Beth Walters - SVP, IR & Communications Mark Mondello - CEO Forbes Alexander - CFO.

Shawn Harrison - Longbow Research Brian Alexander - Raymond James Amit Daryanani - RBC Capital Markets Steven Fox - Cross Research Jim Suva - Citigroup Matt Sheerin - Stifel Mark Delaney - Goldman Sachs Sherri Scribner - Deutsche Bank.

Ladies and gentlemen, thank you for standing by and welcome to Jabil's First Quarter Of Fiscal Year 2015 Conference Call. [Operator Instructions]. Thank you. I would now like to turn today's call over to Beth Walters, Senior Vice President, Communications and Investor Relations. Please go ahead..

Thank you so much Susan. Welcome to our first quarter of 2015 earnings call. Joining me today are CEO Mark Mondello; and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil web site, jabil.com, in the Investors section.

Our first quarter press release, slides, and corresponding web cast links are also available on our web site. In these materials, you will find the financial information that we will cover during this call. We ask that you follow our presentation with the slides on the web site, beginning with slide 2, our forward-looking statements.

During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected second quarter of fiscal 2015 net revenue and earnings results, the financial performance of the company and our long-term outlook for the company.

These statements are based on current expectations, forecasts and assumptions, involving risks and uncertainties that could cause actual outcomes and results to differ materially.

An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2014, on subsequent reports on Form 10-Q and Form 8-K and our other securities filings.

Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's call will begin with opening remarks from Mark on the quarter, the fiscal year, and our business outlook.

We will then move on to our first quarter fiscal results and guidance on our second fiscal quarter of 2015 from Forbes Alexander. We will then open up the call to questions from attendees. And I will now turn the call over to Mark..

Thanks Beth. Good afternoon everyone. I appreciate you taking time to join our call today. I'd like to begin by thanking all of our people here at Jabil, for their continued loyalty and unwavering commitment. As for Jabil's first quarter, I couldn't be more pleased with our results, it was an exceptional quarter.

Forbes will be providing more detail, but here are a few key highlights; our team exceeded expectations, delivering $181 million of core operating income on revenues of $4.55 billion, resulting in core operating margins of 4%.

These results reflect strong demand within our DMS segment, as well as solid execution and performance across the entire business. I'd now like to talk about what we see, as we look ahead. Let me start with Nypro; this business serves the healthcare and consumer packaging markets.

In serving these markets, a key purpose for our Nypro team is how they change lives. They do so, by making products more affordable, more accessible, and more effective. The team is aggressively driving to expand select capabilities in the back half of this year.

Capabilities such as custom automation, complex toolmaking, and product concept generation. Nypro is creating a new competitive class of services. Market share is improving and Nypro's revenue pipeline is robust. The team is focused on key initiatives, directly tied to growing their business over the long term.

Current product ramps underway within Nypro serve as a solid foundation for this growth. Let me now move to our Green Point business; this business sits independently, but side by side with Nypro within our DMS segment.

Our Green Point team charged into the fiscal year with significant momentum, momentum generated from successful engineering and highly technical program ramps within our mobility space. During the quarter, Green Point's revenue were stronger than expected. This resulted in excellent asset utilization in cost leverage.

The team remains excited, as they continue to expand in the areas of tooling, automation, material sciences, and overall industrial design. These areas will be important platforms for growth. Another exciting area which is very strategic for Green Point, is their consumer lifestyles and wearables business.

This market is anticipated to grow 30% a year from 2015 to 2020. Our consumer lifestyles team is designing and manufacturing products, ranging from simple fitness bands to ultra complex smart devices. They have done a masterful job of integrating embedded camera solutions, with intricate assembly and specialized automation.

Leveraging these differentiating capabilities paves the way for revenue expansion, further solidifying Green Point as a key player in this fast growing market. Our Green Point team has Jabil well positioned for the next two to three years. Let me close this section of my commentary, with a look into our EMS segment.

As a reminder, we collated our industrial and energy, high velocity and enterprise and infrastructure divisions, resulting in a well diversified large scale EMS business. Our EMS team continues to take a holistic go-to-market approach, largely centered around core electronics.

