Q3 2020 Earnings Call
Good afternoon, and welcome to the flux third quarter fiscal year 2020 earnings conference call.
Today's call is being recorded and all lines have been placed on used to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
At this time for opening remarks, I would like to turn the call over to Mr., David Ruben Flexes, Vice President of Investor Relations, Sir you may begin.
Good afternoon. Thank you for joining flexes third quarter fiscal 2020 conference call slides for today's discussion are available in the Investor Relations section of our flex Dot Com website.
Joining me on today's call. Some introductory remarks will be our chief Executive officer ready with the baby and our Chief Financial Officer, Chris Collier today's call is being webcast and recorded in contains forward looking statements, which are best on current expectations and assumptions that are subject to risks and uncertainties actual results could materially different such information is subject to chew.
Change and we undertake no obligation to update these forward looking statements for discussion of the risks and uncertainties. Your most recent filings with the S. You see including our current annual and quarterly reports this call references non-GAAP financial measures. The current period. They can be found in our appendix slides otherwise they're located on the Investor Relations section of our website along with it.
Required reconciliations now I'd like to turn the call over to our CEO ready.
Thank you David and welcome to <unk> first a flex earnings call. Good afternoon, everybody and thank you for joining us on the call today I'm excited to provide some context to our strong results for the third quarter and update you on the progress were making 'cause, it's very dynamic and transformational period for flex, but before I start I want to thank all our flex employ.
He's who across the globe continue to deliver on our commitments to our customers and work really hard to execute with disciplined to increase value to all our stakeholders.
So I want to express my sincere thanks to our employees for their efforts and also to our customers for their continued partnership.
So let's go to slide three.
So were the pot last couple of quarters I've discussed the initial directional for a company strategy at our approach to managing our business.
The as promised we're looking forward to sharing more detailed in our strategy at our upcoming Investor and analyst day on March 11th in New York City.
But today I'll focus on the third quarter financial performance, which I'm very pleased to say delivered on our goals and our guidance. So let's start with the financials.
We achieved revenue of $6.5 billion. This is that resolved so for continued growth in our industrial segments, our energy in our automotive businesses and as well that's continuing to progress on executing our mix strategy.
I realize an adjusted operating margin of 4% and this reflects our focus on disciplined execution and portfolio management.
And we delivered a record level adjusted EPS of 38 cents, which was above our Q3 guidance range.
And generated an adjusted free cash flow of 238 million, which is a testament to our continued focus on operational discipline and improved execution.
I wanted to actually start with the to talk about the corner virus outbreak.
As expected our primary concern as of the safety of for our employees and their families.
What we've done is deployed our response teams to take proactive steps to help our employees and we'll continue to adopt doesn't necessary as a situation plays out.
There are actively monitoring the developing situation and we work hard to limit business disruptions.
Were supporting all official efforts to contained outbreak and were fully cooperating with the government officials across China.
Also be looking to help does cause there ever be can through the flex Foundation.
Of course beyond that it's too early for us to quantify any potential impact as the situation is evolving.
I wanted to be rest assured that we have a very detailed and comprehensive plan and the actively manage the situation in a very disciplined way.
So, let's turn to slide four.
What Q3 really reflects that's how we've continued our approach to managing the business.
By improving our mix in our profitability, they've driven disciplined execution and we have pursued design led opportunities and all this along with managing our cash flow and capital allocation.
Oh this is exactly the game plan, we discussed with you three quarters ago.
We've done a tremendous job executing on our business mix strategy and as well as managing our costs not only to meet our commitment but also to enable continued investment in technology and design expertise.
I strongly believe that our focus has strengthened our position or on significant macro trends and future growth markets such as electrification in five G.
And of course, all this will lead to profitable growth, which is a very important pillar of our strategy.
As it continues to speak the current and prospective customers I'm really energized by growing opportunities to partner and create value for our customers and for flat.
Our focus is on solving our customers most critical manufacturing challenges and we want to be a market share leader in this space since we participate.
As always I'd like to share. Some examples of some recent wins that don't really demonstrate our capabilities across our businesses.
You can see in our Q3 results that are industrial and energy segment continues to be exceptionally strong.
And this building on the pipeline on on the strength of some solid business wins.
So one example is a complex large form factor capital equipment project that we recently won.
Our solution included engineering and designing of the large mechanical slate frame and the Interconnects system as LS assisting the customer in the design of the each of my or the human machine interface.
