Flex Ltd. (FLEX) Q1 2014 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Flextronics International First Quarter Fiscal Year 2014 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics Vice President of Investor Relations. Sir, you may begin.

Thank you, Erin, and welcome to Flextronics's conference call to discuss the results of our fiscal 2014 first quarter ended June 28, 2013. We have published slides for today's discussion that can be found on the Investor Relations section of our website. With me today on our call is our Chief Financial Officer, Chris Collier; and our Chief Executive Officer, Mike McNamara. Today's call is being webcast live and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ. Such information is subject to change, and we undertake no obligation to update these forward-looking statements. For discussion of the risks and uncertainties, see our most recent filings with the Securities and Exchange Commission, including our current, annual and quarterly reports. If this call references non-GAAP financial measures, these numbers measures are located on the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures. I will now turn the call over to our Chief Financial Officer, Chris Collier. Chris?

Thank you, Kevin. Good afternoon to everyone, and we appreciate you taking time to join us today. Please turn to Slide 3. For our fiscal 2014 first quarter, we generated $5.8 billion in revenue, which was above our guidance range of $5.3 billion to $5.6 billion. Revenue increased approximately $0.5 billion or 9% sequentially, driven by better-than-expected performance in 3 of our 4 business groups. Compared to a year ago, our quarterly revenue declined $185 million or 3% with the majority of reduction resulting from broad softness in our telecom-related businesses. Our first quarter adjusted operating income was $137 million, up $31 million or 29% sequentially, driven by improved fixed cost absorption and the realization of cost savings stemming from our restructuring efforts. After recognizing restructuring charges of $41 million during the quarter, our GAAP operating income amounted to $87 million. Adjusted net income for the first quarter was $112 million, up $26 million or 30% sequentially, and our adjusted earnings per diluted share was $0.18, which was above our adjusted EPS guidance range of $0.12 to $0.16. Our GAAP EPS for the first quarter was $0.09, and reflects a $0.06 impact from the restructuring charges recorded during the quarter. Please turn to Slide 4. Adjusted gross profit dollars rose $34 million or 11% sequentially. There were several key drivers for this increase. First, we saw an improvement in our utilization rates and our overhead absorption associated with the increase in our revenue. We also realized approximately $15 million of incremental savings this quarter from our restructuring activities. Additionally, we saw continued improvement in our Multek operations, which improved approximately $8 million sequentially as we continue to make progress on its restructuring and streamlining. Lastly, in support of our large ramp in HVS, we continue -- we incurred greater spend as we are positioning resources and capacity to fulfill the higher-than-anticipated volumes both in the June and September quarters, which creates some downward pressure on our margin until we have moved past our initial ramp phase. The combination of all these elements resulted in the expansion of our adjusted gross margin to 6%. Operating profit expansion is a core principle of our financial strategy. This quarter, our adjusted operating income increased $31 million or 29% sequentially to $137 million. This rise was driven by the combination of increased gross profits and SG&A expense leverage. Our adjusted SG&A dollars came in at $211 million, up a modest amount sequentially. However, as a percentage of sales, our adjusted SG&A declined 30 basis points. We continue to expect to operate our business with adjusted SG&A expense in the range of $215 million on a go-forward basis, which will provide for further expense leverage. Our earnings expansion resulted in our adjusted operating margin rising 40 basis points this quarter to 2.4%. We remain confident in our ability to continue to drive operating profit and margin expansion. Our adjusted earnings per share totaled $0.18, reflecting a 38% increase sequentially. Please turn to Slide 5. Okay, let me give you an update on our restructuring activities. This past quarter, we incurred $41 million in restructuring charges, marking the final realization of charges related to our program. Overall, since announcing our program in January, we have incurred $268 million of charges with $162 million or roughly 60% of that being cash related. The underlying activities and the associated cash outflow will continue through the end of fiscal 2014, with a majority of which will be completed and out of our system by the end of next quarter. Our restructuring activities are estimated to generate roughly $160 million of annualized savings, the majority of which are associated with cost of goods sold. During the June quarter, we realized approximately $15 million in incremental quarterly savings, which brought our total cumulative quarterly savings to approximately $25 million. We are currently expecting to realize a range of $5 million to $10 million in incremental savings in our September quarter, which is reflected in our guidance. Exiting the December quarter, we anticipate our quarterly savings to be at $40 million or essentially running at the full annualized savings level. Please turn to Slide 6. Net interest and other expense amounted to $20 million in the quarter, which is better than our anticipated range of $27 million to $30 million and included the expected net loss of approximately $7 million from the sale of our Workday shares in early April. The favorable performance against our expectations was primarily due to realization of stronger FX gains. We expect our quarterly net interest and other expense to be in the range of $20 million to $25 million as we go forward. The adjusted operating expense -- I'm sorry, the adjusted operating tax expense for the first quarter was 4%, which was favorable to our expectation of 8% to 10%, due to the realization of certain discrete onetime tax benefits as we negotiated a favorable settlement on an outstanding tax audit. We continue to expect that our operating effective tax rate will be in the range of 8% to 10%, absent any discrete items. Now looking into the -- reconciling items between our GAAP and adjusted EPS. In the quarter, we have restructuring charges amounting to $41 million. We recognized $9 million of stock-based compensation and intangible amortization totaled $8 million. We also had a tax benefit of $4 million on these items, resulting in a combined impact on EPS of $0.09. Please refer to the Investor section for our website for a detailed reconciliation of our GAAP to non-GAAP financial measures. Our weighted average shares outstanding for the quarter was 640 million shares, down from 664 million last quarter. This is a reduction of 24 million shares or 4%, reflecting our share repurchase activity. During the June quarter, we repurchased 29 million shares. We completed our 10% share repurchase authorization during July with additional purchases of just over 6 million shares. We announced today that we received board approval to repurchase up to another 10% in the upcoming year. At our upcoming July 29 Annual General Meeting, we are requesting shareholder approval for the same 10% authorization. Please turn to Slide 7. We continue to maintain a strong discipline over working capital management. Inventory turns improved to 7.4x from 7.1x in the prior quarter and 7x in the June quarter last year. Overall, net working capital as a percentage of sales rose modestly to 7.5%, up from 7.3% in our March quarter. And while we anticipate greater investment in net working capital to support our projected revenue growth, we remain completely confident in our ability to manage working capital within our targeted range of 6% to 8% of sales. Our cash conversion cycle is 25 days, down 1 day sequentially and 5 days from the prior year. Please turn to Slide 8. We generated $198 million in cash flow from operations this quarter, increasing from $109 million in the prior quarter. We have generated over $1.3 billion of operating cash flow over the trailing 12 months. Our net capital expenditures amounted to $141 million for the quarter, resulting in free cash flow generation of $57 million for the June quarter and $796 million over the trailing 12-month period. As discussed at our May 30 Investor Day, we are expecting to make larger investments in CapEx earlier in this fiscal year. And consistent with that, we anticipate spending around $150 million next quarter in CapEx. I'd like to highlight that our expectation for fiscal '14 CapEx has now increased and will be in the range of $500 million as we continue to strategically invest in our business. I want to be clear that nothing has fundamentally changed in our cash generation model, so while we anticipate there to be some interchange of cash flows between periods as we invest in our growth, our overall fiscal '14 estimate for free cash flow does not change from the roughly $400 million previously stated. We will continue to be disciplined in working capital management and anticipate offsetting the incremental CapEx with higher cash generated through improved working capital performance. During the quarter, we paid $215 million for the repurchase of our ordinary shares. And for the past 5 quarters, we have now spent approximately $537 million, repurchasing 12% of our shares. We also paid $188 million for acquisitions during the quarter, primarily for the assets and inventories purchased in conjunction with our Google/Motorola partnership. Please turn to Slide 9. Our total liquidity remains fairly healthy at roughly $2.8 billion, with our cash totaling approximately $1.3 billion. Our debt to EBITDA level ended the quarter at 2x. Our capital structure remains solid. And combined with our cash flow generation, we believe we are able to support our current and prospective business needs. Lastly, before I turn the call over to Mike, I wanted to highlight that we are pleased with our progress towards our financial plan, as outlined at our Investor and Analyst Day. And we do not foresee any major issues that would impact our ability to meet our near-term plan. Our management team, together with the support of our over 2,000 -- 200,000 employees, is intently focused on our execution. We are fully committed to increasing shareholder value, and we will continue to drive and execute according to the financial guiding principles we have previously discussed. So with that, I will now pass the call over to Mike, our CEO.

