Sanmina Corp (SANM) 2016 Q1 法說會逐字稿

Good afternoon. My name is Connor, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sanmina Corporation first-quarter 2016 earnings conference call.

(Operator Instructions)

Paige Bombino, Vice President of Investor Relations, you may begin your conference.

Thank you, Connor. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first-quarter FY16 earnings call. A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website.

Please turn to the Safe Harbor Statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operation may differ significantly as a result of various factors, including the state of the global economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological change.

We refer you to our quarterly and annual reports filed with the Securities and Exchange Commission. These documents contain risk factors that could cause actual results to differ materially from our projections or forward-looking statements.

You'll note in our press release and the slides issued today that we have provided you with statements of operations for the three months ending January 2, 2016, on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and the slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense, and other infrequent or unusual items to the extent material.

Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income, and earnings per share, we are referring to our non-GAAP information.

I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen -- welcome. Thank you all for being here with us today.

With me on today's conference call is Bob Eulau, our CFO.

Good afternoon, everyone.

For our agenda, Bob will review our financial results for the first-quarter FY16. I will follow up with additional comments about Sanmina's results and future goals. Then Bob and I will open for questions and answers.

Now I'll turn this call over to Bob. Bob?

Thanks, Jure.

Please turn to slide 3. Overall, the first quarter was a mixed start to FY16. Revenue of $1.53 billion was down 6.2% on a sequential basis, and down 8.2% from the first quarter last year.

Non-GAAP EPS was $0.58, which was at the midpoint of our guidance for the quarter. This was based on 81.2 million shares outstanding on a fully diluted basis. During the quarter, we used $29 million to repurchase a total of 1.4 million common shares.

Cash flow from operations was good, at $63 million for the quarter, and free cash flow was $34 million. I'll discuss cash in more detail in a few minutes.

Please turn to slide 4. From a GAAP perspective, revenue was down 6.2%, or $102 million from Q4, to $1.535 billion. Reported net income of $27.1 million, which resulted in earnings per share of $0.33 for the first quarter. This was down relative to last quarter by $3.45.

You may recall that last quarter our GAAP results included an incremental release of our valuation allowance against deferred tax assets. If you exclude this one-time tax item, earnings per share were flat with last quarter.

My remaining comments will focus on the non-GAAP financials for the first quarter of FY16. At $125.7 million, gross profit was down $2.7 million from the prior quarter. Gross margin came in at 8.2%, which was 40 basis points better than we reported in Q4. We're very pleased with both gross profit and gross margin, given the lower revenue.

Operating expenses were down $2 million for the quarter, at $64.7 million. This represents a 10-basis-point increase in operating expenses as a percent of revenue compared to Q4. Spending was down this quarter, primarily due to the return to a normal 13-week quarter and the time off around the holidays.

At $61 million, operating income decreased by 1.1% from the prior quarter, and decreased 10.6% from Q1 last year. Operating margin was 4.0%, which was a 20-basis-point sequential increase. Other income and expense at $5.9 million was flat when compared with last quarter, and up 18% from the first quarter last year. The tax rate for the quarter was 15% of pre-tax income, which was in the range we had expected.

On a non-GAAP basis, we earned $46.8 million in net income, or $0.58 per share. Earnings per share were up 0.7% when compared to Q4, and down 6% from Q1 last year.

On slide 5, we are showing you our key non-GAAP profit metrics. Gross margin was 8.2% for Q1, while we had a $2.7 million decrease in gross profit from Q4. We've been very consistent with our gross margin ranging between 7.7% and 8.2% over the last 11 quarters.

Our operating income decreased 1.1% when compared to Q4. This led to $61 million in operating income, and operating margin of 4%.

Please turn to slide 6. We're providing more information on the segments that we report. As you can see from the graph on the left, integrated manufacturing solutions segment was down $67 million or 5.1% from last quarter. A good mix of business within this segment, and good execution, led to a 60-basis-point increase in our gross margin from Q4. This is the best IMS margin we have reported since we started segment reporting.

The second segment for us is components, products and services. In aggregate, the revenue for this segment was down $36 million, or 9.4%, with gross margin down 60 basis points to 8.7%. With the high contribution margins in this segment, the lower revenue has a large impact on gross margins. This gross margin decline reflects better profitability in the components area, offset by lower profitability in the product and services areas.

