Q3 2022 Benchmark Electronics Inc Earnings Call
Cash and.
And balance sheet summary, and our fourth quarter 2022 guidance, Jeff will then return to provide more insight on sector demand trends, which we'll be discussing in more detail at our November 8th Investor and analyst day event.
If you'll please turn to slide three I will turn the call over to Jeff Bank CEO .
Thank you Paul.
Good afternoon, and thanks to everyone for joining our call today, hopefully by now you've seen our press release and the results for the third quarter 2022.
Which represented continued execution of our revenue and earnings growth strategy.
Revenue of $772 million was up nearly $200 million versus the same quarter last year with five of our six sectors delivering greater than 35% growth.
I'm, particularly pleased with our performance in advanced computing next generation communications and industrial sectors.
At the same time, we again delivered earnings growth greater than revenue with non-GAAP earnings up 46% year over year, and <unk> <unk> above the midpoint of our guidance.
As we said before benchmark is clearly benefiting from two key drivers.
Our success in capturing new wins over the last several years, which are now ramping in the marketplace and our existing customers success addressing high growth markets with their innovative products.
Group will share more details on our third quarter results in a minute.
Turning to the fourth quarter, we continue to see robust demand across the majority of our market sectors.
The midpoint of our guidance positions us to achieve full year revenue growth of around 30% and earnings of $2 11.
Which would represent year over year earnings growth of greater than 55%.
We are encouraged by improvements, we're seeing in supply chain availability and many commodity areas.
However, we still see constraints in some semiconductor families, which continues to limit our production output.
I am proud of the great job our team has done working through these challenges to deliver the results. We have provided to you today.
We look forward to sharing with you more details on the continued execution of our strategy and longer term financial targets during our upcoming analyst day on November 8th at the NYSE.
With that group over to you.
You, Jeff and good afternoon, please turn to slide five for our revenue by market sector.
Total benchmark revenue was $772 million in Q3, which is 6% higher sequentially and 35% higher year over year.
Medical revenues for the third quarter were flat sequentially and increased 41% year over year due to growth with existing customers and new program ramps.
Semi cap revenues increased 7% sequentially and increased 39% year over year.
Demand levels throughout 2022 have remained high for a complex precision machining and large electromechanical Assembly services.
A&D revenues for the third quarter decreased 4% sequentially and 14% year over year due to supply chain constraints with certain programs.
Industrials revenue for the third quarter were down 2% sequentially due to material constraints and up 44% year over year from demand improvements from energy related products building infrastructure and Lidar solutions.
Turning to our traditional markets, we continue to focus on higher value subsectors within compute and telco such as high performance computing and next generation networking respectively.
Computing was up 38% sequentially and 67% year over year from the ramp of high performance computing programs.
In the telco sector revenues were up 20% sequentially and 52% year over year from continued demand strength and new ramps for broadband infrastructure.
In the third quarter, our top 10 customers represented 53% of sales.
Please turn to slide six.
Our GAAP earnings per share for the quarter was 53, which represents 130% growth on a year over year basis. Our GAAP results included restructuring and other onetime costs totaling $1 $3 million related to the closure of our previously announced site more park, California, and other smaller restructuring activities through our global network.
For Q3, our non-GAAP gross margin of eight 6% is inclusive of supply chain premiums.
Improved 50 basis points sequentially due to higher revenue better absorption and a reduction in supply chain premiums or SG&A was $38 7 million up sequentially due primarily to higher variable compensation and continued investment in it infrastructure.
non-GAAP operating margin was three 6%, excluding the impact of supply chain premiums our operating margin is 4%.
In Q3, 2022, our non-GAAP effective tax rate was 19, 4%, which is as forecasted.
non-GAAP EPS was <unk> 57 for the quarter, which is <unk> <unk> higher than the midpoint of our Q3 guidance and 14% higher sequentially.
Please turn to slide seven.
We have shown the effects of supply chain premiums on a trended basis over the last seven quarters on the slide for comparison in Q3 2022, we incurred approximately $74 million sequentially. This number decreased by $17 million, but on a year year over year basis increased $48 million due to the challenging supply chain environment.
The magnitude of these premiums are temporary in nature and as the supply chain environment requires less premiums to be paid as cost recovery revenue will decrease.
