Flex Ltd. (FLEX) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Flextronics International First Quarter Fiscal Year 2015 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 fiscal 2015 first quarter ended June 27, 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 in the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures. Before I turn the call over to our Chief Financial Officer, Chris Collier, I want to point out that as of May 21, 2014, Investor Analyst Day, we renamed and rebranded our High Velocity Solutions, or HVS business, as the Consumer Technology Group, or CTG. This updated naming convention is reflected in the slides and will be reflected in Chris and Mike's remarks today. This change has no associated historical numerical changes and no business group or statements were required. With that, I turn the call over 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 begin by turning to Slide 3 for our first quarter income statement highlights. We are pleased with the start of fiscal 2015 as our results reflected continued progress that we've carried over from the prior year. Revenue was $6.6 billion in the first quarter of fiscal 2015, which exceeded our guidance range of $6 billion to $6.5 billion. Every business group exceeded our expectations, with our Industrial & Emerging Industries, or IEI business, leading the way, growing 10% sequentially. On a year-over-year basis, our quarterly revenue grew over $850 million, or 15%, which reflected growth in 3 of our 4 business groups. This was led by our Consumer Technologies Group, or CTG, which grew more than $600 million year-over-year. Our first quarter adjusted operating income was $183 million, increasing 34% year-over-year, and exceeding the high-end of our guidance range of $150 million to $180 million. Adjusted net income was $148 million, increasing 32% year-over-year. Our GAAP operating income totaled $172 million and net income was $174 million. This included the expected $55 million gain due to the reversal of the contractual obligation charge we recorded last quarter, partially offset by a $11 million loss from the sale of a nonstrategic manufacturing operation in Western Europe. Adjusted earnings per diluted share for the first quarter was $0.25, which exceeded the high-end of our adjusted EPS guidance range of $0.20 to $0.24. Turning to Slide 4, you'll see our trend and quarterly income statement highlights. Our first quarter adjusted gross profit totaled $382 million. It was up 10% year-over-year, while our gross margin was roughly in line with our expectations at 5.8%, which was flat with our prior quarter. We continue to hold ground on our operating performance as reflected by our adjusted gross profit, decreasing 1% sequentially, in line with our drop in sales. This quarter, our adjusted operating income increased $46 million, or 34% year-over-year to $183 million and it reflected a modest increase of $1 million on a sequential basis, despite the sequential decline in sales. On an adjusted operating margin basis, we increased 10 basis points sequentially and 40 basis points year-over-year to 2.8%. We reduced our quarterly SG&A expense by over $11 million since 1 year ago and hit our targeted level of $200 million or below that we had set in January 2014. For the September quarter, we expect our SG&A expense will remain stable at the $200 million level. We're pleased with our continued progress in expanding our operating profit and operating margin and are focused on sustaining our operating expense discipline. I would like to reiterate that a key financial objective for Flextronics remains the expansion of our operating profit dollars, as well as our operating margin. While we're fundamentally structured to achieve higher operating margin from where we are today, margin will always remain a function of our business mix. Now let's turn to Slide 5 for some color around other income statement highlights. Net interest and other expense amounted to approximately $19 million in the quarter, which was slightly below our guidance range of $20 million. For our September 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 first quarter was $16 million, reflecting an adjusted income tax rate of 9.9%. This was at the high point of the 8% to 10% tax rate range we had estimated for the quarter. As we move forward throughout fiscal 2015, we continue to believe that our operating effective tax rate will remain in the 8% to 10% range, absent any discrete items. Now from reconciling between our quarterly GAAP and adjusted EPS, we