捷普科技 (JBL) 2015 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by and welcome to Jabil's First- Quarter of FY15 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn today's call over to Beth Walters, Senior Vice President, Communications and Investor Relations. Please go ahead.

Thank you so much, Susan. Welcome to our First Quarter of 2015 earnings call. Joining me today are our CEO, Mark Mondello, and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, www.Jabil.com in the investor section.

Our First-Quarter Press Release, slides, and corresponding Webcast links are also available on our website. In these materials, you will find the financial information that we will cover during this call. We ask that you follow our presentation with the slides on the website beginning with Slide 2, our forward-looking statement.

During this Conference Call, we will be making forward-looking statements including those regarding the anticipated outlook for our business, our currently expected Second Quarter of FY15 net revenue, and earnings results, the financial performance of the Company, and our long-term outlook for the Company. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our Annual Report on Form 10-K for the Fiscal Year Ended August 31, 2014, on subsequent reports on Form 10-Q and Form 8-K, and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

Today's call will begin with opening remarks from Mark on the quarter, the Fiscal Year, and our business outlook. We will then move on to our First-Quarter fiscal results and guidance on our second fiscal quarter of 2015 from Forbes Alexander. We will then open up the call to questions from attendees, and I'll now turn the call over to Mark.

Thanks, Beth. Good afternoon, everyone. I appreciate you taking time to join our call today. I'd like to begin by thanking all of our people here at Jabil for their continued loyalty and unwavering commitment. As for Jabil's First Quarter, I couldn't be more pleased with our results. It was an exceptional quarter. Forbes will be providing more detail, but here are a few key highlights. Our team exceeded expectations delivering $181 million of core operating income on revenues of $4.55 billion resulting in core operating margins of 4%. These results reflect strong demand within our DMS segment as well as solid execution and performance across the entire business. I'd now like to talk about what we see as we look ahead.

Let me start with Nypro. This business serves the healthcare and consumer packaging Markets. In serving these Markets, a key purpose for our Nypro team is how they change lives. They do so by making products more affordable, more accessible, and more effective. The team is aggressively driving to expand select capabilities in the back half of this year. Capabilities such as custom automation, complex tool making, and product concept generation.

Nypro is creating a new, competitive class of services. Market share is improving, and Nypro's revenue pipeline is robust. The team is focused on key initiatives directly tied to growing their business over the long term. Current product ramps underway within Nypro serve as a solid foundation for this growth. Let me now move to our Green Point business.

This business sits independently, but side by side with Nypro, within our DMS segment. Our Green Point team charged into the Fiscal Year with significant momentum. Momentum generated from successful engineering and highly technical program ramps within our mobility space.

During the quarter, Green Point's revenue was stronger than expected. This resulted in excellent asset utilization and cost leverage. The team remains excited as they continue to expand in the areas of tooling, automation, material sciences, and overall industrial design. These areas will be important platforms for growth.

Another exciting area, which is very strategic for Green Point, is their consumer lifestyles in wearables and business. This market is anticipated to grow 30% a year from 2015 to 2020. Our consumer lifestyles team is designing and manufacturing products ranging from simple fitness bands to ultra-complex smart devices. They've done a masterful job of integrating embedded camera solutions with intricate assembly and specialized automation. Leveraging these differentiated capabilities paves the way for revenue expansion, further solidifying Green Point as a key player in this fast growing market. Our Green Point team has Jabil well positioned for the next two to three years.

Let me close this section of my commentary with a look into our EMS segment. As a reminder, we collated our industrial and energy, high velocity, and enterprise and infrastructure divisions resulting in a well diversified, large-scale EMS business. Our EMS team continues to take a holistic, go-to-market approach, largely centered around core electronics. This provides Jabil with an outstanding value proposition in serving a broad range of end Markets.

The team continues to navigate from what was legacy build-to-print opportunities to build-to-spec models, driving a higher degree of value add. They believe this transformation will result in new sources of income. Our high velocity business, which is part of our EMS segment, is delivering to expectations while booking new program wins. A number of these new programs are now ramping in areas such as digital home and office, automotive, digital entertainment, and print.

