Q3 2019 Earnings Call
This time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
You asked a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you have any if you requiring further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Lisa Hedrick, Vice President of Finance.
Good afternoon, and thank you for joining assign Selectica third quarter 2019 earnings conference call on the call today, a Rodney own it President and Chief Executive Officer, and Downbeat childless Chief Financial Officer.
As a reminder, during this call will make forward looking statements within the meaning that the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities laws.
Such forward looking statements are based on management's current expectations forecasts and assumptions, which are subject to risks uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusion forecast or projection expressed in such statements.
Right Densification in discussion of such factors and assumptions as well as further information concerning financial guidance. Please refer to todays press release, including the cautionary note regarding forward looking statements therein and their annual report on form 20-F in other public filings, which can be accessed FCC dotcom in Cedar dotcom.
We assume no obligation to update any forward looking statements except as required by law. In addition, during this call we were for refer to various non IRS measures, including operating earnings operating margin adjusted gross margin adjusted return on invested capital or adjusted or like the free cash flow.
Gross debt to non I ever at <unk> trailing 12 month, adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS, adjusted EPS unique sense and adjusted effective tax rate.
Listeners should be cautioned that references to any of the poor going measures. During this call to know nine I ever us measures, whether or not specifically did is designated as such.
These non I ever us measures do not have any standardized meaning prescribed by I have for us it may not be comparable to similar measures presented by other public companies that use IRS or who report under U.S. GAAP in use non-GAAP measures to describe similar operating metrics.
We refer you to today's press release in our Q3 2018 earnings presentation, which are available at Selectica dotcom under the Investor Relations tab for more information at that these and certain other non IRS measures, including a reconciliation of historical non I ever us measures to the most direct.
We comparable I ever us measures from our financial statements.
Unless otherwise specified all references to dollars on this call or to U.S. dollars. Let me now turn the call over to Ron.
Thank you Lisa good afternoon. Thank you for joining todays conference call.
Third quarter results reflect solid execution in our dynamic demand environment.
We delivered stronger than expected result, improving our operating margin sequentially, well driving strong free cash flow.
Our Cps segment delivered another quarter of sequential and year over year margin improvements driven by improved mix bolstered by a portfolio review and calls productivity actions.
Well demand and a couple of corporate market remains muted.
And the business continued to operate at a loss we delivered sequential improvements primarily as a result of ongoing cost reduction actions as far the higher volume.
I will provide some additional color on our end markets and outlook, but first.
I will turn the call over them and they give you some details on the third quarter on a fourth quarter guidance. Thank you, Rob and good afternoon, everyone for the third quarter 2019, Selectica reported revenue of $1.52 billion above the high end of our guidance range due to program specific demand strength in enterprise.
Revenue increased 5% sequentially and was down 11% year over year.
No no area for US operating margin was 2.8% above our guidance midpoint of 2.5% and down 50 basis points year over year.
No and I have for US adjusted earnings per share were 13 cents above the midpoint of our guidance range and were negatively impacted by two cents per share of taxable foreign exchange.
Our atheist segment revenue was 37% of our consolidated revenue up from 33% compared to the third quarter of last year.
Ats revenue was relatively flat sequentially and compared to last year. It was slightly above our expectations due to demand strength in both industrial and capital equipment.
On a year over year basis, lower demand in our capital equipment business and lower revenue in our energy business was offset by high single digit growth across our other ats businesses.
Sequentially lower revenue in our energy business, including from Disengagements with unprofitable customers was offset by group and our capital equipment and industrial businesses.
In the third quarter, our Ccs segment revenue was down 17% year over year, but was above our expectations due to demand strength in enterprise.
The year over year decline in revenue was primarily driven by enterprise program Disengagements as part of our Ccs portfolio review as well as continuing end market demand softness in our communications business.
Sequentially Ccs segment revenue was up 9% driven by increased demand.
Within our Ccs segment, the communications end market represented 42% of our consolidated third quarter revenue down from 43% in the same period last year.
Communications revenue in the quarter was largely in line with our expectations and down 13% year over year due to continuing end market weakness, mostly with a few specific programs in our portfolio.
Demand strength and new program revenue in support of data center growth, partly offset this demand softness.