had a positive impact of $0.04 on our GAAP EPS. This was due to the expected reversal of last quarter's contractual obligation charge of $55 million, partially offset by a loss on the sale of a nonstrategic Western European manufacturing operation, stock-based compensation expense of $12 million and $7 million in intangible amortization expense. Our sales in nonstrategic operation was not contemplated in our June quarter guidance. And given its nature, we excluded it from our adjusted earnings. We were very pleased with the execution of this transaction as we further optimize our operating footprint. This transaction had a net cash outflow of $9 million during the quarter. If you turn now to Slide 6, I will talk about our cash flows. As we discussed at our Investor and Analyst Day at the end of May, strong cash flow generation is core to Flextronics. There are several key elements to discuss regarding our cash flow this past quarter. First, we used $81 million in cash flow from operations, which was largely the result of increased investment in net working capital, coupled with a net utilization of cash from other operating items. Our networking capital increased by $129 million to $2.1 billion, representing 8% of our net sales, which is at the high-end of our targeted range of 6% to 8% of net sales. We continue to believe that this range remains valid given the mix of our business. Inside of our net working capital, our inventory balance declined by almost $100 million, or 2% sequentially. This contributed to the favorable improvement of our inventory turns to 7x. We remain confident in our ability to drive further reductions in our inventory positions as we progress throughout this year as there are several inventory management levers we are managing. The other operating cash flow usage of $246 million was predominantly driven by the elimination of the advanced payments we had secured from several customers during fiscal 2014. As the underlying incremental working capital we had been deploying for these customers came back in line with the associated contractual terms. Another key cash flow highlight, this quarter, was our continued discipline on capital investment. As expected, our CapEx was lower than our depreciation during the quarter as our capital expenditures amounted to $73 million, which was $40 million lower than our depreciation expense. We continued to prudently manage our investment spend, so as to remain well-positioned for the future. And we expect that throughout fiscal 2015, our CapEx will continue to be lower than our depreciation levels. Our capital investment target for fiscal 2015 remains in the range of $300 million to $350 million. Now putting this all together, we saw free cash flow for the quarter in line with our expectations at a use of $154 million. Combining our focused working capital management and disciplined capital investment, we believe that our free cash flow generation in our September quarter will be in the range of $200 million. We maintain our conviction in our ability to achieve our targeted free cash flow generation of $3 billion to $4 billion for the 5-year period ending fiscal 2017 as we remain fundamentally structured and disciplined to achieve this target. The last key element to highlight would be our use of cash to repurchase our shares. This quarter, we continued to return value to our shareholders as we paid $106 million for the repurchase of almost 11 million shares, or roughly 2% of our shares outstanding at an average cost of $9.69. Our actions, this quarter, reflect our commitment to returning over 50% of our annual free cash flow to our shareholders. Now turning to Slide 7. Let us review our solid capital structure. We continue to have no debt maturities for the next 4 years. We have over $2.8 billion in liquidity, and our total cash is over $1.3 billion. Our total debt is slightly above $2 billion and our debt-to-EBITDA ratio continued to maintain the same healthy level as it had in the prior quarter at 1.9x. Our capital structure is sound and provides us with ample flexibility to support our business. And that concludes the recap of our financial performance for the first quarter. Before I turn the call over to Mike, I would like to add that we remain confident in our competitive position and the direction our company is headed. The dedication and execution of our employees has provided us with a strong foundation that we're building on as we continue to improve our financial trajectory and consistently deliver on our commitments. Thank you. Mike?

