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

Jim Suva - Citigroup Brian Alexander - Raymond James Amit Daryanani - RBC Capital Markets Mark Delaney - Goldman Sachs Unidentified Analyst Sherri Scribner - Deutsche Bank.

Good afternoon, and welcome to the Flextronics International Second Quarter Fiscal Year 2015 Earnings Conference Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics' Vice President of Investor Relations. Sir, you may begin..

Thank you and welcome to Flextronics' conference call to discuss the results of our fiscal 2015 second quarter ended September 26, 2014. We have published slides for today's discussion that can be found on the Investor Relations section of our website.

Joining me today is our Chief Executive Officer, Mike McNamara and our Chief Financial Officer, Chris Collier. Today's call is being webcast live and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ.

Such information is subject to change and we undertake no obligation to update these forward-looking statements. For a discussion of the risks and uncertainties, see our most recent filings with the Securities and Exchange Commission, including our current, annual, and quarterly reports.

If this call references non-GAAP financial measures, these measures are located in the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures. I would now like to turn the call over to our Chief Financial Officer, Chris Collier. Chris. .

Thank you, Kevin, and to all joining us today, we appreciate your time and interest in Flextronics. Let us begin by turning to Slide 3 for our second quarter income statement highlights. Flextronics financial performance for Q2 reflects our steady progress as we continue to deliver on our commitments.

Revenue grew $118 million or 2% year-over-year to $6.5 billion, which was above the mid-point of our guidance range of $6.2 billion to $6.6 billion. Almost every business group met or exceeded our expectations, and all but one grew year-over-year.

As Mike will discuss in further detail, we continue to see strong year-over-year growth in both our industrial and emerging industries group or IEI which grew more than $163 million or 17% and our high reliability solutions group which expanded 11% year-over-year.

Our second quarter adjusted operating income increased 16% year-over-year to $183 million. This also was above the midpoint of our guidance range which was $165 million to a $190 million. Adjusted net income was $157 million increasing 17% year-over-year.

Our GAAP operating income totaled $172 million and our net income was $139 million both of which reflect improving quality of earnings. Our adjusted earnings per diluted share for Q2 was $0.26, which was at the high-end of our adjusted EPS guidance range of $0.22 to $0.26 and represented an 18% year-over-year improvement.

Turning to Slide 4, you'll see our trended quarterly highlights. Our second quarter adjusted gross profit totaled $379 million, which in dollar terms is up modestly 2% year-over-year. Our Q2 gross margin was in line with our expectations at 5.8%, which is essentially flat sequentially.

We expect margin to improve from our current levels as we continue to drive further operational efficiencies and yield improvements over the coming quarters. We are strategically and consciously shifting our portfolio mix. Our industrial, medical, and automotive businesses continue to grow and are now representing 30% of our total portfolio.

As we highlighted at our Investor Day, we continue to see our portfolio shifting towards a greater mix of these businesses, which carry longer product lifecycles and higher margins. This shift, together with our focus on driving to a higher margin profile for our consumer technologies group contributes to our vision for a steady margin expansion.

This quarter our adjusted operating income increased by $25 million or 16% year-over-year to $183 million. On a sequential basis, our adjusted operating income remained flat despite $114 million in lower sales.

Now on an adjusted operating margin basis, we increased 30 basis points year-over-year to 2.8% which reflects the sixth consecutive quarter of increasing operating margin. Aiding in our continuing operating profit and operating margin expansion is our discipline around our operating expenses.

We have reduced our quarterly SG&A expense by over $16 million since a year ago and for the second consecutive quarter we have achieved our targeted level of $200 million or below that we had set in January 2014.

Conscious efforts have been made to retool to refocus our efforts to drive productivity and efficiency while simultaneously investing in innovation, design efforts, and other strategic initiatives to expand and enhance our platform. We expect to maintain our cost discipline and operate at the targeted SG&A level of $200 million or below.

Return on invested capital is a key metric that supports and guides our financial decision making in allocation of capital, regardless of the business we are operating. Our return on invested capital has improved by 33% year-over-year or up 580 basis points to 23.3% for Q2.

This result exceeds our weighted average cost of capital and reflects improving earnings efficiency in relation to total capital deployed into our business. Now let’s turn to slide 5 for some color around other income statements highlights.

