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Flex Ltd  (NASDAQ:FLEX)
Q3 2019 Earnings Conference Call
Jan. 30, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, and welcome to the Flex Third Quarter Fiscal Year 2019 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, Flex's Vice President of Investor Relations. Sir, you may begin.

Kevin Kessel -- Vice President, Investor Relations & Corporate Communications

Thank you, and thank you for joining us for Flex's third quarter fiscal 2019 conference call. We've published slides for today's discussion that can be found on the Investor Relations section of our website at flex.com.

Joining me on today's call is our Chairman, Michael Capellas; Chief Financial Officer, Chris Collier; Presidents, Doug Britt and Paul Humphries.

Before we begin, let me remind everyone that today's call is being webcast 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 SEC including our current annual and quarterly reports.

If this call references non-GAAP financial measures for the current period, they can be found in our appendix slides. Otherwise, they are located on the Investor Relations section of our website, along with the required reconciliations.

Now I would like to turn the call over to our Chairman, Michael Capellas. Michael?

Michael D. Capellas -- Chairman

Thank you, Kevin. Now please turn to slide two for quarterly business highlights. As indicated in our last call, I along with some of our other board members have been working closely with management during the CEO transition. I will briefly address the quarter before turning it over to Chris and the leadership team. I will also update you on the CEO search later in the call.

During the quarter, we grew revenues, improved the quality of our sales mix, expanded adjusted operating margin and returned free cash flow generation. These results reflect our intense focus on execution in our core business and speak to the breadth of our customer base and the quality of our delivery capability.

Highlights for the quarter include: Revenue of $6.9 billion, was up 3% year-on-year. Adjusted operating profit of $256 million, was up 17% year-over-year. Adjusted operating margin was 3.7%, up approximately 40 basis points year-over-year. Free cash flow was $119 million. Adjusted EPS was $0.34, up 11% year-over-year.

We completed the wind down of our NIKE Mexico operation. Stabilized operations in India and made progress in streamlining our investment portfolio.

In addition to exceeding our financial targets, we continue to build market momentum with our customers.

Now I'd like to turn it over to Doug and Paul, to provide highlights for each of their businesses.

Douglas Britt -- Senior Key Executive

Thank you, Michael. Please turn to slide three. I will discuss the performance of our CEC, IEI and CTG business groups. CEC revenue of $2.3 billion, was up 14% year-over-year, with an adjusted operating margin of 2.8% versus 2.5% last year. Revenue growth was driven by the acceleration of 4G and 5G network infrastructure build-out and our increased participation in both hyperscale and edge computing programs. For example, in major hyperscale computing events, we designed the servers, the battery backup units, the custom racks as well as help to specify and qualify the cable and thermal management systems.

In another win, we will support the launch of a major 5G program for the North America market. We continue to win design-led engagements with customers that leverage our regional and global capabilities and anticipate continued strong bookings momentum.

For the March quarter, we are expecting CEC revenue to grow year-over-year led by the continued strength in cloud and data center solutions and programs benefiting from increased 5G-related infrastructure spending.

IEI revenue was $1.7 billion, up 11% year-over-year, with an adjusted operating margin of 4.7% versus 4.1% last year. Revenue growth was driven by strength in home and lifestyle, which more than offset the softening demand in semiconductor capital equipment. Overall, IEI bookings remained strong across a broad range of categories from some of the world's largest diversified industrial companies.

For example, we won a program for a beverage dispensing appliance, that is being marketed by a leading global beverage brand. We're currently in the design phase that leverages our expertise in dispensing solutions.

In another major win with one of the global leaders in commercial laundry equipment, we are assisting the design and manufacturing services to help the customer move from an analog control system to a digital and IoT enabled platform.

We remain confident in IEI's overall growth prospects, however, for the March quarter, we're expecting IEI revenue to be pressured by continued weakness in semiconductor capital equipment and softness in energy.

In our CTG business, revenue was $1.8 billion, down 12% year-over-year with adjusted operating margin of 2.1% versus 1.9% last year. We continue to rationalize underperforming accounts and revamp our go-to-market approach to be more selective with our customers and categories.

Our adjusted operating margin improvement reflected these benefits as well as stabilization in our India operation and the wind down of our NIKE Mexico operation.

