TTM Technologies Inc (TTMI) 2018 Q3 法說會逐字稿

Good day, and welcome to the TTM Technologies Q3 2018 Earnings Call.

At this time, I'd like to turn the conference over to Sameer Desai, Senior Director of Corporate Development and Investor Relations.

Please go ahead, sir.

Thank you.

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 1 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 and 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 the disclosures regarding the risks that may affect TTM which may be found in the reports on Form 10-K, 10-Q, 8k, the 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.

Thank you, Sameer.

Good afternoon and thank you for joining us for our third quarter 2018 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 our Q3 2018 financial performance and our Q4 2018 guidance.

We will then open the call to your questions.

First of all, I would like to thank our employees for their contributions in the third quarter, as we achieved the highest revenues and non-GAAP EPS for a third quarter in the history of the company, with non-GAAP EPS above the high end of guidance.

This was the first full quarter that we included Anaren's results, and I continue to be pleased with our progress on the integration.

The Anaren acquisition contributed $62.4 million in revenue to our third quarter results and provided a meaningful contribution to our consolidated EPS.

We continue on our path towards diversification of our end markets and differentiation of our capabilities.

The diversification of our end markets helped to reduce quarterly volatility and grow total company revenues in what was a challenging quarter in one of our end markets.

Specifically, growth in our aerospace and defense, cellular, computing and medical/industrial/instrumentation end markets helped to offset more challenging conditions in the automotive end market.

Second, we continue on our path towards differentiation in the automotive and aerospace and defense end markets.

We view the automotive end market as a core growth driver, notwithstanding near-term global demand weakness due to increasing electronics content as well as the adoption of advanced technologies.

We see 4 key megatrends driving automotive PCB content growth: vehicle safety and autonomous driving; increasing adoption of hybrid and electric vehicles; advanced infotainment; and increased connectivity.

Estimates of $67 in PCB content per vehicle in 2017, up from $62 in 2016, are expected to grow to $75 by 2020.

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

Further, our design activity remains robust, which bodes well for future revenues.

In the automotive market, customer engagement begins well before a product ramp.

In total, we registered more than 170 new design wins in 2017.

Designs that we are winning this year will further contribute to revenues in future years.

Year-to-date, we have won 137 new designs, with 38 new design wins added in the third quarter.

Of these 38 designs, 11 were ADAS related, with applications such as radar, LIDAR and cameras.

I am also proud of our employees' efforts in the aerospace and defense area, which have been further enhanced by the Anaren acquisition.

Our organic aerospace and defense revenues were at an all-time record in Q3, as our core business has grown 19% in the first 9 months of the year.

This strength is a result of our team's focus on supporting customer build-to-print and design-to-specification requirements across a broad base of major defense programs.

These efforts have been supported by a robust demand environment.

On the aerospace side, Boeing reported strong earnings, raised guidance for the year and has a record backlog.

On the defense side, tier 1 defense contractors such as Lockheed, Raytheon, Harris and L3 also reported strong earnings and raised guidance for the year.

The Anaren acquisition represents another critical step in our differentiation strategy.

The addition of Anaren has increased our presence in the aerospace and defense end market and greatly enhanced our focus on the high-growth radar and satellite portions of the market.

Anaren's wireless components are also leveraged to the adoption of 5G technology, which will lead to a substantial increase in our future addressable market for these technologies -- or for these components.

The process of integrating Anaren into TTM is proceeding on track.

Q3 was the first quarter that Anaren was integrated into our existing businesses.

We have already begun the process of engaging with customers on the revenue synergy opportunities, which will accelerate TTM's future growth in both the aerospace and defense and commercial areas.

As I've mentioned before, the addition of Anaren moves TTM higher up in the value chain, allowing us to engage with customers earlier in the design cycle.

Our customers can now rely on TTM to deliver a completely designed RF solution to meet their needs.

Now I'd like to review our end markets.

For TTM, the aerospace and defense end market represented 23% of total third quarter sales, compared to 16% of Q3 2017 sales and 24% of sales in Q2 2018.

In addition to the contribution from the Anaren acquisition, we grew 20% year-over-year organically in the third quarter.

Total program backlog at the end of Q3 was $448 million versus $450 million in Q2.