Thanks, Chris. We made solid progress this quarter executing on our plan. The macroeconomic environment continues to be stable. We are improving our margins. Revenues are expanding, and our last challenged business, Multek, is making steady progress. We continue to invest in our business to strengthen our position as a supply chain solutions company supported by a powerful platform offering that is geared to address customers' most pressing supply chain challenges. Last quarter, we highlighted some signs of stability from our customers. We are encouraged that the stability has persisted during the June quarter and that we've also begun to see small signs of improvement across our business. More specifically, 3 out of our 4 business groups outperformed the revenue guidance, and our fourth business group, IEI, was in line and grew revenue sequentially. Despite these positive data points, we still remain cautious. Excluding a few large new product introductions in our HVS group, general second half seasonality remains muted from our vantage point. We believe it is too soon to call a trend from the small improvements we've experienced or to gain any meaningful conviction that the macro economy is posed for sustainable growth. Instead we prefer to direct our collective efforts as a company towards designing and executing supply chain solutions that can help Flextronics secure new customers and relationships while simultaneously expanding our presence within our existing customer base through incremental services. We are actively investing to help companies with regionalization, rationalization and optimization of their supply chains. This is leading to success, providing our customers with solutions that improve their cost structures, increase their supply chain velocity and reduce supply chain risk through the breadth and depth of our platform of supply chain solutions, which remains increasingly important as consumption becomes more geographically distributed and customers need solutions with more regional operations to fulfill these new demand patterns. The most notable example of this is the large mass customization and assembling facility that we have created for Google/Motorola. We are thrilled that our worldwide system is very well positioned for the significant eco-shift -- system shift. Please turn to Slide 10 where we review our revenue performance in more detail. Our Integrated Network Solutions, or INS business group, totaled 44% of our sales during the quarter. Revenue rose sequentially by 3% to $2.5 billion in the quarter, which was slightly better than our expectations of flat as we experienced modest sequential growth. Our INS subsegments of telecom and networking grew single digits sequentially, with telecom providing the strongest sequential growth at 5% due to strength in wireless offerings. For next quarter, we expect these modest improvements to continue and INS to grow in the low single digits, led by strength in networking from recent market share gains. Industrial & Emerging Industries, or IEI, amounted to $906 million or 16% of total sales. Revenue rose 2% on a sequential basis, which was in line with our expected revenue increase of low single digits as new programs with new customers began to ramp and semiconductor capital equipment saw some improvement. Next quarter, we expect similar low single-digit growth as new program ramps continue in the appliance subsegment of IEI. Our High Reliability Solutions group, or HIS (sic) [HRS], is comprised of our medical, automotive and defense and aerospace business and grew 4% sequentially and 20% year-over-year. This performance was ahead of our expectations of flat performance as medical and automotive both exceeded forecasts and grew sequentially. HRS's quarterly revenue surpassed $800 million for the first time in its history and put it on track to surpass $3 billion this fiscal year. Overall, while HRS continues to grow double digits year-over-year, we expect it to be flat sequentially and in line the historical 5-year seasonality for this business group. Our High Velocity Solutions, or HVS, quarterly revenue totaled $1.5 billion and comprised 26% of our total sales. HVS increased 31% sequentially, well above our expectations for a low double-digit increase. This outperformance was the result of a higher-than-expected initial quarter contribution from our new Google/Motorola partnership combined with growth in our consumer electronics customer group. For next quarter, HVS is forecast to grow 25% to 30% sequentially, resulting mostly from growth in our Google/Motorola partnership and normal HVS seasonality. Before summarizing guidance, let me briefly touch on our Multek and power businesses. We expect to close our Multek factories in Germany and Brazil by the end of the September quarter, which is important to reducing Multek's breakeven and ultimately getting it back to profitability, which we see as being achieved in the December quarter. We will also be key -- it will also be key to realizing the remaining cost savings we've outlined from our overall restructuring plan. Multek's operating loss declined as its revenue level rose over 10% sequentially. Power recorded its third straight quarter of positive operating profit and saw its margins expand sequentially. Revenue continues to expand. Margins are at target. Bookings are fairly strong and diversified, and our IP portfolio continues to expand. We are very pleased with the performance of this business. Now turning to guidance on Slide 11. Based on our current visibility and the expected sequential growth in 3 or 4 of our business units, we believe that our September quarter will show continued sequential improvement. For our September quarter, revenue is expected to be in the range of $6.1 billion to $6.4 billion. This reflects a sequential growth range of 5% to 11% or 8% at the midpoint. Our adjusted operating income is expected to be in the range from $150 million to $175 million, which is 19% higher at the midpoint than the $137 million earned this past quarter. This equates to an EPS guidance range of $0.19 to $0.22 per share. Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted EPS guidance that I just provided by approximately $0.03 for intangible amortization expense and stock-based compensation expense. With that, I would like to open the call for Q&A.