Going forward, we will continue to be selective and focused on participating with major brands that control multiple product categories, which have significant regionalization and design requirements. As an example, this quarter we won several programs that leverage our capabilities in audio. We won a program with a large enterprise customer that wants to bring high-end audio devices into its teleconferencing business. Another win is from a major professional audio solutions provider. This customer will be consolidating their manufacturing into our Mexico operations and using our audio design team to support their next generation products.

For the March quarter, we're expecting CTG revenue to be pressured year-over-year as we continue to actively optimize and prune our portfolio.

Now, I'd like to turn it over to Paul Humphries to talk about our HRS business.

Paul J. Humphries -- President, High-Reliability Solutions

Thank you, Doug. Total HRS revenue was $1.2 billion, down 1% year-over-year, with adjusted operating margin of 7.9% versus 8.2% last year. Demand across our health solutions business remained strong. But the increases were more than offset by ongoing headwinds in automotive.

Our automotive business was impacted by the broad-based market softness, which directly impacted our largest automotive customer, resulting in Q3 revenue declining 11% from a year ago. Some of these automotive customers are also facing challenges related to US China trade relations, increased tariffs and a constraining automotive component environment.

These are all contributing to a softer outlook for automotive going forward. However, the challenging automotive headwinds have not diminished our ability to expand our business with new and existing customers.

This is evidenced by year-to-date record bookings of $1.2 billion, which leverages our industry-leading capabilities in the areas of autonomous, connectivity, vehicle electrification and smart tech. This year, we secured our single largest design contract for an autonomous compute solution for a major global OEM, while simultaneously securing the associated manufacturing contract, which is significant.

Health Solutions was up 14% year-over-year and is now running with sale over $500 million for(ph)quarter. The business is characterized by long product life cycles with stringent regulatory requirements. We are beginning to show the benefits of prior year investments, to strengthen and improve our capabilities and competitive positioning

Specifically, Health Solutions focus on design-led engagements, supported by its strong domain expertise has helped secure record year-to-date bookings of nearly $1 billion. Of note, the significant wins we have secured in drug delivery devices during fiscal 2019, which leverages our capabilities and the increased investment in design and precision plastics over the past few years.

For the March quarter, we expect HRS revenue to display growth in Health Solutions, that will be more than offset by ongoing weakness in automotive.

Now let me turn it over to Chris to discuss our financials in more detail.

Christopher E. Collier -- Chief Financial Officer

Thank you, Paul. We are pleased with the results of our third quarter, which exceeded our expectations on multiple levels as our core business remains sound and is performing well. Our solid financial performance is reflective of our focus on operating or well-balanced and diversified portfolio of businesses, which are designed to deliver more predictable earnings and growth.

Please turn to slide four for our Q3 income statement summary. Our third quarter revenue was $6.9 billion, up 3% versus a year ago and toward the high-end of our guidance range as all business groups met their revenue targets.

Our Q3 adjusted operating income was $256 million, which was above our guidance range and grew 17% year-over-year. Our adjusted net income was $181 million, resulting in adjusted earnings per diluted share of $0.34, which was also above our guidance range of $0.29 to $0.33.

Third quarter GAAP net loss of $45 million, which was lower than our adjusted net income due to adjustments for stock-based compensation, intangible amortization and several non-recurring charges totaling $226 million or $0.43 per share. Our third quarter GAAP EPS was a net loss of $0.09.

During the quarter, we took focused actions to optimize our business portfolio most notably within our CTG business. We completed the wind down of our NIKE Mexico operation and recognized a final charge of $36 million, which was primarily for non-cash asset impairments.

Additionally, we reassessed our investment portfolio and began to reposition it, which resulted in a non-cash impairment charge of $70 million.

Lastly, we eliminated certain non-core activities and repositioned some programs to align with go-forward company strategies, resulting in restructuring charges of $86 million, the majority of which or $36 million were non-cash in nature.

Now please turn to slide five for quarterly financial highlights. Our gross profit increased to $453 million, our gross margin declined 20 basis points to 6.5%. The growth margin pressure is reflective of various business mix shifts, most notably inside our HRS business, due to lower automotive revenues as well as incurring higher scrap rates and some inventory-related charges as we ramped certain mobile programs in India.

We've been intently focused on managing our operating costs. In our third quarter, we reduced our SG&A expense by 15% year-over-year to $197 million. We are confident in our ability to operate with cost discipline and thoughtfully invest into our design and engineering capability, while delivering operating leverage.

Our quarterly adjusted operating income came in at $256 million, up 17% from the prior year reflecting year-over-year margin expansion of 40 basis points to 3.7%. We benefited from greater cost discipline and improved operating performance in our CEC and IEI businesses, as they leverage their installed cost structures and their design and technology investments.