We expect sales in Q4 from this end market to represent about 23% of our total sales.

The cellular phone end market accounted for 17% of revenue in the third quarter, compared to 17% in Q3 of 2017 and 8% in Q2 of 2018.

The sequential increase was primarily due to the ramp of production prior to release of new smartphone models.

We expect cellular to represent 14% of fourth quarter sales, as this year's seasonal ramp began earlier than last year, with unit volumes more weighted towards Q3 versus Q4, and due to additional forecast weakness with our Greater China and Korea customers.

Networking/communications accounted for 17% of revenue during the third quarter of 2018.

This compares to 17% in the third quarter of 2017 and the same percentage in the second quarter of 2018.

Dollar sales were up on a year-over-year basis due to the inclusion of Anaren, while core TTM revenues were relatively flat year-over-year.

In Q4, we expect this segment to be 17% of revenue.

Automotive sales represented 15% of total sales during the third quarter of 2018, compared to 20% in the year-ago quarter and 19% during the second quarter of 2018.

Automotive sales were weaker than expected in Q3 and down year-over-year, due to the softness in global demand and the large percentage year-on-year decline in our E-M Solutions business for this market segment.

We expect automotive to contribute 17% of total sales in Q4.

Given the Q3 results and our Q4 forecast, we believe automotive will be below the long-term 5% to 8% growth forecast in 2018.

Sales in the computing/storage/peripherals end market represented 14% of total sales in the third quarter, compared to 14% in Q3 of 2017 and 15% in the second quarter of 2018.

We saw revenue grow year-over-year by 13%, driven primarily by high-end data centers.

We expect revenues to accelerate on a year-over-year basis in this end market and represent approximately 14% of fourth quarter sales.

The medical/industrial/instrumentation end market contributed 13% of our total sales in the third quarter, compared to 14% in the year-ago quarter and the same percentage in the second quarter of 2018.

The strength in the quarter came from some of our top medical and instrumentation customers.

We expect year-over-year sales growth to accelerate for this end market and to represent approximately 14% of sales in the fourth quarter.

Given the Q3 results and Q4 forecast, we believe MI&I will be above the long-term forecast of 3% to 5% growth in 2018.

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

During the quarter, our advanced technology business, which includes HDI, rigid-flex, substrate and RF subsystems and components, accounted for approximately 40% of our company's revenue.

This compares to approximately 37% in the year-ago quarter and 33% in Q2.

The sequential increase was driven by the cellular end market, while the year-over-year increase was driven by the inclusion of Anaren.

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 80% in Q3 compared to 86% in the year-ago quarter and 71% in Q2.

Our overall capacity utilization in North America was 60% in Q3, compared to 55% in the year-ago quarter and 61% in Q2, as growth in our A&D and computing end markets drove additional production in North America.

Our top 5 customers contributed 36% of total sales in the third quarter of 2018, compared to 38% in the year-ago quarter and 27% in the second quarter of 2018.

Our largest customer accounted for 20% of sales in the third quarter versus 21% in the year-ago quarter and 9% in Q2.

At the end of Q3, our 90-day backlog, which is subject to cancellations, was $514.8 million compared to $526.7 million at the end of the third quarter last year and $534.9 million at the end of Q2.

Our PCB book-to-bill ratio was 0.99 for the 3 months ending October 1.

In summary, during the third quarter, we demonstrated the benefits of our diversified end market mix, achieved better-than-expected results in the aerospace and defense market, managed the seasonal ramp in our consumer-oriented markets and continued to see positive results from our focus on operational execution.

While we are facing some short-term challenges in the cellular end market that is impacting our fourth quarter revenue and profits, we remain optimistic about the longer-term positioning of TTM as we continue to build on our strategy of diversification, differentiation and operational discipline.

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

Todd?

Thanks, Tom, and good afternoon, everyone.

Some of the highlights for the quarter include record revenues and non-GAAP earnings for a third quarter: revenue in the quarter of $755.8 million; non-GAAP operating margin of 10.5% versus 8.3% a year ago; and non-GAAP EPS of $0.50.

We also had adjusted EBITDA of $122.3 million versus $85.7 million a year ago; cash flow from operations of $80 million; and we repaid another $40 million of debt just after quarter end.

