the wearables?

I would say that the seasonality you should expect for CTG would be very similar to historical trends.

There's nothing inherent in the portfolio that we're operating today that would change that.

Okay.

Then, the guidance suggests that, at INS, the declines are worsening on a year-over-year basis.

Why is that, and when do you see that business bottom [end]?

Are you asking about the INS trends worsening?

Yes.

I think there's quite a bit of data out.

It seems like the US carriers cut back a little bit in the December quarter, or announced that they were going to cut back a little bit in the December quarter.

Some of the work in China in the LTE rollout seemed to get a little bit slower.

I think there was some expectation for Europe doing more, but I think it's still a little bit slow.

So, we view it as -- so, we're seeing some of that in our INS business, and alternatively -- I think on a short-term basis, the revenues are a little bit strained.

Alternatively, over the long term, we're pretty bullish on it, just because the amount of data that has to go across these networks is never going to stop.

But right now, we're seeing a little bit of a pullback, than where we expected it to be, say, even going into the December quarter.

Thank you.

You're welcome.

Sean Hannan, Needham and Company.

Yes, thanks, good evening, and thanks for taking my question here.

First question I wanted to see if I could ask here is -- if you can talk a little bit about the new business and the win environment -- just trying to get a perspective around how wins have trended versus recent past quarters, or a year ago?

And then part two of that is: Is the mix of the wins in the non-traditional areas -- is that consistently moving up aligned with your longer-term goals, or what are you seeing on that?

Thanks.

Yes.

Let's say, if I take the different categories and break them apart -- in the IEI and HRS category, we talked a little bit about that already, the wins are strong.

We'll get 10% organic growth out of those -- the bundle of those two this quarter -- or this year, I'm sorry.

And we actually can see next year pretty well, and expect it also to have a double-digit growth rate, both IEI and HRS -- or as a bundle, sorry.

We get good visibility in that.

The wins are very strong.

The diversification of those wins is outstanding.

In the automotive business, we probably have more than 50 customers now.

And in medical, of the top 25 companies in medical, we're in 18 of them right now, and that actually positions us to go even further in the future.

Because as we get in to be a preferred supplier, it allows us to sell more of our platform of capabilities and supply chain solutions.

So, I'd say that is going to help and move our portfolio.

In the CTG business, we've been very focused for the last couple years on trying to have a better mix of CTG business -- things that are more technology-enabled -- things like the wearables.

We believe that's going to drive a better margin profile within the CTG group.

So, we're actually not trying to just push on revenue in that group, but trying to push on better revenue.

We've been very successful with that.

The visibility is harder because you have shorter product lifecycles.

In the INS business, we mentioned some near-term softness, but our objectives, which -- we're going to fall a little bit light on this year -- but our objective is to run that segment at pretty much flat.

I don't anticipate that changing that much over the coming years.

But the place that we are focused on, in terms of different kind of wins, is in the appliance area, and some of the new disruptors that are bringing products into the marketplace -- guys like Palo Alto Networks or Fortinet or FireEye, which we participate very actively in, and actually have a pretty strong growth rate.

And we think that can offset the kind of weakness that we generally see, and things that we're talking about in telecom.

But I think each one is a little bit different.

Our best visibility is in IEI and HRS.

And if we leave INS flat and we have CTG running at a better mix within CTG -- this is how we're trying to drive the portfolio, and we think this is what's enabling us to just continually have steady improvement in margins over time.

Okay, that's very helpful.

Next question might be a little bit more specific for Chris -- just want to get a little bit of color around SG&A.

So, as you see, you're looking to manage to around the $200-million level ex options.

In the past, I think there's been some variable movement within that line.

Just trying to understand: Has your operating model changed here, where there's a little bit less variability now quarter to quarter, or there are other behind-the-scenes cost cuts or management that you're able to employ?

Just wondering how you're managing to this, and exactly how you're able to arrive here?

Thanks.

Thanks for the question, Sean.

In terms of SG&A, you've seen us continue to be operating with a really strong discipline and control over that.

