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Executives

Kevin Kessel - Vice President of Investor Relations

Christopher E. Collier - Chief Financial Officer

Michael M. McNamara - Chief Executive Officer

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co.

Shawn Harrison - Longbow Research LLC

Sean Hannan - Needham & Company

Brian Alexander - Raymond James & Associates, Inc.

Amit Daryanani - RBC Capital Markets

Sherri Scribner - Deutsche Bank

Jim Suva - Citigroup

Osten Bernardez – Cross Research

Mark Delaney - Goldman Sachs

Amitabh Passi - UBS Investment Bank

Wamsi Mohan - Bank of America Merrill Lynch

Flextronics International Ltd. (FLEX) F3Q 2014 Earnings Conference Call January 29, 2014 5:00 PM ET

Operator

Good afternoon, and welcome to the Flextronics International Third Quarter Fiscal Year 2014 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 Vice President Investor Relations. Sir, you may begin.

Kevin Kessel

Thank you, and welcome to Flextronics' conference call to discuss the results of our fiscal 2014 third quarter ended December 31, 2013. We have published slides for today's call that can be found on the Investor Relations section of our website.

With me today on our call is our Chief Executive Officer, Mike McNamara; and our Chief Financial Officer, Chris Collier.

Today's call is being webcast live and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ. Such information is subject to change and we undertake no obligation to update these forward-looking statements. For a discussion of the risks and uncertainties see our most recent filings with the Securities and Exchange Commission, including our current annual and quarterly reports.

If this call references non-GAAP financial measures these measures are located on the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures.

I will now pass the call over to our Chief Financial Officer, Chris Collier. Chris?

Christopher E. Collier

Thank you, Kevin and for those joining us we appreciate your time and interest in Flextronics. Let us start by turning to slide three for our third quarter income statement highlights.

We generated $7.2 billion in revenue which was well above the high end of our guidance range of $6.5 billion to $6.9 billion, with every business group exceeding our expectations. Our revenue increased over $770 million or 12% sequentially driven mostly by a robust 35% sequential growth in our High Velocity Solutions or HVS business and further supported by 5% sequential growth in our High Reliability Solutions or HRS business group.

Looking at our revenue on a year-over-year basis it rose over $1 billion or 17%, which was mostly driven by strong double digit growth of 57% in HVS and 15% in HRS, offset by a single-digit decline in our Integrated Network Solutions or INS business.

We continue to expand our adjusted operating income, increasing it $28 million or 18% sequentially to $187 million. This was at the high end of our guidance range of $160 million to $190 million. After accounting for $13 million of stock-based compensation our GAAP operating income totaled $174 million.

Our adjusted net income for the third quarter was $164 million which was up $30 million or 22% sequentially. This adjusted net income translated into adjusted EPS of $0.26, which reflects a sequential increase of 18% and it exceeded the high end of our guidance range or $0.21 to $0.25. Lastly GAAP EPS was $0.23, up 21% sequentially.

Now turning to slide four you will find our trended quarterly income statement highlights. Our adjusted gross profit dollars rose $30 million or 8% sequentially to $400 million. There are a few levers behind our gross profit dollar improvement worth highlighting. First we saw improved utilization and overhead absorption driven by the revenue growth across our HVS and HRS segments.

Second we realized continued operational improvement in Multek our printed circuit board business, which achieved quarterly profitability and then to a lesser extent we realized the remaining incremental benefit from our restructuring efforts that we concluded last quarter. However our gross profit expansion was still burdened by some operational inefficiencies and greater product ramp costs associated with several of the complex programs we've been ramping. Expanding our operation income remains a key financial objective and focus.

This quarter our adjusted operating income increased $28 million or 18% sequentially to $187 million. This increase resulted from our improved gross profits coupled with our ability to leverage our SG&A expense, which ended the quarter at $213 million.

We are pleased with the increased cost control discipline this past quarter as we were able to operate below our expected SG&A level of around $220 million while we continue to make investments to support our initiatives around innovation. This quarter our operating earnings expansion resulted in our adjusted operating margin rising 10 basis points to 2.6% and we remain focused on driving further operating profit dollar growth.

Now let us turn to slide five for some color around our other income statement highlights. Net interest and other expense amounted to roughly $15 million in the quarter which was better than our guidance of $20 million due mainly to our realization of stronger than expected foreign currency gains. From a financial modeling perspective we continue to estimate quarterly net interest and other expense to be in the range of $20 million.

Company's adjusted income tax rate was 5% for the quarter, which was below our expected range of 8% to 10%. We continue to expect that our operating effective tax rate will be in the 8% to 10% range absent any discrete one-time items. Now when reconciling between our quarterly GAAP and adjusted EPS we see a negative impact of $0.03 on our adjusted EPS due to a recognition of $13 million of stock-based compensation and approximately $6 million in intangible amortization.

Our weighted average shares outstanding for the quarter was 619 million shares, which was down from 624 million shares in the prior quarter. This reduction reflects the impacts from our share repurchase activity. During the quarter we repurchased 5.9 million shares at an average cost of $7.56.

Please turn to slide six to discuss working capital management. Our inventory increased $96 million or 2.5% sequentially. When analyzing our inventory it’s important to consider a discrete adjustment that has a meaningful impact. During the quarter we secured approximately $700 million of advance payments from a handful of our customers. In certain instances the level of inventory reduction or consumption was not a contractual threshold causing elevated inventory levels.