As their customer base expands, the high velocity team extends their reach deeper and deeper into the products they design and manufacture. Our team, which leads our industrial business, is actively pursuing share wallet expansion as well as solidifying new customer relationships. They participate in well defined end Markets while serving large, diverse global brands. The industrial team architects complete solutions by weaving together engineering capabilities with our Supply Chain intelligence. Intelligence that is grounded within our formal control tower analytics.

The enterprise and infrastructure business rounds out our EMS segment. This team is excited by new opportunities. Desire for more and more on-demand entertainment, combined with ever-growing amplification of social media, drives the needs for enhanced broadband. This, in turn, results in higher CapEx for both Service Providers and corporate Enterprises.

At the same time, companies want to capitalize on data and the internet of things. This, in turn, drives the need for greater IT infrastructure, which is now serviced by traditional IT vendors, combined with hyper-scale cloud providers. Our networking business remains stable. Higher levels of growth are expected 12 to 24 months out when new product refresh cycles take hold.

I'll close out my prepared remarks with a few thoughts around the outlook for our business. There's no doubt that FY15 is off to a great start, positioning Jabil for what should be a strong year. With that said, we've got plenty of hard work ahead of us. As I step back and look beyond the year, I'm highly optimistic about what's ahead. Said another way, growth is top of mind for Jabil management. The aggressive pursuit of new opportunities is truly what energizes our team.

Over the past 90 days, Forbes and I met with our business leaders. Based on those conversations, we've decided to expand our capital expenditures for the year. We believe expanding our investment at this point in time will accelerate growth in fiscal years 2016 and 2017. This incremental growth will deliver returns in excess of our current weighted average cost of capital. To that end, our capital investments for FY15 will expand to a range of $650 million to $750 million. Let me provide a rough breakdown on how we plan to spend the capital.

We'll spend $140 million to $260 million on footprint expansion and infrastructure. Our expansion is currently planned for various sites in China, lead by Chengdu, along with Malaysia and Indonesia. An additional $45 million to $55 million will be used specifically for our lifestyles and wearables business. $75 million for our Nypro business, a range of $180 million to $200 million for our mobility business, and $80 million to $100 million for our EMS business.

In addition, we're also planning to spend $35 million to $55 million in expanding our capabilities. Finally, $40 million to $60 million will be allocated for non-traditional end markets, markets aligned with long-term megatrends. Net of these expanded capital investments, I believe we will deliver $200 million to $300 million of Free Cash Flow for this year. This further illustrates the strength of our cash flows from operations.

As I think about our business strategically, there may come a time when growth attenuates and good business opportunities disappear. If and when this time comes, we will prioritize free cash flows over investing for the future, but now is simply not that time. Thank you, and I'll now turn the call over to Forbes.

Thank you, Mark. I'd like you to refer to slide 3 that you can find on Jabil's website as I review the results of our first fiscal quarter of FY15. Net revenue for the First Quarter was $4.55 billion, an increase of 5% on a year-over-year basis. Our GAAP operating income was $145 million during the quarter while GAAP net income was $72 million. This compares to $118 million of GAAP operating income on revenues of $4.3 billion in the prior period.

GAAP net diluted earnings per share for the First Quarter were $0.37. Core operating income, excluding the amortization of intangibles, stock-based compensation, restructuring and certain other expenses was $181 million and represents 4% of revenue. This compares to $160 million, or 3.7% for the same period in the prior year, which represents a 13% increase on a year-over-year basis. Core diluted earnings per share were $0.55 versus $0.43 in the same period in the prior year. Moving to slide 4 and our First-Quarter segment discussion.

In the quarter, our diversified manufacturing services segment increased 21% on a year-over-year basis driven largely by solid performances by our Green Point business. Revenue for this segment was approximately $1.9 billion representing 42% of total Company revenue. Operating income was 6.2% of revenue during the quarter reflective of the successful launch of multiple programs across a number of customers within Green Point as well as several other key programs that continued to perform well.