This provides Jabil with an outstanding value proposition, in serving a broad range of end markets. The team continues to navigate from what was legacy build to print opportunities to build the spec models, driving a higher degree of value add. They believe this transformation will result in new sources of income.

Our high velocity business, which is part of our EMS segment, is delivering the expectations, while booking new program wins. A number of these new programs are now ramping, in areas such as digital home and office, automotive, digital entertainment and print.

As their customer base expands, the high velocity team extends their reach deeper and deeper into the products they design and manufacture. Our team which leads our industrial business is actively pursuing share wallet expansion, as well as solidifying new customer relationships.

They participate in well defined end markets, while serving large diverse global brands. The industrial team architects complete solutions, by weaving together engineering capabilities with our supply chain intelligence. Intelligence that is grounded within our formal control tower analytics.

The enterprise and infrastructure business rounds out our EMS segment. This team is excited by new opportunities. Desire for more and more on-demand entertainment, combined with ever growing amplification of social media, drives the needs for enhanced broadband. This in turn, results in higher CapEx for both service providers and corporate enterprises.

At the same time, companies want to capitalize on data and the internet of things. This in turn, drives the need for greater IT infrastructure, which is now serviced by traditional IT vendors, combined with hyper scale cloud providers. Our networking business remained stable.

Higher levels of growth are expected 12 to 24 months out, when new product refresh cycles take hold. I will close out my prepared remarks, with a few thoughts around the outlook for our business. There is no doubt that fiscal year 2015 is off to a great start, positioning Jabil for what should be a strong year.

With that said, we have got plenty of hard work ahead of us. As I step back and look beyond the year, I am highly optimistic about what's ahead. Said another way, growth is top of mine for Jabil management. The aggressive pursuit of new opportunities is truly what energizes our team. Over the past 90 days, Forbes and I met with our business leaders.

Based on those conversations, we have decided to expand our capital expenditures for the year. We believe expanding our investment at this point in time will accelerate growth in fiscal years 2016 and 2017. This incremental growth would deliver returns in excess of our current weighted average cost of capital.

To that end, our capital investments for fiscal year 2015 will expand to a range of $650 million to $750 million. Let me provide a rough breakdown on how we plan to spend the capital; we will spend $140 million to $260 million on footprint expansion and infrastructure.

Our expansion is currently planned for various sites in China, led by Chengdu, along with Malaysia and Indonesia. An additional $45 million to $55 million will be used specifically for our lifestyles and wearables business.

$75 million for our Nypro business; a range of $180 million to $200 million for our mobility business, and $80 million to $100 million for our EMS business. In addition, we are also planning to spend $35 million to $55 million in expanding our capabilities.

And finally, $40 million to $60 million will be allocated for non-traditional end markets, markets aligned with long term mega trends. Net of these expanded capital investments, I believe we will deliver $200 million to $300 million of free cash flow for this year. This further illustrates the strength of our cash flows from operations.

As I think about our business strategically, there may come a time when growth attenuates and good business opportunities disappear. If and when this time comes, we will prioritize free cash flows over investing for the future, but now is simply not that time. Thank you, and I will now turn the call over to Forbes..

Thank you, Mark. I will ask you to refer to slide 3, which you can find on Jabil's web site, as I review the results of our first fiscal quarter of fiscal 2015. Net revenue for the first quarter was $4.55 billion, an increase of 5% on a year-over-year basis.

Our GAAP operating income was $145 million during the quarter, while GAAP net income was $72 million. This compares to $118 million of GAAP operating income on revenues of $4.3 billion in the prior period. GAAP net diluted earnings per share for the first quarter were $0.37.

Our operating income, excluding the amortization of intangibles, stock-based compensation, restructuring and certain other expenses was $181 million and represents 4% of revenue. This compares to $160 million or 3.7% for the same period in the prior year, and represents a 13% increase on a year-over-year basis.

Core diluted earnings per share were $0.55 versus $0.43 the same period in the prior year. Moving to slide 4, and our first quarter segment discussion; in the quarter, our Diversified Manufacturing services segment increased 21% on a year-over-year basis, driven largely by solid performances by our Green Point business.