Net interest and other expense was approximately $10 million in the quarter, which was favorably below our guidance range of $20 million. This performance was due in the most part to our realization of stronger than expected foreign currency gains.

For our December quarter, we continue to believe that modeling quarterly net interest and other expense at $20 million is appropriate. The adjusted income tax expense for the second quarter was $17 million, reflecting an adjusted income tax rate of approximately 10% which is at the high point of our targeted tax rate range of 8% to 10%.

As we move forward throughout fiscal 2015, we believe that our income tax rate will remain at high end of our 8% to 10% range, absent any discrete items. Now when reconciling between our quarterly GAAP and adjusted EPS, you see $0.03 impact from stock based compensation expense and intangible amortization expense, net of tax benefits.

If you now turn to Slide 6, I will talk to you more about our cash flows. Flextronics continues to be an excellent generator of cash and again this quarter we displayed strong cash flow. We generated $387 million of cash flow from operations and $322 million in free cash flow.

The $322 million of free cash flow exceeded our expectation of roughly $200 million for the quarter. A key component of this strong cash flow generation was our disciplined management of net working capital. Our net working capital decreased by $237 million to $1.9 billion.

At this level it represents 7% of our sales, or right at the middle of our targeted range for net working capital which is 6% to 8% of sales. We continue to believe that this range remains valid given the mix of our business. Another key element is our continued discipline on capital investment.

As expected, our capital expenditures of $65 million were lower than our depreciation for the quarter. We continued to prudently manage our capital investment spend so as to remain well positioned for the future. We expect that our CAPEX investments will be lower than depreciation levels throughout fiscal 2015.

And our capital investment target for fiscal 2015 remains in the range of $300 million to $350 million. We maintain our conviction in our ability to achieve our targeted free cash flow generation of $3 billion to $4 billion for the five year period ending fiscal 2017 as we remain fundamentally structured, disciplined, and on target.

Lastly we continue to use our strong cash flow generation to consistently return value to our shareholders through repurchasing of our shares. This quarter we paid $101 million for the repurchase of over 9 million shares or roughly 2% of our ordinary shares during the quarter at an average cost of $10.85 per share.

Now turning to Slide 7, let us review our solid capital structure. Our financial condition remained strong. The no debt maturities until calendar 2018 was over $3 billion in liquidity and our total cash of just over $1.5 billion. Our total debt is slightly above $2 billion and our debt-to-EBITDA ratio improved to 1.7 times from the prior quarter.

Our capital structure is sound and provides us with ample flexibility to support our business. And that concludes the recap of our financial performance for the second quarter.

As you can see from our earnings release today, the underlying fundamentals of our business remain intact and we continue to make steady progress and we continue to deliver on our commitments.

With that I will now turn the call over to Mike who will provide you with his perspective on the performance this past quarter and overview of the business and current trends, as well as share our next quarter's financial guidance. .

Thanks, Chris. Please turn to Slide 8. Our steady execution in a stable environment continues to pay off with measured improvement across many areas of our business.

From a revenue perspective we have exceeded our expectations in high reliability solutions or HRS, for consumer technologies group or CTG on a way to posting $6.53 billion of sales at the high-end of our guidance range.

The biggest upside relative to our expectations again came in our CTG business declining only 1% sequentially, much better than our expectation of a high single-digit decline. HRS grew over 3% sequentially versus our guidance from flat. This marked HRSs 19th straight quarter of year-over-year growth.

On a combined basis our HRS and IEI businesses totaled just over 30% of sales which displays the real strength of our offering and our ability to engage and grow with customers in these markets. In just a short three years we have moved us from under 20% of our total portfolio to 30%.

We continue to find many new ways to partner in these markets and remain confident in driving growth in both HRS and IEI going forward and expanding their combined revenue share towards 40% over the next few years. This was the sixth consecutive quarter of operating margin improvement rising 5 basis points to over 2.8%.

Additionally operating profit dollars came in at $183 million towards the high-end of our guidance. Further supporting our operating improvement of continued discipline and cost controls as SG&A was $196 million versus a target of $200 million. We remained focused and committed to maintaining steady margin improvement going forward.