Excluding supply chain premiums are revenue in the third quarter of 2022 to 698 million, a sequential increase of $61 million or 10% growth in the year over year increase of $152 million or 28% growth.
As discussed gross and operating margins are diluted by this pass through revenue, while gross profit operating profit and EPS are unaffected.
Please turn to slide eight.
non-GAAP ROIC in the third quarter was nine 8%, a 20 basis point increase sequentially and a 200 basis point improvement year over year in the period between Q1, 2021, Q3, 2022, ROIC has grown by 53% as a result of 53% revenue growth and 137 <unk>.
<unk> operating income growth.
Turning to slide nine to review, our cash conversion cycle performance.
Our cash conversion cycle days were 79% in the third quarter.
<unk> to 77 days in Q2 with the increase primarily due to higher inventory days offset by higher customer advanced deposit base, our customer advanced deposits grew $38 million sequentially or 22%.
Higher please.
Please turn to slide 10 for an update on liquidity and capital resources we.
We used $31 million of cash in operations and invested $10 million in Capex.
To spend $45 million to $55 million on Capex in 2022.
In Q4, we anticipate generating $15 million to $25 million of cash flow from operations as we consume inventory.
As a reminder, the majority of our inventory primarily consists of raw components to support our growing e-commerce demand.
In fiscal year 2023, we expect to generate positive cash flow from operations and free cash flow.
Our cash balance was 249 billion at September 30.
As of September 30, we had 131 million outstanding on our term loan 170 million outstanding borrowings against our revolver and had $280 million available on our revolver.
Turning to slide 11 to review our capital allocation activity in Q3, we paid cash dividends of $5 8 million.
As of September 30, we had approximately $155 million remaining in our existing share repurchase authorization will evaluate share repurchases opportunistically, while considering market conditions in the fourth quarter of 2022. Please.
Please turn to slide 12 for a review of our fourth quarter 2022 guidance.
We expect revenue to range from 760 million to $800 million, which at the midpoint represents a 23% year over year growth.
Our revenue range comprehend supply chain premiums of approximately $55 million we.
We expect that our gross margin will be between 9% to nine 2% for Q4 as a result of strong revenue growth and continued improving absorptions.
G&A will range between $37 8 million and $40 8 million or approximately $39 million at the midpoint implied.
Implied in our guidance is for 1% non-GAAP operating margin for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
Expect to incur restructuring and other nonrecurring costs.
In Q4 of approximately 800000 to a $1 million the costs relate to continued activity associated with previously announced site closures are.
Our non-GAAP diluted earnings per share is expected to be in the range of 58 to 62.
Or a midpoint of 60.
Other expenses net is expected to be $5 4 million, which is primarily interest expense.
We expect that for Q4, our non-GAAP effective tax rate will be between 18% and 20%.
<unk> weighted average shares for Q4 or approximately $35 4 million finally from a cash flow perspective, we anticipate generating positive cash from operations in the period and with that.
Ill turn the call back to you Jeff.
Thanks Ruth.
Please turn to slide 14.
Before I go into our sector outlook I wanted to highlight some wins, we secured in the September quarter.
Once again, we saw a good balance across our focus sectors, reflecting the diversity of complex projects that we take on to help customers navigate through the product lifecycle and accelerate time to market to realize their product vision.
In semi cap, we continue to grow existing customers, while adding new customers into the portfolio.
This past quarter, we secured new manufacturing and engineering wins for wafer surface conditioning advanced process control and automated vacuum cure tools.
Reflecting on our diversification I'd like to highlight a recent press release regarding our expanding partnership with yield engineering systems.
Where we are helping them transfer manufacturing of their flagship product line to Malaysia, as well as providing engineering and manufacturing support for an upcoming wet process system in the Phoenix area.
<unk> 2022 has been a great year for New program awards in the semi cap space and we look forward to converting those to revenue in 2023 and beyond.
In medical we continue to be awarded critical medical device and life Science programs with the addition of manufacturing program for a novel Ophthalmology ultrasound system. That's.
Thats designed for imaging and biometry of the eye.
We also received the manufacturing award for a new automatic external to Stabler defibrillator.
Finally, our medical design team won a project for a unique cardiology treatment platform.
In industrial.
<unk> sustainability is at the core of our own internal initiatives and we extend that focus to customers who share that vision.
Particularly in the areas of clean energy energy efficiency and automation.
In the past quarter, we want to manufacturing program for our power converter going into an advanced energy storage system.