Last year -- not last year, but nine months ago, we undertook efforts to actually rationalize our structure as we saw fit to align itself with the future businesses, and to make the investments into areas of which we think we're going to be winning.

In doing so, we actually were able to target to bring down our SG&A down to the $200-million level per quarter.

We've clearly achieved that now for the last three.

Inherent in that, there is a little bit of variability, and you saw that this quarter.

We clipped up to $204 million of spend, so slightly higher than the $200 million.

And that kind of has a variable element associated with the revenue growth, as well as some targeted efforts from time to time where we're getting after business development.

We're trying to put dollars to work around the S in the SG&A.

So, we're focusing on business development and sales effort to really expand our coverage model.

So, you'll see some elements of that, and associated with that, some variable compensation that plays with it.

But overall, the only other aspect to highlight would be R&D, which is a large component of our SG&A; that, at times, will have some variability, given that some periods we may have different levels of investment flowing there.

But all in all, it is our objective and it's our discipline to stay around that $200-million level, and be able to really benefit from the leverage that'll give us as we move forward.

Great.

Thanks very much.

Brian Alexander, Raymond James.

Okay, thanks.

Chris, I want to ask about gross margins.

You were able to keep them relatively flat sequentially, despite the big mix shift towards CTG, where the gross margins are much lower.

And you had roughly flat revenues sequentially in the other businesses.

So, I'm just curious how you were able to achieve that?

Did you get much better leverage in CTG, or were you able to improve the gross margins in those other businesses?

And I just have one follow-up.

Brian, thanks for the question.

Our performance this past quarter was very strong in the ability to manage that gross margin line.

As you alluded to, we had a heavy mix shift change.

But what I talked about last quarter was that we continuously are focused around driving further productivity improvements and yield improvements in our Business.

And that was evidenced, in part, this quarter where we were [able] to get some of those across some of the different programs we've been ramping.

And so, that reflected itself in that margin profile.

I'd highlight that, as you look to this next quarter, again, we see a large [trough] in our revenue in terms of the seasonality impact into the March quarter.

If you take the midpoint of our guidance, you're going to see a six handle in terms of gross margin.

That six handle hasn't been something we've seen in a while.

So, we continue to see improvements in our operational execution and in our operational efficiency, which is driving us higher in terms of our gross margin.

That's where I was headed.

It looks like around 6.1% or so, is what you're assuming for next quarter.

That's great progress.

Then, I just want to make sure that I'm reading you guys correctly on the Lenovo Motorola situation.

Are you suggesting your confidence in the relationship and that business is being driven by your view that you will likely retain the non-China business, but you have much more confidence in the volumes outside of China because of share gains that you expect Lenovo to have?

Or are you more comfortable that you are going to be able to retain the China piece than you were before?

I think what's different about the last time we talked and this time is, we actually have had a lot of dialogue with them.

And we have a lot more information; and a quarter ago when we were doing this call, we were in the unknown.

As we talk to them, as we understand their plans, as we understand where they need capacity, where they don't need capacity, we've become more comfortable around all of our operations.

And -- well, I guess all of our operations just mean China and Brazil.

And in Brazil, it's a little bit different; they don't have the amount of capacity, they don't have the infrastructure to go build those products to start with, and their market share and the continuous market share gains that are experienced in South America is very high.

So, that's all very, very positive.

On the China part, they also need -- would like to keep a balanced portfolio of insourcing and outsourcing.

Certainly, they are going to make changes.

They are going to make some changes, but they also have to think about their own growth and how they're going to accommodate their own growth in Lenovo, as well as the growth in Motorola, because they anticipate having -- they didn't buy Motorola to reduce market share.

They're after becoming an international champion, and they look across to Flex and say: Maybe this is one of the ways I'm able to get the capacity I need to really be an international champion.

So, they are going to make changes.

There are going to be some adjustments.

But as we look forward, we're comfortable that both those facilities will continue to operate and -- they'll continue to operate probably as long as we provide a value statement to them, and as long as we're able to earn the return that we want earned on the investment as well.

But we believe, at this point, we can move to a mutually acceptable relationship where they get what they need and we get what we need, and we're probably keeping the factories open at least for the short term -- certainly for this year.