Turning to slide six, let us review our cash flow generation and highlights. We expect a positive operating cash flow and free cash flow generation in the back half of this fiscal year, as our earnings improve and capital intensity lessens, both in terms of lower net working capital and lower capital investments.

This quarter, we generated $274 million in adjusted cash flow from operations and $119 million in free cash flow. We are pleased with our actions to aggressively reduce inventory toward more efficient levels as we saw a 4 day reduction in inventory days.

In Q3, we reduced inventory by $645 million or 13% sequentially. We have significantly reduced component constraints and improved inventory management in the majority of our businesses. We remain focused on driving further inventory improvements.

Our capital expenditures totaled $155(ph)million for the quarter. We continued to invest in the CapEx necessary to support the underlying high-margin, long-term programs in our IEI and HRS businesses.

During the quarter, we developed a sustainable operating plan for India, and will have our regional build-out in India mostly completed during Q4. For a fourth quarter, we expect our CapEx investment to be at or below our depreciation level.

We expect our CapEx to return back to historical norms next year, as CapEx investments for our HRS business will reduce to historical levels and our regional capacity build-out in India will be completed. It is our expectation that we will be consistently generating positive operating and free cash flow generation as we move forward.

We remain committed to returning greater than 50% of our free cash flow to shareholders via share repurchases. Despite having a very back-end loaded quarter for free cash flow generation, we repurchased roughly 6.7 million shares for $64 million during the quarter.

Now turn to slide seven to review our balanced capital structure. We continue to operate with the balanced capital structure and despite operating in a rising rate environment, we still have a relatively low average cost of debt. In addition, we have no debt maturities until calendar 2020 and have cash and access to liquidity that supports our long-term business growth objectives.

Please turn to slide eight for our fourth quarter fiscal 2019 guidance. Revenue is expected to be in the range of $6.2 billion to $6.6 billion or roughly flat at the midpoint, based on the following business group year-over-year revenue expectations.

For CTG, HRS and IEI, we are guiding revenue to be flat to down high single-digits. And our CEC revenue is expected to be up 5% to 15%.

Our adjusted operating income is expected to be in the range of $195 million to $225 million. Interest and other expense is estimated to be approximately $50 million.

We expect our tax rate in the fourth quarter to remain in the mid range of 10% to 15%. Adjusted EPS guidance is for a range of $0.25 to $0.28 per share based on weighted average shares outstanding of $525 million.

GAAP EPS is expected to be in the range of $0.18 to $0.21 after reflecting the impacts of stock-based compensation expense and intangible amortization.

While our financial results showed marked improvement and momentum in the marketplace, we recognized that we have more to do to improve the consistency of our financial performance, to realize the full potential of our business and to clearly communicate our progress, to regain your trust.

With that, let me turn it back over to Michael for some closing comments before we open the call to Q&A.

Michael D. Capellas -- Chairman

Thank you, Chris. Before we take questions, I would like to address two other important matters. First, during the quarter, we made significant steps to continue to strengthen our board with the addition of two highly respected and experienced executives.

One is Jill Greenthal, who has spent 30 years in investment banking. The other is Chuck Stevens, who recently retired as the CFO of General Motors, after 40 years with the company.

And in conclusion, I would like to update you on our CEO search. We have a well-designed process that is working well and has surfaced a good cross-section of exceptional candidates. We anticipate finalization of our selections soon. In near-term, we are focused on delivering results and improving our business.

With that, I'd like to turn it over to the operator for questions.

Questions and Answers:

Operator

(Operator Instructions) The first question comes from the line of Steven Fox of Cross Research. Please go ahead, your line is open.

Steven Fox -- Cross Research LLC -- Analyst

Hi. Good afternoon. First question, I was wondering maybe Chris you can expand on the operating leverage you realize year-over-year, with operating profits up 17% versus the 3% growth in sales. Can you break down where that -- what you would attribute all of that to? There was a lot of things mentioned, just wanted to understand that a little bit better.

Christopher E. Collier -- Chief Financial Officer

Certainly. I would highlight there was some very strong performance on a year-over-year basis from our IEI business. You saw for the quarter, a very strong operating profit execution. We got that up hopefully inside the target margin range, it pushed out at a 4.7% and put out at $79 million. Those are records for that part of our business. And as a year-over-year basis, it's up nearly 30% in operating profit.