Our enterprise end market represented 21% of consolidated revenue in the third quarter down from 24% in the third quarter of last year.
Enterprise revenue in the quarter with above our expectations driven by demand strength and was down 24% year over year due to planned disengagements in connection with our Ccs segment portfolio review.
Partially offset by new GTM program ramps.
Excluding these disengagements enterprise end market revenue would have been relatively flat year over year.
Our top 10 customers represented 67% of revenue for the quarter up from 65% last quarter and down from 71% in the same period of last year.
For the third quarter, we had one customer contributing more than 10% of total revenue.
Turning to segment margin.
Ats segment margin of 2.8% with flat relative to last quarter as slightly improved performance in our capital equipment business was offset by unfavorable mix in the remainder of Ats.
Our capital equipment business operated at a loss in the mid single digit million dollar range, which was slightly better than expected due to stronger than anticipated demand and the impact if our cost reduction initiatives.
Year over year Ats segment margin of 2.8% was down 180 basis points, primarily driven by losses within the capital equipment business and softer performance in our Andy business largely due to material constraints. These impacts were partially offset by improved contribution from our ramping industrial and Healthtech businesses.
Excluding capital equipment, our ATM business performed well.
[noise] Ccs segment margin of 2.8% was up 40 basis points sequentially up 10 basis points year over year and was in the high end of our Ccs target margin range of 2% to 3%.
The year over year improvement with the result of improved mix and productivity more than offsetting the impact of lower year to year revenue.
Moving to some other financial highlights for the quarter.
Hi, FRS net loss for the quarter was negative $6.9 million or negative five cents per share compared to net earnings of $8.6 million or positive six cents per share in the same quarter of last year.
The decrease was due to lower gross profit and higher financing and amortization costs.
Adjusted gross margin of 6.6% was down 40 basis points sequentially, primarily driven by mix and higher variable expenses.
Adjusted gross margin was down 10 basis points year over year due to weaker Ats performance, including in capital equipment, partially offset by improved mix and productivity in Ccs.
Our adjusted EPS DNA of $49 million was better than expected and down $7 million sequentially, primarily due to favorable foreign exchange impacts and lower than expected variable spend.
No and I FRS operating earnings were $42.6 million up $5.9 million sequentially and down $13.8 million from the same quarter of last year.
We're not yet for us adjusted effective tax rate for the third quarter was 46% higher than our anticipated estimate of approximately 36% due to taxable FX costs driven by the depreciation of the Chinese RMB against the U.S. dollar.
As discussed last quarter, our tax rate continues to be higher than originally anticipated range for 2019 due to lower levels of income including losses in certain low tax geographies.
Adjusted net earnings for the third quarter were $16.6 million compared to $36 million for the prior year period.
Non IRS adjusted earnings per share of 13 cents was above the midpoint of our guidance and was down 13 cents year over year, mainly due to lower non I for us operating earnings and higher interest expense.
No and I have for us adjusted ROI see of 10.1% was up 1.7% sequentially and down 6.1% year over year, primarily driven by lower operating earnings.
Moving on to working capital.
Our inventory at the ended the quarter was $1.0 billion, a decrease of $52 million sequentially.
Tory turns were 5.4, an improvement of 0.4 turns quarter over quarter and down 0.8 turns year over year.
Capital expenditures for the third quarter were $22 million or 1.4% of revenue.
None I FRS free cash flow was $66 million in the third quarter compared to $25 million for the same period last year, primarily driven by improved working capital.
We continue to be encouraged by the improvements we've made in our working capital performance year to date, we have generated $257 million of non IRS free cash flow or $144 million without accounting for the trophy property sale proceeds of 113 million.
Cash cycle days in the third quarter were 61 days, an improvement of four days sequentially, primarily due to improvements in inventory performance.
Our cash deposits reduced to $108 million down $31 million from last quarter at certain customer deposits were returned as inventory reduced.
We continue to work with our customers on targeted inventory reductions, which we expect will be partially offset by a reduction in cash deposits in future quarters.
Moving onto our balance sheet and other key measures. We continue to maintain a strong balance sheet and remain committed to our long term capital allocation priorities, our cash balance at quarter end was $449 million up $12 million sequentially and down $9 million year over year.