Then just last one on Elementum: We didn't talk about it this call; I'm just curious if there's any update there on how they're doing, customer acceptance, traction, et cetera?

Yes, I wasn't going to make this a regular part of the call, of course.

But Elementum -- we're very, very happy with the progress they are making.

We are continually -- we booked quite a few deals in the last quarter.

Very nice accounts -- really, really strong logos, which demonstrate the value proposition of the business, and we're going to keep driving the business forward.

It's still early in the time frame, but if you look at enterprise SaaS companies, there's two companies that are important, and -- in terms of history of performance -- and that's Salesforce and Workday.

And our objective is to stay in the goalpost of the growth rate to those companies.

And if we can do that, it will be a home run.

Okay, thanks, Mike.

Osten Bernardez, Cross Research.

Hello, thank you for taking my questions.

Within INS you have your Converged 3.0 group of businesses, which I believe have been growing historically around 20% or so.

And I wanted to know, A, are you still seeing that type of growth in that group of business -- from that group of customers, and you've noted that I think you're also expecting some kind of seasonality within that group, if I understood you correctly, for the March quarter.

I would also like to hear whether or not you're able to add some -- any additional customers in that group?

We actually did add some; I don't know if they will meaningfully move the needle, because usually these guys start out small, then they ramp.

So, it's probably not worth itemizing or calling out.

But as we go forward into this next year, we think it's another 20% growth rate.

So, we do think that that strength will continue on into the future, and we're pretty pleased with how that whole business unit -- the sub-business unit is moving forward.

Got it.

Then, within HRS, and your comments with respect to the growth you're seeing in the medical business, to what extent is that growth more of a function of your most recent acquisitions, not too long ago, or are you gaining share in that space?

Yes, so, the amount of acquisitions we've done in that space are almost negligible.

I don't even know how much it adds up.

The whole business is heading towards $2 billion; it's not $2 billion yet, but it's heading that way.

I don't know that we're taking share, because as we build that business unit, we are building capability.

As we build the capability, whether it's diagnostic devices, or medical equipment, or disposables, we're actually building and increasing our capabilities substantially.

We're now up to 16 FDA-certified factories around the world.

We've been through extensive amounts of FDA audits.

We're now up to -- 18 out of the top 25 medical customers are now part of our portfolio.

I wouldn't call it a share shift; I would actually more call it that the opportunity for customers to give an outsourced business has increased substantially as a result of the growth of our capabilities.

I actually think we're creating and inventing revenue on the back of increased capabilities.

And I think there's other categories, too, that are going to play a big part of that.

As we move to this whole wearables, and as wearables move into digital health -- the whole digital health market you can argue is going to explode.

It's a large part of where we're putting the investments of our engineering teams and design teams to really grow that more.

So, we're very, very focused on growing that business, but I actually like to think that we're inventing new revenue as opposed to just trying to fight for market share shifts.

Thank you very much.

Mark Delaney, Goldman Sachs.

Yes, good afternoon, and thanks very much for taking the questions.

I had a follow-up first on your comments about the Motorola Mobility impact to your model, and maybe if you could help us understand if the math of -- what if you did happen to lose the business in China -- if that math still holds.

I know the prior guidance was a potential $0.02 to $0.03 negative impact.

I certainly understand you guys are feeling better about that business.

I just want to make sure I understand the downside risk, and if anything has changed there, especially given -- you mentioned improving yield in consumer, and gross margins have started to go up.

So, if any of the math there has changed, and especially given that the Lenovo has still made comments, even earlier in January, about trying to integrate some of the manufacturing to their own facilities later in 2015.

So, if you could help me understand those dynamics, that would be helpful.

Yes, sure.

We outlined what the possible impact would be -- it would free up quite a bit of capital, because inventory would flush into cash.

And we talked about a $0.02 or $0.03 share impact.

We think those are roughly around the same numbers.

We continue to view this business as something that, if it does go away, that the assets will be reutilized within months, not even very many months.

And we think the inventory just flushes out into sales.

So, we actually would think, if we had that condition happen, we'd be roughly around the same place where we were before.