Now I would like to turn your attention to the balance sheet on slide 7. Our cash and cash equivalents were $398 million. Overall, the balance sheet was very similar to last quarter. Cash was down $14 million from the previous quarter.

We used cash, and cash generated, to repurchase $29 million in equity. Specifically, we repurchased 1.4 million shares at an average price of $20.87 per share.

Accounts receivable were down $7 million, and inventory was down $23 million. Property, plant and equipment was down $5 million for the quarter. From a liability standpoint, accounts payable were down $21 million, and short-term debt was down $24 million.

On January 5, we completed the purchase of a storage software company for approximately $40 million in cash and short-term debt. This company provides high-performance software for our Newisys storage arrays. In addition, we anticipate closing on the asset purchase from Motorola Solutions in the next couple of weeks, that we discussed last quarter.

Please turn to slide 8, where we will review our balance sheet metrics for the first quarter. Cash was down $14 million from Q4. We're very comfortable with our cash at $398 million. The cash levels have been very consistent over the last year.

Cash flow from operations for the quarter was good, at $63 million, and net capital expenditures for the quarter were $29 million. This led to $34 million in free cash flow for the quarter. We expect to have positive free cash flow for the remainder of the fiscal year.

Inventory levels continue to be a challenge. While inventory dollars were down $23 million from last quarter at $896 million, inventory turns remained at 6.2. Compared to Q1 last year, inventory dollars were down $12 million, but inventory turns were also down.

In the lower-left quadrant, we are showing you cash cycle days, which combines our cycle time for inventory, accounts receivable, and accounts payable. Overall, cash cycle time increased from 44.6 days last quarter to 47.2 days. This change was primarily driven by a 2.8-day decrease in days payable outstanding.

Starting this year, we are moving to a pre-tax return-on-invested-capital measure. We're making this change because of the large deferred tax asset now on our balance sheet. This eliminates the complications of determining the appropriate treatment of taxes from both a profit and an asset standpoint. The pre-tax return on invested capital was very respectable at 21.2%. This was in line with prior quarters.

Please turn to slide 9. I would now like to share with you our guidance for the second quarter of FY16. Our view is that revenues should be in the range of $1.55 billion to $1.65 billion.

We expect that gross margin will be in the range of 7.7% to 8.1%. Operating expense should be $65 million to $67 million. This leads to an operating margin in the range of 3.6% to 4%.

We expect that other income and expense will be in the range of $6.5 million to $7.5 million. We expect the tax rate to be around 15%, and we expect our fully diluted share count to be around 80 million shares, plus or minus 500,000 shares. When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.55 to $0.59.

Finally, for your cash flow modeling, we expect net capital expenditures of approximately $30 million, while depreciation and amortization will be around $25 million.

Overall, we have executed consistently well in the last 11 quarters, and have positioned ourselves solidly for the future. Growth continues to be our number-one objective, but it's imperative that we grow with the right kind of business.

At this point, I will turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Ladies and gentlemen, I'll review the business environment, add a few more things to what Bob said for first quarter, and I'll talk about our outlook for second quarter and the rest of FY16.

So, let me give you -- or I should say let me a few more highlights to what Bob already told you for the first quarter. The way I will summarize first quarter is overall good quarter. Revenue, yes, was softer than what we forecasted, and basically that was driven across all our markets. But we did deliver solid operational execution.

We also delivered a solid operating margin improvement, despite a mixed market environment. And we also delivered, as Bob mentioned, strong cash flow.

During the quarter, we continued to make improvements, and we continued to win new business and expanding our customer base. I can tell you that we are well positioned to take advantage of business opportunities as market demand improves -- so, well positioned from that point of view.

Now please turn to slide 11. I would like to give you some highlights here in our first-quarter revenue by end markets. As you can see, top 10 customer delivered 48.2% of our revenue. As we continue to diversify revenue by end markets and customers, and we do a lot of focus here because that's the key to our strategy, is to continue to diversify markets and the customer base. Book to bill for the first quarter was positive 1.02 to 1.

Okay, let me give you some more highlights on the segments itself. Industrial, medical and defense -- beginning of the quarter we did forecast it to be down, but it was a little bit more down, approximately 7.5%, driven by weakness across industrial, defense and medical.

Communication networks delivered 39% of our revenue. That was slightly down of 3.4%. Beginning of the quarter, we thought it was going to be flat, but it was slightly down. The weakness was on our older products. But on a positive side, the new products, such as networking and optical and mobile broadband were pretty stable during the quarter.

