TTM Technologies Inc (TTMI) 2017 Q3 法說會逐字稿

Good day, and welcome to the TTM Technologies, Inc.

Q3 Earnings Call.

At this time, I would like now to turn the conference over to Sameer Desai, Senior Director of Investor Relations.

Please go ahead.

Thanks.

Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook.

Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent Annual Report on Form 10-K and our other filings with the Securities & Exchange Commission.

These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation.

TTM does not undertake any obligation to publicly update or revise any of these statements whether as a result of new information, future events, or other circumstances except as required by law.

Please refer to our full disclosures regarding the risks that may affect TTM, which may be found in the reports on Form 10-K, 10-Q, 8-K, Registration Statement on Form S-4, and the company's other SEC filings.

We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA.

Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the Company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com.

I would now like to turn the call over to Tom Edman, TTM's Chief Executive Officer.

Please go ahead, Tom.

Thank you, Sameer.

Good afternoon, and thank you for joining us for our third quarter 2017 conference call.

I'll begin with a review of our business strategy, including highlights from the quarter, followed by a discussion of our third quarter results.

Todd Schull, our CFO, will follow with an overview of certain key balance sheet and cash flow metrics, our Q3 2017 financial performance, and Q4 2017 guidance.

We will then open the call to your questions.

Revenue for the quarter was $666.8 million, above the midpoint of guidance and growing 4% year-on-year, representing the fourth consecutive quarter of organic year-over-year growth.

In addition, this was the highest revenue third quarter in the history of the company.

We also demonstrated solid operating results, with non-GAAP operating income above our expectations for the quarter.

Non-GAAP EPS of $0.32 was negatively impacted by approximately $0.06 of non-cash foreign exchange loss due to the weakening U.S. dollar.

Absent this impact, we would have exceeded the high end of our guidance.

The third quarter results validated many of the elements of the strategy we've communicated over the past year.

First, the diversification of our end markets helped to reduce quarterly volatility.

On a year-over-year basis, most of our end markets grew, more than offsetting some difficult conditions in the networking and communications end market.

Of particular note, we achieved record program backlog in the aerospace and defense market.

Second, the automotive market continues to be a core growth driver due to increasing electronics content, as well as the adoption of advanced technologies.

We see four key mega-trends driving automotive content growth - one, vehicle safety and autonomous driving; number two, increasing adoption of hybrid and electric vehicles; number three, advanced infotainment; and number four, increased connectivity.

In previous calls, we have stated that market forecasters expected the PCB content per vehicle to grow from $60 in 2016 to $70 by 2020.

These forecasts have recently been revised upwards, with $62 in content in 2016 growing to $75 by 2020.

Some hybrid and electric vehicles currently employ well over $150 of PCBs per vehicle.

While hybrid and electric vehicles make up only 1% of global automotive production today, forecasts expect unit volumes to increase significantly following price parity with traditional combustion engines as early as 2022.

Additionally, both Cummins and Daimler have recently announced the development of electric trucks.

Both autonomous vehicles and electric vehicles are in the early stages of adoption, but already represent a strong focus area for our customer engineering engagement.

TTM is uniquely positioned to take advantage of these mega-trends and content growth due to our focus on radio frequency, or RF, and advanced technology, such as high-density interconnect, or HDI.

TTM has a long history of RF technology leadership, which is currently being applied to the automotive industry in radar and LiDAR technologies used in safety systems and autonomous driving.

As radar technology evolves from 24 gigahertz to 77 gigahertz, customers are looking for the proven solutions we provide.

Like radar, we are also seeing strong activity in LiDAR market for both ADAS and autonomous driving application.

LiDAR is an additional sensor which will be used in conjunction with cameras, sonar, and radar to provide better information on the surrounding environment.

We are in qualification with five new LiDAR customers who are in the prototyping stage for future LiDAR products to be used in autonomous commercial vehicles.

