Flex Ltd (FLEX) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to the Flex Third Quarter Fiscal Year 2020 Earnings Conference Call.

Today's call is being recorded.

(Operator Instructions)

At this time, for opening remarks, I would like to turn the call over to Mr. David Rubin, Flex' Vice President of Investor Relations.

Sir, you may begin.

Good afternoon.

Thank you for joining Flex' Third Quarter of Fiscal 2020 Conference Call.

Slides for today's discussion are available on the Investor Relations section of our flex.com website.

Joining me on today's call with some introductory remarks will be our Chief Executive Officer, Revathi Advaithi; and our Chief Financial Officer, Chris Collier.

Today's call is being webcast and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ.

Such information is subject to change, and we undertake no obligation to update these forward-looking statements.

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

This call references non-GAAP financial measures for the current period that can be found in our appendix slides.

Otherwise, they are located on the Investor Relations section of our website along with required reconciliations.

Now I'd like to turn the call over to our CEO.

Revathi?

Thank you, David, and welcome to your first Flex earnings call.

Good afternoon, everybody, and thank you for joining us on the call today.

I'm excited to provide some context to our strong results for the third quarter and update you on the progress we're making through this very dynamic and transformational period for Flex.

But before I start, I want to thank all our Flex employees who across the globe continue to deliver on our commitments to our customers and who worked really hard to execute with discipline to increase value to all our stakeholders.

So I want to express my sincere thanks to our employees for their efforts and also to our customers for their continued partnership.

So let's go to Slide 3. So over the last couple of quarters, I've discussed the initial direction of our company strategy and our approach to managing our business.

So as promised, we're looking forward to sharing more details on our strategy at our upcoming Investor and Analyst Day on March 11 in New York City.

But today, I'll focus on the third quarter financial performance, which I'm very pleased to say delivered on our goals and our guidance.

So we'll start with the financials.

We achieved a revenue of $6.5 billion.

This is a result of our continued growth in our industrial segments, our energy and our automotive businesses and as well as continuing to progress on executing our mix strategy.

We realized an adjusted operating margin of 4%, and this reflects our focus on disciplined execution and portfolio management.

And we delivered a record level adjusted EPS of $0.38, which was above our Q3 guidance range, and generated an adjusted free cash flow of $238 million, which is a testament to our continued focus on operational discipline and improved execution.

I want to actually start with a -- to talk about the coronavirus outbreak.

As expected, our primary concern is of the safety of our employees and their families.

What we have done is deployed our response teams to take proactive steps to help our employees, and we'll continue to adapt as necessary as the situation plays out.

We are actively monitoring this developing situation, and we'll work hard to limit business disruptions.

We're supporting all official efforts to contain the outbreak, and we are fully cooperating with the government officials across China.

We'll also be looking to help this cause wherever we can through the Flex Foundation.

Of course, beyond that, it's too early for us to quantify any potential impact as this situation is evolving.

I want you to be rest assured that we have a very detailed and comprehensive plan and will actively manage the situation in a very disciplined way.

So let's turn to Slide 4. What Q3 really reflects is how we've continued our approach to managing the business.

By improving our mix and our profitability, we have driven disciplined execution and we have pursued design-led opportunities, and all this along with managing our cash flow and capital allocation.

Now this is exactly the game plan we discussed with you 3 quarters ago.

We've done a tremendous job executing on our business mix strategy and as well as managing our costs, not only to meet our commitments but also to enable continued investment in technology and design expertise.

I strongly believe that our focus has strengthened our position around significant macro trends and future growth markets, such as electrification and 5G.

And of course, all this will lead to profitable growth, which is a very important pillar of our strategy.

As I continue to speak to current and prospective customers, I'm really energized by growing opportunities to partner and create value for our customers and for Flex.

Our focus is on solving our customers' most critical manufacturing challenges, and we want to be a market share leader in the spaces we participate.

As always, I'd like to share some examples of some recent wins that will really demonstrate our capabilities across our businesses.

You can see in our Q3 results that our industrial and energy segment continues to be exceptionally strong and is building on the pipeline -- on the strength of some solid business wins.

So one example is a complex large form factor capital equipment project that we recently won.

Now our solution included engineering and designing of the large mechanical frame and the interconnect system as well as assisting the customer in the design of the HMI or the human-machine interface.