Good afternoon. Thanks, Chris. Please turn to Slide 8. We have continued to make steady, predictable improvement across most metrics. We exceeded our expectations in all 4 of our business groups and set record quarterly sales for both our IEI and HRS businesses, driven by multiple new program ramps, as well as strength amongst our semi-cap, auto, and energy customers. The biggest upside relative to our expectations actually came in our CTG business, declining only 11%, less than half the decline we were expecting. Our CTG upside was driven mostly from increased revenue with our largest customer. Operationally, we continue to grind out productivity and consistent profit improvements. We achieved our adjusted SG&A target of $200 million in quarterly expense. Better than expected sales, combined with a leaner cost structure helped us drive operating profit dollars to 170 -- $183 million. Exceeding the high end of our guidance of $180 million and also 11% above the midpoint of our guided range of $150 million to $180 million. We also managed to grow operating profit dollars slightly from our March quarter. This enabled us to expand our operating margin sequentially for the fifth consecutive quarter. We are focused on maintaining steady improvement going forward. Our balance sheet is in great shape, and we continue to expect strong free cash flow for fiscal 2015. Steadily returning value to shareholders remains a consistent part of Flex's shareholder value proposition and our commitment to return over 50% of our annual free cash flow is intact. During the quarter, we repurchased 10.5 million shares, or 2% of our outstanding shares for $106 million. Our consistency in buying back shares over the past 4-plus fiscal years has enabled us to reduce our share count by 269 million shares for over $1.8 billion, retiring roughly 28% of our shares outstanding. Our continuous focus on driving innovation and differentiation remains at the core of what we do. We lead the industry in enabling innovative supply chain solutions and our traction in this area accelerated over the last quarter as we added many new customers and saw heavy activity around our product innovation centers. We are extremely confident that our vision and our capabilities are unmatched, enabling the introduction of many new products and process technologies across multiple industries. Please turn to Slide 9. Let me make a few comments about Motorola Mobility and its pending acquisition by Lenovo. At our May Investor and Analyst Day, we outlined the original value proposition underpinning our relationship, the strategic value it has created, and our view of the future direction of the relationship. It is also important to note that while we highlighted our strong existing relationship with Lenovo, this was further affirmed this week when they awarded Flextronics the prestigious Supplier of the Year Award for our European operations. There are no updates to what we have previously aligned at our May Investor and Analyst Day with the exception of the news that Motorola will be exiting the Dallas, Fort Worth manufacturing facility by the end of the December quarter for which we expect no negative financial impact or restructuring charges. Also, our overall expectation of the possible financial impact remains unchanged. Please turn to Slide 10. Before I discuss our business group, I'd like to preface it with a comment on the macro-environment. The macro-environment continues to be stable, but more recently, it is showing more of a positive bias. Our Integrated Network Solutions Group, or INS, rose 4% sequentially, better than our expectation for stability. Revenue was $2.5 billion, reflecting an $85 million increase from last quarter and relatively flat with last year. Our telecom and networking segments were both up single-digit sequentially due to better-than-expected demand across numerous customers, as well as higher-than-expected contributions from certain new program ramps. For next quarter, we expect the INS revenue to decline low-single digits sequentially. Our Consumer Technology Group, or CTG's revenue declined 11% sequentially to $2.2 billion. This was much better than our expectations for a sequential decline of 20% to 25%, due mostly to better-than-expected sales to our largest customer. Due to the better-than-expected performance from this customer in the past 2 quarters and the pending acquisition of its business and its related timing, we're being conservative in our go forward forecast. As a result, we are guiding to a high single-digit sequential decline in CTG for the September quarter, which includes some positive sequential growth in our core CTG business due to seasonality, offset by our conservative expectations for our largest customer. Additionally, we're expecting flat sequential growth for CTG in our December quarter, which includes a modest sequential growth for our core CTG business, offset by our continued conservative expectation for our largest customer. Our Industrial & Emerging Industries Group, or IEI, recorded another strong quarter of sequential growth with sales up 10% sequentially, or $107 million to $1.1 billion or 17% of sale. Year-over-year, IEI sales growth increased 25%. Our sequential growth was better than our expectation for a high single-digit increase due to the continued ramp of a few programs and better-than-expected growth in semi-cap and energy. Next quarter, we expect IEI will be stable as strength with appliance and energy customers are being offset with some weakness in semi-cap and office equipment customers. Our High Reliability Solutions group, or HRS, which is comprised of our automotive, medical, and defense and aerospace business rose $3 million, or under 1% sequentially, and 5% year-over-year to $846 million, or 13% of sales. Next quarter, we expect the HRS to be stable again as seasonal softness in auto is offset by strength in medical. As I mentioned earlier, both IEI and HRS ended this quarter with record levels of sales and a combined $2 billion of quarterly sales, growing 16% year-over-year. We continue to expect strong performance from these 2 businesses with combined growth anticipating to be approximately 10% for fiscal 2015. Now turning to our guidance at Slide 11. Guidance for our September quarter revenue is $6.2 billion to $6.6 billion. Our adjusted operating income is expected to be in the range of $165 million to $190 million, or $177.5 million at the midpoint. This equates to an adjusted EPS guidance range of $0.22 to $0.26 per share, based on weighted average shares outstanding of 595 million. Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted earnings per share guidance that I just provided by approximately $0.03 per share or intangible amortization expense and stock-based compensation expense. Our focus, as a company in this stable environment, remains to strive for continuous improvement whether it is grinding out productivity improvements, making sure we're disciplined and focused on hitting our free cash flow targets or driving bottom line earnings per share growth. With that, I would like to open the call up -- I would like to open up the call for Q&A.