[Operator Instructions] Our first question comes from Shawn Harrison with Longbow Research.

Just first on the Google/Motorola win. With the revenues ramping here, I guess, earlier than anticipated, is there any change in terms of kind of the peak revenue expectation for the December quarter or the 2% EBIT margin target associated with that business?

Yes, Shawn. I think it's still hard to say. As you know, there's a pretty significant refresh of products that occur every year at this time for a lot of the mobile customers. So the visibility is still pretty limited for us. We continue to believe that we're going to be in the multiple billion dollars for this quarter and -- or this year and remain on track for that. And at the same time, from a margin standpoint, we always anticipated being -- not hitting our margin targets for the first 6 months of the programs -- for the first 6 month of the program, sorry, and then after that, we expect it to be roughly at HVS target margin. So we actually still anticipate all those targets to be on track. But again, they're new programs, and we'll have to see as it unfolds through the course of the year.

Okay. And then second, just on the increased CapEx investment for the year, Chris, maybe you could detail what markets those are targeted toward?

Shawn, so the increase is probably really spread across mainly all the segments. There's a focus primarily within machining and some of our mechanicals. And I'd say the lion's share would be aligned to the HVS segment.

Our next question comes from Amit Daryanani from RBC Capital Markets.

A couple questions for me. One, maybe just talk about the September quarter guide and really around the margin expansion. It looks like despite the uptick in revenues, conversion margins are going to be fairly light. I get it to be around 5%, and that's despite the $10 million of restructuring tailwind that you're going to have. So maybe just talk about what's leading to the lower margin expansion despite the pickup. I realize the mix is an issue, but anything else you would to add to that.