The electronic manufacturing services segment performed to our previous expectations, decreasing 5% on a year-over-year basis. Revenue was approximately $2.6 billion representing 58% of total Company revenue. Core operating income for this segment was 2.4% of revenue.

Reviewing our cash and some key metrics on slide 5, we ended the quarter with cash balances of $922 million while debt levels were consistent with the previous quarter at approximately $2 billion. Cash flow from operations was $189 million in the quarter. Core EBITDA was approximately $297 million representing 6.5% of revenue while core returns on invested capital was 19%. During the first fiscal quarter, we also repurchased approximately 2 million shares at a total cost of $40 million. These purchases conclude the previously authorized programs in place.

Net Capital Expenditures during the First Quarter were $194 million. As Mark discussed, for the year, we are increasing our capital expenditure forecast by $300 million to support the addition of some 1.5 million to 2 million square feet of manufacturing footprint and infrastructure which should support continued revenue growth and program ramps in FY16 and beyond. Capital Expenditures for the Fiscal Year are now estimated to be in the range of $650 million to $750 million.

If you'd now turn to slide 7, I'd like to discuss our business outlook for the Second Quarter. We expect revenues in the Second Quarter to be in the range of $4.15 billion to $4.35 billion, where at its midpoint, a decrease of 6% sequentially reflecting seasonality and mobility in consumer-based products. On a year-over-year basis, guidance reflects a 19% increase. This increase, being reflective of numerous program wins within our automotive, lifestyles, and wearables, mobility, healthcare, industrial, and enterprise and infrastructure customer relationships.

Core operating income is estimated to be in the range of $135 million to $165 million and, the core operating margin in the range of 3.3% to 3.9%. Core earnings per share are estimated to be in the range of $0.39 to $0.50 per diluted share, and GAAP earnings per share expected to be in the range of $0.25 to $0.38 per diluted share. These figures based upon a diluted share count of 196 million shares.

Based upon the current estimates of production, the tax rate on core operating income in the Second Quarter is expected to be 26%. While the tax rate for the full year as a result of the mix of earnings being forecast, now expected to be 24%.

Turning to our segment guidance and revised full-year outlook on slide 8, the diversified manufacturing services segment is expected to increase approximately 53% on a year-over-year basis, or a sequential decline of 11% representing typical seasonality. Revenue is estimated to be approximately $1.7 billion. The electronic manufacturing services segment is expected to increase approximately 3% on a year-over-year basis for a seasonal decline of 3% on a sequential basis. Revenues are estimated to be approximately $2.55 billion.

FY15 has started on a very sound footing. Given our line of sight around new business wins across a number of end Markets, we are now in a position to increase our revenue and EPS guidance for the full Fiscal Year. Revenue is now expected to be in the range of $17.5 billion to $18.5 billion, and at its midpoint, a 14% increase year-over-year. Our core earnings per diluted share are now expected to be in the range of $1.85 to $2.15.

At the midpoint of our revenue guidance, we currently estimate that the DMS segment will grow approximately 35% on a year-over-year basis while our EMS segment is expected to grow 4%. Cash flows from operations in the full Fiscal Year are now estimated to be in the range of $900 million to $1 billion with Free Cash Flows after Capital Expenditures estimated to be in the range of $200 million to $300 million. I'd now like to hand the call back over to Beth.

Great. Thanks, Forbes. Before we begin the question-and-answer session, I'd like to remind our call participants that while we want to take questions on our business, in customary fashion, we will not address any customer or product-specific questions. Thank you for your cooperation on this. Operator? We would like to begin the question-and-answer session now.

(Operator Instructions)

Your first question comes from the line of Shawn Harrison with Longbow Research.