I'd also probably point out the CEC business that is showing return to growth and printed out at a 2.8% operating margin for the period and had some real sizable, almost 25% year-over-year profit expansion.

In my prepared remarks, I highlighted both of those are benefiting from increased volumes that are being able to leverage off a very strong installed cost structure.

And then in the prepared remarks, I also highlighted, we've been very disciplined in and around our cost and we've been very thoughtful as we said in the start of the year about how we're going to optimize and leverage inside of SG&A, and we've been able to do a really nice job of bringing that down meaningfully both on a sequential basis and a year-over-year and really been targeted around optimizing the design and engineering efforts to really true go-to-market capabilities in product categories.

So I think we're pleased overall with a strong performance in pushing ourselves to a 3.7% operating margin for the quarter.

Steven Fox -- Cross Research LLC -- Analyst

Okay, and -- that's helpful. And then on India, you said that you stabilized the operations and have plans to expand in place this quarter. So what does that mean in terms of what kind of volumes you're at now? And how you can grow it over the next year and what kind of programs are going to be produced at India? Thanks.

Christopher E. Collier -- Chief Financial Officer

Certainly. Yeah. So we had our focus this year on entering the India market. As we talked in the quarter, we took efforts to develop a sustainable operating plan. What that entailed was having focused efforts around capacity planning, material planning, working with the multiple customers at a multinational that have broad product categories, that we're looking to position with.

It was our intent to stabilize that and to grow that at a proper level. I'd maybe turn the call over to Doug to maybe expand any further on how we think about that business.

Douglas Britt -- Senior Key Executive

Yeah. Thank you. You highlighted correctly. Yeah. For our multinational customers as a growing market, had a growing middle class, it's digitizing and it's providing consistency with our plan to provide these multinational customers access points to regional markets.

India is a growing market and we're providing that. So we see a measured approach, disciplined approach in how we grow India, but many of our multinational customers are going to utilize us for that footprint.

Steven Fox -- Cross Research LLC -- Analyst

Thanks very much.

Operator

Your next question comes from the line of Ruplu Bhattacharya of Bank of America. Please go ahead, your line is open.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks for taking my questions. And congrats on the strong margin performance this quarter. My first question is on the CTG segment. Can you give us an idea of how much more pruning do you think is left in this segment? And your margins came within the low end of the range, so 2.1%. Any guidance on how we should think about segment margins going over the next couple of quarters, because you are pruning the portfolio, but that should help margins. So any guidance there would be helpful.

Douglas Britt -- Senior Key Executive

Yes. Thanks. We do continue to prune and optimize the portfolio. We see that happening in Q4, but coming to an end. And in terms of the business itself, we have some seasonality in our Q4, which will impact as you could see our guide, it could impact our margins, but we are committed to getting this business into the guided 2% to 4% operating profit range in the next fiscal year.

Christopher E. Collier -- Chief Financial Officer

And Ruplu, what I just explain on to that is what you'll see in our Q4 is that given the revenue decline due to seasonality provides us with some capacity utilization and absorption challenges. So you see some pressure on the margin there as well as, as we take further optimization here, but clearly our intent is to be hyper-selective in terms of engagements and we're committed to driving that business back into the starting margin range.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks, Chris and Doug for that. Maybe one question for Paul. Just the dynamics between medical and automotive, I mean, because auto was weak, gross margins on a year-over-year basis this quarter was impacted. But when you look out over the next couple of quarters, I mean balancing medical versus auto, do you think the strong margin performance is 7.9%, are you concerned about margins at all over the next couple of quarters? And any thoughts on when the autonomous work that you're doing when does that start kicking in and when do we see meaningful revenues from autonomous in the automotive space?

Paul J. Humphries -- President, High-Reliability Solutions

Thanks. So I think from a margin perspective, we're comfortable that we can maintain within the targeted margin range. I'm not going to commit to a particular number, but why we are seeing exactly weakness in automotive, we're also really excited about the capabilities that we built in areas like autonomous and connectivity vehicle electrification. So we're confident in the capabilities that we've developed and how we can move the business forward.

And we're also really happy to see the growth in our medical business as we mentioned in the prepared, those were up 40%,(ph)and we think that business is also doing really well, and we'll be able to maintain position inside -- into the next quarter.

So overall, we're optimistic for the long-term, facing some headwinds and some secular trends currently, but still we're confident about the long term of the business.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thanks so much for all the details.