Revenue for the segment was approximately $1.9 billion, representing 42% of total company revenue. Operating income was 6.2% of revenue during the quarter, reflective of the successful launch of multiple programs across a number of customers within Green Point, as well as several other key programs that continue to perform well.

The Electronic Manufacturing services segment performed to our previous expectations, decreasing 5% on a year-over-year basis. Revenue was approximately $2.6 billion, representing 58% of total company revenue. Core operating income for the segment was 2.4% of revenue.

Reviewing our cash and some key metrics on slide 5, we ended the quarter with cash balances of $922 million, while debt levels were consistent with the previous quarter at approximately $2 billion. Cash flow from operations was $189 million in the quarter.

Core EBITDA was approximately $297 million, representing 6.5% of revenue, while core returns on invested capital was 19%. During the fist fiscal quarter, we also repurchased approximately 2 million shares at a total cost of $40 million. These purchases conclude the previously authorized programs in place.

Net capital expenditures during the first quarter were $194 million. As Mark discussed, for the year, we are increasing our capital expenditure forecast by $300 million to support the addition of some 1.5 million to 2 million square feet of manufacturing footprint and infrastructure.

This shall support continued revenue growth and program ramps in fiscal 2016 and beyond. Capital expenditures for the fiscal year are now estimated to be in the range of $650 million to $750 million. If you now turn to slide 7, I'd like to discuss our business outlook for the second quarter.

We expect revenues in the second quarter to be in the range of $4.15 billion to $4.35 billion. While at its midpoint, a decrease of 6% sequentially, reflecting seasonality in mobility and consumer based products.

On a year-over-year basis, guidance reflects a 19% increase, this increase being reflective of numerous program wins within our automotive, lifestyles and wearables, mobility, healthcare, industrial and enterprise and infrastructure customer relationships.

Core operating income is estimated to be in the range of $135 million to $165 million, and the core operating margin in the range of 3.3% to 3.9%. Core earnings per share were estimated to be in the range of $0.39 to $0.50 per diluted share, and GAAP earnings per share expected to be in the range of $0.25 to $0.38 per diluted share.

These figures are based upon a diluted share count of 196 million shares. Based upon current estimates of production, the tax rate from core operating income in the second quarter is expected to be 26%, while the tax rate for the full year, as a result of the mix of earnings being forecast, now expected to be 24%.

Turning to our segment guidance and revised full year outlook on slide 8, the diversified manufacturing services segment is expected to increase approximately 53% on a year-over-year basis or a sequential decline of 11%, representing typical seasonality. Revenue is estimated to be approximately $1.7 billion.

The Electronic Manufacturing services segment is expected to increase approximately 3% on a year-over-year basis, or a seasonal decline of 3% on a sequential basis. Revenues are estimated to be approximately $2.55 billion.

Fiscal 2015 has started on a very sound footing; given our line of sight around new business wins across a number of end markets, we are now in a position to increase our revenue and EPS guidance for the full fiscal year. Revenue is now expected to be in the range of $17.5 billion to $18.5 billion, and at its midpoint, a 14% increase year-over-year.

While core earnings per diluted share are now expected to be in the range of $1.85 to $2.15. At the midpoint of our revenue guidance, we currently estimate that the DMS segment will grow approximately 35% on a year-over-year basis, while our EMS segment is expected to grow 4%.

Cash flows from operation in the full fiscal year are now estimated to be in the range of $900 million to $1 billion, with free cash flows after capital expenditures estimated to be in the range of $200 million to $300 million. I'd now like to hand the call back over to Beth..

Great. Thanks Forbes. Before we begin the question-and-answer session, I'd like to remind our call participants that while we want to take questions on our business in customary fashion, we will not address any customer or product specific questions. Thank you for your cooperation on this.

Operator, we'd like to begin the question-and-answer session now..

[Operator Instructions]. Your first question comes from the line of Shawn Harrison with Longbow Research..

Hi. Good evening and congrats on the results.

