Plexus Corp. (PLXS) Q3 2024 Earnings Report, Transcript and Summary

Good morning, and welcome to the Plexus Corp. conference call regarding its Fiscal Third Quarter 2024 Earnings Announcement. My name is Maria, and I will be your operator for today's call. [Operator Instructions] The conference call is scheduled to last approximately 1-hour. Please note that this conference call is being recorded. I would now like to turn the call over to Mr. Shawn Harrison, Plexus Vice President of Investor Relations. Shawn?

Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 30, 2023, is supplemented by our Form 10-Q filings and the Safe Harbor and Fair Disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials to Plexus' website at www.plexus.com, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer; Steve Frisch, Chief Strategy Officer; Pat Jermain, Executive Vice President and Chief Financial Officer; and Oliver Mihm, Executive Vice President and Chief Operating Officer. For today's call, Todd will provide summary comments before turning the call over to Oliver and Pat for further details. Before I turn the call over to Todd, please note that during our fiscal fourth quarter, Plexus will participate in Needham's Virtual Industrial Tech, Robotics and Clean Tech Conference on August 20th, and the benchmark company's 2024 TMT Conference in New York City on September 4. With that, let me now turn the call over to Todd Kelsey. Todd?

Thank you, Shawn. Good morning, everyone. Before I begin my prepared remarks, I would like to acknowledge that today's call will be Steve Frisch's last earnings call, ahead of his retirement at the end of our fiscal 2024. I would like to thank Steve for his numerous contributions to Plexus' growth and success over the past 34 years. Steve, congratulations on your pending retirement and thank you for your service to Plexus. Please advance to Slide 3. During our fiscal second quarter earnings call, I highlighted my expectation of a strong finish to fiscal 2024 that would position Plexus for further momentum in fiscal 2025. This view was formed as a result of early signs of demand inflecting higher, aided by share gains and new program ramps, efforts to increase efficiency and reduce cost, and progress on our working capital initiatives. Our fiscal third quarter results and fiscal fourth quarter guidance reinforced this outlook of sustained momentum, creating the potential for 9% to 12% revenue growth for fiscal 2025, with 5.5% GAAP and greater than 6% non-GAAP operating margin exiting fiscal 2025, as well as continued solid free cash flow generation. Please advance to Slide 4. We delivered outstanding fiscal third quarter financial results. Revenue of $961 million was within our guidance range. While we experienced stable to improved revenue outlook for most customers during the quarter, design changes and product launch delays from an industrial customer, and a slower-than-anticipated transition of a competitive market share gain within aerospace and defense customer resulted in those market sectors performing below our expectations entering the quarter. This demand is largely nonperishable and will be realized in future quarters. During last quarter's earnings call, we forecast our non-GAAP operating margin would exit our fiscal 2024, 60 to 100 basis points higher than our fiscal second quarter results. As an outcome of strengthening demand from our engineering solutions and sustaining services, improved efficiencies in manufacturing and solid cost management, we achieved these expectations earlier than anticipated. Our fiscal third quarter non-GAAP operating margin of 5.8%, exceeded our guidance range of 5.2% to 5.6%, and represented a nearly 90 basis point sequential increase. Non-GAAP EPS of $1.45 also exceeded our guidance range, given the robust operating margin performance and lower interest expense, a benefit from deploying the outstanding free cash flow generated this quarter. For the fiscal third quarter, we generated $114 million of free cash flow, the second highest quarterly performance in company history. We have now generated $147 million of free cash flow fiscal year-to-date. Please advance to Slide 5. Our go-to-market organization also had an outstanding quarter represented by solid wins and substantial customer recognition. During the quarter, we were honored to receive awards recognizing delivery performance and supplier excellence from 2 of our top