Paul J. Humphries -- President, High-Reliability Solutions

And then you also mentioned about autonomous.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Yes.

Paul J. Humphries -- President, High-Reliability Solutions

So we have won one major, we've actually won several autonomous programs. Some of those are actually giving small revenues to date through design revenues, but we're probably out into '21, '22, before we start to see significant impact from those programs.

Christopher E. Collier -- Chief Financial Officer

And I would just add on to that. I think the benefit that we've been able to see here is our ability to leverage the joint expertise of the enterprise across automotive, across server storage and across network and design in terms of how we can capture and compel demand inside of the autonomous platforms.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. Sorry, maybe just one last thing. So over the next couple of years, I mean, you've got opportunities, you've got bookings in both medical and automotive, and you're talking about good demand in the autonomous piece over the next couple of years. How should we think about the relative balance between medical and automotive in terms of revenues? Do you think like which one -- which one can drive the segment more than the other, if there is just one like that?

Christopher E. Collier -- Chief Financial Officer

Yeah. I appreciate the question. We're just not going to get out and provide that level of color. What we try to do today is provide some good insight in terms of the prepared remarks, how we're really achieving record bookings inside of HRS and it's across a broad array of categories, a broad array of customers. So we'll be able to provide you a better lens into some of that trajectory when we have our next Investor Day as well. Thank you.

Operator

Your next question comes from the line of Jim Suva of Citi. Please go ahead, your line is open.

Jim Suva -- Citigroup -- Analyst

Thank you very much for the details thus far. A quick question on the geopolitical situation with the trade wars and companies shifting manufacturing around. Have you seen much action on that? If so, it seems like Flex should be a better potential beneficiary from that? But will you also face some initial ramping cost, let's say, for example moving some production out of like China to another location. How should we think about and your ability to recoup the ramp cost and the pricing? Thank you.

Christopher E. Collier -- Chief Financial Officer

Thank you, Jim. So we have not really been materially impacted by tariffs to date. We do believe it brings uncertainty with our customers. While we don't predict how this will play its way out, we are well-positioned with our regional footprint to benefit from these trade transfers. If in one day they take place. We're already helping certain customers to assess potentials. We've had some instances where we've actually engaged with them in process of transitioning.

And when we're doing that, it is our intent to secure a return for the capacity that we're -- and capability and the solutions that we're putting forward with them. So it should enable us to increase margins and it would be a practice that we'd entail as we partner and help them solve these complicated global trade situations.

And maybe I'd turn it over to Doug, who want to expand anything you've seen directly from the business?

Douglas Britt -- Senior Key Executive

I think you highlighted it pretty well. We're positioned well regionally to support any transfers. There is a lot of discussion not a lot of movement yet. Currently with the rates, if they end up moving up to higher levels, that many customers that are planning with us and looking at financial implications of moving business to North America or Europe, but no significant material movements at this point.

Jim Suva -- Citigroup -- Analyst

Thank you so much for the clarifications. It's appreciated. Thank you.

Operator

Your next question comes from the line of Steven Milunovich of Wolfe Research. Please go ahead, your line is open.

Steven Milunovich -- Wolfe Research -- Analyst

Thank you. Could you comment a bit more on the overall economic impact on the company and then specifically on automotive. It sounds like the look forward is a little weaker than maybe the last quarter was, so are you beginning to see some economic impact that maybe you didn't see in the December quarter? And then specifically in the auto business, we used to be asked, hey, what if there is a recession, what's the impact? And you would say, well, we are not that sensitive to SAAR(ph)we're more on the autonomous side and so forth. But it looks like you're getting hit(ph)a fair amount on the automotive side. So is that just kind of a natural industrial business, where you're going to see economic impact even with the autonomous you are doing?

Christopher E. Collier -- Chief Financial Officer

Yeah. Let me give you some insight and then I'd turn it over, and we can have Paul expand further with regards to automotives in particular. In terms of the broader demand environment, there certainly is a fair amount of uncertainty out there, and now there is some potential weighing on overall macro softness. However, we're benefiting from some strong underlying bookings that have been taking place over the last several years.

I think the long-term fundamentals and where we position ourselves around evolving macro trends remains intact, whether it's the digitization, IoT, you heard in our prepared remarks about how we're growing inside of 5G and the cloud computing. And then into autonomous and the electrification of vehicles. I think that we have positioned ourselves very well across a broad array of categories, and the broad array of capabilities such that some of these headwinds that we face, we're be able to deal with in a different way.

