Jabil Inc Q2 FY2024 Earnings Call

Greetings. Welcome to the Jabil Second Quarter of Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to Adam Berry, Vice President, Investor Relations.

Good morning, and thank you for joining Jabil's second quarter fiscal 2024 earnings call. Joining me on today's call are Chief Financial Officer, Mike Dastoor; and Chief Executive Officer, Kenny Wilson. Over the next few minutes, Mike and I will review our Q2 results, update current demand trends and provide new guidance for fiscal 2024. We will then turn the call over to Kenny, who will provide several of the building blocks that give us confidence in our strong outlook for fiscal 2025. Before we begin, 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 the website. At the conclusion of the call, the entirety of today's presentation will be posted for audio playback. I'd now ask that you view the slides on the website and follow along with our presentation, 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. 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, 2023, and our other filings with the SEC. 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. With that, I'd now like to shift our focus to our second quarter results, where the team delivered approximately $6.8 billion in revenue, roughly in line with the guidance range we provided, as a majority of the businesses performed extremely well against the updated guidance we provided back in December. Core operating income for the quarter came in at $338 million, or 5% of revenue. This was up 20 basis points as a percentage of revenue year-over-year due to a strong mix of business led by automotive and health care, while also supported by an ongoing mix shift within our networking and storage end markets. Net interest expense for the quarter came in higher than expected at $72 million, reflecting higher levels of inventory during the quarter. It's also worth noting that we successfully closed on the sale of our mobility business to BYD Electronics during the quarter for approximately $2.2 billion. As a result, GAAP operating income was approximately $1.1 billion, and our GAAP diluted earnings per share was $7.31, reflecting the substantial gain associated with the sale at the end of December. Core diluted earnings per share for the quarter was $1.68, $0.05 above the midpoint of our guidance range provided in December. Now turning to our performance by segment in the quarter. Revenue for the DMS segment came in at $3.4 billion, down approximately 16% from the prior year, driven almost entirely by year-over-year comparisons for the mobility divestiture. On a like-for-like basis, our DMS segment performed very well, led by approximately 11% growth in our automotive and transportation businesses. Core operating margin for the segment came in at 5.6%, 100 basis points higher than the same quarter from a year ago, reflective of the ongoing mix shift within our DMS business. Revenue for our EMS segment came in at $3.3 billion, down roughly 18% year-over-year and roughly $100 million to $200 million below our expectations for the quarter. The majority of our year-on-year revenue decline within EMS was driven by our move to a consignment model within our cloud business and lower revenue in markets like 5G, renewable energy and digital print as expected. However, unexpectedly, and towards the end of the quarter, our 5G and renewables businesses were both negatively impacted by yet another decline in demand associated with those end markets. For the quarter, core margins for the EMS segment were 4.4%, down 70 basis points year-over-year. Next, I'd like to begin with an update on our cash flow and balance sheet metrics as of the end of Q2, beginning with inventory, which came in nine days higher sequentially to 87 days. Net of inventory deposits for our customers, inventory days were 62%, which was a quarter-on-quarter increase of four days. Our second quarter cash flows from operations came in at $218 million, while net capital expenditures totaled $170 million, resulting in $48 million in adjusted free cash flow during the quarter. During the quarter, we repurchased 6.5 million shares for $825 million, leaving us with approximately $1.2 billion remaining on our current repurchase authorization as of February 29. With this, we ended the quarter with cash balances of $2.6 billion and total debt to core EBITDA levels of approximately 1.2 times. In closing, Q2 was largely a solid quarter. For starters, the divestiture of our mobility business and the allocation of those funds towards the share buybacks reflect the strategic intent of this management team to both reshape the business where appropriate, while also maintaining healthy returns to shareholders. At the same time, the business is performing quite admirably despite considerable declines in two of the end markets we serve, as evidenced by our ability to deliver higher margins despite these headwinds. And finally, I'll leave you with a bit of optimism as we look ahead to fiscal '25 and beyond. As we think about the adjacencies across the end markets we serve, it's becoming clear that there's a common theme forming among a number of the end markets, specific to the surge of artificial intelligence, and the impact it will have on our customers' businesses well into the future. And with this surge, there's a proliferation of data being created by electric vehicles and autonomous vehicles that needs to be harnessed. In the healthcare industry, we're in the early innings of getting our arms around the benefits of AI in the operating room. And in our cloud business, we're seeing significantly increased demand for our services related to AI specific to hardware, manufacturing and design. And perhaps most exciting, this enthusiasm is beginning to turn into tangible results. For instance, our AI GPU volume in the first half of 2024 is 200 times that of the level of 2023. So there's a lot to be excited about as we look a little bit further down the road. In a few minutes, Kenny will share his thoughts on fiscal '25 and why he believes our original outlook of $10.65 remains attainable despite a transitional fiscal '24. But first, I'll hand the call over to Mike, who will provide more details on fiscal '24, including an update on our growth outlook by end market.

