Kevin Kessel - VP of Investor Relations Christopher Collier - CFO Michael McNamara - CEO

Matt Sheerin - Stifel Amit Daryanani - RBC Capital Markets Jim Suva - Citi Sean Hannan - Needham and Company Brian Alexander - Raymond James Osten Bernardez - Cross Research Mark Delaney - Goldman Sachs Sherri Scribner - Deutsche Bank

Good afternoon, and welcome to the Flextronics International Third Quarter Fiscal Year 2015 Earnings Conference Call. Today’s call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics’s Vice President of Investor Relations. Sir, you may begin.

Thank you, and welcome to Flextronics’s conference call to discuss the results of our fiscal 2015 third quarter ended December 31, 2014. We have published slides for today’s discussion that can be found on the Investor Relations section of our website. Joining me today 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 would now like to turn the call over to our Chief Financial Officer, Chris Collier. Chris?

Thanks Kevin, and to everyone on the call, we appreciate your interest in Flextronics. Let's begin on Slide three with our income statement highlights. Flextronics’ financial performance for Q3 reflects our steady progress as we continue to deliver on our commitments. Revenue increased sequentially by $496 million or 8% to $7 billion exceeding the high-end of our guidance range of $6.4 billion to $6.8 billion for the quarter, as all four of our business groups exceeded our Q3 guidance. We continue to see strong year-over-year growth in both our Industrial and Emerging Industries group, or IEI, which grew more than 19% or $180 million year-over-year, and our High Reliability Solutions group or HRS which expanded 10% year-over-year. Our third quarter adjusted operating income increased 11% year-over-year to $207 million. This also exceeded the high end of our guidance range of $175 million to $205 million. Adjusted net income was $175 million increasing 7% year-over-year. Our GAAP operating income totaled $193 million and net income was $153 million, both of which reflected our improved quality of earnings. Lastly, our adjusted earnings per diluted share for Q3 was $0.30 which exceeded the high end of our adjusted EPS guidance range of $0.24 to $0.28 and it represented a 15% year-over-year improvement. Turning to slide four you'll see our trended quarterly financial highlights. Our third quarter adjusted gross profit totaled $411 million, which in dollar terms is modestly higher by 3% year-over-year. Our Q3 margin of 5.8% came in line with our expectations and reflected a sequential increase of five basis points and improved more than 20 basis points when compared to last year. Our margin is fundamentally a function of our business mix. It is our objective to move our long-term portfolio towards a greater mix of businesses which have longer product lifecycles and higher margins. This together with our focus on driving to a higher margin profile for our Consumer Technologies Group or CTG contributes to our vision for steady margin expansion. We believe there is room for further margin improvement above our current levels as our execution improves on certain complex programs we've been ramping. This quarter our adjusted operating income increased by $20 million or 11% year-over-year to $207 million. On a sequential basis, our adjusted operating income increased by $24 million primarily due to the contribution from nearly half a billion dollar increase in our revenues along with improved execution and leverage. Our adjusted operating margin was 2.9% reflecting an increase of almost 15 basis points sequentially and over 30 basis points year-over-year. Aiding in our continued operating profit and margin expansion has been our discipline around our operating expenses. Our quarterly SG&A expense has been reduced by nearly $10 million versus a year ago. We intend to leverage our productivity and efficiency gains to support further investments in our design and innovation efforts as well as focusing on strategic marketing and selling initiatives to expand and enhance our platform. We believe that we should be able to operate our business with quarterly SG&A in a range around $200 million. Return on invested capital is a key metric that supports and guides our financial decision-making, as well as our allocation of capital. This quarter, our return on invested capital improved to 