Embedded computing and storage was 21% of our revenue. That was also down 8.9% from the last quarter, driven by weak demand from storage and automotive. The rest of the products were pretty stable.

Now please turn to slide 12. Let me talk to you about revenue outlook by market segments for second quarter. For the second quarter, we see overall stable markets. Growth will be driven by new projects.

So, for industrial, medical and defense segment, we are forecasting to be nicely up, driven by industrial. And that will be mainly driven by new projects. Medical we're also forecasting to be slightly up, and defense.

For communication networks, we are forecasting for next quarter to be flat. Overall, we see stable environment, and especially in the networking, optical and mobile broadband. Embedded computing and storage we're also forecasting to be slightly up, driven by automotive, storage and other products.

Now let me talk to you about what we expect for the rest of FY16. Overall, we are still optimistic that FY16 will be a growth year for us. Today, we see overall demand to be stable with our customer base. We have a strong pipeline of new and existing projects that we've been working on for a long time. We believe that these programs will start to ramp up in this second quarter, and we are starting to see that nicely right now.

We also extended our partnership with Motorola Solutions. This is a great customer win for us. We extended our long-term partnership, but this is taking it to the next level. We expect this transaction to be closed this coming February.

For Motorola Solutions, we'll be producing government public safety equipment at the high end. As I said earlier, it's a great win for Sanmina, and this is something that is sustainable and should be there for many years to come.

Let me also add a few more comments on business segments. We break our Business in two buckets: integrated manufacturing solutions; and components, products and services. As Bob mentioned, integrated manufacturing solutions did pretty well in the first quarter. And what we see today, this will continue to do well, and should see a nice growth starting in the second quarter.

Components, products and services -- the mix itself was not favorable in the first quarter, and demand was weaker than what we forecasted. But for second quarter, we expect to see some growth, and improvements in the product mix, and a strong pipeline that we have of new opportunity should help us drive the growth. I think the key -- getting back to this mix -- components, products, services -- that revenue growth is the key to drive the margin expansion in this segment. Overall, we continue to invest in the business development, and we believe this is what's going to drive our growth in the future.

Let me also make a few comments about Sanmina's future -- where are we going from here, what we see today. I am personally still very optimistic about Sanmina's future. Our strategy is working, as our whole strategy is built around focusing on our customer success, by providing higher-end technology solutions for mission-critical products and services. We continue to be investing in talent and new technologies, and diversifying our Business to deliver better financial results that are sustainable and consistent for many years to come.

I can tell you the Company is executing well. That is the key to win in the future.

Also, let me make a comment about global economy. Global economy is still hard to predict in this environment. There has been a lot of ups and downs there, but the Company is ready for any economic environment. We are well diversified and we are well positioned in our industry.

So, please turn to slide 13. In summary, again, for the first quarter, good results in this challenging environment. Most important, we continue to deliver solid margin improvements on a sequential basis.

And for second quarter, we are forecasting demand to be stable. Growth will be driven by new programs, and we'll continue to generate cash flow -- strong cash flow. For rest of FY16, we'll continue to diversify with our key customers and end markets, and we're going to continue to focus to drive sustainable growth and profitability.

So, ladies and gentlemen, now we would like to thank you all for your time and support. Operator, we are now ready to open the lines for question and answers. Thank you, again. Operator?

(Operator Instructions)

Your first question comes from the line of Steven Fox with Cross Research. Your line is open.

Hello, Stephen.

Good afternoon. First off, if you could provide a little bit more color on the software acquisition and its contribution going forward to the business financially. My second question would be looking at your revenue and gross margin guidance off of the 8.2% gross margins you just did, you're expecting some better revenues, but the gross margins at the midpoint would be down a little bit. Maybe if we could foot that, that would also be helpful. Thanks so much.

So let me, Steve, add to your comments. First of all, on the software we acquired, it's part of our new ISIS. We had a partnership with this small company for a few years and it's a very unique thing. We have a couple customers that are interested in this product. Actually we have one customer that's signed up to it. It was the right thing to do.

I think strategically it can add a lot to our Company. And that's I really can say about that right now for competitive reasons. I think it's going to be exciting. Most important, it will help us deliver the higher margin in the new ISIS products. It's an exciting thing for Sanmina.