Thanks, Adam, and good morning everyone. Over the next few minutes, I plan to provide more information on the following: First, I'll walk you through our financial outlook for Q3 and updated outlook for FY '24. Next, I'll provide an update on why we are confident in our growth opportunities for FY '25. And then, I'll provide an update on our accelerated share buyback execution plans, which are progressing ahead of schedule. With that, let's turn to the next slide for our third quarter guidance. Towards the end of our second quarter, we experienced a sudden slowdown within our 5G and renewable energy end markets, which we expect will continue through the second half of FY '24 and result in lower than expected revenue for the last two quarters. Within our renewable energy business, the inventory correction that began in our Q1 is now expected to persist through the balance of our fiscal year as customers in this end market lower demand forecasts towards the back half of February. The renewable energy team has done an excellent job consolidating the supply chain within our current customer base and we will have a higher overall share of our customers' business as we move towards the end of Q4. In 5G, towards the end of the quarter, infrastructure rollout slowed quicker than expected as faster growing markets like India substantially pulled back on all 5G infrastructure investments. As a result of these two market dynamics for Q3, we expect total company revenue to be in the range of $6.2 billion to $6.8 billion. Core operating income for Q3 is estimated to be in the range of $325 million to $385 million. GAAP operating income is expected to be in the range of $221 million to $301 million. Core diluted earnings per share is estimated to be in the range of $1.65 to $2.05. GAAP diluted earnings per share is expected to be in the range of $0.82 to $1.38. Net interest expense in the third quarter is estimated to be $75 million. Now moving on to full year guidance on the next slide. At a high level, with the exception of the near-term dynamics within our renewable energy and 5G markets, the majority of our expectations for revenue by end market this year remains largely in line with our projections in December. Importantly, for the year, we continue to expect year-on-year growth across some of our core end markets, which are still experiencing year-on-year growth, notably in electric vehicles, health care and AI cloud data centers. Moving to the next slide. Despite the revenue headwinds in the near term, we are confident that we will Jabil to be more resilient as we've diversified across geographies, products, customers and end markets. Because of this, we're not anticipating the same level of margin erosion traditionally seen in past slowdowns. Our diversified approach, global footprint and strong relationships with customers give us confidence in weathering these near-term challenges. We're adapting, staying focused on margins and cash flow, and committed to delivering value. Notably, by FY '24, we expect core operating margins to come in higher than we expected in December at 5.6%. Three reasons largely account for our ability to drive margins higher despite lower revenue. First, as our agile model allows, we pushed our planned investments and costs that will support new ramps in renewables in the back half of the fiscal year. Because of this, deleveraging is limited. Second, we expect to offset lower revenue with fixed cost recoveries from 5G and renewable energy customers. And third, we made progress with our efforts to align our cost structure and footprint with our go-forward business. All of this gives me confidence in our ability to deliver core operating margins of 5.6% in FY '24 and positions us well for future margin expansion as we drive revenue growth higher on an optimized cost structure. Putting it all together for FY '24 on the next slide. We expect our improved mix of business and optimization efforts will drive incremental operating leverage, thereby giving us the confidence to raise our core operating margin guidance to 5.6%, for FY '24 on revenue of $28.5 billion. We expect this dynamic to result in core EPS of $8.40, which is reflected by improved core operating income margin and accelerated share repurchases. Importantly, for the year, we also remain committed to generating more than $1 billion in free cash flow. Moving to the next slide. Overall, we feel good about the trajectory of our end market portfolio and are well positioned to drive growth in FY '25 and headlined by continued growth in automotive, health care and AI data centers along with anticipated recoveries in areas of our business that are contracted this year. Globally, both EV and hybrid platforms continue to outpace ICE unit growth rates, albeit at a lower rate than we had originally anticipated at the beginning of the fiscal year. Our EV business is supporting a number of new vehicle platforms with multiple customers in areas such as next-gen compute and control modules, power conversion battery management, LIDAR