customers, Honeywell Aerospace and Medtronic. This positive sentiment was also borne out in the strong engagement and the results of our recently completed annual customer satisfaction survey. Our team's passion for delivering 0 defects with perfect delivery and commitment to customer service excellence creates an ongoing dividend that is reflected in our new program win strength and industry-leading revenue growth. For the fiscal third quarter, we won 35 manufacturing programs, worth $279 million in revenue annually when fully ramped into production. Included in this result is a record contribution within Healthcare/Life Sciences. In addition, our Engineering Solutions organization is seeing increased market sector diversification and demand for its services, resulting in the team achieving the highest level of new business wins in the past 4 quarters, a positive leading indicator of our overall business health. Please advance to Slide 6. Our sustainability journey is central to realizing our vision to help create the products that build a better world. In June, we published our fiscal 2023 Sustainability Report, capturing the demonstrated progress we made in fiscal 2023 to advance our sustainable and responsible business practices. Highlights from the report, which is available on Plexus' sustainability web page include expanding our technical capabilities to design, manufacture and service products, which are more environmentally sustainable and responsibly produced, joining the UN Global Compact, to drive action by aligning to the UN sustainability goals, achieving an 8.4% energy intensity reduction across Plexus' global manufacturing sites, launching 2 new Employee Resource Groups, supporting nearly 20,000 paid volunteer hours through our volunteer time off program, and donating in excess of $1 million globally through the Plexus Community Foundation. We are continuing to build on these achievements during fiscal 2024 and remain committed to environmental impact reductions, aided by initiatives such as the installation of 1,600 solar panels at our Kelso, Scotland facility, which is shown on this slide. We also continue to give back to our communities. We are partnering with the greater Fox Cities Habitat for Humanity on our second complete home build. Plexus provides financial support for the build, while our team members support the homes construction, leveraging our volunteer time off program. I'm proud to share that Plexus was chosen as one of America's Greatest Workplaces for Mental Wellbeing by Newsweek magazine. In addition, our team in Guadalajara, Mexico was awarded the Jalisco Responsible Badge. These awards recognize the importance we place on our team member safety and total wellbeing since our people are at the heart of our strategy. Please advance to Slide 7. As the fiscal third quarter progressed, an increasing amount of customer input supported our view that demand is inflecting higher in many of our end markets, creating momentum into our fiscal 2025. In particular, in addition to the tailwinds from market share gains and new program ramps, we continue to experience robust underlying commercial Aerospace and Defense demand, increasing Healthcare/Life Sciences customer forecast, and improved semiconductor capital equipment and broadband communications demand. As a result of these market factors, we are guiding revenue in the range of $990 million to $1.03 billion, representing solid sequential growth. We're also forecasting non-GAAP operating margin of 5.6% to 6% and non-GAAP EPS of $1.50 to $1.65. I anticipate that Plexus will sustain our momentum into fiscal 2025. We are positioned to see revenue benefits from share gains and new program wins and healthy growth across each of our market sectors, leading to continued quarterly sequential revenue growth. In addition, we have optimized our business, creating substantial efficiencies, while introducing working capital initiatives to drive more and meaningful free cash flow generation. The combination of these factors create the potential to generate 9% to 12% revenue growth for fiscal 2025, with 5.5% GAAP and greater than 6% non-GAAP operating margin exiting the fiscal year. In addition, we expect continued solid free cash flow generation, which will be deployed to create additional shareholder value and drive EPS leverage. I will now turn the call over to Oliver for additional analysis of the performance of our market sectors. Oliver?

