Flex Ltd. (FLEX) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Flextronics International Fourth Quarter Fiscal Year 2014 Earnings Conference Call. [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, operator, and welcome to Flextronics' conference call to discuss the results of our fourth quarter and fiscal year 2014 ended March 31, 2014. 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 Executive Officer, Mike McNamara; and our Chief Financial Officer, Chris Collier. 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 a 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 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 pass the call to our Chief Financial Officer, Chris Collier. Chris?

Thank you, Kevin, and to all joining us today, we appreciate your time and interest in Flextronics. Let us start by turning to Slide 3 for our fourth quarter income statement highlights. We generated $6.7 billion in revenue for our fourth quarter ending March 31, 2014, which exceeded our guidance range of $5.9 billion to $6.3 billion. Every business group exceeded our expectations, with our Industrial & Emerging Industries, or IEI business, leading the way, growing 10% sequentially; and our High Reliability Solutions, or HRS business, growing 2% sequentially. This marked the second highest all-time quarterly revenue level for IEI and our HRS business set another record for quarterly revenue. On a year-over-year basis, our quarterly revenue grew $1.4 billion, or 27%, driven by growth in 3 of our 4 business groups led by strong growth in our High Velocity Solutions, or HVS business. Our fourth quarter adjusted operating income was $182 million, increasing 72% year-over-year and exceeding the high-end of our guidance range of $170 million. After recognizing restructuring charges of $35 million and stock-based compensation expense of $10 million during the quarter, our GAAP operating income totaled $137 million. Adjusted net income for the fourth quarter was $146 million and our adjusted earnings per diluted share for the fourth quarter was $0.24, which exceeded our adjusted EPS guidance of $0.18 to $0.22. Please turn to Slide 4 for our fiscal year 2014 income statement highlights. Our annual revenue jumped 11% to $26.1 billion reflecting growth from our Motorola business expansion, coupled with new business wins across multiple customers and multiple segments, which more than offset almost $1 billion reduction in revenues from fiscal 2013, associated with our exit from RIM. Operational execution was a focus throughout fiscal 2014. And all through the year, we continue to see meaningful gross profit expansion, which grew $118 million, or 9%. We also saw the expansion of our adjusted operating profit, which increased 9% to $665 million. Our fiscal 2014 adjusted earnings per share amounted to $0.89, which was a 6% increase over the prior year $0.84, which had included a onetime gain of $74 million from our sale of our investment and Workday. Excluding this prior-year gain, our fiscal 2014 EPS grew 22%, driven by the contributions from our operating earnings expansion and a reduction in our outstanding shares from our share repurchase program. Turning to Slide 5, you'll see our trend and quarterly income statement highlights. We saw a much more resilient operating performance reflected by our adjusted gross profit declining only 3% sequentially despite a 6% drop in sales. Our adjusted gross margin was 5.8%, increasing 20 basis points sequentially from the December quarter, but down 10 basis points from the prior March quarter. There were a couple contributors to this sequential improvement in our gross margin worth noting. First, we continue to realize operational improvements in Multek, our printed circuit board business, which has been profitable for the past 6 months and, in fact, is achieving target level margins and growing its business in excess of industry averages. Next, we have benefited from a healthier level of mix in our business as a result of the expansion in our IEI and HRS business groups, both of which carry greater-than-corporate-average gross margins. This quarter, our adjusted operating income increased by $76 million, or 72% year-over-year, to $182 million. We saw a slight decline of 3% or roughly $5 million on a sequential basis. On an operating margin basis, we increased 10 basis points sequentially and 70 basis points year-over-year to 2.7%. Our operating profit performance reflects our improved cost control and discipline as we were able to drive our operating expenses lower and leverage our SG&A. We are pleased with the progress we've been making this year in expanding our operating profit and operating margin as we continue to maintain operating expense discipline combined with a strengthening gross profit margin. I would like to reiterate that a key financial objective for Flextronics is the expansion of our operating profit dollars. While we are fundamentally structured to achieve higher operating margin from where we are today, margin remains a function of the mix of our business. Now let's turn to Slide 6 for some color around other income statement highlights. Net interest and other expense amounted to approximately $16 million in the quarter, which was below our guidance range of $20 million, primarily due to foreign currency gains realized this past quarter and improved interest income. For our June quarter, we continue to believe that modeling quarterly net interest and other expense at $20 million is appropriate. The adjusted income tax expense for the fourth quarter was $20 million, reflecting an adjusted income tax rate of 12%. This was