However in response we work with these customers to provide the necessary funding to offset the increased levels of inventory we’re carrying for them. We record these advances as a current liability and in the future as we produce or sell off the associated inventory we expect to see a corresponding decrease in our current liabilities, thus a neutral impact on our cash flows. It is important to understand that we’re not taking on any additional risk with this inventory and that we have secured appropriate compensation for this incremental working capital we’re deploying on behalf of certain customers. For illustrative purpose I have reflected in a shaded section on slide six what our inventory balance would be after netting the incremental $700 million of customer advances during the quarter.

We continue to manage our working capital within our targeted range of 6% to 8% of our net sales and the December quarter came in at 7.3%. We expect to continue to manage working capital within this targeted range. Our cash conversion cycle this quarter was 23 days which improved one day both sequentially and from the prior year. We expect our cash conversion cycle to remain within the 20 to 25 day range.

If you turn now to slide seven I will talk about our cash flows. We generated cash from operations of over $760 million this quarter and year-to-date we have now generated over $1.1 billion. We used our operating cash flow to fund our capital expenditures of $150 million for the quarter which is generally in line with our expectations.

Our CapEx focus remains on investing in production equipment to support our mechanical operations, increasing automation, further investing in our innovation strategies and general capacity additions consistent with our revenue growth. We expect capital expenditures will be below our depreciation levels beginning in our fourth quarter and throughout calendar 2014.

Free cash flow of $614 million was very strong for the quarter and benefited from our ability to collect customer advances that were necessary to offset the current elevated inventory levels we’re carrying. We’re very pleased with our ability to continue to generate strong, sustainable free cash flow.

During the quarter we repurchased roughly an additional 6 million of our shares. And year-to-date we have spent approximately $363 million repurchasing 7% of our shares and have already surpassed what had been spent in the entire prior fiscal year. Our share repurchase plan has been, is and will continue to be a key feature of returning value to our shareholders.

Now turning to slide eight we’re providing some insight into our current capital structure. As you can see we continue to operate with a strong capital structure. Our total liquidity remains healthy at just over $3.1 billion with our cash totaling $1.6 billion. Our total debt remains slightly above $2 billion and our debt-to-EBITDA ratio remained consistent with the prior quarter at two times.

Before I conclude I'd like to provide some insight on the work force reduction efforts we've highlighted in the earnings press release today. We're taking definitive actions focused on realigning our SG&A cost structure. These actions are intended to optimize our infrastructure and our productivity. We expect to record charges in our fourth quarter in the range of $30 million to $35 million comprised primarily of employee severance and benefit-related costs. Upon the completion of these planned activities we expect quarterly SG&A savings of $50 million essentially reflecting a two quarter payback on this action.

With that I’ve concluded the recap of our third quarter performance. It was a strong quarter as we hit our core financial objectives. We grew our revenue, which came in above the high end of our guidance and up 12% sequentially. We continue to expand our adjusted operating profit dollars, growing 18% sequentially. We drove continued adjusted EPS accretion which also increased 18% sequentially. We generated strong free cash flow amounting to over $650 million year-to-date and is well past our earlier fiscal year target of $400 million. And lastly we continued our focus on providing shareholder returns, as we repurchased nearly 6 million shares while we invested further in our business.

Now Mike will provide you an overview of the business, current trends as well as share our next quarter financial guidance.

Michael M. McNamara

Thanks, Chris. The December quarter marked the third consecutive quarter of expansion for the key metrics of our business. We delivered strong sequential growth in revenue, operating profit dollars, net income and earnings per share. We also expanded our adjusted operating margin percentage even with HVS programs responsible for most of our revenue growth this quarter. Free cash flow was very strong at $614 million and we are now comfortably going to exceed our fiscal 2014 free cash flow target of approximately $400 million by over 50%. The overall macro environment remains stable but we still see a fair amount of uncertainty and cautiousness across our customer base and we expect this challenging environment to persist in calendar 2014.

We have grown our quarterly revenue over 35% from our March quarter and this growth has created efficiency challenges for us and in some cases incremental cost as we ramp our system. As we exit our March quarter we are largely through these ramps and we anticipate a stable year ahead. Our focus as a company in this stable environment will be to drive productivity, cash flow and earnings per share growth.

We are taking targeted actions to realign our corporate overhead. We will invest $30 million to $35 million to optimize our cost structure with most of the targeted actions focused on reducing SG&A expenses. We expect this will allow us to reap significant productivity in the administrative portion of our cost structure without degrading our operational capabilities. Much of this productivity is on the back of significant investments in our India shared-services center which added over 1,500 people in the last 12 months. The underlying payback on these actions is very quick and we expect to be realizing a quarterly SG&A savings of $50 million effective the June quarter.

Presently we see our company fully invested in the working capital and CapEx required for the new programs launched this year. And as Chris mentioned we expect to under spend CapEx relative to depreciation for all of calendar 2014. This will help generate continued strong free cash flow into next year. We expect to continue to invest in the programs that we believe are differentiators for the markets we play in.

I would like to share with you several initiatives that serve as proof that our investments are beginning to payoff and our differentiation is increasingly being acknowledged by customers and other third parties alike. First our Milpitas production innovation center or PIC was honored with the coveted INDUSTRYWEEK’s best plant award. We invested over $30 million into our product innovation center strategy and this PIC in particular is right in heart of Silicon Valley and a true showcase site.