Hi, good evening and congrats on the results. Two questions. Just first off on the MS business if I look at the midpoint of the guidance for a year, it looks a little bit more back-half weighted than we've seen in prior years. If you could just -- is that solely product ramps that drive the EMS business in the back half? Or, do you feel a little bit better about the end Markets? And then, the second question is just to the timing of the CapEx increase right now. Knowing that you expect to see some benefit in 2016 and 2017, is there a way you could articulate whether that rolls in immediately into 2016, and you start to see the revenue benefit? Or, how does the CapEx spending right now benefit your 2016 revenues and play out?

Hi, Shawn. Thanks, this is Forbes. Let me take the first part of the question, and that was the EMS segment being back half. You're correct in your thought process there. It's a little bit of both of what you articulated. We are seeing certainly some recovery in the industrial and energy marketplace in the back half of the year versus our first half of this year. And also, we're seeing some nice new wins, new product ramps across our enterprise and infrastructure sector.

I think Mark also mentioned in his prepared remarks some growth in automotive and digital home entertainment. These are new programs that are coming into the Company, and we'll start to ramp as we move into our fiscal Third Quarter and start to hit volume in the fourth quarter and then into 2016. So, a little bit of better visibility around industrial energy marketplaces and some real nice solid wins coming into the Company.

Shawn, to supplement what Forbes said there, you could think about it maybe as 60% of the growth coming in our high velocity area and 40% of the growth coming in between enterprise infrastructure and industrial. The enterprise infrastructure market is still tough, but our team is doing a great job. And, as I said in our prepared comments, we've been working really hard the last 12 to 18 months to change our value proposition there. And then, we're also doing a decent job -- or, the team is doing a decent job with picking up market share.

In regard to the CapEx, I think that we originally had a CapEx range of $350 million to $450 million. A decent amount of that will have an impact in the back half of this year. Most of the incremental CapEx we talked about on today's call will position the Company well for 2016 and 2017.

And, I guess to just clarify positioning, does that mean that you're going to see an immediate revenue benefit in 2016? Or, is this something that the benefit ramps throughout the year? I just don't want to get ahead of myself in terms of modeling.

Well, right now, I would think that the shape of 2016 will look somewhat similar to the shape this year. So, I think this year we're looking at Q1 as probably our most robust quarter, and I would think 2016 the same would hold, Shawn.

Very helpful, Mark, and once again congrats.

Thanks.

Your next question comes from the line of Brian Alexander with Raymond James.

All right, thanks. Good evening. Just I guess on the CapEx question, so I understand and appreciate now is not the time to stand still. But, what has changed in the last 90 days to lead to such a massive increase in CapEx? I think you're almost doubling it from what you thought going into this Fiscal Year. What do you see now that you didn't see then. And, related to that, how much visibility do you have into the ramps that are supporting these investments? And, how should investors think about the return on these investments over the next couple years?

Yes, Brian, if I'm sitting where you're sitting I'm asking the same question. The $350 million to $450 million we felt aligned well with the midpoint of guidance we gave in September of $1.80, and we felt like there could be upside to that. But, at that time we're like you know what -- let's align CapEx and our CapEx guidance to the financial guidance we were giving you. As we sit today, we've taken guidance up for the year. We delivered an extra $30 million of income in Q1, and we're guiding Q2 up relative to consensus. And, one of the things that Forbes and I did as I said in my prepared comments is we spent an extensive amount of time along with Bill Muir, our COO, and some other executive Management with our business leaders, and we just got a decent amount of opportunities. The question becomes, do we put our foot on the brake and turn away some of those opportunities or not?

I think one thing to think about is in my prepared remarks I talked about the fact that the majority of the delta is around footprint and infrastructure. And, really, we're thinking about accelerating what we thought would be early FY16 CapEx, and we're pulling it into 2015. That's to get an additional -- I don't know -- 1 million, 1.5 million square feet of infrastructure in place for business that we think looks very good for us. We have been working tirelessly for the last two years on growth opportunities, and we've got a lot of opportunities. I don't want to turn those away, and the other thing I talked about in my prepared comments was we're not going to get all of these correct. But, we've got some very disciplined hurdle rates around our weighted average cost of capital, and every one of the opportunities we've approved has anywhere from a 6-point to a 15-point spread, 16-point spread over our 10 points to 12 points of capital expenditure or expense. So, we feel pretty good about it, Brian.