slightly above the 8% to 10% tax rate range we had estimated for the quarter due to several factors, but primarily to a net increase in our liabilities from an uncertain tax positions. I would highlight that our adjusted tax rate for the entire fiscal 2014 was 7.3%. We continue to believe that our operating effective income tax rate will remain in the range of 8% to 10%, absent any discrete items. Now from reconciling between our quarterly GAAP and adjusted EPS, we had a negative impact of $0.17 on our GAAP EPS, due to approximately $7 million in intangible amortization, a recognition of $10 million in stock-based compensation, $55 million of other charges and approximately $35 million associated with the workforce reduction efforts we executed this quarter that were targeted at productivity improvements. We anticipate completing all the associated activities with the workforce reduction efforts over the next couple of months and expect quarterly savings of $15 million to be realized by our second quarter of fiscal 2015. At that time, our SG&A spend will be at approximately $200 million. Let me elaborate on the $55 million of other charges we recorded. As part of a manufacturing agreement with a customer, we had to recognize the charge for a contractual obligation under the terms of the contract. Although the customer has waived the obligation, we had not finalized the amendment to our manufacturing agreement as of March 31. And therefore, we were required, under accounting rules, to record the charge. We believe the amendment will be executed in our June quarter and when it is, we will reverse this charge. Our weighted average shares outstanding for the quarter was 612 million shares. During the quarter, we continued to consistently execute on our share repurchase program as we repurchased 12 million shares at an average cost of $8.98. Please turn to Slide 7 to discuss working capital management. We were successful during the quarter in driving inventory reductions as our inventory balance declined by over $370 million, or 9% sequentially, which declined at a faster pace than our quarterly revenue. As discussed last quarter, when analyzing our inventory and working capital, it is important to consider the impact from advanced payments we had secured from a handful of our customers. Recall that we had secured the necessary funding to offset the increased levels of inventory that we were carrying for them and that these advances are recorded as a current liability. It was appropriate for us to secure this compensation for the incremental working capital we were deploying on their behalf; so again this quarter, as reflected on Slide 7, what our inventory balance would be after netting the incremental customer advances. In addition, these adjustments could be carried over to the networking capital and the cash conversion cycle metrics. We continue to manage our working capital within our targeted range of 6% to 8% of our net sales and we believe that this remains to be valid given the mix of our business. Our modest erosion in our inventory turns equates to an increase in our inventory days by 2 days to 55 days and negatively impacts our cash conversion cycle, which crept up 4 days sequentially to 27 days. If you turn now to Slide 8, I will talk about our cash flows, which remain strong. This marks our 13th consecutive quarter of positive operating cash flow generation as we generated $98 million in cash flow from operations. Our operating cash flow for the fiscal year totaled over $1.2 billion, which was our second highest of all time. Our net capital expenditures amounted to $54 million for the March quarter, which as expected, was lower than our depreciation of $111 million for the quarter. For the year, we invested over $500 million in the business as we focused investments to support innovation; expand design capabilities; improve our mechanicals and automation capabilities; and for general capacity for new programs. Our fiscal 2014 investments have positioned us well for the future and we expect that throughout fiscal 2015 that our CapEx will be lower than our depreciation levels. We continue to generate strong free cash flow. For the quarter, we generated $44 million and we ended fiscal 2014 with free cash flow generation of $701 million. We continue to use our strong cash flow generation to return value to our shareholders as we paid $113 million for the repurchase of our ordinary shares during the quarter and for the fiscal year 2014, we spent approximately $475 million repurchasing 9% of our shares. Now turning to Slide 9. Here, we are providing some insight into our current capital structure. During the March quarter, we successfully renewed our $2 billion credit facility. This further strengthened our capital structure as we now have no debt maturities for 4.5 years. We have almost $3.1 billion in liquidity and our total cash is at $1.6 billion. Our total debt is slightly above $2 billion and our debt-to-EBITDA ratio improved from the prior quarter to 1.9x. And that concludes the recap of our financial performance. Fiscal 2014 was clearly a year of progress for Flextronics. We are proud of the achievements by our employees this past year and are excited about our position going forward. The dedication and execution by our employees has provided us with a strong foundation to further build upon as we continued to improve our financial trajectory and consistently deliver on our commitments. With that, I will now turn the call over to Mike, who will provide you with an overview of the business and current trends, as well as share our next quarter financial guidance.