Amit, so the midpoint of our guidance suggests around a $25 million increase or 19% increase in our operating profit. So we'll continue to drive operating profit expansion. In terms of margins, the levers that we should be considered that impact that, obviously, mix, as you just stated. Additionally, we've estimated restructuring benefits in the September quarter to range between $5 million to $10 million in incremental benefits. So this range is heavily dependent on timing of our actions across multiple locations. So the quicker we can close on those elements, the quicker we get those costs out of the system, the greater we'll hit in that savings. And you would see that incremental impact to profits, as well as margins. So between the $5 million to $10 million range, that's roughly 10 basis points of a margin impact. And lastly, I would say our operational execution with our Multek business could also provide some benefits to the margin profile.

That's helpful. And I guess regarding the capital allocation, the buyback program, if I understand correctly, you can start the buyback program after the July 29 approval potentially. And if I recall last year, you guys actually tried to get an approval for 20% buyback from the Singapore government, which I guess you eventually didn't get approved for. But did you guys try to get an increase of the 10% number this time?

Yes. So we continue to be waiting for the Singapore government to issue their finalization around raising the limitation beyond the 10% that's already in law. In our proxy is one of the proposals. It's allowing us to seek shareholder approval to the 10% that's already in law, as well as if the extension goes beyond the 10% threshold. So yes, we actually are awaiting the follow-on for the 20%, and it's also embedded into our proposal.

Yes, and just finally maybe just on that front. Do you know the timing on when you could potentially get that approval from the Singapore government?

I would say we've been waiting for a while on this.

Yes. Our ability to predict when governments make motions to change their internal laws and how they manage their companies has been not so good. So I think we'll keep pushing them. We'll keep having -- we have an objective of getting it to where we can control our capital structure and not be constrained by an artificial 10% limit. And we'll keep pushing. But in the meantime, we've been disappointed how long it's taken.

Got it. So minimum 10% buyback, potentially 20%, if you get all the right approvals, right?

It's 10% or greater. It could be a 20% threshold. In fact [ph], the government will come back with its own determination on what they would extend that limitation beyond the 10% already in law.

Our next question comes from Jim Suva with Citigroup.

When you look at the variance from what you thought the quarter was going to turn out to actually how it turned out, I think the biggest upside really came from the high velocity. And when we think about that, I'm just trying to understand, get my arms around your ability to predict and manage that business. For example, I believe that Motorola, that you actually closed it around April 16 and you gave guidance around April 30. And to see that big upside, can you just help us really understand your ability to deal with that type of volatility? Or is this going to bring inherently more volatility into the Flextronics model? Because you were able to, seems like, get all the sales in, but we just really wonder if since it was a new inception of the first quarter of the integration of the Google/Motorola, it's just some uncertainty there.

So Jim, first thing I'd say is we build to our customers' forecast. So our customers forecast, what their marketplace looks like, and then we do our best job to look at those numbers, manage them the best way we can to make sure that our variability is minimized, and we manage to that. So it's hard for us to take over a multi-billion dollar business on the 16th and be accurate with what that forecast looks like on the 30th. The other thing that we have going into this is we have a lot of variability because Motorola, as you know, is releasing new products into the marketplace. They've made several announcements over the past 6 weeks. And these are new products going into new places. So which carriers they end up selling those into, what deals they make, what price points they sell it at is all a function of what they decide to do. The key thing is that we maintain the flexibility to respond to those changes in a pretty proactive way. So when we think about HVS, we think about managing our business to be able to respond to that variability. So we have the ability to respond to upsides that occur in the September to December quarter and then adjust pretty rapidly in the March quarter, either through over time. Moving equipment around the inventory itself flushes very, very rapidly because it typically runs -- we have less than 30 days. So that flushes very, very quickly. And so I think what we do is we'll go manage that high-velocity or high-variability business as best we can. We'll have to deal with seasonalities. We'll have to deal with new product ramps. Those are going to be a determinant of our customer as to how they manage those and forecast those. But I can tell you, we've been very, very aggressive of putting in a system that can react both up and down so that we don't get caught with any kind of residual overheads. But particularly, in this particular one, you got a lot of new products coming into the marketplace. It's going to be very, very hard to predict for the next few quarters.

Great. And then maybe a follow-up question that might be a little bit better for Chris since it's kind of financial. But Chris, you mentioned that you're going to be doing a little bit more CapEx, and it sounds like that's aimed towards high-velocity solutions. Is that aimed even more so towards the Motorola/Google? Or is it aimed more towards like the other consumer devices that you do like Xbox and things like that? And then also top customers, what percent they are?

Okay. I'll start with the -- there's no top 10 -- there's no customer that's a 10% customer this period, and the top 10 amounted to roughly the same as it depends [ph] around 52% of our total revenues. As it relates to the CapEx, yes, it aimed a lion's share at the HVS, and that's aimed to address the volume increases that we're seeing. And in fact, part of it will be earmarked to the Google/Motorola ramp. Additionally, we've been highlighting a lot of other underlying developments within HVS such as in wearables, as well as other programs. So some of the other CapEx is associated with some of those other businesses, and it's around the mechanicals and other attributes associated with those programs.