24%. This result reflects our improving earnings efficiency combined with our strict discipline -- capital deployed into our business. Now let's turn to slide five for some color around other income statement highlights. Net interest and other expense was $14.1 million in the quarter, which was favorably below our guidance of $20 million. This performance was primarily due to stronger foreign currency gains associated with our hedging programs. For our March quarter, we believe that $20 million remains the appropriate guidance for net interest and other expense. While I'm speaking about currency, I'd like to address an important difference between Flextronics and many other global companies. Over 90% of our revenue is settled in U.S. dollars. This means that the strengthening of the U.S. dollar which can have the effect of lowering revenue and profit projections for many companies has a minimal effect on Flextronics reported revenue and profit. Our adjusted income tax expense for the third quarter was $18 million, reflecting an adjusted income tax rate of approximately 9.25%, which is within our targeted rate range -- tax rate range of 8% to 10%. We continue to believe that our operating income tax rate will remain in this 8% to 10% range absent any unforeseen discrete items. Now when reconciling between our quarterly GAAP and adjusted EPS you see the impacts of stock-based compensation expense and in intangible amortization expense net of tax. If you now turn to slide six, I'll talk about our cash flows. As you can see Flextronics continues to be an excellent generator of our free cash flow. For the December quarter, we generated $337 million in free cash flow which exceeded our expectation for the quarter. We continue to operate with great discipline over working capital management and capital expenditures. Our net working capital decreased by $53 million sequentially to $1.8 billion. Net working capital as a percent of our sales was 6.5% this quarter remaining towards the low-end of our targeted range of 6% to 8%. We continue to believe that this range remains valid given the mix of our business. Our net capital expenditures of $26 million were lower than our depreciation for the quarter as we realized meaningful proceeds of approximately $62 million associated with the selling of certain property, plant and equipment. We continue to manage our CapEx spend to remain well-positioned for the future. And our CapEx target for fiscal 2015 now is in the range of $300 million, which is at the low-end of our prior $300 million to $350 million target. At this level, we will have invested over $900 million in CapEx and to our business over the past two years with the focus of our investments centered on expanding technology, automation and focused capacity and capability to support the double-digit growth of our IEI and HRS businesses. So when considering our earnings guidance, coupled with our targeted investments in networking capital and CapEx, we anticipate that our free cash flow will be greater than 600 million for fiscal 2015. This targeted achievement further supports our conviction to achieve our targeted free cash flow generation of $3 billion to $4 billion for the five-year period ending fiscal 2017 as we remain fundamentally structured, disciplined and on pace to achieve this. Lastly, we continue to use our strong cash flow generation to consistently return value to shareholders through repurchasing of our shares. This quarter we invested 84 million to purchase just over 1% of our ordinary shares. Now turning to slide 7, we will review our capital structure. Our financial condition remains strong with over $3.2 billion in liquidity and just over $1.7 billion in cash compared with a total debt of slightly above $2 billion. We have no debt maturities until calendar 2018 and our credit metrics are improving. As this quarter our debt-to-EBITDA ratio was reduced slightly to 1.7 times. 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 third quarter. As you can see from our earnings release today, the underlying fundamentals of our business remain intact. And we continue to make steady progress and deliver on our commitments. I now turn the call over to Mike, who will provide you with his perspective on our performance this past quarter and overview of the business and current trends as well as, share our next quarter’s financial guidance.

