Flex Ltd. (FLEX) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Flextronics International Second Quarter Fiscal Year 2013 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Kevin Kessel, Flextronics' Vice President of Investor Relations. Sir, you may begin.

Thank you, Sarah, and thanks for joining Flextronics' conference call to discuss the results of our fiscal 2013 second quarter ended September 28, 2012. We have published slides for today's discussion that can be found on the Investor Section of our website. With me today on our call is our Chief Financial Officer, Paul Read, who will lead us off with the review of our quarterly results, followed by Chief Executive Officer, Mike McNamara, who will conclude with the discussion of the current business environment and our guidance for the December quarter. Today's call is being webcast live and recorded. Our presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts on our website and in the Form 8-K submitted to the SEC. During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. I will now turn the call over to our Chief Financial Officer, Paul Read. Paul?

Thank you, Kevin. Good afternoon. Please turn to Slide 3. We generated $6.2 billion in revenue for our fiscal 2013 second quarter ending September 28, 2012, which was above the midpoint of our guidance range of $596.3 billion. Revenue declined $1.8 billion or 23% year-over-year, driven almost entirely by the transformation of our business model, reflecting a mix of that is significantly less High Velocity Solutions business, largely as a result of our ODM personal computing business in FY '12, which had contributed $743 million of revenue in our year-ago quarter. Initially, in early FY '13, we took actions to wind down our assembly business with our largest mobile handset customer, furthering our portfolio transformation. Our second quarter adjusted operating income was $183 million, growing 4% year-over-year, and our GAAP operating income was $175 million, which improved 8% year-over-year. Adjusted net income for the second quarter was $176 million and our GAAP net income for the second quarter was $160 million. Our second quarter results included gains of approximately $22 million net of tax or $0.03 a share benefit from a fair value adjustment related to warrants received to purchase common stock of Workday. Our adjusted earnings per diluted share for the second quarter of $0.26 includes $0.03 gain -- includes a $0.03 gain and is up 18% year-over-year. Our GAAP EPS for the second quarter was $0.24, which is up 33% year-over-year. Our diluted weighted average shares outstanding or WASO for the quarter was 678 million. This is a reduction of 7% or 53 million shares compared with the 731 million shares reported 1 year ago, reflecting the results of our share buyback programs. In September, we announced that our Board of Directors issued a new authorization permitting the repurchase of up to the current maximum limit of 10% of our outstanding shares. Please turn to Slide 4. Our Integrated Network Solutions or INS business group totaled 44% of our sales during the quarter, declining from 46% last quarter. Revenue was $2.7 billion in the quarter, reflecting a slight decline of 2% sequentially and declining 9% year-over-year. This quarterly revenue performance is slightly below our expectations of stable revenue, as the weak demand trend we had identified for the June quarter continued this quarter for most of our larger telecom customers. Breaking down our performance within INS on a sequential basis, we saw our telecom segment decline 11%, with broad-based weakness across most of our telecom customers. Weakness existed in both wireless and wireline infrastructure, but our wireless business was the weaker of the 2. Only partially offsetting this weakness was mid-single-digit growth from our data networking and high single-digit growth from our service storage customers. Our growth in data networking and server storage was due to products supporting video demand as well as data center and cloud deployments. Year-over-year, we saw weakness across all our INS business segments, mostly due to a more challenging macroenvironment. Industrial & Emerging Industries or IEI amounted to $1 billion and comprised 16% of total sales. This was roughly in line with our expectations of a stable sequential revenue outlook. Within IEI, we experienced very healthy double-digit growth in appliances, driven entirely by new program ramps. This strength was offset by weakness in capital equipment and energy, both of which were down mid-single-digits. On a year-over-year basis, IEI grew 3%, driven by several new customer programs in the appliances segment and better year-over-year performance in capital equipment and kiosks. Partially offsetting this trend was substantial decline of several energy-related customers. Our High Reliability Solutions group is comprised of our medical, automotive and defense and aerospace businesses and rose 16% year-over-year but declined 2% sequentially. The group comprised 11% of total sales with quarterly revenue of $657 million. This performance is slightly below our September quarter's stable revenue expectations, as we encountered mixed performance across the broad base of customers and industries this group serves. Nevertheless, this marked the 11th consecutive quarter of double-digit year-over-year revenue growth for this business group. Regards to our medical business, we experienced a slight sequential decline as growth in medical equipment was more than offset by declines in disposables and consumer medical devices, primarily due to reduced demands and new products being released. Year-over-year, our medical business was up, driven by new outsourcing wins with multiple medical equipment OEMs. Our automotive business continues to perform very well, rising mid-single-digits, and we further expanded our relationships with top-tier OEMs this quarter. In fact, our business level with our top customer in this group puts it on pace to enter our top 10 customer list this current quarter. Our broad portfolio of services and design capabilities continue to allow us to secure several new customers. Year-over-year, our automotive business has grown nearly 20% on the strength of new programs. Our High Velocity Solutions or HVS quarterly revenue added total $1.8 billion and comprised 29% of our total sales. HVS grew 17% sequentially, which exceeded our expectations of growing mid-single digits and reflect seasonality in our consumer electronics businesses and prior quarter bookings ramping in High Volume Computing. Looking within HVS, our mobile business was only down single