Mark, I think last quarter you talked about ultimately getting to $20 billion in revenue and a 4% operating margin.

I did.

Do these investments -- do these accelerate that? Is that something that you think is achievable next year? And then, I just have one more follow-up.

I guess I'd state it this way. I wouldn't be doing it if I didn't think it would accelerate it, Brian. So, that's our objective. We put up 4 points in the first quarter. We won't do 4 points for the Corporation for the year most likely. But, we are aiming at 4 points for FY16. That's correct.

Just the last quick one. The growth that you're seeing in DMS is obviously very strong. And, I imagine most of that -- not all of it, but most of it is being driven by your largest customer. So, remind us -- what's the upper limit of your comfort level in terms of revenue and profit exposure to any one customer?

Well, I think that's an interesting question. Let me make one statement. Obviously, we've got a great relationship with our largest customer. I would tell you that being that -- and being that our relationship is quite strong, that certainly had some level of impact on our First Quarter. The nice thing is that we also saw some fairly substantial income from other customers in that space. And, again, we've been working very hard on diversification as well, so that was a very good positive for Management in Q1.

As far as my level of comfort with a single customer, it's dependent on who the customer is and how diversified we are within that customer. Last year, we had a tough year, and I don't know that I could say that will never happen again because the mobility business is pretty volatile. But, that was am unusual situation, and as I've said before, we're working hard to diversify within our current customer relationship as well as diversifying the Green Point business overall.

All right, thank you very much.

Thanks, Brian.

Your next question comes from the line of Amit Daryanani with RBC Capital Markets.

Good afternoon. Two questions. Maybe sticking to the CapEx side. Just talk about versus the 90 days ago, which are the one or two buckets that you have actually upped the CapEx aggressively in? Seems like its mobility and footprint. But, maybe talk about which of the six buckets you've outlined obviously in the ramp-up in capacity CapEx? And then, historically, you've had co-investments with some of your customers who have put in some CapEx dollars of their own. Do you expect that to happen this year as well?

Hi, Amit. So, the increase -- essentially $300 million represents footprint and infrastructure. As Mark said, we'll be adding square footage -- 1.5 million to 2 million square feet in China, in Malaysia, and in Indonesia. So, that footprint is to support wide array of business opportunity. For example, a great opportunity in our aerospace and defense business that we've supported through these investments. Extensive lifestyle and wearables business across an expanding customer base that we've seen come into the Company. And, that's really a Chinese play also and some expansion Malaysia for some wins in our enterprise business. And then, the expansion in Chengdu will support a number of customers there both in areas such as mobility, lifestyles, and wearables. So, really quite a broad base of opportunity that as Mark said, we've been working on now for what, 18 months to 2 years. So, very well positioned as we move into 2016, and as I say, when you're putting up that amount of square footage, there's significant lead time with the scale of these operations we're putting in place.

I guess, Forbes, when you talk about the infrastructure investments, is that more on CNC machines that you've got to deploy for especially the mobility set? Is that where the infrastructure dollars are going into? (multiple speakers)

No, I'm talking about IT infrastructure, leasehold improvements. There is some level of equipment in there, but the lion's share is in the fabric of the buildings, the infrastructure, water purification plants, et cetera. Clean rooms.

I guess if I just follow-up on the EMS side of the business now. You're running about 2.5% margins. You have a pretty good ramp in the back half based on the $11 billion run rate you expect for the full year. Do you think you need that kind of $11 billion run rate to achieve 3% op margins, just out of the midpoint of your target, I think? And, if not, what do you need to get that business to be at the midpoint of the long-term target from a margin basis?