We also extended our relationship with an existing customer who is focused on solutions that accelerate electrification, where we will manufacture industrial drives power and control systems.
Within engineering, we're partnering with an innovative company to help design autonomous mobile robots for the health care hospitality and manufacturing industries.
In the A&D sector within aviation. We are also seeing new win momentum such as a new program, where we are designing communication systems for the emerging commercial drone or UAV market.
Within defense, we also saw solid growth in the quarter recording manufacturing wins for aviation radar artillery pilot controls and high speed RF next generation radars.
And advanced computing and communications wins include an LTE <unk> smart coverage solutions and a high volume fully automated manufacturing win for an RF filters.
Expanding on our <unk> business, we wanted an additional project with a longtime existing computing OEM.
Now turning to slide 15 I.
I'll provide some color on expected demand trends by sector for the fourth quarter.
As mentioned, we are cognizant of the recession risk and inflations potential impact to the broader economy. However, we believe the transformation work we accomplished over the last few years has provided us with greater diversity and stability.
Coupled with the minimal exposure to consumer centric markets demand indicators across the majority of our sectors remained robust in Q4 and into 2023.
In semi cap revenues have grown double digit year on year for 12 consecutive quarters and while we expect Q4 to again grow double digits year on year industry demand is expected to soften in the near future given memory market weakness, new China restrictions and supply constraint rebalancing.
Thankfully, the aforementioned strength and new program wins and diversification of our customer base will enable us to help offset this industry level weakness.
Longer term, we remain bullish on the sector given our customer win momentum in this space strong secular drivers in the form of semiconductor proliferation.
And the investment in new domestic manufacturing aided in part by the chips Act.
In our medical sector, we once again delivered strong growth in this business with Q3, improving 41% year over year.
We certainly could have shipped more but it is one of our most supply chain impacted sectors with long qualification cycles required on any redesigns to provide alternative components selection, we were limited in our ability to meet upside.
We expect Q4 performance to be similar to Q3 sequentially with strong double digit year on year growth.
In Industrials September quarter revenue grew over 40% versus the prior year demonstrating another strong performance for.
For <unk>, we expect industrial to be consistent with the September quarter, we see a good balance between demand for existing products, such as test and measurement devices and new program ramps and advanced Lidar applications Energy management systems, and industrial robotics has growth catalysts over the next several quarters.
Moving to the A&D sector outlook Q3 performance was in line with our expectations as here are to supply chain challenges continue to be acutely felt in this sector.
As a recent design wins begin to ramp in the coming quarters, we expect further recovery next year.
Within telco the September quarter, once again performed well with 20% sequential and greater than 50% annual growth reported in the period.
We continue to be encouraged by the growth prospects supported by ramping broadband infrastructure wins and government programs aimed to enable broadband from anywhere.
Finally, and advanced computing, we continue to help build some of the largest and most sophisticated high performance computing systems in the world, including the current effort underway on a new supercomputer platform that will contribute to the next few quarters performance in this sector.
Let's now turn to slide 16.
Back in the fall of 2020, we laid out our mid term model for the company, which we committed to achieving by the time, we exit 2022.
We've made steady progress on these goals and excluding the effect of pass through revenue associated with supply chain premiums.
Pleased to say, we met or exceeded each of our targets in Q3.
Furthermore, at the midpoint of guidance for Q4, we are poised to exceed our targets for the full year.
This would include revenue growth, excluding premiums of greater than 20%.
With non-GAAP gross margin of nine 6% at the high end of our target range.
Operating expenses well within the range and non-GAAP operating margin of three 9% for the year above the high end of the range.
If we were to exclude stock based compensation like many of our peers. Our non-GAAP operating margin for the year is expected to be greater than four 5%.
In summary, if youll turn to slide 17.
Demand among our target sectors continues to be robust and we are helped by our diversified strategic focus.
Our strategy to pick leading companies and partner with them on their innovative products is paying off positioning us to potentially deliver 56% non-GAAP earnings growth in 2022.
Looking forward to 2023, we believe this strategy our portfolio and continued pipeline of new customer wins positions us to grow faster than the market.
We look forward to sharing more with you at our analyst day in a couple of weeks.
With that I'll now turn the call over to the operator to conduct our Q&A session.