and other sensors as well as charging solutions. Additionally, we were recently awarded new business in optical camera modules where OEMs are redeploying optics hardware capabilities, enabling the rollout of different levels of autonomous driving through software updates. It is important to note the majority of the year-on-year growth we expect in EVs in FY '25 will be driven by new programs and will be less reliant on volume growth with existing customers. These new platforms give us confidence in our expectations of another year of growth for EVs in FY '25. Longer term, Jabil is well positioned to support both EV and hybrid technologies as they continue to take a larger overall share of auto unit growth globally. Within our health care business, we see significant opportunity to offer critical solutions and capabilities to customers outsourcing complex tasks. Jabil's credibility in health care as the largest EMS provider in the space positions us well to take advantage of the growing outsourcing of manufacturing trend. In FY '25, we anticipate another year of growth in our base business as we continue to explore opportunities in new capabilities and B2B transactions similar to our strategic collaboration from a few years ago. And in the data center space, there is a common theme forming among a number of our end markets related to the surge of investments in AI and machine learning. The pace of AI investments continues to accelerate, and Jabil is winning our fair share of this growing pie as we have positioned ourselves well to assist our customers build out next-generation AI data centers. Our teams are quickly diversifying and winning share across multiple end markets in the AI data center infrastructure space, where we're seeing growth in AI GPU configurations, accelerated optical switches for AI backend networking applications, silicon photonics, liquid cooling capabilities and power and energy storage. Given our success to date in this space, we now expect AI related net revenue across multiple end markets to be approximately $6 billion in FY '25, or an increase of 20% year-on-year. Within the semi-cap market, we continue to anticipate demand to remain muted for FY '24. However, overall market dynamics are expected to improve as commentary across the industry suggests recovery may be on the horizon with a growing expectation that things improve towards the end of this calendar year as fab utilization ticks higher and memory inventory normalizes. And in renewables, as we look to FY '25, while we expect this end market to recover very slowly, we are winning new business and market share along with the aforementioned consolidation within our current customer base. Looking forward, we're excited about the underlying momentum across our diversified portfolio and are well positioned to drive growth in FY '25. Next, I'd like to provide an update on our share repurchases. In December, I outlined our intentions of executing a series of accelerated buybacks for the balance of the $2.5 billion repurchase authorization in FY '24. I'm happy to say that we're ahead of schedule with $825 million repurchased in Q2. This brings our year-to-date repurchase amount to 10.4 million shares for $1.3 billion for an average purchase price just under $127 per share. We fully anticipate completing the remaining $1.2 billion on our current repurchase authorization in FY '24 and we'll continue to opportunistically optimize our repurchases. With the plan in place and progress to date, I expect WASO to be in the range of $123 million to $126 million for FY '24 and approximately $110 million to $113 million in FY '25. On the next slide, in summary, for FY '25, I'm excited about the underlying momentum across our diversified portfolio, and I'm confident that we're well positioned to drive multiple paths of growth in FY '25 as a result of the following: consolidation of share in the renewable energy space, expected recovery of the semi-cap end market, confirmed market share gains with multiple existing customers, new programs booked with new customers, and I am particularly excited about our silicon-to-solution strategy, which will help accelerate the infrastructure that will be required to fuel the AI and machine learning macro trend in the market. This is borne out in the continuing mix shift of our networking and storage end market where we continue to replace legacy lower-margin networking equipment with higher-margin AI-driven equipment. On top of all this, when you consider our optimized cost structure, we are well-positioned to expand core margins to more than 5.7%. In addition, our accelerated share repurchases and expected lower net interest expenses give me confidence in our ability to deliver core EPS of $10.65 in FY '25. In my view, Jabil has not just diversified but also significantly more resilient than we were several years ago due to our intentional efforts to invest and align our resources with areas in key end markets, which offer higher returns and multi-year secular growth opportunities.