We now have repaid a total of $84 million of debt since the -- our acquisition of Anaren.

On to the details.

For the third quarter, net sales were $755.8 million compared to net sales of $666.8 million in the third quarter of 2017 and compared to second quarter 2018 net sales of $716.9 million.

The year-over-year increase in revenue was due to the inclusion of Anaren and growth in our core aerospace and defense, cellular, computing and medical/industrial/instrumentation end markets, partially offset by lower revenue in our automotive end market.

GAAP operating income for the third quarter of 2018 was $54.6 million compared to $44.1 million in the third quarter of 2017 and $31.7 million in the second quarter of 2018.

On a GAAP basis, net income for the third quarter of 2018 was $27 million or $0.22 per diluted share.

This compares to $21.5 million or $0.19 per diluted share in the third quarter last year and $84 million or $0.65 per diluted share in the second quarter of this year, which included a release of a tax valuation allowance of $74.6 million.

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

Our non-GAAP performance excludes acquisition-related costs, certain noncash expense items and other unusual or infrequent items as well as their associated tax impact.

Additionally, we exclude nonoperational changes in our tax expense, such as the release last quarter of a tax valuation allowance.

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 17.5% compared to 14.6% in the third quarter of last year and 17% in the second quarter of this year.

The year-over-year increase in gross margin was primarily due to the contribution of Anaren and higher volumes in the end markets noted earlier, which more than offset the challenges of lower volumes in our automotive-focused facilities.

Selling and marketing expense was $18 million in the third quarter or 2.4% of net sales versus $15.9 million or 2.4% of sales a year ago and $18.1 million or 2.5% of net sales in the second quarter.

Third quarter G&A expense was $35.5 million or 4.7% of net sales compared to $26.3 million or 3.9% of net sales in the same quarter a year ago and $34.4 million or 4.8% of net sales in the previous quarter.

The year-over-year increases in selling and marketing and G&A expenses were due to the addition of Anaren.

Our operating margin in the third quarter was 10.5%.

This compares to 8.3% in the same quarter last year and 9.7% in the second quarter of 2018.

Interest expense was $18.2 million in the third quarter, an increase of $7.3 million from the same quarter last year due to the incremental term loan associated with the Anaren acquisition and higher interest rates.

During the quarter, we recorded $1.8 million of foreign exchange gain.

Government incentives brought the total gain to $2.2 million or approximately $0.02 per share.

This compares to a net loss of $7 million in Q3 last year.

The foreign exchange gain in this year, in the third quarter, was due primarily to the depreciation in the renminbi versus the U.S. dollar during the quarter.

Our effective tax rate was 12.5% in the third quarter, up from 10.3% a year ago.

Third quarter net income was $55.1 million or $0.50 per diluted share.

This compares to third quarter 2017 net income of $33.4 million or $0.32 per diluted share and second quarter 2018 net income of $52.3 million or $0.48 per diluted share.

Adjusted EBITDA for the quarter was $122.3 million or 16.2% of net sales, compared to the third quarter 2017 adjusted EBITDA of $85.7 million or 12.9% of net sales.

In the second quarter, adjusted EBITDA was $115.9 million or 16.2% net sales.

Cash flow from operations was $80 million in the third quarter versus $71.4 million in the same quarter last year.

Cash and cash equivalents at the end of the third quarter totaled $208 million.

Depreciation for the third quarter was $41.1 million.

Net capital spending for the quarter was $35 million.

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

We expect total revenue for the fourth quarter of 2018 to be in the range of $720 million to $760 million.

As a reference point, our fourth quarter revenue last year was $739.3 million.

We expect non-GAAP earnings to be in the range of $0.44 to $0.50 per diluted share.

This compares to earnings of $0.57 per diluted share reported in Q4 of last year.

The EPS forecast is based on a diluted share count of approximately 105 million shares.

Our share count guidance includes dilutive securities such as options and RSUs, but no shares associated with our convertible bonds, which varies based on 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 7.3% of revenue in the fourth quarter.

We expect interest expense to total about $18.5 million.

Finally, we estimate our effective tax rate to be between 10% and 15%.

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 $19 million; stock-based compensation expense of about $5.6 million; noncash interest expense of approximately $3.5 million; and we estimate depreciation expense will be approximately $40 million.