Yes, that's a great question. I think as we've indicated, the back half of the year we're expecting somewhere between $400 million to $600 million of revenue growth over the first half of the year. With that, to your point, that will bring we believe margin expansion of about 20 to 30 basis points on the first half of the year. And, what that will do for our enterprise and infrastructure -- excuse me, our EMS segment -- so, still mean that the overall year margins are probably 2.5 points -- 2.4% to 2.5%. So, as we move into 2016, as we exit the year at upper $2 billion, maybe $3 billion, we're running about that $12 billion pace, and we should certainly then start to see targets around about 3%.

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

Thank you.

Your next question comes from the line of Steven Fox with Cross Research.

Thanks. Good afternoon. Mark, I was wondering if we could just -- you provided a lot of details. I'm looking at the Press Release where you talked about positioning the Company to capture transformative technologies. So, I'm wondering how much of what you're announcing in terms of CapEx is transformative in terms of capabilities as opposed to end Markets? And, if you could be specific in terms of what you meant in the Press Release by that one line? That would be helpful. And then, I have a quick follow-up. Thanks.

Sure. It's broad, and if I think about the buckets of CapEx, and I think about transformative technologies relative to legacy EMS, I would suggest that take the footprint expansion and infrastructure out of the equation altogether. If I go down the list -- lifestyles, wearables -- absolutely transformative technologies. Polymers, materials, material sciences, embedded optics, embedded cameras, things like that. When I think about the Nypro business -- absolutely transformative technologies. Drug delivery systems, Pharmaceuticals. Things that are completely different than legacy circuit Board manufacturing.

When I think about our mobility business, that business is massively engineering-intensive and has no electronics -- or, essentially no electronics in it at all. So, that's composites, materials, machining, et cetera. When I think even about our EMS business today, I think about areas like advanced wireless sensors, photonics, things like that. And then, when I think about moving into different areas altogether, in my prepared comments, I talked about some allocation of funds. I think $40 million to $60 million for non-traditional end Markets, and I would throw that in that category as well.

Great, that's helpful. And then, just one other question in terms of capital spending. So, I understand the reason to up it in terms of the growth opportunities. But, if we were going to take like say a two-year to three-year view on how to think about capital spending now in a growth environment, is this sort of the range relative to sales we should think about? Or, how would you sort of talk about your regular investments if we're in a sustainable growth period?

Yes, my guess would be this. My wish is that sales -- my wish is sales are increasing. And, we've decided to make a fairly substantial investment in infrastructure and footprint so we won't have to do that every year. When it comes to the investments in different businesses, I think if you Pareto-ize that, that would be normalized CapEx. And, my hope is that you see that for the next two or three years. And, as I said in my prepared comments, if we get to a point where -- I don't -- I have no interest in top line growth. None. We're trying to be very respectful and disciplined around our growth all about income and higher and higher quality of income, and we talk non-stop internally about ROIC in cash flows.

If we get to a point where -- I don't want to put so much pressure on the organization that it feels forced. If we continue to see the opportunities we see, we're going to continue to make the investments. Because at some point in time, as I said, whether the Company is $15 billion, $20 billion, $25 billion or whatever the number might be, there will come a point in time where maybe with our service offerings and our value proposition the growth isn't there. And, the nice thing about our businesses is there will be an extensive period of time that we can pull back CapEx substantially and return a bunch of capital to shareholders. It's just as we sit today, I don't think that it's a smart idea to adopt that model right now.

Great. That's very helpful and good luck going forward.

Thanks so much.

(Operator Instructions)

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

Good afternoon and Happy Holidays. And, wow -- congratulations. Great results and great outlook. When we look at within the main driver of it, it appears Taiwan Green Point did fantastic. Can you help us understand a little bit about two of the factors within that? And, that being the utilization rates and then the yield rates? Are we running basically 24 hours a day, 7 days a week and optimize thus the CapEx? Or, are you still ramping and having yields that really need to come up so you can actually pump up a lot more revenues without more CapEx? How should we think about that? Thank you.

Thanks, Jim. Let me start with we made a decision last year when we had the issue that we had, and we made a decision to keep a lot of capital in place and a lot of infrastructure in place. We did that based on the relationship we have with our largest mobility customer, and that has proven to be a pretty good decision. We've reloaded those assets in relatively short order in combination, and this is a little bit of a digression -- but, we've also disengaged with our second largest customer last year to protect shareholders. We've been really successful in redeploying the vast majority of those assets in very short order.

