Good day, ladies and gentlemen, and welcome to the Benchmark Electronics Incorporated Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference VP of Strategy and Investor Relations, Miss Lisa Weeks. Miss Weeks, you may begin.

Thank you, operator, and thanks everyone for joining us today for Benchmark’s third quarter 2017 earnings call. With me this afternoon, I have Paul Tufano, CEO and President; and Don Adam, CFO. Paul will provide introductory comments and Don will provide a detailed review of our third quarter financial results and fourth quarter outlook. We will conclude our call with a Q&A session. After the market closed today, we issued an earnings release highlighting our financial performance for the third quarter and we have prepared a presentation that we will reference on this call. The press release and presentations are available online under the Investor Relations section of our website at www.bench.com. This call is being webcast live and a replay will be available online following the call. Please take a moment to review the forward-looking statements advised on Slide 2 in the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today’s remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties described in our press releases and SEC filings. Actual results may differ materially from these statements and Benchmark undertakes no obligation to update any forward-looking statements. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release, as well as in the Appendix of the presentation. I will now turn the call over to our CEO, Paul Tufano.

Thank you, Lisa, and good afternoon everyone and thank you for joining our call. If you turn to the third quarter summary, in the slide deck first off we are seeing that I am very pleased with our performance this quarter. It’s the fifth consecutive quarter that we met or exceeded our commitments and we are very pleased with that. From a revenue perspective, we generated $604 million of revenue that’s up 5% year-on-year, it is the third consecutive quarter of revenue growth. That growth was really fuelled by performance in four of our various market sectors, our Aerospace and Defense sector grew 16% year-over-year primarily with broad based growth from existing customers. Our Medical segment grew 17% year-over-year. This is the first quarter of year-on-year growth of any significance since the second quarter of 2016. We are pleased with that, that’s primarily driven by growth in our cardio and diabetic care programs. Our Test & Instrumentation segment grew 34% year-over-year. We are especially fortunate to have a broad engagement of semi cap equipment manufacturers of our portfolio and given the strength of that sector we are enjoying good growth. And finally, we saw our computing up 16% year-over-year driven by storage and security providers. From a gross margin standpoint, we posted 9.4 points of gross margin, that’s a 20 basis point improvement year-on-year. Our non-GAAP operating margins were 4.1%, our EPS was $0.39. Our cash cycle days was 73 days, that’s an 8-day improvement over the previous period a year ago, was a seven day deterioration from the second quarter of this year. Now clearly our range for cash conversion days has been 72 and 68, but quite frankly we were hoping to be below 70. The results of that increased quarter-on-quarter of cash cycle days is that our…

Thank you, Paul and good afternoon everyone. Now let’s start on slide nine and we’ll recap the third quarter income statement. Revenues were $604 million which exceeded the high end of our guidance and were up 5% year-over-year, and again which was the third straight quarter of year-over-year revenue growth. Our third quarter non-GAAP operating margin was 4.1% and was consistent with the last quarter. Non-GAAP EPS was $0.39 and was above the high end of our guidance of $0.32 to $0.36 driven by a better absorption and higher-than-expected revenues and a favourable tax rate. Please note that our GAAP EPS for the quarter was $0.35 and these GAAP results include $2.5 of restructuring and other costs, offset by a $1.5 million recovery from the sale of inventory that was written down in the first quarter due to our previously disclosed customer insolvency. For the quarter, our ROIC was up was 9.9% which is up 40 basis point improvement from the last quarter and 130 basis point improvement from last year and our long-term target is 12%. Now let’s turn to Slide 10 for our quarterly results by market sector. Industrial revenues were flat quarter-over-quarter and were down 12% year-over-year primarily due to softness across several of our top customers. A&D, revenues for the third quarter grew 16% year-over-year the decline 4% quarter-over-quarter from qualification delays from several customers. Medical revenues were up 16% quarter-over-quarter and 17% year-over-year from higher demand and program rents from both new and existing customers. And then finally in the Test & Instrumentation sector, revenues were flat quarter-over-quarter and up 34% year-over-year from the strong demand in our precision machining business, serving the semi-cap market. In summary, our higher-value markets represented 68% of our third quarter revenues, which is a 9% increase in last year…

Thank you, Don. This afternoon as part of our press release we’ve announced that Don will be retiring from Benchmark after 15 years of service. There is a great sadness that we see him go. He has been instrumental to me over the past year and he’ll be sorely missed. Clearly the reallocation to Phoenix would have been one of the best to his family and as a result of that he will be leaving us. Our search is underway. And I’d like to thank Don for all his support and contributions and wish him all the best going forward. So with that operator let’s open up for questions.