As Chris just mentioned, the March quarter came in above our expectations on multiple fronts. Before discussing the quarter in detail, let me take this opportunity to step back and review a few highlights from our just-completed fiscal year 2014. Please turn to Slide 10. Fiscal 2014 was truly a year of continuous improvements. We consistently grew revenue, adjusted operating profit and adjusted EPS sequentially every quarter from our March a year ago through our December quarter, and we exceeded expectations for all 3 of these metrics this quarter. Year-over-year, we expanded revenue by 27%, adjusted operating profit by 72% and adjusted earnings per share by 85%. During the past fiscal year, we made significant progress improving our component businesses. In Multek, we streamlined the footprint, improved operational execution and upgraded the management team. We expect Multek will hit its targeted profitability going forward. Our power business also achieved its profit and growth targets for all of fiscal year 2014. As a bundle, our component businesses are anticipated to remain profitable and above corporate average margins moving forward. We achieved outstanding cash flow in fiscal 2014. We generated $1.2 billion in cash flow from operations. Free cash flow came in just over $700 million and remain on track with our long-term target to generate $3 billion to $4 billion in free cash flow with a 5-year period spanning fiscal 2013 through 2017. Our operating model consistently generates strong free cash flow and is the engine that drives our ability to invest in our business and return value to our shareholders. We continue to invest in our long-term competitive position by expanding our capabilities and supply chain solutions. For example, we invested actively to improve our mechanical and automation capability, which includes our latest acquisition of RIWISA. We also made investments in product innovation centers, Lab IX, and our design and engineering capabilities. We are happy to be hosting our annual Investor and Analyst Day this year on May 21 at our Product Innovation Center in Silicon Valley, so the investment community can actually see how we engage with new technology companies firsthand. Lastly, we continued to make investments in supply chain software tools and formalized it with the recent launch of Elementum this past quarter. Elementum brings the latest in big data, cloud and mobile technologies to deliver real-time supply chain information to customers. We also continued to return value to our shareholders. During fiscal 2014, we repurchased shares every quarter, totaling 60 million shares bought for approximately $475 million. Our consistency in buying back our shares aggressively over the past 4 fiscal years has enabled us to reduce our share count by 258 million shares for just over $1.7 billion and effectively removing 28% of our shares outstanding. Returning value to shareholders will remain a consistent part of Flextronics' shareholder value proposition. Please turn to Slide 11, where we will review our revenue performance in more detail. Before I discuss our business groups, I'd like to preface it with a comment on the macro environment. We continue to see the macro backdrop as fairly unchanged over the past quarter and relatively stable. We have seen this relatively stable environment for most of the last year. On our Integrated Network Solutions, or INS business group, it declined 7% sequentially, slightly better than our expectation of an approximate 10% decline. Revenue was $2.4 billion, reflecting a $180 million decrease from last quarter and $36 million below the prior-year level. Server and storage and networking segments were both down sequentially due to seasonality and overall market softness, while telecoms saw unexpected single-digit growth due to a few customer upsides. For next quarter, we expect the INS revenue to remain stable. Industrial & Emerging Industries, or IEI, had strong growth with sales up 10% sequentially or $94 million to just over $1 billion. Year-over-year, IEI was also very strong with a 16% growth. Our sequential growth was better than our expectation for low single-digit increase due to the ramp of few programs and growth in all IEI segments including appliances, energy, equipments and industrial. Next quarter, we expect the continued ramp of new programs to enable high single-digit growth with appliances and energy leading the way. Our High Reliability Solutions group, or HRS, which is comprised of our automotive, medical, and defense and aerospace businesses rose 2% sequentially and 9% year-over-year to $843 million. This was also above our expectation for a low single-digit sequential decline. The upside was related to better demand, equally split between automotive and medical. Next quarter, we expect HRS to be stable. Our High Velocity Solutions group, or HVS revenue, declined 14% sequentially to $2.4 billion. This was much better than our expectations for a normal sequential decline of 25% to 30% due to significantly less-than-expected seasonality across multiple HVS customers, particularly with our largest customer, which remained the only 10%-plus customer in the quarter. As a result, we are expecting our Q4 upside to lead to lower production levels in the June quarter as demand normalizes, which results in a decline of 20% to 25% next quarter. Now turning to our guidance on Slide 12. Guidance for June quarter revenue is $6 billion to $6.5 billion. Our adjusted operating income is expected to be in the range of $150 million to $180 million, or $165 million at the midpoint. This equates to an adjusted EPS guidance range of $0.20 to $0.24 per share based on the average shares outstanding of 605 million. Quarterly GAAP earnings per diluted share are expected to be higher than the adjusted earnings per share guidance that I just provided by approximately $0.06 per share, reflecting $0.09 other income for the reversal of the $51 million -- $55 million other charge, less approximately $0.03 for intangible amortization expense and stock-based compensation expense. Our focus as a company in this stable environment will be to drive productivity, cash flow and earnings per share throughout the year. With that, I would like to open the call for Q&A.

