Celestica Inc. (CLS) Q2 2014 Earnings Report, Transcript and Summary

Good afternoon. My name is Nick, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Celestica Second Quarter Results Conference Call. [Operator Instructions] Manny Panesar, Director of Investor Relations, you may begin your conference.

Thank you, Nick. Good afternoon, and thank you for joining us on Celestica's Second Quarter 2014 Earnings Conference Call. On the call today are Craig Muhlhauser, President and Chief Executive Officer; and Darren Myers, Chief Financial Officer. This conference call will last approximately 45 minutes. Darren and Craig will provide some brief comments on the quarter, and then we will open the call for questions. [Operator Instructions] Copies of the supporting slides accompanying this webcast can be viewed at www.celestica.com. As a reminder, during this call, we make forward-looking statements related to our future growth, trends in our industry, our intentions concerning the return of cash to our shareholders, our financial, operational results and performance and financial guidance that are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. We also refer you to our cautionary statements regarding forward-looking information in the company's various public filings, including the Safe Harbor statements in today's press release. We refer you to the company's various public filings, which contain and identify material factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements and which discuss material factors and assumptions on which such forward-looking statements are based. These filings include our annual report on Form 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission and in our annual information form filed with the Canadian Securities Administrators, which can be accessed, respectively, at sec.gov and sedar.com. During this call, we will refer to certain non-IFRS financial measures, which include adjusted gross margin, adjusted SG&A, operating margin or adjusted EBIAT, adjusted net earnings, adjusted EPS, return on invested capital or ROIC, inventory turns, cash cycle days and free cash flow. These non-IFRS measures do not have any standardized meaning under IFRS and may not be comparable with other non-GAAP or non-IFRS financial measures presented by other public companies, including our major competitors. We refer you to our press release, which is available at celestica.com, for more information about these and certain other non-IFRS measures, including a reconciliation of the historical non-IFRS measures to the corresponding IFRS measures, where a comparable IFRS measure exists. Unless otherwise specified, all reference to dollars in this call is to U.S. dollars. I will now turn the call over to Darren Myers.