Most LiDAR applications will require three to eight LiDAR units per vehicle, with each unit consisting of three to eight PCB boards, including both HDI and rigid-flex technology.

Finally, I'd like to comment on our cellular market.

Last quarter, we said that we were seeing a slower start this year in our normal seasonal ramp of cellular products, which was to impact our results in the third quarter.

We are pleased to report that we saw stronger demand and better execution than we expected.

As a result, revenues in the cellular market grew 4% year-on-year versus the 8% decline that we had projected.

I'd like to congratulate our cellular-focused plants for an excellent quarter.

Now, I'd like to review our end markets.

Automotive sales represented 20% of total sales during the third quarter of 2017 compared to sales of 19% in the year-ago quarter, and 20% during the second quarter of 2017.

We saw an acceleration of year-over-year growth in Q3 to 9%, driven by increased demand from the electric vehicle area for our assembled product solutions.

We expect year-on-year revenue growth to continue in the fourth quarter, particularly in our EM solutions segment, and expect automotive to contribute 20% of total sales.

The cellular phone end market accounted for 17% of revenue in the third quarter compared to sales of 17% in Q3 of 2016 and 13% in Q2 of 2017.

We saw year-over-year growth of 4%, largely driven by the launch of new cellular phones.

We expect cellular to represent 27% of fourth quarter sales as we continue to see seasonal strength from the launch of these new products.

Network and communications accounted for 17% of revenue during the third quarter of 2017.

This compares to sales of 21% in the third quarter of 2016 and 20% in the second quarter of 2017.

Sales declined on a year-over-year basis largely due to weakness from the networking market, partially offset by relatively stronger demand in the telecom market.

In Q4, we expect this segment to be 16% of revenue.

The aerospace and defense end market represented 16% of total third quarter sales compared to 15% of Q3 2016 sales and 17% of sales in Q2 2017.

On a year-over-year basis, we saw solid growth of 7%, driven by our larger defense customer.

Program backlog rose to $220 million from $206 million last quarter, which is a record level for TTM.

We expect sales in Q4 from this end market to represent about 14% of our total sales.

Sales in the computing storage peripherals end market represented 14% of total sales in the third quarter compared to total sales of 12% in Q3 of 2016 and 14% in the second quarter of 2017.

For the third quarter in a row, we saw year-on-year growth of over 20% from increased adoption of advanced PCB technologies in high-end laptops, growth in data center applications, as well as strength in the semiconductor sector.

We expect sales in computing to represent approximately 11% of fourth quarter sales.

The medical industrial instrumentation end market contributed 14% of our total sales in the third quarter compared to 14% in the year-ago quarter and 15% in the second quarter of 2017.

We saw revenues grow 8% year-over-year due to growth from some of our larger industrial customers.

We expect sales for this end market to represent approximately 12% of sales in the fourth quarter.

Next, I'll cover some details from the third quarter.

During the quarter, our advanced technology business, which includes HDI, rigid-flex, and substrate, accounted for approximately 37% of our company's revenue.

This compares to approximately 35% in the year-ago quarter and 33% in Q2.

The year-over-year and sequential growth was driven by the cellular and computing end markets.

We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new markets.

Capacity utilization in Asia-Pacific was 86% in Q3 compared to 86% in the year-ago quarter and 83% in Q2.

Our overall capacity utilization in North America was 55% in Q3 compared to 58% in the year-ago quarter and 54% in Q2.

Our top five customers contributed 38% of total sales in the third quarter of 2017 compared to 35% in the year-ago quarter and 33% in the second quarter of 2017.

Our top five OEM customers during the quarter, in alphabetical order, were Apple, Bosch, Cisco, Huawei, and Tesla.

Our largest customer accounted for 21% of sales in the third quarter versus 17% in the year-ago quarter and 16% in Q2.

At the end of Q3, our 90-day backlog, which is subject to cancellations, was $526.7 million compared to $428.4 million at the end of the third quarter last year and $433.7 million at the end of the second quarter of this year.