[Operator Instructions] And our first question comes from Mr. Shawn Harrison, Longbow Research.

Mike, I was hoping maybe you could just elaborate more around your largest customer, now that you've had 90 days since the announcement that they were being sold to another party, just in terms of, first, what was the profitability of the business in the March quarter? And then, if there's any update in terms of the business agreement that you've been given that you can provide us?

Yes. Let me answer the second question first on the agreement. As you can probably imagine they're in a pretty significant quiet period, both Motorola and Lenovo, regarding the deal. And as to whether or not there is any updated agreement changes or anything else, there is not. So we don't have any new data on that. We do think it's going to take some time to flow through the system and move to a different kind of agreement. We think we're going to have to wait until the transaction completely closes. But -- so for now there's no real update on that, and we just continue to be couraged that we'll try to -- that we can use our capabilities and the size and the previous relationship with Lenovo to work through a solution with Lenovo that makes sense for both our companies. But -- and as regard to profitability, I can't speak to details of profitability of any particular customer, but one of the things I can say is you could probably see the revenue growing, the adjusted earnings per share growing, the operating profit growing, the profit percent growing. So it's continuing to contribute in a very predictable way.

Okay and then as a follow-up, INS, as we look for fiscal '15, we've had 2 consecutive years of negative growth. Do you think there's enough market tailwinds or enough wins in your backlog to drive positive growth in that business for the year, and when would we start seeing that, maybe on a quarterly basis?

Yes, we think the -- that is also a tough question, Shawn. What we see in the marketplace today is if we look forward with all our customers as a bundle, we see some strength right now in telecom with a number of different 4G build outs. And it's probably going to take some time for us to really understand if that's going to drive any positive growth for the year. But all in all, we think it's-- that, that group is roughly stable, maybe it's slightly down as a bundle if I look at the total hardware of those companies, and I think we'll run roughly consistent with the market demands. So it really depends on what the market does and I suspect we'll roll relatively close to it.

And our next question comes from Amit Daryanani, RBC Capital Markets.

Just a real quick one on the HVS segment. You guys mentioned that you guys saw -- if it sounds like a little bit of a pull-in from your largest customer. I was wondering if you could provide any color what that amount was and how that kind of shifts from the June quarter. And then, I know you guys can't provide any customer-specific info, but is the ramp-up of the business in line with what you've stated on a long-term basis in the past?

Yes, I think, let me address 2 things in that comment. One is Motorola. And again, I don't want to give any specific numbers around Motorola. I think it's pretty well known that they did a pretty significant low-cost phone launch at the very end of the December quarter. I think that launch was quite successful for them and we saw a lot of that revenue roll-through into our March quarter. So there was kind of a structural event associated with that revenue upside for our largest customer, which is not just normal seasonality. So I think that's the #1 reason for that upside. The other thing, though, I do want to emphasize, we had couple of other HVS customers that ramped at the same time. We had 2 major customers in HVS, not our cellphone customer, who had very, very strong demand and we were not able to actually meet that demand in the December quarter and a lot of that flowed across into March. So this upside that we saw into the March quarter was not just a Motorola unexpected upside. It was also 2 other customers, in particular, that had very, very strong products. So what we see now is some of those -- if I take those 3 events as a bundle, you're seeing those customers catch up with market demand filling their channels and, as a result, we see just a tougher June quarter. And so probably what's happening with us, which is very unusual, is to really go into a March quarter that was so high relative to the December quarter, and then what we'll end up seeing is that June will end up being our trough quarter. We'll end up growing our revenue and OP and OP percent out of that June trough. So it's moved, it's -- I don't think it's ever happened to Flex before, that we didn't have a trough in the March quarter, but those are the conditions that kind of changed that this year.

Okay, and then one quick extra one. Since the free cash flow got pulled in a little bit with that adjustment last quarter, do you have any color on what the ALS [ph] Cash flow for '15 will be or some sort of dynamic in June?