[Operator Instructions] Our first question is from the line of Sean Hannan from Needham & Company. Next question is from the line of Amit Daryanani from RBC Capital Markets.

A couple of questions. One, I guess, Mike, with regard to the upside you saw from your large customer within CTG, and you're being conservative about that on a go-forward basis given the sale that's happening there. I guess, the strength that you saw to the extent you can see, was that an inventory build by the customer ahead of that transaction? Or do you think they're just having good demand and if the demand sustains, do you think there's potential for upside in the September quarter as well?

Yes. All the indications that we have is that it's real sell-through. The products are well accepted in the market place as we understand it. We don't anticipate it being an inventory build. And if they continue to see that sort of upside going into the September quarter, obviously, we will have upside [indiscernible].

Got it. And then, I guess, Chris, when I look at the working capital metrics, it really looks like the AR was the one that drove a lot of the networking capital impact to you guys. Was there any linearity in the quarter that played that? Like it will almost imply the quarter was fairly back-end loaded, is that a fair assumption?

I think that there's an elements of that. Due to some timing in some of the revenue charge for the quarter, you'll see some of that collections presenting itself into September. What we highlighted is that it came in roughly where we expected and that we see ourselves returning to that strong free cash flow generation hitting around $200 million in the September quarter. And we also think that there's opportunities and levers within the inventory as we progress throughout this year to also provide further operating cash flow.

The next question is from Sir Jim Suva from Citigroup.

I quick follow-up from Amit's question about the largest customer. Are you guys actually trimming your outlook a lot more than they are? Or are you guys kind of in harmony with that consumer seasonal decline because normally, you just wouldn't see that type of decline for September.

Yes, we're just -- so Jim, I think we're just looking at the overall demand profile. We're looking at what could happen. And they're going through a transition with a giant purchase. We don't know what implications it's going to have in terms of their sell-through into the marketplace. We don't know what strategies the new owner is going to have as it relates to pricing. And there's just some uncertainties at it relates to demand, I think. And so I think, as a result, we've gone in a little bit more conservative. And we just think it's appropriate. And we don't have any particular major ramps going on. And we just think -- and the success of the marketplace is actually pretty strong. But alternatively, there is a lot of uncertainties, and we would just like to stay with a conservative forecast at this time as a result.

Okay, that makes sense. Maybe a big strategic question about capital allocation. Can you remind us about your stock buyback and the laws in Singapore? How do you think you guys did a proposal, what the status is? And then also cash for deployment, whether it would be through M&A or stock buyback? I'm sure growing the business organically is a top priority. Any maybe you can just talk about the allocation and help remind us who aren't overly familiar with the Singapore buyback laws.

.Jim, it's Chris. I'll start with the regulatory or the other restrictions that we would have. Last year, we were granted a waiver, a new authorization to be able to repurchase up to 20%, which historically we've been capped at the 10%. And that 10% threshold was a threshold that we've been bumping into for some time. If you look back over the last 4 years, we've actually repurchased roughly 33% of our float, taking 269 million shares and over $1.8 billion spent on that. In fact, this past quarter, as you can see, we continue to do so because the share repurchase program, as we've said before, has been, is, and will continue to be a key feature set for us as we return value to our shareholders, and it's also following on to the commitment we made as we went on the investor base back in May that we are committed to returning over 50% of our free cash flow generation to the shareholders. So we've been able to -- we have the increased flexibility as that threshold moves higher. But we view it more as around our ability and our appetite. So clearly, we have the ability with our $1.3-plus billion of cash plus a strong free cash flow generation, so we have the ability to sustain that, as well as we've had the appetite, which you've seen us over the past 4 years continue. So as it relates to the capital allocation, not much has changed. We're making sure that we're investing in this business organically for growth. We made a heavy level of investment this past year with over 500 -- over $0.5 billion invested into CapEx into the business. So you're seeing us able to taper that off, and still invest in innovation this current year, but not at the same level. And we're still looking at our niche strategic M&A activities. So you'll still see us playing in that space there. And the residual, again, goes back to us with a clear focus of delivering to our shareholders over 50% of our free cash flow.

And then, Mike, strategically, are there some tuck-in acquisitions or skill sets or complementary or adjacent things you're kind of looking at, because I mean, you guys have a good problem of way excess cash.

Yes, we have a good problem of cash and we actually have another good problem, which is our portfolio of capabilities largely across the globe are already built. So the other thing that we have is, is we have very, very well built portfolio. So we're not going into the marketplace in a position of weakness. There aren't specific things that we need to have in order to compete. We kind of already have all those things. And we have those things kind of across the globe. So as we look at those things, we don't need to do as much. It's a great opportunity as a result of cash and so it's one of the reasons that we did go out and say, we wanted to deliver 50% of the cash back to shareholders. That being said, our double down segment, as you know, is to keep driving automotive and medical. And if we do have those M&A opportunities available, it's likely that you'll see them in those 2 areas, where we can further cement our leading position because we believe, both in medical and automotive. Today, we're way in the lead in terms of revenue capability across a broad spectrum of different technologies. So that's the place that we would go and double down on and continue to invest in.