digits, as we experienced a less-than-expected impact from the wind-down of our assembly business with our largest mobile customer. The ramps-down in volume with this customer will now more meaningfully take place during our December quarter. Our High Volume Computing business declined low double digits mostly due to weakness in printers and business PC. Our consumer electronics business rose more than 40% on seasonality and some new program ramps. Year-over-year, HVS was down substantially mostly due to the large declines in High Volume Computing due to our ODM exit and in our mobile business as a result of the ramp-down of assemblies for our largest smartphone customer. Please turn to Slide 5. Adjusted gross margin was 6%, which was consistent with last quarter but improved by 130 basis points from a year-ago quarter, reflecting the margin expansion we expected to result from our portfolio transformation through the elimination of our PC ODM business and greater concentration of low-volume, high-mix business which carries higher margins. Adjusted operating income increased 4% sequentially to $183 million in our September quarter. Adjusted operating margin remained stable at 3% sequentially. However, it expanded on a year-over-year basis by 80 basis points. During the quarter, we completed our footprint optimization activities in power as we finalized the last facility closure, which impacted our operating results by roughly $6 million. Additionally, while we continue to finalize our realignment activities with our largest mobile customer and rapidly deploy and reposition our assets and resources, our operating routes were only slightly impacted by these transition costs. We had anticipated absorbing around $10 million of transition-related costs this period. However, these costs are now expected to be realized in our December quarter, during which we will be ceasing most of our business activities with this customer. Our 3% adjusted operating margin was within the margin guidance range we have targeted for the period, and we continue to believe that our business is fundamentally structured to achieve operating margin returns of 3.5% based on a portfolio mix of 17% [ph] low-volume, higher-margin business, coupled with increased revenue levels. Our adjusted EBITDA was $305 million in the second quarter and totaled $1.1 billion over the last 12 months. Our adjusted EBITDA margin increased 30 basis points to 4.9%. Our adjusted EPS from continuing operations of $0.26 was up 18% from the $0.22 we reported last year, again, reflecting the $0.03 benefit of fair value adjustment related to warrants received to purchase common stock of Workday. Please turn to Slide 6. Net interest and other expense amounted to $10.5 million of income in the quarter. After excluding the impact of the fair value adjustment of $23 million related to Workday, we saw a modest increase of $1.8 million to $12.6 million from $10.8 million in the prior quarter. This was slightly better than our guidance range of $15 million to $20 million of expense for this line item and was primarily driven by continued realization of foreign currency gains, albeit at a lower level than recent quarters. Again, we continue to believe that a range of $15 million to $20 million for our quarterly net interest and other expense remains appropriate for next quarter and going forward. This also includes any fair value adjustments related to our warrants in Workday that might occur. The adjustment tax expense -- the adjusted tax expense for the second quarter was $17.6 million, reflecting an adjusted tax rate of 9.1%, which falls within the 8% to 10% tax range we had estimated for the quarter. For our December quarter, our guidance is based on maintaining an effective tax rate -- range of 8% to 10%. Now turning to reconciling items between our GAAP and adjusted EPS. Stock-based compensation amounted to $8.4 million in the quarter, and intangible amortization net of tax was $7 million in the quarter. The 2 combined items represented a $0.02 impact to EPS from continued operations. Additionally this quarter, we agreed to divest of a small non-core business that is treated as discontinued operations for U.S. GAAP. After recognizing the accelerated intangible amortization resulting from this pending sale, this discontinued operation reflected a $10 million net loss on a GAAP basis. Please refer to the Investor section of our website for a detailed reconciliation. Please turn to Slide 7. While inventory remained relatively stable sequentially at $3.1 billion, we were pleased with the favorable impact in our inventory turns to 7.4 turns. The expansion of our inventory turns resulted in a 3-day favorable impact to our cash conversion cycle and was driven primarily by solid management and execution, as we wind down our business with our largest mobile customer. Our cash cycle reduced 3 days sequentially to 27 days, which was within the 25- to 30-day range we targeted to manage our business, following the reduction in our portfolio of the High Velocity business that is characterized by significantly higher asset turnover. The current 3-day decrease was the result of the favorable impact from an inventory turns expansion, coupled with a 3-day improvement in our DSO and offset by a reduction of our days payable outstanding of 3 days. As seen from the networking capital chart on the top right of this slide, our networking capital as a percentage of sales reduced by 130 basis points to 7.2% and is within our targeted range of 6% to 8%. Our ROIC for the quarter was 20.9% and remains consistently well above our weighted average cost of capital. Please turn to Slide 8. We generated $482 million in cash flow from operations, which marked our 7th consecutive quarter of positive operating cash flow generation, and we have generated over $0.5 billion in operating cash flow year-to-date. Our net capital expenditures amounted to $141 million for the September quarter. As a result, we generated $342 million of free cash flow for the quarter. This strong performance puts us on track to generate free cash flow in the range of $500 million for the fiscal year. During the quarter, we used our strong free cash flow generation to reduce $101 million of our revolver debt net of borrowing. Please turn to Slide 9. We ended the quarter with approximately $1.6 billion in cash, which is up $277 million sequentially. Total debt was reduced from $2.2 billion to $2.1 billion. Our net debt decreased by $378 million to $534 million, while our debt-to-EBITDA level is at a very healthy 1.9x. That concludes my comments. And I'm going to now turn the call over to our CEO, Mike McNamara.