Our next question comes from Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Maybe to follow up on a couple of questions earlier, on the buyback, if you do get approval for up to 20%, I'm just curious what your appetite would be to buy back potentially up to that amount. Can you see yourselves actually buying considerably more than 10% if you do get the approval? And then on Multek, I think you said the loss narrowed by $8 million. So if I remember back to last quarter, I think you lost $19 million. So you're losing about $11 million this quarter. How much of the improvement was volume leverage on the revenue growth? How much was restructuring savings? And where do you expect that business to be once you're done restructuring? How should we think about the margin profile on Multek?

Yes. I'd like to start off and address the 20% allocation issue a little bit. Want to make sure, the 20% is not so that we can buy 20% as soon as we get that allocation. The 20% is because we have an artificial threshold of 10% that we cannot buy over. Over the last couple years, we have bought roughly 10% of our stock back, and we were capped. So to me, the reason to go to 20% is to free up the flexibility so that we can manage our capital structure however we want and not have it bound by an artificial -- or a constraint that was created that we don't think has any purpose. So I want you to think about it as being -- that's not an indication that we're going to buy 20%, that is so that we have complete and total flexibility to manage our capital structure, to do whatever we choose to do and do the right thing in the interest of the shareholders. So I just want to make sure that's clear of why we're trying to get this 20% and what we intend to do with it. So as far as Multek, I'll jump in a little bit and then let Chris follow up. We do get a lot of volume and we get 10% increase in revenue in a [indiscernible] operation, which is largely fixed cost. You have a pretty significant flow-through, and the flow-through can be easily as high as 30%. So out of that improvement that you mentioned, a good 50% is probably from volume change and the other 50% probably from restructuring benefits. We expect those restructurings to be complete or all the costs associated with the restructuring actions to be done in the September quarter. And what that -- what we then expect is that December quarter, we expect to be profitable and we expect to be pretty pleased with the business based on some of the bookings that we're seeing today.

Yes. I would only add to that, that -- so we will be out of our Germany and Brazil factories by the end of September. So what that does is it's going eliminate the burden of significant operating losses that we're having to carry. And the completion of those closures will ensure that we have eliminated a significant variability out of our Multek business. So as Mike alluded to, we're on track. We're progressing nicely with that business as we go through the restructuring rationalization, and we anticipate achieving the completion of that and moving into a profitable business in the December quarter. And then just going back, Brian, so I'm just going to give a little more color. Just over the past 3 years, we've repurchased approximately 170 million of shares or roughly 25% of our shares. And in fact, as I mentioned earlier, we've been a buyer of our shares throughout the month of July as we recaptured another 6 million shares to complete the authorization. So we've had a commitment to the share repurchase program, and I would anticipate you seeing us remain committed as a key feature of our capital allocation strategy. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: That's good to hear. And just a final clarification, just the confidence level in getting operating margins close that 3% level as we exit the calendar year, I think you're going to be around 2.6% in September per your guidance. And it looks like the restructuring savings are relatively modest after the September quarter. And I know you've got mix shift towards HVS, which could skew the margins downwards. So just kind of where are you in terms of confidence on getting back to 3%? How quickly can you get there?

Okay. So for us, execution is our theme, and we continue to progress nicely to our plan that we had set out and that I had talked through at Investor Day. There's multiple levers as we move to that target range in the December quarter. A component was our restructuring benefits, which we're on track to achieve the targeted levels. Then there is the Google/Motorola ramp, which we also indicated is progressing as intended. And then there's the overall mix. So the mix won't play a part in what that operating margin level is, but we will remain highly confident in our ability to drive the operating profit up to the $200 million plus level, which is roughly 88% of an increase as we move throughout this year. So you'll see us stepping up in our margin each period up to that target level.

And our next question comes from Amitabh Passi with UBS.

I wanted to just, Mike, maybe clarify a comment you made previously. If I go back a few years when consumer was a fairly reasonable portion of your business, we typically used to see a big September ramp, more muted ramp in December and then a double-digit decline in March. I'm just trying to figure out, are we back to the days where that's the kind of seasonality we should see? It's particularly confusing given the fact that you've got a couple of these programs ramping as well.

Yes, I would say we have 2 pretty significant seasonal ramps going on right now. One is Google, which is new. That's entering into our business. And the other one, I think, that's probably significant is our Xbox program. As you know, we have a significant percent of the volume in Xbox. There's a product refresh, as well as a volume kick for the seasonality. So you've got 2 effects that are occurring -- going on over the next couple quarters. And I think it really depends on -- what we end up seeing is that the significant seasonality is in the HVS as you say. Last year, we ran our business at roughly 28% or so of high-volume business. This year, we expect to run it at about 35% overall. It may peak around 40% in some of the quarters. But on average, we're going to be at 35%. We've been as high as -- you go back 5, 6, 7 years, we've been as high as 70% in HVS. So it's still significantly less than in the past. We continue to emphasize in all our -- and all of our M&A is geared around those businesses and places like HRS, which you saw grow 20% year-on-year. So we expect to have continued growth of IEI through the course of the year. And all these businesses we end up trying to dilute the effect of that seasonality. So while we will have some seasonality associated with things like Xbox and Motorola at the same time, where we're putting our M&A dollars and our resource emphasis is a lot in these other business units, which we hope to have above-average growth rates. So we're going to do our best to try to keep them in balance, like we always do. We kind of said in the Analyst Day that we'd probably run this business this year between 30% and 40%, or the high-velocity business between 30% and 40%. And we'll keep -- and our allocation of M&A dollars won't change. We will continue to spend those dollars in the non-HVS segment to try to balance it out.