The next question is from the line of Mr. Brian Alexander from Raymond James.

This is Jeff Koche in for Brian. Back to the first question it does seem like the last few quarters you guys have been upsiding your -- the top end of your guidance by something like 2% to 6%. Is this like -- is this really a change in the timing of customer orders? And, I mean, because it definitely seems like the back-end loaded, this isn't the first quarter. So can you give us like some color on that?

Yes, there are some -- I think, there are some back-end loading. If you're wondering did it -- did some of the revenue come out of Q2 and go into Q1 as a result of pull-ins or back-end orders or something. Maybe a little bit. We did see some good upside because we view the macroeconomy has been -- being okay. So we did get some -- all the upside that we saw going up to $6.6 billion last quarter was not just Motorola. It was a broad section of customers. But we don't see really a lot of pull-ins or we don't really see a lot with the exception of maybe semi-cap. Semi-cap was very, very heavy last quarter that drove some upside in revenue and a lot more of that semi-cap, I think, will fall away this quarter. The other thing, we saw a lot of this telecom pushed pretty hard last quarter, and we saw some upside there and customers are struggling to get parts that they needed to in order to get the upsides and a lot of that revenue pushed came through in the June quarter. So I'd say not a lot of it, but if I was to pick 2 places, I'd think about telecom and I'd think about semi-cap. And then we just add general strength from our largest customer.

Jeff, the only thing I'd add to that is in fact, the last 3 quarters, the last couple of weeks of each of these quarters has been much stronger than historically for us. And so we've been on the last 2 weeks, each of these last 3 periods, seen a much heavier lift in our demand profile there.

Got it. Great. And then one follow-up, so the midpoint of guide is roughly equal to your September quarter last year and yet, the midpoint of your op income is closer to $180 million, up like $25 million year-over-year. Can you just kind of walk us through that accretion, like how much of it is restructuring? And maybe how much, if you could allocate it to some of the other businesses, that will be very helpful.

Great. So as you know, the midpoint of our September guide is relatively flat at the top end, and we grow 12% in the middle and earnings is almost 10%. If you look back over the past year, we continue to make progress and are heading in the right direction. We've been making a very focused and disciplined effort around our cost structure. It took place last year with the restructuring efforts that we undertook, a large share of that was within our Multek business. So -- and then later in the year, we actually, in our December quarter, we announced that we are taking a focused rationalization on our SG&A. So the combination of those 2 has provided some of that benefit or that uplift year-over-year, as well as the growth. If you look year-over-year, you're starting to see our higher-margin businesses, become more significant in our mix. So they helping to contribute to a better, richer profitability.

The next question is from the line of Mr. Shawn Harrison from Longbow Research.

I just wanted to, I guess, delve into the feeling a bit better on the macro and the INS business seeing upside this quarter, but being down into the September quarter. Is there anything other than seasonality affecting the business in the September quarter, be it customer weakness or anything like that in there?

No. I think the -- I don't think there's very much seasonality, really. I think is that a little bit of a pick up so when you do a sequential comp and makes a little bit more difficult. It was actually reasonably strong in the June quarter for a lot of the telecom customers, so we actually saw some unexpected upside. We were anticipated being flat and ended up being a little bit better, so it exceeded our original expectations for the June quarter. And now you're doing a comp against that little pop that we got in the June quarter, so it just makes it for a more difficult comp. If I was to think about it, we don't see much seasonality around this time of the year. We normally see a little bit of seasonality in the March quarter in those -- in the INS business. But we're -- we continue to -- we made some comments about Investor and Analyst Day, we would like to see or expect to see INS roughly flat for the year, we continue to see that, on a rough-cut basis, obviously, there's 3 quarters left, so it's hard to say, but we continue to believe that despite the upside that we saw last quarter. We'll probably end up with pretty flat year, on an overall basis.

Okay. And then just as a follow-up. Multek and Flexpower heading into the back half of this calendar year maybe you could just talk about what you're seeing in terms of new program wins and whether the business, I guess, in the June quarter was profitable as well.

Yes. So we continue to be profitable in those in our components business. We would actually expect that profitability and the revenue to pick up as we go through the next few quarters because these guys do have some seasonality, both these 2 divisions have some seasonality associated with it. So we'll expect to end the year, certainly, with operating profit above our corporate average and -- but we would actually expect it to get stronger over the next quarter. Multek in particular, it's been around really a long time. It just has a massively diversified portfolio across both high-end products and low-end products. We've made a number of investments like into our ITC, which is our Internet technology -- or our Interconnect Technology Center, which is -- some of you may have seen one during the Analyst Day -- during the Analyst Day, which is providing a lot of flex capability into Multek and feeding it with some new business. So in summary, we're positive on the operations. We are expecting to grow revenue over the course of the next few quarters. We expect them to actually improve their operating profit over the next few quarters, but overall, we'll end up the year certainly above the corporate averages in profit.