Our cash flows and capital structure continues to be pillars of strength for Flextronics. We are on track for another strong free cash flow year. As Chris mentioned, free cash flow was $322 million for the quarter ahead of our expectations of $200 million.

Free cash flow for the fiscal year-to-date is now $168 million and we continue to see $600 million or above as an achievable target for fiscal 2015. Our consistent return on value to shareholders continued with additional 9 million shares retired via our buyback for just over $101 million.

In the first half of our fiscal 2015, we have retired approximately 20 million shares for $207 million. As you can see, our commitment to return over 50% of our annual free cash flows remains firmly intact based on where we are at the half way point of this year.

Our consistency in buying back our shares over the last four plus fiscal years has enabled us to reduce our shares outstanding by over 30% Or 278 million shares or over $1.9 billion. Our focus on enabling innovation and differentiation for our customers yields a strong competitive advantage for Flextronics.

We lead the industry in designing innovative supply chain solutions and won the first place award in 2014 Supply Chain Innovation Competition at the Council of Supply Chain management professional’s annual global conference.

Many of you saw our customer innovation center in San Jose at our May Investor and Analyst Day and how we are enabling new customers to scale and acting as the marketplace of innovation for new processes and product technologies.

In just our San Jose campus alone, year-to-date, we have held 424 tourists, hosting over 2700 people resulting in 30 new customer additions and developing many new process technologies. Please turn to slide 9.

Before I dive into our performance by business group I’d like to make a few comments about our largest customer, Motorola Mobility and its pending acquisition by Lenovo.

At our May Investor and Analyst Day and again last quarter, we outlined the original value proposition underpinning our relationship to strategic value it has created in our view of the future direction of the relationship. We await the closing of the transaction to receive additional updates which we’ll communicate when appropriate.

In terms of macro environment, we continue to see it as stable. Our guidance also reflects this. Turning to our network solutions group or INF, which was in line with our expectations for a low single-digit declines. Revenue was $2.4 billion reflecting a $94 million decrease from last year and down 7% from a year ago.

In the quarter, our telecom server and storage businesses were down mid single-digits collectively while our networking business rose modestly. For next quarter we expect INS revenue to be stable with our core telecom business being flat, network declining slightly, and server storage increasing slightly as an offset.

Our Consumer Technology Group, or CTG's revenue declined 1% sequentially to $2.1 billion.

This was better than our expectations for a sequential decline of high single-digits due mostly to better-than-expected ramps across a number of customers in areas such as variables and consumer as well as a bit better than the expected demand from our largest customer.

We are guiding to a modest seasonal increase in CTG sales up low single-digits which is slightly above our prior expectations of flat. Our Industrial & Emerging Industries Group recorded a second straight quarter of above $1.1 billion.

However it declined slightly by $31 million or 3% sequentially due to softer than expected semi-cap equipment sales which come after multiple quarters of our performance in that customer set. As a result IEI was just below our expectations for flat.

Year-over-year IEI remains the strongest performer across all four of our business groups with sales up 17%. Next quarter we expect IEI will be stable, as strength from appliance and energy customers should be offset with some softness in semi-cap and some industrial customers.

The stable outlook translates into solid double-digit year-over-year growth and we remain confident in our ability to grow the business 10% plus. To that point this quarter was well above average for new IEI bookings which bodes well for the 12 months ahead when many of them will begin to ramp.

Our High Reliability Solutions Group, which comprised our automotive, medical, and defense and aerospace businesses rose $29 million or 3% sequentially, and 11% year-over-year to $875 million. Next quarter we expect HRS to be relatively stable as we see consistent levels of production in both medical and automotive.

Similar to IEI, HRS also had an above average quarter of new program bookings which should continue to provide momentum with double-digit growth in this group. For the second consecutive quarter on a combined basis, IEI and HRS had roughly $2 billion in quarterly sales, and grew 15% year-over-year.

We continue to expect strong performance from these 2 businesses with combined growth anticipated to be approximately 10% for fiscal 2015. Now turning to our December quarter guidance on Slide 10. For the December quarter, revenue was expected to be $6.4 billion to $6.8 billion.