The amortization of intangibles includes the Anaren acquisition.

However, as a reminder, the purchase accounting process is not yet complete.

And so the amortization amount could change.

Finally, I'd like to announce that we'll be participating in the Barclays Global Technology, Media and Telecommunications Conference in San Francisco on December 5.

That concludes our prepared remarks.

And now I'd like to open the lines for questions.

Travis?

(Operator Instructions) First question comes from William Stein.

Really 2 things I'd like to talk about.

First is the weakness in the quarter in automotive; and next is the outlook in cellular.

With regard to that, the automotive, I think you cited soft demand and a decline in E-MS business.

Does that relate to perhaps a component shortage that you're seeing?

Or is that more demand and not supply related?

Yes.

So the -- so a small part of it, the PCB side of our business, definitely reflects in automotive what I would call some unit sales softness that our customers were experiencing, primarily in China and in Europe.

The E-MS side, which is really the larger -- had a larger contribution here in terms of being below where we expected to come out on Q3, was really more of a weakness that they were seeing in demand coming from customers on the EV side, electric vehicle side of the business, which, as you know, in the E-MS business, we tend to service both China and U.S. customers there.

And just saw some unexpected weakness, a little bit of that caused by components shortages, but more really just coming from the customer side and a drop in their forecasts.

And I assume that's the one -- that's the one or ones in China and less in the U.S.?

Well really, pretty much across the board.

Okay.

And then the outlook, you cited a guide for cellular that's, I think, below investor expectations, and you acknowledged that there's a different timing this year.

Is that the only end market that you're seeing sort of unexpected weakness?

Or is there anything more broad-based that would be something investors expect to be tariff related, let's say?

Yes.

So yes, interesting.

When you look at our Q4 forecast and where we expect to be, and really our other markets are continuing to grow on a year-over-year basis, automotive is one market is relatively flat as we forecasted year-on-year.

The only market where we expect to come up short year-on-year is really cellular.

And I would just remind you, Will, that as we look at the cellular ramp every year, we look at that combination of Q3 and Q4.

And what happened this year versus last year is that we had an earlier start.

We had forecast that.

Those designs were released earlier than last year, and we were able to start from a higher yield performance level.

And so as we -- because of that, we were able to push out higher unit volume in the third quarter portion of the ramp.

Of course, that then leads into the fourth quarter.

That factor then combined with more conservative forecasts coming from the customer base would be the 2 big factors, that customer base inclusive of some demand softness that we're seeing out of Greater China and Korea.

Our next question comes from Steven Fox.

Just following up on that last answer.

Maybe correct me if my numbers are wrong.

But if I add up the second half including your guidance for 2018 compared to the second half of 2017, you're down roughly 20%, 25% on my numbers year-over-year -- for the half.

So I'm not quite understanding how the timing factor's playing out within that.

And then is all that -- that 20% drop, is that all related to demand?

Or is there a market share loss or pricing or something else we can touch on?

Yes.

So when you're looking, I wouldn't -- I don't think you're too far off there in terms of your estimates, Steve, the -- if you're looking at Q3 and Q4.

But what you need to remember is that I was talking about unit volumes being shipped.

And obviously, if you remember last year, we -- because of the yield challenges, the advance of -- the major technology shift that occurred last year, we were starting from higher ASPs in that third quarter.

And so if you're looking at ASP levels, absolutely third quarter last year starting with a new technology and very challenging yields, we would be at higher ASPs dropping as we went into Q4.

This year, we had a nice earlier start.

It's performing at higher yield levels.

You're going to see less of an adjustment going into Q4 on ASPs.

But overall, absolutely, the unit volumes would exceed that difference that you're noticing.

So there isn't -- there is an ASP factor there, for sure.

The other piece of that 20% is really what we would refer as customer conservatism perhaps in the forecasts.

It's very hard for us to tell.

But we manage to customer forecasts and we're going to ship to those forecasts.

We'll see-- as in every year, we don't understand really what sell-through looks like until mid-December kind of time frame.

If inventories are well managed, then what -- we certainly have grounds to be more optimistic as we head into the first quarter next year.

But we'll again have to see how sell-through -- what happens with sell-through there.

Okay.