So, as we sit today, I would characterize the quarter as assets were very well utilized, and demand was much stronger than we expected. And, I think demand was stronger than expected because we were fortunate enough to have a team in Green Point from an engineering perspective and a technology perspective that delivered a great solution to our customers. As I said earlier, the quarter was driven, not only by our largest customer, but a number of other customers as well.

And then, next topic is my follow-up is on the yields. Because the CapEx I think is very well justified given your revenue outlook. The question is can you keep revenue growing due to increasing yields? Or, are yields at Green Point pretty much optimized to the point of, hey, this is now causing you to put forth more CapEx?

I think yields run in cycles based on product cycles, Jim. You have to have the appropriate foundation of assets in place to play in a diverse way across the entire mobility sector. I'd also remind you that Green Point also has our lifestyles and wearables business, and we're excited about that. We're making the investments, and it's not so much about yield, it's about the fact that we want to be sure we have enough infrastructure in place to capture the revenue streams that we think we can capture.

Great. Congratulations to you and your team at Jabil.

Thank you.

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

Just another question regarding your operating margins in the EMS business. You talked, Mark, about growth prospects for next year, and I think 60% of that growth is coming from high velocity which traditionally was lower margin than the enterprise and infrastructure business. But, I know the high velocity business is changing for you the nature of that business. So, what should we think about mix and its impact on margins in EMS? And also, I know you're making investments in that business, and is that also why margins will be below 3%? And, perhaps we should see that increase into FY16 as those businesses become more mature?

Good question. So, let me break that up a little bit. As we look at our EMS business first half to second half, I think that we -- the first half margins will be in the 2.3% range is what I would guess. And, as I think about framing out the second half for you, I think we probably pick up 20 to 30 basis points of margin would be my guess. And, the obvious question is, Mark, why wouldn't we get better leverage, and why wouldn't we see margins start bumping up against 3 points?

I think the biggest reason is we are being very disciplined around ROIC. Not to suggest we are not paying attention to margins, but I really want to grow cash flow dollars over the next two or three years as long as we have real ROIC returns with an appropriate gap between the real returns and our cost of capital. The organic business growth is the best growth we can have in the business because it's the least expensive. It doesn't come with a lot of the complications that acquisitions do.

Not to say we won't do acquisitions because I think we will, but you were on point with most of the growth for the back half of the year will be in high velocity. And again, I think Forbes talked about it, and I talked about it in my prepared statement. It will be around automotive, digital home, digital entertainment, and our high velocity margins historically have been in the 2% to 3% range. But, because of the way we run that business and we manage working capital and asset utilization, that business ends up with real ROIC North of 20%. And, we also end up in that business with terms and conditions that end up being very favorable to us.

So, I think again as I think about this year, I'd manage the back half of the EMS business maybe 20 basis points higher than the first half, and then as we move to FY16, one of the things I talked about in September was we came off a tough year last year. We talked about this year being a year where we'd optimize the business. My gut feel is that we'll have the business 70% or 80% optimized this year, and we'll complete the optimization. Not to say we ever get fully optimized, but as far as costs and overhead absorption, I think we'll see the full benefit of that in 2016.

Okay, that was quite helpful, Mark. And then, just as a follow-up, regarding the revenue trends within EMS and the core business -- enterprise and infrastructure -- could you give us a little color on what you're seeing in the three main areas, Telecom and networking and storage?

Yes, we're seeing all of that business being GDP-like, but as we've talked about before, there's a lot of technology shifts there. And, certainly, around cloud computing, and one of the things that is really interesting to us is as social media continues to increase, as digital entertainment On-Demand increases, there's a definite need and more and more of a want around additional global bandwidth. And, that's an area that we're pretty excited about, and we think we'll benefit from.

Okay, thanks very much and Happy Holidays.