Our adjusted operating income is forecasted to be in the range of $175 million to $205 million, or $190 million at the midpoint. This equates to an adjusted EPS guidance range of $0.24 to $0.28 per share, based on weighted average shares outstanding of 590 million.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted EPS guidance that I just provided by approximately $0.04 per share for intangible amortization and stock-based compensation.

Before we open up the call for Q&A I would like to thank all Flextronics employees worldwide who are dedicated day in and day out to our improvement.

The management and I, team and I recognize their relentless hard work dedication required to consistently deliver on our commitments, please our customers competitiveness, and return value to our shareholders. With that I would like to open up the call for Q&A.

So, operator?.

Yes, thank you. (Operator Instructions). And our first question here comes from Mr. Jim Suva from Citi. Your line is now open sir..

Great. Thank you very much and congratulations on continual roadmap of executing, that’s great. It sounds like from your prepared remarks that CTG was the biggest upside to the quarter and if so can you help us understand little bit about dynamics.

Because I believe given the size of it, you got to kind of pinpoint that Motorola I guess not to talk about customer specifically, you don’t like to, but your biggest customer there probably with the source of that upside is the majority of it or was it not that major customer and just all the other little companies in that.

If you could help us understand and I think the reason why that’s important is under the view of the risk of what’s going on with the potential closing transaction?.

Hi, Jim. It was kind of a balanced upside. It wasn’t entirely from our largest customer and you are right I can’t get into details about that customer. But as I mentioned we also had some pretty good upside from some of the variables customers.

We are now up to booking probably 25 different variable deals across a whole variety of different applications whether they’d be anything from fabrics, to wrist bands, to watches I mean just a whole range of different things. So we had some upside there, we had some upside from Motorola.

So I’d call it reasonably balanced and we even had some upside with some of our consumer gaming business. So I would view it as kind of a balanced view and not just overwhelmed by the Motorola business..

Great and then a quick follow-up, when we think about your visibility today, say versus this time a quarter ago and this time a year ago; similar, better, a little more murky, the reason why I ask is you know across the technology supply chain whether it be EMS companies or distributors or chip companies, it seems like there is a kind of a polarizing impact with some companies saying it is kind of normal and a lot of others saying that we are seeing a big slow down here in the past few weeks.

If you can help us assess your visibility that would be great. Thank you..

I think our visibility has not changed very much and I consider it to be reasonably good. We have not seen a big pull back across the industry. I know some company has made a lot of noise about it.

We just haven’t seen that evidence, don’t know if we are going to see that later or not but just based on what we can see and our expectations, we continue to see a very stable environment and we just don’t see the evidence of any kind of major pullback..

Thank you very much..

Welcome..

Thank you and now our next question comes from Brian Alexander from Raymond James. Your line is now open sir..

Okay, thanks very much. If I look at the revenue guidance for December and I took the midpoint at $6.6 billion is down about 8% year-over-year but all of that is coming from the consumer business being down I think over 20%. So maybe just give us a sense for how much of that consumer decline is a function of your largest customer in that segment.

I know it’s still very uncertain but what are your factoring into the December quarter? And then related to that if I look at the other three segments, they effectively net out to flat year-over-year revenue growth, is that how we should think about those businesses collectively ex-consumer going forward or do you think that with a strong book that you’ve seen in HRS and IEI and perhaps a moderating declines in INS that you might actually be able to grow the rest of the portfolio? Thanks..

Brian so if we look at you know the consumer business relative to last year, last year we had some really, really hot launches. Microsoft did a very, very significant launch with their connect products which was very significant on the back of a lot of marketing and a lot of upside.

We had some really big launches with Comcast and with Google that hit the marketplace and just took off. It appeared in Times magazine as the number one product of the year. We had a number of launches around this time last year with Motorola that hit and they also did really, really well and we did a lot of channel flow at that time.

So you had three big things that we kind of used, even talked about it last year that 7.2 was kind of an anomaly and as a result of three really big consumer launches. And they are probably bits and piece of other things.

So when I think about a comp on a year-on-year basis it is tough to be the comp against those big things because we don’t have the same huge launch with Comcast, we don’t have the same huge launch or as a big a launch with Microsoft, and we don’t have as a big a launch with the products hitting on Motorola.