Mike, just a follow-up on that, I mean, do you expect anticipate the ramps accelerating through December? Or is sort of September kind of the main peak in terms of sequential growth and it sort of starts to moderate from there? I'm just trying to get a sense of...

Our historical seasonality from December to September has been about 1%. So it's actually not as much as normal because a lot of the shipments, a lot of the volume occur actually before the December quarter, mostly because October, November tend to be very, very high-volume months. But the December quarter tends to be a lower-volume month because you kind of miss the seasonality if you're shipping product from Asia in December. So I think this year might be different. We do have -- and once again, I'll go back to the Motorola piece. It's hard for us to interpret exactly what their volumes are going to be when it's new leadership, new company, new ways of attacking the marketplace in terms of everything from pricing and marketing strategies. We can't -- we don't know what those are -- exactly are going to be. So it might be different than normal, and we'll just have to wait and see. But I think the key point is, is we have not lost sight of the continuous drive to balance our portfolio in a balanced way, and that's what we'll do.

And then just one quick follow-up. You acquired 2 facilities in Motorola, I believe, one in Brazil, one in Taiwan. But you're ramping, I think, predominantly in Texas. I'm curious, what are you doing in the facilities that were acquired, just what absorption and utilization rates on the acquired facilities?

Well, from a people standpoint, I'd call them 100% utilization. From an equipment standpoint, I would call it near 100% because we only took the equipment that we needed to do to build the forecast. So I would call those facilities in balance. In fact, as we go through the course of the year, we've raised our CapEx to $500 million because we actually don't have enough equipment across the company to meet the volumes that are coming at us. So in those -- both those cases, I'd call them very, very strong. And as far as utilization of the facilities, it's kind of not relevant from a financial standpoint, to tell you the truth. The cost of those facilities is so significantly low, it doesn't even -- kind of doesn't even show up.

Next we have Matt Sheerin with Stifel. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Just a follow-up on the last question just in terms of visibility into the December quarter. Earlier this year, I think you talked about a 30% to 40% sort of revenue growth between the March and December quarters, which would imply that you'd get close to a $7 billion revenue run rate. And it sounds like the visibility, particularly in the high-velocity businesses, is somewhat limited now. I know you're ramping a new -- or an incremental customer in the networking space. It sounds like you've got a pipeline and other business. But how should we think about hitting that kind of number?

Yes, that's -- will be maintained for a couple quarters. We continue to target going after that $7 billion number. So we think that's still in our sights. There's more things than just Motorola. We mentioned appliance deal and that was pretty significant in the Analyst Day in May. You guys know about Juniper. That's -- we're in process of ramping. There's a new product that just came out yesterday from Google. I don't know -- I'm sure many of you have saw it, the Chromecast. We'll be the exclusive manufacturer of that product. There's a lot of wearables products that we've talked about over the course of the last couple months. So there's a lot of different things that provide enough comfort for us that as we think about what the possibilities are for Motorola, either the upside or the downside, with these other pieces, we continue to be pretty comfortable that we can hit that $7 billion number. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's helpful. And then on your manufacturing in Texas, can you just walk us through the economics of hitting the 2% or higher EBIT margin target for HV in Texas when lots of companies still have challenges hitting those kind of margins in lower-cost regions?

Well, I mean, what we're doing is we're building a business model in our HPS business that we try to target a 2% kind of minimum. And when we constructed the deal in Dallas, Fort Worth, we had the same kind of expectations. So we anticipate that it'll run like any other facility. So we expect the first 2 quarters to be challenging from an operating profit standpoint as we bring in people and we bring them up to speed. As we've opened that facility, we've already hired 1,100 people. So it's a significant investment in people to go be able to drive the volumes. But we're pretty confident. We know the products really well. We've now been engaged with it for several months, and we've got to know product. We've got to know how it performs, and we're still pretty comfortable that after the 6 months learning curve, that we'll be at our standard margins.

Next, we have Sean Hannan with Needham. Sean K.F. Hannan - Needham & Company, LLC, Research Division: So just was looking to see if you could perhaps talk a little bit about the degree of interest you have today on the acquisition front. Obviously, markets have really been not all that robust. You talked a little bit about still being a little cautious in the back end of the year. There have been some businesses you've picked up, as well as some assets. Your balance sheet can obviously handle a little bit more. And so just want to get a perspective from current point in time. And then if you can also, when answering, share some of your thoughts on the degree of interest that a component solution would have as thematically, I don't think components have been working incredibly well for you the past few years in aggregate. So any additional color on that would be helpful.