Additionally during the past year we've inaugurated a handful of other PICs throughout the world to support our customers in all key geographies. We are enabling and scaling innovation for our customers at a time when new disruptive hardware technologies and companies are growing rapidly.

Second, in July we announced the formation of a Lab IX hardware accelerator program. And in November we released the names of its first four early stage disruptive hardware technology companies that would be supported. Lab IX is primarily based in Silicon Valley and Israel and works hand-in-hand with our product innovation centers. We are rapidly expanding relationships with component and product innovators through this program.

Third, we discussed back in our May Investor and Analyst Day the importance of real-time information to manage world-class supply chain. We now have a very strong product offering using the latest generation software architecture to increase visibility and reduced risk in supply chains through the use of real-time information. Stay tuned for more information around this topic in the next month as it is formally launched.

Please turn to slide nine where we review our revenue performance in more detail. Now let me spend a little time on each of our business groups. Our Integrated Network Solutions or INS business growth was flat sequentially, slightly better than our expectation for single-digit reduction. Revenue was $2.6 billion and reflected a $10 million increase above prior quarter levels. Telecom and networking both declined single-digit sequentially. Server storage on the other hand rose double-digits on a sequential basis due to new program ramps and better demand for certain customer products. For next quarter we expect INS revenue to decline approximately 10% sequentially driven by general market weakness and typical seasonality.

Industrial and Emerging Industries or IEI revenue was $933 million and declined $7 million or less than 1% sequentially. This was better than our expectation for a high single-digit sequential decline at a small handful of customers, saw slightly better than expected demand. Next quarter we expect to ramp some previously delayed programs to more than offset any IEI seasonality and to enable low single-digit growth. We continue to see this business group having stable market demand.

Our High Reliability Solutions group or HRS, which is comprised of our medical, automotive, defense and aerospace businesses rose 5% sequentially and 15% year-over-year. This was above our expectation for a low single-digit sequential decline. The slight upside was related to a few medical customer surpassing their previously reduced forecast and automotive also seeing slight upside. Next quarter we expect HRS to decline low single-digit as medical feels some mild pressure. But overall we consider this business group to be operating in a stable environment.

Our High Velocity Solutions business group or HVS revenue rose 35% sequentially or $732 million to $2.8 billion. This was well above our expectations for sequential growth of 15% to 25% due to stronger than expected ramps across multiple new programs combined with less component constrains than initially anticipated. This growth was broad-based and not just driven by one customer.

Bettering our HVS revenue was the performance of our high volume smartphone customer, Motorola, which was the only 10% plus customer in the quarter. It was in-line with our expectations in terms of sales and we continued to make steady progress on improved profitability and cash flow generation.

We remain confident and optimistic that our position within Google's hardware ecosystem is strong, can expand. Going forward we are no longer going to discuss the specifics of this customer, rather it will be addressed within our consolidated HVS results. For next quarter we expect HVS will encounter normal consumer seasonality, and will pressure revenues down 25% to 30%. As we look into next year we continue to believe this segment will operate at 13% to 14% of our revenues, depending on seasonal fluctuations and some volatility in this space.

Lastly I would like to provide an update on the components businesses. Power recorded its fifth straight quarter of profitability and continued strong double-digit revenue growth and is executing very well. Our power business is already recognized as the technology leader in mobile chargers and with our new Powermat relationship we’ll be at the forefront of the next generation of wireless charging.

Multek, our print circuit board operation was profitable for the entire quarter. Our Multek restructuring was very successful in reducing our breakeven level, driving increased efficiency and improving productivity. We anticipate its profitability to improve throughout next fiscal year. Demand is strong and execution continues to improve. We’re increasingly confident that our component businesses are positioned to earn an above average operating margin going forward.

Now turning to our guidance on slide 10, guidance for our March quarter revenue is $5.9 billion to $6.3 billion. Our adjusted operating income is expected to be in the range of $140 million to $170 million or $155 million at the midpoint. This equates to an adjusted earnings per share guidance range of $0.18 to $0.22 per share. Quarterly GAAP earnings per diluted share is expected to be lower than the adjusted earnings per share guidance that I just provided by $0.05 to $0.06 with the costs associated with SG&A reduction and approximately $0.03 for intangible amortization expense and stock-based compensation expense.

With that I would like to open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Matt Sheerin with Stifel your line is now open.

Matthew Sheerin - Stifel, Nicolaus & Co.

Yes, thanks and good afternoon. Mike I am wondering, I am hoping that you can comment on reports that just hit the wires on Lenovo acquiring Google’s handset and the Motorola handset operations, how that might impact your relationship with Google in terms of manufacturing and your relationships with Lenovo?

Michael M. McNamara

Yeah, so first of all we don't want to speculate what may happen or may not happen and because obviously this is some news that you have probably just seen recently. What I can tell you is our original intent with the whole Motorola deal, which I think we have repeated quite frequently was to build a broader relationship within the Google ecosystem where we believed over time we would find a lot of different disruptive hardware products coming out that we would be able to participate in. We think that’s intact.

Our relationship with Google is very good. We’ve been ramping programs and we think that remains intact independent of any future direction of Motorola. So we believe that we’ve been quite successful making the transition to build a broader relationship.