Thank you, Manny, and good afternoon, everyone. Celestica delivered a solid second quarter with revenue and adjusted earnings per share at the higher end of our guidance range. Second quarter revenue of $1.472 billion was at the high end of our guidance range as we experienced strong demand from our communications end market. Second quarter revenue increased 12% compared with the first quarter of 2014 and decreased 2% compared with the second quarter of 2013. Some highlights for the second quarter include: IFRS net earnings of $40.9 million or $0.22 per share. Non-IFRS adjusted earnings per share of $0.25 or $0.02 above the midpoint of our guidance range. Non-IFRS operating margin of 3.5% improved 60 basis points compared to the second quarter of 2013. Free cash flow of $41 million increased sequentially with improvements in inventory performance, and we delivered 19% return on invested capital. Looking at revenue from an end market perspective, relative to our beginning of quarter expectations, we experienced improved demand from our communications end market while revenue performance from our other end markets was generally as expected. Our diversified end markets comprised 28% of our total revenue for the quarter, which was consistent with the first quarter of the year and up from 25% in the second quarter of 2013. Diversified revenue increased 12% sequentially with growth in our industrial and aerospace and defense end markets. Within our industrial end market, sequential growth driven by new wins was partially offset by softness in our semiconductor business. Compared with the second quarter of 2013, diversified revenue grew 11% with increases across all areas with the exception of solar. Revenue from our communications end market represented 40% of total revenue. Communications revenue increased 12% from the first quarter with improved demand across a subset of customers. Compared to the second quarter of 2013, communications revenue declined 5%, primarily due to reductions in telecom and lower overall spend, partially offset by revenue growth from new programs. Second quarter revenue from our storage end market, representing 17% of total revenue, increased 16% sequentially, as expected, in part due to the ramp of new programs. Storage revenue grew 30% compared to the second quarter of 2013 driven by new programs, as well as overall improved demand. Server revenue in the second quarter, representing 10% of total revenue, increased 12% sequentially, in part due to seasonal impacts. Server revenue decreased 31% compared with the second quarter of 2013 as a result of overall weaker demand and the insourcing of the lower-margin assembly program that we have previously disclosed. And finally, our consumer end market, representing 5% of total revenue for the second quarter, was relatively flat on a sequential basis and decreased 26% compared to the second quarter of last year, primarily due to program completions and a deemphasis of certain lower-margin business in our consumer end market. Our top 10 customers represented 64% of revenue for the second quarter, which was consistent with the first quarter and down from 66% compared with the second quarter of 2013. For the second quarter, we had 3 customers individually contributing greater than 10% of total revenue. Moving on to some of the other financial highlights for the quarter. Our non-IFRS adjusted gross margin of 7.3% in the second quarter increased 70 basis points compared to the second quarter of 2013, due primarily to improved program mix and our continued focus on cost management. Non-IFRS adjusted SG&A expense for the quarter was $50.3 million, which was within our expected range of $49 million to $51 million. Non-IFRS adjusted operating profit or adjusted EBIAT of $51 million or 3.5% of revenue increased 40 basis points sequentially as a result of the higher revenue. Compared with the second quarter of 2013, despite lower revenue, adjusted operating profit increased 17%, and adjusted operating margin increased 60 basis points, driven by improved mix and cost productivity. Our adjusted tax rate of 10.4% in the second quarter was within our expected annual range of 10% to 12%. Second quarter IFRS net earnings were $40.9 million or $0.22 per share compared to $28 million or $0.15 per share for the second quarter of 2013. Second quarter IFRS net earnings increased by $12.9 million or 46% compared to the second quarter of 2013 despite the impact of lower revenue. This improvement in net earnings was primarily driven by improved operating results, as well as other recoveries recorded in the second quarter of 2014. Non-IFRS adjusted net earnings for the second quarter were $44.9 million or $0.25 per share compared to $38.6 million or $0.21 per share for the same period of 2013. Turning to working capital performance. Our inventory decreased by $44 million from the end of the first quarter to $782 million at the end of the second quarter. Inventory turns for the second quarter were 6.8 turns compared with 6.0 turns for the first quarter. Capital expenditures for the second quarter were approximately $21 million or 1.4% of revenue, within our expectations of 1% to 1.5% of revenue. Cash cycle for the second quarter was 44 days, an improvement of 4 days compared with the first quarter, due in part to lower inventory days. For the second quarter, we generated $41 million of free cash flow, driven by sequential improvements in earnings and working capital. Moving on to the remainder of the balance sheet. The company's financial position remains strong. Our cash balance increased $30 million from the end of the first quarter to $519 million at June 30. As an update to our share repurchase program, in the second quarter, we canceled 2.6 million shares at an average share price of $10.43. These shares were funded from the $27 million that we paid in the first quarter as part of a prepaid share repurchase plan, or a PSR. Under the PSR, the shares are not canceled until the PSR is complete. In the second quarter, we paid $17 million under a new PSR that was completed subsequent to the end of the second quarter on July 22. This PSR resulted in the repurchasing cancellation of 1.4 million shares at an average price of $12.17. Our current normal course issuer bid or NCIB will expire August 6, 2014. Today, we have repurchased and canceled 9.2 million shares as part of the NCIB. We may repurchase a further 300,000 shares prior to the completion of this NCIB. Based on our financial strength and confidence to consistently generate cash flows, we are planning to file on the third quarter with Toronto Stock Exchange a notice of intention to commence a new NCIB. If this notice is accepted by the TSX, we estimate that we will repurchase for cancellation, at our discretion during the following 12 months, up to approximately 6% of our outstanding shares. The actual number of shares we can repurchase will depend on applicable rules of the TSX, and we'll not be able to determine the final number to be repurchased until we launch the new NCIB. At the end of the second quarter, we had 178.8 million subordinate and multiple voting shares outstanding. As well, we have no outstanding debt, and our credit facility remains undrawn. Moving forward to our guidance for the third quarter of 2014. For the third quarter, we are projecting revenue to be in the range of $1.4 billion to $1.5 billion. At the midpoint, this suggests third quarter revenue to decrease 1% sequentially and decrease 3% compared to the third quarter of 2013. At the midpoint of our guidance, we expect to deliver non-IFRS adjusted operating margin of 3.4%, sequentially down by 10 basis points, however, an improvement of 20 basis points compared to the third quarter of 2013. Third quarter adjusted earnings per share are expected to range from $0.21 to $0.27. Our non-IFRS adjusted SG&A expense for the third quarter is projected to be in the range of $49 million to $51 million. I would now like to turn the call over to Craig for some comments on the business environment and our near-term outlook.