Thank you, Mike, and thanks to everyone for joining us today. Fiscal '24 was always going to be a transitional year for Jabil, one of which we've successfully completed the largest transaction in the company's history with the mobility sale and its subsequent efforts by our teams to optimize our footprint and cost structure for the go-forward company. For this transaction and the optimization of our footprint were anticipated, the end market slowdown was not. As I have stated previously, the key attribute of our model is agility and our ability to quickly react and effectively absorb changes in revenue. At Jabil, we obsess about operations, working tirelessly to ensure that what is within our control, we control well. Managing our factories to absorb such a March slowdown does not happen by chance, so it's pleasing to see our margins hold up. Additionally, dislocations like this provide opportunities for some consolidation and it's reassuring to make progress with customers who trust us to allocate more of their spend to Jabil. In tandem with our focus on operational execution, we have been intentional in how we've shaped our commercial portfolio. The closing of the mobility deal was not a one-off event, but part of a process where we look for aligning our capabilities current and future with markets exhibiting the desirable characteristics of long-term secular growth at appropriate margins and cash flows. The result of this allows us to help simplify the lives of our current and future customers while making appropriate returns. For example, in our recent history, this has seen us transition from low-tech electronics and automotive to EV and autonomous driving systems, including optical cameras. From PCBA manufacturing and health care to precision machining of customized implantables, from build-to-print servers to highly configurable AI data center racks, from simple network switches to liquid-cooled accelerated switching supporting AI applications and from build-to-print in the telco space, starting a seat at the table, as we look to optimize our advanced packaging value chain for silicon photonics across multiple end markets. In short, we are continuously realigning the company to ensure we are ready to support the future needs of our customers. In addition to the mobility deal, another couple of proof points were evident in the quarter. We are proud to have been awarded a new video security and optics business with Motorola Solutions, including two highly competent manufacturing sites in North America. This supports a focus on supply chain regionalization where we see significant benefits from the ability to leverage our global footprint coupled with the advantage of being domiciled in the U.S. And in the AI data center infrastructure space, we are building low and medium voltage switchgear to support proliferation of AI data centers. We were awarded a liquid-cooled accelerated network switching program, which will ramp in fiscal year '25. While already, we are seeing the benefits of the addition of the Intel Silicon Photonics team with multiple wins in the pluggable transceiver space. As I think about exiting this year as a more optimized company, coupled with the numerous opportunities across our commercial portfolio, I'm confident in our ability to expand margins year-on-year while also delivering core EPS of $10.65 and free cash flow in excess of $1 billion. Note that in modeling fiscal year '25, we anticipate total revenues similar to fiscal year '23 levels, excluding the mobility divestiture. Importantly, we expect the mix to be much improved as our business continues to trend toward markets benefiting from long-term secular trends. In closing, in the last 90 days, I have had the privilege of spending time with multiple customers and internal organizations, including the executive team at Motorola Solutions, as we celebrated the new award. In addition to the Jabil team from Retronix, Procurability and Intel and with our teams in Asia as we celebrated Chinese New Year with a long-held Jabil tradition. While in Asia, it was also my honor to accept a Shingo prize awarded to our health care site in Shanghai, the largest med device site to receive this award in the last 15 years. As I reflect on all of this, I believe it further demonstrates that in addition to having the right capabilities and being in the right end markets, we also have the right team to buy their actions every day, strengthen our unique global culture. All of this puts us on firm footing for fiscal '25 and beyond.