As it relates to Lenovo we have a very good relation with Lenovo. We received this Supplier Quality of the Year award last year. We do work with them today in Europe, China and the U.S. and the relationship at executive levels is also very, very strong. So as relates to Lenovo we look forward to working with Lenovo, to the extent that is where the business ends up and we’ll look to build on that relationship which is already pretty strong and pretty broad.

And I almost have same comment as it relates to the IBM announcements that came our earlier. We’ll look to have this be an opportunity for us to grow. So I think the question is a good one and in both these companies, both Google and Lenovo we have very good relationships.

Matthew Sheerin - Stifel, Nicolaus & Co.

Okay, great. And just as a follow-up, in terms of the restructuring it looks like it’s focused all on SG&A and not any operational reductions and headcount reductions. Are you happy with the footprint that you have in terms of the people in place and in terms of the leverage going forward where the cost cutting is really just focused on expenses at this point?

Michael M. McNamara

Yeah, we actually are very happy with it. We’ve made some adjustments just over a year ago with our footprint. We think it’s the right footprint. You can see some of the benefits as it rolls off into Multek where we made some very specific comments around their improved profitability and operating performance, largely on the heels of that restructuring.

As we look forward we had a very, very complicated year this last year. We did have a lot of ramps that we talked about. We closed some factories. All those things carry with it double expenses from an administrative standpoint. So we are kind of beyond those expenses now and it’s the time for us, as we look forward we see a much more stable business, stability is, we are looking forward to and it’s a good thing because it allows us to drive productivity.

So we are in the mode of driving that productivity very hard particularly as it relates to the administrative place because we don't believe we need to take down our operating footprint and we don't want to degrade any of our operating capabilities and we are going to drive hard on administrative efficiencies. So you are going to see that. And the other thing I'd like to add is, is as you can see the return on investment and how fast that flows through will be very, very rapid.

Matthew Sheerin - Stifel, Nicolaus & Co.

Okay. Thanks a lot, Mike.

Michael M. McNamara

You are welcome.

Operator

Thank you. Our next question comes from Shawn Harrison with Longbow Research.

Shawn Harrison - Longbow Research LLC

Hi. I wanted to follow-up on the cash balances for excess inventory. If you could maybe talk about what market verticals, kind of affecting those cash balances and just any more detail on that, because I guess that's the first time I've heard of that large a number from you guys in a while?

Christopher E. Collier

Hi, Shawn this is Chris.

Shawn Harrison - Longbow Research LLC

Hey, Chris.

Christopher E. Collier

So let me frame it up in a certain way here, probably not going to get around the specifics around this segment or customers that contribute to that. But so inventories primarily are our customers’ responsibility and we generally procure based on their demand. So what we saw is a handful of customers that needed to provide us with an appropriate level of compensation because we are carrying elevated levels of that inventory for them. And so those levels are beyond contractual levels that we had established.

So in response we secured around $700 million of economic relief. And we're really pleased with the ability to achieve that and secure that. We view these events as creating more of an economic consignment of these goods where we still have title but we've been fully reimbursed economically. So I think it’s important to understand that we don't have any incremental risk with these higher levels of inventory but rather think of it as still having us bearing custodial risk associated with this.

But as you think about how it impacts cash flows, essentially we supercharged this current quarter with advances. And so we played a little bit with some of the timing, tapping some of our future cash flows a little bit in advance here. So the impact to cash flows going forward is going to be relatively neutral as the release of the liability aligns with the sale of inventory. I'd probably expand and just say that we would have expected a greater cash flow in our Q4 and but now we are only going to see a modest generation as we've already received some of that cash flow in this period.

And so I think just going back we are seeing modest free cash flow in Q4 well in excess of where we had anticipated free cash flow of the year at $400 million. So we are pleased with the ability to engage with the customers and manage net working capital this way.

Shawn Harrison - Longbow Research LLC

Chris, I mean is it one sector, is it multiple sectors if you are not willing to elaborate on just kind of…?

Christopher E. Collier

So it’s not just one sector, it is multiple sectors and it’s a handful of customers. So it was unusual, that's we've called it out and I think that's the color I can give you.

Shawn Harrison - Longbow Research LLC

Okay. And just a brief of follow-up on kind of the Motorola-Google relationship, being at a 10% customer I mean how much did Google represent of that. Just trying to get an idea of how much you have been able to kind of integrate yourself with Google so far, if you can comment.

Christopher E. Collier

Yeah. So as we stated in the prepared remarks the Motorola was 10% customer for the quarter, 10% plus. How I would characterize the Google relationship is that it’s continuously emerging, as we continuously expand with them. And it’s now -- it’s entering into a top ten customer for us.

Shawn Harrison - Longbow Research LLC

Okay, on its own.

Christopher E. Collier

On its own, yes.

Shawn Harrison - Longbow Research LLC

Got you, very helpful. Thanks so much guys.

Christopher E. Collier

Thank you.

Operator

Thank you. Our next question comes from Sean Hannan with Needham & Company

Sean Hannan - Needham & Company

Yes, can you hear me?

Christopher E. Collier

Yes.

Sean Hannan - Needham & Company

Okay, great, thanks. So just see if I could follow-up a little bit around the PCB and the power business. Just trying to see if I can get a sense of little bit more on the trajectory that you see this calendar year and what's specifically driving that, if you could elaborate on that a little bit, Mike that would be helpful? Thanks.

