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spk08: Hello, and welcome to the Jabil third quarter and fiscal year 2023 earnings conference call and webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Adam Berry. Please go ahead, Adam.
spk02: Good morning, and welcome to Jabil's third quarter of fiscal 2023 earnings call. Joining me on today's call, our Chief Executive Officer, Kenny Wilson, and Chief Financial Officer, Mike Destor. Please note that today's call is being webcast live, and during our prepared remarks, we will be referencing slides. To follow along with the slides, please visit Jabil.com within the investor relations portion of our website. At the conclusion of today's call, the entirety will be posted there for audio playback. I'd now like to ask that you follow our earnings presentation with the slides on the website, beginning with the forward-looking statement. During this conference call, we will be making forward-looking statements, including, among other things, those regarding the anticipated outlook for our business, such as our currently expected fourth quarter and fiscal year net revenue and earnings. 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 on any report on Form 10-K for the fiscal year ended August 31, 2022 and other filings. The table disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. With that, I'd now like to shift our focus to our third quarter results, where the team delivered approximately $8.5 billion in revenue at the top end of our guidance range. Core operating income for the quarter came in at $404 million, or 4.8% of revenue. This is up 60 basis points on a year-over-year basis. Net interest expense in the quarter came in better than expected at $75 million, reflecting lower levels of inventory during the quarter, resulting in better working capital management by the team. From a GAAP perspective, operating income was $375 million and our GAAP diluted earnings per share was $1.72. Core diluted earnings per share was $1.99, a 16% improvement over the prior year quarter and towards the upper end of our guidance range. Now turning to the segments. Revenue for the DMS segment was $4.35 billion, an increase of 13% on a year-over-year basis, driven by strength in our automotive and healthcare end markets. In particular, it's worth highlighting our automotive business. which grew approximately 60% year-over-year, as the team performed extremely well as volume, content, and brands continued to expand. Core operating margin for the segment came in at 4.1%, 30 basis points higher than the same quarter from a year ago, but down 50 basis points sequentially, as typical given the normal seasonal pattern within our mobility business. Revenue for our EMS segment came in at $4.1 billion, down 8% year over year, and in line with our expectations. Also as expected, we saw a revenue shift in our 5G wireless and cloud business, driven by our previously announced move to a consignment model for certain components within that end market. It's also worth noting that our industrial business, driven by global demand for renewable energy, increased by approximately 30 percent year-over-year. For the quarter, core margins for the EMS segment were an impressive 5.5 percent, up 90 basis points year-over-year and 40 basis points sequentially, reflecting strong growth in industrial and the aforementioned shift to a consignment model. Next, I'd like to begin with an update on our cash flow and balance sheet metrics as of the end of Q3, beginning with inventory. which saw a great improvement sequentially to 84 days. More importantly for us, net of inventory deposits from our customers, inventory days were 62 in Q3, an improvement of seven days sequentially. Our third quarter cash flows from operations came in at $468 million, while net capital expenditures totaled $212 million, resulting in $256 million in free cash flows during the quarter. In the quarter, we repurchased 1.9 million shares for $154 million, leaving us with $821 million remaining on our current repurchase authorization as of May 31st. With this, we ended the quarter with cash balances of approximately $1.5 billion and total debt to core EBITDA levels of approximately 1.2 times. In summary, the team delivered another impressive performance in Q3. In a moment, I'll turn the call over to Mike and Kenny to provide some additional thoughts on our performance in the quarter and update our outlook for fiscal 23. But before I hand it over, I'd like to announce our fourth quarter earnings call and sixth annual investor briefing scheduled for September 28th, where we'll lay out our strategy and our financial plan for fiscal 24. Please mark your calendars. Additionally, from an investor relations perspective, we're going to be active in fiscal 24 with meetings, factory tours, and market deep dives, where we plan to discuss and showcase some of the growth drivers that we feel support our longer-term expectations. Please stay tuned. And thanks for your time today. It's now my pleasure to turn the call over to Mike.