Of course, one of the key Differentiators was a regional manufacturing capability, because we needed to support the customer's needs in both North America in Asia.
But this combined with our design capability made this a winning proposition.
And we continue to see interest from companies in the space, we're looking to partner with us not only to leverage our manufacturing expertise, but also our design expertise, particularly in areas of power energy in capital equipment.
The next example is out of our automotive business, which has made a lot of positive progress despite the global economic headwinds facing the industry.
We've made a lot of inroads into the economists space and I've talked about this before in the other calls we've had but this time we added another major win in China with an indigenous Chinese OEM.
We also continue to expand our position electrification and recently won an integrated battery management solution for engine German OEM, what both these wins.
Showed that we can leverage the technical expertise.
Not only in our automotive business, but also in our power and our computer engineering groups.
Here, we are seeing the benefit of early collaboration and leveraging our broad capabilities, including connectivity in power management to bring value to solutions to our customers.
So I'd like to reinforce our commitment to the four areas I've talked a lot about this before and these are managing our mix.
Driving disciplined execution.
Winning more design led business and of course consistently driving free cash flow.
I strongly believe that combining these with the right type of growth will be the coral for our strategy.
Our performance this quarter and for fiscal 2020 demonstrates that were done that were delivering on our commitment.
This consistent performance will serve as a platform for us to focus on profitable growth and invest to drive our long term strategy.
Of course, there's still a lot of work to do and more potential to harness.
But our consistent performance over the last three quarters.
Really positions us.
Well on the path to profitable growth.
So overall I'm really pleased with our performance this quarter.
We're making progress on our goals and I'm confident that are positive momentum will continue.
I'll turn this over to Chris for our quarterly financial results and then I'll come back with some closing remarks, Chris.
Thank you were able to please turn to slide six for our third quarter income statement summary.
[noise] third quarter revenue totaled 6 billion and was above our guidance range.
Our Q3 adjusted operating income was 256 million.
Which was above our guidance range and remained roughly the same year over year. Despite a 461 million dollar decline in revenues.
Our adjusted net income was 193 million.
Resulting in adjusted earnings per share 38 cents.
This was up 10% year over year and was above our guidance range.
Third quarter GAAP net income of 111 million was lower than our adjusted net income.
Primarily due to $19 million stock based compensation.
14 million, none intangible amortization and 49 million net restructuring and other charges.
Now please turn to slide seven four quarterly financial highlights.
Our third quarter adjusted gross profit was up 1% year over year to 459 million.
While our adjusted gross margin improved a healthy 60 basis points year over year to 7.1 person.
This represents our third consecutive quarter of year over year gross margin expansion, reflecting improved operational execution.
They richer mix of business.
Or just enough to United expense increased 3% year over year to 203 million this quarter.
Resulting in us today as a percentage of revenue to be 3.1%.
As we continue to manage with strong cost discipline.
Which provides us sustainable operating leverage.
We continue to improve our profitability and our operating margin by managing portfolio mix.
Improving operational performance.
And sustaining cost control.
This quarter or adjusted operating income was 256 million.
Our year over year, adjusted operating margin expanded by nearly 30 basis, 0.24%.
Which reflects our six consecutive quarter of year over year margin expansion.
Now turning to slide eight for third quarter business group performance.
Each of our business groups, either met or exceeded our revenue guidance.
HRS revenue was 1.2 billion up 3% year over year, driven by all automotive growing 7%, which offset a 1% decline in L. solutions.
Okay.
Got it grew as we continue to scale multiple new programs across its portfolio.
Oh solutions was modestly weaker of new business gross was offset by lower demand from certain legacy programs.
Revenue for our yard business grew 20% year over year to 2 billion.
Which exceeded our prior guide of up 10% to 15%.
Hi, I experienced broad strength across its portfolio with notable growth from energy or energy customers as well as growth in home and lifestyle programs.
See revenue declined 17% year over year to 1.9 billion.
Which was better than our guidance and reflective of reduced demand with certain telecom and networking customers.
As well as the impact for more wallwork settlement, which was completed last quarter.
Lastly, CTG performed as expected as revenue declined 25% from the prior year to 1.3 billion.
Due to the of Fox, reducing our exposure to high volatility low margin short cycle businesses.
And our targeted CTG portfolio repositioning activities.