Next question is from the line of Mr. Mark Delaney from Goldman Sachs.

I have a few. So first, I wanted to follow-up on the prior question on the outlook for INS. I think, it was down 1% year-over-year in June and the guidance for September is down 5% year-over-year. I know Mike, you just commented about you think it going to be flat roughly for the full fiscal year. If I just look at the sequential changes in fiscal '13 and '14. It's roughly flat in December and then down in March and so. I'm just wondering if you can just elaborate a little bit more. Do you have the orders in hand that give you the confidence of there's a pick up in the back half? Or is there-- just elaborate on what the expectations are there.

It's a pretty big business. It's multiple billions and you know and the pickup we're talking about is a few percent. So we don't -- do we have orders in hand, whether we have orders in hand or not, it actually doesn't matter. I mean, what really matters is our customer sell-through into their customer base. So we actually have a hard time making projections of what our customers and sell-through would actually be in for the next 3 quarters. So no, it's just -- we've run this business for a long time. This is our best guess at, what it might look like, this is what we're driving to. It's what we think, we're hearing from our customers. And -- but again, what we're talking about is a few percent here or there, the numbers that you just mentioned.

Okay, that's helpful. And then I think, you said in you prepared remarks, Mike, that you expect the combination of IEI and higher reliability to grow in total 10% for the full year. Did I understand that correctly?

Correct.

Okay. And so if I just do the math on that, and I think in the first half of the year, my quick math here is right, it was up 15% in the first half of the year. So it seems like there's a deceleration and even if I just-- assuming that the midpoint of your guidance for September, and so then even if I run those, both those groups as flat in both December and March. I'm coming up with up 12, so it seems like you're trying to imply that there might be some downtick in the second half of the fiscal year. On the sequential basis in either Industrial or High Reliability is that the right way to be thinking about that?

Mark, it's Chris. I think, you might be reading into it a little too much right there. So if you look at June and then you look at September, for us on a year-over-year basis, it's 15%, 16% year-over-year growth. We spent a fair amount of time at our Investor Day trying to elaborate on how we're winning in both of those markets. And how we continue to find opportunities to further penetrate existing customers, plus a whole host of new customers. We are continuously finding new logos to come in from small to medium to large global conglomerates on IEI side, as well as a lot of opportunity to expand relationships within the medical side. So as we think about the rest of this year, we're seeing double-digit 10%-plus growth. We're just not getting into the back end of the year with such fine granularity.

Okay, that's helpful. And then if I could just ask one last question, then I'll requeue if I have additional after this. But so on the buybacks, I think you spent a little over $100 million on repurchases for this quarter. And my understanding is your guidance is to return over 50% of free cash flow. And I think, it was a use of $154 million in June. And I think, Chris, your guidance was about $200 million for September. So in that $50 million of free cash flow in the first half and you already spent $100 million in the first fiscal quarter. So maybe you can just help me think about what the trajectory of the potential buyback is over the rest of the year?

No problem, Mark. So for us, our commitment is to return to our shareholders over 50% of our annual free cash flow. So I also tried to paint a picture that, while we had a use of free cash flow of $154 million at this first quarter, year-to-date will be plus $50 million, plus in free cash flow to the Q2. And we went on to, in my prepared remarks, I went on to indicate with conviction that we maintain our $3 billion to $4 billion free cash flow generation target over the next 5 years ending fiscal 2017, which has an implied free cash flow of $600 million-plus. And so as you think about the share repurchase program, we continue to be committed to that program, it has been, is and will continue to be the key way we're returning value to our shareholders. And you're seeing us this past quarter, again, repurchasing about $106 million or roughly 2% of the float at $9.69, and you know, it's just going to continue to be that way. And I don't get view -- I don't measure it on a quarterly basis, I am viewing this on a return on an annual basis. I hope will that helps.

Next question is from the line of Osten Bernardez from Cross Research.