spk05: Thanks, Adam. Good morning, everyone. For the first nine months of fiscal year, the team has posted solid top-line growth improved core operating income by more than twice the pace of revenue growth, and grew core EPS by 16%, while also expanding core operating margins by 30 basis points, a solid performance by the team. As you heard from Adam, our growth and improved profitability this year continues to be driven by areas of our business benefiting from secular growth like electric vehicles, healthcare, renewable energy infrastructure, and cloud. All in all, our solid performance year to date gives us excellent momentum as we enter the final quarter of FY23. With that, on the next slide, you'll see our fourth quarter guidance. For Q4, we expect total company revenues to be in the range of $8.2 billion to $8.8 billion. At the midpoint, this anticipates DMS and EMS revenue to be $4.3 billion and $4.2 billion, respectively. Core operating income is estimated to be in the range of $424 million to $484 million. Gap operating income is expected to be in the range of $400 million to $460 million. Core delivered earnings per share is estimated to be in the range of $2.14 to $2.50. Capital earnings per share is expected to be in the range of $1.96 to $2.32. Interest expense in the fourth quarter is estimated to be $73 million, which is lower than we forecasted in March, reflecting better working capital management by the team. Moving to the next slide, where I'll offer an update on our end market demand assumptions and how these translate to our FY23 revenue expectations. At a high level, our assumptions remain largely consistent with our March update. We continue to be conservative in our approach, given the current macroeconomic dynamics, and expect strong growth from our secular markets to be slightly offset by lower demand in some of our consumer-facing markets and in SEMICAF. In our automotive end market, EV growth continues to be robust, limited only by the pace at which we can scale up production across multiple geographies with several OEMs. In healthcare, the outsourcing of manufacturing trend continues to play out as we're seeing increased activity with interest from multiple OEMs exploring our capabilities. Growth expectations for our industrials business have also improved since March. driven higher by renewable energy infrastructure. Specifically, we're seeing good growth in solar inverters, smart meters, energy storage, and power and building management solutions. We now expect our industrials business to be up more than 25% in FY23. This growth is being slightly offset by incremental end market weakness in our semi-cap business. In summary, we feel the outlook for our business is solid. and expect demand across many of our end markets to remain strong. We now expect revenue for FY23 to be $34.7 billion, up 4% year-over-year, which is $200 million about what we thought in March. Considering this updated growth outlook, let's now turn to the next slide to get a view of our updated guidance for FY23. Notably, we see income coming through with the increase to revenue. We now expect to deliver core operating income of $1.71 billion a year-over-year increase of approximately 11% while holding core margins at 4.9%. This 4.9% represents a growth of approximately 30 basis points year-on-year. With the additional income, we're now anticipating core EPS will be $8.50. We remain committed to generating more than $900 million in free cash flow this year. Beyond FY23, we expect our secular markets to continue to drive growth. I also believe our margins will continue to expand with the combination of our positive mix shift towards higher margin end markets and operational efficiencies driven by automation and internal use of AI and ML technologies. In summary, the team is executing extremely well. I expect a strong momentum to continue into FY24, although we remain cautious and vigilant on the near-term macroeconomic conditions. With that, I'll now turn the call over to Kenny.