Turning to profitability, we were pleased to deliver adjusted operating profit above our guidance and to expand our adjusted operating margin to 4%.
HRS generated $82 million of adjusted operating profit and a 6.6% adjusted operating margin.
Interest margin was a function of a mix of its business and reflects the ongoing ramp of our largest ever health solutions program as it moves towards full scale production in fiscal 2021.
I I set a record quarterly adjusted operating profit of 124 million.
And pushed its adjusted operating margin to 6.3 person.
It continues to benefit from good commercial discipline, and a richer mix of business with greater design and engineering content.
See delivered 53 million of adjusted operating profit in a 2.8% adjusted operating margin.
As management took distinct auctions to just Ccs cost structure and.
And it also benefited from improved sequential revenue contribution.
Finally, CTG posted a 1.8% adjusted operating margin.
As it remain pressured during our portfolio transition and ongoing repositioning of its operating structure.
Turning to slide nine let US review, our cash flow generation highlights.
Our third quarter performance, despite strong cash flow execution.
We continue to operate with good discipline over a net working capital and our capital expenditures.
Now working capital this quarter benefited from favorable timing for customer payments and a continued improvement in our inventory management.
This quarter, we ended with 3.7 billion.
Or 56 days worth of inventory.
Down, 5% or three days year over year.
We remain focused on further inventory management improvements as we drive multiple options across the company.
Our net capital expenditures totaled 55 million for the quarter.
Significantly lower than depreciation.
We were operating with control over a capex spend this quarter. We also benefited from 49 million in proceeds.
As we continue to reposition and optimize our operating system.
We were operating a well below tell global infrastructure.
And are benefiting from prior years investments that are now supporting new technologies products and programs.
We also continue to leverage our existing assets to redeploy installed capacity, where it is needed among different sites and businesses.
Which is a notable strength of our global system.
We remain confident that we're sufficiently invested to support profitable long term growth in our higher margin businesses.
As we entered the last quarter of fiscal 2020, we expect that our Capex will continue to closely aligned with our annual depreciation level, thereby benefiting adjusted free cash flow.
This quarter, we generated 238 million in adjusted free cash flow.
We have generated positive adjusted free cash flow for five consecutive quarters as we operate with discipline.
And strive to generate adjusted free cash flow conversion inline with our historical levels.
We remain focused on our commitment of delivering shareholder return.
As we repurchased over 5 million shares for $61 million during the quarter.
And over 4% of our outstanding shares over the last 12 months.
Lastly, we continue to operate with a balance capital structure with staggered debt maturities in a relatively low average cost of debt.
During the quarter, we issued 215 million of senior notes with a 10 year maturity and use proceeds in cash on hand to reduce our debt position by 200 million.
Which had the effect of extending or debt duration with minimal impact on interest expense.
Please turn to slide 10 for fourth quarter guidance.
Revenue is expected to be in the range of $5.8 billion to $6.2 billion.
And it reflects more modest seasonality impact than in prior years.
HRS revenue is expected to be flat to up 5%.
As we anticipate continued auto demand growth.
As we ramp new programs, coupled with a modest growth and our health solutions business.
We expect sustained demand and I.
With 20% to 25% growth as it continues to experience broad strength across its portfolio.
In addition to ongoing new business ramps.
She sees revenue is expected to be down 5% to 15% year over year.
Reflecting the distinct reductions in customer demand due to actions undertaken earlier this year, coupled with persistent muted demand in telecom and networking.
And for CTG, we expect revenue to be down 20% to 30%.
Reflecting the impact of targeted reductions of highly volatile products.
As part of our ongoing specific portfolio management efforts.
Our adjusted operating income is expected to be in the range of $220 million to $250 million.
Displaying continued adjusted operating margin expansion.
Interest and other expense is estimated to be between $40 million to $45 million.
We expect our tax rate in the quarter to remain in the mid range of 10% to 15%.
[noise] adjusted EPS guidance is in a range of 30 cents to 34 cents per share based on weighted average shares outstanding of 510 million.
Our adjusted EPS guidance excludes the impact of stock based compensation expense.
Net intangible amortization and the impact from our remaining restructuring and other charges.
As a result, we expect a GAAP earnings per share in the range of 19 cents 23 cents.
Lastly, I would like to note that our guidance excludes any potential impact from the Corona virus outbreak given the rapidly evolving situation.
With that.