Regarding margin for next quarter, we have a lot of new programs that are coming in that will affect our margins a little bit, but it's all going to depend on the mix, Steve. If the mix is there, I think we have a pretty good opportunity. But the new products, lot of new products coming. Also, the expansion of growth with Motorola Solutions, we're going to start shipping to them in February and March.

All of those things add there. There's some risk there but we feel very comfortable what's in front of us. Bob, anything at all you want to add to that?

I agree. The IMS margin was fantastic in the first quarter. I think it's difficult to assume that's going to continue at that level. We're going to try to get it back there. It was really a very good quarter. Very good mix and very good execution.

Great, that's helpful. Just one quick clarification. So MSI, the new MSI, programs are in the guidance for two-thirds of the quarter basically?

Yes. Some of it, yes.

Okay. Thank you very much.

Thanks, Steve.

Your next question comes from the line of Jim Suva with CitiBank. Your line is open.

Thank you. Congratulations. Thanks, and congratulations to you and your team.

It sounds like the clarification that Motorola is in for the next quarter, which is fine. Can you help us understand so we can look at organic versus inorganic so we don't extrapolate that type of growth going forward? How much is Motorola bringing into your revenues, or how we should think about that?

Well, first of all, we're not going to break it down, Jim. But let me tell you, we are entering a long-term strategic relationship with MSI. This is really a complement to our existing partnership that we have with them. It's a customer that we've been working on for many, many years. This is a huge win for us.

We are taking over transferring over this operation to us in the second quarter, sometime in February timeframe. So we definitely expect some revenue. We don't know how much they are going to be at this time. We have a certain number in our forecast. But going forward, it's a substantial customer and we're very excited about it.

Okay. As a follow-up, when we think about your revenue guidance for next quarter and the earnings guidance for next quarter, should we say it has been pretty much all attributed to core Sanmina? Or is it the additional layers of these acquisitions that are really adding the material change?

I would say that most of the margin and even -- and the revenue come from core Sanmina's businesses. It's not -- basically no major impact on our margin next quarter. Bob?

I agree. And part of the reason why we gave a little bit wider than normal range on revenue is because we don't know exactly what's going to happen as that acquisition gets completed. But it's, as Jure said, a very good piece of business with an existing customer and it's essentially an asset purchase. It's the kind of investment we would have to make if we were winning incremental programs with that customer.

Just to add to that, it's really, Jim, an extension of our existing partnership, as I said earlier. So it's a big win for us.

Great, thank you.

Then your comments regarding your key initiatives are to grow the Company. Obviously, it's hard to control what the world and demand forecasts are. So are you calling for us to pretty much bake in for this year, so it's growth in total for the Company? And if so, is the growth an incremental mostly from the acquisitions of the fold-in of the businesses as opposed to organic?

Well, first of all, we believe that most of all growth is still going to continue to be growing from our organic base and also MSI, we looked at that as organic. This is a relationship that we have with this company for the last 20 years. We expanded with them about two years and we are going to expand.

Back to the growth, we definitely believe today everything that we see will grow. And in our core business, Sanmina's core new businesses, we've been working in last couple years to really win the new programs, which we did a really good job there. So overall, we expect it to be stable.

We can not control the economy. Something falls off the cliff, that's what I said earlier, I think our Company is in the best position that we've been now for a long, long time, to be able to handle no matter what happens.

We're really excited what's in front of us. At the same time, we've been investing heavily in technology, engineering. We continue to provide a lot more and a lot of different services to our customer. So I think we are very well positioned no matter what to continue to grow. I think our future looks a lot better than in fact we told you six months ago.

All right, thank you. And congratulations to you and your team.

Thanks, Jim.

Your next question comes from the line of Andrew Hong with B. Riley. Your line is open.

Hi, Andrew.

Hi, Andrew.

Hi, thanks for taking my questions.

Sure.

I was wondering if we could dig into a little more detail on components, products and services. I agree that there's a lot of room for improvement here, but what can you do this fiscal year to drive revenue higher in this segment? Then aside from overhead absorption and mix, what can you do to improve the gross margin?

Okay, first of all, we have a lot of new qualifications in the pipeline and some new programs across all our businesses. So from that point of view, we definitely see that will help us drive the improvements, improve the efficiencies. Then efficiency will drive the margins.

We also have some bigger programs that are coming in the segment. We talked about the new ISIS opportunity. I think that will help us drive the margin. We also look at our defense and aerospace. That should continue to move in the right direction. That industry went through a lot in the last three or four years.