Of course, one of the key differentiators was our regional manufacturing capability because we needed to support the customers' needs in both North America and Asia.

But this, combined with our design capability, made this a winning proposition.

And we continue to see interest from companies in this space who are looking to partner with us, not only to leverage our manufacturing expertise but also our design expertise, particularly in the areas of power, energy and capital equipment.

The next example is out of our automotive business, which has made a lot of positive progress despite the global economic headwinds facing this industry.

We've made a lot of inroads into the autonomous space, and I've talked about this before in the other calls we've had.

But this time, we added another major win in China with an indigenous Chinese OEM.

We also continue to expand our position in electrification and recently won an integrated battery management solution for a German OEM.

But both these wins show that we can leverage the technical expertise, not only in our automotive business but also in our power and our compute engineering groups.

Here, we are seeing the benefit of early collaboration and leveraging our broad capabilities, including connectivity and power management, to bring value solutions to our customers.

So I'd like to reinforce our commitment to the 4 areas.

I've talked a lot about this before.

And these are managing our mix, driving disciplined execution, winning more design-led business and, of course, consistently driving free cash flow.

I strongly believe that combining these with the right type of growth will be the core of our strategy.

Our performance this quarter and for fiscal 2020 demonstrates that we're delivering on our commitments.

This consistent performance will serve as a platform for us to focus on profitable growth and invest to drive our long-term strategy.

Of course, there's still a lot of work to do and more potential to harness.

But our consistent performance over the last 3 quarters, really positions us well on the path to profitable growth.

So overall, I'm really pleased with our performance this quarter.

We're making progress on our goals, and I'm confident that our positive momentum will continue.

I'll turn this over to Chris for our quarterly financial results, and then I'll come back with some closing remarks.

Chris?

Thank you, Revathi.

Please turn to Slide 6 for our third quarter income statement summary.

Our third quarter revenue totaled $6.5 billion and was above our guidance range.

Our Q3 adjusted operating income was $256 million, which was above our guidance range and remained roughly the same year-over-year despite a $461 million decline in revenues.

Our adjusted net income was $193 million, resulting in adjusted earnings per share of $0.38.

This was up 10% year-over-year and was above our guidance range.

Third quarter GAAP net income of $111 million was lower than our adjusted net income, primarily due to $19 million of stock-based compensation, $14 million in net intangible amortization and $49 million in net restructuring and other charges.

Now please turn to Slide 7 for our quarterly financial highlights.

Our third quarter adjusted gross profit was up 1% year-over-year to $459 million, while our adjusted gross margin improved a healthy 60 basis points year-over-year to 7.1%.

This represents our third consecutive quarter of year-over-year gross margin expansion, reflecting improved operational execution and a richer mix of business.

Our adjusted SG&A expense increased 3% year-over-year to $203 million this quarter, resulting in SG&A as a percentage of revenue to be 3.1% as we continue to manage with strong cost discipline, which provides us sustainable operating leverage.

We continue to improve our profitability and our operating margin by managing portfolio mix, improving operational performance and sustaining cost control.

This quarter, our adjusted operating income was $256 million.

Our year-over-year adjusted operating margin expanded by nearly 30 basis points to 4%, which reflects our sixth consecutive quarter of year-over-year margin expansion.

Now turn to Slide 8 for our third quarter business group performance.

Each of our business groups either met or exceeded our revenue guidance.

HRS revenue was $1.2 billion, up 3% year-over-year, driven by automotive growing 7%, which offset a 1% decline in health solutions.

Automotive grew as we continued to scale multiple new programs across its portfolio.

Health solutions was modestly weaker as new business growth was offset by lower demand from certain legacy programs.

Revenue for our IEI business grew 20% year-over-year to $2 billion, which exceeded our prior guide of up 10% to 15%.

IEI experienced broad strength across its portfolio, with notable growth from our energy customers as well as growth in home and lifestyle programs.

CEC revenue declined 17% year-over-year to $1.9 billion, which was better than our guidance and reflective of reduced demand with certain telecom and networking customers as well as the impact from our Huawei settlement, which was completed last quarter.

Lastly, CTG performed as expected as revenue declined 25% from the prior year to $1.3 billion due to the effects of reducing our exposure to high-volatility, low-margin, short-cycle businesses and our targeted CTG portfolio repositioning activities.