Thanks, Kenny. So there was a lot here today. And in closing, I'd like to quickly summarize some of the key messages. Our second quarter results and our fiscal '24 outlook are largely in line with the guidance we provided back in December, with the exception of the impact from two specific end markets, including renewable energy and 5G wireless. And despite our lower outlook for '24, positive demand signals in the market, along with new wins, higher core margins due to mix shift and the accelerated buybacks from the proceeds of the mobility transaction give us confidence in fiscal '25 which is why we chose to maintain our $10.65 core EPS target. Thank you for your interest in Jabil. Operator, we're now ready for Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Steven Fox with Fox Advisors.

Hi. Good morning. Two questions from me, if I could. I guess, first of all, on the cuts within 5G and renewables programs. Can you give us a sense for why you think this is the last time you're going to have to come back and cut those numbers? Like, what are the indications, not just through the fiscal year, but through maybe the calendar year from customers on that front? And then secondly, on the better margins that you're targeting now, I understand the mix shift, but maybe a little bit more color on like the biggest mix shift drivers if we exclude the mobility math from that? Thanks.

Hi, Steven. Thanks. Good morning. Yeah. Let me take that, the question on demand. I mentioned in Q1 when we've seen the broad-based demand reduction that we've got a process where we're pretty intimate with our customers in terms of their forecast, looking at inventory and inventory in channels. We called that right across all of our end markets with the exception of the 5G telco space and renewables. And there's a couple of specifics there. So Mike mentioned the India issue here, and I think what we see here is that although we said there was a substantial pullback. In effect, what happened was the rollout stopped with basically no input from the Reliance in this instance. So when we look at that, there's no indication of that and basically, we've baked into our number now going forward. So we're comfortable that everything else in the telco space, we've seen and we understood. This was just a gotcha in India. We're not forecasting or expecting that to recover in this year. So we think we're pretty safe there. In the renewable space, again, we've been working with the customer through calendar Q4 into Q1. And what we decided to do there is that basically, the inventories in the channel, and it's not going to be sold through. So we've reduced the build plan; they’ve registered what they're going to ship. And what we're seeing is that the inventory in channel now is now reducing. We haven't forecasted a covering that this year. We have been very, very conservative. Also, just as we look to '25, we've been very conservative, and we've modeled those run rates going forward into '25. So when you look at what we're talking about in '25, we don't expect these two end markets to recover. So we think we've been appropriately conservative.

Hey, Steve. The mix shift significantly impacts us. We've transitioned many of our legacy networking and storage operations to higher-margin AI-related business. Although AI's contribution in the cloud space isn't immediately visible in the revenue line due to the consignment effect, the volumes have increased significantly in that area. This shift in mix is contributing positively to our margins. Additionally, we've implemented extensive cost optimization measures. Earlier this fiscal year, we mentioned a stranded cost and footprint optimization restructuring, and we are now seeing the benefits of that in the second half of the year. Q2 was a transitional quarter for our cost optimization efforts, but improvements are unfolding. We've also managed to recover some costs from our customers despite a decline in revenues due to the abrupt nature of the cuts. Combined with the anticipated ramps in Q3 and Q4, we don’t need those ramps to be as high, especially since they typically offer lower margins during the initial quarters of revenue growth. All these factors give us strong confidence. We initially projected a margin of 5.3% to 5.5%, but we've increased our expectations beyond that to around 5.6%, and we feel very positive about this outlook.