So we think Motorola has been reasonably flat but we have a lot -- so we just had a lot of other things that were kicking in. As far as the other businesses, we just think about those other businesses, you know, INS has become very, very stable kind of on a continuous basis.

It has either been either stable or maybe even a slight down side on that business. That business we had an objective of keeping at 0% and so keeping that at 0% on a year-on-year basis would be, we consider that to be positive in this particular market environment. In the industrial businesses, in HRS business I mean part of that is just timing.

Industrial in particular, we went two quarters both March and June quarter or December and March quarter where we had double-digit sequential growth. So we are coming off a real tough comp off the sequential businesses.

And I just think those businesses are fundamentally structured that we have the bookings in place and if we think about on year-on-year basis we will be able to drive both those businesses combined like a 10% level. And we think between those two we will -- so we just think those will be fine.

So we think those are just more quarterly disruptions, timings of new programs, things like that. But I think if you look at those other businesses on a year-on-year basis to be able to get to 10% growth we think is very workable. .

And just related to that, a follow-up for Chris. I know you focused more on operating income dollars than margins. You had four very strong double-digit growth quarters in terms of operating income and your guidance suggest low single-digit growth in profitability in December, some of that related to the tough trends that Mike just alluded to.

I guess my question is what is your confidence that once we get past these tough parts that you can reaccelerate profit growth and get back to double-digits in operating income growth? Thanks. .

Hey, thanks for the question Brian. So, maybe it is a great way to recalibrate to our vision. In my prepared remarks I specifically identified that we expect margin to improve from the current levels as we continue to drive further operational efficiencies as well as yield improvements in the next coming quarters.

As we think about margin and we have said it before, the premise is that margin is fundamentally the result of the mix of our business but we continue to lay forth a plan to grow segment -- these higher margin, longer product lifecycle businesses meaningfully into the future.

We actually have many ways in which we are partnering and penetrating in each of those spaces essentially creating a trend if you will for those markets. So we see great solid double-digit growth, we are just going to help push that margin.

But in the interim, if you were to take the vision we had laid forth back on the Investor Day where we had defined the growth rates as well as the margin profiles for each of those business groups. You kind of blended yourself in that target portfolio to see a range of 3.4% to around 4.8% at the high end of an OP margin range.

If you take that same frame work and put that in the current trend that we just did for Q2, you actually see an operating profit margin range that is more like we play one at the low end up to 4.3 to level setting in the Q2 print.

You actually start thinking about where are we today versus even the low-end and we are in splitting distance of getting there.

I mean we are just shy of about $18 million from that low end and as I said before, to get inside that range it is also about driving further productivity for the productivity improvements, yield improvements, and we are aggressively working our way through that.

We are identifying root cause problems, defining action plans that will then accelerate those operational improvements and execution.

So we see ourselves at the current state moving our way into that range and then as the mix changes and we get some more uplift and some revenue all of which continues to help us remain firmly convicted about that vision of into that margin range. .

Thanks very much. Nice job. .

Thanks. .

Thank you and our next question comes from Amit Daryanani from RBC Capital. Your line is now open. Thank you. .

Thanks a lot, good afternoon guys. Two questions, maybe just to pick up on what you were talking about Chris. If I play with the target model that you guys talked at the Analyst Day with the numbers you have now, something like 3.5% off margins at the midpoint of those ranges.

Where is the 70 basis point delta to which you are doing versus what you should be doing, is it just underperformance in each of those segments, do you have a high cost structure, or is it all essentially isolated in the CTG segment where you have more challenges? and really maybe the problem to get to if IEI and HRS keep growing the way they are and those margin structures should be 4% to 6% and 5% to 7%, that alone should give you a nice tailwind from a mix perspective I am trying to understand are those segments running where they should be and the delta then in CTG is it more kind a broad based headwind that you have?.

Hey Amit that’s a great question. So let me paint it a couple of different ways. First, you actually mentioned the tailwinds that we get for those growing businesses that are at the higher margin profiles, in each of those we have room to improve as we are launching many different programs within that, within those spaces.

And we continued to find in home our operational excellence around some of the more complicated elements of those businesses. So there is room to improve within those but right now where we sit we like where we are positioned inside those businesses with regards to their return profiles.