Our PCB book-to-bill ratio was 1.17 for three months ending October 2nd.

In summary, we delivered solid third quarter operating results following our strength in Q2.

We demonstrated the benefits of our diversified end market mix, achieved better-than-expected results in the cellular market, registered strong growth in our computing, automotive, and aerospace and defense markets, and continued to see positive results from our focus on operational execution.

We remain optimistic about the future of TTM.

Now, Todd will review our financial performance for the third quarter.

Todd?

Thanks, Tom, and good afternoon, everyone.

We had a solid operating quarter in Q3, and let me just summarize a couple of the highlights.

Revenue in the third quarter of $666.8 million grew 4% year-over-year and represents an all-time high for the third quarter.

Non-GAAP operating margin was 8.3%, exceeding expectations.

Non-GAAP EPS was $0.32 in the third quarter, at the midpoint of guidance, notwithstanding the negative impact of $0.06 per share resulting from $7.4 million of unrealized non-cash foreign exchange loss due primarily to the depreciation of the U.S. dollar versus the Chinese currency.

Excluding this impact, EPS was $0.38, above the high end of the guiding range.

We generated $85.7 of adjusted EBITDA.

And lastly, we completed a debt refinancing whereby we replaced our term loan B, which had an interest rate of Libor plus 425 basis points, with a $375 million high-yield bond with a fixed rate of 5-5/8% and a $350 million term loan B with an interest rate of Libor plus 250 bps.

The net effect of this transaction was to reduce our cash interest expense by $4 million annually while fixing a portion of our debt.

On to the details.

For the third quarter, net sales were [$668.8] million.

This compared to net sales of $641.7 million in the third quarter of 2016 and compared to second quarter 2017 net sales of $627.2 million.

The year-over-year increase in revenue was across most of our end markets, led by growth in our computing, automotive, and aerospace and defense end markets, partially offset by lower revenue in our networking and communications end market.

GAAP operating income for the third quarter of 2017 was $44.1 million compared to $50.2 million in the third quarter last year and $45.1 million in the second quarter of this year.

On a GAAP basis, net income for the third quarter of 2017 was $21.5 million, or $0.19 per diluted share.

This compares to $25.6 million, or $0.23 per diluted share, in the third quarter of last year and $20.6 million, or $0.18 per diluted share in the second quarter of this year.

The remainder of my comments will focus on our non-GAAP financial performance.

Our non-GAAP performance excludes debt extinguishment costs, restructuring expenses, acquisition-related costs, certain non-cash expense items, and other unusual or infrequent items, as well as the associated tax impact of these items.

Additionally, we exclude non-operational changes in our tax expense, such as the impact of retroactive changes in the tax law and non-cash discreet items.

We present non-GAAP financial information to enable investors to see the company through the eyes of management and to provide better insight into the company's ongoing financial performance.

Gross margin in the third quarter was 14.6% compared to 17.1% in the third quarter of 2016, and 15.4% in the second quarter of 2017.

The year-over-year decrease in gross margin was due to a slower start in our normal seasonal ramp of cellular products, coupled with a technology transition, as well as the reclassification of certain costs from G&A into COGS that we have discussed in previous earnings calls.

The sequential decrease was also due to the dynamics I just mentioned in our cellular business, and a change in our revenue mix towards increased revenues from our electromechanical solutions segment.

Selling and marketing expense was $15.9 million in the third quarter, or 2.4% of net sales, compared to $15.4 million, or 2.4% of net sales in the same quarter a year ago, and $15.5 million, or 2.5% of net sales in the second quarter.

The year-over-year increase in the amount of sales and marketing expense is due to the higher sales levels.

Third quarter G&A expense is $26.3 million, or 3.9% of net sales, compared to $33.3 million, or 5.2% of net sales in the same quarter a year ago and $25.9 million, or 4.1% of net sales in the previous quarter.