[Operator Instructions] Our first question comes from Sean Hannon from Needham and Company. Your line is now open.

Yes. Good evening. Can you folks hear me?

Yes.

Okay. And first is a comment to Don, Don you been true pleasure and gentlemen work with that last many, many years, so you will certainly be missed. First question here in terms of the results versus the guidance. The outperformance – some slight outperformance we had, right? Is this primarily attributable than to computing, I think that was somewhat referenced in those last remarks. And if that true, is that kind of pull forward that you had anticipated that pull that as what otherwise would have been in that 4Q guide?

No, not really, I mean, I think that some of the revenue upside you saw does come from computing. But it wasn’t pull ahead. If you think about our computing exposure, we are really in lot of storage applications and very niche of these applications are they’re kind of special [Indiscernible] and as you know special bids are lumpy and they tend to be back end at the end of the quarter. So it’s always hard to forecast where they could be. Something you take a little conservative, you have to make sure we don’t get caught by surprise. And so the volatility of those kind of products and how they go to market just lends itself to more volatility than that.

Okay. And then when I look at the wins that you folks have been accumulating. You did a nice job around that execution in the quarter. You’ve had some really great steady progress over the course of last many quarters. If I look at that -- how that’s been lining up and of course considering it could be 12 to 18 months before some of that really is materializing on that top line. But it would seem to suggest that at this point now we should have some much better comfort in being able to see some accelerated revenues that would outperform what you perhaps planning up to do here in 2017. And so, just want to see if we can a perspective on that. You guys not going to guide to it, but at this point of the juncture I think it would be useful to get a little bit of insight especially given that revenue growth is such a factor in turning the story here?

That’s a fair question. So, but I think we have made some progress in driving bookings growth. So we need to get that above 200. And we’re on track to do that. I will believe it will materialize in the revenue. Now the question is time to realization. And I think as we’ve talked about in the previous call. In the medical and A&D spaces, time to realization from a booking can be 18 to 24 months. And so the wins we’re getting now depending on the programs and where the program fundings are for A&D and where they go for medical FDA certification, we will show revenue. Now the question is when in 2018 and when in 2019 does it go? The wins we’re getting in Telco have a much shorter time to realization. And so I think that was the balance between Next Gen Telco and the high value segments is really important. I think those did start to materialize hopefully in 2018, whether it’s a latter half of 2018 and more in earnest in 2019. The industrial space is to me the wildcard, because industrial is an area where you get time to time to realization of revenue that should be within 12 to 18 month. Now, we are weak in industrial, let’s be honest. I mean we are very heavily rotated to flow control which is oil and gas. I think we’re going to start to see some recovery in that space in 2018. You know I think it will be modest. And therefore we need to diversify on our exposure industrial areas. That’s why I’m very a bit fan of smart cities, because that’s a significant growth driver going forward. I’m a big fan in energy storage management. I’m a big fan of smart kiosks and a variety of things. And what we have to do is we have to target and win more bookings in those areas. And if you caught our bookings in industrial, we’ve been we been kind of light for last several quarter. So one of my big focus is to get industrial at a higher rate of bookings that gives you more ability and certainty on revenue growth near terms and longer terms. That was a very long-winded answer to your question, and I apologize.

Paul, that actually provide a lot of useful color, although I still let see if I can follow-up here, and as we all step back taking away the color commentary, trying to interpret little bit more as we look at the model opportunities as we all try to assess the state here. Do you feel at this point that you’re appropriately position based on what’s been one that you should see some accelerated revenue growth though in 2018?