I have a follow-up to that, Steve. We've been discussing this, particularly with you. Slide 17 provides a clear visual representation of our confidence in maintaining robust margins over the long term. Looking back three to five years, we primarily operated in the server space. Now, we are vertically diversifying into areas like rack assembly, which has been immensely successful for us. We've transitioned from legacy enterprise switching to accelerated switching that supports AI, evidenced by recent awards we've received. We are also benefiting significantly from the Intel deal we just finalized, after which I met with the Intel team in Singapore in January. They have made an impressive impact, which is encouraging for us. Additionally, we're offering products like CDUs, liquid-cooled racks, and we're now venturing into low voltage switchgear and rack power distribution, which are markets we previously did not engage in. We are evolving from being solely a server player to generating multiple revenue streams in this area, especially as parts of the data center become disaggregated. This transformation gives us confidence in our strategy. When I mentioned that we're refining the company, I meant that we are leveraging our historical strengths and actively listening to our customers to discover additional value-added opportunities. This approach allows us to help them reduce costs while also increasing our margins. I believe this strategy supports our goal of growing and sustaining our margins in alignment with our customers' needs for the long term.

Great. That’s all very helpful. Thanks for that answer.

Thank you. Our next questions come from the line of Ruplu Bhattacharya with Bank of America.

Hi. Thank you for taking my questions. I was trying to count how many times you mentioned AI in your prepared remarks, and then I just lost count. So needless to say, AI is a meaningful driver for demand in different end markets. Mike, is there a way to quantify how much revenue will come from AI over the next year or what the margin impact would be? And Kenny, can you delve a little bit more into what you're doing in the cloud business? What is Jabil's competitive advantage? A lot of people are going into AI in the data center. So how do you think your competitive advantage stands against others and how do you see your cloud business revenues growing over the next couple of years?

Hey, Ruplu. Just to be clear, I said AI 21 times in my reports, so I did count. On the AI piece, so if you look at my prepared remarks, Ruplu, I did talk about the AI revenue. I think we're going to grow by about 20%, 25%. We're about in the $4.5 billion, $5 billion range, we're going to be north of $6 billion in FY '25 and that's across multiple end markets. Obviously, as Kenny mentioned, we'll be playing in the cloud data infrastructure space. We play in areas such as network switching. There's a whole bunch of business that was switching from or replacing from our legacy network business to AI-related business. Sort of it's spread out, particularly in those two line items when we call them out on our revenue chart. But overall, about $6 billion plus, we actually feel that will continue to grow in that 20%, 30% range over time as this proliferation of AI across different end markets just continues to expand. So it's starting off where you expect it to start in the cloud space. And then as you work around the cloud space, that will gain more momentum. And then as you go forward, and I'm talking here two years out, even that would spread into all our other end markets as well because all that we do is mainly hardware and all hardware will benefit from the AI proliferation.

Let me address your second question about Jabil's competitive advantage. The growth in this area suggests that there will be ample opportunities for many people, which is positive. When we assess our competitors, it appears that there is sufficient work available. Our approach is to view the industry from our customers' perspectives and simplify their processes. Data centers require silicon photonics transceivers that can handle power and switching, as well as servers and rack assembly. We observe that as customers add suppliers, their operations become more complex. Therefore, having a reliable supplier that can offer multiple services is beneficial for them. For instance, if a provider can supply pluggable transceivers but not line cards, it creates complications when integrating the optical device onto the line card. We are able to provide both solutions, which strengthens our position. Our goal is to expand vertically and integrate more services, an approach we've also seen in the automotive sector; Mike referenced the cameras we manufacture in that industry. Additionally, our global presence allows us to utilize best practices worldwide, and being based in North America has proven advantageous for secure supply in the long term. Overall, we believe we are well-positioned, and our main task is to execute effectively. We are optimistic about the long-term growth prospects in this sector.

Thank you for your response. I would like to follow up. This is the second consecutive time you've lowered your full-year guidance. Previously, you reduced revenues by $2.5 billion, and now, excluding the $400 million from the mobility sector, the reduction appears to be around $2.1 billion. My question is similar to the one I had last time: what gives you confidence in your guidance, and how can investors trust that you won’t lower your expectations even more for fiscal 2024? For instance, if renewables underperform, could it deteriorate further? Also, Mike, regarding next year, you mentioned several factors for margin improvement. What could potentially hinder that progress? What are some risks that could affect Jabil's ability to achieve those margins, and what should we be cautious of? Thank you for addressing my questions.