We made further progress in the quarter on deleveraging our balance sheet by repaying the full outstanding balance on our bank revolver, reducing the balance from $53 million as of June Thirtyth 2019 to $0 as of September Thirtyth.
Our gross debt position was $594 million at the end of September down $54 million sequentially, while our gross debt to non IRS trailing 12 month adjusted EBITDA leverage ratio was 2.1 times down from 2.3 times as of June Thirtyth.
Restructuring charges related to our cost efficiency initiative were $10 million this quarter, bringing the total program spend to date to approximately $70 million.
Now turning to our guidance for the fourth quarter of 2019.
We are projecting fourth quarter revenue to be in the range of 1.4 to 5 billion to $1.5 billion to $5 billion.
At the midpoint of this range revenue would be down approximately 15% year over year.
Fourth quarter non IRS adjusted earnings are expected to range between 12 cents to 18 cents per share.
At the midpoint of our revenue and adjusted EPS guidance ranges non I have for us operating margin would be approximately 2.8% flat to the third quarter with lower revenue.
Non IRS adjusted SGN expense for the fourth quarter is expected to be in the range of 50 million to $52 million.
Based on the projected geographical mix of our profit in the fourth quarter, we anticipate our non IRS adjusted effective tax rate to be approximately 35%. This does not include the impact of taxable foreign exchange and any unanticipated tax settlements.
Turning to our end market outlook for the fourth quarter and our Ats end market, we anticipate revenue to be up in the low single digits percentage range year over year as growth across most of our Ats businesses, including a capital equipment is expected to be partly offset by the impact of program Disengagements in our energy business.
And our communications end market, we anticipate revenue to decrease in the low teen percentage range year over year, driven by continuing end market demand softness mostly with a few specific programs in our portfolio.
And our enterprise end market, we anticipate revenue to decrease in the high 30% range year over year, driven by planned program Disengagements as part of our Ccs portfolio review and lower demand when compared to a very strong fourth quarter last year.
I'll now turn the call over to Rob for additional color and an update on our priorities. Thank you Mandy overall, although adverse market conditions persist.
Encouraged that in the third quarter, we delivered.
The improvement in our operating margin continued to generate strong free cash flow.
The fourth quarter are projecting stable operating margin performance, while growing adjusted EPS.
During the benefits of our Ccs portfolio review program cost productivity initiatives and the benefit of certain program ramps across our business.
Well then the Ats segment, our productivity initiatives and our capital equipment business are beginning to deliver results, although not yet at breakeven our capital equipment business improved and delivered a smaller sequential loss in the third quarter.
Hoping primarily from our productivity initiatives.
Slightly higher revenue from new program ramps.
The demand environment in semiconductor market continues to remain soft. However, we are seeing some signs of improvement and our customers are forecasting a moderate level of demand growth in the first half of 2020 .
Driven by growing demand for new technology equipment.
Well, it's too early for us to size the level of demand that will return in 2020, we are encouraged that the demand outlook in semiconductor is more promising then it was three months ago.
Within our display business revenues remain depressed.
We expect a moderate level of recovery late next year as we anticipate that the demand for next generation smartphones and large formfactor displays will increase.
While we anticipate our capital equipment business to generate a loss in the low single digit millions in the fourth quarter.
We're working towards breakeven profitability or better in the near term.
Improvements will largely be driven by cost productivity initiatives and volume leverage as our bookings convert to revenue I firmly believe in the long term fundamentals of the capital equipment market.
We believe that when the capital equipment market recovery.
Ladies and infrastructure, we have him in place.
Well positioned us well for revenue growth and margin expansion.
Across the balance of Auryxia segment, we are seeing the benefits of new program ramps in industrial and Healthtech.
And we expect to improve profitability as we continue to add scale to these businesses.
R&D business continues to perform well notwithstanding inefficiencies largely caused by materials constricts.
Looking ahead, we continue to focus on expanding margins that are Ats segment.
As a result of strengthening demand in our capital equipment business growth in our the Ats markets and productivity initiatives, we have a strong pipeline of sales opportunities and strong bookings momentum with new wins across all of our Ats markets, which we believe positions us well to drive growth over the long term turning to.