Amit, this is Chris. I'm going to spend time in several weeks here at our Investor and Analyst Day to give you the forward vision for 2015, but what I can tell you is that we still are fundamentally structured for a solid free cash flow generation. If you consider the levers that we have in our favor here, we have improved earnings. We -- as I said in my prepared remarks, our CapEx investments will be underspending depreciation this coming year and throughout the year. We eliminated some meaningful funding needs this past year that related to restructuring and with the stable environment that we're operating in, you're going to see less working capital funding as a burden. So all in all, those are the fundamental elements that give us that comfort in a strong free cash flow generation that I'll elaborate further on in a couple of weeks.

And our next question comes from Mr. Mark Delaney, Goldman Sachs.

I'm hoping first, Mike, you can elaborate a little bit more on some of the dynamics you were discussing in your High Velocity segment. I understand there was pull-in into the March quarter that is going to impact the revenue in June. Typically, there is seasonal builds beyond June as we start to think into the September quarter, so I don't expect any specific guidance. But is there anything that you're seeing in terms of your customer conversations or backlog that would lead you to believe there's anything different with the typical seasonality for HVS beyond the June quarter this year?

No, not really. We just think the trough looped, but we do expect that once we get through the June quarter, we'll expect to see the HVS business then start to climb in a very predictable and traditional way and as that seasonality occurs into the December quarter. So we don't actually see anything different. Like I said, I think there was a couple of very, very hot products in the December quarter and I know you know 2 of them, which I can actually probably mention because you know that we build them: one being Chromecast, one being Xbox One. These are very, very strong products. We weren't able to meet their December demand and rolled -- we rolled some revenue into the March quarter. And we would expect all of our HVS customer to then have a robust December upside in a very, very traditional way. So we don't think it's gone away. We just think it's somewhat of an unusual circumstance, and -- but understanding those facts, it's easy to understand that going back to the December quarter, we think it'll begin to increase again and exhibit normal seasonal patterns.

That's helpful. And then for a follow-up question, I'm hoping you can help us to better understand the outlook and some of the performance improvements over the last year in the components part of your business. I think there has been some cost reductions that have benefited Multek and the power business as well. Beyond just the cost savings and in terms of the revenue improvement that you've seen in those component businesses, is there any 1 or 2 customers or large programs that have really helped to drive the profitability there or has that been broad-based?

Well, I think the answer is kind of twofold. The Multek, they run a very, very diversified portfolio; diversified across different industry segments and even within each of the different industry segments it's very, very diversified. So I think that one is just a very, very broad-based recovery. And it's on the back of closing 2 factories. We closed an operation in Germany, closed an operation in Brazil. What's left is operations in Minnesota, which do some very, very high technology kind of products and also a large operation in China. So with the restructuring of the footprint with optimizing our -- and simplifying our -- and improving our ability to execute a more simple model, and at the same time changing the management team, which has proved to be -- have outstanding results, we're pretty thrilled where we ended up. The last few quarters have been nicely profitable. We actually have a very, very strong look of business going into next year, a very, very diversified fashion. And so I think that one's recovering nicely. And to the standpoint that we think it's so diversified, it has so many different product categories that we think it'll be pretty stable going into the next year. And actually, we'll overachieve revenue growth rates. Power is a little bit different. Power, we did the restructuring a year ago or more than a year ago, so we actually ramped power quite predictably all year long, achieving roughly close to our target margin. So we really weren't going to turn around with power. We did that a year ago and so we see relatively stable operations all year long in power, so very good finances. And we're very excited to get Multek turned around. It continues to be very, very focused on diversification and we're making really good improvements. And I think I had mentioned in the prepared remarks, we actually expect them as a bundle to go through FY '15, exceeding the corporate average for the entire year and operating profit.

And our next question comes from Mr. Jim Suva from Citi.

When we -- now that Flextronics is meaningfully growing sales, can you talk a little bit about your utilization and ability to host with your current footprint? What type of sales run rate can you get? And kind of following on that same topic on footprint and manufacturing, if the Motorola plants -- are they multi-customer plants? Or worse case, if Lenovo moves internal, could you adjust those to other production needs or close them? Or do you have any like agreements with the local governments for labor contracts and as such?