We got a lot of good opportunities in the pipeline at the component level and the product level. So we expect that. We've got a fair amount of stuff on the optical side of our business that should help us.

And then also oil and gas is in there. That's been really tough right now. We don't have a lot of hope for oil and gas this year, but we continue to invest in that industry because we think the long-term, it's the right thing to be there.

Overall, I think we're doing the right things here. We're tuning things up and we continue to expand our customer base. And most importantly, I think we got some good new programs coming up. And all of those things together will drive the margins. We do expect to improve the margin this coming quarter. I don't know how much, but definitely they should be better than what they were in the first quarter.

Okay, thank you. I have just one quick follow-on, on Motorola Solutions, if that's okay.

Yes, it is.

Is it fair to say that the Penang facility accounted for more than 50% of Motorola Solutions' manufacturing needs?

It's, it's up there. We can't make a comment how much it is because we can't talk about our customer stuff. But it's a big -- it's the right thing for Sanmina. Most importantly, we have very strong partnership that we earned through many years' performance.

Sanmina is well positioned to be able to provide a quality that this company is looking for and technology. So I think most important, as we always said, as Bob said earlier, we say it all the time, it's the quality of the customer, quality of the customer. Somebody that can be repeatable, repeatable. I believe as long as Sanmina executes well, this is a customer that is repeatable for many years in the future. So it's a good win for us and it's the right product mix for us. And we can support it from components to finished goods.

Thanks very much.

Thank you.

Thanks, Andrew.

Your next question comes from the line of Sean Hannan with Needham & Company. Your line is open.

Yes, thanks, good evening. Can you folks hear me?

Yes, we can, Sean.

Hey, Sean.

Okay, great. In terms of looking at the industrial and medical segment, and obviously defense, so last quarter there weren't a whole lot of positive expectations for the segment. In terms of the broader segment, particularly industrial, there was some softening, I think, for perhaps yourself, as well as some other peers at the end of 2015. Can you talk a little bit about what you ultimately saw and where we are today as a general feel for where those end markets are? Any comments around forecast volatility?

Yes. Well, first of all, Sean, this is a segment that we've been focusing for a long time. So I just want to make sure it's clear we still believe today industrial, medical is the place for us to be for long-term.

We had a basically weakness -- it wasn't just one customer. We had some customers that were up, some customers that were down, but overall when you look at the bucket, it was below our forecast. Today, those forecasts are more stable. If you look at our medical side of the business, we have a lot of new programs coming up. Those programs are taking long time to get qualified on the medical side of the business. Good thing about them, once you qualify them, once you win them, they are there forever.

Same thing goes for defense and aerospace industry. We are obviously in the products side of the business, but we've really been focusing the last three years to expand it in printer circuit boards, in back plants, mechanical, the whole interconnect and so on. And of course industrial side.

So I think Sanmina has a wider customer base today, more stable base. So we see, if anything, going forward for the rest of the year, assuming that economy is, let's say stable, let's say normal as I can forecast today. I think our forecast is pretty stable.

We don't really see anything major there, except in oil and gas, that can give us any headaches. But oil and gas already is so low that it can't affect us anymore. So that's the only side of the industrial bucket that I would say is really weak. The rest of it is pretty stable.

Okay. So just to clarify, versus a quarter ago, for that entire reporting segment, sounds like the forecast volatility has improved. There's more stability in your (multiple speakers) --

Yes, definitely better ability today, yes.

Okay. And then in terms of the new wins that you're -- not necessarily that you're ramping in the immediate quarter and for the year, but in terms of the win environment. Can you talk a little bit about what you've accomplished so far this year? Any color you can provide to compare that, say, versus the momentum in the start of 2015 through this point. And how are you seeing the focus from a segment standpoint of those wins if there is really any differential?

Well, first of all, Sean, we've been working on for a long time to diversify customers and also the markets. So if you look at just industrial, medical, defense, really we spend a lot of time to diversify that segment. We continue to add technology and services for that segment. And I think that's one of the reasons we've been successful and we expect to be even more successful because we are investing in that type of a segment.

But overall, as a Company, we are trying to really go after the opportunities that will allow us to deliver a little bit better margin. We're trying to change the model here. And I know it's not showing yet where we need to be. We're not happy with our results today. We think that what we are working on has a lot more upside and that's why we show up to work every day. That's why we are still excited what's in front of us.