Let me turn it back over a rapidly for some closing comments before we open the call for Q1 night.
Thank you Chris.
After considering the fourth quarter guidance that Chris just provided we now expect our annual EPS to be in the range if $1.25 to dollar 29, that's really nicely aligns with our commitment from April off $1.20 $2 30, our GAAP I know you P. S is expected to be in the range of 26.
The 30 cents and include stock based compensation expense intangible amortization and restructuring and other charges.
Since last year. The flex team has been working really hard to establish a consistent and sustainable track record that you can have confidence than.
<unk> results in Q3 and for the first nine months, if our fiscal year are evidence that we're moving into right direction, they're focused on the right areas of consistently executing delivering profitable growth and then meeting our commitments.
With that im going to old have the operator open the line for questions.
Thank you.
In order to ask the question you will need to press star one on your telephone.
To withdraw your question, Chris the founder hash key.
We ask participants to limit themselves to one question and one follow up question. Please standby, while we compile the Q and a roster.
Your first question comes from the line of Paul Coster. This J.P. Morgan Your line is open.
Yes, thanks very much for taking my question a couple first off the RCC in CTG businesses.
Do you have some sensitive when at least the portfolio totaling will be done a in CTG and when you think both segments might stabilize.
[noise] Hello. Thank you for the question I know in CTG, they've done a lot of planned actions in terms of changing our mix and changing the size of our portfolio and I'd say that in a most afar work is done but that being said, we should always be looking at our port.
Folio and trying to figure out the tale of the portfolio and see if there's a way to better manage it I'd seen C.C. they've had a combination of portfolio actions and the market impact from our networking and telecom customers.
From a portfolio actually not saying cc. The majority of our actions have been taken this here and were continuing to look at that networking and telecom space from a market perspective, and seeing how that plays out for the rest of the year. So as I step back the one thing I'll say from a portfolio perspective, Paul as sad.
My thinking on how we'd run businesses is that we should always be looking at parts of for our business that will be at the low end up our performance expectation and figuring out what's the right way to manage it because at the end of the day, we want this relationship to be a win win for our customers.
And we'll be doing that across our portfolio, but I have confidence that we have done a significant amount of far work already but that doesn't change that will be keeping on looking at it and on ongoing basis.
Thank you talk to my follow up question is to do with the old so sick, but we're hearing that the also industry as it transitions from ice to electric vehicles.
It is interested in the argued that she transforming its supply chain and moving away from its traditional supplies to new manufacturing capabilities, such as your own well the Myspace generically do you concur and or are you seeing a change in the scope of what they are.
Allocating to you as a result suit that may be strategic shift.
Hey, Paul. Thank you for the question yet you know I think a it's a well known fact that the automotive space is going to a clear market shifts and going through clear shifts in terms of its supply chain strategy I'll, I'd say that flexes ball position.
As the strategy and evolve because we have strong manufacturing capability across the portfolio off electrification and autonomous which are very critical next generation technology, but also the have really strong design and domain expertise around these platforms.
At a really important so as we see overall the value chain supply chain getting changed in the automotive space I would say manufacturers' lights slack.
And us, particularly as well position in this space and our early investments and autonomous and electrification will also really broadly helped us in a significant way that being said were building a very collaborative business model across with all our partners not just in the hardware space, but also.
Software space and both of these technologies, so Paul I think where vault position and the supply chain and the to in automotive space is going to changes, but we think that's an advantage to flex.
Thank you.
Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
Oh, yes, and good afternoon, thanks for taking the questions and congratulations on the good results.
Of course on the unfortunate how situation in China, and you certainly realize that krona virus impact is very uncertain at this point, but I think about a quarter of fluxes manufacturing capacity is located in the China region. So maybe just operationally you can talk about what flux, maybe seen with its own factories at this point in terms of any extended shutdowns and what percentage of your.
Refractories, maybe a impacted at this point.
Thanks, Mark first thanks for the comment on our results for I'm quite pleased with our performance I'd say on Corona light as you know for its like I said in my prepared remarks. The most important thing is making sure that our colleagues our employees in our factories in China I have the best possible help that they can provide and then.
Very focused on that as the most important thing.
That being said you know our teams really know how to handle this type of situation extremely well and they have a very disciplined and very detailed plan that were executing right now for our customers and our suppliers as we're looking at the impact to our factories.