Thank you, Todd. Good morning. I will begin with a review of the fiscal third quarter performance of each of our market sectors, our expectations for each sector for the fiscal fourth quarter and some directional sector commentary for fiscal 2025. I will also review the annualized revenue contribution of our wins performance for each market sector and region, and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with the industrial sector on Slide 8. Revenue decreased 4% sequentially in the fiscal third quarter. The result was below our expectation of flat revenue for the fiscal third quarter and primarily driven by a new product introduction pushout due to customer design revisions and regulatory delays. Looking ahead to the fiscal fourth quarter, we expect sequential strength in semi cap, test and measurement and broadband communications. This will result in high single-digit revenue growth for the industrial sector for the fiscal fourth quarter. Industrial market sector wins for the fiscal third quarter of $58 million included a win that establishes a new partnership with a global leader in nuclear energy. We will be supplying products that support the green energy transition. Our wins also included a next-generation product for an existing broadband communications customer. This product will be built in our Penang, Malaysia campus. Within the semi cap, our wins included 2 programs with an existing customer. One program reflects a market share gain, while the other program marks the engagement with a new division with this customer. Our new program awards, coupled with some customers starting to show demand increases, gives us optimism for continued semi cap growth in fiscal 2025. Our fiscal year 2024 full industrial market sector outlook of a low single-digit year-over-year revenue decline remains unchanged. As we look to fiscal 2025, we expect a return to growth led by semi cap, test and measurement and broadband communications with our other market subsectors finding stability as the fiscal year progresses. Please advance to Slide 9. Revenue in our Healthcare/Life Sciences sector was flat sequentially for the fiscal third quarter, meeting our expectations. Our sequential growth outlook for the Healthcare/Life Sciences sector reflects an improved trend from recent quarters, as we expect revenue to increase mid-single digits for our fiscal fourth quarter. Increase is principally driven by multiple new program ramps with existing customers as well as further strengthening in demand for our Engineering Solutions. Healthcare/Life Sciences sector wins for the fiscal third quarter were exceptionally strong and totaled $197 million, a new quarterly sector record resulting from robust harvesting activity by the team. Five of the programs won are new products or next-generation products with existing customers, demonstrating the strength of our ongoing partnerships. Our wins also included a substantial award for a single-use device product supporting surgical procedures. This product will be produced in our Guadalajara, Mexico campus and is reflective of our strong standing with this customer relative to operational excellence and customer service excellence across all 3 regions. We also had 2 significant ultrasound awards for our facility in Oradea, Romania. One of these awards is in recognition of our historically strong execution, as our customer has decided to award Plexus ole-sourced status. Our fiscal 2024 Healthcare/Life Sciences market sector outlook of a mid-teens year-over-year revenue decline remains unchanged, inclusive of the previously mentioned headwind from procuring components at above market prices. As we look to our fiscal 2025, we remain optimistic for a return to strong growth, benefiting from the sequential revenue improvement we expect for the fiscal fourth quarter and the ongoing strength in program [ rates ]. Advancing to Slide 10. Our Aerospace and Defense sector increased 4% sequentially in the fiscal third quarter, below our expectation of a high single-digit increase. Supply constraints related to commercial aerospace program specific components and customer design change were the predominant factor. These issues will continue into our fiscal fourth quarter, offsetting continued strong underlying demand. As a result, we expect revenue for the Aerospace and Defense sector to be flat for our fiscal fourth quarter. Our wins for the fiscal third quarter for the Aerospace and Defense sector of $24 million included a next-generation emergency responder radio, that will be built in our Oradea, Romania facility. We also won a number of follow-on next-generation products for our Neenah, Wisconsin campus, including communications equipment for an aerospace platform. These awards further underscore our dedication to customer service excellence and creating strong partnerships with our customers. Our outlook for fiscal 2024 remains unchanged as aerospace and defense demand continues to be robust across all of our subsectors. As a result, we continue to expect revenue growth for fiscal 2024 to exceed the high teens growth witnessed in fiscal 2023. Further, we see continued positive demand tailwinds in fiscal 2025. Advancing to Slide 11, we can review the regional highlights of the manufacturing wins for the fiscal third quarter. The Americas wins were exceptionally strong at $163 million and included the addition of a new Healthcare/Life Sciences sector customer for our Chicago, Illinois facility with the award of this customer's next-generation neonatal support product. This manufacturing win builds upon an existing engineering services engagement. The APAC region's fiscal third quarter wins of $57 million included a substantial semi cap program with an existing customer for our Penang, Malaysia campus. Plexus was selected due to our early proactive engagement and highlighting and addressing technical issues. The EMEA region's fiscal third quarter wins of $59 million includes the Healthcare/Life Sciences sector drug delivery device that will be produced in our Oradea, Romania facility. Our historical execution strength, including the nimbleness of our response to ensure customer success contributed to this win. Please advance to Slide 12 for a review of our funnel of qualified manufacturing opportunities. Even with the strong wins performance, our funnel saw an uptick to $3.6 billion as we were able to convert a number of unqualified early stage opportunities into qualified manufacturing opportunities. The industrial sector grew 7% sequentially to $955 million. The funnel's increase was driven by semi cap and reflective of growing subsector confidence. Despite the record wins, the Healthcare/Life Sciences sector funnel incrementally grew to $1.8 billion and is well represented across both existing customers and new targets. The funnel for the Aerospace and Defense sector increased to $859 million. This sector is contributing significantly to both the diversification and uplift in our Engineering Solutions funnel. Finally, with improving customer decision-making, wins for Engineering Solutions hit a 4-quarter high, enabling future growth and improved utilization of our engineering team. I will now turn the call over to Pat for an in-depth review of our financials -- financial performance. Pat?