Okay. Good afternoon. Thank you, Paul. The macroeconomic environment continues to be quite challenging across many product categories. We do not see a rebounding in the near future, and therefore, we are managing our business as if the slow economy will continue. It is our objective to book enough business to offset any macro declines and simultaneously layer in some larger programs that can move our revenue growth positively next fiscal year. At the beginning of this fiscal year, we were confident of achieving $6.6 billion in revenue, which we need to hit 3.5% operating profit, assuming a 70-30 mix of high-volume to low-volume business. It is clear that this revenue level will not be achieved this fiscal year. For the next few quarters, we'll seek to accomplish 3 major objectives. First, we will seek to replace lost revenue from a macro decline with new bookings. This is not the most efficient profit model as we have costs to bring on new businesses that is offsetting a lower base revenue. We're very happy with our level of bookings, largely as a result of some organizational shifts implemented in the March quarter, and we are pretty confident that the macro deterioration can be offset with these new bookings. Secondly, we mentioned unusually high level of bookings achieved in the June quarter that layer several new programs on top of existing base revenue. As discussed, most of the revenue will ramp up over the next few quarters, but the revenue will largely be added in FY '14. Many of these programs are more complex than traditional programs, and we're accruing more startup costs than normal as a result. It is our objective that these new programs provide the necessary volume to achieve growth in FY '14 even in a slow macroeconomic environment. Third, we plan to improve our cost structure in order to help us achieve our 3.5% target on a lower revenue base. It's clear that the environment is challenging with limited visibility, and many economics are still present. On a positive front, we achieved a solid 3% operating profit and more importantly, a 2.6% GAAP net income margin. Operating cash flow was exceptional at nearly $500 million, and free cash flow was over $340 million. Our CapEx was $141 million and will be higher this year on the strength of the bookings over the last few quarters. Our pipeline of outsourcing opportunities continues to expand, and many customers are looking at transformational supply chain solutions that can improve their cost structure, increase supply chain velocity and reduce their supply chain risk. We have never been busier in our company, as we are deploying more complex solutions to enable our customers. In this environment, we benefit from our comprehensive suite of assets and are using these assets aggressively to convert this pipeline of opportunities into FY '14 growth and beyond. Our CSER initiatives, while not new, are receiving more attention and praise within the industry and are rapidly becoming a very important advantage for our company. For the second consecutive quarter, our top 10 customer concentration remained below 50% and near its lowest level in roughly 3 years at 48.6%. This is down meaningfully from 55% in fiscal 2012. This quarter also marked our third consecutive quarter absent any 10%-plus customers. Our mix shifted to a 71% low volume, high mix and 29% high volume, low mix. And we continue to expect that we will maintain a roughly 70-30 mix for fiscal 2013. Our strong position of low-volume, high-mix manufacturing, combined with our increased customer diversification, bodes well for the future predictability of our business, which should become more evident as the macroeconomic environment stabilizes. While our low-volume, high-mix business was down 1% sequentially against a very challenging macroenvironment, we're excited the quarter with this business running at a $17.6 billion annualized revenue run rate, which provides us with market-leading scale and capabilities to address these growing markets. We remain committed to margin expansion, which remains a key ingredient to our transformation. Operating margin for the quarter remained stable at 3% despite the negative mix shift we experienced in the tough macroenvironment. However, next quarter we expect operating margins to take a small step backwards as the realignment charges related to our RIM business were deferred from Q2 to Q3. The macroenvironment remains challenging versus [ph] revenue, and we expect to see increased startup costs from multiple ramping programs across multiple technologies. We still see operating margin expansion post the December quarter. But as discussed earlier, we do not expect to reach 3.5% operating margin this year. Our business remains on track to generate free cash flow in the range of $500 million this fiscal year. As we previously mentioned, this includes the impact of additional CapEx spend this year to fund the strong bookings we've had year-to-date, which is good news for the growth and outlook next year. We expect to deploy our remaining free cash flow into niche acquisitions and our stock repurchase program, which has already retired 21% of our outstanding float in the last 10 quarters. Now turning to guidance on Slide 11. For our fourth quarter, revenue is expected to be in the range of $5.8 billion to $6.2 billion. Our December quarter revenue guidance reflects a decline of 6% to up slightly or down to 3% at the midpoint. At the midpoint of our guidance range, we are forecasting both our INS and IEI businesses to decline mid-single digits, while our HRS and HVS businesses are expected to remain stable. Our adjusted EPS guidance is $0.18 to $0.22. It is based on an estimated weighted average shares outstanding of 680 million and assumes an operating margin of 2.8% at the midpoint. Our adjusted EPS guidance excludes any fair value adjustments related to our warrants in Workday. Our forecasted sequential decline in operating margin reflects a shift in the recognition of charges related to our exit of the RIM Assembly business, slightly unfavorable mix shifts and continue to ramp up costs for multiple programs that are expected to have more substantial top line impact next year. Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted earnings per share guidance I just provided by approximately $0.02 for intangible amortization expense and stock-based compensation expense. With that, I would like to open the call for Q&A. We ask that you please limit yourself to one question and one follow-up. So operator, would you please open the line for questions?