You know if you think about our overall presence in China, we don't have any factories in the who Bay province, where the bulk of the issue is and also if you look at China long term is that the number of people that we have deployed there in our assets have come down significantly because of all the diversification that effort.
So that we have taken in the past here, but the approach were taking is a very disciplined approach. We have very detailed plans that are executed across our factories already.
And we're working with the government agencies to see what the actual shutdowns are going to be and looking for exceptions, there where possible. So mark I'm very comfortable that we have a game plan that being said that situation is evolving and we're dealing with it every day in terms of understanding new information and acting accordingly.
Yeah, that's very helpful.
Following up a the along the same wind and maybe some of the tariff related or planning that that is watching had to go through over the last year is a reasonable case study first at the to think about but when one flex it had to respond.
It makes shifts in minutes manufacturing plant being has reminded how long and I can take I know, it's a very complex question. Because you have so many different thousands of products and customers, but just talk about some examples of how quickly you flex may be able to move move obviously factories, what I need to and is that something that you usually that need to go through <unk>.
Allocations with customers or something you can do I'm relatively quickly. Thanks.
Thanks, Mark you know it. So I was just reminded that you know most of 'em you know our supply chain strategies are driven by our customers right and we support them and follow them.
In the out in the in their supply chain strategy and as they look at in a diversification globally, a they've been supporting our suppliers you know I'd say you know some definitely can move faster than the others. So for example, I'd say anything in our consumer segment, maybe RCC segments you know.
Cycle to pick up factories and move them are much faster than.
And our industrial or our automotive or a medical segment. So I think that that's in general how you should think about our portfolio, but our real focus is on following our customers wherever they want to go and what were seeing customers do is really look at.
I'm driving dual sourced strategy and having sourcing from multiple factories to de risk their supply chain and went really well position from that because as you know our our geographic diversity is pretty significant.
Thank you very much.
Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open.
Hi, Thank you for taking my questions and again congrats on the quarter.
Very strong margins. So maybe my first question I'll start with that specifically on the East segment, you reported again very strong 6.2% operating margin, which is above the long term range. So I mean any thoughts on the sustainability of margins at this level and and how do you see penetration your opinions.
Ration into the industrial and energy end markets do you think it do you have any sense of how much more penetration there is.
To go in these end markets and how should we think about segment margins or the next couple of quarters.
Well the rupee. Thank you for your comments on our performance and well, let's say, we're very pleased with our <unk> performance and like I said, you know across our <unk> energy segment and our base industrial businesses. We saw a really good growth across the board and really good conversion.
In which also comes from volume increases across this segment.
You know my comment in terms of margins will be that you know our focus will always be driving the right makes within every segment.
The beauty off the I've spaces that the available market is significant and even today. If you look at vertical integration within customers it's still.
Quite vertically.
Integrated so for us to be able to take products from customers and move it across our value chain is a big available opportunity for us and so our expectation is that I I will continue to grow because available market as big and it's right in the spaces that we wanted to participate in it has.
Long cycles from a customer affinity cycle standpoint, and we're also seeing growth in the energy sector and in <unk> and our hope is that we'll continue to manage makes and find the right kind of pipeline within this segment.
To improve margins as equal along so it's a space the live very excited about in our performance. So far really proves that we can continue to ramp this the segment a in the future too.
Okay. Thanks for that rate with the and that makes sense. Maybe another question on margins for this time for HRS.
It came a little bit lower than what we would have expected to 6.6% is still pretty high margins, but I mean, you talked about them ramping business and from investments you're doing can you just kind of elaborate on what what those investments or how long how much were investment is there to go and how should we put anything about segment margins over the next couple of quarters.
Thank you.
And paying group, who had see me in a very bullish about our HRS segment. If you think about the two aspects so far a terrorist segment automotive and held they both are areas that we have amazing expertise in EMEA market share leadership in our automotive segment. Despite a market had been has continued to perform.
Really well from a growth perspective, and continued margin improvement perspective, I'd say by we've seen some challenges has been in our health business, but that is not as a result off our bookings are our growth in that space. It's more related to how we had ramping the businesses being booked as you're aware of it.
Booked a lot of complex projects in the space and those programs ramping up means that it is a tremendous amount of work for our operations team to be able to ramp up those programs, while they're learning through that Ah, but they have a lot of confidence in our in this space I'm very excited about the pipeline of bookings we have the.