Two questions, just first off on the EMS business, if I look at the midpoint of the guidance for the year, looks a little bit more, I guess, back half weighted than we have seen in prior years, so if you could just -- is that solely product ramps that drives the EMS business in the back half, or you feel a little bit better about the end markets? And then the second question is just to the timing of the CapEx increase right now, knowing that you expect to see some benefit in 2016 and 2017, is there a way you could articulate whether that rolls in immediately into 2016 and you start to see the revenue benefit, or how does the CapEx spending right now benefit your 2016 revenues and play out?.

Hey Shawn, thanks. This is Forbes, let me take the first part of the question, and that was the EMS segment being back half. You're correct in your thought process there; it’s a little bit of both of what you articulated.

We are seeing some recovery in the industrial and energy marketplace in the back half of the year, versus our first half of this year; and also, we are seeing nice new wins, new product ramps across our enterprise and infrastructure sector.

I think Mark also mentioned in his prepared remarks, some growth in automotive and digital home entertainment, these are new programs that are coming into the company, and we will start to ramp as we move into our fiscal third quarter, and start to hit volume in the fourth quarter and then into 2016.

So a little bit of better visibility around industrial energy marketplaces and some real nice solid wins coming into the company..

Shawn, to [indiscernible] what Forbes said there, you could think about it, maybe as 60% of the growth coming in our high velocity area and 40% of the growth coming in between enterprise infrastructure and industrial.

The enterprise infrastructure market is still tough, but our team is doing a great job, and as I said in our prepared comments, we have been working really hard the last 12 to 18 months to change our value proposition there, and then we are also doing a decent job, well the team is doing a decent job with picking up market share.

In regard to the CapEx, I think that we originally had a CapEx range of $350 million to $450 million; a decent amount of that will have an impact in the back half of this year. Most of the incremental CapEx we talked about on today's call, will position the company well for 2016 and 2017..

I guess, to just clarify positioning, does that mean that you're going to see immediate revenue benefit in 2016, or is this something that -- the benefit ramps throughout the year, I just don't want to get -- I guess get ahead of myself in terms of modeling?.

Well right now, I would think that 2016 -- the shape of 2016 would look somewhat similar to the shape this year. So I think this year, we are looking at Q1 as probably our most robust quarter, and I would think 2016, the same at [indiscernible] Shawn..

Very helpful Mark, and once again, congrats..

Thanks..

Your next question comes from the line of Brian Alexander with Raymond James..

All right. Thanks, good evening guys. Just I guess on the CapEx question; so I understand and appreciate now is not the time to stand still, but what has changed in the last 90 days to lead to such a massive increase in CapEx? I think you're almost doubling from what you thought going into this fiscal year.

What do you see now that you didn't see then, and related to that, how much visibility do you have into the ramps that are supporting these investments, and how should investors think about the return on these investments over the next couple of years?.

Yeah Brian I cannot -- if I am sitting where you're sitting, I am asking the same question.

The $350 million to $450 million we felt aligned well with the midpoint and guidance we gave in September of $1.80, and we felt like there could be upside to that, but at the time we are like, you know what, let's align CapEx and our CapEx guidance to the financial guidance we are giving. As we sit today, we have taken guidance up for the year.

We delivered an extra $30 million of income in Q1.

We are guiding Q2 up relative to consensus, and one of the things that Forbes and I did, as I said in my prepared comments, that we spent an extensive amount of time, along with Bill Muir, our COO and some other executive management, with our business leaders, and we just got a decent amount of opportunities.

And the question becomes, do we put our foot on the brake and turn away some of those opportunities or not. I think the one thing to think about is, is in my prepared remarks, I talked about the fact that the majority of the delta is around footprint and infrastructure.

And really, we are thinking about accelerating what we thought would be early FY 2016 CapEx and pulling it into 2015, and that's to get an additional, I don't know 1 million, 1.5 million square feet of infrastructure in place for business that we think looks very good for us.

I just don't -- we have been working tirelessly for the last two years on growth opportunities, and we have got a lot of opportunities, and I don't want to turn those away, and the other thing I talked about in my prepared comments was -- we are not going to get all of these correct, but we have got some very disciplined hurdle rates around our weighted average cost of capital, and every one of the opportunities we have approved has anywhere from a six to 15 point spread, 16 point spread over our 10 to 12 points of capital expenditure or expense.