Ccs overall I am pleased with the performance of our Ccs segment in the third quarter.
Despite significantly lower revenue relative to last year I Ccs segment improved margin and operated in the high end of our 2% to 3% target range as a result of our portfolio and cost productivity actions as a reminder, relaunched our Ccs portfolio review at the end of 2018 it might have evolved.
The market dynamics in the year mess industry.
Including the increased commoditization of certain products.
The goal of this review.
Let's turn identify programs that were not expected to generate sufficient returns over the long term and to work closely with our customers to address these gap with the goal of improving Ccs segment margins and releasing working capital.
As a result of this review we successfully negotiated improved commercial terms on a number of programs and identified programs with approximately $500 million of annualized revenues, which we agreed with our customers to transition or not renew.
These plan program Disengagements, which are largely in our enterprise market are on track to be completed by the end of 2019.
With an anticipated full year 2019 revenue decline I've, just over $400 million relative to last year.
As a result of the portfolio review and cost productivity actions third quarter year to date Ccs segment margin is up 30 basis points relative to last year. We are pleased at the actions associated with this program are having their intended results.
Over the last two years, we have experienced significant declines in our communications end market with revenue down 14% year to date.
On a year over year basis.
These declines are largely due to program specific market dynamics.
And in some cases have resulted in returns below our financial targets.
While we have been an active discussions with a number of our customers on actions to improve our returns we have come to a mutual agreement with Cisco to begin a planned and phase exit of existing programs beginning in 2020.
We believe this decision will enable both companies to better deliver on their strategic priorities.
As a result of the Nonrenewal of these programs, we're adding our revenue was Cisco to the Ccs portfolio review program, which is currently underway.
In the third quarter of 2019, Cisco represented 13% of revenue.
At this level Cisco would represent approximately $750 million of the company's revenue in 2019.
As a result, the overall revenue impact of the Ccs portfolio review will increase from approximately 500 million to 1.25 billion.
The impact of expanding this portfolio review will be negligible to our fourth quarter and has already been factored into our guidance as we look to 2020, we expect that the impact of our portfolio review program to which we are now adding Cisco revenue will result in a revenue reduction in the range of $400 million to $600 million as compared to 2000.
Just a nine team.
And expect the transition to be largely completed by the end of 2020.
As a result of the Cisco program transitions, we anticipate approximately $30 million an additional restructuring charges in 2020, as we realigned our cost base.
We anticipate a negligible impact to adjusted EPS next year, as we execute unnecessary cost actions and redeploy resources to support growth in other areas of our business. We look forward to working with Cisco's incredible team and providing remarkable cousins customer support.
Ensure our successful transition.
While we're not providing revenue guidance for 2020 at this time, we do anticipate revenue growth in other areas of our Ccs segment.
Including our merging enterprise and cloud engagements fueled by our GTM solutions and revenue growth in Ats to help partially offset the revenue decline, resulting from the Cisco transition.
We continue to drive the actions, we believe are necessary to deliver shareholder value over the long term and while we anticipate 2020 revenue declines from current levels.
Anticipating year to year growth in both operating margin and adjusted earnings per share to be clear.
Plus because long term success will be built by having strong franchises in both our Ats and our Ccs segments.
We remain focused on delivering high value solutions in Ccs, including JD.
While continuing to invest a new capabilities.
We believe the actions, we're taking our strengthening our company and will position us to help our customers succeed over the long term.
Now before I open the call for questions I wanted to highlight a recognition that we recently received from one of our Ccs customers Hitachi.
We are proud to have been recognized by Hitachi with their part of the year Award. This prestigious award is presented annually to one partner from across the stocks She's global network of companies.
This significant achievement is a testament to the work up all of our employees around the world to support this important customer.
I'd like to take this opportunity to thank our employees for their hard work our customers for their support and loyalty and our shareholders for their continued support of swastika.
We look forward to updating you on our progress over the coming quarters.
With that I'd like now to turn the call over to the operator to begin our culinary.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hashi.
Please standby and what we compiled acuity roster.
Your first question comes from the line of Gus Papageorgiou from Pi financial your line is open.