Future potential we see for this business. So it's one that we feel very comfortable with and we continue to focus on accelerating these program primes and learning from those and doing it well and we walk away feeling very bullish about the potential for HRS as a whole.
Great. Thank you for taking my questions Congrats again on the quarter.
Thanks throughput.
Your next question comes from the line of Jim Suva with Citi. Your line is open.
Hi, This is Jim young calling on behalf of gyms.
Thanks for taking the question all my first question. It's all seasonality I think you several quarters. The first time your performance above normal says nothing about full quarters.
And Youre guiding I think the march quarter or slightly above seasonal as wall or do you think you have finish most of your portfolio optimization and how should we think of offices and they'll be going forward.
Thank you.
Chris you want to take it.
Yeah. Thank you for highlighting that Tim Yeah for sure. When you think about the garden. So we just said for the does reflect a much more muted seasonality than historic historically, you look back at the five year average is roughly a 10% March quarter reduction in mid point of our guide is a is much lower than that.
A lot of that is attributed to the dialog. We had an earlier question around the portfolio mix focus that we've had we've taken significant efforts throughout this year to reposition ourselves in be thoughtful around the high volatile short product lifecycle businesses.
And that's what you've seen in terms of both the C.C. and especially CTG business.
Business repositioning as a result, you will see a much more balanced.
Depiction of the company's revenue as you move throughout the fiscal year.
Got it looks very helpful.
Quick follow up question automotive I think a room. So you mentioned, the putting new programs driving the strategy automotive Penn Plaza.
Relatively high concentration was couple of all told you times for those new programs. You are ramping is it from your largest customers or from a more diversified customer. Thank you.
I'd say.
No the I talked about program ramps and both health and automotive, but automotive growth is definitely because of a the market share wins that we have had in this space I would say were progressing really well in our overall diversification strategy for automotive both geographically and across.
Customer base and that has been a real focus for us as you heard from us in the past and then we are also even though the focus on electrification and economists is also helping significantly because we're expanding our platform and our content than these platforms. So all of those are helping in terms of changing the.
That makes up for automotive a customer base as we have it today. So we feel really good about very yard and we'll continue on that effort.
Great. Thank you so much.
[noise]. Your next question comes from the line as Adam Tindle with Raymond James Your line is open.
Okay. Thanks, and good afternoon, Chris I, just wanted to start with a comment that you me about this quarter admirably holding profit dollars flat despite a sizable decline in revenue year over year.
Looks like revenue declines you know maybe attenuating based on your forward guidance and possibly on the path to revenue growth. So on the other side of this just wanting to understand how you're thinking about leverage for fiscal 2001. For example, prior to this quarter I think we were all embedding double digit profit dollar growth on low single digit revenue growth. So just trying to understand how.
Think about a reasonable incremental contribution margin. So that we don't get ahead of ourselves following this quarter and ended the analyst day.
Thank you Adam and thanks for identifying some of improving performance we have.
One of things is we put an announcement I'll just a couple of weeks ago, though we have our investor day on March 11.
And that is gonna be a perfect.
Time frame for us to get deeper and expand further around the underlying strategy to see how we think through each of the businesses trajectory as well as margin, but what you can see from our performance year to date and what is reflected from our guidance.
For Q4 isn't ability for a company to continue to operate was due care and disciplined around its cost structure, our rest of your news been.
Well managed well positioned and as I highlighted in my prepared remarks, it enables us some substantial leverage as we move forward.
That in terms as well as to how we continue to shift the business mix, you're seeing us now put a seven handle in terms of the gross profit gross margin and I think as you continue to see us operated with discipline continue to improve our operational.
Execution, you're gonna see us continue to put together a trajectory that you're gonna have competence and we just do not want to get out in front of a growth trajectory or margin profile at this stage, we'll be able to unpack that a deeper for you in a matter six weeks.
Okay understandable, maybe just to.
Another question on HRS to put a finer point on it last quarter I know there was a lot of moving parts you had customer move outs, you're ramping those very large programs. This quarter looks like the revenue was there. The segment did returned to growth for the first time and I think four quarters or so but did get pretty sizable margin erosion I think the next quarter or margins still has a sir.
Standalone it if I'm embedding youre guidance correctly. Please correct me if I'm wrong, there, but if you could maybe just unpack a little bit more detail and some of the buckets of investments weighing on margins and the timing for those to attenuate would be helpful. Thanks.