Yes, yes. We already have a pretty powerful portfolio where we're at scale with virtually any component that we do. But we will continue to -- we believe in order to maintain a continued balanced portfolio that a continued effort and focus towards that HRS business group continues to be where we'll probably put some acquisition dollars to the extent it comes up. To the extent it doesn't, we're still growing nicely organically. But we will continue to look at acquisitions in that place. And when we look at the acquisitions, they're really not for volume or scale, we have a lot of volume or scale. But they're probably going to be for technologies or customer access or some new way of being able to penetrate the automotive, aerospace and defense and medical market more directly. So we still have an interest in those businesses. Like I said, I think they tend to be small. I think they tend to be capability oriented. And that's where our focus is going to be. As far as the components go, if they're components we already have, it might be interesting. Do we have an interest in building a broad-based component portfolio like we did back some time ago when we were looking at displays and camera modules and many other things? We actually don't have an interest in doing very much of that. So our focus is more to balance the portfolio, to reduce the risk, to build on longer product lifecycles and to invest in acquisitions that are going to give us capabilities that can drive to higher margin kind of businesses. And that's kind of the focus. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Okay, that's helpful, Mike. And then next, you've hit a few times tonight on Multek. Just wanted to see if you could elaborate a little bit more on specifically what that business is seeing presently in terms of general demand bookings. And you've talked a little bit on the cost front of how we're improving that through the course of the year. Wanted to understand what you're thinking about on the top line, and how that comes into that mix of business.

Well, I mentioned last quarter alone, we had a 10% increase in revenue. I don't know if we'll be up 10% for the year, but it's possible. Our bookings tend to be pretty broad based right now. We're getting a lot of very nice bookings with a lot of products that are pretty relevant on the marketplace today and a lot of new product announcements that have come out that, we're using some of the Multek business. The other -- and that half of the business is kind of the higher velocity kind of business. The other half of Multek is really built around telecom, datacom and the high-end board. And that has been and continued to be very, very stable over the course of the year. So that part of the portfolio is in very strong shape, highly diversified and stable. And the bookings in the other half of the portfolio, which is really more around the mobile and the more advanced boards, has been very strong. Now hopefully, that will hold. And what's key for us, as I mentioned earlier, is we actually -- or maybe I didn't mention it earlier, but we are actually working hard through the restructuring actions that we took is to create a company that has substantially less variability. So by taking out our Germany factory, by taking out our Brazil factory, taking out some of the LCD initiatives we had, it actually took out quite a bit of variability in performance where we now think it's going to be able to perform at a much more predictable rate. So not only is it simpler, easier to run, it has less variability. And right now, our revenues, our bookings have been very, very good, which we're really pleased with. But we're not -- it's not -- we're hoping it will be successful by the December quarter. But we'll have to wait and see. It's disappointed us often in the past, and we're not going to declare victory until we really see a couple of quarters that look really good.

Next, we have Sherri Scribner with Deutsche Bank.

I was hoping to get a little more detail on the INS business. I know you're talking about the telecom and the networking piece and telecom being up about 5%. I know server and storage is also in that segment. Want to get some thoughts on how that business is trending, and maybe you could update us on approximately how big that business is within INS.

Yes. I'm going to say that business is roughly about $2.5 billion out of the, say, nice round numbers, $10 billion. So it's about 1/4 of it. But the reality is, is I find the INS business to be reasonably uninspiring. It went up a little bit. We were up 3% on the overall segment. So I just don't think there's a lot going on. It seems to be relatively flat. People talk a lot about telecom going up. But you really have to be able to get the right telecom. A lot of the people talk about telecom and some of the excitement they're having is around China doing a 4G buildout. The timing of that is still to be determined, and the amount that the Chinese vendors end up getting out of that telecom award will be a huge determinant of what the rest of the business looks like. So we tend to have pretty good strength in networking. We see networking might be up about 5% this year. We have some added growth as a result of Juniper coming in. But on average, I view it as pretty stable -- and the same thing with server and storage. You started with server and storage. It's been very, very flat. It was slightly up this past quarter. But I think, kind of overall, it's a reasonably flat to up a couple points kind of market. So nothing very inspiring and nothing that we can see that's going to move our needle that much.

Okay, that's helpful. And then, Chris, just a quick question for you in the SG&A line. I think you said in your prepared remarks about $215 million in SG&A on adjusted basis going forward. How long can you keep SG&A at those levels if we're possibly doing $7 billion in revenue in December? Don't you have to add some SG&A?

No. Sherri, so no. As we discussed at the Investor Day, we've actually been pre-positioning resources and technology in to support our anticipated revenue growth across the programs. We anticipate staying at that $215 million level throughout this year. And I think that, that is a good level to be considering us to be able to manage the business at.

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

Mike, appreciate the color that it's hard to predict the out-quarters for the Google/Motorola business. But can you give us maybe a little bit more specific update on what's the revenue assumption embedded in the guidance for next quarter? And will you be running about breakeven in that business next quarter as you're ramping?

Yes. So when you say next quarter, you mean the September quarter, correct?

Correct.