Okay.

And then just a follow-up on the buyback -- I know it's been a focus of the Company.

The pace of the buyback was a little bit lower this quarter versus in the prior quarters.

Could you help us understand the reason for that, and then how we should think about the size of the buyback in the coming quarters?

Hi, Mark, thanks for the question.

So, I'd start by just saying that we have an unwavering commitment to increasing shareholder value, and that's really taken the shape in terms of our aggressiveness in our share repurchase.

The share repurchase program has been, is, and will continue to be, the key feature in us returning value to the shareholders.

I wouldn't read much into the level of purchase of $84 million or over 1% this past quarter at all.

If you look back, we've now repurchased over 2 billion shares over the last four-and-a-half years, and that's over 30% of the float.

And year to date we've bought back right around $300 million versus about a $500-million free cash flow.

So, we've been very aggressive, and we expect to be -- to consistently be buying back the shares at what we believe to be attractive valuations.

Thanks very much.

You're welcome.

Sherri Scribner, Deutsche Bank.

Hi, thank you.

I wanted to ask a little bit about the INS segment again.

I know that you're seeing some weakness now, but the segment has been declining for the past 11 quarters on a year-over-year basis.

I'm just thinking about INS, as well as CTG, being the largest segments of your Business.

It seems from the perspective of CTG, the compares get more difficult in FY16.

So, with 70% of your Business potentially not growing, I'm trying to get a sense of where you think growth rates might be in FY16?

Thanks.

Okay, yes, good question, Sherri.

Obviously, we've outlined where we think the growth rates are going to occur.

And I think about growth rates, I think both operating margin dollars and margin percent, as well as just pure revenue.

From a pure revenue standpoint, we're trying to be heavily focused at HRS and IEI growing at double digits.

So, that is something that we've been very, very focused on for many years, and that's why we have enough pipeline probably to go achieve that, because we do get pretty good visibility into those categories.

The INS -- we actually don't think we'll grow.

Alternatively, based on where we see the bookings are, based on our positioning with some of these new customers, which we call 3.0 -- we think between what's happening there, we think we can be reasonably flat.

And CTG we're not trying to have a big growth rate.

We're actually trying to have a better book of business.

That's kind of our overall plan.

It's what's led to the margin expansion over the last few months, and we actually think there's more runway with that margin expansion as we go forward using that plan.

So, that's kind of how we see the next year unfolding.

At the same time, we expect to be -- provide shareholder value by buying back shares.

So, between the margin improvement, between the growth in IEI and HRS, and between a little bit better mix and CTG, we think between that bundle it provides a very attractive return for investors.

But we'll be having our Analyst Day coming up shortly.

I think Kevin's going to make a few comments about that.

At that point, we'll address a little bit more the long-term strategy for the Company.

Okay, that's helpful.

And then just with the mix improving in FY16 with more growth in HRS and IEI, will you expect operating margins to move above 3%?

You're pretty close to 3% now, but I'm just curious if you think you can move above 3%?

Thanks.

Sherri, this is Chris.

We laid out the vision last year at our Investor Day as to our long-term model and the growth rates of each of our underlying business and target margin ranges, if you will, for that.

And again, margin will be fundamentally the result of our mix.

But clearly if you take that framework that we devised last year, and put that into just this past quarter, you'd see us in the range based on that revenue mix of a 3.1% to a 4.3%.

We're just shy, about $10 million, from getting into the low end of that range.

We continue to make progress.

We have a very strong focus around our execution and around improving our operating efficiency.

So, surely that is our focus and commitment to drive ourselves into that visioned range of operating margin.

Thank you.

Great.

Operator, I think we're out of time, but as Mike said, I wanted to let everybody know that we have narrowed down the dates for our Investor and Analyst Day here this year.

It'll be May 6 or 7; we're going to narrow that down very shortly.

It'll take place in New York City, so expect to save-the-date -- a formal save-the-date from us in the next few weeks.

At the same time, I'd like to thank everyone for joining us on the call, and this will conclude our conference call.

Thank you.

This concludes today's conference call.

Thank you for participating.

You may disconnect your lines at this time.