Thank you, Darren, and good afternoon to everyone on the call, and thank you for joining us today. Overall, Celestica delivered a solid second quarter with continued improvements across key financial metrics, including revenue, earnings, free cash flow and return on invested capital. In the second quarter, we experienced sequential revenue growth across 4 of our 5 end markets with strong year-over-year growth in our diversified and storage end markets. To provide some perspective in the business, I'd like to highlight some of the key dynamics within our end markets. Second quarter diversified revenue came in generally as expected with sequential growth in our industrial and aerospace and defense end markets. On a year-over-year basis, we achieved double-digit revenue growth in our diversified end markets with increases generally across all areas. While overall second quarter revenue in our industrial end market was consistent with our expectation, revenue in our semiconductor business was softer than expected, due largely to the lower demand forecast from one customer. As a result, the semiconductor revenue in the second quarter declined sequentially versus our expectations of a relatively flat revenue from the first quarter. The softness in our semiconductor revenue, coupled with the challenges associated with the ramping of new programs for one customer, resulted in the higher-than-expected losses in the second quarter. In the second quarter, we experienced a loss of $4 million at the gross profit level compared to breakeven in the first quarter. Consequently, we're taking additional actions targeted at improving our semiconductor operational and financial performance in the second half. Notwithstanding these targeted improvements in the second half, we expect to incur an operating loss for the balance of the year in our semiconductor business as we continue to ramp new programs, absorb excess capacity and make further operational improvements. The semiconductor market remains a strategic area in which we intend to continue to invest by strengthening our existing customer relationships and developing new business opportunities and securing new business with the industry leaders. During the first half, we made steady progress in creating new relationships with new customers and expect a continued success in securing new business. For the third quarter, we're expecting our diversified business to grow sequentially in the mid-single-digit percentages with projected increases from our industrial and healthcare end markets, while aerospace and defense is expected to be relatively flat. Revenue from our semiconductor business is expected to increase sequentially in the mid-single digits. The communications segment had a solid second quarter with sequential growth across many customers, both in our enterprise and telecom businesses. For the third quarter, we are forecasting revenue to be down slightly on a sequential basis due to our strong second quarter demand. On a year-over-year basis, we are currently forecasting the communications segment to be down in mid-single digits, driven primarily by our telecom business due to certain buildouts last year and continued softness in the Japanese market. After a very strong second quarter in our storage end market, resulting from a ramp of new programs, customer demand in storage is forecast to be relatively flat in the third quarter. However, compared to the third quarter of 2013, we're expecting double-digit growth in storage in the third quarter, driven primarily by new programs launched in the first half of 2014. Within our Server end market, the sequential revenue increase in the second quarter was due, in part, to seasonality. The overall customer demand in our Server market is expected to be soft. And the current third quarter forecast from several customers suggest an overall sequential revenue decline in the low double-digit percentages. And finally, as we continue to deemphasize lower-margin business in our consumer area, for the third quarter, we're expecting some sequential declines. Going forward, revenue from our consumer end market is expected to contribute less than 5% of our total revenue. In summary, while our second quarter performance was impacted by the challenges in our semiconductor business, we achieved non-IFRS adjusted operating margins of 3.5% at a lower revenue level than our original expectation. This was achieved through our solid performance and strong execution across all other aspects of our business. In addition, we're honored to have received recognition from a number of customers during the second quarter, including Hitachi's most prestigious award, the 2013 Excellent Partner Award; the Diebold 2013 Platinum Award for Supplier Excellence; and the Cisco 2014 Outstanding Technical and Execution Achievement Award. While we're pleased to receive such recognition, we continue to drive further improvements in quality, flexibility and cost productivity across our business and implement innovative supply chain solutions to enable our customers' success. As we look to the future, we remain focused on continuous improvement, operational excellence and diversifying our revenue base by winning new business in our target markets with existing and new customers. Based on our confidence in our long-term strategy, our track record and our demonstrated ability to consistently generate cash, we are making the necessary investments in people, capabilities and technologies required to accelerate our progress and support our long-term objectives while returning value to shareholders through continued share purchases over the next 12 months. That concludes our prepared remarks. Nick, please open the call for questions.

[Operator Instructions] Your first question comes from Amit Daryanani from RBC Capital Groups.

I guess 2 questions for me. One, maybe on the semiconductor side. Craig, you talked a little bit about operating income headwind you guys had and the cost cutting you're taking to fix that. Could you just maybe talk about how big is that piece of business within DMS for you guys? And should you be able to get it to run at the numbers that you want, which assumes maybe high single digit of margins. What sort of open contributions will that eventually have for you guys?