That's helpful.

And then just as a follow-up.

I know you're not being very specific, I think, on Anaren in terms of guidance, et cetera.

But can you give us a sense off of the revenue numbers that you just disclosed for Q3 how you expect Anaren to trend in Q4?

And what type of organic growth rate are we sort of tracking to in that business?

I think Tom highlighted in his comments, prepared comments, the revenue contribution for the Anaren business, which are now integrated into our business, so we kind of broke them apart and integrated them into a couple of different business units within our operations.

But Tom disclosed, I think, revenue of about $63 million in the quarter in terms of their contribution, which is pretty much along the track of what we were expecting.

Their business, we gave guidance in general, 3, 6 months ago, as we did the acquisition, I think a little bit last quarter, we said we expect them to grow a little bit faster than our historical organic growth rate.

They've got a pretty good pipeline.

It can be a little lumpy from time to time because as of the program orders that come in.

But the pipeline looks very encouraging and we would expect their organic growth rate, if you will, to be quite a bit better than our -- what we've guided in the low to mid-single digits.

They should be several points better than that.

So if I'm doing the math right, that means that in terms of dollars, that they're going to generate more revenue dollars in Q4 than Q3?

That's going to be -- we're not giving that precise.

It'll be relatively close.

The next question comes from Sean Hannan.

Sorry to beat some dead horses here, just wanted to follow up on some of the same topics, primarily cellular as well as automotive.

Let me start with cellular, since we were just talking about that and perhaps see if we can explore the thought process a little bit more.

Tom, you made some comments a moment ago.

In terms of thinking about this 3Q weighting, the ultimate consequence impact on a 4Q, I realize there's still some ambiguity, but should we conceptually be setting up for much less of a sequential downtick when we enter into that March quarter?

And I realize you're not giving guidance, but we have a fundamental shift in terms -- well we have fundamental shifts in terms of the take.

So I think you would help to understand that.

So all I can comment on is really what has publicly been out there.

I think the -- at the end of last year and certainly, in our first quarter call, we commented on the level of inventories in the channel for cellphone.

And that's as -- I think it would be a natural response to that to run very carefully and to be more careful in managing the business, managing the supply base.

But ultimately, Sean, that really is dependent on sell-through.

And as we head into that December time frame, then I think all of us will have much better visibility into what the March quarter looks like.

But what I can say is that we did -- and our team did a tremendous job in the third quarter in terms of the production volume that we were able to push out the door.

And that's absolutely critical that meeting the customer satisfaction.

And I again congratulate our team on that performance.

We will see where the forecast lead us.

And we're giving you the best view of the moment that we have in terms of an understanding of what the forecast looks like in the cellular area.

And then lastly, I'd just like to reemphasize again.

It's just one -- it's one of our markets.

We have, over the years, been on a very steady strategy and in terms of diversifying our business base.

And that, again, will pay off for us in Q4 with the growth that we're seeing in the other end markets that we're involved in.

Okay, all right.

Let me see if I can shift over to automotive.

I'm a little confused in that segment as well.

There are a number of elements that as we think about, let's say, ADAS, where we have content growth beyond just dependency around the end-unit sell-through.

And so want to see if we can get some perspective around what did shipments into ADAS applications look like?

And then from a broader standpoint, what is our feeling right now in terms of any commentary we're getting back from a customer base for resolution, pickup, resumption of growth at an aggregate?

I'm not sure if I'm very clear on that aspect.

Okay.

Thanks, Sean.

Yes, the -- if you look at the automotive space and our PCB split, the -- between 10% and 15% of our revenues in the automotive area tie to advance technology printed circuit boards.

And inclusive of the RF boards that we build, primarily those go into the sensor applications that are required and camera applications that are required for autonomous vehicle, also required for ADAS.

And that area absolutely has continued to grow.

As its 10% to 15% of our overall product mix, the more conventional printed circuit board area benefits both from unit volume growth and electronics content growth.

So I think that's where you're seeing -- you're -- what we're seeing is a softness on the unit volume side.

And then that is compensated for by the growth that we see in the electronics content.

That will certainly carry into next year.

We -- I highlighted some of the design wins.

That volume continues to grow.

It's just that it's 10% to 15% of our sales in the automotive area.