You as well.

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

Good afternoon, and thanks very much for taking the questions. First, just wanted to follow up on the customer concentration. You can talk about how much exposure you have coming from your largest customer now? And then, with the new programs that you're expecting to ramp later in 2015 and into 2016, do you expect your customer concentration to increase or decrease?

So, Mark, not talking specific numbers around specific customers, but one 10% customer in the quarter. And, that's the way we view things as we look through the Fiscal Year. But, we're very pleased with number of new customers joining the capability sets within Green Point in lifestyles and wearables, that business. So, we're comfortable, as Mark had said earlier, in answering the question with the relationship we have across a broad range of our customers and the concentrations we have and any customer that starts coming up towards the 10% or above. Our rule is really to mitigate risk, and we do that in a number of ways by continuing to diversify across the various product sets and end Markets that they serve. So, that's our main focus, and we're very comfortable with the exposures we have across the customer set.

Okay, and for a follow-up, you have talked about wearables a few times on the call. How much does wearables represent as a percentage of the Company sales today? And, where do you envision that going over the course of FY15 and FY16?

Yes, Mark we unfortunately just don't break that out. That's embedded in our Green Point business.

Okay, if I could just try one more. I know OpEx cuts had been something that had been planned. I think in a couple of facilities in Europe, and I think it was supposed to flow in later in FY15. Given the upside in sales, is that something that's still on the table that we should expect?

Yes, absolutely. Those plans are going according to schedule, if you will, and it will be Western Europe activity underway so we should start to see that coming in Q3 and Q4.

Got it. Thank you very much.

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

Hi, thanks. Forbes, I just wanted to dig a little bit into the operating expense line. It was up a lot this quarter. Hoping you could give a little detail on that, and also help us understand how you expect OpEx to flow through the rest of FY15? Do you expect some additional cost savings? Would OpEx come down? What are you thinking about?

Yes, Sherri. So, in terms of -- you're looking at our GAAP OpEx?

Yes, both.

Okay, so the GAAP OpEx let me explain that. If you're looking at our financial statements, you'll see an increase there of about $70 million on a year-over-year basis. $40 million to $50 million of that is the result of stock-based compensation. Let me explain that. This quarter last year, we reversed out some $20 million-plus of stock-based compensation where this year we recognized I think $16 million. So, you've got a significant swing there.

The balance of the OpEx increase on a year-over-year basis has been as we've expanded our footprint both in [Hachiouji], Chengdu, and obviously, SG&A to support those activities. Also, if you recall on our last call, we talked about some additional investments there in terms of capabilities to support future growth. And now, clearly, we're starting to see that growth come through. So, as we move through the balance of the Fiscal Year, certainly this fiscal -- this Q1 we've just printed would be the high point. We would expect that to come down some $6 million to $8 million in Q2, and then we'll start to see the benefits of some of the restructuring activity in the back half of the year. That should certainly level off there as we move through the balance of the year.

Okay, that's helpful. And then, just wanted to dig a little bit into the commentary about transformative businesses, and trying to understand you think that you have the capabilities at this point that you need for those transformative businesses. Or, are there areas that you probably need to add in thinking about what areas do you need to possibly do M&A? Thanks.

Hi, Sherri. Yes, I think we have a lot of the capabilities, and we're seeing some good program wins around those capabilities. We've also at a strategic level across all of our DMS and EMS collated what we believe are areas that we need to continue to refine and advance. And then, Bill Muir is kind of our air traffic control on that working with our business leads, and we will continue to grow some of that organically. And, if we don't believe we can grow some of those capabilities organically, we'll do some fairly modest M&A deals to acquire the capability we need to acquire.

Thank you.

You're welcome.

We have reached our allotted time for questions. I would now like to turn the call back over to Beth Walters for any closing remarks.

Great, thank you very much, everyone, for joining us on the call today for our fiscal First-Quarter results. We look forward to following up with you on the quarter and as the quarter progresses. Thank you very much.

Thank you for participating in today's conference. You may now disconnect.