The year-over-year decrease in G&A as a percentage of sales was largely due to the reclassification of certain costs from G&A into COGS, as well as lower spending.

Our operating margin in Q3 was 8.3%.

This compares to 9.5% in the same quarter last year, and 8.8% in the second quarter of this year.

The decline year-over-year was due to the dynamics I noted earlier in our cellular business.

Interest expense was $10.9 million in the second quarter, a decrease of $3.3 million from the same quarter last year due to the repricing of our debt, as well as prior debt repayments.

We recorded $7 million of foreign exchange loss and other income net in Q3 compared to a net gain of $3.9 million in Q3 last year.

The loss in Q3 2017 was due primarily to the 2.2% appreciation in the Chinese RMB versus the U.S. dollar during the quarter.

Our effective tax rate was 10% in the third quarter.

It was 21% in the same quarter last year.

Third quarter net income was $33.4 million, or $0.32 per diluted share.

This compares to third quarter 2016 net income of $40.1 million, or $0.39 per diluted share, and second quarter 2017 net income of $33.3 million, or $0.31 per diluted share.

Adjusted EBITDA for the third quarter was $85.7 million, or 12.9% of net sales compared with third quarter 2016 adjusted EBITDA of $102.2 million, or 15.9% of net sales.

In the second quarter, adjusted EBITDA was $85.5 million, or 13.6% of net sales.

The year-over-year decline was due to the $9.2 million swing in non-cash, non-economic foreign exchange expense and the dynamics in our cellular business noted earlier.

Moving on to our segment performance, the PCB segment had net sales of $606.2 million in the third quarter, up from $595.5 million in the third quarter of 2016 and $574.3 million in the second quarter of 2017.

Gross margin for this segment was 15.5% in the second quarter compared to 17.7% in the same quarter a year ago and 16.1% in the second quarter.

The year-over-year changes in sales and gross margins were noted in my earlier comments.

The PCB segment's third quarter operating income was $70.5 million compared to $76.4 million in the same quarter last year and $69.4 million in the second quarter.

The electromechanical solutions segment had net sales of $60.6 million in the third quarter, up from $46.2 million in the third quarter of 2016 and $52.9 million in the second quarter of 2017.

The year-over-year and sequential revenue increase was due to an increase in our automotive end market.

Gross margin for this segment was 8.7% in the third quarter compared to 11.1% in the same quarter a year ago and 10.1% in the second quarter.

The gross margin decrease year-over-year and sequentially is due primarily to changes in our product mix.

The electromechanical solutions segment's third quarter operating income was $2.9 million compared to $2.4 million in the same quarter last year and $2.9 million in the second quarter.

Corporate SG&A expense not directly associated with either of these segments was $16.6 million in the third quarter of 2017, $16.7 million in the same quarter last year, and $15.9 million in the second quarter of 2017.

Cash flow from operations was $71.4 million in the third quarter versus $102.7 million in the year-ago quarter.

We do experience fluctuations quarter-to-quarter due to a variety of factors, such as the timing of customer payments.

Our fundamental cash operating metrics, however, cash cycle days, remained consistent at 45 days, one day less than last year.

Cash and cash equivalents at the end of the third quarter totaled $301.9 million versus $246.9 million in the second quarter.

Depreciation for the third quarter was $37.5 million, and net capital spending for the quarter was $22.9 million.

Now, I'd like to turn to our guidance for the fourth quarter.

We expect total revenue for the fourth quarter of 2017 to be in the range of $700 million to $750 million.

As a reference point, our fourth quarter revenue last year was $707 million.

We expect non-GAAP earnings to be in the range of $0.49 to $0.55 per diluted share.

This compares to an EPS of $0.58 per diluted share reported in Q4 of 2016, which included $0.07 per share of non-cash, non-economic foreign exchange and other gains.

Also, as a reminder, Q4 2016 was a 14-week quarter.