Clearly, automotive has been and remains challenging and global production has weakened throughout the year. And in particular, we saw some really significant underperformance inside of China. However, our offering extends multi-regional and across a whole array of product categories. And so while tariffs are probably and component shortages are more accentuated in that business, I think we are doing pretty well good job of balancing that demand profile.

Paul J. Humphries -- President, High-Reliability Solutions

So and what I'd say is, we -- I think well positioned for the long term to capture the areas of growth in automotive, such as autonomous, connectivity and electrification. I mean, those are definitely the longer-term trends that we're seeing. And so we are very confident and we are focused on the right areas, we have the right strategy in place.

But in the short-term, we are definitely seeing the impact of softness in Europe and North America and particularly, in China, where one of our major customers has been fairly severely impacted. And so we don't think that we're out of position in the long term, but we're certainly seeing the secular trend to a slower environment. And certainly, a level of caution as to what's going to happen in automotive over the short-term, but long-term, we believe we're well positioned.

Steven Milunovich -- Wolfe Research -- Analyst

That's helpful. And Chris on the reduced SG&A level, is this kind of a go-forward level in absolute dollars that we should expect over the next few quarters?

Christopher E. Collier -- Chief Financial Officer

I think it's been our focus all year around driving a real cost discipline. We targeted a 3% to 3.2% type of a range. I think we've taken some great measures. I think you are going to see some sustainability. I think it's going to be around this range plus or minus $5 million -- $5 million, $6 million. It will vary. Each period, their timing as it relates to funding on design and engineering as well as other aspects. But I think overall, you've seen a marked shift in terms of our cost discipline and we can operate here at this level and see some really nice earnings leverage as a result.

Steven Milunovich -- Wolfe Research -- Analyst

Thank you.

Operator

Your next question comes from the line of Mark Delaney of Goldman Sachs. Please go ahead, your line is open.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Yes. Good afternoon. Thanks for taking the questions. First question is around CTG both financial and strategic angle to that area. So on the financial side, Doug if I heard you correctly, you're expecting to be done with the optimization in this upcoming quarter fiscal 4Q. Are there any revenue implications for the June quarter that we need to be -- might pull up, if there is any larger program exits that are being contemplated for next quarter that maybe would happen late in the quarter? So that's a financial portion of it.

Strategic portion, maybe you can just help us better understand the thought process around mobility in India? It sounds like that's not part of the business as being reevaluated as part of the more focused CTG strategy. And smartphones in the past got Flex into trouble via Sony Ericsson or RIM or Motorola mobility. So maybe you can just give us a little bit more color about what's giving you guys the comfort that do the(ph)smartphones in India is going to fit within this margin profile that the company is targeting and while to be more successful than your past efforts there? Thank you.

Douglas Britt -- Senior Key Executive

Great. Thanks for the question. As we discussed, we're pretty close to the portfolio rationalization so that will be concluded in Q4. Our commitment in this business is to multinational companies that have multiple product categories and that leverage our design and regional manufacturing capabilities.

And as we've discussed, we're going to be selective. The mobile business is a key element based on us being selective with the customers that we engage with. These customers have multiple product categories, they have IoT enabled devices, and we've got commitments that we are engaged with these customers on. So this will be part of the portfolio, but it's going to be very selective on how we engage.

So overall, the CTG commitment is we're working to get this business back in the targeted range of 2% to 4%, and our goal is to get there next fiscal year.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Okay. And just, is there any kind of big revenue drop down in June from these program exits in the March quarter?

Douglas Britt -- Senior Key Executive

We've got pretty much our guidance laid out, and we have seasonality that occurs in this business during this quarter. So that's all taken in consideration in the guidance that we provided.

Christopher E. Collier -- Chief Financial Officer

And as we step forward, we'll be able to give you better clarity into June, but overall, it's again we're in a position of really focused repositioning being very selective. We've been eliminating investments in areas and businesses that didn't yield and I think you should just see us being very disciplined, very measured in this business as we move forward.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Okay. That's helpful. My second question was on CEC, I know this is doing quite well. I think it's going to grow for a full year for the first time since 2012, if I'm (inaudible) correctly? And Doug, you called out 5G in particular in your remarks is something that's driving the growth. Can you just give us a sense of how sustainable this growth is for CEC overall and how much you can access(ph)tied to 5G? Thanks very much.