So we feel pretty good about it Brain..

So Mark, I think last quarter you talked about ultimately getting to $20 billion and a 4% operating margin; do these accelerate that, is that something that you think is achievable next year, and then I just have one follow-up?.

I guess I'd hit it this way, I wouldn't be doing it if I didn't think it would accelerate it Brian, so that's our objective. We put up four points in the first quarter. We won't do four points for the corporation, for the [indiscernible] most likely, but we are aiming at four points for FY 2016, that's correct..

And just a last quick one, so the growth that you are seeing in DMS is obviously very strong, and I imagine, most of that, not all of it -- but most of it is being driven by your largest customers.

So remind us what's the upper limit of your comfort level in terms of revenue and profit exposure to any one customer?.

Well that's an interesting question, let me make one statement. Obviously, we have got a great relationship with our largest customer. And our -- being that our relationship is quite strong, that certainly had some level of impact on our first quarter.

The nice thing is, is that we also saw some fairly substantial income from other customers in that space, and again, we have been working very hard on diversification as well. So that was a very good positive for management in Q1.

As far as my level of comfort with a single customer, its dependent on who a customer is and how diversified we are within that customer.

Last year, we had a tough year, and I don't know that I could say that it will never happen again, because the mobility business is pretty volatile, but that was an unusual situation, and as I have said before, we are working hard to diversify within our current customer relationship, as well as diversifying the Green Point business overall..

All right. Thank you very much..

Thanks Brian..

Your next question comes from the line of Amit Daryanani with RBC Capital Markets..

Good afternoon guys.

Two questions, maybe sticking to the CapEx side, just talking about, sort of 90 days ago, which are the one or two buckets that you have actually upped the CapEx aggressively, and it seems like its mobility and footprint to me, talk about what sort of the six buckets you outlined, how are you seeing the ramp up in CapEx? And then historically, you have actually had some cool investments with some of your customers who have pout in some CapEx dollars of their own, do you expect that to happen this year as well?.

Yeah Amit; so the increase of essentially $300 million, represents footprint and infrastructure. As Mark said, we will be adding square footage, 1.5 million to 2 million square feet in China, in Malaysia and in Indonesia. So that footprint is to support a wide array of business opportunity.

For example, a great opportunity in our aerospace and defense business, but we supported those investments, extensive lifestyle and wearables business across an expanding customer base, that we are seeing coming to the company, and that's really a Chinese play also, and some expansion in Malaysia for some wins in our enterprise business.

And then, the expansion in Chengdu will support a number of customers there, both in areas such as mobility, lifestyles and wearables. So really quite a broad base of opportunity, that as Mark said, we have been working on now, for 18 months to two years.

So very well positioned as we move into 2016; and as I say -- when you put up that amount of square footage, there is a significant leadtime with the scale of these operations that we are putting in place..

I guess Forbes, when you talk about the infrastructure investments, is that more on CNC machines that you got to deploy for the specialty mobility side, is that where the infrastructure dollars are going into?.

No, I am talking about IT infrastructure, leasehold improvements, there is some level of equipment in there, but the lion's share is in the fabric of the building, the infrastructure, water purification plants, etcetera, etcetera..

And I guess, if I just follow-up on the EMS side of the business now, you're running at a 2.5% margin, you have a pretty good ramp in the back half, based on the $11 billion run rate you expect for the full year, do you think you need that kind of $11 billion run rate to achieve 3% op margin, which is sort of the midpoint of your target I think, if not, what do you guys need to get that business to be at the midpoint of the long term target from a margin basis?.

Great question. I think as we have indicated, the back half of the year, we are expecting somewhere $400 million to $600 million of revenue growth over the first half of the year. [Indiscernible] to your point, that will bring, we believe margin expansion of about 20 to 30 basis points on the first half of the year.

Now what that will do for enterprise and infrastructure -- excuse me our EMS segment, it will still mean that the overall year margins are probably up 2.5 points, 2.4%, 2.5%.