This is Steve Fox pitch hitting for Osten. Mike, just one question on your comments about the macroenvironment showing some positive vibes recently. I know you mentioned that it's manifesting itself somewhat with better end of quarter volumes. But if you just talk about how else you're seeing it, whether it's in new program ramps or any particular markets that are showing those trends more than others? One of your smaller competitors was talking about better new program ramps or a faster ramp, I don't know if you guys are seeing as much of that. And then I have a quick follow-up.

Part of what we try to do and try to understand what the future looks like for us as we maintain this massively diversified portfolio and try as best we can to understand what are the trends in the macro that will drive that positively or negatively, because we actually can't forecast our customers end consumption, of course. Obviously, it's hard for them to do that. So when we think about it, we see strength in auto, we see strength in what I'd call almost general industrial across the board. Year-to-date, we've had a lot of strength at semiconductor cap. I think, it was more of a bubble. And I think it'll come off that later in the year. We've mentioned some of the strength that we've seen in telecom. And but at the same time, we also talked about growing 10% in just in automotive, industrial in general. And automotive and industrial is not growing 10%, so those are on the back of new program ramps and just general strength in terms of bookings as opposed to just waiting for the economy to do better. So in general, we see a strengthening economy. Obviously, you guys see all the macro data, so you can make your judgment as to that. We some real strengths in some of the different industries and at the same time, we believe, we're actually winning our pace of new business in the areas that are important to us, like IEI or HRS.

Just a follow-up question. You mentioned heavy activity in your innovation centers. Beyond what you talked about at the Analyst Day. I don't know if this is an incremental change since then or just more of the same. But how much of that is related to your own activities versus the economy and if there's any kind notable examples recently that you can share, that would be helpful.

Yes. So the economic indicator of this is just about the amount of innovation, the fact that product life cycles actually are quicker in-- the whole world and all product categories are embracing technology as a solution, whether it's an automobile or whether it's a washing machine. So whether it's the connected home, just broadly going through that, it's really built around a lot of technology acceptance across many, many product categories. So independent of economic growth that's just the trend of the world. It is creating opportunities for us being somewhat of a leader of providing these kind of innovations. And we're seeing a lot of strength, so whether it's new companies starting up or it's just companies looking for innovative solutions that are big companies, but actually want to find ways to embrace innovation, all of these things are what we consider to be the activity is going through the roof. And some of the stats that we talked about even at innovation day, we had like 3,000 people go through just the Innovation Center in Silicon Valley here. And we've seen no letup of any of that and really what we are trying to do there is not just take on new companies and look for more volumes and new companies, but it's actually to try to be the intersection of all these new ideas and seeing all these different technologies and being able to distribute these ideas and technologies and innovation into the channels, which helps kind of the small guy and the small innovator that helps the big guy that owns the channels. So we're actually trying to be as of the kind of the centerpiece of all this-- much of this innovation. So all I can say is you saw a lot of it, when we were here in Analyst Day. We continue to see an accelerated level of activity and new customers and more and more, we're able to connect the dots. We build process around connection these dots to drive innovations, and we're just seeing more and more adoptions with the customers.

Next question is from the line of Wamsi Mohan from Bank of America Merrill Lynch.

Mike, in your comments around Motorola, you highlighted the strategic value that it created. And I was wondering how the non-Motorola Google business is tracking? Any updates that you could share there in terms of how large this business is now? And how fast it's growing.

I don't exactly have that number and probably wouldn't quantify it. That one's difficult to estimate, obviously it's difficult to estimate. We have so many different programs that we're working on at the moment that it's hard to really know the very, very innovative program, which is very, very different. It's hard to know how many these programs are going to turn out, so it's hard to quantify it. We've talked about some that we've gone public with things like the Chromecast, which ended up winning 2013 Time Magazine's Product of the Year. A lot of it we can't talk about it, so all I can say is that the original premise of getting into the ecosystems of these really, really big guys continues to be very, very valid. We continue to work very, very hard to getting deeper into those ecosystems and the original premise of this is -- continues to be very, very valid today.

Chris, you noted the sale of that nonstrategic Western European manufacturing facility. Do you see any additional opportunities for footprint rationalization.

Wamsi, at this point in time, there's really nothing more from the facility sale type of aspect. We're just really focused right now on really getting after our productivity in our operations. And further advancing on lean initiatives and really focused on driving that operating profit dollar and operating margin expansion. So as it relates to any distinct one-off operational footprint rationalization, I don't see anything further.

Okay, and last one for me. Mike, any chance to quantify the magnitude of that pull-in that you said potentially happened to some degree in telecom and semi-cap?