spk09: Good morning, and thanks for joining us today. As you heard from Adam and Mike, our business is in good shape and the team has executed well this year in what continues to be a dynamic operating environment. The success we're seeing across our business is a key proof point of our team's ability to leverage multiple capabilities across disparate end markets as we continue to diversify our service offerings, underpinning our improving financial performance. Let's turn to the next slide where you'll see our updated outlook for fiscal year 23. We continue to expect good year over year growth and operating leverage this year, which gives us the confidence to raise our expectations for core EPS by 10 cents to $8.50. At the same time, we remain highly focused on delivering more than 900 million in free cash flow. It also sets a firm foundation for further margin and free cash flow expansion as we look to fiscal year 24. In fact, when I look at the growth in our business this year, it's worth highlighting that nearly 60% of our portfolio is now aimed at markets with strong secular growth, specifically electric vehicles, renewable energy, healthcare, and 5G and cloud. Our automotive business contains its healthy growth rate as a team navigates multiple complex program introductions, increasing both our scale and addressable content per vehicle. Jabil continues to be extremely well positioned to support our customers as they accelerate their transition to EVs in the coming years. And in our industrial business, we are supporting customers as they navigate the rapid transition towards clean energy. Over the last several years, we've invested heavily in capabilities to support energy storage, energy conversion, and grid-level power management solutions, which are now being deployed across multiple markets at scale. Although we are in the early days of growth in this space, as government policies like the Inflation Reduction Act in the U.S. mature in scale, Jabil is extremely well positioned to support our customers in the coming years. In healthcare, we continue to capitalize on the trend to outsource manufacturing, and our credibility with some of the leading OEMs in this space has positioned us well for future growth. Another area that is increasingly coming into focus for us is in the AI and ML space. This has implications both on the growth side of our business across multiple end markets, but also has the potential to drive efficiencies across our internal processes and factory network. As it relates to our internal processes, we are capturing data and using the latest toolkits to help improve our operations. Please, however, don't view this as a new initiative. mainly the next step in the continuous improvement path we've been on for many years. Our operating system naturally drives us to simplify, standardize, optimize, and automate processes, and it exists in conjunction with our enhanced ability to mine big data, which ultimately drives sustainable improvements. In September, the JMO team will go deeper in all of these areas at our investor briefing. At that event, we plan to offer our fiscal year 24 financial outlook as we continue to prioritize growth in core margins and cash flows. Specifically, we will lay out how we plan to increase revenue while also expanding core operating margins beyond 5%, how we plan to increase free cash flow while continuing to invest in growth, we provide another year of solid core EPS growth, and finally, provide an update on our capital return frameworks. In closing, I feel strongly that we have the right team, capabilities, and diversified portfolio to support strong momentum into the final quarter of fiscal year 23 and beyond. And none of this would be possible without a thriving and unified JABO culture, which is as strong today as it has ever been. Thank you for joining us today and your interest in JABO. I will now turn the call over to Adam.
spk02: Thanks, Kenny. Operator, we're now ready for Q&A.
spk08: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Rupa Bhattacharya from Bank of America. Your line is now live.
spk04: Hi, thanks for taking my questions. Jabil has reported strong ROIC or return on invested capital over the past few years. Looks like over the past few quarters, it's been really strong. I mean, we calculate above 30% ROIC. This quarter was strong as well. Can you remind us what ROIC you target and what are the factors that will influence this going forward?
spk05: The ROIC that we've reported is in the 30% range. We normally target in that 25-30%. If you look at our working capital management, the way we use our invested capital, our CapEx and all the factors that make up invested capital, we're extremely disciplined on that. The returns are coming in, so the numerator and denominator on the ROIC calculator or the ROIC calculation is actually quite robust and strong, and you can expect those levels of ROIC going forward as well, Rupal.
spk04: All right. Thanks for that, Mike. As a follow-up, maybe I can ask, you know, let me ask about the semiconductor capital equipment end market. I mean, that end market right now is weak, and your revenues are down year on year. However, when I think about it, that segment offers higher than corporate average margins. So do you think you have enough capacity in that segment to take advantage of the market move upwards when that happens? And what things do you keep in mind when deciding to invest more CapEx into that end market?
spk09: Hey, Rip Luce, Kenny. Hey, good morning. Yes, it's a great question. In fact, just this morning I was reading an article that covered AI and it talked about the semiconductor space and just the way for fabrication equipment and the demand and how that increases through 24, 25 and 26. So I would say that our view is quite consistent with yours that... We think that although it's a lull right now, that it's going to pick up in probably the second half of calendar 24 and beyond. So remember that we try and be diversified in all our end markets, and we're very well diversified in this market also from a front-end and back-end perspective. We've been expanding our footprint across the world in anticipation of the pickup in demand through the back end of next year. So we've got a pretty competent team there that are ready, and we're ready to build the demand for our customers when demand picks up through the back end of next year. So we feel really, really good about where we are from a Semicat perspective.
spk04: Okay. Thanks for all the details and congrats on the strong execution in the quarter. Thank you.