So you know, as we move into 2016, as we exit the year or produce maybe $3 billion, we are running about that $12 billion pace and we should certainly then start to see targets around about 3%..

Perfect. Thanks a lot and congrats on the quarter guys..

Thank you..

Your next question comes from the line of Steven Fox with Cross Research..

Thanks. Good afternoon. I guess Mark I was wondering if we could just, you've provided a lot of details, I am just looking at the press release where you just talked about positioning the company to capture transformative technologies.

And so I am wondering, how much of what you are announcing in terms of CapEx is transformative in terms of capabilities as opposed to end markets and if you could just be specific in terms of what you meant in the press release by that one line, that would be helpful, and then I had a quick follow-up. Thanks..

Sure. Its broad, and if I think about the bucket to CapEx, and I think about transformative technologies relative to kind of legacy EMS, I would suggest that -- take the footprint expansion and infrastructure out of the equation altogether. If I go down the list, lifestyles, wearables, absolutely transformative technologies.

Polymers, materials, material sciences, embedded optics, embedded cameras, things like that. When I think about the Nypro business, absolutely transformative technologies. Drug delivery systems, pharmaceuticals, things that are completely different than legacy circuitboard manufacturing.

When I think about our mobility business, that business is massively engineering intensive, and it has no electronics or essentially no electronics in it at all, so that's composites, materials, machining, etcetera.

When I think even about our EMS business today, I think about areas like advanced wireless sensors, photonics, things like that and then when I think about moving into different areas altogether, in my prepared comments I talked about some allocation of funds.

I think the $40 million to $60 million for non-traditional end markets, and I would throw that in that category as well..

Great, that's helpful.

And then just one other question in terms of capital spending; so I understand the reason to update in terms of the growth opportunities, but if we were going to take, like say a two to three year view on how to think about capital spending now in a growth environment, is this sort of the range relative to sales we should think about, or how would you sort of talk about your regular investments, if we are in a sustainable growth period?.

Yeah, my guess would be this, my wish is sales are increasing, and we have decided to make a fairly substantial investment in infrastructure and footprint. So we won't have to do that every year.

When it comes to investments in different businesses, I think if you kind of [indiscernible] that, that would be kind of a normalized CapEx, and my hope is, is that you see that from the next two-three years; and as I said in my prepared comments, if we get to a point where, I don't -- I have no interest in top line growth, none.

We are trying to be very respectful and disciplined around our growth, all about income, and higher and higher quality of income. And we talk non-stop internally about ROIC and cash flows. If we get to a point where -- I don't want to put so much pressure on the organization that it feels forced.

If we continue to see the opportunities we see, we are going to continue to make the investments, because at some point in time, as I said, whether the company is $15 billion, $20 billion, $25 billion or whatever the number might be, there will come a point in time where, maybe with our service offerings and our value proposition, the growth isn't there.

And the nice thing about our business is, is there will be an extensive period of time, that we can pull back CapEx substantially, and return a bunch of capital to shareholders. Its just -- as we sit today, I don't think it’s a smart idea to adapt that model right now..

Great. That's very helpful and good luck going forward..

Thanks so much..

[Operator Instructions]. Your next question comes from the line of Jim Suva with Citigroup..

Good afternoon and happy holidays; and wow, congratulations, great results and great outlook. When we look at kind of within the main driver of it, it appears Taiwan Green Point did fantastic.

Can you help us understand a little bit of two of the factors within that, and that being the utilization rates and then kind of the yield rates, are we kind of running basically 24 hours a day, seven days a week and optimize just the CapEx? Or are you still ramping and having yields that really need to come up, so you can actually pump up a lot more revenues with our more CapEx, how should we think about that? Thank you..

Thanks Jim. Let me start with -- we made a decision last year when we had the issue that we had, and we made a decision to keep providing capital in place and a lot of infrastructure in place; and we did that, based on the relationship we have with our largest mobility customer, and that has proven to be a pretty good decision.

We reloaded those assets in relatively short order, in combination, and this is a little bit of a digression; but we also disengaged with our second largest customer last year to protect shareholders, and we have been really successful in redeploying the vast majority of those assets in very short order.