Ladies and gentlemen at this time, we will we will begin that Q&A session I'd like to ask a question you may do so by pressing star and then one on your Touchtone telephone.
You are using a speaker phone, we do ask that you. Please pickup your handset prior to pressing the keys to ensure the best sound quality.
Let me draw your questions at any time, you May press star into.
Once again that is star and then one to join the question queue.
We will pause momentarily to assemble the roster.
And our first question today comes from Jason Schmidt from Lake Street. Please go ahead with your question.
Hey, guys. Thanks for taking my questions. Jeff just wanted to follow up on your commentary on the semi cap space. I know you do expect an eventual softening just given the dynamics you outlined but just curious if you guys are already seeing signs of things slowing down a bit.
Yeah. Thanks, Jason good to have you on the call and thanks for the question.
Of course, we've seen a lot of the announcements by not only customers, but others in the space about the predicted trend towards reduce front end wafer fab equipment spending next year.
We were not immune to that we certainly see it but we also have had a really strong year of new wins in 2022 in fact, I would put it up there with one of the top two sectors for for new wins. Many of those will start contributing in 'twenty three and beyond to the continued revenue there and then also.
Getting more diversified across the set of customers that we think also kind of helps overcome downward pressure.
That being said.
See that our fourth quarter guide is strong and as we look into next year, we feel like we're pretty well positioned to continue to do well in that in that segment, but we don't anticipate the kind of growth rates, we had been seeing because.
The overall industry seems a little bit softer and a little more insured. Some of that is also the memory side I will say were a bit higher bias to logic.
So we tend to work more on logic tools, although we do have some some memory related business, but but that's kind of we're thinking about it we're still also very long.
Positive constructive on the long here's secular.
<unk> trend and I think the investments we've made are going to pay big dividends, particularly when you look out over the next few years here.
Okay.
Helpful and I know, Jeff when you joined a big initiative was kind of really focusing on.
<unk> Engineering design services. Besides just manufacturing I know you guys don't break out kind of your wins based on those categories anymore, but how much of the growth recently do you think is just being able to expand your services that your customers beyond just the underlying demand trends.
One thing we track Jason is the attach rate of wins to EMS opportunities and making sure that we're not just doing manufacturing that how do we help whether it's building or engineering or test a test system or actually helping complete the product design.
I'm pleased to say again in the third quarter, we saw over 75% attach rate to two those deals. So there's strong contribution there.
<unk> seen I mean, our overall business is growing pretty fast so I won't say that theres been outpacing growth in engineering, but both sides are growing and helping in that total number.
We haven't typically broken it out because engineering is still a small part of the total but it definitely helps with why we are winning and why folks come to us because we're not we can be more of a one stop shop and help them at any point in that product lifecycle, and we are actually spending more energy on product realization.
You might have a concept and you might help getting it through design, maybe you got a redesign to free up alternative parts. So that you help us supply chain or maybe it's an end to end and we're really getting participation in all.
All three of those kind of areas. So we feel pretty good about our engineering.
Business, but.
But with the way things are growing.
We got to keep moving forward and adding to our capabilities.
Got it and then just the last one from me and I'll jump back into queue. How should we think about your traditional markets that computing and telco.
So you've made a strategic focus.
Kind of focusing on certain programs here and obviously <unk>.
'twenty two is a big step forward from a growth standpoint, but do you view. This growth this year more reflective of the underlying demand trends or is this more simply you guys haven't just now focus on the right programs I'm just trying to get a sense on sort of the sustainability of these two segments.
Yes.
We're going to give more color at the analyst day on how we're thinking about that but maybe I'll just sort of preview a little bit.
We really have narrowed our focus on advanced computing to those high performance computing platforms. We built some of the largest most sophisticated boards you're talking about water cooling systems.
Very complex compute mechanisms and so even the way we think about it the margins from that work the value add thats there.
No longer that traditional commodity compute business and same thing when you flip over and look at telco.
We're really involved with the next generation networking infrastructure.
We don't build set top boxes for example, we build really sophisticated RF infrastructure and again it's.
It's a much.
More meaningful contribution from a margin standpoint, and as such so.
It's the fact that like this quarter, you'll see the traditional markets, what we've used to categorize traditional or a bigger percent of the total that really isn't concerned us because it's not having the drag that it might have back when we were doing that.
Large low margin <unk> project that we decided not to renew so it really had we really have kind of transformed that so even the way we articulated I think youll see us shift a bit in the coming year.