So nice growth there, balanced by a little bit of unit volume weakness that's affecting the rest of the PCB side.

And then, of course, overall, as I mentioned, the biggest contributor to the down in the third quarter for us was really on the E-M Solutions side of the business, which is -- which really masked what's going on in the PCB side of the business.

Our next question comes from Paul Coster.

This is Paul Chung on for Coster.

So now that you have 1 quarter of Anaren and some visibility for 4Q, so how should we think about operating margins for 4Q?

Sorry, I missed your OpEx guide there.

Our guidance basically was EPS of $0.44 to $0.50.

If you do kind of the reverse engineering on all of that, you should come out with a margin that's going to be probably in the neighborhood of -- well, let's see here, I want to say it's going to be around 10%.

So it is down a bit from last year, as we highlighted some of the challenges that we're looking at there.

In terms of EPS, like I said, we're down about $0.10 year-over-year if you take the midpoint of guidance.

The challenges that we're looking at that in terms of our year-over-year, obviously, as we've talked about, cellular.

Revenue looks relatively flat on the top line, but we're seeing a significant reduction in cellular, somewhere in the neighborhood of about $100 million, just under $100 million year-over-year.

And so we're offsetting that with strong contribution from Anaren.

So about 2/3 of that is the Anaren business that we've acquired.

And then we're seeing great growth in several of our other end markets.

Computing is up significantly year-over-year.

Our core A&D, so A&D without the Anaren contribution is up significantly year-over-year.

MI&I is up significantly.

So we're seeing good growth across the breadth of our business.

When you get to the profit line then on relatively flat revenue at the midpoint, it's the mix of revenue.

In our high-tech business, we have a significant amount of capital equipment and capital investments, fixed cost infrastructure, which is -- works both ways.

It's a 2-edged sword.

On the way up, you get stronger incremental margins because you have a higher fixed cost based.

But on the way down, it hurts you also.

And particularly in our cellular business where we see some of our leading technology investment in terms of production capacity, where the incremental margins on the way down are disproportionate to perhaps the incremental margins that we're seeing on the way up in some of our other end markets.

And so that's causing us to have about a roughly $5 million year-over-year decline in gross profit.

It's really that mix of business.

And as we highlighted with the softer revenue, our utilization at that -- at our high-tech facility is not what it usually is in Q3 and Q4.

It's a little softer.

And that utilization rate is really what's contributing to that incremental -- negative incremental margin, if you will.

And then the second component of that that hurts us year-over-year is really, the Anaren cost structure is different than the business that our legacy business or our core business.

Their gross margins are higher and their op margins are higher, but their SG&A is also higher.

And so that adds -- on a year-over-year basis, we're up in SG&A primarily through the Anaren acquisition.

So if you look at that $10 million of operating profit year-over-year decline, half of it's the SG&A business model with the Anaren acquisition.

And the other half is really driven by our cellular or high-tech manufacturing capacity utilization.

Okay.

And then moving into fiscal year '19, how should we think about the kind of seasonal change in margins throughout the year, now that you have some visibility with Anaren?

And then if your cellular is -- you're not achieving some of that scale that you would benefit from, does that kind of 12% to 14% operating margin range get pushed out a little bit?

I don't know that we would say that.

I mean, if you look at Q3, we were 10.5%, which was a very good Q3 and room to improve.

As Tom's talked to, we have 2 end markets that -- the cellular market, which is certainly different this Q4 than it was in perhaps years past in terms of overall volume.

We have to see what happens with that in Q1 and Q2.

I don't want to jump to -- if you look at our historical pattern, you tend to peak in Q3 and Q4.

You'd have a softer Q1 and Q2.

And then you do that dance again in our cellular market.

Not sure if we're going to see a different cadence this coming year.

As Tom alluded to, it's hard for us to project that until we really get information on how sell-through activity is going, which really, we won't see until late in this quarter.

There is the potential.

Things are being managed certainly a bit more tightly, which suggests that there might be opportunity, but it's just too early to call on that.

The other aspect is the automotive side of the business, which is -- Tom's given a lot of color on that and what we're seeing.

How does that continue to trend?

Is the unit volume going to stay relatively flat?

Is it going to rebound a little bit, or -- that's certainly an element of conjecture at this point.