Michael M. McNamara

Yeah. So we closed two factories, one if Brazil and one in Germany. Our remaining factories are in Minnesota and in China with about 80% of that revenue being in China and the revenue in Minnesota being highly specialized Flex Circuit business that's predominantly for aerospace, defense, automotive and kind of the high reliability group customers.

So this efficiency allowed us to reduce our G&A pretty substantially and the focus to just only have two operations with 80% in one location allowed us to really focus on efficiency and productivity. We've changed -- you asked for power or Multek?

Sean Hannan - Needham & Company

You just spoke both.

Michael M. McNamara

Yeah, both. So we changed some of the management team and we beefed the management team simultaneously and at the same time our revenue growth has actually been quite impressive. So we are outperforming the average revenue growth in the industry and the pace of the industry we're actually outperforming that.

Part of that outperformance is on the back of our increased revenue that you are seeing in the EMS biz, a lot of that has pulled through. So we do a lot of work with local business, we do lot of other customers that have been ramping. So it's allowed us to get much higher utilization in the factory. So it's just a little bit of everything but everything put together has put it into a trajectory that we are very happy with it. And it's very close to achieving even our target profitability at this point.

Sean Hannan - Needham & Company

Okay. And I think a lot of that move is pointing through to profitability and that's helpful. I think you folks have been really directing us toward that improvement for a bit. I was more pointed towards the business activity. It sounds like you answered part of that in terms of you got flow-through coming through from the EMS side and didn't know if there are any other contributors?

Michael M. McNamara

Not really, it's -- I’d not call it, pretty broad based in terms of what's going in there. One of the other things I mentioned a couple of EMS programs that are flowing through like Google and Motorola but the other thing that we're getting a lot of traction on is growing pretty rapidly in the variables business.

We probably have some of the -- and part of the upside to our $7.2 billion, a lot of that was built on the variable strength. We have very, very strong position in multiple industry leading customers. Those products make heavy use of Flex Circuits and we did Flex which is exactly what the Multek operations do.

So we additionally as we've added to our product innovation centers here in Silicon Valley we've also added a whole technology group that's focused on providing solutions using Flex and rigid Flex which is somewhat unique to Flextronics. Very few companies have both the rigid and the flexible in one location and it allows us some additional capabilities and some additional differentiation.

And by engineering that into some of these industry leading variable companies has provided a lot of revenue upside as well. So there is just a lot of dimensions. I would call the growth very broad-based and even across different kind of product categories, even within Multek. So that's why I think we're pretty pleased, we kind of view the operational restructuring done, we view the management changes that we made done, there is a broad base of revenue coming into it. We would expect to outperform the industry again this year in terms of revenue growth based on the forecast we have and so we're pretty pleased with it.

You also asked about power and power does not -- any real new news. We continue to do very, very well, we have satisfied with the performance for well over a year. We've doubled down on that business by engaging in the Powermat, not doubled down, but we've increased our penetration into that business.

We have the highest technology in the mobile charging business today. We have by adding the Powermat relationship we want to make sure that we maintain our technology leadership within mobility as it relates to charging mobility, we think mobile charging is an important feature of what the future will -- that we will need for the future. And we think Powermat’s a great power to -- a great partner to take us to the next level. So kind of a lot of dimensions on both those different businesses and so we're actually bullish on both.

Sean Hannan - Needham & Company

Great, thanks for all the color Mike.

Michael M. McNamara

You're welcome.

Operator

Thank you. Our next question comes from Brian Alexander with Raymond James.

Brian Alexander - Raymond James & Associates, Inc.

Yes, thanks. I don't know if you said this specifically before but I guess I'll just ask the question. Were you actually profitable in the December quarter with your large mobility customer and do you still think that you can sustain profitability with that customer, even accounting for seasonality going forward if we were to see a big drop off in March do you think you will still make money there? And I have a follow up.

Michael M. McNamara

So look I think we’ll have normal seasonality as it relates to profitability of mobile customers with this customer. One of the comments that I made is we’re kind of done with all of our ramps and -- but I actually don't want to get into specific profitability on the customer. So I actually think it will perform normally. I think it goes down in the March quarter, it goes way up in the December quarter and I think we’ll see that over the course of next year. So I think it will perform normally and because we don't have any start-up charges or excess charges that we have to absorb like we did last year. So but it’s actually become uncomfortable talking about their revenue and their profit and we’re actually trying to not talk about their revenue and profit, both for them and for us.

Christopher E. Collier

But [Sean] one of the highlights though in the prepared remarks we did highlight that we were in line with our expectations, both in terms of revenue and in terms of the profitability for that customer this quarter.

Brian Alexander - Raymond James & Associates, Inc.

Got it. That makes sense. Just a follow up on gross margins, if I back into the gross margin for the March quarter from your overall revenue and operating income guidance, Chris it seems like you should be back above 6% which you haven’t been above in several quarters and you are doing it with a higher mix of HVS, which we all know is lower margin. So the question is do you think you’ve hit a new watermark on gross margin based on all the actions you have taken and do you think that you should see gross margins stay above 6% each quarter going forward with the exception of December, when you have the HVS mix back up?

Christopher E. Collier

You highlighted couple of good things here. So yeah the implied guidance does represent having a fixed handle on the gross margin. It really is going to be a function of the mix. You see the mix shift in our March quarter shifting back to heavier concentration of the low volume, high mix businesses that we operate. I think we’ve taken distinct actions over the last 12 months to drive a different operating cost model and structure. I think you are seeing benefits of that as we progress this next year.