Yes, good questions, Jim. First of all, one of the things that we did about -- also did about a year and a quarter ago is we under -- began that program to rationalize our footprint and we actually, at that time, took out about 11 factories. We did that over the course of this last year, while simultaneously growing the revenue pretty significantly. So it's actually a case why our operating margin somewhat underperformed where we'd like it to be on a targeted basis. But at the same time, we accomplished a lot and we rationalized our footprint into the footprint that we'd like, which is where we are today. Our utilization is still to the point where we can probably grow our revenue another $5 billion, $10 billion. I mean, every business is a little bit different, so I can't say that across-the-board. But as we rationalize those 11 factories, we put ourselves into a footprint where we could continue to grow. We can grow efficiently and with high utilization and be prepared for what we believe would be coming at us in the next couple of years. And when I say grow $5 billion to $10 billion, I'm talking more about facility space, which is kind of the lowest cost footprint or the lowest cost of capacity. The equipment, we would obviously have to add as we went. It runs closer to actually the target utilization and, of course, people run right at target utilization. So we believe we have the right footprint going forward. We can grow organically very nicely off the footprint we have, and I would say that includes all the way across Europe, Brazil and into Asia. As far as the Motorola factories, in some cases, we'll repurpose them. There's only one factory we actually own, which is the factory in China. We currently don't have multiple customers in that factory today. It is, however, one of the highest execution factories we have in our system. And the other factories we actually have -- in Brazil, we have other customers that we're moving in there at the moment and Dallas-Fort Worth tends to be a purpose-built factory for the Motorola business. So I think as we look to the future, depending on the manufacturing agreement we ended up working out with Lenovo, we will adjust our scale and our size and -- to the extent that they need it adjusted and based on their market strategies. And we'll just -- we don't know anything yet and we'll have to see what that looks like going forward.

And our next question comes from Ms. Sherri Scribner from Deutsche Bank.

Mike and Chris, this is Kriti Shuti [ph] here calling on behalf of Sherri Scribner. I just wanted to go back to Multek. So in your prepared remarks, you mentioned the gross margins improved, driven by improvements in Multek. And I know the last quarter, you spoke about traction from the wearables business. Would you say a lot of the improvement in Multek comes from products such as flex circuit and rigid-flex?

I would say most of the improvement came from a very broad-based diversified set of business from traditional customers, which I think about it as being mobile customers, networking, telecom, storage, even some automotive. I think the -- and a lot of the investments we made in this ELIC capacity, which is the next generation capacity for high-end mobile phones and tablets. So I think most of the uptick in terms of operating improvements came from that. The wearables, I actually expect to see a lot of uptick this go-forward year. Actually, I expect that to add to Multek this go-forward year. So a lot of the wearables are still low volumes. They're going to continue to grow over time. We actually like the fact that we have rigid and flexible in 1 factory, or in 1 location. In China, it tends to be a very unique combination and also to have the SMT right in those operations at the same place. So this is going to prove to be a very significant competitive advantage as we go into the wearables as we go forward. The well-positioned wearables, we think this is the cornerstone technology of being able to penetrate that marketplace and to be able to be a market leader. And -- but it didn't contribute that much to last year's results, but again, I expect it to contribute nicely to the go-forward results.

Okay. A follow-up question. What do you think needs to happen for you to be able to reach the long-term operating margin target of 3%?

So as you look to the guidance that we set for this Q1, at the midpoint, we're sitting right around the 2.7%. As you hit the high end of our guidance, you take that back up to 2.8%. One of the things in the near term to realize is that we are actually suffering a -- from the impacts of the $500 million -- $0.5 billion reduction sequentially, but the mix of our business continues to improve. You're seeing us control various controllable elements of the business. You're seeing us control the SG&A spend, so we're going to be driving SG&A down to $200 million by our September period. Our components businesses are healthy. And so I think if you start taking apart the various levers that we have to grow, when you start seeing the growth in the back end of the year and we get the contribution from the improving revenue pattern, you're going to see that take shape. But again, we're driving operating profit dollars expansion, not focused on margin. Margin will be a function of the mix of our business. But we're really pleased with the trajectory of this past year and where we see ourselves continuing.

And our next question comes from Mr. Osten Bernardez, Cross Research.

With respect to the -- your outperformance during the quarter, you outperformed in all your own forecast for all the other segments in addition to HVS and certain markets. And how much of that was a function of, I guess, previously delayed programs, pent-up demand or just new programs being pulled in earlier than expected? Also tied into that, what are you seeing or hearing from your customers with respect to sentiment going forward? And how did that play into your guidance for the June quarter?