Thank you, Oliver, and good morning, everyone. Our fiscal third quarter results are summarized on Slide 13. As mentioned, revenue was within our guidance range. However, gross margin of 9.8% exceeded our guidance and was sequentially higher by 70 basis points. Several factors led to this improvement, including customer mix, greater demand for our Engineering Solutions and sustaining services, efficiency gains across our manufacturing regions and savings realized from our restructuring efforts. Selling and administrative expense of $46 million, met expectations. This amount included $6 million of stock-based compensation expense. Non-GAAP operating margin of 5.8% exceeded our guidance due to the strong gross margin performance. This result excludes 100 basis points of restructuring charges and 70 basis points of stock-based compensation expense. Nonoperating expense of $8.9 million was also favorable to expectations due to improved foreign exchange performance and lower-than-anticipated interest expense as we deployed a portion of our excess cash to reduce debt. Non-GAAP diluted EPS of $1.45 exceeded the top end of our guidance due to the factors mentioned. This result excludes $0.30 of restructuring charges and $0.24 of stock-based compensation expense. Turning to our cash flow and balance sheet on Slide 14. We were very pleased with our free cash flow performance this quarter. We delivered $131 million in cash from operations and spent $17 million on capital expenditures, resulting in free cash flow of $114 million. This result significantly exceeded our expectations. As Todd mentioned, this is the second highest performance in company history. With the strong performance, we reduced our borrowing by $89 million, while continuing to support our share repurchase program. During the quarter, we purchased approximately 185,000 shares of our stock for $18.6 million. We have $19.5 million remaining under the current $50 million authorization and plan to continue purchases during our fiscal fourth quarter. Next month, we will be reviewing with our Board of Directors our plans for a new program once the current authorization is completed. At the end of the quarter, we had an additional $350 million available to borrow under our credit facility and a conservative gross debt-to-EBITDA ratio of less than 1.3x. In addition to funding our share repurchases, we will continue to use any excess cash to reduce borrowing under our credit facility. For the fiscal third quarter, we delivered return on invested capital of 10.4%, which was 220 basis points above our weighted average cost of capital. Cash cycle at the end of the fiscal third quarter was 83 days, 3 days favorable to expectations and sequentially improved by 8 days. Please turn to Slide 15 for details on our cash cycle. Our cash cycle improvement came from a combination of lower inventory days and higher days in advanced payments. We continue to be encouraged by the efforts from our supply chain, customer-facing and regional teams to drive sequential improvements in both areas. This quarter, they delivered an $84 million sequential reduction in gross inventory. When compared to last year's fiscal third quarter, gross inventories were lower by more than $200 million, which contributed to the 10-day reduction in inventory days over that period. As Todd has already provided the revenue and EPS guidance for the fiscal fourth quarter, I'll review some additional details, which are summarized on Slide 16. Fiscal fourth quarter gross margin is expected to be in the range of 9.7% to 10%. At the midpoint, gross margin would be similar to the fiscal third quarter. We expect selling and administrative expense in the range of $50.5 million to $51.5 million, which is inclusive of approximately $10 million of stock-based compensation expense. Note that this amount includes accelerated stock-based compensation expense related to a previously announced executive retirement. Looking ahead to fiscal 2025, we would expect quarterly stock-based compensation expense to be $6 million to $7 million. Fiscal fourth quarter non-GAAP operating margin is expected to be in the range of 5.6% to 6%. Nonoperating expense is anticipated to be in the range of $8.2 million to $8.7 million. This would be a sequential improvement as we continue to deploy excess cash to reduce our borrowing and related interest expense. Entering fiscal 2025, we anticipate a further reduction to nonoperating expense as we are currently forecasting approximately $8 million per quarter. For the fiscal fourth quarter, we are estimating a non-GAAP effective tax rate between 16% and 18%, and diluted shares outstanding of approximately 27.7 million. Even with working capital investments needed to support sequential revenue growth anticipated in the fiscal fourth quarter, our expectation for the balance sheet is to see consistent working capital investments compared to the fiscal third quarter. We expect this level of working capital will result in cash cycle days in the range of 78 to 82 days. At the midpoint, this would be a sequential improvement of 3 days, which is mainly related to reductions in gross inventory. Given the improvement in cash cycle days, we anticipate another quarter of positive free cash flow. A couple of comments on the full year. We expect capital spending in the range of $90 million to $110 million, which would equate to less than 3% of revenue. Last quarter, I had mentioned that we could generate up to $100 million in free cash flow for the fiscal year. With our strong performance year-to-date, we are now projecting in excess of $150 million of free cash flow for fiscal 2024. With that, Maria, let's now open the call for questions.