Talking about it but but it's good. It's a good question are we definitely feel like we're getting the right programs and that there is some sustainability here, we just might want to shift a bit like how we portray that to you guys.
Okay. That's helpful. Thanks, a lot guys.
Yep no reaction.
Okay.
Our next question comes from Steven Fox from Fox Advisors. Please go ahead with your question.
Hi, Good afternoon first question I had was on the supply chain I'm just looking at the numbers you provided in terms of the premiums and margins et cetera. It looks like maybe the supply chain was a little incrementally tougher for you guys I'm not sure if I'm reading that right, but can you just dig into how it compared to last quarter.
And anything that you would call out is easing versus how our company is going to be into next year, and then I had a follow up.
Yes.
Thanks for the for the question I'll start out on that is supply chain premiums came in lower sequentially than the second quarter.
Which we were happy about and they were still a little bit higher than what we had initially forecasted which really speaks to I think that continues.
Constraints in certain areas of the market, we are seeing some level of improvement in some areas, but there still is some constraints. The other thing I'll mention about the supply chain premiums.
These are broad based across all customers of our portfolio. It really is a couple of handfuls of customers who are willing to pay these premiums.
And really in certain sectors, only and so it really has been broad based from that perspective.
But I wouldn't say that.
Let me just add to that.
We're not I wouldn't say supply chain is more difficult than what we saw in Q2. In fact, we were pleased with some of the stuff we've freed up to get the revenue growth and ship the products, we did but while we've seen improvement in a number of categories of components and as you can imagine memory is more free now maybe.
Cause softness on the consumer side and such but there still are some critical semiconductors that are gating that.
Affectionate Golden screw term that is still gaining us in some areas from.
Completing critical builds and getting getting clearer to build there so.
We hope we see continued improvement, but we still.
We anticipate even through fourth quarter, we're going to have those areas that no. One no. One can get that particular part until the capacity frees up additional capacity comes online. So it's something that we'll continue to deal with the into 'twenty three but as <unk> said I think directionally, we saw supply chain premiums kind of peak out in and we will.
Expect that to be a downward trend and we are guiding at lower again in the fourth quarter.
Okay. That's really helpful. And then just back on the semi cap market for you guys. So with some of the chip terms that were put into place by the by the administration.
Is there any like very near term impact that we see.
<unk> for the year end.
How does this affect you directly and maybe indirectly this quarter next quarter.
When you look at the Biden Chips Act.
That youre not going to see help like this quarter or next I mean, obviously there just on the appropriation of like the first tranche of that you have seen people like Intel say theyre going to move forward on an Ohio fab because they got the investment from the government or theyre going to do that.
When you think about US we are in.
We support the semiconductor capital equipment that once that building comes out of the ground and the foundations poured in the concrete is in place and the walls are up than build semiconductors, they've got to build you got to buy wafer fab equipment and that's the part where we help with we help produce so there is a little bit of a lag.
Which is why we would say we probably don't expect.
Huge help from the chips act even in even in the front end of 'twenty three I think it will be a little further down the path.
But that being said.
We have continued to win next generation tools, and we participate across a broad spectrum of technologies in this space. So.
While we have some customers that are more impacted by memory, let's say of those that are working on the sub five nanometer.
Demand on next generation chips, theyre not seen a weakness and we're enjoying strong business there that continues to grow so.
It's a little bit you got to go a bit deeper there but.
But we do feel like in general the run.
<unk> stance of domestic semiconductor manufacturing.
We saw that microphone $100 billion fab in upstate New York, you got TSMC building a ton of fab here in Arizona, you got Intel building new Fabs.
Those those bode well for our investments in our growth continued growth long term in this space.
That's helpful. I guess, what I was also trying to get at was the.
Near term impact of.
U S semiconductor company is being told to stop servicing Chinese customers like is that something that would blow back on <unk> in the near term in terms of what you're physically doing in China or would it just be an indirect impact and maybe you wouldn't have Seattle business.
That's a good question and I didn't I didn't speak to the new U S restrictions on.
They're pretty broad reaching.
It was pretty sudden so a lot of our OEM partners are still assessing what does it mean what is the licensing look like there is potential risk in the near term even in the fourth quarter here, we've comprehended that in our guidance I guess that speaks to the diversity of our portfolio, but there is potential near term risk on.