Turning to profitability.

We were pleased to deliver adjusted operating profit above our guidance and to expand our adjusted operating margin to 4%.

HRS generated $82 million of adjusted operating profit and a 6.6% adjusted operating margin.

HRS margin was a function of the mix of its business and reflects the ongoing ramp of our largest-ever health solutions program as it moves towards full-scale production in fiscal 2021.

IEI set a record quarterly adjusted operating profit of $124 million and pushed its adjusted operating margin to 6.3%.

It continues to benefit from good commercial discipline and a richer mix of business, with greater design and engineering content.

CEC delivered $53 million of adjusted operating profit and a 2.8% adjusted operating margin as management took distinct actions to adjust CEC's cost structure and it also benefited from improved sequential revenue contribution.

Finally, CTG posted a 1.8% adjusted operating margin as it remained pressured during our portfolio transition and ongoing repositioning of its operating structure.

Turning to Slide 9. Let us review our cash flow generation highlights.

Our third quarter performance displayed strong cash flow execution.

We continue to operate with good discipline over our net working capital and our capital expenditures.

Net working capital this quarter benefited from favorable timing for customer payments and a continued improvement in our inventory management.

This quarter, we ended with $3.7 billion or 56 days' worth of inventory, down 5% or 3 days year-over-year.

We remain focused on further inventory management improvements as we drive multiple actions across the company.

Our net capital expenditures totaled $55 million for the quarter, significantly lower than depreciation.

We are operating with control over our CapEx spend, and this quarter, we also benefited from $49 million in proceeds as we continue to reposition and optimize our operating system.

We are operating a well built out global infrastructure and are benefiting from prior years' investments that are now supporting new technologies, products and programs.

We also continue to leverage our existing assets to redeploy installed capacity where it is needed among different sites and businesses, which is a notable strength of our global system.

We remain confident that we are sufficiently invested to support profitable long-term growth in our higher-margin businesses.

As we enter the last quarter of fiscal 2020, we expect that our CapEx will continue to closely align with our annual depreciation level, thereby benefiting adjusted free cash flow.

This quarter, we generated $238 million in adjusted free cash flow.

We have generated positive adjusted free cash flow for 5 consecutive quarters as we operate with discipline and strive to generate adjusted free cash flow conversion, in line with our historical levels.

We remain focused on our commitment of delivering shareholder return as we repurchased over 5 million shares for $61 million during the quarter and over 4% of our outstanding shares over the last 12 months.

Lastly, we continue to operate with a balanced capital structure with staggered debt maturities and a relatively low average cost of debt.

During the quarter, we issued $215 million of senior notes with a 10-year maturity and used proceeds and cash on hand to reduce our debt position by $200 million, which had the effect of extending our debt duration with minimal impact on interest expense.

Please turn to Slide 10 for our fourth quarter guidance.

Revenue is expected to be in the range of $5.8 billion to $6.2 billion and reflects more modest seasonality impacts than in prior years.

HRS revenue is expected to be flat to up 5% as we anticipate continued auto demand growth as we ramp new programs coupled with a modest growth in our health solutions business.

We expect sustained demand in IEI with 20% to 25% growth as it continues to experience broad strength across its portfolio in addition to ongoing new business ramps.

CEC's revenue is expected to be down 5% to 15% year-over-year, reflecting that the distinct reductions in customer demand due to actions undertaken earlier this year coupled with persistent muted demand in telecom and networking.

And for CTG, we expect revenue to be down 20% to 30%, reflecting the impact of targeted reductions of highly volatile products as part of our ongoing specific portfolio management efforts.

Our adjusted operating income is expected to be in the range of $220 million to $250 million, displaying continued adjusted operating margin expansion.

Interest and other expense is estimated to be between $40 million to $45 million.

We expect our tax rate in the quarter to remain in the mid-range of 10% to 15%.

Adjusted EPS guidance is in the range of $0.30 to $0.34 per share based on weighted average shares outstanding of 510 million.

Our adjusted EPS guidance excludes the impact of stock-based compensation expense, net intangible amortization and the impacts from our remaining restructuring and other charges.

As a result, we expect a GAAP earnings per share in the range of $0.19 to $0.23.