Well, I think, Amit, it's $70 million in the second quarter. And basically, we're still confident in our ability to get into our target margins. The overall diversified segment is above our target margins. So we obviously are working through some operational challenges at one facility, just to put it in perspective. And we feel very confident that over the course of the balance of the year, we'll fix the operational issues, and over the course of 2015 as we rebound on the demand side and we ramp new programs, we'll be in line with our expectations in terms of the contribution to our overall business.

Got it. That's helpful. And I guess, as a follow-up within your communications market, a couple of component providers in that space have been a lot more negative about it, especially regarding the back half. You guys sound fairly comfortable with the low sale, the decline, I would say. Maybe just talk about what gives you the comfort with that? And is there a geographic exposure that you can talk about? Is it much more North America or China skewed within that comm equipment segment?

Let me try that. I'll give you just some color. We participate across a number of areas in the business, including routing and switching in wireless, as well as optical products for service providers and enterprise customers. We think the demand environment from our visibility and our relationships and the programs that we have, while we saw some upside in the second quarter, we expect third quarter to be relatively flat. The challenge for us in telecom last year, we experienced some strong demand on the back of the buildout in North America, which is no longer in place, and the general softness in demand continues to plague us. So we feel generally comfortable, but as you know, the visibility is limited. But certainly, in the guidance, we feel fairly comfortable with what we're seeing.

Your next question comes from Sherri Scribner from Deutsche Bank.

I just wanted to ask a clarification about the restructuring actions in the semi cap business. Are those going to flow through the P&L? So are those included in the $0.21 to $0.27 assumption? And then just, Craig, if you could give us some sense of what you're hearing from customers about end demand? I mean, you guys had a pretty strong quarter. Most of your end markets were up double-digit sequentially. So it seems like things are getting better even though you noted some questions about how demand is trending, if you could just clarify that.

Sherri, it's Darren. I'll take the first, and yes, there is going to be some restructuring that we will make, but that is contained within our guidance.

And, Sherri, on the market side, and what I'm hearing from customers is relatively stable demand. I would say, it's -- you're not seeing any breakout performance. It would be program-specific. And the programs that we're winning are beginning to take hold. We're gaining market share, and we're executing. So I think that's the very encouraging part of the model here. And as you know, we're making this transition in a deliberate fashion, and we're trying to make sure we deliver on all fronts. And I think it's beginning to show through.

Your next question comes from Joe Wittine from Longbow Research.

Quickly on the Servers business, I just want to be clear. Are you deemphasizing any part of that business? Or is this just referring to the third quarter guidance? Is this pure macro? Or is it, on the other hand, I guess, a decline after what was a pretty strong second quarter admittedly?

We tend to deemphasize what we call the low end or the x86 or the nonproprietary end of the Server business. And we don't see that as a market where we can effectively participate and meet our target returns. So it's generally a customer-specific issue, and it's related to the programs that we're involved with.

And, Joe, it's Darren here. I mean, not that there's any regular seasonal trends anymore, but when you look back at history, Q2 to Q3, we've seen those declines more in the proprietary space server.

Okay. Got it. And then maybe a quick follow-up on storage. Does the June quarter represent the peak of the ramps you had been referencing kind of entering the year? I guess the third quarter guidance suggests it was, but I just want to make sure because one of your big storage partners has some material ramps coming up here in the third and fourth quarter.

Well, I think it's again, it's program-specific. It's customer-specific. As you know, we've got very strong quarter-on-quarter, year-on-year performance here. And the general outlook is that it's to continue. And as things unfold, we're winning new programs, and we're obtaining new customers. So difficult to define the peak per se, but we expect continued improvement.

Maybe a quick follow-on on the macro question that was previously asked. Any points to call out as far as the different segments go on new programs up for bid, where you're seeing activity, where you're seeing any kind of changes relative to, say, a couple of quarters ago? And I'm done.

I think we're seeing across the board, Joe. And I think we're very encouraged by the opportunities. We've had a strong first half in the area of communications and enterprise. And obviously, we're out looking at strong second half in the diversified space and continued performance in the communications space. So generally, it's across all end markets as customers are moving aggressively to deal with their challenges and looking at Celestica as a partner to help them do that.

Your next question comes from Jim Suva from Citi.

A semiconductor question. Was this more due to just a top customer or 2 having demand shifts you didn't anticipate? Or are they asking you to move locations? Or did they -- did you miss a prior design with them and it went to a competitor? Kind of how did you get into a situation of making a loss? Because I know the company traditionally doesn't like to do business at losses.