[Operator Instructions] Our first question comes from the line of David Williams of The Benchmark Company.

First, congrats on the really solid execution here and the continued progress, certainly driving some nice benefit on the profitability, but also good to see that the revenue.

Thank you, David.

Yes. So maybe first Pat or Steve and Todd, just if you can kind of talk through maybe how your customer tone has changed over the last maybe 90 or 180 days. I know it's been -- you talked about being a little more positive and certainly seeing better demand. But can you talk around maybe where you're seeing that, maybe what the puts and takes are? And where if anything, things have turned, maybe less favorable?

Yes. I would say, well, from a broad standpoint, the tone is incrementally positive. So we continue to see our customer base in aggregate shift towards a much more positive sentiment. And if we break it down by market sector, I mean, that's where you see a little bit of deviation across the various different sectors. Aerospace and Defense continues to be very bullish. The outlook for the remainder of '24 and into '25 is quite strong. Semi cap appears to have turned the corner, we're seeing incremental demand uptick on a quarter-over-quarter basis for the past 3 or 4 quarters now. So that seems to be a trend. Although it's not hitting the large increase that you'd expect at some point, maybe a little bit later into towards the end of '25. If we look at the rest of industrial, that's probably the -- once you get beyond communications and test and measurement, that's where you get a little bit of demand weakness right now. And I would say that those markets are probably 6 to 9 months behind where health care is at right now. And within health care, we're generally seeing more positive sentiment kind of at the bottom and trending up, and we're seeing good potential for revenue increases as a result of the strong wins in new program ramps.

Great color there. And maybe just thinking about the operating margin line, that's clearly been an area of focus. I know you put a lot of actions in place to drive that, clearly getting the benefits. But can you maybe talk about the puts and takes there? What do you think are the biggest drivers? And where is there still room to squeeze a little more on that operating margin line out?

Yes. And David, this is Pat. Maybe I'll start with gross margin, which has been performing really well for us. And I think going forward, something in the high 9s, 9.8% to 10% would be reasonable. A lot of that's been driven by improvements with our manufacturing efficiencies, some automation efforts, also our services, more engineering, sustaining services are benefiting our gross margin. When you start looking at SG&A and going down to operating margin. SG&A could be a little higher kind of in the mid 4s to lower 4% range, and I'm talking on a GAAP basis now. Part of that, as we look to fiscal '25 is additional incentive compensation that we'll be incurring, which is highly tied to 2 components: revenue growth, which we expect strong growth next year, and then return on invested capital. The combination of that gross margin and SG&A is what's getting us to that 5.5% GAAP operating margin. So those are kind of the main drivers. We'll get a full year of efficiencies out of the restructuring actions we're doing this year as well. So that's what gives us confidence in exiting '25 at that GAAP of 5.5%.

One last one for me, if I may. Anything regionally or geographically that you're seeing in terms of -- maybe China specifically?

From a demand standpoint, our China business is kind of holding steady is what I would say. And we continue to target in China for China, primarily within that region. So the team over there just does a wonderful job of executing as well, too. So it's a good region for us from an operational performance standpoint.

Our next question comes from the line of Steven Fox from Fox Advisors LLC.

I guess, first off, I was curious about the progression of margins in Europe, in particular. It sounds like you're adding more and more new programs into Oradea. The margins were depressed last year seem to be coming back. Like, how do we think about that region's profitability? And then I have a follow-up.