Great. Thanks.
Just wondering can you kind of remind us again, what your margin goals are for he Ts and Ccs and.
As you transition Cisco out.
Your longer term goals that you establish do you think they have there's upside to those goals are now you're not ready to make that commitment yet.
And then secondly.
Obviously, the Cisco is a big deal and.
Just wondering.
Junipers had or has been historically your second biggest customer what are the applications for the existing customer base and Ccs do you anticipate.
The two that there's a chance you, whose other big customers or do you think that with Cisco.
That that that kind of you kind of turned the page on on that chapter.
Okay, I guess, it's a mandeep here a nice to talk to you again I'll take the first question I'll, let Rob chime in for the second one so as a reminder, on our on our margin targets.
They remain the same so we are targeting to get back into the 5% to 6% margin range for Ats. As a reminder, we were in that range as early as a second quarter of last year.
We believe the things that we're working on right now we're going to get US there at capital equipment recovers as we continue to ramp the programs in industrial and Healthtech and as a constraint environment any indeed eases, we're expecting to be back in that range and we're working towards being in the higher end of that range on the Ccs side. The ranges, 2% to 3%, we're happy that we've been able to be in that range.
Now.
Ever since the second quarter last year.
With the performance that we saw this year as well and just targeting to continue to be firmly within the middle of that range. We believe that when those things happen it will bring our margins to.
The higher levels, we continue to target moving towards 375 to four and a half and when we're in.
Both of those.
The code that if you will we believe that will happen, we're just not calling out the timing right now just because of the market and held dynamic they can be.
And I'll, let Rob I talk with the second question.
So now with respect to any potential additional portfolio actions.
The actions.
I guess the programs that are in the current program I think once fully realize will leave us with a solid ccs portfolio, so not planning any.
Major actions additional actions at this time and obviously as the markets evolve and things will continue to with us, but right now as you put it I think once we turn to page with Cisco I think the Ccs portfolio will be a very good shape.
Great. Thanks for taking my questions.
Thanks.
Your next question comes from the line of Santas workshop was from BMO capital markets.
Afternoon.
Maybe to extend on does this question was were there any characteristics. According to Cisco business than we did a bit different from the rest of the Cts business. That's that's remaining with you maybe lower levels of GTM content or anything else can point to that would make a different.
Yes. Thanks to answer the question you know, we can't really comment specifically on the Cisco portfolio.
The only thing I can say as you know Cisco as Weve reported.
Regularly the revenues have been declining recent and are on our business, which actually put cost pressure on the entire program and that had a lot to do with.
Our mutual decision to.
To a planned and they are phased exit.
And then maybe just from a competitive perspective isn't the case that other MMS providers are being maybe lots of fun than you are with respect to the profitability they're targeting.
Or is it that's perhaps others can.
Deliver on the fiscal business more probably than you can for some structural reasons.
I think some of it has to do with mix. Some of it has certainly there with volume leverage a I would think those two things are key contributors from a cost perspective, frankly, I think our factories are the best in the world and were very productive in our factories in our quality is second to none.
And then finally for.
I guess either you on the tariff impact any any update there in terms what you're seeing.
So tariff impact I think it's the because honestly they say we haven't noticed any more material changes than we've seen in the in the past.
We generally think about in two ways, we have traditional Oems, which have been more measured.
In their actions and then as customers who.
Consume their own demand, if you will and they've been a little bit more active.
They're measures and we're working with them.
To find alternative solutions as they seek some.
Broadly in the market I would say where they've been in that recipient of market share.
As we've chosen to go after.
Thanks offline.
Thank you.
Your next question comes from the line of Paul steep from Scotia capital.
Great. Thanks.
Robert Mandeep could you talk a little bit about what how we should think about the working capital release that might come close the disengagement with Cisco in terms of the inventory reduction I know you talked about some offsets on cash deposits mandeep, but that would be helpful. And then I've got two quick follow ups.
Yes, Hi, Paul.
So if we do expect to see a positive cash impact as a result of this and that will be net of restructuring, we're not giving any specific targets at this point, but I'll point to a few things and we continue to target 100 $150 million of free cash flow in a steady state and we believe that with the decline in revenue.