Well, Jim, we did an acquisition last year in the area of precision machining. And we acquired a facility that has been asked to conduct significant program ramps. And in conducting those program ramps, we've run into some operational challenges, primarily due to the ability to recruit the right skills. We're riding the ship here. And the time it takes to work through the backlog, make sure we're investing and improving the business for the long term, obviously is the critical nature here. So it's not pervasive in the semiconductor equipment network. It happens to be in one facility. And then we also have the fixed cost absorption because we're building capability to scale the business in Asia. So the combination of operational challenges in the ramp, building scale and fixed costs, and then this roughly 10%, 12% decline quarter-on-quarter with one customer has exacerbated the issue this quarter.

And, Jim, I would just add that, that decline was also -- there was some demand softness from that customer that we did not expect at the beginning of the quarter. That certainly led to the bigger loss, in addition to what Craig has described.

Okay. And then my follow-up, with those operational challenges, a year ago, when you bought this company, you were very excited about the profitability in rolling out and deploying it. Now that you're hitting a few speed bumps with the operational challenges, does this mean and is this why you're doing a accelerated stock buyback as opposed to holding that cash for similar acquisitions or diversifying for an acquisition? Or kind of what do you say about your acquisition pipeline?

Well, what it says, Jim, it's not the reason we're going ahead with the share buyback. I mean, we feel comfortable in our cash flow generation. I think the message is, at this point in time and based on the funnel that we've got of opportunities, we don't see anything as attractive, at least from a shareholder perspective, than the buyback. And we're looking to continue to look. But at this point in time, we don't have anything active to the point where we feel that this is not the right thing to do.

And, Jim, when you look at our history, we've done both invest in the business and buybacks. So we feel very comfortable at our capacity to do both and are looking to do both.

Your next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

The strength in storage is pretty impressive. You alluded to new ramps over here, but you're clearly growing a lot faster than the market is growing, particularly the high end of the market where your traditional customers have been. So do you think that this is significant share gains from your perspective? Or are you moving down the scale of complexity at all? Or is this a new set of storage customers that you're experiencing the ramps with?

Wamsi, this would be share gains with current and new customers and customers -- some customers that are new to outsourcing, and then the scope of our engagement with those customers is expanding dramatically as they launch new programs. And the complexity is staying at the high end. So I should tell you, we're not migrating to the low end.

Okay. And just as a follow up. When you look at sort of where your overall company growth is, obviously, you've had certain headwinds that you've had to deal with this fiscal year. Do you think it's reasonable to expect that as you look 2 quarters out, that you could actually return to overall company growth?

We're not putting a timeline on it, but we expect we will return to overall company growth. The question is the timing of our ramps, certainly the stability of the market and a number of other factors in terms of our execution and our continued win rates, revenue realization, and the timing of that's difficult to predict. But yes, we're getting more and more optimistic as time goes by.

Your next question comes from Thanos Moschopoulos from BMO Capital Markets.

The industrial segment seems to be growing nicely. Is there anything specific to call out there as far as what's driving that growth?

I'd just say continued growth with new customers and new programs that we've won over the course of the last 12 to 18 months. And then obviously, the underlying stability or the demand stabilizing for the programs that we have.

Okay. And then the cash cycle showed some improvement this quarter. Is there much further room for improvement on that front? Or is there sort of a trade-off as diversified becomes a larger part of the mix?

Yes. We're pleased with the inventory turns improvement to 6.8. That drove the cash cycle up. Certainly, looking to continue to make those improvements and get that north of 7 over time. So we'll be looking as -- even as we bring in more diversified, there's still room for us to make further improvements in our inventory performance, which will drive cash.

And so that inventory will be the primary driver of improving that cycle?

Yes.

Your next question comes from Daniel Chan from Scotiabank.

You guys mentioned that there are no imminent M&A opportunities out there. Are the valuation's still high and is the activity still high? And how long do you wait until you consider other things like Dutch?

Daniel, this is Darren here. The acquisitions, I mean, there's activity out there. I would say the quality assets, ignoring the valuation for a moment, the quality of the assets that are going to add to our capability to add to our proof points, bring us new relationships, I mean we're very particular on that. We're looking to invest, and we have a very strong balance sheet to do that. So we're willing to be patient to find the right assets. And we'll look to put that to use as time goes on here. But we don't want to do the wrong deal because that will cost more in the long run.