Yes. I think I mentioned some of the upsides that we saw in HVS, some very specific programs that had very high marketplace acceptance that -- where the demand rolled into December. Talked a little bit about a product launch timing for our big cellphone customer. We also had some upside in telecom that we didn't anticipate. So a lot of the -- I think what you're seeing is a lot of the 4G investment that's going on in the world right now is starting to roll into some of the demand patterns, which we didn't anticipate as much from. So we're starting to see that. We also had surprising strength in industrial. We actually had very strong numbers continuing in automotive and medical. So really, it was somewhat a cross current of strong demand across a lot of different segments and we didn't necessarily see that. We -- and, I guess, that ties into your question about the macro and what are we hearing from our customers. Mostly what we're hearing is it's stable. There's no real surprise out there. It continues to be steady growth. It's not exceptional growth, but it's good steady growth and on the back of good steady growth, we can actually drive our margins higher. We can drive our productivity in a more aggressive way and, as a result of this stable environment, we are going to see continually better numbers across the balance of the year.

Got it. And then lastly for me, I just wanted to know if you'd be able to share sort of what kind of traction you've been able to have with Elementum in terms of adding more customers to that solution?

Yes. So we're in various forms of engagement with customers. We have some customers that we've already -- we already have revenue from. You'll get a demonstration of that when you come into -- if you come out to the Analyst Day in a couple of weeks. We have many different conversations associated with Elementum right now. And, in fact, we are at all different stages. Some are in contracts, some are in negotiations, some are in discussions, some are in proposal. It's a very, very normal sales pipeline kind of process that's developing. This was not really ready to be sold to outside companies except for the last few months, so we're still on the very front end of that process. But we are very, very, very encouraged by the interest, some of the excitement and the ability to actually be able to attract really, really top talented people that take it to the next level.

And our next question comes from Mr. Brian Alexander, Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Just a question on the upside in the quarter. So it looks like operating income came in above the high end of guidance by about $12 million. Revenue came in above the high-end by about $400 million. So if you look at incremental margin on the revenue upside, it was about 2.8%. Is that what you would've expected, given where the upside came from? In other words, if it didn't come mostly from HVS, do you think you would've seen more leverage in the quarter? Just curious why there wasn't more leverage on that revenue upside, and then I have a couple of follow-ups.

Brian, this is Chris. Yes, you hit it right on point. The roughly 2.8% to 3% is kind of the increment we would expect with that type of mix. If you had seen it in a heavier dosage from our other nontraditional, you'd see that much higher in the 4.5-plus type of a contribution. So that is the throughput that we saw in the contribution we saw for the Q4 beat. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Got it. Okay, great. And then just maybe a clarification on the OpEx outlook for the June quarter, Chris. Are you assuming OpEx climbs to $215 million before the cost savings kick in and you come back down to $200 million in September? Or did I misinterpret your comments about where OpEx would go in the June quarter?

Yes, I'm sorry if I was unclear earlier. No. OpEx will be going down. We see it going down somewhere between the $205 million that we closed out March and $200 million in June. So it will be somewhere in that mix and our target is to drive it down to $200 million and below by September. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay, so I guess that implies gross margins are a little bit below 6% in the June quarter, which is down a little bit year-over-year. And you've got revenue growth, components margins are up, other restructuring benefits have kicked in and it doesn't seem like mix is really much of a headwind year-over-year. I know HVS is up, but I think IEI is up as well. So I know I'm throwing a lot of factors at you, but I'm just kind of curious why wouldn't the gross margin be expanding on a year-over-year basis with all those tailwinds?

Let me go back and just break down a couple of points here. So clearly, we have a favorable mix coming into this next quarter, but it's being offset by absorption impacts by dropping out almost $0.5 billion of revenues in this 3-month period. We're definitely getting some benefit from the incremental business that we're seeing in the nontraditional areas. We are getting the benefit from a stable Multek, but it really comes back down to just this absorption challenge that we had just in the current period. And at the high-end of our guidance it's actually going back up to a 6 handle, so you should see it climbing higher as we move throughout the year. It's just that, again, we're essentially having a trough in the June quarter when you would have thought it would be our March.

Our next question comes from Amitabh Passi from UBS.

This is Sages [ph] filling in for Amitabh. I was hoping you could provide some more color on some of the new program -- some of the ramping of the new programs that you said drove the upside in your IEI segment?