We don't want to get too far ahead of ourselves on that.

What we are seeing though is growth in the areas of the business that are very attractive to us, which is the higher technology aspects or some of those 4 key messages that Tom has alluded to in terms of ADAS and electric vehicles and connectivity and the infotainment systems or those things.

That offers -- that trend's going to continue.

What's hard to project right now is really what's going to be the trend on the unit vehicle volumes and how much of that has to be offset through growth in our -- the other parts of our automotive business.

So it's a little hard to say.

When you look at it in the big picture, most of our end markets do not have pronounced seasonality.

There's subtle ebbs and flows based on Chinese New Year in one quarter or summer vacations in another business.

Really what has swung our seasonality historically has been the consumer business or the mobility business.

And I think we've beat that horse to death in terms of trying to highlight or provide information as we see it right now.

So I'd be cautious about next year in interpreting your seasonality.

The next question comes from Matt Sheerin.

Most of the questions have been answered here, just back to the handset business.

You talked about $100 million shortfall.

And I know you beat that September guidance by 10 million or 15 million or so, but still, that big shortfall this quarter.

And so you talked about your large customer, some pull-ins there.

But it also seems like the seasonality that you had previously expected, I think you were guiding up 80% to 100% in each of the September and December quarters.

So -- and then you're talking about Asia customers.

So how much of it is the smaller customers versus the big customer?

And is that something that you've just seen in the last couple of weeks where you saw the orders come in?

Or is that something that you saw through the quarter?

Yes, the -- in terms of the -- yes, so we only guide 1 quarter at a time.

Just want to be clear about that, so...

But you did give annual guidance that you could back into the December quarter based on your guidance for the year for the handsets, which got you to about 500 million for the segment.

And that's the shortfall that I'm talking about.

Yes, but again, we don't provide annual guidance.

We give -- we talk about whether we're in line or not with long-term market forecasts.

But let me highlight again the dynamics of the second half of the year and what we see in Q3, Q4 ramps -- ramp cycle.

This year versus last year, key elements are an earlier start this year and at higher yields; a less pronounced technology shift, which leads to a difference in terms of -- the ASPs that we started at last year would be greater than the ASPs where we started this year with that yield.

So that's why perhaps in Q3, while you're seeing a revenue uptick of 10 million or so, you're actually seeing a unit volume uptick that's higher than that.

The second element is a more conservative forecast certainly than what we saw last year.

We generally receive forecasts early on in the cycle.

they get updated as we go through the quarter.

And then we see really where sell-through is at the end of -- sorry mid-December kind of time frame.

And then the last factor really is that Greater China and Korea weakness.

And to give you a feel for what that means, that's generally about 20% or 25% of our overall cellular phone end market is represented by Greater China and Korea.

And so seeing weakness there also has an impact on our forecasts as we go into the fourth quarter.

So it's a combination of those 3 elements that we're seeing here in the fourth quarter.

Okay.

So it sounds like the forecasts there were weaker kind of across the board then, okay.

Yes.

(Operator Instructions) The next question comes from Maynard Um.

I'm just wondering if you have any sense as to why the EV market was softer.

Because it looks, at least in the U.S., that we should be seeing increasing units.

Any sense of whether customers had some amount of inventory?

Are there market share shifts?

Or any color there?

Just seems a little surprising.

Yes, on our E-MS business, I don't want to over-exaggerate this, because it's a -- relatively, you think about profit contribution, a pretty small part of our mix.

It just happens that a good portion of that business is in automotive area.

So it does swing the growth numbers every once in a while.

This was one of those quarters.

The -- but if you're looking at EV demand overall, we tend to service smaller companies that are starting up on the China side.

And then in the U.S. side, we tend to -- most of our product there goes into battery management and energy storage areas.

And so what we were seeing and really across the board was just -- were just some shifts in forecasts that were unexpected.

If I were to point to what was causing that, I think certainly in China, we -- I think there was this overall weakness in the economy and unit sales that seem to be affecting our customers.

And these again are smaller customers that are working with pretty tight balance sheets.

And so that causes a swing in terms of their forecasts.

U.S. side, less.

We saw quite a bit of movement there, again, on some of the start-ups and particularly in some of the energy storage application areas.