I think that if you look at our growth about 5%. We’re between 4% or 5% this year. We’re at 5% year-to-date. We’re 4.9% year-to-date for the third quarter. So we’ll be let’s say 4% to 5% for 2017. I think our ability to go beyond that number. In 2018 is going to be a function of how strong the second half is. Because the second half of 2018 is when we’re going to see some of these programs we won in 2017, we didn’t materialized. And as we go to our planning process in 2018 -- for 2018 which is happening in the several weeks, we’ll have better color. And the key is going to be the programs we’re on today how much roll-up would be on those programs just because of normal s-curve [ph]. And that’s the [Indiscernible] energy right now. I’m happy with the wins we’re achieving. They are in the right space. We’re going to accelerate them. You’ll probably see more restoration of revenue growth in the second half of 2018, but what that means for the full year 2018, I can’t say its like we understand what happens on the S-curve on those of the programs.

Full appreciated. Very useful color. Thanks for helping to try and answer the litmus test question at this point. So thanks very much. I’ll jump back in the queue.

Thank you. And our next question comes from Stephen Fox from Cross Research. Your line is now open.

Good afternoon. Two questions from me please. First of all on the guidance. Looks like now you’re looking at down sales quarter-over-quarter and year-over-year. What are their big drivers in term of why that’s happening? And then secondly kind of related on the operating margin guidance, I though originally you thought you could do more like mid fours, now you’re looking closer to 4% even though a year ago you did 4.8 and you’ve been doing 4% for the first half. Is there any incremental cost that we should think of? I was wondering if there's anything specific that’s sort of transitory or ongoing around R&D et cetera? Thanks.

So, if you look at the expense side of it, clearly we are – we’ve increased our overall SG&A expending. If you look at it on a quarter-to-quarter, year-over-year basis, it’s probably up $3 million to $4 million every quarter. We’ve previously talked about that being function of real investments and people and capability and part of being employee-related expense. So, I think the fourth quarter will be -- maybe the same slightly higher than the third quarter in terms SG&A investment, but it really comes down to top line a little bit, currently, our guidance 6.10. If you look at last year it was better than that. So part of our question why -- what would drive that it will go higher than 6.10? And so, there’s a few things that might, they are computing. As I said this is our kind of special bid lumpy business. Year ends are usually when you see more activity as people flush budgets. There maybe upset on computing. We took a balance here. If there is that could drive the revenue up. The margin contribution on that kind of business is less than the average, but it can drive it up. And so, there’s probably in everyone of our businesses one or two little things that could drive top line and the top line will drive more margins, because it’s more about absorption. But if you ask me, what is a big thing that could drive the top line revenue growth? I would say, what happened in computing space.

That all may sense. And then just quick follow-up. So in terms of what you’re forecasting quarter-over-quarter, how would – I know you talked about the percent changes there. Any one or two big dynamics that maybe make this fourth quarter sequentially different from a year ago fourth quarter when you had a little bit more of seasonal lift? Or is it just a different forecasting process?

I think it’s – we’ll take a very balance view when we forecast. And I think that is just the question of where certain products are their segments. I think that as I said, compete the big piece, we saw a good PI, where customer station growth over the last three, four quarters. We think overall that space is going in 2018 and beyond. Whether or not there’ll be a fourth quarter pop, that remains to be seen. So, each of our businesses or sectors we’ve attempted to look at where we are, look at where the risks are, I’ve give you down low balance we’ve had in past.

Okay. Thank you very much.

[Operator Instructions] And our next question comes from Jim Suva of Citi. Your line is now open.

Hi. This is Tim Young calling on behalf of Jim Suva. Thanks for taking the question. Can you talk about your industrial segment which I believe is slightly underperformance for the quarter and I believe it has been down year to-date? How should we think about the growth trajectory core segment as you has strong new wins in core segment in 2016, but it seems like the new win hasn’t been successfully reflected in the revenue? Thanks.

Sure. As I said earlier, I mean, if you look at our industrial segment we’re heavily rotated toward flow control technologies in oil and gas. Now clearly that has not been a growth area over the last couple of years. I think we’ll see some recovery in 2018, which is probably modest, but first, we have to make industrial grow again. We need to diversify our customer engagements in to other area. I spoke with you just while ago. We need to focus on smart cities. We need to focus on energy storage management. We need to focus smart kiosk. We need to focus on whole bunch of other areas where we can have more growth profiles than just be dependent on what oil and gas does. And that’s we are going to do. We have not made the progress. I would like to make this year, but we’re focused on improving our position.

Just quick follow-up, thanks. Just quick follow-up on that oil and gas, are you seeing the churn rate or the order canceling like investment segment, or is just the program ramps slower than you previously expected? Thanks.