Lastly, I would like to note that our guidance excludes any potential impact from the coronavirus outbreak, given the rapidly evolving situation.

With that, let me turn it back over to Revathi for some closing comments before we open the call for Q&A.

Thank you, Chris.

After considering the fourth quarter guidance that Chris just provided, we now expect our annual EPS to be in the range of $1.25 to $1.29, which really nicely aligns with our commitment from April of $1.20 to $1.30.

Our GAAP annual EPS is expected to be in the range of $0.26 to $0.30 and includes stock-based compensation expense, intangible amortization and restructuring and other charges.

Since last year, the Flex team has been working really hard to establish a consistent and sustainable track record that you can have confidence in.

Our results in Q3 and for the first 9 months of our fiscal year are evidence that we're moving in the right direction, and we are focused on the right areas of consistently executing, delivering profitable growth and then meeting our commitments.

With that, I'm going to have the operator open the line for questions.

(Operator Instructions) Your first question comes from the line of Paul Coster with JPMorgan.

A couple.

First off, the CEC and CTG businesses.

Do you have some sense of when, at least, the portfolio culling will be done in CTG?

And when you think both segments might stabilize?

Paul, thank you for the question.

I'd say, in CTG, we have done a lot of planned actions in terms of changing our mix and changing the size of our portfolio.

And I'd say that most of our work is done.

But that being said, we should always be looking at our portfolio and trying to figure out the tail of the portfolio and see if there's a way to better manage it.

I'd say in CEC, we've had a combination of portfolio actions and the market impact from our networking and telecom customers.

From a portfolio action, I'd say in CEC, the majority of our actions have been taken this year.

And we're continuing to look at the networking and telecom space from a market perspective and seeing how that plays out for the rest of the year.

So as I step back, the one thing I would say from a portfolio perspective, Paul, is that my thinking on how we run businesses is that we should always be looking at parts of our business that will be at the low end of our performance expectation and figuring out what's the right way to manage it because at the end of the day, we want this relationship to be a win-win for our customers, and we'll be doing that across our portfolio.

But I have confidence that we have done a significant amount of our work already, but that doesn't change that we'll be keeping on looking at it on an ongoing basis.

My follow-up question has to do with the auto segment.

We're hearing that the auto industry as it transitions from ICE to electric vehicles is interested in the idea of actually transforming its supply chain and moving away from its traditional suppliers to new manufacturing capabilities such as your own or the EMS space generically.

Do you concur?

And are you seeing a change in the scope of what they are allocating to you as a result of that, maybe a strategic shift?

Yes, Paul, thank you for the question.

Yes, I think it's a well-known fact that the automotive space is going through clear market shifts and going through clear shifts in terms of its supply chain strategy.

I'd say that Flex is well positioned as the strategy evolves because we have strong manufacturing capability across the portfolio of electrification and autonomous, which are very critical next-generation technology.

But also, we have really strong design and domain expertise around these platforms that are really important.

So as we see overall, the value chain, supply chain getting changed in the automotive space, I would say manufacturers like Flex and us, particularly, is well positioned in this space.

And our early investments in autonomous and electrification will also really broadly help this in a significant way.

That being said, we're building a very collaborative business model across with all our partners, not just in the hardware space but also the software space in both of these technologies.

So Paul, I think we're well positioned and the supply chain in automotive space is going through changes, but we think that's an advantage to Flex.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Congratulations on the good results.

I have a question on the unfortunate health situation in China, and you certainly realized that coronavirus impact is very uncertain at this point.

But I think about 1/4 of Flex' manufacturing capacity is located in the China region.

So maybe just operationally, you can talk about what Flex may be seeing with its own factories at this point in terms of any extended shutdowns?

And what percentage of your factories may be impacted at this point?

Thanks, Mark.

First, thanks for the comments on our results.

We're quite pleased with our performance.

I'd say on coronavirus, first, like I said in my prepared remarks, the most important thing is making sure that our colleagues, our employees in our factories in China have the best possible help that we can provide, and we are very focused on that as the most important thing.

That being said, our teams really know how to handle this type of situation extremely well.

And we have a very disciplined and very detailed plan that we're executing right now for our customers and our suppliers as we're looking at the impact to our factories.

If you think about our overall presence in China, we don't have any factories in the Hubei province, where the bulk of the issue is.