Yes. If I think about the couple of billion dollars of revenue that we have across INS, it's still very, very small, call it $50 million to $100 million kind of number. So it's still not extremely meaningful and I'd just like to see some upside.

Next question is from the line of Amitabh Passi from UBS.

Mike, I wanted to clarify a comment I thought you made for CTG. Did you imply or say that for the December quarter, you expect sales to be flattish versus the normal seasonal pattern of another sequential uptick?

Yes. I think what we said for CTG is that it'd be -- okay, so let's talk about it in 2 different places, Motorola and CTG. What we said is at Motorola, we would be guiding that conservatively, not a reflection of Motorola's necessarily forecast and what we said is we'd have modest seasonality in CTG's, kind of same as always. But if you put them into a bundle, it would probably mean December quarter is more of a flat quarter relative to where we expect September to be today.

Okay, excellent. And then, I wanted to just -- and so maybe then by extension, does that mean in March, you would also expect to see muted seasonality? Or again, because typically, in March, we tend to see high-single digits, low-double digit type declines?

Yes. I think that March, we've historically had pretty significant seasonal declines in double digits. Last year, we had less. I expect this year, we're going to have less on the decline that we've had in the past. And I think probably those declines are starting to be a little bit more structural at Flextronics [indiscernible] portfolio.

We were getting out pretty far here, and we just really wanted to stress also the conservatism around our largest customer and with the transaction that's underway with them. We have -- we're getting out several, several quarters here, but really the point is that we're seeing conservative approach plus some seasonality impacts as we move forward.

Okay, I appreciate that. The motivation for the question was if I flat line CTG, INS looks flat and then even if I assume INE and HRS grow sort of low-double digits, it basically seem like the June quarter might be a peak quarter in terms of sales, and which is why I was just trying to understand it sort of the ebbs and flows over the next couple of quarters.

Okay, I guess, all we can do is, we can work with your model team off-line later. But we're just trying to give you enough indication of what we're seeing in the near term, we can put in our guidance. And then we're probably getting out a little too far ahead given the broader environment.

And then just one final one. On HRS, Mike, again, peak sales, but if I look at just year-over-year trend over the last 4, 5 quarters, it's been decelerating. Is there anything in the pipeline, where we should expect to see maybe an inflection for the year-over-year growths to reaccelerate over the next 4, 5 quarters, any help you can give there for HRS?

Yes, we're actually exceptionally bullish on the pipeline, particularly for HRS. So if we think about it, some really interesting programs that carry with it some reasonable margins. We're really excited about the HRS portfolio. We've been building that portfolio for many, many years. As you know, we're now up to probably close to $2 billion and to start, calling that hopefully, double-digit growth going forward is -- add some significant contribution deflects. So we have a great portfolio. I mean, maybe we're in a little bit of a pause in the last 2 quarters. As you know, this quarter was only 5% growth year-over-year. Alternatively, it's like the 18th straight quarter OF sequential growth. We feel like 18 straight sequential growth quarter, so we're not going to feel too bad about it just yet. But as we look forward, we actually think it's a very, very strong portfolio. We're really positioned well with the set of the businesses that we have and with the capabilities we have. And we're actually quite bullish and that's the reason we talk about -- and the same comments with IEI, and that's why we've been pretty bullish about really trying to drive that -- those segments' double digits.

The last question is from Mr. Sean Hannan from Needham & Company. Sean K.F. Hannan - Needham & Company, LLC, Research Division: So I just wanted to see if I could you ask. If we could break down a little bit the components of INS contributing to your guidance for next quarter. There's really been some mixed data points out there in computing, some of actually have been slightly encouraging and that's been interesting, although, not entirely consistent. And obviously, there has been some thoughts around some reasonable slowdowns, when it comes to telecom infrastructure pause, et cetera. So can you help us walk through for us, what you're seeing a little bit more in detail and the makeup on that piece of the business?

That's kind of hard to do. Remember our portfolio is different than the industry's portfolio. We have -- we continue to see communications, as I mentioned, was pretty strong. This last quarter, we expected to pull back a little bit on this quarter on a sequential basis. Our server and storage business, we expect to be relatively flat. I mean, if I look at the entire portfolio, it's hard to dissect, which one's up, which one's down and relate that to the macro. So all I can say is as I look at it on an overall basis, again, I think we're getting super granular. All I can say is that on an overall basis, we actually expect it to be going through the balance of the year reasonably flat.

Thank you, everyone, for joining us on our call today. A replay will be available on our website. This concludes our conference call.

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