spk09: Yeah, you're welcome.
spk08: Thank you. Next question is coming from that Sharon from steeple. Your line is now live.
spk01: Yes, thank you. And good morning. I wanted to dig a little deeper on some of the end market commentary, particularly on the consumer side. It looks like you actually took up your connected devices guidance a little bit for the year. but still down double digits. Are you seeing any signs of consumer bottoming here or any outlook that gives you some confidence that you're going to get back to growth at some point?
spk09: Yeah, I think Mike mentioned it quite well in his prepared remarks about, you know, we're cautious of the near-term macro. You know, we're very, very well diversified in the connected devices space. And, you know, but sometimes you get pleasant surprises in the upside like we had in Q3. But we still think it's choppy and spotty. And we think we're bumping along the bottom. I would also... mentioned, Matt, that, you know, as we look at our business here, you know, we did get a COVID pickup effectively and we're probably running at the run rates that we were, you know, in 19, 20, 21, that kind of level. That said, you know, we have one more than a fair share of opportunities in the space. So we do expect, as the macro corrects, that we should see a pickup in connected devices. But right now, I'd say visibility is quite short and we're just being really, really cautious.
spk01: Okay, great. Thank you for that. And I also wanted to just talk about the inventory reduction that you've seen and the general supply environment. I know you've had some headwinds, certainly in auto, EV, and some other markets. Are you starting to see some signs of supply easing, or is that still a gating factor in auto or some of your other businesses?
spk05: So, Matt, yes, the inventory did go down by seven days sequentially. The team's done a fantastic job. I think last quarter I mentioned I expect inventory to sort of bounce between 60 and 65 days in the short to medium term. We're seeing that coming through in the longer term. We can take it down into the mid to high 50s. We're confident of that. But the supply chain remains patchy. It is sort of easing in a lot of areas, offset by constraints and others. If you look at automotive, you look at semiconductors, you look at any power-related components, MCUs, all of them seem to be still in a constraint situation. So We're seeing a mixed bag here on the supply chain side. The golden screw issue is still there. That's not gone away, although it's easing a little bit. So the best way to categorize or characterize this is it is easing, but nowhere near normal yet. So just something to keep watching. We're focused on it, and we'll continue to evolve with the supply chain changes.
spk09: I'd have a comment on that just to support that mix. input there, Matt, just to give you some context. So we're tracking, you know, in the semiconductor space, automotive semiconductors, and whereas 12 months ago we were tracking 1,200 components that were classed as golden screws for different assemblies, you know, that number is probably half now is the number that we're managing. So it's down a lot, but it's still a big – Still an issue for us that we continue to navigate. So it's getting better for sure, but it's not gone yet. Got it. Okay, thanks very much. You're welcome.
spk08: Thank you. Next question is coming from Stephen Fox from Fox Advisors. The line is now live.
spk10: Hi, good morning. Two questions from me as well. First off, thanks for the extra disclosure on industrial and auto. On the industrial piece, I was wondering if you could give us a little more color as to how Jabil is differentiating in those markets? I know some of the programs you mentioned you've been in for quite a while. What's sort of changed beyond the secular that's driving that 40% growth? And then I had a follow-up.
spk09: Yeah, so thanks, Steve. So firstly, you know, we go through a process every year, Steve, where we look at our long-range plan and we plan out three, four, five years. You know, so this hasn't just... suddenly appeared as an opportunity for us. We'll be looking at this for a long time. Brent Tompkins, who runs that group, has been really, really focused on we need to develop capabilities to support things like grid-level energy storage, which would be new for us just from a scaling perspective, but also leaning into the things we've done historically in the EMS side of our business. So it's been a little bit of a, like, for example, We opened a new facility in Salt Lake City, so that's been a few years in the making. It's pretty much full now and we're looking to expand that with multiple customers, which is good. So it's really just been leaning into our customers' roadmaps, looking at the capabilities that we have, augmenting that with other capabilities and being able to support things like, as we mentioned, You know, grid-level energy storage, which we see as a key area for us, and, you know, smart power conversion and energy management. So, you know, we're feeling pretty good that we're in, you know, we've got the right capabilities developed to be able to support our customers, you know, for the foreseeable future.