So as we sit today, I would characterize the quarter as, assets were very well utilized, and demand was much stronger than we expected, and I think demand was stronger than expected because we were fortunate enough to have a team in Green Point, from an engineering perspective and a technology perspective that delivered a great solution to our customers.

And as I said earlier, the quarter was driven not only by our largest customer, but a number of other customers as well..

And then my follow-up is on the yields, because the CapEx I think is very well justified, given your revenue outlook.

The question is, can you keep revenue growing due to increasing yields or are kind of yields at Green Point pretty much optimized to the point of hey, this is now causing you to put forth more CapEx?.

I think yields run in cycles based on product cycles Jim. You have to have the appropriate foundation of assets in place, to play in a diverse way across the entire mobility sector. I'd also remind you that, Green Point also has our lifestyles and wearables business, and we are excited about that.

So we are making the investments, and its not so much about yield, its about the fact that we want to be sure we have enough infrastructure in place to capture the revenue streams that we think we can capture..

Great. Congratulations to you and your team there..

Thank you..

Your next question comes from the line of Matt Sheerin with Stifel..

Yes, thanks, good afternoon everyone. Just another question regarding your operating margins in the EMS business. You talked, Mark, about growth prospects for next year, and I think 60% of that growth is coming from high velocity.

Whilst traditionally, it was lower margin than the enterprise infrastructure business, but I know the high velocity business is changing for you, the nature of that business.

So what should we think about mix and its impact on margins in EMS? And also, I know you're making investments in that business and is that also why margins will be below 3% and perhaps we should see that increase into fiscal 2016, as those businesses become more mature?.

Good question. So let me break that up a little bit. I think that, as we look at our EMS business first half to second half, I think that we -- the first half, margins will be in the 2.3% range is what I would guess.

And as I think about -- frame out the second half for you, I think we probably pick up 20 to 30 basis points of margin, would be my guess. And the obvious question is Mark, why wouldn't you get better leverage and why wouldn't we see margins start bumping up against three points.

I think the biggest reason is, is, we are being very disciplined around ROIC, not to suggest we are not paying attention to margins, but I really want to grow cash flow dollars over the next two, three years, as long as we have real ROIC returns with an appropriate gap between the real returns and our cost of capital.

The organic business growth is the best growth we can have in the business, because it’s the least expensive.

It doesn't come with a lot of complications that acquisitions do, and not to say we won't do acquisitions, because I think we will, but you're kind of on point with most of the growth for the back half of the year will be in high velocity, and again I think Forbes talked about it and I talked about it in my prepared statement, it will be around automotive, digital home, digital entertainment, and our high velocity margins historically have been in the 2% to 3% range, but because of the way we run that business and we manage working capital and asset utilization, that business ends up with real ROIC, north of 20%, and we also end up in that business, with terms and conditions that end up being very favorable to us.

So I think again, as I think about this year, I'd manage the back half of the EMS business maybe 20 basis points higher than the first half, and then as we move to fiscal 2016, one of the things I talked about in September was, we came off a tough year last year. We talked about this year being a year where we optimized the business.

My gut feel is, is that we have the business, I don't know, 70% or 80% optimized this year, and we will complete the optimization, not to say we ever get fully optimized, but as far as costs and overhead absorption, I think we will see the full benefit of that in 2016..

Okay. That was quite helpful Mark.

And then just as a follow-up, regarding the revenue trends within EMS and the core business, enterprise and infrastructure, could you give us a little color on what you're seeing in the three main areas, telecom and networking and storage?.

Yeah, we are seeing all that business kind of being GDP-like, but as we have talked about before, there is a lot of technology shifts there, and certainly around cloud computing -- and one of the things that's really interesting to us, is as social media continues to increase, as digital entertainment on-demand increases, there is a definite need and more and more of a want around additional global bandwidth, and that's an area that we are pretty excited about, and we think we will benefit from..

Okay. Thanks very much and happy holidays..

You as well..

Your next question comes from the line of Mark Delaney with Goldman Sachs..

Good afternoon and thanks very much for taking the questions.