With Cisco, we will be able to look at that as an opportunity on top of 100 150. If you look at the free cash flow generation. This year, where revenue is down a little bit over 10%. A you know we're in the mid 200 or close to $250 million right. Now you back at the property sale, we're still at close to $150 million of free cash flow.
And that's the first three quarters.
So it shows that that the formula can work and we believe that we're going to see some positive impacts next year as a result.
Okay, and how should we think about.
The distribution component of that Ccs business is it you have we materially sized it to you a nominal amount. After this when you sort of exit this Mount finally, and then one follow up on Atps. If you could talk a little bit of but some of the new wins that you referenced across other areas was pulled that'd be helpful.
Thanks.
Sure Paul ill take the first part so maybe just as a recap again, we expect that the impact from the program Disengagements is going to be in the ballpark of 400 to 600.
Million dollars next year, and so we will be still having a.
Decent amount of revenue with the Cisco.
In 2020 of course, there will be a little bit more heavily weighted in the first half of the year versus the second half of the year as we expected to be substantially.
Complete by the ended the year as a reminder, we will be I'm expecting growth in other parts of our business. So we expect a strong organic growth in HTS based on the many wins that we have done ramping and then we do expect some organic growth in Ccs as well the other thing I'll just highlight again.
That you know through the cost actions that we are targeting to take in the Cisco portfolio, we're expecting that the impact to EPS from that will be a negligible and 2020 and then.
Given the growth that we're expecting in other parts of the business as well as some of the profitability improvements were expecting through volume leverage we do expect to grow EPS in the rest of the business.
Impose respect to the second question, we're seeing strong growth in a Andy.
We're seeing strong growth in industrial that's driven by industrial connectivity Internet of things healthcare is growing quite nicely.
Surgical devices and plans diagnostic equipment capital equipment, Yeah. This four elements of capital equipment in our business semi cap.
Is coming into its own it's being led by a logic and foundry spend and Threed NAND. We're also seeing some strength in industrial capital equipment.
And.
It's actually covered at all.
Perfect. Thank you [laughter].
Thanks, Paul.
Your next question comes from the line out roughly about a chart from Bank of America Merrill Lynch.
Hi. This is it is there a fine.
Thank you for taking my questions.
So regarding the plan to focus the business in the enterprise segment.
Thank you are pretty happy with where the portfolio is.
Should we see the process is complete the Don or do you feel see opportunity to fund the portfolio further and maybe more generally how should we view the Ccs margin progression over the next few years.
[laughter].
Yes, so I'll take the.
First part of that in terms of the.
Actions that we've announced so far I think once.
They are completed I think the portfolio within Ccs who will be.
Very good shape. The first round of actions was obviously some centered around enterprise and adding the communication Cisco Communications program to it those two things combined will of course, exactly where we are with a with a nice mix Ccs for solid with respect to margins I'll, Let me discuss them, yes. So.
You know as Ed mentioned, our target margin range for Ccs is 2% to 3% we were at the higher into that range. This past quarter, but just to highlight what is obvious which is we are doing not only a significant transformation in the company, but we're also doing a significant transformation within Ccs as we continue to invest in areas like.
M. and grow in many other growth areas and so as we go through that transformation. We're looking to continue to stay within this range and there is some pressure on margins as you bring revenue down and we have to drive cost productivity, but we believe that I'm the 2% to 3% range is still is the right target for now.
Thanks, that's helpful.
Thank you.
Next question comes from the line of Paul Treiber from RBC capital markets.
Oh, thanks, very much I just in regards to the a the facilities and that May have been utilized for Cisco you know, what's the strategy for neither exiting them or re utilizing them for other customers.
Yes, Hi, Paul So the work we do for Cisco is isolated to our Thailand facility. It's in a dedicated building.
And as other programs that we have within our Thailand facility that actually growing so while we're working to.
Action some of the costs associated with that we're also looking to redeploy as many people it's possible to.
Other parts of the business as other programs around.
Maybe just add onto that Paula as you're probably familiar Thailand is a very large campus for us. So one of the largest areas of our of our business and as a result of the tariff challenges that have been going on now for a couple of years, we have been seeing a significant amount of growth I'm moving towards Thailand, as Rob mentioned earlier, we believe we've done a net risk.