[Operator Instructions] Our first question comes from Craig Hettenbach with Goldman Sachs.

Mike, can you just discuss the new bookings activity? I know last quarter you highlighted $2 billion, just how that progressed for the September quarter? And any color by some of the technologies or end markets?

Yes. And the reason -- let me start by saying, the reason I called out those bookings specifically is, I felt that they were a kind of a layering on. It was outside of our normal booking range. Very often, the normal booking range is required to book any kind of normal deterioration in the price -- in the continuous reduction in cost of materials for electronic components. So these were definitely a layering on. And in terms of technologies, it goes anywhere from services all the way -- a lot of mechanical technology kind of businesses and a lot of machining businesses, a lot of more complex assemblies, some electrical and mechanical assemblies and as well some, what I would say, more next-generation, more advanced, consumer kind of products. So it's a real range of products. But I did view it as a bookings on top of what I would consider normal bookings. And as I mentioned, I expect those -- we expect those to come in around FY '14.

Okay. And if I can have a follow-up, Paul. You talked about some higher CapEx needed for these new programs. How is the company looking to balance kind of the CapEx needed, as well as the new buyback authorization?

Yes. Thanks, Craig. Our CapEx levels will be higher this year compared to the previous years in the range of $50 million to $100 million probably. So we'll probably be seeing between $400 million and $500 million kind of numbers. With the strong free cash flow that we have to date, the 6 months, and we normally generate good free cash flow over the second half of the year, then we expect to be up around $500 million for the whole year. And that's after the increased CapEx levels. And so that's how we look at the opportunity that we have using the cash that we're generating to do stock buyback, acquisitions or other investments like that.

Our next question comes from Sherri Scribner with Deutsche Bank.

Paul, I was hoping you'd give us a little bit of detail on the components business. I know you mentioned power, and you're in the process of ramping that down. But can you give us some sense of the profitability of that segment and your progress there?

Yes, for sure. Their -- the power business is certainly going through some growth here. It didn't really have the growth it might have had in the September quarter. It certainly grew and in double-digit growth rates. But it was hampered, I think, through some new product launches which are now unlocking for the December quarter. So we'll see substantial growth in this business in the December quarter. The business is profitable. It incurred the $6 million of charges in the September quarter to complete the restructuring charge of the facility footprint, so it is a very nice footprint now. Just a couple of facilities and some very good customers and the revenues ramping pretty heavily now into the December quarter with the launch of the new products that it supports. So I think that one is all in good -- in very good shape. Multek had some growth. We thought it'd be a double-digit growth, but it was kind of more of a single-digit growth in the -- sequentially now in the September quarter. It has some big growth ahead of it, certainly double-digit plus here in the December quarter. But I think that the ramp that it's going through right now is certainly holding back some of the margin. But I think we'll see profitability here in the December quarter for sure and -- but nevertheless, in the September quarter, it was kind of affected, I think, by the overall macro conditions. It's a very diverse business in terms of the customer segments that it services. And so any really macro effects that we ask [ph] getting throughout the rest of our business are going to show up in the Multek business, and that was evident in the September quarter. So the growth in September wasn't as great as we thought it would be or hoped it would be, and so the profitability simply didn't come through for that business.

Okay. So power is profitable, and Multek is slightly below profitability, expected to improve in December. Is that right?

Yes. Yes, that's how it is. That's it.

Okay. And then, Mike, you made some comments about margins being pressured as we ramped new programs over the next couple of quarters and particularly in fiscal '14. Is that going to make it harder for you to get to the 3.5%. What type of basis-point impact would you expect those new programs to be?

Well, I think once ramped, they'll fit into our overall structure that we're trying to achieve of the 3.5% operating profit. I think the challenge really, more than anything else, is not even the startup cost. It's actually the volume. So the challenge we're having is, as I mentioned, is 4, 5 months ago, we thought, certainly, we would hit $6.6 billion in revenue in the December quarter. And that seemed to attrit away a little bit more every single month over the last quarter -- the last 2 quarters. So what we really need to do is to get off the margin pressures, and we need to get back to that revenue growth rate -- not the revenue growth rate. We need to achieve the revenue of $6.6 billion. At $6.6 billion, we believe we'll be able to absorb a startup cost in that, and you won't even see it. And so I think more important to us is to get that volume running through our system and be able to absorb the company's current investment in facilities and infrastructure. And that's -- and as I mentioned in my prepared remarks, one of the things that we're doing pretty actively is looking at ways that -- how we can lower that $6.6 billion threshold. So maybe we can move it down somewhat over the next couple of quarters, and that's going to certainly help us if the macro stays very, very weak. Because like I said, the visibility is very, very limited. It's hard to see any kind of -- when we talk to the customer base, any real upside that anyone is anticipating for next year. So we're going to anticipate another tough macro. And as a result, let's go do the work now to start taking that down and not just hope the $6.6 billion comes.