That as they work through that I also think there's a bit of a whipsaw going on in the sense that people like Oh, we can't ship to China OE. We have we have a license for the next year and it's going to transition for US also from a production standpoint, we don't manufacture our syndicate our women in China. So that's not a <unk>.
For us so I might just add that because that's not something we're currently contemplating its more if our customer demand shifts because that restriction kicks in.
Great. That's all Super helpful. Thank you.
Sure.
Our next question comes from Jim Ricchiuti from Needham <unk> Company. Please go ahead with your question.
Hi, good afternoon, essentially Chris on for Jim.
In the previous quarter, you had mentioned that approximately $200 million of demand was answer Phil how is this trending.
That dollar amount rolling over a quarter to quarter and are you finding that the demand is waiting in the queue as it gets pushed out thank you.
So Chris good to have you on the call from an unfulfilled demand standpoint, I think Jeff mentioned, it still more than $200 million.
Unfulfilled demand now we are seeing some movement within there. So it's not the same demand. So we did obviously fulfill some of the prior.
Kind of replenishing itself and obviously as we kind of move forward.
As we talked about some of the supply chain challenges are constraints as they ease that will help support getting those parts in and being able to increase the production for that unfulfilled demand as we move forward and some of that is contemplated in our Q4 and well consider that in 2023 as well as we look out to 2023.
One thing Chris is it's been surprisingly durable in the sense that.
If orders not been fulfilled we haven't seen it really be all that perishable I would say, it's a small percent that's been perishable and we saw that transcend I think as we continue to grow revenue and control more products, we will burn down.
That hunts fulfilled demand, but we really haven't seen a significant loss in that so it has tended to carry forward.
Don't really see.
A reason that that would that trend wouldn't continue.
Got it got it.
Certainly our incentives so of the.
Uh huh.
Got it very helpful. Thank you.
Are you seeing any signs that the.
The much discussed consumer softness in the broader economy is improving availability of components like semiconductors.
On your end.
And how much of the inventory is in connection with products that are substantially complete but may be waiting on a critical component like a semiconductor.
Let me get the front of that and then I'll, let <unk> talk about the inventory.
Good question, though because I think it's something we should provide me a little more clarity on.
I think we are seeing some help in some areas like I mentioned memory right. The consumer drop there the PC drop we.
We are seeing some things free up and I think it'll help in and it's funny I just a question I ask our chief procurement officers like Hey, consumer weakness here helps on industrial Unfortunately.
It's not a perfect helped because a lot of what we do is we tend to be.
We tend to be higher mix lower volume a lot of custom if you think about some of the aerospace and defense programs or some of the custom medical equipment rebuild.
They tend to use sometimes very unique.
Components and so it's not fully translatable like hey that PC didn't need it we'll take it so it's.
I would say a broader broadly helps it also might free up wafer fab capacity that they can shift to the products, we need but it's not a like for like it's not like that component of freed up and we can pop it in our unit we typically have.
A little more unique.
You need components that go into the solutions that we build for customers. So it's not like they're there.
Broadly I would say there is some help but but it's not like going to be a windfall overnight based on that but maybe you could talk about the data and Chris Let me, let me touch on the inventory.
Interesting question that you have there.
First of all let me step back in terms of our overall inventory.
Vast majority of our inventory is raw components really in support of our EMS industry.
Obviously, we have inventory on the.
Semi cap side as well, but the majority is on the EMS side.
And as you think about the.
Unfulfilled demand that we just talked about on your prior question. If we don't we have a lesser amount in our whip at this point in time that any point in the past.
Really because if we can build it the customers want it and they wanted as quickly as possible right. So.
That really is the inventory is really about the raw materials and waiting for those few components for with that incremental demand. So we can fulfill that and get it out the door.
Got it thank you.
Very helpful.
And one more from me if I may.
In the event of a of a milder.
Mild recession, how would you expect.
That environment to impact the trend of Oems outsourcing their manufacturing.
I think in the past when there has been a tougher economic environment I think you'd find Oems, saying what business. So we're really in a way the most.
Building this product the most efficiently and do we need all the head count we have and could we do it more.
Someone else do a better job at it so we've typically seen a recessionary environment.
Be good for the outsourced.
The trend in outsourcing we still.
Particularly in A&D and then.