And also, if you look at China long-term, is that the number of people that we have deployed there and our assets have come down significantly because of all the diversification efforts that we have taken in the past year.

But the approach we are taking is a very disciplined approach.

We have very detailed plans that are executed across our factories already, and we're working with the government agencies to see what the actual shutdowns are going to be and looking for exceptions wherever possible.

So Mark, I'm very comfortable that we have a game plan.

That being said, the situation is evolving, and we're dealing with it every day in terms of understanding new information and acting accordingly.

That's very helpful.

A follow-up along the same lines.

And maybe some of the tariff-related planning that the supply chain had to go through over the last year is a reasonable case study for us to think about.

But when Flex has had to respond and make shifts in its manufacturing plants, maybe you can just remind us how long that could take.

I know it's a very complex question because you have so many different thousands of products and customers.

But just talk about some examples of how quickly Flex may be able to move between factories when it needs to.

And is that something that you -- usually that need to go through requalifications with customers?

Or something you can do relatively quickly?

Thanks, Mark.

So I will just remind you that most of our supply chain strategies are driven by our customers, right?

And we support them and follow them in their supply chain strategy.

And as they look at diversification globally, we have been supporting our suppliers.

I'd say some definitely can move faster than the others.

So for example, I would say, anything in our consumer segment, maybe our CEC segment, the cycle to pick up factories and move them are much faster than our industrial or our automotive or our medical segment.

So I think that, that's, in general, how you should think about our portfolio.

But our real focus is on following our customers wherever they want to go.

And what we're seeing customers do is really look at driving dual-source strategy and having sourcing from multiple factories to de-risk their supply chain, and we're really well positioned from that because, as you know, our geographic diversity is pretty significant.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

And again, congrats on the quarter, very strong margins.

And so maybe my first question, I'll start with that, is specifically on the IEI segment.

You reported, again, a very strong 6.3% operating margin, which is above the long-term range.

So I mean, any thoughts on the sustainability of margins at this level?

And how do you see penetration -- your penetration into the industrial and energy end markets?

Do you think -- do you have any sense of how much more penetration there is to go in these end markets?

And how should we think about segment margins over the next couple of quarters?

Well, Ruplu, thank you for your comments on our performance.

And we'll say we're very pleased with our IEI performance.

And like I said, across our energy segment and our base industrial businesses, we saw really good growth across the board, and really good conversion, which also comes from volume increases across this segment.

My comment in terms of margins will be that our focus will always be driving the right mix within every segment.

The beauty of the IEI space is that the available market is significant.

And even today, if you look at vertical integration within customers, it's still quite vertically integrated.

So for us to be able to take products from customers and move it across our value chain is a big available opportunity for us.

And so our expectation is that IEI will continue to grow because the available market is big and it's right in the spaces that we want to participate in.

It has long cycles from a customer affinity cycle standpoint.

And we're also seeing growth in the energy sector in IEI, and our hope is that we'll continue to manage mix and find the right kind of pipeline within this segment to improve margins as we go along.

So it's a space that we're very excited about, and our performance so far really proves that we can continue to ramp this segment in the future, too.

Okay.

And that makes sense.

Maybe another question on margins but, this time, for HRS.

It came a little bit lower than what we would have expected, but 6.6% is still pretty high margins.

But, I mean you talked about some ramping business and some investments you're doing.

Can you just kind of elaborate on what those investments are?

Or how long -- how much more investment is there to go?

And how should we, again, think about segment margins over the next couple of quarters?

Thanks, Ruplu.

Yes.

I'd say we're very bullish about our HRS segment.

If you think about the 2 aspects of our HRS segment, automotive and health, they both are areas that we have amazing expertise in and we have market share leadership in.

Our automotive segment, despite market headwinds, have continued to perform really well from a growth perspective and continued margin improvement perspective.

I'd say, where we have seen some challenges has been in our health business, but that is not as a result of our bookings or our growth in that space, it's more related to how we are ramping the businesses we have booked.

As you're aware, we have booked a lot of complex projects in this space.

And those programs ramping up means that it is a tremendous amount of work for our operations team to be able to ramp up those programs well, and we're learning through that.

But we have a lot of confidence in our -- in this space.

We're very excited about the pipeline of bookings we have and the future potential we see for this business.