Our next question comes from Shawn Harrison with Longbow Research.

Just wanted to follow up on kind of the lowering the 0.2 [ph], achieve the 3.5% ROI. It sounds like as if you're going to be taking out costs. But to that, are you looking to consolidate facilities? Were you looking at headcount reductions? And just maybe some of the areas and kind of the time frame. And even if there's a way to put, is it 10 basis points of benefit, you'd expect to see out of some of these actions, just a number on it.

Yes. I don't think we're ready yet to put a number on it. But the answer to your question is, we will certainly do some organizational restructuring. We will certainly do some facility consolidation. As we look at the opportunities out there, we kind of view that we can get a very, very fast return on any sort of costs. So we think they're going to be minimal. But we do think there's ways to simplify and streamline and approve [ph] the efficiency of the organization, which are outside of just purely -- which also will contribute to more productivity, which will improve our cost structure and -- but I don't think we're quite ready yet to say what we can move that number down to. And obviously, it depends a super amount on what the mix looks like going forward. But I think the important point is we're just not going to sit back and let -- if it's going to be a weak macro next year, so it's going to be weak macro next year. Let's go figure out how we continue to lower the breakeven point of the company down and continue to lower the point at which we're able to achieve that 3.5%.

Okay. And then as a follow-up, just maybe taking an optimistic approach that the macro doesn't deteriorate further from here. So as we look into the March quarter, may be if you could just discuss the puts and takes on both a seasonal revenue dynamic and then also and I guess the headwinds that will roll off. It seems as if you'd have probably about $10 million of less RIM headwinds. But if there are other -- any other costs kind of rolling on or rolling off, that would push margins up or down?

Yes. We would anticipate March to be maybe a mid-single-digit decline in revenue, which is very kind of even typical seasonal, maybe even a little bit better than seasonal. We would expect those RIM costs to be completely run out. We actually expected those to be run out in September, but they kind of got delayed a little bit just as a result of -- just finishing programs and such. So we actually wouldn't expect improving operating margins into the March quarter despite the revenue going down by mid-single digits. So we would -- we do expect margin recovery going forward. Some of the actions we're going to take are going to help that margin recovery going forward. But I think for March quarter, you got to think about mid-single digits down with improving margins.

Our next question comes from Amit Daryanani with RBC Capital.

Just 2 questions for me. One, could you maybe talk about, and maybe I didn't get this, but how much of revenue do you think will go in December with the large mobility customer? Let me get some sense [ph] -- and down 3% sequential guide. How much of that is driven by the RIM-centric issues versus the broader macro issues?

I think the December quarter, the RIM reduction revenues will be accounting for all of the difference between what we reported in September and the midpoint of guidance there in December. Other -- so if you exclude that, it's probably flat quarter-to-quarter. So that was -- that's how we feel.

Got it, that's helpful. And then maybe if I just look at the September quarter margins, if I recall you guys actually guided the quarter to 3% to 3.3% and you'd factored in about $15 million of researching charges: $5 million for power, $10 million for RIM. Given the fact you didn't have those $10 million charges and the revenues that you find, I think, for this quarter were to [ph] the midpoint, could you just talk a little bit why did the margins come in at the low end of that 3% to 3.3% range versus potentially the mid to high end of it?

Yes. There's a couple of things there. One is that we -- the revenue from our large mobile customer, which we expected to really decline in September, did not decline as much as we had thought, and it's pushed out more to the December quarter. So that had an impact on the mix. We said that HVS was up some 17% sequentially, and we expected it to be kind of a single digit up. So I think the mix contributed probably about 10 basis points of margin dilution. And the other thing we've alluded to here is some of these startup costs, that we're having these multiple new programs and technologies that we're ramping for many customers. And we think that costs us around 20 basis points of margin in the quarter.

Our next question comes from Osten Bernardez with Cross Research.

Briefly, would you be able to explain how the expected ramp in production for -- given your recent bookings is different from prior ramps? And where do you see your current capacity utilization?

Well, that -- capacity utilization is kind of a tough question because we have so many different technologies we manage, anything from plastics to metals to PC-based assembly. But we view -- in general, we view our system to be relatively well utilized at the $6.6 billion of revenue. If I was to distribute that business across the whole bundle of those technologies kind of as it is today, so that's -- and that's the reason that we think it runs out at 3.5% OP, because that ends up being a reasonably well-utilized Flextronics set of facilities. And getting back to your other question on ramp, we do expect it to -- we don't expect it to occur in March. We're going to have our normal seasonal downturn, of course, which will drive the revenue in the March quarter. But we would expect to see some of these increases in the June quarter and probably ramping all the way through to the December quarter in terms of -- until we get to full ramp -- maybe even some into that March quarter. So it's probably a 1-year ramp for some of these programs, predominantly starting around the beginning of our fiscal 2014.