Okay.

And in terms of -- how much of lead time visibility do you have in the auto business?

And I'm curious because China's speculated to be reducing taxes that might help growth.

And some of the OEMs have settled WLTP emissions, testing issues, which sounds more like a temporary issue than something more ominous longer term.

So I'm just wondering how much visibility and lead time do you have into that business?

Sure.

On the PCB side of our business, the lead time is pretty good.

We receive forecasts that will go out 6 months or so.

Actual purchase orders come in generally within the quarter.

But we are getting forecasts that go out several quarters.

Those forecasts, I think -- again, I pointed to what was going on the PCB side has certainly -- it's been relatively flat and down slightly.

But that area, I think the impact of that has been mainly from just unit sales that have been lower than expected on our customer side.

And that's led to pulls out of hub inventory that were a bit less than forecast.

As we look longer term, the big driver is going to continue to be electronics content.

It's going to continue to be innovation in terms of what drives the growth piece of our business.

And so there, we haven't seen -- I think we've continued to see a strong quarter.

We've continued to look at what appear to be good forecasts there as well.

So my view of this is it's yes, we are seeing a softness there that's probably more caused by unit sales than anything else.

We'll see what these -- what the impact of some of the stimulus measures that are being -- are going to hopefully be put in place, what that will have on consumer demand.

That would certainly lead to a much better climate on the unit sales side of that automotive piece for us, and we'll continue then to see the electronics growth continue.

So we're -- again, with our forecast, we're looking at the relatively flat year-on-year in Q4.

I think that represents that we're pushing, that it's still holding up.

And then hopefully, we see some upside as we go into Q1 from the stimulus measures and other measures that will be put in place.

Great.

And then if I could just lastly, you talked in the past about increasing complexity in smartphones as a driver to ASP.

As we look out going forward, how should we think about the market?

Do think we're sort of at the secular peak, maybe not just in terms of units, but maybe also in functionality?

And then how difficult would it be for you to reduce the amount of capacity you have to reduce your fixed cost?

Yes.

So first part of the question, probably the most difficult part to answer, right, because I think there continues to be advances in the smartphone area.

Whether or not that will stimulate demand is really tough for me to comment on.

But I know from the technology road maps that we see, that we're going to continue to see innovation here.

And certainly, from a printed circuit board standpoint, that innovation is usually oriented around the circuit density or the miniaturization of the device or of the PCB requirement.

So as we look at printed circuit board requirements, the board itself, the size doesn't change all that much, but we see circuitry density continuing to go up.

And so that will drive ongoing innovation technology movement in our business.

If you look at the facilities themselves, our advanced technology facilities, our focus will continue to be on diversifying the cellphone piece of our business and working on -- as the -- particularly as more advanced technologies are picked up by customers in Greater China and Korea, that will help us in terms of level load, because the product introductions there are more frequent.

And then the use of advanced technologies in automotive and even some of our other markets, as customers look to miniaturize or to shrink the size of their own package and as they use more advanced chipsets.

So that -- those kinds of requirements in other markets will drive demand for advanced technology boards.

In automotive, that will particularly come in the infotainment area and in camera applications.

And we are -- and we and other participants in the industry are all working on the kind of reliability data requirements that are demanded in automotive in order to allow for this adoption to occur.

But it will occur in that -- in the automotive area.

And same drivers in other markets, whether it's to -- for a server application, whether it's in optical networking, whether it's in aerospace and defense, that is -- there's always a driver to miniaturize.

There's always a driver to use new chipsets and more advanced chipsets.

And so we will see that same trend driving these other markets.

That's really where our focus is in terms of absorption of capacity and advanced technologies.

At this time, I will turn the call back to Tom for closing remarks.

Great, thank you.

Yes, let me just close by summarizing some of the points that we've discussed in the call.

Number one, we delivered record earnings and for a third quarter and we finished ahead of the guidance that we provided to investors.

We continue to execute well on our core strategies of diversification and differentiation.

We are excited by many of our long-term growth drivers and the revenue synergies and ongoing differentiation arising from the integration of Anaren.

And finally in closing, I'd like to thank our employees, again, for your contributions, certainly our customers and our investors for your continued support.

Thank you and goodbye.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.