Let me take a step back, Ruplu, because we’ve thought about this a lot. Our relationships with customers are usually long-term, in some cases spanning multiple decades. We have a strong partnership, working closely together. We share forecasts and monitor inventory, so we’re closely connected. We have team members on-site, including business development staff and planners, who are part of this collaboration. This process is not just top-down; it arises from the ground level. I understand your question about Q1, where we observed a broad-based reduction. Looking ahead to Q2, the trends we anticipated for most of our markets are coming to fruition, which gives us confidence. Unexpected developments can occur, such as the sudden halt in radio deployments in India. In the renewable sector, we’ve engaged with more customers than we had six months ago. However, the pace of inventory rollout has been lower than anticipated, leading us to significantly adjust our projections. Overall, we believe our other business areas are holding steady, and we feel we are at a low point. I also want to emphasize the importance of focusing on what we control. Historically, during similar downturns, our earnings per share have dropped by 40% or our margins have decreased by over 100 basis points. We are actively working to enhance our company’s resilience and robustness. Despite difficulties in some markets, our businesses have shown remarkable resilience. My message to investors is that unexpected events may occur, but we are improving our margins, and an EPS of $8.40 reflects that our company is more robust than it has been in the past.

And Ruplu, I'm going to answer your question in a slightly different way than you were at it. Obviously, you asked about the risk and what can go wrong and why the margin story holds good for us. So let me just try and answer it by talking about the $10.65 a little bit. Because all of that is factored into our $10.65 guide. Why do I feel so strongly about that particular $10.65 number? Before that, let me just give you some building blocks. So if you look at what our interest costs this year will be in the high 200s. We expect next year to be in the mid-$200 million. So if you take an interest number of about $250 million for the building blocks there, if you take WASO, we will have done substantially the $2.5 billion will be completed by FY '24. In FY '25, we'll continue a more normalized run rate of buyback. So I expect WASO to be about $110 million to $113 million in FY '25. Now based on these two numbers, if you take the incremental income that's needed to make $10.65, the numbers are around $130 million to $140 million of incremental income. I talked about some of the end markets, how we're sort of benefiting from some other macro trends that are coming into play right now. I talked about AI; I talked about the different end markets within storage, in cloud, et cetera, where we're seeing this whole AI proliferation. And that alone, as I mentioned, is about $1 billion to $1.5 billion incremental revenue, net revenue, I should add as well, sort of net of any consignment effect that FY '25 presents. We've talked about I mentioned automotive, what we're seeing for FY '25 and our assumption is not based on end market growth. Our assumption is based on new program wins. We're talking about wins that we already have under the belt. We've already booked those and it's just a matter of delivering those next year, obviously, but not expecting some big miracle layer for the end market to change substantially. If it does, it will actually be an opportunity for us. But right now, if you just assume a 10%, even in this bad environment in FY '24, we're close to 10%. So there's no reason to expect automotive to be substantially lower than 10%. And then if you take health care and maybe a 5% growth, again, it's a very modest growth. If you add up this AI, automotive and health care alone, that's about $2 billion of revenue. You're talking about 5% to 6% margin, even more if you get leverage out of it. So at 6%, you're talking $120 million of that $130 million, $140 million incremental income that I mentioned is needed for the $10.65. It's already there in just these three end markets and the balance of all the end markets. And I'm talking about semi-cap, which, by the way, is showing very strong signs of a recovery that's coming. It's not here, but a lot of customers have changed the way they talk about their own businesses, and that's changing quite a bit in the positive direction. So we do expect not this year, we're not talking about calendar year '24. But in calendar year '25, we do expect very high probability of sharpish sort of recovery there. Renewables, totally agree, it's slowing. Digital print and retail, steady Eddie, and then connected devices as the basis in FY '24 is so low that even a small little increase there you certainly see the $130 million, $140 million of income that we're talking about is not difficult to get to. And then if you look at the margin play, obviously, there’s mix going on, this mix shift that we continue to talk about. And the cost optimization, you’ll also have a full year impact of our cost optimization efforts that we’ve undertaken in FY ‘24. So I hope I answered your question from a risk perspective. Look, the risk is very low. If you look at – if you break down the individual components of what we’re talking about for FY ‘25, the $10.65 sounds highly achievable.