For sure you know margin as I highlighted for HRS is really a function of the mix of its business and one of the things. We've we've tried to extend into as we have some meaningful ramps are underway in our health solutions and those are going to be foundational for future growth in revenue for us and.
Obviously at the front end of these types of programs your profitability in margin is much lower than it is once you get up to volume. So we have some shifts going on.
In terms of Ah that portfolio for sure a margin of four HRS continues to be holding very nicely, if not improving and again I'd point you to the total companies picture for Q4 at the midpoint of guidance.
Having a very meaningful gross profit in growth in operating margin expansion year over year.
I would add way to think about things in general is that you know the diversity of our portfolio is important right. They have the opportunity to.
Put money into program Prime said really focus on these complex programs that we are ramping in our businesses and really move our bookings to revenue in in our HRS portfolio and we'll continue to invest and that has the right thing to do they can afford to do it and it plays out well for us in the long term.
Okay, just one quick housekeeping, Chris on interest and other it was just significantly better than guidance. So just wanting to understand something structurally change there or what the right run rate is for that thanks.
For sure and so if you think good about this past quarter, we actually.
It was broad.
Broad based improvement performance in that line item, we did a much better job in terms of many managing the debt levels in cash during the period and so we've got several million dollars of improvement from an end net interest level. We had a we had a recorded several million dollars of currency gains that weren't forecasted.
During the period and we did a bit better in terms of some of the the reducing of losses and some of the a minority investments that are that are in that same line item I moved you to a guidance in this next quarter of a 40 to 45 million that kind of fits very similar to how we had guided last quarter, a there's nothing fundamentally.
Shifting underneath that outside of you know a backdrop of an improving interest rate environment. If you will.
Okay. Thank you.
Your last question comes from the line, Matt Sheerin with Stifel. Your line is open.
Yes, yes. Thank you.
So regarding the CE she business and you commented about continued softness in networking and telecom I know you've got some pretty broad exposure there.
What's your thinking in terms of the Fiveg cycle, a lot of your peers had talked about.
Installed there.
Networking there seems to be some inventory issues that have not yet played out so any any commentary your visibility would be helpful. Thanks.
Yeah, So I'm I'm, Matt you know, we all know feel very good about our positioning in C.C., whether it is with five G. I'm in the telecom space or in networking or even in the cloud and data center space.
We have said that there is delay in fiveg programs that I talked about that a little bit last year. If you think about it regionally into Europe , and Asia had definitely slowed down quite a bit in.
America was ramping a little bit faster, but or overall, we see fiveg being a little slower, but just kinda expected in these large infrastructure Rollouts and you know in general I think that's what we have seen I'd say networking is up probably just a a seasonality is.
You in a moment in time that'd be continue to see slowness and networking and you can see that with our customers and what they're calling for.
I expect that to continue in Q4.
And it's too early for us to call where that changes I would say, but we think there really well positioned and all spaces of he is he see we have always been the market leaders in this space.
And then networking and five G Adnan cloud.
We continue to be it really well positioned and then our unique capabilities in servers and storage in wireless and battery management all of that that has really consolidator positioned very well in this space. So we'd say some market issues, but overall performing well.
Okay. Thanks for that and just lastly, Chris on regarding your Opex I mean, it was a little bit higher than we had expected to of course, you had a lot of revenue upside in the quarter, but what should we be thinking about opex.
As a percentage of sales for instance, should should you be able to start working that down and get as you get leverage on the mix and a better gross margins.
Yeah sure Matt. The Q3 was at 203 million it was up modestly year over year save 3% you know.
What you're seeing is that's below that operate with really good discipline around this line item you know it does create meaningful leverage we're very confident in our ability to operate this in the range of 3% to 3.2% that we've stated before.
While doing so clearly enabling ourselves to to support our future growth and the and the levels of investment necessary a bit of the step up this period as we actually did better across the board in terms of revenue and profitability that leads to a bit higher in terms of some of the incentive compensation. So all around this range is where you should see us and we have high confidence and being able to opt.
Great three to 3.2 person and provide meaningful leverage.
Okay. Thanks, a lot.
Okay with that I'd say, thank you for joining us and I'm really pleased with our performance in Q3 and they've been consistent in our performance all through our fiscal 2020, we look forward to seeing.
So all in March in our Investor day, and were looking forward to sharing more insight into the strategy in the future we have for flat. So thank you everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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