Thanks, Chris. Please turn to slide eight for our Q3 highlights and key trends. Our steady execution continues to improve our ability to deliver on our commitments. From a top line perspective, we exceeded our expectations in all four of our business groups. With much better than expected demand materializing in CTG and modestly better than expected demand and our remaining three business groups. This propelled our top line to over $7 billion in sales above the high-end of our guidance range of $6.4 billion to $6.8 billion. Overall our customer relationships where we are implementing new and innovative supply-chain solutions, continues to expand. Our CTG business rows 20% sequentially, meaningful above our expectation of low single-digit growth. HRS grew 4% sequentially, versus our guidance of flat. Both INS and IEI increased 1% sequentially, slightly ahead of expectations for stable demand. This was a seventh consecutive quarter of operating margin improvement rising over 10 basis points to over 2.9%. This strong performance drove operating profit up to $207 million also above the high end of our guidance range of $175 million to $205 million. We remain focused and committed to maintaining steady margin improvement going forward. Our continued profit improvement was reflected in our adjusted EPS which reached $0.30 and represented 15% year-over-year growth. Our ability to generate free cash flow continues to be a differentiating feature of our company and business model. As Chris mentioned, free cash flow was $337 million for the quarter putting year-to-date free cash flow at $505 million. Our consistent return a value to shareholders continued with approximately 8 million shares retired via buyback or $84 million. In the past 12 months, we have retired approximately 40 million shares or $403 million and remain firmly on pace to deliver on our commitment to return over 40 -- over 50% of our annual free cash flow. Our consistency in buying back our shares over the last four past fiscal years has enabled us to reduce our net shares outstanding by 30% or 286 million shares for $2 billion. Our continued focus on innovation, design engineering in both hardware and software remains a cornerstone of Flextronics sketch to scale value proposition. Our almost 2,000 design engineers in over 20 locations around the world focused on providing unique and differentiated solutions for our customers by providing product innovations for core underlying technologies or building blocks that enable IOT or as we say the Intelligence Of Things. This further increases our customer’s competitiveness in the marketplace. In the past year we filed over 300 patents worldwide and also saw over 100 patents granted. This past quarter also brought number of important design wins led by our innovation group that creates new customer relationships, strengthens existing customer relationships and is expected to produce strong manufacturing pull-through of revenue. Please turn to slide 9 for a look at revenue by business group. Before coming up – covering our performance by business group, I would like to make a few comments about our customer, Motorola Mobility which is now owned by Lenovo. Our ability to apply a broad platform of supply-chain solutions further enabled Lenovo to confidently access new markets deliver outstanding operational execution and will provide access to new technology to our innovation initiatives. These capabilities will position us well for a long-term relationship. We've had time to meet with many of the key Lenovo executive frequently since the acquisition closed. The timing is good as we have never had a stronger execution from our factories which uniquely serve the key carriers in both North and South America. We expect to have a very positive relationship going forward as Lenovo forecast to go its market share significantly throughout the world. Longer-term this business will be a function of our ability to demonstrate value to the total supply chain. As a result we believe this business has now evolved into a very standard customer relationship. The terms of the macro-environment – in terms of the macro-environment, we haven't seen much change from the stable backdrop. We have previously discussed with the exception of INS where we have seen incremental softness driven by reduced CapEx spending, and this is reflected in our guidance. Let's start a business group review with INS, which was slightly ahead of our expectations for stable demand. Revenue was $2.4 billion reflecting a $26 million increase from last quarter, but down 6% from a year ago. In the quarter, our storage and appliance business were very strong, up double digits and both reached record levels. However, our Telecom and networking business both the declined modestly and were an offset. Our competitive strength in INS continues to display itself and their improving win rate and the addition of new customers and disruptive areas of the market. Unfortunately, general weakness in core Telecom and networking continues to offset positive elsewhere. For next quarter we expect INS revenues to be down high single-digits, which is in line with normal INS seasonality. CTG’s revenue shot up 20% sequentially to $2.6 billion. This was better than our expectations for single-digit growth due mostly to better demand for mobile products and new product introduction and program ramps and focused carriers categories such as wearables. We are guiding CTG to a seasonal decline of 20% to 25%, which is slightly better than its five-year historical average of down 26%. IEI recorded third straight quarter about $1.1 billion and rose slightly by $10 million or 1% sequentially due primarily to strength in energy and household industrial that was just enough to offset weakness in semiconductor equipment. IEI slight increase put ahead of our expectations for stable demand; year-over-year, IEI remains of the strongest performer for us with sales up 19%. Next quarter, we expect IEI will be stable sequentially but will show solid year-over-year growth. Our HRS group which comprises our automotive, medical and defense and aerospace businesses rose $32 million or 4% sequentially and 10% year-over-year to $907 million. The better-than-expected demand was primarily inside our medical business which saw broad increases across customers and products from drug delivery to diagnostic equipment. This mark HRS's 20th straight quarter of year-over-year growth. As it exceeded the $900 million quarterly revenue level for the first time, exceeding $900 million is quite an achievement when you consider that this group had quarterly sales of less than 400 million post this record acquisition. Next quarter we expect HRS to be stable as we see consistent level of production in both medical and automotive. Now turning to our March quarter guidance on slide 10. For the March quarter revenue is expected to be between $6 billion and $6.4 billion. This range reflects the normal seasonal decline. Our adjusted operating income is forecasted to be in the range of $165 million to $190 million. This equates to an adjusted earnings-per-share guidance range of $0.23 per share based on weighted average shares outstanding of 585 million. Quarterly GAAP earnings per diluted share expected to be lower than the adjusted EPS guidance I just provided by approximately $0.04 per share for intangible amortization stock-based compensation. Before I open up the call for Q&A, I would like to take this opportunity to thank all Flextronics employees worldwide for their hard work and for driving improvements to enable us to consistently deliver on our commitment, increase our customer competitiveness and return value to our shareholders. With that, I would like to open up the call for Q&A. Operator?