spk10: Great. That's super helpful. And then just on the auto, sort of an opposite end of the spectrum financial question, which is the growth is tremendous. And it doesn't seem to be hurting the overall margins at all. But can you give us a sense for how that's possible? And I would imagine that these aren't mature margins, whatever you're producing within the auto sector when you're growing 60%. So just sort of maybe give us a little perspective on that. Thank you.
spk09: Yeah, and what I want to tell you, Steve, the good thing about the auto industry for us is that it's hard. And the fact that it's hard means it's difficult for people to engage. So, I mean, you know, you've seen our facilities. So the ability to, you know, introduce products globally, consistently, the same quality standards, you know, using complex automation systems, You know, that's difficult. And your ability to get up to speed quickly dictates how well you can lean into the margins in the short term. You know, Mike's talked about this kind of bow wave or, you know, where your margin profile is under expectations as you go through the ramp and then normalizes, you know, above corporate averages. So we're starting to get through that a little bit, although obviously we introduced new products and new programs and we're expanding our footprint, as you know. So I think it's our ability to take in new products, deploy them and ramp them globally is going to be what's going to dictate how effective our margins are. But we're doing a reasonable job here, I'd say. So we're pretty bullish about where we land in the future. I'd remind you also that we're active across multiple markets. you know, OEMs here. So we've got opportunities coming at us, you know, across the world with different customers, which makes us feel quite bullish about our future.
spk05: And Steve, if I can just add, the product lifecycle in automotive extends out to six or seven years. As you get deeper into the bell curve that Kenny mentioned, with some of the automation that we've done, It really suits long product lifecycle products, such as automotive, where operational efficiencies continue to drive margin even beyond end market sort of impact. So just something to keep in mind that the longer a product lifecycle, the higher the operational efficiency as a result of automation, which again drives margins upwards as well.
spk10: Great. That's all very helpful. Thank you.
spk08: Thank you. Next question is coming from Shannon Cross from Credit Suisse. Your line is now locked.
spk07: Thank you very much. I wanted to talk a bit about the healthcare business. You know, clearly you've done well with the Dan J relationship, and that business continues to grow. I'm wondering, you know, where you're seeing the best opportunity looking forward, because I would assume this will be a a pretty solid grower given demographics and everybody needs, unfortunately, surgeries as we all get older. So if you could just provide a bit more there and then I had a question on margin. Thank you.
spk09: Hey, Shannon. Nice to hear from you. Yeah. So, you know, we approach healthcare in three kind of areas of focus. you know, we've got really good relationships with our current customer base and we look to, you know, to expand that with, you know, whether it's in the med device, diagnostics or pharma. And what we see a lot in each of those areas is the need for, you know, connected healthcare so that there's opportunities, whether it's continuous glucose monitoring or, you know, sensors. And so we see that the, we've got a really broad base of customers, capabilities, and markets. And just as we continue to serve them well, we think that there's a real growth opportunity. I mean, an example would be, you know, if you look at the auto-injectors we're making for diabetes, and we make hundreds of millions of them a year. And then you look at the opportunity that, you know, that comes out with, you know, from the kind of weight reduction that you see with the drugs there. So... We are really, really, it's broad-based and we're well-positioned and we feel quite bullish about our ability to grow that. I'll tell you also that healthcare moves at a slower pace than some of our other businesses. But we've got credibility and we're having more discussions about, you know, kind of V2Vs where there's opportunities for us to do something, not in the same scale as our JGMDs, deal that we did, but we see opportunities coming in for us in the longer term. So, yeah, we think, you know, Andy Priestley runs that business for us. Him and his team are doing a wonderful job, and we're feeling quite bullish about where we end up in the longer term in healthcare.
spk07: Great. And then, you know, from a margin perspective, I understand that, you know, mix of revenue drives the significant amount of the margin movement on a quarterly basis, but You know, kind of maybe as a follow-up to what Steve was asking about in auto, can you talk about some of the other margin changes you've seen within some of your subcategories? You know, whether, I don't know, networking or industrial as it becomes, you know, more renewables focused. Just to give an idea of sort of what's happening, you know, below the covers in terms of the margins. Thank you.