We also highlighted we are tacking on the SG&A line. But going back to gross margin I would anticipate seeing us continue as long as that mix stays in that same balance, the handle over the fixed going forward.

Brian Alexander - Raymond James & Associates, Inc.

Great, thanks a lot.

Operator

Thank you. Our next question comes from Amit Daryanani with RBC Capital Markets. Your line is now open.

Amit Daryanani - RBC Capital Markets

Thanks a lot. Good afternoon guys. Couple of questions from me, one, your OpEx line, it’s been fairly resilient at least on a sequential basis over here. Maybe just help us think how do we think about OpEx beyond the March quarter when some of these cost cutting benefits come in? Do you think they will get back to sub $200 million, like $195 million run rate in June and beyond or are there any offsets that we should be aware of as you get through the back half of this calendar year?

Christopher E. Collier

Hi, Amit it’s Chris. So in the framework that we have laid out we are going to spend around $30 million to $35 million on these targeted SG&A activities and we will be upon completion of those actions we will be achieving a quarterly savings of around $15 million. So you naturally will see that line item coming back down to the $200 million and below once we get through completing those activities.

Amit Daryanani - RBC Capital Markets

Got it. And I guess if I just look at your operating margin performance, especially if I stack it up against the May Analyst Day data that you guys provided and I think at that point the hope was $6.9 billion sales, 3% op margins you seem to be well ahead of that, at least on the December quarter run rate that you had. Op margin is still about 30-40 basis below what you guys were hoping for back in May. Maybe step back and talk to us about what is the gap for that 30 to 40 basis points operating margin versus what you guys were expecting back in May, when you didn't know about the Motorola ramps I think?

Christopher E. Collier

Good question. You know, that roadmap we laid out and we have continued to message throughout the year, when you see the quarter performance we just executed upon, I think there is a couple of drivers that came into play. One was that one customer that we are really not going to be talking a lot about going forward. We identified early on a higher level of profitability. While we were profitable this past quarter we’re not achieving that level of profitability. So that is contributor to the profit erosion there.

Additionally from a margin perspective you need to consider the mix of business that we sit today at the end of this quarter, nearing more 60:40 than what it was implied when you did that model before. And then again we highlighted that even in this current quarter we still were succumbing to some operational inefficiencies and ramp challenges of some of the complex programs that we continue to ramp.

So I think if you play those three elements out you see us naturally extend from the 187 out past the 200 we had said but going back from that trough of 105 to the 187 that’s 7% to 8% of an increase in a short period of time. So while it's -- we like the trajectory it can be greater and we're still working on that.

Amit Daryanani - RBC Capital Markets

Fair enough, thanks a lot and congrats on a nice quarter.

Christopher E. Collier

Thank you.

Operator

Thank you. Our next question comes from Sherri Scribner with Deutsche Bank.

Sherri Scribner - Deutsche Bank

I just had two questions one I just wanted to ask about the components business. I know you talked about that being above the corporate average. Was it above the corporate average this quarter and when do you expect this to be above the corporate average?

Christopher E. Collier

Yes, so it was above the corporate average this quarter and we anticipate it stays at that level and based on a lot of the color that Mike had given you, I can understand the feel behind that confidence.

Sherri Scribner - Deutsche Bank

Okay. And then just looking at the INS segment I appreciate the detail on that, and was a little surprised you did well in server storage as a company, I've not seen a lot of upside there. I was hoping to get little more detail on what you are seeing specifically in the networking segment and also INS has been declining on a year-over-year basis for the past eight quarters, guidance suggest the declines again what turns that business around? Thanks.

Michael M. McNamara

Yeah, I think that if I think about the macro environment for INS I think it's going to be challenged for the next -- for the foreseeable future. So it's been soft for, I think for a couple of years. I think on average the growth in the industry if you take that Huawei is even flat to down perhaps in terms of hardware growth and I think that will continue to remain a challenged segment.

Our upside in server storage is probably more from new programs that we brought in as opposed to industry dynamics and the industry sell-through going up. So it's more a Flextronics unique thing, it's not that server storage got better.

But I think if I look at the overall INS revenue going forward we do expect it to be relatively flat growth for the foreseeable future, except for this quarter. The March quarter it always goes down. If you look at the March quarter 10% of our businesses, a year ago it down 10% in the March quarter. So that's actually pretty normal seasonality. But if I think about it structurally that business is really pretty flat and I think even keeping that zero is positive.

So what we're focused on is as you know we focus a lot on some of these new disruptive technologies and we go after these new companies. We're doing work with companies like -- with [inaudible] and Power Optic Networks and [inaudible] and Cyan and if you look at the amount of the hardware disruptors or maybe hardware/software disruptors in this market we have a very, very strong market position with them.

So what we're trying to do is to be able to augment some of that weakness that you see in the core businesses with some of those new disruptors and hopefully we'll be able to keep this at -- and I think the result of that end up being a reasonably flat market for us.

Sherri Scribner - Deutsche Bank

Thank you.

Michael M. McNamara

You're welcome.

Operator

Thank you. Our next question comes from Jim Suva with Citi.

Jim Suva - Citigroup

Thank you and congratulations to you and your team, I mean absolutely great results and outlook very strong too. First, just a housekeeping question and then kind of a more strategy question. A housekeeping question for your EPS guidance, does it include stock buyback because or is that just kind of more of the run rate of the stock buyback that you have done?