This year, our Q4 will have 13 weeks.

In 2016, that extra week added about $29 million of revenue and $1.1 million of operating income, or about $0.01 of EPS.

The EPS forecast is based on a diluted share count of approximately 106 million shares.

Our share count guidance includes dilution from dilutive securities, such as options and RSUs, as well as roughly 2.2 million shares dilution associated with our convertible bonds, which is a function of our future stock price.

As a reminder, for every dollar increase in the average share price above $14.26 during a quarter, our shares outstanding would increase by approximately 1.5 million shares.

We expect that SG&A expense will be about 6.1% of revenue in the fourth quarter.

We expect interest expense to total about $10 million, and we estimate our effective tax rate to be between 13% and 17%.

To assist you in developing your financial models, we offer the following additional information.

We expect to record during the fourth quarter amortization of intangibles of about $6 million, stock comp expense of about $5 million, non-cash interest expense of approximately $3 million, and we estimate depreciation expense will be approximately $40 million.

Finally, I'd like to announce that we will be participating in the Barclays Technology Conference in San Francisco on December 6th and the Needham Growth Conference in New York City on January 17th, 2018.

That concludes our prepared remarks.

And now, we'd like to open the line for questions.

Savannah?

(Operator Instructions) Steven Fox.

First question was on automotive.

So can you talk a little bit more about the growth there in terms of how it affected your mix?

It seems like you now have a large customer in auto that's new.

Is that mix continue to be a negative to gross margins, going forward?

What type of growth would you expect from that?

And also, can you talk about just generally the growth that's being driven in the backlog from electric vehicles and chargers and things like that into next year?

This is Tom.

Let me start with the situation on the customer front.

I think you were referring to our top five customers, the fact that Tesla was on the list.

Doesn't mean that that's a new customer at all, just means that they were in the top five this last quarter.

So as we look forward, certainly the content in electric vehicles is higher than standard vehicles.

That's a positive from a TTM perspective.

Certainly use in autonomous driving capability, some of the other electric vehicle areas where you're looking at dense circuitry demands leads to demand for HDI, as well as RF boards, and that's again, a positive from a PCB content standpoint.

And certainly those are areas that we are focused on.

Overall, we were very encouraged with the announcement -- and this is a Prismark data point that came out, where they did move their projections for content in PCB to $62 per vehicle at the end of this year, and then $75 by 2020.

We had talked with our investors on the fact that we thought that that was expected.

And let me correct that.

That was actually an NTI forecast, not Prismark.

But that was very encouraging.

And overall, of course, we're supported here by longer-term trends in terms of the mega-trends that I spoke about earlier.

We see those continuing.

We see electronics content continuing to be driven.

I think the forecasters now are catching up with the reality, so bodes well for growth.

And then, just as a reminder, if you look at our growth this year, we are still expecting to be at the high end of that 5% to 8% projected growth rate for automotive.

So again, nice backdrop there.

And then, just to be clear, though, there is an electric vehicle-related market demand out of your electromechanical business.

Is that correct?

Yes, absolutely.

And so as we look at definitely the overall automotive piece and PCB, both impacted by electric vehicles as well.

And electric vehicle piece in our EM solutions business has a nice broad brush of customers, electric vehicle customers, China and non-China.

And then, just as a follow-up, if you could talk a little bit further about seasonality in the cell phone market.

So obviously it's a little different this year, like you pointed out, but does that have any implications beyond this quarter that you could share with us in terms of how maybe seasonality is different into the first half?

And along the same lines, can you just confirm that your own ramps in terms of your yields, et cetera, to your large customer went off as you would have expected in this past quarter and going forward?

Yes.

Let me start with the second part of the question.

In terms of the yield ramp, as we'd reported last quarter, the ramp itself did start later than it has in recent years, more similar to what we saw with the iPhone 6 several years ago.

That ramp did start late, therefore we moved up that yield curve later in the quarter than expected.