spk09: Yeah. Yeah, sure. Let me take a swing at that, and then Mike can help also. You know, we are... If I look, you know, year over year, we're up 60 basis points, and obviously we think we've got 30 basis points for, you know, for the year. So, you know, we're feeling pretty good about our margin profile and trajectory. We are, I think, 60% of our business, as I said in my prepared remarks, we think is in... you know, business which is going to grow and continue to grow in the longer term. You know, things like, you know, we think that our automotive will be, automotive and healthcare should be above corporate averages. We think renewables will be. We mentioned about semi-cap being lower. We think that that recovers, that that helps us. And we've done a lot of tidy up in the rest of our business to make sure that we're, you know, we're running. I mean, what we've got to do also is we've got to make sure we run good operations regularly. If we run good operations, then efficient operations, then we think we can give our customers good value. So I don't know. Hopefully that's helpful. Mikey, any comment?
spk05: I just had one sort of macro comment. I think more than in-market secular trends are obviously driving a huge growth prospect for us. But above that sits the whole outsourcing of manufacturing as a as a trend as well, which drives margins. If you look at the complex design requirements we have today, the dynamic supply chain markets, the manufacturing at scale in multiple geographies with strong local knowledge, with localization of manufacturing, regionalization of manufacturing, and then you have automation driving a lot of this forward as well. So that by itself is driving this entire outsourcing of manufacturing as a trend, which then leads into stickiness, which then leads into margin expansion as well. And I would suggest that almost all of our end markets that we present here are seeing some sort of change in behavior from an industry standpoint, and specifically from for Jabil from our capability standpoint as well. So all good drivers of margin going forward, Jen.
spk07: Thank you.
spk08: Thank you. Next question is coming from Paul Chung from KP Morgan. You're live. Is that live?
spk00: Hi. Thanks for taking the question. So nice progress on inventory, you know, and your free cash flow conversion kind of continues to grow. from 21 levels, kind of rebounding there. And, you know, guide for growth suggests kind of improved pace there, maybe potentially hitting, you know, free cash flow north of $1 billion for the first time. So how do you think about the pace into 24 and some of the dynamics across working capital?
spk05: We'll continue to provide some guidance on free cash flow 24 in September, Paul, but you can expect the team to be completely focused on driving margins, driving free cash flow, and then using the free cash flow to continue to do buybacks because we feel we're undervalued still. So I think that free cash flow conversion, expect that to continue to go up as well as the working capital dynamics change. I don't think you'll get a one-for-one return. Inventory goes down. It doesn't mean all of that will flow through in free cash flow because we have other means of offsetting some of the inventory sort of days through AR, through AP, which we've been doing pretty effectively. So expect free cash flows to continue to go up on an annual basis going forward, Paul, is the best way to describe, and we'll provide more guidance in September.
spk00: Okay, great. Thanks for that. And then separately, you know, are you starting to see evidence of some deflationary impact on components? And, you know, which end markets are you seeing some bigger impact there? And, you know, how do we think about the impact on revenue and margins into 24 as kind of prices ease? Thank you.
spk09: Yeah, we're not really seeing that. I mean, there's puts and takes, some up, some down, Paul. And it's not something that we're overly – concerned about. And it's not something that we think is going to impact our, you know, our outlook for 24. You know, we think that, you know, we're driving to, you know, north of 5% margins for 24. Obviously, we'll update that in September. But yeah, it's not something that's occupying a lot of our thoughts right now.
spk00: Okay, great.
spk08: Thank you. Thank you. Next question is coming from Melissa Fairbanks from Raymond James. Your line is now live.
spk06: Hi. Thanks, guys. Congrats on another great quarter, really great working capital management. I just had a quick question on the interest expense because it does have such a big impact on the core earnings. We're going to see it tick a little higher in the August quarter. I'm assuming that's driven by the inventory requirements tied to seasonality. First of all, is that correct? And then second, what should we expect for interest expense beyond August, maybe on a more normalized basis?