Okay. And then on the storage side, obviously, good growth as you win programs. Is that largely driven by some of the JDM programs you guys have there? And do you plan on taking these JDM programs into other verticals, for example?

Yes. I mean, it's certainly is -- the backbone of the strategy has been leveraging our JDM design module for design technologies. And we are already taking that into other aspects of the business, including the Server and the switching space.

Your next question comes from Naser Iqbal with Salman Partners.

My first question would just be, Craig, in terms of the new program ramps, in the beginning of the year, you talked about some meaningful program ramps not just in '14, but in '15 as well. So should we expect those meaningful program ramps are still on course at the back half of this year and in '15 as well?

Well, we have a pipeline of opportunities. We also have programs ramping. And then we have revenue realization achieving the volume targets that were set by customers for those programs. But it's safe to say the number of opportunities that we've got are continuing for the balance of the year will definitely impact 2015. And we expect the revenue momentum for the company to continue to improve as we go through time.

And, Naser, obviously, that depends on the markets and how programs do and all those things as well.

Right. Because it seems that even with the shifts in customer demand, the new program ramps have been helping. I'm just wondering is it that -- is that the -- have you seen the peak of it? Or is there a lot more to come, staggered out between the back half of this year and also going into '15?

I think what we're looking for is a nice, balanced, predictable growth rate over time. You see the leverage on the company by growing selectively in markets where we can win and make money and execute flawlessly. So we're very encouraged by the progress. It's a model we're working to build here. Darren said there's a lot of caveats around it. Obviously, we're encouraged by our progress so far.

Okay. Great. And just maybe on the semi cap segment -- business, to the extent it was breakeven in Q1, is it just like what are your expectations for a Q4 exit in terms of the target? Is it to achieve a breakeven? And in terms of -- with the restructuring and the other initiatives you're doing, do you think you need more customer wins? Or do you think with the existing customers you have that, that will be enough if the demand improves that, that will bring you to -- it will bring the business to your targets?

Naser, I think when you look at the losses, I mean, certainly, going into the guidance, we factored in the restructuring. I think you're not going to see it get much better than it was in the second quarter, and we look at the third quarter. We're not giving guidance out into the fourth quarter, and even, as Craig made note at the beginning of the year, we do expect losses through this year. And we're looking for -- we've won a lot of business, we continue to win business, and we have to look to ramp that business, fill our Johor facility and fix some of the issues in our one particular facility. That will take time. And we're going to do it in the right way. And it will take into next year.

Right. So you think you have enough of the pieces in your plate to solve this problem. But you don't need more significant customer wins?

We certainly see enough activity to be able to grow this business and to work our way into the margins we need for this business.

Your next question comes from Robert Young from Canaccord Genuity.

I just want to ask -- I want to ask a little bit about the operating margins at 3.5%. That seems very strong, below the $1.5 billion quarterly run rate and despite the bit of a drag from the semi cap business. I was wondering if maybe you could talk about whether that's stronger than expected, what might have driven that, and how that might affect modeling going forward for us?

Rob, yes, the quarter was a strong quarter. I mean, we've talked in the past that hitting 3.5% at $1.5 billion run rate with the semiconductor loss, this was a strong quarter. And you see, really see the benefit when we can bring some extra revenue into the model. So we had the upside in communications. That drove a fair amount of the upside, as well just our continued focus on cost productivity. So for now, I'm still -- it's in the range of $1.5 billion. It obviously depends on mix and a number of factors. So for the time being, I'd leave that where it is, but we're always looking to do that better.

Okay. And With the JDM initiatives, would that be any impact here or is that something that would be more of a longer-term benefit?

Over the longer term, certainly, those help to continue to shore up margins, but that's more of a longer term, not in the short term.

Okay. And I just got a couple smaller ones. The 3 customers over 10%, I know you don't normally name them, but is -- could you potentially provide the end markets or any other color where they are?

No, Rob, we don't talk about it. We disclose annually in the statements the customers, but we don't disclose it on the quarter.

Okay. And then the last question is just on the R&D, a small item, but it went quite a bit. Is that microelectronics initiative? Is that something that's going to stay at that level? Or is that just a onetime little impact?

No, that was -- that's associated with our JDM efforts. And it's more in the just the amount of 2 on different things this quarter. So it will probably come down a little bit as we go forward.

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

Thank you, Nick, and again, thanks, everybody, for your interest and joining us today. And we look forward to your continued support, and look forward to talking to you again at the end of the third quarter. Thank you very much.

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