So it's one that we feel very comfortable with, and we continue to focus on accelerating these program ramps and learning from those and doing it well.

And we walk away feeling very bullish about the potential for HRS as a whole.

Your next question comes from the line of Jim Suva with Citi.

This is Tim Yang calling on behalf of Jim Suva.

My first question is on seasonality.

I think December quarter is the first time your performance is above normal seasonality in the past 4 quarters.

And you are guiding, I think, March quarter as slightly above seasonal as well.

Do you think you have finished most of your portfolio optimization?

And how should we think about seasonality going forward?

Chris, do you want to take it?

Yes, sure.

Yes, thank you for highlighting that, Tim.

Yes, for sure when you think about the guidance that we just set forth, it does reflect a much more muted seasonality than historically.

If you look back, the 5-year average is roughly a 10% March quarter reduction and midpoint of our guide is much lower than that.

And a lot of that is attributed to the dialogue we had on an earlier question around the portfolio mix focus that we've had.

We've taken significant efforts throughout this year to reposition ourselves and be thoughtful around the high-volatile short product life cycle businesses, and that's what you've seen in terms of both the CEC and, especially, CTG business repositioning.

As a result, you will see a much more balanced depiction of the company's revenue as you move throughout a fiscal year.

Got it.

That's very helpful.

A quick follow-up question on automotive.

I think, Revathi, you mentioned the new program ramps are driving the strength in automotive.

And in the past, I think you have relatively high concentration with a couple of auto OEMs.

But those new programs that you're ramping, is this from your largest customers or from a more diversified customer base?

I'd say, the -- I talked about program ramps in both health and automotive, but automotive growth is definitely because of the market share wins that we have had in this space.

I would say we're progressing really well in our overall diversification strategy for automotive, both geographically and across customer base, and that has been a real focus for us as you've heard from us in the past.

And then we're also -- the focus on electrification and autonomous is also helping significantly because we're expanding our platform and our content in these platforms.

So all of those are helping in terms of changing the mix of our automotive customer base as we have it today.

So we feel really good about where we are, and we'll continue on that effort.

Your next question comes from the line of Adam Tindle with Raymond James.

Chris, I just wanted to start with a comment that you made about this quarter admirably holding profit dollars flat despite a sizable decline in revenue year-over-year.

It looks like revenue declines may be attenuating based on your forward guidance and possibly on the path to revenue growth.

So on the other side of this, just wanting to understand how you're thinking about leverage for fiscal '21.

For example, prior to this quarter, I think we were all embedding double-digit profit dollar growth on low single-digit revenue growth.

So just trying to understand how you think about a reasonable incremental contribution margin so that we don't get ahead of ourselves following this quarter and into the Analyst Day?

Thank you, Adam, and thanks for identifying some of the improving performance we have.

One of the things is we put an announcement out just a couple of weeks ago that we have our Investor Day on March 11.

And that is going to be a perfect time frame for us to get deeper and expand further around the underlying strategies, the -- how we think through each of the businesses' trajectory as well as margin.

But what you can see from our performance year-to-date and what is reflected from our guidance for Q4 is an ability for a company to continue to operate with due care and discipline around its cost structure.

Our SG&A has been well managed, well positioned.

And as I highlighted in my prepared remarks, it enables us some substantial leverage as we move forward.

That in terms is, well, as to how we continue to shift the business mix.

You're seeing us now put a 7 handle in terms of the gross profit or gross margin.

And I think as you continue to see us operate with discipline, continue to improve our operational execution, you're going to see us continue to put together a trajectory that you can have confidence in.

We just do not want to get out in front of a growth trajectory or a margin profile at this stage.

We'll be able to unpack that deeper for you in a matter of 6 weeks.

Okay.

Understandable.

Maybe just another question on HRS to put a finer point on it.

Last quarter, I know there was a lot of moving parts.

You had customer move-outs.

You're ramping those very large programs.

This quarter, it looks like the revenue was there.

The segment did return to growth for the first time in, I think, 4 quarters or so but did get pretty sizable margin erosion.

I think the next quarter margin still has a 6 handle on it if I'm embedding your guidance correctly.

Please correct me if I'm wrong there.

But if you could maybe just unpack a little bit more detail on some of the buckets of investments weighing on margins, and the timing for those to attenuate would be helpful.

For sure.