And as you remember, we encompassed that in our forecast for the third quarter.

What I can say is that we were encouraged by our yield performance, in fact did better than we had forecasted in the third quarter.

We're continuing to work on yield improvement here as we go into the fourth quarter.

We're very much heads-down in terms of focusing on output and maximizing our output capabilities.

And as in past years, the similarity here will be that we expect really not to get a glimpse into sell-through until mid-December timeframe.

And so how that carries into next year right now is difficult to estimate.

What I can say is that it did start -- we started a little bit later than expected in this year.

The only sort of similar data point that I can point you to is the iPhone 6. And in that case, certainly demand carried over into Q1, and even into Q2.

Now, we'll see how that cycle carries out this year.

Matt Sheerin.

Just following up on Steve's question regarding the cellular SmartPhone business and margins, you talked about yields improving, and profitability should be improving there, too.

But if you look at your guidance, it implies that operating margins will be down somewhat year-over-year.

And I know last year you've had a lot of things go right.

You had mix in your favor and other issues.

But, at these revenue levels, do you expect -- [should] be able to get to 11%-plus operating margins at some point?

Yes.

So I'd also remind you, and this, again, below the line, but last year we also had $0.07 of FX and other that were favorable.

But if you look at the operating line, and specific to cellular, there's no question we're in a technology transition here, and it's a large technology transition.

We've talked about the fact that that means we're on a steep yield curve as we move in.

And then, of course, we're starting a little bit later this year than we have in the last several years.

So moving up that yield curve, absolutely critical in improving our profitability.

We're making very good progress there.

We're anticipating that that progress will continue in the fourth quarter.

And as we become more comfortable with this new technology node, then we'd foresee, again, bringing that operating profit, continuing to improve it, going forward, as we work with this MSAP technology.

And why don't I let Todd cover the overall operating margin?

Yes.

I would just add to that, so when you look year-over-year, Matt, the other thing that we're battling this year is softer revenue, or softer market conditions in our networking and communications end market.

And we have a few plants that are primarily focused in those end markets, and so obviously they have a bit more of a challenge this year than they did last year.

So those two major factors, the end market condition and network communications, as well as the technology transition that Tom was talking about and how we're progressing in our profitability model there through better yields, those things are different this year.

Now, will those change going into the future?

We still have as a target our operating model of a 10% operating margin average for the year.

And of course, we know that Q4 tends to be our best quarter of the year because of the seasonal ramp, so naturally it would be above -- you would expect it to be above that average.

We're not there this year, but we certainly have the expectation that the business model itself is capable of getting it better as we climb through these two challenges that we just talked about.

And just dovetailing on your comments on the networking and communications weakness, it looks like the year-over-year declines are going to be worse in Q4.

And I know we're in the middle of -- or between the 4G and 5G, and I know you've talked about volumes not really playing out there for a couple of years.

But do you get a sense that this segment, both networking and comms together, will bottom at some point where you're more flat?

And if not, are there cost things that you can do in terms of lowering your cost structure or moving facilities, or things like that?

Yes.

The telecom side, and I'd say that this is -- I'd start with a little bit of encouragement, actually.

On the telecom side, and we talked about it last quarter, I characterized telecom as sort of bouncing along the bottom.

And I think sequentially, seeing the telecom side of that business come up in this last quarter, that's at least good news from the standpoint of seeing it -- I think we've certainly hit bottom, and we're now starting to see some relative improvement.

I don't expect that to be major by any means.

Where I do expect that shift to come in telecom will be with 5G.

And as I've said before, we see 5G coming, starting to play into our mix from a prototyping standpoint next year, but really not hitting volume until 2019 into 2020.

On the networking side, and this is where I'd say we were surprised by the softness, I still view that as more of a short-term phenomenon.

It was related.

We'd just seen enterprise spending come down.

I think the longer-term trends there are positive.

They're driven by data traffic.