Okay, that's helpful. And I guess I'll add -- to follow up on the ramp question. How do I think of -- from a -- I guess from a startup cost perspective, should we consider that, say, compared to prior ramps, that the startup costs are relatively lower this time around versus historically?

I think the way to think about it is, I think they're actually higher than normal. Because the programs we tend to take are almost all using multiple technologies that are more complex in nature. Now that's good from the standpoint of -- it's a very competitive position. It uses a lot of the technologies that Flextronics has. It makes a more complex solution for the customer, which means there are less people that can provide the solution. So I think that's a positive from that standpoint. And I think, you probably -- if we were at $6.6 billion of revenue, we wouldn't be talking about startup costs. We'd be just absorbing them. It's just harder. It's just easier to see these startup costs. They tend to hurt a little bit more, but you can't absorb them quite as well when you have these underutilized facilities. So it just makes it a little bit more visible, if you will, because you're not -- I mean our objective is, we always start up new programs, and we just need to bury the startup costs into existing targets and be able to hit them. So that's all part of the business. But with a more underutilized set of assets, which I would define as $6.0 billion instead of $6.6 billion, you tend to see those startup costs a little bit more, so they feel a bit more. But they are higher startup costs as a result of more complex programs. So again, that's good and it's bad. It's bad in the startup. It's good in the sense that it becomes more defensible and more sticky.

Our next question comes from Amitabh Passi with UBS.

This is actually Chelsea Shi on behalf of Amitabh. Our question actually is -- obviously, the cash flow is relatively strong this quarter. So I'm just wondering, what's the strategy going forward in terms of using this cash on hand, especially on the share repurchases and M&A front? It would be great if you can give us some updates on that.

Yes, certainly. The free cash flow is very strong, evidenced by $340 million in the September quarter, which we're very pleased with. We see continued free cash flow generation throughout the rest of the year and roughly $500 million for the full year. So it gives us tremendous amount of flexibility, financially anyway, to make investments. And whether it's some acquisitions or share buyback, we won't be hoarding the cash. We will be putting it to use. And you've seen us in the past do a significant amount of share repurchase at these price levels and even higher than this. So I think that we'll concentrate on that and the acquisition side, as well as anything -- any opportunity that comes our way organically or new customers that require working capital or CapEx to service that as well. And we're building towards a stronger fiscal '14 from a revenue perspective, and we're making those investments now. And they should pay off for next year.

Our next question comes from Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Just a follow-up. I'm just trying to understand what's driving the 20-basis-point operating margin decline in December versus June? If I compare the December revenue guidance, it's $6 billion at the midpoint. It's the same as the June quarter that you achieved. Yet margins are expected to be about 20 basis points lower. You're actually getting a 10-basis-point benefit from lower restructuring charges versus the June quarter, because I know the September quarter kind of skews things. So on similar revenue, you're looking for a 30-basis-point organic operating margin decline. And I just wanted to confirm, is that all startup costs or is there something else going on?

Well, mix is one feature of that. December quarter mix is generally skewed more on the High Velocity side. And I just said that September, for example, with the extra High Velocity business costs of 10 basis points compared to how we had guided. So it can have that kind of effect on the margin percentage. And then there's the ramp-up costs like we just talked about, and that's still significant. We still think that's about 20 basis points for the December quarter. So that's how -- I think it's those 2 things really. Because, yes, we did have some $10 million in June. So we'll have that in December as well, but it's really mix and the ramp costs. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: So just to be clear, Paul, to get to 3.5% from where you're going to be in December at 2.8%, it sounds like the mix should be relatively steady. So should we assume 20 basis points comes from lower restructuring costs and the remaining 50 basis points comes from incremental revenue and startup cost absorption? And it doesn't sound like you're willing to put a stake in the ground on when you think that happens. But it sounds like the earliest might be second half of next year.

Yes. I think that's -- you build it up that way. We think that the top line getting to $6.6 billion from $6.0 billion, the midpoint, that's worth about 30 basis points. We use a contribution margin of around 4.5% for that. And then, of course, we've got -- what we've just talked about, the $10 million of RIM and ramp-up costs, that's 20 basis points. So all that adds up to about 3.5%. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: And timing?

Timing -- well, it's certainly not this year. We need $6.6 billion and in this environment, not only is revenues are down, the visibility is shorter. And so it's really hard to see past the next 6 months, and as you know, we're heading into a March quarter. So revenue is going to be down probably mid-single digits. So we're not seeing it this year, but certainly, we'll be targeting it for the following year.

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

Mike, one of your competitors recently lowered both their growth and margin targets in the segments that map roughly to your non-HVS business and up in the HVS business. Are you seeing similar long-term trends of convergence of INS and HVS segments from a margin perspective?