spk05: So Melissa, just to clarify, interest cost in Q3 was $75 million. The guidance we provided for Q4 is in the $73 million range. So it's not going up. It's actually going down a little bit. I think we continue to benefit from working capital management. The team is highly focused. Some of the golden screw issues are easing, not as much as we'd like, but still on the right path. So all in all, we feel that that's sort of a run rate, especially in the first two or three quarters of FY24. I'll continue after yesterday's Fed comments. It might be that sort of run rate for the entire year in FY24 as well.
spk06: Okay. Sorry about that. A little modeling snafu there. Maybe just as a follow-up, it seems AI is the hot topic these days. So I wanted to be sure you had the chance to talk about it. In the slides, you highlight cloud and AI, ML, automation as being some of the growth drivers for 24. You talked a little bit about the automation side of things, but maybe address what you're seeing in cloud and AI.
spk09: Yeah, thanks, Melissa. And actually, I'm kind of sniggering here because... when we were preparing for the call, I was just back from an Asian tour in our facilities. And I was really blown away by, I hadn't been there for a few years, you know, pre-pandemic. And I was kind of blown away by just the improvements we've made internally. And, you know, using, you know, robotics, automation, you know, getting rid of non-valuable activities and leaning into AI to help us with, Algorithms that help us introduce new products quickly from an inspection perspective, etc, etc, etc. So it was unbelievable just how many people we've taken out of our processes by leaning into automation and using an AI engine to support that. And we talk about that, and I know that some people say that AI is going to be overhyped in the short term, but obviously more beneficial in the longer term. But what we do see is, and we are seeing, you know, you need a lot of... To teach these large language models, you need advanced networking, and obviously you've got a lot of... requirements for processing in the cloud. So what we see is, and I think this is going to pick up over the longer term, but the ability to produce advanced networking products and the ability to make cloud devices where they require liquid cooling, they require high-speed optical interconnects, that plays to capabilities that we've been developing over a long period of time. And it's why we're quite bullish in the longer term, you know, from a cloud perspective, because we're able to bring in multiple capabilities that we've developed in other parts of our business to support customers in that space, which is going to help them as they get requests to support customers. you know, companies that are running large language models in the AI space. So we think that, for sure, overhead's in the short term, but we think in the longer term it's going to be another real secular growth opportunity for us.
spk06: Great. Thanks very much. You're welcome.
spk08: Thank you. Next question is coming from Mark Delaney from Goldman Sachs. Your line is now live.
spk11: Yes, good morning and thank you for taking the question. You mentioned you're planning for a challenging macroeconomic environment in 2024. As you see things today, are you thinking the macroeconomic environment is incrementally more difficult next year or is it more of a continuation of the kind of challenges you've been seeing?
spk05: Just to clarify, I think the words I use would just be cautious and vigilant. There's a lot of chatter around consumer end markets. We've seen some of that. It's a little bit patchy. It goes up, it comes down. For instance, Q2 was down. Q3 was actually up for us from a consumer standpoint. We're not seeing anything major in any of our end markets that would give us any concerns. I was just being cautious and vigilant. That's the only meaning behind my comments there, Rob. And if you look at the secular markets that we're in today, all growth-oriented, the EV, healthcare, renewables, 5G, cloud, they're all moving in the right direction. So I don't think that gets slowed down by macroeconomic conditions that much. There might be, instead of growing by double digits, maybe it grows by single digits, but But overall, we're not seeing any of that right now, and we just want to be cautious and vigilant as well.
spk11: That's helpful. Thank you, Mike. And my other question, as you're seeing such good growth in certain markets like EVs and renewables, are there steps you have to take operationally in order to continue that growth, either more factory capacity, finding more labor and other constraints you may be running into given the growth rate you've been undergoing in a couple of those key markets? Thanks.