Thank you. [Operator Instructions] Our first question will come from Matt Sheerin with Stifel. Your line is now open.

Yes, thanks and good afternoon, everyone. A couple of questions for me. First, your comments regarding Motorola. It sounds like that relationship seems pretty solid. Does that mean that you don't expect to lose any of that business this year? You talk about the China facility perhaps going away. So do you have more confidence in your relationship there?

Well I think Matt we have a better idea of what's going to happen into the future. The transition happened just probably 8 or 10 weeks ago. We've had quite a few meetings. We've been able to understand what their strategies are – as a company with the growth rates are going to be coming into the coming year. So we have quite a bit of certainty certainly into the short term and as we look at the relationship which we view as very strong a lot around the back of really strong operations execution, we think there is – they are going to end up having a blend of internal and external manufacturing and we believe we are probably the best position to be an extra manufacturing partner just because of our position supplying carriers into North and South American marketplace. So we are just comfortable the way the business is running today. It is obviously continues -- the fact that it is short product lifecycle is not going to change as you know. But we are actually quite pleased that -- we are just quite pleased the way the relationship is, the visibility that we have into the near-term and we just think it has evolved into a very standard business relationship.

Okay, great. And looking at the IEI and HRS businesses, a lot of growth there and obviously better margin potential. I know you've been making investments as you are ramping new programs there. You seem poised to really to look at pretty strong leverage as you get into fiscal 2016, is that your goal to start to see the margins in those businesses expand into next year?

Yeah, it’s definitely a cornerstone of how we see margin expansion going forward. We believe that as we continue to move the portfolio a little bit into more and more HRS and IEI businesses, we will be able to move the margin. It is hard to just flip a switch as you know with the $26 billion company and that's going to take time. And I think what you're seeing from us with the comments we made earlier about the operating margin expansion over the last seven quarters consistently is we just expect to continually move it to a little bit better position, a little bit better portfolio mix and the longer product life cycle and higher margins that we would expect out of these business groups. So, this is where we will continue to march forward. As we do M&A, we will do M&A in those product categories. So, we will actually try to accelerate any portfolio shifts that we can that make sense, but this is a cornerstone of margin improvement is to move the portfolio.

Okay, thanks very much.

Next question will come from Amit Daryanani with RBC Capital Markets. Your line is now open.

Thanks a lot. Good afternoon, guys. I've got two questions. One given the update on the Lenovo relationships finally you are more comfortable having it at least in the foreseeable future, how does it change the long-term mix of your business, the analysis you guys have that’s kind of laid down part of the targets 40% non-tech, does that have to trend lower as we go forward given the Lenovo relationship? And how does the operating margin potential which I think at that point was 3.7% if you hit the optimal mix, how does that change now?

Yeah, I think how fast that margin moves is going to be a function of mix as you just described. If we had our druthers we would try to move the growth rate of IEI and HRS substantially faster. Rather than just cutting back on the CTG rate. The CTG rate is hard to estimate because as you know on average these are 1, 1.5 year product lifecycle sometimes even nine months and it’s an $8 billion business for us, so I don't want to underestimate the challenge of keeping that $8 billion funnel full as well. But our objective is to move HRS and IEI at accelerated rates. This year as a bundle we'll move them 10%. We would expect, we believe we have enough in the pipeline already to go move them another 10% next year without any acquisitions. So we'll just keep focusing our resources on those business units. We'll focus our M&A dollars on those business units and our vision won't change to continually work the margins and work the mix in a consistent predictable way. And no matter what mix it is we'll expect – the shareholders should expect that we will earn a good return on capital on the dollars that are invested in all our businesses.

Got it. I guess just sticking to the IEI and HRS segments, I mean to your it’s $8 billion business today, I think it crossed north of $2 billion quarterly for the first time – what sort of pipeline, what sort of bookings are you having in those segments right now and how much comfort do to have that it can sustain 10% to 15% growth in the next four, six, eight quarters?

So I think in order to get 10% growth rate and again when I think about 10% growth rate, I don’t think about every single quarter being 2.5, I think about the year being 10%, so you're going to have ups and downs as you know. But we have very good visibility. So one of the challenges with IEI and HRS is that what while they have longer product lifecycle at the same time any time you book products it takes longer to ramp those products and longer to win the business. So ramping products in those categories over the next 12 or 18 months many of the bookings are already complete. So I would say we probably have more visibility to those two product categories than any of our other product categories. So we actually view it as being pretty strong so – we’re pretty comfortable last year talking about doing 10% with both of them and that's why we are comfortable as we go forward we expect to also hit 10% as we move forward.

Got it. Thanks a lot and congrats on the quarter, guys.

Thanks.

Our next question will come from Jim Suva with Citi. Your line is now open.

Thank you and congratulations to you and your team there at Flextronics. You made some comments in your prepared remarks about increasing your capital for I believe it was the wearables or the Internet of Things or that area. Can you help us understand a little bit about that sector as it appears to be a very high growth sector for you, the wearables? Some things such as the capital commitment, is it materially is very unique to that sector? Is it easily deployable? I assume, there are lots of small companies in this, or maybe it is a small amount of very large companies and maybe you could help us understand the margin profile of this because it looks like it is a kind of new area for Flextronics.