Well, we kind of said our INS business should run around 3% to 4%. I think that's where we continue to see it run. Our HVS, relative to that competitor you're talking about, our HVS segment is actually quite a bit different, I think. So we have a little bit different margin profile. Our margin profile on that is probably more like around 2%. So we do not see a convergence between INS and our HVS. And I think part of that is because our HVS tends to be real high-volume programs as opposed to [indiscernible] volume. And I think it's -- the way we're running today, we would expect somewhat of the same. And where we're running today is somewhere in that 3% to 4% range. So I think that's stable for the near term. But certainly, I can understand their comments. And it continues to be a difficult environment, as there becomes less revenue out there. So -- but we don't see a convergence into the HVS profitability.

Okay. And as a follow-up, can you talk a little bit about why the transition away from your largest mobile customer in HVS is getting pushed out one quarter? And also if you could comment on what you saw in terms of linearity in the quarter and demand by region.

Yes. Yes, so the -- I don't think there's any particular reason about delaying the customer transition. The customer -- we're doing certain product categories associated with that customer in certain products, in certain regions. And the customer needed certain things to be finished, and filled out, and we accommodated those requests. And as a result, we had much higher September revenue with that quarter, and we'll take the transition in December instead. And as far as linearity, it continues to be very linear. So we do not see much back-end revenue at all. In fact, I would say, last quarter, we had more, more -- better linearity than we've seen in quite some time. So I actually think we're running a very, very linear business. No, we do not anticipate a back-end loading of any kind this quarter.

And any color, Mike, on the demand trends by region?

Well, we only have partial visibility of that. Because a lot of times we're building products in one region that can go to a number of different regions, and that distribution occurs in the customer. But what I can tell you is we spent a lot of time talking to our customers in a variety of different product categories as you can imagine. And without a doubt, the overwhelming response we hear is that U.S. continues to be reasonably good. The Europe demand pretty much across the board, whether it's automotive all the way into telecom, datacom, it's quite weak. And China has -- and some of the emerging markets have been a little bit disappointing through this year. So that kind is the trend that we see, and that's actually a reasonable trend that contemplate across all of the different -- many of the different product categories.

Our next question comes from Sean Hannan with Needham & Company. Sean K.F. Hannan - Needham & Company, LLC, Research Division: So just going back to the bookings for the quarter, I realize you're not quantifying this. But can you perhaps give us an indication whether this was consistent with March or other recent periods? It wasn't as high as June. And then, was the level high enough standalone, if annualized, provide growth in this environment? Or is -- or those wins in September, is that a level that you would actually have to effectively step up really for some of that growth?

Yes. For our September quarter bookings, we're -- I would consider them to be very good, and I would consider them to be pretty strong. And our backlog of potential bookings is very high. So there is no doubt there are more and more customers looking to outsource. There are more and more customers that are looking to find ways to improve their own profit structure, their own cost structure or reduce their cost structure and improve their profits. And they're looking for outsourcing to do it. So I'm bullish on the industry and certainly, what we're seeing as the potential bookings. So I view them as strong enough to generate growth. But I'm hesitant to say that we're going to have growth in those, because I'm just continued to be worried about the macro. We've been surprised this year. As I mentioned, we thought we'd hit $6.6 billion. We ended up hitting $6.0 billion for December. We didn't hit it yet, but we expect $6.0 billion for the December quarter. That was a surprise for us even just relative to 3, 4, 5 months ago. So I'm reluctant to say that, that's going to generate growth. What I said in my prepared remarks is that it sure seems to us that, that rate of bookings, which I consider to be very good, can offset macro declines. So we are hopeful that the rate of bookings that we have, that if there's macro declines, we can offset it. And then hopefully, we can get some layering of some of the bigger programs that we booked last quarter. And -- but if we don't get macro deterioration, I would expect that we have the potential for revenue growth here, just off the, what I would consider to be, the normalized bookings. So we're really pleased with our bookings. No, I don't want you to think I'm wrong there. It's just that I'm -- maybe we're a little bit more conservative about where the macro is going forward. Sean K.F. Hannan - Needham & Company, LLC, Research Division: That's helpful. And then next question. So you had mentioned the sustainability of the 70-30 mix this year, 30% High Velocity. But does the current environment pressure force you to think about changing that target perhaps a little bit more and driving some different mix through your model for future periods? If I can get your perspective around that, it would be helpful.