spk05: Yes, on the EV side, for example, yes, we have to expand our operations. We're expanding in the Americas. We're expanding in Europe. We're expanding in Asia. So there is definitely – we need to grow in our footprint in some of the geographies. Healthcare is a little bit more steady, Eddie, but overall still – The trend is upwards, renewables. We've just opened a new factory in the U.S. And we'll continue to expand as and when we feel the requirements there. But, yes, it is something we're watching. We're being very thoughtful. We're very disciplined. We don't want to overinvest in CapEx. And we're watching trends very carefully to make sure there are long-term benefits sustainable trends and not just type, which is temporary. So, yeah, the answer to your question is yes.
spk09: Yeah, and a follow-up on that, Mark, also is that, you know, we always talk about having a single instance of SEP in our company and You know, that, for example, becomes critically important. You know, as we look to get requests from customers to introduce new products, introduce them across multiple geographies, that, you know, having that single instance of SAP is critically important. But more than that would be, you know, JJ Creeden and his team are looking at making sure that our factory network is operates consistently with the same processes. We've got a kind of unified table culture, as I mentioned, so our ability to incubate new business or new capabilities in one part of the world and then be able to deploy that at scale across the rest of our network really lends itself to our model. And so we're feeling quite bullish that we're really well positioned to support the needs of our customers in the world where geographical manufacturing seems to be more in vogue. Thank you.
spk08: Thank you. Next question coming from David Vogt from UBS. Your line is now live.
spk03: Great. Thanks for taking my question, and good morning. I just want to go back to the AI automation conversation. I know you're probably going to provide a lot of color on this in September, and I know it's early days. But when you think about sort of the end markets and your customer base, obviously there's going to be some technological shifts in what's happening, whether it's in sort of the data center or the networking stack. How does that work with you and your customers in terms of you potentially winning new types of businesses for new technological sort of changes effectively? And generally, what are the lead times in terms of from concept discussion to deployment? And then I have a follow up on margins, which I can maybe just roll in here as well. So it sounds like near term, the opportunity is for your own efficiency gains from automation going forward. in fiscal 24 from AI potentially. Is that the fair way to think about the business next year? Thanks.
spk09: Yeah, so for sure, and if I don't answer this question, please, David, you know, there was a lot there. So for sure internally, I mentioned previously that our internal process is we simplify, optimize, standardize, and automate. We've been doing that forever. This helps us accelerate some of that, as I had mentioned. So we see that this is definitely going to help us from an ability to introduce new products, ability to be more efficient and therefore drive margins. So for sure we see that. In terms of engagement with customers, I mean, we don't see any one of our end markets that this isn't going to be favorable for, you know, whether it's in, you know, autonomous driving or in healthcare or whatever. And the relationships that we have are quite deep-rooted with our customers. You know, we access their technology roadmaps in conjunction with them to help them introduce new products. So I think that... This isn't going to change the model that we have, the engagement model we have with our customers. We've got our technical experts, of which we've got thousands across the company, are actively engaged with customers looking at their roadmaps and how we can support them. So I think for sure there'll be some acceleration there, but for us it's almost business as usual as it comes to engaging with our customers.
spk03: That's helpful. Maybe can I just ask a quick follow-up along those lines? I know it's early days. Do you get the sense that maybe some customers would reprioritize spending and roadmaps from maybe some existing sort of products and or roadmaps to really take advantage or jump on this sort of new sort of large, long-term, secular driver in AI? I don't think so. Yeah, I don't think so. I mean, I think that...
spk09: You know, when people talk about this being hyped in the short term, I think it's been hyped in the press in the short term. I think everyone who's been involved in our industry or in the industry, you know, AMD talked about it yesterday, NVIDIA. I mean, they haven't just woke up yesterday and decided it's a good idea. They've been working on this roadmap for multiple years. So, you know, I think there's a little bit of hype in the press. But to those who are involved in the industry, I think it's just like a continuation of the roadmaps we've been working on.
spk03: Got it. So it sounds like it's additive. That's helpful. I appreciate it. Thank you.
spk08: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
spk02: This is the end of our call. Thank you for joining. Please reach out if you have any further questions. Thank you.
spk08: Thank you. That does conclude today's teleconference webcast. We disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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