I think that's going to drive networking equipment.

Certainly the service provider demand should strengthen, going forward.

That will help our customers, and in turn help TTM.

So on the networking side, I view it, again, as more of a temporary situation.

In terms of how are we responding, Matt, the good news there is we were already on track to shift part of our China footprint towards volume requirements on the MII side, the Medical, Industrial, and Instrumentation side.

We have been on that path.

We continue to be on that path.

That's really where we're taking our footprint and one of our plants that was very involved in this area into more and more volume requirement there.

And that will be our direction.

That will leave us with really two volume facilities for networking communications in China.

And then our U.S. footprint support for prototyping and pilot production.

Sean Hannan.

Just wanted to see if I could come back really quick around the yield topic.

Tom, you acknowledged that this is certainly going to be -- it's a steep yield curve as you work through this here.

Just trying to better understand, now that we're a little further on down the path, is there an opportunity where you folks could be able to hit, say, target or more normalized yields perhaps at some point into the March quarter?

Is there a greater level of confidence at being able to accomplish something like that?

Yes.

I think, Sean, there's no question, as we become more comfortable with the technology transition, that our confidence climbs.

And I think that has happened in the past, is we commercialized the advanced HDI technology.

We saw the same kind of thing over the course of one-year cycle, and then going to the next year, we gained quite a bit of confidence.

And certainly that's the case here as well.

We're just now through our first quarter of ramp, so it's too early to say where we'll top out.

But certainly we've got a critical -- we've taken a critical step as TTM in terms of making that technology transition, initiating it, starting to climb up that curve, and to be a little bit ahead of plan.

That's all good news, and we'll see where we can take it from here.

And then, separately, one of the segments that you had mentioned a little bit earlier in terms of getting some strong performance within industrial also lump into that group.

I think you have medical, where you're playing into those markets.

And just want to see if we could get a sense of how you feel the cadence of the business going into that segment grouping, how that feels at this point based on other prior activity for new programs and wins and designs going into some of those efforts.

Clearly there are some longer lead-times there, so hoping that there might be a little bit of visibility or viewpoints you could share with us here.

You're right to point out, MI&I is a very mixed segment when you think about the different drivers.

And what we're seeing, instrumentation as an example, the last I under MI&I is an area where you see quite a bit of fluctuation.

It's been a area of some strength here as semiconductor capital equipment has been -- demand has been strong, but also an area that's very dynamic.

And certainly as we look at Q4, we're seeing that, a little bit of softness there.

The balance, industrial improvement, we saw that in the quarter, good strength in industrial.

We are seeing the down-hole market come back a little bit.

That's been a positive.

Just as we'd forecast to start seeing some strength there in the back half of the year, that has happened, and I would expect that to carry forward.

The medical side we're very excited about, and why I say that is because it's one of those areas [where] our customers can range from a startup to a very large medical instrumentation company.

And with that kind of breadth and the number of customers in this area, we're able to service that initial startup with what we do very well in North America in terms of design support, really engineering support, carrying into prototyping and pilot, and we now have that volume answer for that customer as they grow into -- as their volume grows.

If they decide to keep it onshore, we also have volume answers for them in North America.

So it really for us, a very exciting area.

I think the medical area has been growing on the high end of that 4% to 6% that the industry forecasters are projecting.

And again, it's an area we feel we've got sort of the right solution to.

So that's a breakdown of MI&I for you, Sean.

And if I step back and think about that in aggregate, it would seem to me, and tell me if the logic is incorrect, that the performance you have as an opportunity for that segment should be able to -- we have an opportunity for some acceleration as we move into '18 here.

Is that a fair thought at this point in time?

I think that's a fair thought, especially when you think about where we're coming from, because this year, with the first half of the year being relatively weak on the industrial front, if you start looking forward into '18, I'd see at that point we'd feel much better about certainly moving up from that level and moving back towards that 4% to 6% that is being projected by Prismark.