Yes, yes. So the 70-30 model is what we believe to have, if we were to be reasonably utilized, which I would call the $6.6 billion, enables like a 3.5% operating profit. So in our business, to me, the way you can dial in operating profit is on mix. If we only have a -- if it's not 70-30, if it's 80-20, then our target shouldn't be 3.5%. It ought to be whatever, 3.6% or 3.7%. And if it's 40-60, maybe it ought to be 3.2% or 3.3%. And if it's 50-50, then maybe we ought to be at 2.9% or -- so the important part of the conversation of the 70-30 is that's what we believe is a fairly utilized electronics operation, that we are able to achieve a 3.5% operating profit. Now the goal itself isn't just necessarily to achieve 3.5% operating profit. It's to generate cash and earnings per share and growth for our customers. So we still, even in that 30% model, have to book a lot of business. These tend to have shorter product life cycles. 30% of whatever, $25 billion is still a lot of billions that we have to go and replace and book. So that 70-30 is going to shift around. We can't exactly dial it in. It's going to shift around. What we are probably, more importantly, focused on is that 30% is quality customers, that the customers have sustainability, that there's no risk of -- no way out risks or any kind of unusual risks associated with extreme variability. So if in that 30%, as we're booking that business, we find customers that are very strong, have what we believe to be significant future potential, have strong balance sheets and such, I mean, we'll certainly let that float up to go up. And on the same thing, I guess, maybe we'd let it flow up to 40%. On the same conversation, if we couldn't find our quality base in that 30%, we'd let that flow down to 20%. So the ultimate goal at the end of the day is to provide shareholders with good cash flow, good predictability, less variability and be able to generate cash and improved earnings per share on a continuous basis. So we're [indiscernible] 70-30. And it's kind of important to make sure that you guys understand that the 70-30 and the reasonably utilized Flextronics facility is at 3.5% operating profit. But our ultimate goal is to make sure we have good, quality customers that -- where we can deliver quality earnings to you.

Our last question comes from Jim Suva with Citi group.

A question for Mike and then a follow-on for Paul. Mike, when you talk about these new ramps, can you talk to us about kind of the concentration of where they are? I know you -- they may be across several of your segments. But maybe if you could help us understand either a couple of them that have a good dollar or percent weighted a little bit more, and I guess the question is, is it weighted more towards the 70-30 or a little bit skewed like 80-20 or 60-40, just kind of as you sit there as CEO? And then a question for Paul. Paul, during this time where the cycle has a lot of uncertainty and kind of bouncing along the bottom here, EMS companies traditionally generate a tremendous amount of cash flow because they don't have to put a lot more money into building out new factories or more capacity and expansion. So can you talk to us a little bit about your cash flow priorities, like would you be looking to accelerate the stock buybacks? So you can get a longer EPS benefit versus stringing it out during the year. It seems like you really don't need a lot of money for the organic growth. Or you're going to like save some of the money and string it out, because it looks like you've got some debt that due kind of, was it next year or 2014, if I remember right? Paul, how should we think about that cash flow, because it seems like you're actually going to generate more cash probably than originally expected, say, 1 year or 2 ago?.

Yes. Jim, I'll take the first part of that question. So I consider it to be relatively balanced. Just doing the quick math here, probably 50% of that business is what we would call INS business. And I think you could probably get that, because it starts ramping in April and it takes 1 year to ramp, and usually that tends to be more complex products, longer product life cycle kind of products that take time to ramp up and get to volume. But we also had a reasonable chunk of HVS business, the High Velocity business, kind of interesting and different kind of business. But -- and then the resulting balance -- the smaller balance is HRS and IEI. So funny enough, it almost distributes itself nicely across the existing percentages.

Yes. Free cash flow or cash flow, in general, is just a very strong feature of our business model and driven by, first of all, quality of earnings and really strong working capital management and control, et cetera. So -- but it's underpinned, I think, a lot of the good things that we do here, a very strong quarter for us. I think good linearity of sales during the quarter helped that with the receivables coming down 3 days. But to address the question, really, what do we would do with it? I mean, we expect to continue to generate it now through the rest of the year, so $500 million or so. We've always said that buybacks are almost like fourth in line for us, but we do them quite a lot. I mean, we really invest in the networking capital business with our customers. And Mike's thought about a lot of new programs for the next year, and so we want to make sure that we can organically pay for that. You're working capital runs about 6% to 8% of sales, that's a very good model for us. CapEx, we've stepped up this year. We'll probably spent $50 million to $100 million more than we normally would, and that's going in place right now. So that's pretty heavy compared to previous years. M&A, we've done some small tuck-ins. We'll continue to do that. We have some nice opportunities on the horizon for us, and we're looking at them very carefully, but they're not large. But very different technologies and also some different customer bases. The buybacks, you've seen us be very active, and it gives us definitely a step-up in EPS, a permanent one, as the WASO has reduced permanently, which has been very accretive for us at the prices that we've been buying at. And it's spending head and shoulders above many other things we could spend our money on, so we'll continue to do that. In regards to the debt comment that you had, we have about $1 billion due almost 2 years away now. October 14th, I think, is the date. We're very comfortable with the debt levels that we're at. We're at 1.9 debt-to-EBITDA right now, and we think with the EBITDA growing some, so we really have a very comfortable position with regards to liquidity and the debt profile that we have. And we're just going to really re-up that debt at some time to replace that with some longer-term debt at very favorable interest rates, of course, that we're seeing today. So I really like the position we're in or have been in. We said back in June to the investors that we'd generate $3 billion to $4 billion over the next 5 years. And I think this is evident of how this works, albeit an exceptional quarter at $340 million, but a good year nevertheless.

Thank you, everybody, for joining the call today. If you'd like to access a replay of the call or obtain a transcript, please go to the Investor section of our website. This concludes our conference call.

Thank you. That does conclude today's conference. Thank you, all, for participating. You may disconnect your lines at this time.