Medical there is still more than half the market is not outsource so lots of opportunity that will naturally I believe grow the way that compute telco predominantly outsourced already so I think a recessionary environment.
We will cause people to to really think hard about that.
And whether they would could do it more cost effectively.
Other dynamic going on as folks are looking at.
What's the most cost effective way to move material around the world or move product and we still see this move towards near shoring whether that's.
60% of our demand is in the U S.
We don't want to ship it all from China, or maybe we want to build more.
And in region or near region. So.
Big increase in demand in Mexico for example, because it's near the U S.
And it's a lot more cost effective to bring product.
Across the border than than putting it on a boat or shipping an error from Asia. So that's another trend that I think.
That folks will have to look hard at budget.
Budgets get tighter.
Chris and one other thing to add if you think about the.
Challenge of finding talent Oems also have to evaluate whether they can find that talent internally or look for our outsourced partners and whether that's on the technical engineering side or the manufacturing site.
Another I think driver for outsourced focus for outsourcing focus that we continue to see.
Got it thanks, very much and congrats on the on the results this quarter.
Chris Thanks.
Once again, if you would like to ask a question. Please press star and one on.
Our next question comes from Andrea <unk> from Sidoti. Please go ahead with your question.
Hi, and thank you for taking my questions.
Follow up on.
Outsourcing trend.
Question and with you around it and take in terms of.
But would you say the demand is.
Supply chain, driven engineering driven at this point.
Is demand engineering or <unk> or <unk>.
Our pricing.
<unk> solutions are a.
Customers turnkey amongst them because you have the supply chain.
Relationship because we have the engineering talent.
Which one do you see.
I think it really is a function of both on yet.
Customers, who are coming to us for design and engineering needs that cannot be fulfilled elsewhere and there are others that are coming to us from a manufacturing standpoint, because of our global scale and our footprint in.
In fact that we have relatively smaller footprint.
In China, we've got a greater percentage of our footprint in the Americas, whether thats in the U S or Mexico, and so that manufacturing footprint is really supporting near shoring and re shoring needs Global Oems.
I think it really is a function of both and as Jeff mentioned the other aspect is we have a focus in terms of attaching engineering with manufacturing and manufacturing with engineering.
We take the market in that way, which also help support.
The desires of our customers.
Yes, I think youre right.
Pretty good mix.
Okay. Thank you.
And then I was curious where the M D.
You said there were certain areas.
Component shortages what are the areas.
And what can we expect in terms of seeing growth in A&D and the coming quarters.
So.
The dynamic with A&D, what I would say a little bit of many times, particularly in the defense space.
Ultimate.
Customer might be the U S government or.
A defense related entity.
And they're just the the pace at which they will move to look at getting in front of supply chain constraints.
And it's not as simple as one of our one of our customers, saying sure. Just go use this alternate component it will be fine what ends up happening is they say well we like the component, but now we've got to go back to the three letter agency and it's got to get qualified and that's a six month process and then we'll get back to you and then we will.
See if we can get the funding to go do that to then place the part of an order and so it's just more elongated there and its not like Theres a quick substitution that can happen. So I wouldn't point to any particular.
The same semiconductor constraints that we're kind of seeing in other industries.
Just there.
This is another one I might add because <unk> talked about it before supply chain premiums there are unheard of in this right.
They say no no wait.
We can deal without that particular device and will wait six months. So there is frustration I would say in that customer set saying guys. So wish I could do better, but they're not as.
She has not been as responsive and it's not really for the fault of our customers is typically the regulations and things they have to go through those steps to get that to free up and that's why we're seeing that that it's just it's more persistent that those challenges are not all being alleviated so much in A&D.
Space This quickly.
Okay. Thank you and that will flow from me.
Yes.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to Paul <unk> for any closing remarks.
Thank you Jamie and thank you everyone for participating in Benchmark's third quarter 2000 to 2022 earnings call before we go I'd like to remind listeners of a couple of upcoming events. As mentioned previously we will be hosting an investor and analyst day at the NYSE on November eight.
We will be back in New York on December 6th seventh attending the Raymond James Technology Investor Conference, followed by the Sidoti Virtual small cap conference on December eight.
Then in January we look forward to attending the 20 <unk>.
Needham growth conference taking place.
The 10th through the 12.
With that thank you again for joining us today, and we look forward to seeing you at one or more events in the coming weeks and months.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.