Yes. Steve, this is Pat. Obviously, we've been really pleased with the performance over the last year. I think there's still opportunity. There's still some capacity to fill up in Oradea and some of the additional wins we've got coming into our Livingston and Scotland facilities will continue to benefit margins. So I think that can be a driver for us of getting to the 5.5% GAAP operating margin exiting '25, that will be a key component for us.

That's helpful. And then in terms of just market share gains, you've talked about previously, but I'm just curious, like over the last 90 days when you're mentioning now some new share gains. Like is there any way you could generalize why you're having that success? How much is sort of taking business from competitors? How much is just new OEM penetration? And like I said, why is that happening?

Yes. I think -- this is Oliver. Thanks for the question. Trying to underscore in the script that we continue to really focus on customer service excellence, perfect delivery on time. And our customers value that. And so what you see is we talked about a number of market share gains that we had inside some of our sectors inside the quarter here, and then continued wins from existing customers. We talked about the Neenah campus. The majority of those wins all come from either continuing on programs or next-generation programs with existing customers, and really the focus on operational excellence and customer service excellence is what provides that for us.

Yes. I think some -- a good example of how this is occurring, Steve, is what I reflected in the prepared remarks around the customer awards that we've received in. Recently, it's been from Honeywell Aerospace and Medtronic, 2 of our most significant customers that we have. So when you win awards like that as a top supplier, you have an ability to be able to take incremental share and consolidate some -- certain businesses and things like that.

Our next question comes from the line of Matt Sheerin of Stifel.

Just following up on Steve's question regarding program wins. I know you've talked in the past about opportunities for reshoring, particularly like in semi cap as customers move to new programs that they're looking to move outside of China, Asia and other regions. Are you continuing to see that in that new program win or that share win that you talked about, did that also move locations?

Yes, I would say the big trend that we see, Matt, is in next-generation products. There's a general trend toward in region for region, particularly when you get to a larger form factor type products. So when you talk about semi cap, it's maybe a little bit early to start to see that -- starting to move to the Americas, but it wouldn't surprise me as we move forward if that was a trend that we would see.

Okay. And then on the Healthcare/Life Sciences, which has been down significantly. I know part of that, as you talked about, the pass-through of the lower component costs as those premium costs have gone away. Could you remind us like that, what that headwind has been in the last couple of quarters year-over-year? And at what point do we get really true apples-to-apples comps in terms of real organic revenue growth?

Yes. The headwind from inflating or from purchasing components at inflated prices, year-over-year '24 to '23 for Healthcare/Life Sciences was a -- was a mid -- mid-single-digit impact in terms of revenue headwind. As we look forward to fiscal '25, we really see that normalizing to something that's essentially very, very low single digit or inconsequential.

Matt, it's Shawn. On a sequential basis, it's essentially negligible in terms of the impact to our revenue right now within Healthcare/Life Sciences.

Okay. So it's bottomed out. Okay. Great. All right.

[Operator Instructions] Our next question comes from the line of Anja Soderstrom from Sidoti.

Congrats on the retirement, Steve. In terms of the gross margin being good developments there. How should we think about that going into out quarters? Do you think you can get a north of 10% there eventually when you get more absorption on the head -- overhead?

Yes. Anja, I think as we're leaning to '25, a good range is probably 9%, 8% to 10%. Going beyond that, could we get north of 10% possibly with leverage from additional revenue. I think the better opportunity is probably on SG&A that will gain more leverage there to drive maybe above the 5.5% GAAP operating margin. That I think will be our opportunity as we look past fiscal '25 for our next goal and how to get to that goal.

Okay. And just on the SG&A, you noted you expect the stock-based compensation to be higher next year helped by improved results. But how should we think about the restructuring you've been taking and sort of the true SG&A expense there versus this year?

Well, we're calling that out separately. So the guide I'm providing is just purely SG&A that will continue. I think there are opportunities for us with automation to lower that SG&A as a percentage of revenue on a GAAP basis to 4.5% or below. And again, combining that with gross margin close to 10%, we can hit that 5.5% GAAP operating margin.