Douglas Britt -- Senior Key Executive

Yeah. Thank you. We're excited about the opportunities that we're seeing in CEC. There is a macro trend globally, where 4G and 5G networks are building out. There's a lot of applications that will be written to support that artificial intelligence. We have talked about autonomous. Also the hyperscale and cloud CapEx expenditures continue to rise, and we're playing in both of those. We have a great design engagement. We have great design capabilities and then couple that with our access to all the key markets, we're winning in the space and we see a good opportunity to grow this business moving forward.

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Thanks.

Operator

The next question comes from the line of Matt Sheerin of Stifel. Please go ahead, your line is open.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Yes. Thanks. Regarding the IEI segment, where you talked about weakness in semi-cap. Could you elaborate on that? And do you have expectations of that bottoming, and as you enter fiscal '20, do you think that, that segment will continue to grow just due to the strength of the other segments within IEI?

And then relative to margins, you have had nice margin expansion for a few quarters now and given the weakness in the key customer base there, do you expect that to be under pressure somewhat as you get into fiscal '20?

Christopher E. Collier -- Chief Financial Officer

Our IEI business, we think we're structurally well positioned for growth over the long term. We're down as we mentioned in Q4 due to the softness in semi-cap. Semi-cap is at a six-year low for us. As that cyclical market returns, we'll benefit from that. Our business is complicated in semi-cap and is accretive to the margin profiles in that business.

And then, as we move forward in the next quarter, we have a richer business within IEI as we've developed more mechanical capabilities. We're benefiting -- and our margins are benefiting based on that.

We're excited about the pipeline and the bookings that we've recorded. We continue to win a number of new programs from a broad customer base across the industrial market, and we're excited about the margin performance that we delivered this quarter.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

But just on the margins going forward, do you think they're going to continue to move in the right direction?

Douglas Britt -- Senior Key Executive

We're committed to maintaining margins in the 4% to 6%, and we'll benefit as we get higher revenues and better absorption, but we're committed to maintaining in the 4% to 6%.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Okay. And just Chris, a question relative to the inventory reduction and the free cash flow, which has been nice to see -- you're still on days basis, still about where you were a year or so ago. So -- and given that lead times are coming in on most components, do you still see more improvements there over the next couple of quarters?

Christopher E. Collier -- Chief Financial Officer

Yes. Certainly, Matt. One of the highlights in the prepared remarks was just that, we're pleased with the execution this past quarter, some meaningful reduction in management, bringing inventory levels back down and further see greater opportunity in this next quarter to bring it even further down. Very similar to where we've been operating historically. So the team's been very focused. We've been after several different activities really been able to do a nice job of clearing a lot of component constraints working on better load and planning. And I just think you're going to see continued nice trajectory in terms of our inventory management.

Operator

Your next question comes from the line of Adam Tindle of Raymond James. Please go ahead, your line is open.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. Thanks, and good evening. I just wanted to return back to a CTG margins. I think we back out the year-over-year benefit from not losing money with NIKE, I don't think they're improving, profit dollars are declining and March guidance implies more of the same.

Now this assumes no meaningful losses in the non-GAAP numbers this quarter, so correct me if I'm wrong, but the same would hold to the March quarter and you've got no NIKE losses there, India stabilized. Why wouldn't it be better year-over-year for March, though you sounded confident in margin for fiscal '20, so I'm just hoping, you can dig deeper on some of those topics and maybe what changes to enable your confidence in CTG margins for fiscal '20?

Christopher E. Collier -- Chief Financial Officer

Certainly. I'm going to take a response here and then Doug if you want to provide any color if I miss anything. Listen, the focus that we have right now on that piece of business is very clearly to be optimizing it. We've talked about pruning. We've been eliminating different investments thinking differently about different areas as well as different customers, as well as different businesses that just were not yielding. It is our intent to operate that business inside of its target margin range.

We're taking distinct actions to achieve that, in the March quarter, you're going to see further efforts in terms of reducing our exposure inside of CTG, and it's reflective in terms of the margin profile.

You've seen historically CTG in that March quarter come down meaningfully in terms of its margin profile. So it's no different except we are actually taking distinct actions to prune and the core of the business is still a bit weak. We're taking focused efforts to improve that.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. And then maybe just as a follow-up. I don't know if Michael or Chris wants to address this one. You talked about ample liquidity. You've got strong cash on the comp. Your high mix segments are slowing. There is other assets in the space that could potentially accelerate the mix improvement through acquisitions. Many of those have pretty clean balance sheet and net cash. So may be just talk about strategic thinking on M&A. Is there an opportunity to accelerate the move toward higher mix verticals? Thanks.