Yeah, sure Jim. It is a new area. We participated with a number of different customers last year as you know. FY2015 over FY2014 will certainly probably double the revenue associated with that and I would expect this next year we would grow it again substantially at least in the area of somewhere around [50%] [ph] just from what we can see relative to the growth rate of these businesses. As far as being capital intensive, we don't find them to be capital-intensive, really anything more than anywhere else. We tend to find these businesses being more technology driven than capital-intensive. So a lot of what we have to do there is a lot of miniaturization. We have to do different things with materials just to enable the signals to come through and there's a lot more complexity that you have to drive into a consolidated product. It is a huge – we use a lot of the intellect and the know-how of Multek to leverage alongside of Flextronics to create some differentiating advantage. As you know Multek has a very, very strong flex circuit capability as well as a rigid flex or just rigid boards and we're leveraging a lot of those technologies into wearables. So I don't find them to be particularly capital-intensive. I find them to be very technology intensive. You know we talked about these 300 patents that we applied for. A lot of those are in the wearable space because these are the places where a lot of the invention actually has to occur to bring a new product category to market. So we're just very comfortable with the know-how that we’ve built. We're comfortable with some of the IP that we are developing. We're happy that we are able to integrate Multek into a flex solution simultaneously and as result I think we're going to see a very steady growth. But it has not taken an abnormal amount of capital at all.

Great. And my follow-up question is you actually touched on a little bit is the patents. I don't recall having covered to coming for quite a long time about you guys talking a lot about patents. So is this kind of also a new area of focus in this Flextronics on the patents or the customer or do you co own it? And is this something you can monetize or is it more of a patent for the way you manufacture it? Thank you.

Now mostly our processes methods are material. These are Flextronics patents. We are not talking about customer patents here we are talking about Flex patents. And you know sometimes – occasionally we may do deals where the customer has a license to exclude some license from that patent or that we can use as well but they have a license used for their products, but on average these are all Flextronics patents. And we look to protect the know-how that we have associated with our – with these new process technologies. And a lot of these patents are really focused that as these products become smarter and I made the comment about as I think about IOT we talk about it, it’s being kind of the Intelligent Of Things , as these new devices get intelligent a good example is wearables which I already described, but as these new devices get intelligent they need different technologies to enable that intelligence and it might be -- needs different ways to power it, it might need different miniaturization's, it may need different kind of materials and all these things may require invention. So a lot of what we're doing is helping customers move into that intelligence of thing mode and a lot of it as a result we are focusing on investing in the underlying core technologies that actually enable those products to become intelligent and the first place.

Thank you and congratulations again to you and your team.

Thank you. Appreciate it.

Next question will come from Shawn Harrison with Longbow. Your line is now open.

Hi, good evening this is [indiscernible] calling on behalf of Shawn. I was wondering if you can provide some color, you mentioned that the wearables or ramping at CTG. How do you reconcile that with prior comments around changing seasonality? How do you see seasonality going forward and – expend a little bit on how wearables are going to ramp?

Yes, so wearables will still be a very seasonal category. So I don't think that's going to change. They continue to be something people look around holidays as gift giving and so I don't think and a lot of the guys do wearables are trying to launch it around the holidays so I think the seasonality of that product category is probably not going to change. It is just that every year it is probably going to be a significantly higher amount of revenue.

Okay. And then seasonality of CTG just in general ex-wearables?

I would say that the seasonality should expect for CTG which would be very similar to historical trends. There is nothing inherent in the portfolio that we are operating today that would change that.

Okay. Then the guidance suggests that INS the declines were worsening on a year-over-year basis. Why is that and when do see that business bottoming?

So you asking about the INS trends worsening?

Yes.

Yeah. So, I think there is quite a bit of data out. It seems like the U.S. carriers cutback a little bit in the December quarter or announced that they were going to cutback a little bit in the December quarter. Some of the work in China in the LTE rollouts seem to get a little bit slower. I think there was some expectation for Europe doing more but I think it is still a little bit slow. So we view it as – so, we are seeing some of that in our INS business and alternatively – so, I think on the short term basis the revenues are a little bit strained. Alternatively or long-term we're pretty bullish on it just because the amount of data that has to go across these networks is never going to stop. So, right now we are seeing a little bit of a pullback than where we expected it to be say even going into the December quarter.

Thank you.

You're welcome.

Our next question comes from Sean Hannan with Needham and Company. Your line is now open.

Yes, thanks, good evening and thanks for taking my question here. First question I just want to see I could ask here is if you can talk a little bit about the new business and the win environment just trying to get a perspective around how wins have trended versus recent past quarters or a year ago? And then part two of that is the mix of the wins in the non-traditional areas, is that consistently moving up aligned you longer-term goals or what are you seeing on that? Thanks.