Then on the strategy question, you've got some very big parts of your business where the customers are potentially changing specifically the Motorola, Google as well as IBM assets but then Lenovo is also a current customer of yours. Are you able to, for lack of a better word secure or negotiate or come upon agreement upon that business staying with Flex before the transactions happen or is it all after the transactions happened because I guess the fear is in a year from now are we looking at, I am just going to pick at a number here 18% of your company's business could potentially be in-sourced?

Christopher E. Collier

So 18% would be Motorola plus IBM or how do you describe it 18%.

Jim Suva - Citigroup

Yeah.

Michael M. McNamara

Okay, so listen we don't know what the world looks like going forward. What we do know is we have a fabulous relationship with Lenovo. We know that we provide some very strategic services for Motorola and for IBM. We would work to try to build and use this as an opportunity to leverage that relationship that we have with Lenovo to do more work from. Maybe they are going to in-source it someday. I mean I don't mean to say that they won't ever do that but probably would take a long time and they don’t even in-source everything that they have today.

So I would look at this as an opportunity to build on that relationship. I think we talked about being Supplier of the Year last year, I think at Analyst Day two, two Analyst Day's ago we actually showed you guys a video of Lenovo and what we view is to be the most advanced supply chain in the world which is in Europe and it’s inlet on the products and it goes all the way through the manufacturing and distributions in to end customers that we do for Lenovo.

So I'd like to think of that, we -- it’s an opportunity for us to build on that relationship. So I think if someone was going to buy the assets, I think Lenovo would be a great choice for Flextronics. And we would look to just build on it.

So but I mean where it goes a year from now, who knows right. I mean it’s going to take a lot of time. It would probably take them six months to get anti-trust approval, I mean it’s going to take time to work its way out. And we just have a lot of time to work a lot of different things between now and then. But we are super happy that we are in a position with the buying customer that we have a very, very good relationship and they think we are a very high quality manufacturer.

Christopher E. Collier

And Jim back to your first question, the weighted average share count that we provide in the guidance of $650 million reflects the benefits from last quarter’s purchases. Our guidance will never reflect any forecasted or anticipated share repurchase activity.

Jim Suva - Citigroup

Okay. Great. Thank you very much and then again congratulations on the great margins and profitability and sales.

Michael M. McNamara

Thanks.

Operator

Thank you. Our next question comes from Osten Bernardez with Cross Research.

Osten Bernardez – Cross Research

Hi, good afternoon, thanks for taking my questions. I guess just to begin, with respect to Google, Motorola and Lenovo, I guess hypothetically if we were to assume that given your relationships with all three companies, that if you are able to continue manufacturing those devices, would you foresee any changes in pricing as it relates to the deal?

Michael M. McNamara

Well it’s actually hard to say but what I can tell you is that the pricing that we already do for this kind of HVS business is very aggressive, it’s always competitively bid. So I think it’s at market and as a result of being in that market I think we can be pretty comfortable that there is not going to be a significant change in pricing.

Osten Bernardez – Cross Research

Thank you for that. And then with respects to your comments on the ramp costs that you experienced during the quarter. Would you be able to point to any specific served markets where those expenses were higher than you expected, or consisted of the large portion of those expected, excuse me?

Christopher E. Collier

Hi, Osten. So we actually had several ramps that we've talked about previously that span multiple segments. Primarily what I am alluding to here is more in the INS and IEI businesses this past quarter that had a more meaningful impact on our performance.

Osten Bernardez – Cross Research

Got it, thank you very much.

Christopher E. Collier

Thank you.

Operator

Thank you. Our next question comes from Mark Delaney with Goldman Sachs.

Mark Delaney - Goldman Sachs

Thanks very much for taking the question. I was hoping first if you could elaborate a little bit more on the impact of Motorola on your business and potentially any impact that Lenovo was having. So maybe if you could help us understand, if you think any of the current strength in your revenue in this current quarter of Motorola products was potentially related to Google, prebuilding inventory ahead of a potential sale. And then specifically I wanted to make sure I understand if your guidance for the March quarter is assuming any negative impact on the Motorola products related to the proposed sale?

Christopher E. Collier

Yeah. So I don't know if there is that much to add. We are just not ready to speculate on what may or may not happen overtime. Like I said it’s going to six months to probably get to the regulatory approvals and all those other things. And then who knows what their operating strategy is going to be on a go-forward basis.

We just know we are positioned well with them. We've got a capability that they need and I think we will just go build the relationship up with Lenovo and continue building it and see how it works. But I don't expect anything to change in the near term.

So regarding your last question about is there a negative impact, is anything contemplated as a result of this news in our forecast the answer is no. So we’re just assuming it’s a steady stage go-forward kind of basis. So we don't anticipate -- we don't foresee a negative impact in the near term.

Mark Delaney - Goldman Sachs

Okay that’s helpful. And then in terms of that restructuring actions that you guys talked about is any of that related to the Motorola products right now?

Christopher E. Collier

No really that is not you know factory specific. That’s really focused on lot of our kind of what I call corporate overhead and administrative overhead that we use to run the company and like I said a lot of that overhead is almost, we had a double banging a bit just last year just because of the amount of work we’re doing and the new ramps and it just takes a lot more effort and cost.