(Operator Instructions) Paul Coster.

This is Paul Chung on for Coster.

So on the cellular ramp in 4Q, did I hear you correctly?

Did you say 27% of revenues?

Yes, you did, Paul.

Okay, so that would be maybe your highest revenue on record in that segment.

Is that a function of more higher ASPs, or unit-driven?

Yes.

So good way to think, so post-acquisition of Viasystems, I think your statement is right.

Pre-acquisition, it would have been a different story.

With a significant technology transition like this, there's generally going to be a change in ASP, and that shift in ASP would drive higher revenues, also drives higher production costs, as you know.

And so then it really does become all about that yield performance and where we're focused, but more of an ASP story there.

So the year-on-year decline is really from that ramp in 3Q for gross margins, because your utilization rates look like they were actually up year-on-year.

So is that technology transition?

Is that correct?

Yes, that's correct.

We're going through that big technology change.

As Tom mentioned earlier, we're developing our skill set with it, and it grows every week.

We're pleased to say that we exceeded our expectations in the third quarter, but we still have a ways to go.

We're not kidding ourselves.

There's room to improve here, and we need to improve.

So we have set some high goals for ourselves, and we're driving towards them.

And then your opportunity beyond Apple, can we expect TTM to leverage [this] expertise and maybe expand materially in the Android platform?

So the technology itself allows our customers to narrow their line and spacing, and to move below 30 microns in lines and spacing.

So that enablement, and you think about in terms of circuitry density, right, allows our customers to build thinner, lighter product and to populate the component density, or increase the component density.

So that characteristic of course is attractive to other customers in the cellular area, and certainly it's attractive to other customers in different end markets.

So I would say that I would look at this as being similar to the advanced high-density interconnect technology in that it enables capability that our customers across our end markets will be looking for long-term.

And the question always is what is the rate of adoption, how does the -- how robust is the circuitry becomes critical, as well.

And so there'll be -- of course there'll be tests and qualifications, going forward, that will determine that rate of adoption by our customers.

In the aerospace segment, looks like you're on track to hit high single digits for the fiscal year.

How should we think about this segment longer-term, especially in fiscal year '18 as you're hitting a tough comp, and what do you expect to drive that growth there?

Thank you.

Start out with the backdrop, the budget, certainly the DOD budget request is up 7% from fiscal year '17.

I think that climate in terms of support from Congress is very positive.

That spending is certainly going to be concentrated in favorable areas from a TTM perspective around modernization of our armed forces, and then also in areas where we have particular strength.

And to talk a little bit more about that, if you think about surveillance and communication areas, RF comes into play there, very important to TTM as a core technology.

As our customers look at increasing, again, increasing their circuitry density, that leads to HDI demand.

And customers looking at modernizing older analog platforms, generally looking at moving from a wire cable kind of connection into rigid-flex requirements in order to accommodate spacing requirements and to improve overall digital design.

So those are all positive aspects that come with modernization, so we've got a nice favorable backdrop here, and specific programs, and a breadth of programs that is over 80 programs at this point that we're involved in, so a nice breadth of programs, programs that are moving in the right direction.

And then, I'll just end with a comment.

I think the overall program backlog being at record levels of $220 million provides further evidence of the momentum there.

So we're very encouraged about the support that we can provide our customers here in the aerospace and defense segment, or end market.

Thank you.

And it appears we have no further questions at this time.

I can turn it back over to you, speakers, for any additional or closing remarks.

Sure.

Just I'll close by summarizing a few of the key points that we made earlier.

We delivered solid results in the third quarter of 2017.

We delivered revenue and operating income above expectations.

Our goal is to continue to improve our operating and financial performance in the coming quarters.

I'd like to thank our employees, our customers, and our investors for your continued support.

Thank you, and good-bye.

And this does conclude today's call.

Thank you everyone for your participation.

You may disconnect at any time, and have a great day.