The other thing we are doing is we are changing the way we get after our consumer technologies business and we are moving that to a richer mix and so we are not at that target margin profile for that business, so that’s improving.

We’ve seen a lot of dialog we’ve had around the innovative the connected home and other disruptive plays and ability to partner with new technology companies in that space, that’s taking time. And in every one of those whether it's in variables or connected we actually get a much greater margin profile than what historically has been in CTG.

So, that mix shift is going to help to fast forward. But as I just talked a second ago to Brian I decide an easy 30 basis points of just in our own execution around our business as we actually transition some programs from development into production.

And as we keep getting after the root cause and action plans around some other operational excellence that we need.

So it’s a multitude of layers we just continue to push forward, we are focused around continuous improvement, we are focused around continuing to expand both operating profit dollars and margins, and at the end of the day the way we laid out that vision was fundamentally structured to achieve that range.

It is just upon us to execute and keep pushing ourselves to that level..

Fair enough. If I could just follow-up on the free cash flow generation is obviously very impressive this quarter but secondly it was a bit maybe the accounts receivable were down fairly substantially.

It almost seems like you had a very front end loaded quarter which I am not sure that was the case or if you just had some securitization that happen to help you? Just walk me to the free cash flow and working capital, what happened in AR site this quarter?.

Yes, another good question. And so when you look at the free cash flow it was -- we are really pleased that $322 million of free cash flow well above where we had thought around 200. We are very focused on driving to our $3 billion to $4 billion of free cash flow that was certainly committed to by 2017.

If you peel back how this is being developed, if from consistent steady earnings improvement coupled with a discipline around working capital management and a discipline around our capital investment where we have been under spinning depreciation.

Going to the working capital aspect, the point you highlighted receivables actually came down $410 million sequentially. That was actually part of the problem last quarter so reversed the hurt that we had in Q1 which is all cantered around timing of collections.

There is really nothing, we did not change, accelerate, or increase any level of securitization of factoring. So it is really a sense of timing. If you look last quarter we actually had been a user of cash to the extent we had better collections that period it would have been better in line. So it’s really a timing.

If you look at on a year-to-date basis we are right on where we should be. We are following a target range of networking capital of 68%. We’re right smack in the middle at 7% right now and we see clearly many levels to play to improve our networking capital management and to continue to drive to this cash flow generation that we are targeting..

Perfect that’s really helpful and congrats on a nice quarter guys..

Thank you..

And our next question comes from Mr. Mark Delaney, Goldman Sachs..

Good afternoon and thanks very much for taking the questions.

I think about a year and a half now that Flex had the Motorola Mobility assets and I understand the comments that the company made earlier on the year on the Analyst Day that because of the profitability with Motorola was very low that even if Lenovo eventually does enter into some of that production that the EPS, potential EPS headwinds that Flextronics will be pretty well.

I think you guided $0.02 to $0.03 to full year earnings.

I wonder if you can just give us an update on what the potential impact might be and just given that I imagined the company has -- now that you have had this business for while, you had time to improve the yields and I am wondering if that changes how much profit is being generated from that business and what's the potential downside risk maybe if you give it back to some of that business?.

Yeah, if you remember we outlined at Investor and Analyst Day, we kind of did a what if there was a complete in sourcing of China and there was also some uncertainty around the whole Dallas Forth Worth project.

And as you know the Dallas Forth Worth project is completely out of -- kind of immediately out of our system in terms of any sort of financial risk. We concluded with the customer about a quarter ago.

As we mentioned we will continue to run that business but we concluded that deal about a quarter ago where those costs to shutdown that factory were absorbed by our customers. So we have taken that risk element out of our system.

The other thing we talked about at Analyst Day is what happens if China gets in sourced and we basically said by the time we will take the working capital and convert it back into cash and you take the depreciation and you put that or you take the equipment and you move back into other sites and kind of reduce the amount of CAPEX we spent in the following periods, even if it is like a $0.02 to $0.03 impact including charges that we would expect.

So we continue to see that relatively just about the same as we do today. Obviously on Analyst Day we have a lot of less risk as we don’t have the Dallas Forth Worth thing hanging over us. But we do continue to make improvements in yields and productivity.

And if you notice we have had the Motorola business for six quarters and we have actually had six straight quarters of increasing operating profit margins and we have had five quarters of increasing ROIC. So we have been managing to run this thing very effectively.