No. The industry they server are petrochemical plants, refineries, offshore drilling. So clearly with the downturn in oil prices we’ve seen that industry be decimate. And so over the last several quarters, year and a half we’ve seen significant erosion. Now we did see some growth this quarter in that space and hopefully that will continue as we go throughout 2018.

Thank you.

Thank you. And we have a follow-up question from Sean Hannon, Needham & Company. Your line is now open.

Thanks for taking the follow-up here. So, just kind of coming back to some of the viewpoints around the wins that you folks have accumulated, the industrial focus, Paul, you had called out some wins that you have been able to garner within smart cities. Want to see if there’s an opportunity perhaps to tweak that out a little bit more, what else has been won? What are you currently doing in that today? Is there anything, you’re actually generating revenues on? Or is really this win we reference today, the main foray for you folks into that area? Any more color would be great.

Okay. So, most of our smart city wins that we announced this year have yet to translate to revenue. You’ll see at least one alone begin to hopefully hear in the fourth quarter, earlier next year. I think what is more important to me is the number and variety of wins we get in smart cities, the smart city that’s a big catchall category, right?

Exactly.

And we are trying to parlay our strength in optics, not optics transmissions, but in optics cameras and everything. That’s [Indiscernible] on smart cities. We’re translating part of our knowledge and capabilities in RF. So to me it’s about getting and acquiring as many new smart city customers as possible and a variety of different application platforms to allow us to be able to provide a lot more value to customers who are entering in this space. This smart city will begin to really take off in the next several years. And so being in position now, I’m hoping that we can garner a better share of smart city market across the board.

Okay. That’s very helpful. And then switching to the medical for you folks, you’ve had some good success in brining through a fair amount of business in this reported quarters. It’s a nice improvement there. I think that there has been some internally some enthusiasm around kind of a recovery and some return to growth within that space. So want to understand how should we think about looking past than it is going to pull back little bit this next quarter. How should we think about the cadence of that business performing from here based on what’s already been one in hand. And should we continue to grow before say, some of the more recent program wins start to kick in and continue those growth factors, so that we kind of stabilize around these levels. How do we think about this path on the medical front? Thanks.

So, I would hope that we’ll continue to grow. Now, there are few programs that quite honestly that are launching now, that if they launch that will continue to allow us to see that growth accelerate quarter over quarter. And of it will be on market acceptance and part of it will be where they stand with regard to stability of the product line. So you know the more that engagements we have the greater the certainty of that revenue growth. And so just adding more engagements at various stages of their maturity will get us there. I’d like more engagements and you know that’s the task of the medical team to derive more engagements. The Qualcomm win was a great win for us. This is a whole brand new market, and it’s going to have tremendous applications in patient monitoring, in pharmaceuticals, in remote medicine. So it gives us the ability to have a lot of best on the table, and that’s what we’ve got to do, we’ve got to put a lot more shifts on the table so we have more degree to freedom. So I’m hopeful that we will continue to see Medical acceleration of growth, the more those chips are on the table, the more confident I’m going to be.

That’s great. And I’m glad you mentioned Qualcomm – and my last question I just wanted to if we can get an understanding. Is that a unique exclusive relationship? Is there – can you reference anything in terms of exclusivity there and you know what’s been communicated or are among your customers in terms of enthusiasm for that partnership and where this could incrementally drive you from here. Thanks.

So you know and the time factor is probably period of exclusivity. It’s probably a normal 18, 20 month thing. To me, as long as we perform for Qualcomm, as long as we are good partner and getting the product designed and doing the registration process where we help them with special expansion of design and need to generate demand then -- we’ll get our fair share. What is I think unique about this opportunity is that it’s really a holistic system. I mean, we will design and manufacture biometric sensors. But the sensors themselves are of no value without HIPAA based cloud network because that allows you to have a portable bring data and forth and to have healthcare professionals monitor it and more importantly to analytics on the data to improve outcomes. And so to me it’s the combination of the two that’s the most important. And you know the fact that we are the hardware provider and they are the cloud software provider this is a great validation of go-to-market for us in these kinds of spaces. And we will do everything in our power to make sure that we are the best partner to Qualcomm, and you know as I think about this space; there is a number of opportunities that are going to unlimit [ph].

Very good. Thank you so much for taking all my questions today, folks.

And I am not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.