So Anja, from a stock-based compensation expense, we'd expect that to go back to more normal ranges for fiscal 2025 on a quarterly basis. What we will see incrementally higher is variable incentive compensation, and that's because the anticipated much stronger revenue growth next year as well as higher return on invested capital that we'll generate.

Okay. And then just on the competitive landscape, have we seen any major changes there. And I think over the past quarters, so you've been saying that your competitors have still been rational in terms of pricing. Do you still see that or...?

Yes, it's much the same. I mean it's a good competitive market right now. I think it's always competitive, but it's certainly rational, and it's certainly a market that we feel really comfortable about our ability to win in.

Our next question comes from the line of Chris Grenga from Needham.

This is Chris Grenga on for Jim Ricchiuti. You'd called out the nuclear energy win. And just curious if you could provide any more color on what you're seeing in general with respect to power generation applications you've recently also spoken about power opportunities related to data centers driven by AI applications. Just curious if you can add any more color on those 2 with respect to how you see them contributing to growth in the near term?

Yes. Sure. Chris, thanks for the question. This is Oliver. Yes, absolutely. So we highlighted a win relative to power generation. Last quarter, we highlighted the nuclear energy win this quarter. And certainly, I think in terms of what we see in our funnel as well as the wins that we're pulling through absolutely reinforce the fact that the demands of AI on the infrastructure are requiring investment from utility companies and infrastructure. And so we're seeing that trickle through for us. And as I think we've talked about in the past with new awards, they can take some time to materialize. So that's something we would expect to impact our fiscal -- fiscal '25 growth.

Got it. And with respect to the A and D funnel, just with respect to the growth there that you saw and as well as just the general composition of the funnel, is that evenly split between commercial and defense? Or is there any skew towards one versus the other?

Yes. From a funnel perspective, for A and D, we're seeing good balance across all of our subsectors. And so I think, quite encouraging in terms of the balance there.

Great.

I would also -- Chris, it's Shawn Harrison. The only thing I would add is we're seeing an increasing amount of demand for our Engineering Solutions within the Aerospace and Defense market sector. And as you know, and most folks on the call know that it's a very good leading indicator, but we're just seeing really robust demand for our Engineering Solutions with our -- within the Aerospace and Defense market sector.

Our next question comes from the line of Melissa Fairbanks of Raymond James & Associates.

Love to see the progress on the working capital and the free cash flow. Congratulations. I know you've been working hard on that throughout the organization. I just wanted -- I had a quick follow-up on the Healthcare/Life Sciences business. You've got some really good announcements on the Medtronic, the ultrasound front. In the near term though, are you starting to see some easing of the equipment purchasing or inventory digestion that's been a little bit of a headwind for the existing programs? Or is the growth next quarter driven by the new programs?

Yes. So we'd say, Melissa, we're about 80% to 90% of the way through the inventory corrections right now. So we're starting to see some positive signs as they move further out. But the growth is largely driven by the new program ramps in the strong leanest performance that we've had within the Healthcare/Life Sciences sector. And one stat I'd like to just point out before -- while we're talking about it as well, is that our -- our wins over the trailing 4 quarters within Healthcare/Life Sciences is over $500 million at $523 million. So it sets us up really well to get some strong growth within that sector as we look to '25 and beyond.

Great. That's all I had. I think you guys covered pretty much everything.

Thank you.

Thanks.

Thank you. I am showing no further questions at this time. I would now like to turn back to Mr. Todd Kelsey, President and CEO.

Thank you, Maria. I'd like to thank shareholders, investors, analysts and our Plexus team members that joined the call this morning. To reiterate the key themes of today's call, we anticipate delivering a strong finish to our fiscal 2024 with sequential expansion in revenue, robust operating margin and sequential growth in EPS with continued free cash flow generation. Looking further forward, we expect sustained revenue growth momentum into fiscal 2025, capitalizing upon Aerospace and Defense market sector strength, increasing Healthcare/Life Sciences customer forecast and improved semiconductor capital equipment and broadband communications demand. We anticipate with this revenue growth momentum, the benefits from optimizing our business for greater efficiency during fiscal 2024 and ongoing free cash deployment toward debt reduction and share repurchases will create meaningful EPS growth in fiscal 2025. Thank you very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.