But in any other margin program if it goes away, our operating profit percent goes up, our work in process converts to dollars and as you know we like to buy back shares on a pretty frequent basis. So between all that we are not concerned about it too much. As you know it gave us a great position in with Google to do other projects.

As you know Google is becoming more and more of a hardware manufacturer as evidenced by what they did Dropcam and with (inaudible). All the projects that are frequently in the newspaper and in Google. And at the same time it gives us a stronger position into Lenovo quite frankly which is one of the largest electronics manufacturers in the world today.

So we are going to be positive about how we can work this and use the rest of our system to create value. But it is kind of a long answer but I want to give you enough context around it. But the short answer is we expect to be pretty close to where we were on the Analyst Day. .

That's the context. I appreciate that.

And for a follow-up question, I am hoping that you can help us think about potential seasonality for the March quarter, by that the mediums, the medium sequential decline over the last five years is down 13% sequentially and I get an average of down 11% but I know basically it can always move things around from year to year and then of course your mix of business has changed overtime too so, help us think about what the seasonality for the March quarter could be for revenues on a quarter-to-quarter basis?.

Yes, it is always hard to predict but what we have been trying to do, as we move our portfolio and move the kind of businesses that we have in CTG we actually expect less seasonality's as a result of the structural change in the portfolio.

So what that means is both in December quarter we should have less going up and on the March quarter we should have less downside.

So structurally if we think about going forward, we think we are in mid to high single-digits decline in the March quarter and we think about that not only this year but maybe that's -- we are hoping that to be a more structural change as a result of our portfolio mix. .

Thank you very much. .

Thank you. Our next question comes from Austin Bernardez, Cross Research (ph). Your line is now open..

Yes, good afternoon, thanks for taking my questions. I guess just to jump into from a segment perspective, looking at INS and you commented that you are expecting your networking business to increase quarter-over-quarter for December.

I was wondering if you could provide some colour as to sort of what the order patterns were during the September quarter and how we should be thinking about the INS business going forward from a seasonality standpoint?.

Yes usually the seasonality in INS is, it doesn’t have that much seasonality. It usually has a little bit of a downside in the March quarter but on average seasonality as plus or minus like 1% or 2%, almost like on a continued base during the year and then the March quarter ends up being down like a 6% if we were to look at our five year average.

So I think that all these things we just think about the INS business, so we think that order pattern might be typical again this year but we have to wait and see.

But we are trying to focus on the INS business as we know that we have kind of a tough, our customers have kind of a tough revenue level that they are trying to achieve in their hardware groups. We see the group somewhat down like a 0% to 5% kind of thing on an annual basis in terms of the data we see in the marketplace.

We are trying to offset that by really going after more customers in China, where we already have a pretty good position. We are trying to offset it by going into the appliance manufacturers. We’ve got a great position with the next generation technology guys, you know guys like a (inaudible) and a lot of others.

We looked at like the last 10 IPOs and we are in like 8 of them. So we do expect that group of business to start to grow and to create a more meaningful impact in terms of offsetting any declines in the more traditional space.

So on average we see not too much seasonality, a normal seasonality for the March quarter is 6%, down 6% and -- but we are trying to offset that with the opportunity that we see in China and in new appliance manufacturer and even in the Converge 3.0 infrastructure space with really integrating tools systems..

Thank you for that and then lastly from me, Chris if you could comment on sort of how we should be thinking about OPEX from a more longer term perspective in terms of what type of revenue do you think you can support with the sub $200 million OPEX and at what point should we be picking up that figure potentially growing?.

Hi Austin, so with regards to the SG&A, our OPEX we are really happy with where we are performing right now. Clearly operating was a good strong discipline in control. You know our target was to get down to $200 million level or below by the September quarter.

We actually beat that by hitting that earlier in June, sustain that into this current quarter. We should be able to operate in this range for a while. It’s our objective to offset marred or inflationary increases with productivity and efficiency gains. This is a clear level for us to be played.

We get a lot of leverage off of this to move forward from here. You guys continue to invest a bit in innovation and especially in the S part of the SG&A, selling side. But all of that together I still think we’ll be right around this level to target this day here. And I don’t see it picking up any higher.