Yes. So we expect to be really slightly over breakeven but not much higher than breakeven, so as we ramp that up. But in terms of what are the specific revenue guidance, one of the things that we don't want to do and can't do going forward is tell you what revenues are for specific customers. It's not right for us to be talking about revenue guidance and then telling -- saying it went up or went down. And we need to be reasonably discreet as it relates to our customers trying to launch their product lines and how they want to message and manage their business. So I don't want to give any more details than I already have. We've been in it now for 3 months, and we're quite confident that after the 6-month learning curve that we'll be hitting HVS targets. We expect it to be a couple billion dollars. Like I said, which carriers they book and what kind of specials they run and how much marketing dollars they throw in, there's still a huge variability associated with that. So we're going to make sure that we maintain a workforce and an investment profile that is very, very flexible so that we can respond both up and down so that Flextronics is -- ends up at HVS margins -- at target for -- over the course of the year. But we're pleased we're on track. We're on schedule to get the 6-month learning curve behind us, coming soon. And I don't want to give any more color in terms of the very specific revenues by quarter on that customer going forward.

And Chris, you guys did better on your op margins, 2.4% versus Street models, 2.2%. And so the question sort of dovetails with what some others have asked here. It seems like even with the higher revenues, the implied margin is 2.6% versus Street was expecting 2.7%. So I mean, I guess sequentially people were hoping for a 50-basis-point improvement. We're going to end up with 20 basis points of a higher level. Is it that the profitability, the low-hanging fruit in terms of – I shouldn't call it low hanging. I mean, you guys have done a lot of hard work to get the margins where it is. But is it that the ramp of profitability just gets tougher here from here to 3%? Or is it just a matter of higher HVS mix that's causing the ramp to appear a little slower?

I think your just last point that you just highlighted is a contributing factor. The mix definitely has an impact there as you look to margin. But again, I keep going back, we continue to drive operating profit expansion. And also in the guidance, we actually highlighted there's a range in the restructuring benefits of $5 million to $10 million. At the higher end of the benefit range, you're going to see about a 10-basis-point change there as well. Clearly, the early-stage volumes as we're ramping these larger programs is going to contribute to some challenge. And as we also alluded to, we'll get to our – once we're fully through this ramp phase, we are going to be at our targeted margin profile for those HVS programs. So mix is an impact, we can see some improvement on the restructuring benefits that can contribute like a 10-basis-point change, and we'll be roughly right around where that modeling takes you to, around 2.7%.

Next, we have Christian Schwab with Craig-Hallum Capital Group.

You talked at your Analyst Day about your biggest win ever with Hewlett-Packard. Has that begun to ramp yet to any measurable volume?

Biggest win ever with Hewlett-Packard.

That's what I have in my notes. And I know everyone talks about Juniper. I'm just wondering if there's something -- I think I have Brazil mentioned.

Okay. You're talking the biggest win from Hewlett-Packard that we've had, yes, not necessarily the biggest one Flextronics had.

Absolutely.

Yes. No, we do have a significant win with Hewlett-Packard. A lot of it is Brazilian-based, so we'll be doing multiple product categories for them in Brazil across a number of different service categories, both assembly and repair and others. So that is in place. We have not yet ramped that, and we'll do that over time.

Okay, great. At your Analyst Day, you guys kind of talked about $6.9 billion kind of being your target range and walked through new products in Google and seasonality to get there. You mentioned a couple people talking you into $7 billion earlier. Do you feel comfortable with that $7 billion given the strong start of your new relationship with Google? Or how should we be thinking about that?

Yes, we still think we're roughly on track. We talked a little bit about that earlier. There's more than just Google. There's Juniper, and I mentioned the Chromecast and obviously the Motorola. We've got some seasonality, some new product launches with Microsoft and their Xbox. And we talked about some appliances and wearables. It's pretty -- you talked about Hewlett-Packard just now. There's a lot of different elements to that and a lot of different pieces. And they all seem to be on track for us, and we continue to be comfortable chasing that target.

Excellent. As we think about the capital allocation plan and the buyback program, if we look at the last 2 years, just on a yearly basis on a weighted average share count, you purchased about 58 million to 59 million shares. On average, it's gone down on a weighted average basis. Should that be what we should assume as a minimum as we model for '14 and '15? And if we see a 20% type of approval from the Singapore government, whenever that may or may not come, that it might be even more aggressive than that?

I would say that we continue to be committed to the share repurchase program. And as you alluded to, we've been topping up to near the 10% allowance level over the last several years. We've been a buyer of the shares all the way through July, and I think it's going to remain a key feature of our capital allocation strategy as we move forward.

Great. One last question, if I may. On the capital allocation front, has there been any in-depth discussion about possibly expanding the capital allocation plan to a dividend and a share repurchase program? Or are we pretty happy with just a share repurchase program for the time being?

So really there's no update since I last spoke on this. Dividends are clearly a key component that we must be considering. We have a strong financial condition. We generate sustainable cash flows. So when we think about returning value to shareholders, it is an element that must be evaluated. Obviously, we're in a growth phase right now, and we believe our share repurchase has been valuable to our return profile. So we'll continue to evaluate the inclusion of a dividend and at what level and at what time. But for now, there's really nothing more concrete to discuss on that.

Okay. Operator, we've run a little bit past our time here, so we're going to end the call now. I want to thank everybody for joining us on the call today, and this will conclude our conference call.

Thank you for your participation on today's call. You may disconnect your line at this time.