And as I mentioned by the time we get through the March quarter we believe we’re done with those. And so we still have a little bit of residual ramp up cost coming in the March quarter but then it flows out. So we’re getting ahead of the game and we’re rapidly as possible going to take out some of that redundancy. We see a very stable year next year and we have the right physical asset set-up for our facilities. So we’re pretty pleased with that and it’s a great opportunity for us to drive productivity and cash flow. That’s what we’re going to do and we’re going to get out ahead of it. And we’re going to be aggressive about it.

Mark Delaney - Goldman Sachs

Thank you very much.

Christopher E. Collier

Welcome.

Operator

Thank you. Our next question comes from Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank

Hey Mike sorry to beat a dead horse. I just wanted to try this one other way. Can you give -- can you remind us what the scope of your relationship is today with Lenovo? Are you predominantly on the computing side with them, are you also doing mobile devices for them? I just want to get a reminder and a refresher on kind of the scope of your relationship today.

Michael M. McNamara

Yeah we do quite a variety of different things. We do not do any mobile phones with them today. We do, do quite a different computing products and repair and logistic operations around the world in a variety of different locations but we do not do any mobile manufacturing of any kind.

Amitabh Passi - UBS Investment Bank

Okay, thanks. And then Chris just I apologize. Just a clarification of the $60 million annualized savings in SG&A did you say by the June quarter you will actually realize or get to $15 million per quarter run rate or will that take longer?

Christopher E. Collier

Upon completion so maybe this lags a little bit, we’re going to be at that $15 million a quarter. You should see us roughly in that range around that June period but really as soon as that is fully complete and we’re making our best efforts to tackle those measures quickly.

Amitabh Passi - UBS Investment Bank

Okay. All right, thanks. That’s all I had. I appreciate it.

Michael M. McNamara

Operator, we have time for one more question.

Operator

Thank you. Our last question comes from Wamsi Mohan with Bank of America Merrill Lynch.

Wamsi Mohan - Bank of America Merrill Lynch

Yes, thank you. And Mike could you tell us how large your business with Lenovo is currently and also could you size the variables business. How large it was this past quarter and how large you think it could be in annual revenues? And I have a follow-up.

Michael M. McNamara

Yeah Lenovo is, it’s probably I would say roughly around $500 million business for us today. I don't know exactly that number and obviously it moves around little bit by quarter but it’s about $500 million. And as far as the variables go that’s ramping rapidly. So on the variables business the question is what is it this quarter and what is it next quarter, we’re close to $500 million run rate with variables and we actually think that can accelerate going out in 2014.

Wamsi Mohan - Bank of America Merrill Lynch

Okay, thanks. And as a follow up, there was some talk about Foxconn talking with various states here in the U.S. to set up some manufacturing operations. How worried should investors be about the risk of Foxconn starting to target some of the higher margin markets?

Michael M. McNamara

As it relates to Flextronics, zero.

Wamsi Mohan - Bank of America Merrill Lynch

And that’s because…?

Michael M. McNamara

I think to set up -- so first of all part of what they talk about us is LCD displays and set up an LCD manufacturing operation and they talk about automation, building robots, that’s kind of stuff. I mean first of all we don't do LCD displays. We don't build robots and there is no market that I know of in the United States that we participated where putting up a fully automated factory with robots is going to service any of our customers.

So if that’s a direction and activity that they are going to launch I actually don't think it conflicts with any business that we see in the United States. Second of all we’ve already got like a huge position in the United States and we are in like 10 sites, we’ve got five million square feet, we’ve 10,000 employees, we’ve got know-how experience, we’ve got already set up operations, we don’t have greenfields, we have production introduction centers, we have Lab IX, we’ve got innovation centers, we’ve got, the amount of things we’ve is pretty overwhelming.

You know come in Silicon Valley we have a million square feet if they want to, in Texas we’ve probably a 1.5 square feet, almost 2 million square feet, we’ve probably 2 million square feet in Texas. If you go into the Carolinas we -- I have like 800,000 square feet and doing distribution we’ve had operations for 15 years in the United States and we have the customer base. So to do a low-volume high mix work takes patience and time. And it’s just hard, I think to have that patience and time when you are $130 billion company.

So I think that the impact is for all those reasons, is actually pretty low. And it doesn’t mean they won’t come in and do some things but it probably won’t be within our core business.

Wamsi Mohan - Bank of America Merrill Lynch

Okay, thanks appreciate the color. And lastly Chris, what caused the lower tax rate this past quarter and when do you see that reverting back to 8% to 10%? Thanks.

Christopher E. Collier

I am sorry, didn’t hear that. Can you repeat that please?

Wamsi Mohan - Bank of America Merrill Lynch

Yeah, sure. I was asking about the lower tax rate this past quarter, what caused it and when do you see the rate reverting back to 8% to 10%.

Christopher E. Collier

We are guiding to stay in that same range of 8% to 10%. This past quarter, you saw us slightly below that. It’s really a mixed bag driven by a whole host of different items from the amount of earnings in different jurisdictions to changes in the valuational allowances, to even changes in certain tax positions. So it’s all around the place, but a lot of moving parts. I just should say going forward, it’s anticipated to stay within that 8% to 10% range.

Wamsi Mohan - Bank of America Merrill Lynch

Okay, thank you.

Michael M. McNamara

Okay, thank you everybody for joining us on our call today. This concludes the call.

Operator

Thank you. That concludes today’s call. You may disconnect at this time.

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