Christopher E. Collier -- Chief Financial Officer

Yeah, certainly. For us, our capital allocation priorities is to take a long-term view. We have a commitment to take our free cash flow and 50% of that to return it to shareholders via the repurchase. We've been very focused over the past 18 months to reposition internal capability and capacity to support the growth in future earnings potential, inside our IEI and HRS businesses.

We've had limited M&A and we see that as being limited, as we move forward, because we possess a very well built out global system with sufficient capabilities to support our core target growth markets and an ability to support the mega trends that we're after.

So I would say it'd be limited in terms of M&A. I think you're going to see us continue to be very supportive of our commitment to share repurchasing. And I think that you're just going to see us being very prudent and measured in driving a smart capital return and supports and sustains a sound financial condition.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

That's helpful. Thanks, Chris.

Operator

Your last question comes from the line of Christian Schwab of Craig-Hallum Capital. Please go ahead, your line is open.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for taking my question here. And congrats on a great start to the year. I want to go back to the 5G opportunity and I'm wondering if you can expand upon either by the number of platforms or the number of customer engagements you have.

On the last quarter conference call, the CEO of Nokia when asked about the 5G spending cycle peak in, he said, -- he believed it would take at least 10 years, and the reason for that is you're going to have to upgrade the low mid and high bands of all the spectrum. So with that as a backdrop, I'm just wondering how proud your exposure is? And I think a gentleman asked a question earlier. I don't know if you answered it, but what part of the CEC group is communications? What percentage of revenue roughly?

Douglas Britt -- Senior Key Executive

Thank you. First, in our CEC group, we believe we're structurally well positioned for growth in the group. We mentioned 4G and 5G. We are involved in the infrastructure build-out, so that includes all the infrastructure. There is optical, there is a lot of different infrastructure equipment that goes into building out the new networks. We also build radios. And we're not speculating on the wins in the trajectory of our customers.

We see really strong line of sight between 4G and 5G infrastructure build-out, the new wins that we have, as well as our hyperscale, Cloud and edge customer base. We're winning many new programs in that space and that's the combination of our CEC, we believe that the backdrop -- or the macro of 4G and 5G will be here for many years and we're going to benefit from it.

Christopher E. Collier -- Chief Financial Officer

And I would just extend on that with just that we're winning with existing as well as creating new partnerships inside the cloud. We're not going to get into specifics around the number of those and we're also not going to be breaking out inside the CEC, and the breakdown between networking telecom and that. We're just overall pleased it has a nice trajectory and we're structurally well positioned with good technology know-how.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Fabulous. Thank you. On the component constraints that we have seen, Sanmina talked about losing up in the December quarter that helped them, I assume it probably helped you little bit work through some of that inventory. As you look through the remainder of the calendar year, how do you see capacitors and resistors and discrete components? Do you -- Is it really loosened up and not a headwind? Or is it just decrease from the extreme tightness that we experienced last year?

Christopher E. Collier -- Chief Financial Officer

Yeah. Let me just try to give you a little color here. I would say that overall, we're managing the situation very well. We've been very successful in delivering demand, securing supply, working strategically with our partners. One of the unique things is that without increased level of design and engineering expertise, we have created different relationships with many of these suppliers, that's enabling us to have more than our fair share of allocation and securing supply.

I think that overall, it's improving..I think for some of the -- we even highlighted, there are still some challenging at the automotive. The automotive is especially inside of some of the capacitors, where there is larger cap size is. There's some more constrained demand. But more broadly speaking from a Flex perspective, we're doing a very nice job of securing our fair share and managing through this cycle.

Kevin Kessel -- Vice President, Investor Relations & Corporate Communications

All right. I wanted to thank everybody for dialing in and for your interest, and this concludes our conference call.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 52 minutes

Call participants:

Kevin Kessel -- Vice President, Investor Relations & Corporate Communications

Michael D. Capellas -- Chairman

Douglas Britt -- Senior Key Executive

Paul J. Humphries -- President, High-Reliability Solutions

Christopher E. Collier -- Chief Financial Officer

Steven Fox -- Cross Research LLC -- Analyst

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Jim Suva -- Citigroup -- Analyst

Steven Milunovich -- Wolfe Research -- Analyst

Mark Delaney -- Goldman Sachs & Co. LLC -- Analyst

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

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