At the end of the a tear situation with business coming out of China, and so number one is we believe that we can isolate G costs that need to be action.
Within the campus and then a we're also in the process of ramping business, where we can redeploy a lot of that a structure.
Thank you that's very helpful. Just secondly, just in terms of the comment that the EPS impact from the Cisco disengagement will be negligible. The I mean, just thinking it through like should we think of the profitability on that type of business as as well below the targeted two to three.
Percent range for Ccs overall.
So we're not going to comment Paul on the profitability of a specific customers, but I'll reiterate something that Rob had mentioned in his answers earlier, which is through our public disclosure you're able to see that the revenue has been declining a with Cisco and in a a when a customer sees that level of a decline.
We do have profitability challenges along the way and so we are going to be able to target the cost that that account currently absorbs and that's why we believe that we can manage any ABS in fact going into next year and we do think that the portfolio will be just a stronger stronger when we come out of it.
Okay. Thank you I'll pass on.
Excellent. Thank you Paul.
Your next question comes from the line up Daniel Chan from TD Securities.
Hi, Thanks.
Do you guys get into these conversations on a restructuring these programs how do you get to.
The conclusion of disengaging, rather than reducing certain programs are moving.
Programs to each other suppliers.
You know broadly speaking I mean, the first thing we try to do is to drive as much productivity as we can in collaboration with our suppliers and.
Internally and with our customers.
Second thing we try to do is to try to work on improving the mix for the business offering JD and solutions are higher value added solutions.
The last thing we try to do generally speaking is to work with our customers on commercial terms.
On to improve overall ROI sees.
And in collaboration with them.
In some cases, we find in many cases, we find a win win or in other cases, we find a win win another way through just deciding that it's in our own best interest collectively to to help them through a disengagement.
And that's typically how.
The portfolio shaping program has kind of played out.
Okay. Thanks, that's helpful.
And then considering that these guys were.
Just a customer any impact on your buying power with much lower.
So exiting this program.
No we don't anticipate that at all in and most of our.
Ccs customer the bill of material is largely owned by managed by though we havent fuel.
So, hence we're buying off their LTL.
And then find one for me.
Hoping up more opportunities where are you would've had a conflict with Cisco in the past the pass you did mention that hyperscale.
Cloud providers have become a customer are there more opportunities like those now that cisco's disengaging.
I would say they are I wouldn't say that it was a barrier in the past.
In emerging part of our business and supporting our cloud providers.
That's an area that we haven't continue to be focused on moving forward and it has grown very nicely.
Past quit the time and we've been investing in our JD and solutions to help fuel that growth.
Okay. Thank you.
Okay. Thanks.
Your next question comes from the line of Jim Suva from.
Hi, This is Josh keel I'd be happy Jim Suva, Thanks for taking my question.
Just wondering how old are tied the visibility I, it's the common equipment space, it's trending have there, but not any delays or push outs.
Yeah, so within capital equipment. The orders are certainly I'm starting to pick up.
In Q3, we had some late quarter a upside so the decline wasn't as.
As a.
As much as we thought it would be into Q4, we're certainly seeing a little bit of an uptick.
Are they want to book is looking positive for the first half of 2020, but still needs to kinda.
Fill in a little bit first target.
Further confidence.
The back half a 2020.
Lot of speculation on whether that will fill in a not by the entire industry and you wherever in the out their cap of wait and see mode to see if the broad memory market recovers to fill in the back after 2020.
Thank you does that answer your question Josh.
Yes. Thank you.
Yeah.
And as a reminder to ask a question press star one on your telephone keypad.
The next question comes from the line of Todd Coupland from Sea I'd be seat.
Hi, good evening everyone.
Just a follow up on the semi market.
So we were to think about slices within Sami you recommending that we focused on the on the memory side of the business when we see.
Capex increases.
Foundry companies like TSMC up 40%.
You aren't necessarily going to benefit from that in terms of flow through that's the way to think about that.
No actually.
We are the benefactor of both foundry and logic and also Threed NAND based on our customer base.
And that's what we've seen in terms of the demand uptick.