Margin, as I highlighted for HRS, is really a function of the mix of its business.

And one of the things we've tried to extend into is we have a -- some meaningful ramps underway in our health solutions.

And those are going to be foundational for future growth in revenue for us.

And obviously, at the front end of these types of programs, your profitability and margin is much lower than it is once you get up to volume.

So we have some shifts going on in terms of that portfolio for sure.

Margin for HRS continues to be holding very nicely, if not improving.

And again, I'd point you to the total company's picture for Q4 at the midpoint of guidance having a very meaningful gross profit and operating margin expansion year-over-year.

Adam, I would add, the way to think about things in general is that the diversity of our portfolio is important, right?

We have the opportunity to put money into program ramps and really focus on these complex programs that we're ramping in our businesses and really move our bookings to revenue in our HRS portfolio, and we'll continue to invest in that.

So it's the right thing to do.

We can afford to do it, and it plays out well for us in the long term.

Okay.

Well, just one quick housekeeping, Chris, on interest and other, it was just significantly better than guidance.

So just wanting to understand if something structurally changed there?

Or what the right run rate is for that?

For sure, Adam.

So if you think about this past quarter, we actually -- it was broad-based improvement performance in that line item.

We did a much better job in terms of managing the debt levels and cash during the period.

And so we got several million dollars of improvement from a net interest level.

We had a -- recorded several million dollars of currency gains that weren't forecasted during the period, and we did a bit better in terms of some of the reducing of losses and some of the minority investments that are in that same line item.

I moved you to a guidance in this next quarter of $40 million to $45 million that kind of sits very similar to how we had guided last quarter.

There's nothing fundamentally shifting underneath that outside of a backdrop of an improving interest rate environment, if you will.

Your last question comes from the line of Matt Sheerin with Stifel.

So regarding the CEC business, and you commented about continued softness in networking and telecom.

I know you've got some pretty broad exposure there.

What's your thinking in terms of the 5G cycle?

A lot of your peers had talked about a stall there.

Networking, there seems to be inventory issues that have not yet played out.

So any commentary or visibility would be helpful.

Yes.

So Matt, we overall feel very good about our positioning in CEC, whether it is with 5G in the telecom space or in networking or even in the cloud and data center space.

We have said that there is delay in 5G programs.

And I talked about that a little bit last year.

If you think about it regionally, Europe and Asia definitely slowed down quite a bit.

North America was ramping a little bit faster.

But overall, we see 5G being a little slower, which is kind of expected in these large infrastructure rollouts.

In general, I think that's what we have seen.

I'd say networking is probably just a seasonality issue in a moment in time that we continue to see slowness in networking.

And you can see that with our customers and what they're calling for.

We expect that to continue in Q4.

And it's too early for us to call where that changes, I would say.

But we think we're really well positioned in all spaces of CEC.

We have always been the market leaders in this space.

And in networking and 5G and in cloud, we continue to be really well positioned.

And then our unique capabilities in service and storage, in wireless and battery management, all of the -- that has really consolidated our position very well in this space.

So we'd say some market issues but overall performing well.

Okay.

And just lastly, Chris, regarding your OpEx, it was a little bit higher than we had expected.

Of course, you had a lot of revenue upside in the quarter.

But what should we be thinking about OpEx, as a percentage of sales, for instance?

Should you be able to start working that down and get -- as you get leverage on the mix and the better gross margins?

Yes, sure, Matt.

The Q3 was at $203 million.

It was up modestly year-over-year, say, 3%.

What you're seeing is us being able to operate with really good discipline around this line item.

It does create meaningful leverage.

We are very confident in our ability to operate this in the range of 3% to 3.2% that we've stated before, while doing so, clearly enabling ourselves to support our future growth and the levels of investment necessary.

A bit of a step-up this period as we actually did better across the board in terms of revenue and profitability.

That leads to a bit higher in terms of some of the incentive compensation.

So all around, this range is where you should see us, and we have high confidence of being able to operate 3% to 3.2% and provide meaningful leverage.

Okay.

With that, I'd say thank you for joining us, and we're really pleased with our performance in Q3, and we've been consistent in our performance all through our fiscal 2020.

We look forward to seeing you all in March in our Investor Day, and we're looking forward to sharing more insight into the strategy and the future we have for Flex.

So thank you, everyone.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.