Yeah. Yes, let’s say if I take the different categories and kind of break them apart, in the IEI and HRS category we talked a little bit about that already, the wins are strong. We will get 10% organic growth out of those -- the bundle of those two this quarter or this year, I'm sorry. And we actually can seen next year pretty well and expect it also to have a double-digit growth rate both IEI and HRS or as a bundle, sorry. So we get good visibility in that. The wins are very strong. The diversification of those wins is outstanding. You know in the automotive business we probably have more than 50 customers now, and in medical of the top 25 companies in medical we're in 18 of them right now and that actually positions us to go even further in the future. Because as we get to be a preferred supplier a lot of those to sell more of our platform of capabilities and supply chain solution. So I would say that is going to help and move our portfolio. In the CTG business we have been very focused for the last couple years and trying to have a better mix of CTG business things that are more technology enabled things like the wearable. We believe that's going to drive a better margin profile within the CTG group so we're actually not trying to just push on revenue in that group but try to push on better revenue. And we have been very successful with that. And the visibility is harder because you have shorter product lifecycles. In the INS business, we mentioned some near-term softness, but our objective which we are going to fall a little bit light on this year but our objective is to run that segment at pretty much flat. And I don't anticipate that changing that much over the coming years. But the place that we are focused on in terms of different kind of wins is in the appliance area and some of the new disruptors that are bringing products into the marketplace guys like Paul Humphries, network fortunate or FireEye which we participate very actively in and actually have a pretty strong growth rate and we think that can offset the kind of weakness that we generally see and things that we are talking about in Telecom. So I think each one is a little bit different. Our best visibility is an INI and HRS and if we leave INS flat and we have a CTG running at a better mix within CTG, this is how we are trying to drag the portfolio and we think this is what's enabling us to just continually have steady improvement in margins over time.

Okay, that's very helpful. Next question might be a little bit more specific for Chris. Just want to get a little bit of color around SG&A. So as you see, you are looking to manage to around the $200 million level ex options in the past I think there's been some variable movement within that line. So just trying to understand has your operating model changed here where there's a little bit less very ability now quarter-to-quarter or -- behind the scene cost cuts or management that you are able to employ? Just wondering the scenario how you're managing and exactly how you are able to arrive here? Thanks.

Thanks for the question, Sean. So in terms of SG&A, you've seen us continue to be operating with a really strong discipline and control over that. Last year – not last year, but nine months ago we undertook efforts to actually rationalize our structure as we saw fit to align itself with the future businesses and to make the investments into areas of which we think we're going to be winning. So in doing so we actually vary the target to bring down our SG&A down to the $200 million level per quarter. We've clearly achieved that now for the last three. Inherent in that there is a little bit of variability and you saw that this quarter. We crept up to $204 million of spend so slightly higher than the $200, and that kind of has a wearable element associated with the revenue growth as well as, some targeted efforts from time-to-time where we are getting after business development where we are trying to put dollars to work around the S in the SG&A. So, we are focusing on business development and sales effort to really expand our coverage model. So you will see some elements of that and associated with that some variable compensation that plays with it. But overall, the only other aspect to highlight would be R&D which is a large component of our SG&A; that at times will have some variability. Given that some periods we may have different levels of investment flowing there. But all-in-all, it is our objective and it’s our discipline to stay around that $200 million level and be able to really benefit from the leverage that will give us as we move forward.

Great. Thanks very much.

Our next question will come from Brian Alexander with Raymond James. Your line is now open.

Okay, thanks. Chris, I want to ask about gross margins. You were able to keep them relatively flat sequentially despite the big mix shift towards CTG where the gross margins are much lower. And you had roughly flat revenues sequentially in the other businesses. So I'm just curious how you were able to achieve that? Did you get much better leverage in CTG or were you able to improve the gross margins in those other businesses and I just have one follow-up?

Hey Brian thanks for the question. Our performance this past quarter was very strong in the ability to manage that gross margin line. As you alluded to we had a heavy mix shift change. But what I talked about last quarter was that we continuously are focused around driving further productivity improvements and yield improvements in our business and that was evidenced in part this quarter where we are eager to get some of those across some of the different programs we've been ramping and so that reflected itself in that margin profile. I would highlight that as you look to this next quarter again we see a large drop in our revenue in terms of the seasonality impact into the March quarter. If you take the midpoint of our guidance you're going to see a six handle in terms of gross margin. That's six handle hasn't been something we've seen in a while, so we continue to see improvements in our operational execution and in our operationally efficiency which is driving us higher in terms of our gross margin.

You know that's where I was headed. It looks like around 6.1% or so is what you're assuming for next quarter. So that's great progress. And then I just want to make sure that I'm reading you guys correctly on the Lenovo Motorola situation. Are you suggesting your confidence in the relationship and that business is being driven by your view that you will likely retain the non-China business but you have much more confidence in the volumes outside of China because of share gains that you expect Lenovo to have? Or you more comfortable that you are going to be able to retain the China piece than you were before?