So as long as the economy cooperates, I really believe we have enough in our pipeline to continue to do well in 2016. And hopefully by sometime end of this calendar year, some of these even bigger programs that we are working on will starting to show up. We're really excited about what's in front of us, but it's one quarter at a time, Sean.

Okay, thank you. Last question here, within the communications space, it sounds like you have expectations for generally flat. Can you expand on what you're feeling from customers within that segment?

It seems like there certainly continues to be some puts, some takes. Are there pockets of softness that you're needing to really overcome with new ramps? Is there a large magnitude of new ramps in order to provide that offset? Help us to think about what's coming through in that segment and providing the stability for the forecast that you're giving us here today.

Well, first of all, the forecast for second quarter, what we see for us is stability comes really from the new projects that we have in the segment. So we're very fortunate. A lot of the technology that we are working on today, what we are shipping is really state of the art technology for most of our customers. So demand in that type of product is a little bit, how do I say, better visibility.

Some of the older products is not as good, but the newer products are doing well. And for us, that's what's really holding that stability in that quarter. I think longer term, if I look at the rest of the calendar year, I think overall, we are optimistic for communication network, based on the projects that we have and also the forecast that we are seeing from our customers.

And MSI being a part of that?

MSI is in a different bucket.

Okay, thank you.

Your next question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

Congratulations, Jure.

Thanks, Christian.

Thanks, Bob. I got dropped a little bit earlier, so I apologize if this was answered. The high end of gross margins for the quarter just ended, is there one or two things specifically you can point out that drove that?

Well, the main thing for us was we had very good gross margins in the IMS segment. Really, as I said in my remarks, which you might not have heard, is we had the best margin there we've had since we started the segment reporting. And it was really a result of very good mix and very good execution by the team.

Okay. Well, congratulations on that.

Thanks.

As we look to uses of cash flow in the future, are there more tuck-in acquisitions and new customer costs to be absorbed for programs as a use of cash versus buybacks? Or is it going to continue to be a combination of both?

Well, I'd say overall, it's going to continue to be a combination. The good news, I think, is that the share repurchase program sets a very high bar for the acquisitions that we take a look at. And we look at everything on a risk-adjusted basis and only make the strategic acquisitions if it clearly adds value to our shareholders.

I think we're in a great position now, as we continue to generate cash, to look for those opportunities. And if we find them, great. If we don't, we'll continue to repurchase our shares.

Great, no other questions, thanks. Congratulations on a good quarter.

Thanks, Christian.

Operator, we have time for one more question.

Your final question comes from the line of Mitch Steves with RBC Capital Markets. Your line is open.

Hello. Thanks for taking my question. Great quarter here.

I just had a quick question on the share repurchase first. It looks like you guys reduced it by about $6 million year over year so far. Can you give us an update on what you expect to do throughout this year, through calendar 2016?

I may have said, I'm sure I said in the past, we really view the program as an opportunistic program. We obviously are very comfortable repurchasing shares at the kind of price they are at today. So we don't have a specific target in mind. We have roughly as of the end of the quarter, roughly $175 million remaining on our authorization. Over some period of time, we fully expect to use that authorization, but we don't have a specific amount we're targeting for the year.

Got it. And then second one, gross margins is still pretty solid here, but I'm curious what are the puts and takes in the component product services? Looks like the high end was about 10.4%. Now you're kind of at 8.7%. Could you give me an idea of what's driving the volatility there?

I'll take a first stab at that. By far, the biggest factor for that segment is revenue. And we've had real challenges on the revenue side for the last few quarters. And because the contribution margins are so high and the fixed costs are high, whenever revenue goes the wrong direction, it really puts us under pressure there. So that's the number-one factor.

And Jure made some comments earlier. We think there's a lot of opportunity to improve. I would say our services area continues to deliver solid profitability; it's been very stable. But in both the components and the products area, we still think there's plenty of room to improve and there are very good opportunities that we're working on right now.

Got it, thank you very much.

Thanks.

Well, ladies and gentlemen, that's all we have today. I appreciate your time. If you have any more questions, if we didn't answer anything, please give us a call right away or tomorrow, whenever. And we're looking forward to talking to you 90 days from now.

Thanks, everyone.

Bye-bye.

This concludes today's conference call. You may now disconnect.