Obviously, DRAM is a wait and see mode and broaden and in terms of though the broad memory market terms of when that recover as there is some speculation.
That it will pick up in the back half of 2020, but.
We have to see if a inventory gets depleted and prices rise in capex spending starts increasing but right now in terms of foundry and logic certainly in Threed NAND certainly.
[noise] and what what level of I guess recovery in those slices I know you talked about sort of a moderate slow first half.
What what level of recovery would you need to see and 2020 to actually.
Get the overall.
Yes to move up.
Assistant with.
With that.
The company comments.
The disengagement I mean.
Well.
Todd Mandeep here tell me, if I'm able to answer your question properly or not so we started to see the downturn in capital equipment begin in the third quarter last year and as you know that's when we started to fall out of our Ats target margin range of 5% to 6%, we're glad to see some demand upside that came in in the third.
Quarter, we're seeing some of that demand upside continuing into the fourth quarter and but we're not yet at a breakeven point and so we're expecting to see additional growth from where we're at right now in order to get to that profitability level. Two things are going to get it. There one is the the impact of the productivity actions we've already taken.
But then of course, a volume leverage.
As well now just as a reminder, though if you look outside of our capital equipment business and the rest of DHS portfolio is actually performing quite well this quarter. It was a little bit outside of the target margin range. We're ramping programs were working through material can strengthening Andy but the rest of the Ats business.
It is able to if you will hold its own and so capital equipment, though when it's performing in a normalized environment and normalize would be maybe closer to the first half of 2018 levels.
We expect to be back in the range and then of course as that's the semiconductor side when display starts coming online which were currently seeing towards the end of next year. We believe that that's going to help lift us to the higher end of that margin range because capital equipment is able to perform above the.
Yes target margin range, when both display and semi are performing well okay.
Okay. That's helpful.
And then just one one for me on Cisco, So if I remember correctly the major disengagement piece last year was largely fulfillment business.
Can you just give us broad strokes the kinds of things you're doing that aren't allowing you to get to target profitability in ER.
With this customer.
Yeah, I would say the mix that we have is a combination of oh.
M.S. and also direct order fulfillment.
Theres no JD I'm content.
In the mix okay.
And you are right that the the majority of the.
Portfolio program that we've had a which is all in enterprise has been fulfillment business, where we're pleased that we've been able to reduce our exposure to fulfillment by almost half over the last year.
Okay.
And.
I really just sort of step back.
Two major global Oems I get you want to make money for the things you're doing.
But clearly lower levels of businesses.
Pausing consolidations.
Needs to read the supply chain. So when you see these kinds of.
Major moves over a couple of years.
What does that make you think about in terms of rationalization consolidation within tier one.
M.S. players just just talk about your view.
Whether that's needed in the market at this point thanks.
Yeah, Yeah on the brought HMS market.
No as you mentioned, there's certainly a more capacity than there is demand.
But history as a kind of dictate a long history as dictated that consolidation amongst tier one yeah messes.
Hasn't necessarily created shareholder value historically speaking.
And moving forward, there's various views on whether that will create.
Sure holder value moving forward.
No, but it's.
I think it's very hard thing to do for tier ones to consolidate because the value proposition will be driven by a lot of restructuring I'll spend a lot of.
A lot of medicine, the net benefactor will probably be the folks who don't consolidate so for those reasons you know on.
I'm, a big optimists that that's in the cards.
Moving forward, but a time time will say moving forward certainly the markets I dynamic and things change.
But you know.
And there's various papers out in the industry that certainly will disagree with me <unk>.
Yes, Okay. That's a that's helpful. Appreciate the color thanks a lot.
<unk>.
There are no further questions at this time I will turn the call back over to the presenters.
So thank you and we're pleased with our margin expansion and strong free cash flow generation in Q3 within our Ats markets. We are encouraged by the early signs of our semi cap recovery.
So you see us business is actually performing well limits the portfolio shaping program.
The decision we reach with Cisco is the right one for both parties and we're working towards a well planned and phase transition.
As I've mentioned before our strategy has certainly sound and overtime. The actions, we're taking will improve our diversification enable consistent and profitable growth.
Thank you all for joining and I look forward to updating you as we progress throughout the year.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.