I think what's different about the last time we talked and at this time is we actually have had a lot of dialogue with them. And we have a lot more information and a quarter ago when we were doing this call we were kind of in the unknown. As we talk to them as we understand their plan, as we understand where they need capacity where they don't need capacity, we become more comfortable around all of our operations. And I guess all of our operations just China and Brazil and in Brazil it's a little bit different. They don't have the amount of capacity, they don't have the infrastructure to go build those products to start with and their market share in the continuous market share gains are experienced in South America is very high. So that's a very, very positive. On the China part they also need – would like to keep a balance portfolio of insourcing and outsourcing. I mean certainly they are going to make changes. I mean they are going to make some changes, but they also have to think about their own growth and how they are going to accommodate their own growth in Lenovo as well as the growth in Motorola because they anticipate having – they didn’t buy Motorola to reduce market share. There are after becoming an International champion and a look across Flex and say maybe this is one of the ways I'm able to get the capacity I need to really be an International champion. So they are going to make changes. There are going to be some adjustments, but as we look forward we are comfortable that both those facilities will continue to operate and they’ll continue to operate probably as long as we provide a value statement to them and as long as we're able to earn the return that we want to earn on the investment as well, so but we -- believe that at this point we can move to a mutually acceptable relationship where what they need and we get what we need and we’re probably keeping the factories open at least for the short term, certainly for this year.

And then just last one on element, we didn't talk about it this call, I'm just curious if there's any update there on how they are doing, customer acceptance, traction, etcetera?

Yes, I wasn't going to make this a regular part of the call of course, but – elements we are very, very happy with the progress they are making. We have continually booked quite a few deals in the last quarter. Very nice accounts, really, really strong logos which kind of demonstrate the value proposition of the business and we are just going to keep driving the business forward. I mean it is still early in the timeframe, but if you look at enterprise S [ph] companies there's two companies that are important and terms of history of performance and their sales force and workday and our objective is to stay in the goalpost of the growth rate to those companies and if we can do that it will be a home run.

Okay, thanks, Mike.

Our next question will come from Osten Bernardez with Cross Research. Your line is now open.

Hello, thank you for taking my questions. Within INS you had your converged 3.0 group of business which I believe have been growing historically around 20% or so and I wanted to know sort of A; are you still seeing that sort of that type of growth in that group of business from that group of customers and you've noted that I think you are also expecting some kind of seasonality within that group if I understood you correctly for the March quarter. And I would also like to hear whether or not you are able to add some any additional customers in that group?

So, I can’t -- we actually did add some, I don't know if they were meaningfully moved the needle, because usually these guys start out small and they ramp. So it is probably not worth itemizing or calling out. But, as we go forward into this next year we think it is another 20% growth rate. So we do think that that strength will continue on into the future and we are pretty pleased with how that whole business unit -- the sub business unit is moving forward.

Got it. And then within HRS and your comments with respect to the growth you are seeing in the medical business. To what extent is that growth more a function of I guess your most recent acquisitions not too long ago or are you gaining share in that space?

Yeah, so the amounts of acquisitions we've done in that space are almost negligible. I don't even know how much it adds up. The whole business heading towards $2 billion, I mean it's not $2 billion yet but it's heading that way. I don't know that we're taking share because as we build that business unit we're building capability. As we build their capability whether it's diagnostic devices or medical equipment or disposables, I mean we are actually building and increasing our capabilities substantially. So we are now up to 16 FDA certified factories around the world. We've been through extensive amount of FDA audits. We are now up to 18 out of the top 25 medical customers and are now part of our portfolio. So I wouldn't call it a share shift, I would actually more call it that the opportunity for customers to give us – to give an outsource business has increased substantially as a result of the growth of our capabilities. So I actually think we're creating and inventing revenue on the back of increased capabilities. And I think there's other categories too that are going to play a big part of that is we moved to this whole wearables and as wearables move into digital health, the whole digital health market you can argue is going to explode. It's a large part of where we are putting the investments of our engineering teams and design teams to really grow that more. And so we are very, very focused on growing that business, but I actually like to think that we are inventing new revenue as opposed to just trying to try for market share shifts.

Thank you very much.

Our next question will come from Mark Delaney with Goldman Sachs. Your line is now open.