Yes, I don't know how much detail to give you. Quarter-on-quarter, we grew significantly, as we discussed, and this next quarter, as we guide going forward, we're still at very, very significant sequential growth rates. So we're starting to see those programs climb in. As they climb, we're starting to see the revenue go up. Now simultaneously, the operating margin will be improving on those programs as we -- as they move towards revenue. So very often at the start of a program, you have lower margins as you work to ramp and get programs to yield. Now as you look at what those programs look like going forward, as they start hitting revenue, they start -- a lot of those start-up costs start dissipating. So we are starting to see that. We actually expected most of the start-up costs to occur last year, which they did. And as they fall off, we start to see the margin improve, both from an operating margin -- or operating dollar standpoint, as well as an operating margin percent. It's one of the reasons that you saw operating margin percent climb all last year. As we look forward this year, most of -- a lot of these ramps are nearing their completion and, as a result, should be beneficial for both operating profit dollars and operating margin going forward. So you can see that in the revenue, and hopefully that will be a good contribution for us this year.

The only color I would add to that would be that we are seeing significant interest and traction across all the different markets we serve within IEI. And that's evidenced by the record level quarterly revenue we'll have in June. We're seeing interest in booking across many new logos and they are coming from small to medium-sized companies, as well as some large conglomerates. And it's broad-based and it's distributed globally. So just really excited about the opportunities and the growth prospects for this piece of our business.

And the next question comes from Mr. Christian Schwab, Craig-Hallum Capital Group.

As we look at the HVS business, would you guys anticipate that revenues on a year-over-year basis will be up in '15 versus '14?

It's hard to tell at this point and we're not really giving guidance of what that looks like. We have our Analyst Day coming up here in just a couple of weeks and we'll give you a lot more color as to the programs we're working on, the market segments we're focused on, how do we think we're going to attack the marketplace and what kind of benefits we think we'll get from it. So I would -- in light of the fact that we don't want to give any guidance on this call, I would wait for that. I think you'll get a lot more color in that Investor Day and I think that would be the right time to be -- to give you some information on that.

Okay. And then if I may, just to say it one other way. Earlier in the call, you talked about the HVS business in the September quarter recovering in a predictable and traditional way, I think is what you said. Just so we're all on the same page before we see you in a few weeks on May 21, what would you expect the sequential quarter-over-quarter growth range? How would you categorize that growth range in a predictable and traditional way?

So normally, if you think about March being the down quarter -- I mean, again, I'm not giving any particular guidance. When you think about March usually being our trough quarter, we start to climb out of that the following quarter, kind of like at a 9% level. I think that's our historical average, so think about it being like a mid single-digit kind of trajectory over the next couple of quarters. So if you just put June back into the trough quarter, think about that being March and then take HVS and have it go for a couple of straight quarters at mid-single digit growth, and I think that's the likely trend. That's what we consider to be seasonal. It's -- we think this year will be -- again, have similar characteristics. Just take the March quarter in HVS and move it to June for us.

Got it. And then my last question regarding the share repurchase program. Over the last few years, we kind of repurchased, call it, 50 million to 58 million of shares of reduction on a weighted average shares outstanding basis on a year-over-year level. Should we expect a continuation of that trend? Or at some point, will we potentially reallocate return of cash to shareholders in the form of a dividend instead of stock repurchasing? Or should we assume that we continue in a similar fashion with your shareholder value enhancement program?

Great question. So let me just say it this way. We have an unwavering commitment to increasing shareholder value. Our share repurchase plan has been, is, and continues to be a key feature for us in returning that value to shareholders. As you highlighted, fiscal '14 shows us committing $475 million or over 2/3 of our free cash flow to the share repurchase program. So again, we really appreciate the value creation that we're getting from that program. As we've mentioned before, a dividend is something that should be considered in our shareholder return profile. It's something that it is when and not if, when we adopt it. A dividend is part of our strategy. But for the time being and where the stock is positioned, you're going to see us continue to be committed to the share repurchase program. And the last thing I'd add would be at the -- in 3 weeks here, I'll be able to expand further and give you a better view into the vision forward as to our capital planning.

Great, looking forward to it.

Thanks, Christian, for your question and thank you everybody for joining us on our call. As another reminder, May 21, that's a Wednesday coming up, we will be doing the Investor and Analyst Day. It will be happening in San Jose, California. For more information or to register, you can go directly to our IR website or contact us. This concludes our conference call.

Thank you. This concludes today's conference, and thank you for joining. You may now disconnect.