But one thing I would highlight also is that inside of our SG&A is our research and development spend or R&D which does have some minor variations, so it may kick us up or down a couple million dollars period-to-period. It might be episodic but nothing significant.

So rest assured, we are operating just at the safest level even with growing revenue and focused around the S part, really focused on selling them..

Thank you very much..

(Operator Instructions) And our next question comes from Sherri Scribner, Deutsche Bank..

Hi, thanks.

Just with the growth that you are seeing in the CTG business I am curious if there is any capabilities that you think you are missing in terms of manufacturing capabilities and there is any opportunities for acquisitions in that business? And then secondly since you are generating a decent amount of cash have you reconsidered introducing a dividend thing?.

I will take your first question and let Chris talk about the second one. You know as far as the CTG capabilities, we kind of view them as actually pretty strong for the product mixes that we are going after. And now I will give you a couple of examples.

You know connected home, we have a whole range of technologies and wireless technologies that we are now taking and putting into our number of different customers products in order to get them smart and connected into the whole engineering of things.

So from that standpoint we just view our capabilities, we have 1500 design engineers around the world, we have a huge amount of capability as it relates to anything from display interfaces and software and wireless modules and really the kind of things that you really need to go connect a consumer smart device into that new connected infrastructure.

And our variables were probably even stronger. I think I mentioned earlier we probably have about 25 customers in variables. We do everything from sensors, to glasses, to fabrics, to wrist bands, to watches, to a variety of different product categories.

And what we are focused on in that place because you mentioned the capabilities, that's actually what is important in variables in our view. I don’t think anybody really knows what the consumer preferences are going to be on consumers and our variables in the future.

What we are very, very focussed on is the underlying core technologies associated with variables. And these are things like -- and we probably had 30 patents in materials and methods and advanced manufacturing processes and technologies over the last 12 months.

So what we are actually focussed on is not the customer acquisition part of the variables, we are trying to focus on the underlying core technologies that enable and are recorded for variable technologies. And we are building a chest of capabilities that are very differentiating.

And the reason they are differentiating is you actually have to solve plastics problems, you have to solve circuit problems, you have to solve very traditional electronics problems all simultaneously.

And the fact that we have more techs effectively, we have a big mechanicals operation, and the fact that we have really, really broad electronics ecosystem really gives us the tools that we need. So when we think about those two very, very important technologies we are in great shape.

So I think about some of the other underlying technologies that we need, it is really just to be able to access the new disruptors and the new innovators and we just have a whole range of technologies or I would say initiatives that allow us to attach into these new disruptors, where they are on Lab 9 or whether it is our innovation platform, or whether it is the customer innovation centres.

I mean all of these and the fact that we have this really strong regional footprint where new innovation occurs both in Silicon Valley and is probably where we are strongest. That’s probably where a huge percentage of that mobile connectivity innovation happens. And we are tapping in other places.

So we just view the structural capabilities as we evolve into what is the new CTG as being very, very robust, for a long time. .

And Sherri through the -- for the second part of your question, thank you for recognizing our strong cash flow. We continue to evaluate and consider all capital allocation options as we look for the best return for our shareholders. You know that goes from share repurchases to M&A to deleveraging and even to dividends.

As a reminder we have had a history of consistently returning value to shareholders on the back of our consistent free cash flow generation. And over the past four and half year now we have generated over $2.5 billion in free cash flow and have bought back over $1.9 billion of our stock.

So we have been consistently returning greater than 50% of our free cash flow to the shareholders and actually it is more like 75% as you look backwards. So today, we continue to believe that our consistent approach to share repurchase which is grounded in our strong cash flow generation is what is appropriate.

So, that's kind of where we are living today. But again we continuously are evaluating and consider all of our capital options as we move forward to maximize return for our shareholders. .

Thank you..

Thanks. .

At this time we don’t have any questions on the queue and I am turning the call back to Mr. Kevin Kessel. .

Thank you and thank you everyone for joining us on our call today. I know there were a lot of other companies reporting and we appreciate your time and attention. For more information please see our IR website or contact us directly. This concludes our conference call..

Thank you. That concludes today's conference call. Thank you for joining and you may now disconnect..