Yes, good afternoon and thanks very much for taking the questions. I had a follow-up first on your comments about the Motorola Mobility impact your model and maybe if you could help us understand if the massive what if you did happen to lose the business in China, is that – and other our guidance was potential $0.02 to $0.03 negative impact. Certainly understanding you guys are feeling better about that business. I just want to make sure the downside risk and if anything has changed there especially given you mentioned improving yields in consumer and gross margins have started to go up, and if any of the math there has changed and especially given that the Lenovo has made comments I mean you seen it earlier in January about trying to integrate some of their manufacturing to our their own facilities later in 2015, so if you could help me understand those dynamics, that would be helpful?

Yes, sure. So we outlined what the possible impact would be. It would free-up quite a bit of capital because inventory would flush into cash. And we talked about $0.02 or $0.03 share impact. We think those are roughly around the same numbers. We continue to view this business as something that if it does go away that the assets will be reutilized within months, not even very many months and we think the inventory just flushes out into sales, so we actually would think if we had that condition happen we would be roughly around the same place where we were before.

Okay, then just a follow-up on the buyback. I know it’s been a focus of the company. The pace of the buyback was a little bit lower this quarter versus in the prior quarters, can you just help us understand the reason for that and then how we should think about the size of the buyback in the coming quarters?

Hi, Mark thanks for the question. So I would start by just saying that we have an unwavering commitment to increasing shareholder value and that's really taking the shape in terms of our aggressiveness in our share repurchase. The share repurchase program has been, is and will continue to be the key feature and us returning value to the shareholders. I wouldn't read much into the level of purchase of 84 million or over 1% this past quarter at all. If you look back we've now repurchased over 2 billion shares over the last four and a half years and that's over 30% of the flow and year-to-date we bought back right around $300 million versus about a $500 million free cash flow so we've been very aggressive and we expect to be -- to consistently be buying back the shares at what we believe to be attractive valuations.

Thanks very much.

You're welcome.

Our next question will come from Sherri Scribner with Deutsche Bank. Your line is now open.

Hi, thank you. I wanted to ask a little bit about the INS segment again. I know that you are seeing some weakness now, but the segment has been declining for the past 11 quarters on a year-over-year basis. I'm just thinking about INS as well as, CTG being the largest segments of your business. It seems from the perspective of CTG the compares get more difficult in fiscal 2016 through a 70% of your business potentially not growing; I'm trying to get a sense of where you think growth rates might be in fiscal 2016? Thanks.

Okay. Yes, good question Sherri. Obviously we've outlined where we think growth rates are going to occur and I think about growth rates I think both operating margin dollars and margin percent as well as just pure revenue. From a pure revenue standpoint we're trying to be heavily focused at HRS and IEI growing at double digits. So that is something that we've been very, very focused on for many years and that's why we have enough pipeline probably to go achieve that because we do get pretty good visibility into those categories. The INS, we actually don't think we will grow. Alternatively based on where we see the bookings are based on our positioning with some of these new customers which we call 3.0, we think that's – we think between those what's happening there we think we can be reasonably flat and CTG we are not trying to have a big growth rates. We're actually trying to have a better book of business. So that's kind of our overall plan. It's what led to the margin expansion over the last few months and we actually think there is more runway with that margin expansion as we go forward using that plan. And so that's kind of how we see the next year unfolding at the same time we expect to be provide shareholder value by buyback shares. So between the margin improvements, between the growth IEI and HRS and between bundled with better mix in CTG we think between that bundles it provides a very attractive return for investors. But we will be having our Analyst Day coming up shortly; I think Kevin is going to make a few comments about that. And at that point we will address a little bit more about the long term strategy for the company.

Okay. That's helpful and then just with the mix improving in fiscal 2016 with more growth and HRS and IEI, would you expect operating margins to move about 3%? You are pretty close to 3% now, but I'm just curious if you think you can move above three? Thanks.

So hey Sherri, this is Chris. So we laid out the vision last year at our Investor Day as to our long-term model and the growth rates of each of our underlying business and target margin ranges, if you will, for that. And again margin will be fundamentally the result of our mix but clearly if you take that framework that we devised last year and put that into just this past quarter you would see us in the range based on our revenue mix of 31 to 43. We are just shy about $10 million of getting into the low end of that range. We continue to make progress. We have a very strong focus around our execution and around improving our operating efficiency. And so surely that is our focus and commitment to drive ourselves into that vision range of operating margin.

Thank you.

Great! Operator, I think we are out of time, but as Mike said I wanted to let everybody know that we have narrowed down the dates for our Investor and Analyst Day here this year. It will be May 6 or 7, we are going to narrow that down very shortly. It will take place in New York City, so expect to save the date – formal save the date from us in the next few weeks. And at the same time, I’d like to thank everyone for joining us on the call and this will conclude our conference call. Thank you.

This concludes today's conference call. Thank you for participating. You may disconnect your lines at this time.