I guess -- just wanted to follow-up on customer concentration; if you guys can just talk about how much exposure you have coming from your largest customer now, and then with the new programs that you're expecting to ramp later in 2015 and into 2016, do you expect your customer concentration to increase or decrease?.

So Mark, not talking specific n umbers around specific customers, we have sort of about one 10% customer in the quarter, and that's the way we view things as we look through the fiscal year. But we are very pleased with a number of new customers joining the capability sets within Green Point and lifestyles and wearables, that business.

So we are comfortable, as Mark had said earlier in answering the question, the relationship we have across the broad range of our customers and the concentrations we have.

And any customer that starts coming up towards a 10% or above, our rule is really to mitigate risk, and we do that a number of ways by continuing to diversify across the various product sectors and end markets that they serve. So that's our main focus, and we are very comfortable with the exposures we have across the customer set..

Okay.

And for the follow-up, you guys have talked about wearables a few times on the call, how much does wearables represent as a percentage of the company sales, and where do you guys [indiscernible] over the course of fiscal 2015 and 2016?.

Yeah Mark, we unfortunately just don't break that out, that's embedded in our Green Point business..

Okay. Probably just one more, I know OpEx caught up in something that had been planned, I think in a couple of facilities in Europe, and I think it was actually supposed to flow in later in fiscal 2015. Do you have any upside in sales, and that's something that's still on the table that we shared [indiscernible]..

Yeah absolutely, those plans are going according to schedule if you will, and it will be Western Europe activity underway, so we should start to see that coming in Q3 and Q4..

Got it. Thank you very much..

Your next question comes from the line of Sherri Scribner with Deutsche Bank..

Hi thanks. Forbes, I just wanted to dig a little bit into the operating expense line that was up a lot this quarter, hoping you could give a little detail on that, and also help us understand how you expect OpEx to flow through the rest of fiscal 2015.

Do you expect some additional cost savings, would OpEx come down, what are you thinking about?.

Yeah Sherri, in terms of -- you're looking at our GAAP OpEx?.

Yes..

Okay. So for the GAAP OpEx, let me explain that. If you look in our financial statements, you will see an increase there by $70 million on a year-over-year basis. $40 million to $50 million of that is a result of stock-based compensation.

Let me explain that; this quarter last year, we reversed out some $20 million plus of stock based compensation, but this year we recognized I think $60 million. So you got a significant swing there.

The balance of the OpEx increase on a year-over-year basis has been as we have expanded our footprint, both in Wushu [ph] Chengdu, and obviously SG&A to support those activities. Also if you recall I think on our last call, we talked about some additional investments there, in terms of capabilities to support future growth.

And clearly, we are starting to see that growth come through. So as we move through the balance of the fiscal year, certainly this Q1, we just thought it would be the high point.

So we would expect that to come down some $6 million to $8 million in Q2, and then we will start to see the benefits of some of the restructuring activity in the back half of the year, and that should certainly level off there, as we move through the balance of the year..

Okay, that's helpful.

And then just wanted to dig a little bit into the commentary about transformative businesses? I am trying to understand, you guys think that you have the capabilities at this point that you need for those transformative businesses, or are there areas that probably need to add and sort of thinking about what areas do you need to possibly do M&A? Thanks..

Hey Sherri; yeah I think we have a lot of capabilities, and we are seeing some good program wins around those capabilities.

We have also kind of at a strategic level across all of our DMS and EMS kind of collated, what we believe are areas that we need to continue to refine and advance, and then Bill Muir, is kind of our air traffic control on that, working with our business leads, and we will continue to grow some of that organically, and if we don't believe, we can grow some of those capabilities organically, we will do some fairly modest M&A deals to acquire the capability we need to acquire..

Thank you..

You're welcome..

We have reached our allotted time for questions. I would now like to turn the call back over to Beth Walters, for any closing remarks. End of Q&A.

Great. Thank you very much everyone for joining us on the call today for our fiscal first quarter results. We look forward to following up with you on the quarter, and as the quarter progresses. Thank you very much..

Thank you for participating in today's conference. You may now disconnect..