Okay. Thanks for all the details. Appreciate it.

Thank you. Our next questions come from the line of Mark Delaney with Goldman Sachs.

Yes. Good morning and thanks for taking my question. The company mentioned an expectation to have about $6 billion of AI-related revenue in fiscal '25. Better understand how you're defining AI-related revenue? And then maybe also help us understand out of that $6 billion, how much is coming from data center and then how much are some of these other end market opportunities where you see some AI opportunities like health care?

Yeah. Hey, Mark. I would say that probably just over half of it is related to data centers, maybe slightly two-thirds, and the remaining amount would be optics and advanced switching. That's the general breakdown.

Mark, I want to add that when we look at our data center revenue, it's important to remember that it's net revenue, accounting for the consignment effect. Our gross volumes are increasing significantly, with growth rates around 25% to 30%. Although this isn’t immediately reflected in the revenue numbers, it will impact the margin positively as that’s where we’re adding value. Therefore, focusing solely on the revenue figure can be somewhat misleading; we need to consider the volume growth, which is indeed rising by 25% to 30% in that area.

Okay. That's helpful. But just to clarify, so would any rack for hyperscale or be counted as AI or does it need to have GPUs in it? Just trying to understand sort of the categorization of AI versus some of these other broader categories.

No, it has to have some GPU attached. Most of our business now has shifted from the legacy server business to AI-related GPU, predominantly in our cloud business.

We recently opened a new facility about six months ago that is primarily focused on GPUs in that area.

Helpful. My other question was on margins. Mike, you mentioned fixed cost recoveries is one reason for the margin resiliency in fiscal '24. Maybe you can help us speak to how secure the recoveries are? Is that something that you still need to go out and negotiate? And then maybe talk a little bit around your ability to still achieve a 6% EBIT margin over the longer term. Thanks.

Yeah. The recoveries are already done, Mark. It's not based on our future event. It's already agreed upon. Can you repeat your second question?

Your ability to get to the 6% EBIT margin in the longer term, which is something I think you said could be achievable. I don't think you put a specific time frame on it, but to what extent do you think you're still tracking to eventually get a 6% or higher non-GAAP EBIT margin? Thanks.

Right. So we will exit at FY '24 at 5.6%. We're being very sort of conservative by saying 5.7% plus for FY '25. I think getting to 6% is not five years from there. It's maybe a year or so away from FY '25. So we're getting closer and closer to that 6%. And I think the margin story is definitely in our favor right now. It's all the business that we're seeing. That is all higher margin mix shift.

Thank you. Our next question comes from the line of Melissa Fairbanks with Raymond James.

Hey, guys. Thanks very much. I was wondering, if we could dig into the expectation for health care. I know it's not quite as exciting as AI, but we've heard from some of your peers that capital equipment investment has been challenged recently I assume that's what's behind your lower full year outlook. But you actually found increasingly constructive about the overall business. Could you give us a little more color on what you're seeing there?

Sure, Melissa. When we break it down, we focus on medical devices, pharmaceuticals, and orthopedics. In the first half of the year, we expected some softer inventory digestion, but we anticipate recovery in those areas, particularly with pharmaceuticals and GLP-1 products showing strong performance. Our factories are running at full capacity to meet that demand. In medical devices, we're seeing a modest recovery, though it's still a bit soft but improving. Overall, we project the second half of the year to be 8% stronger than the first half as we manage inventory levels, and we feel confident about this growth. Additionally, Mike mentioned a 5% growth forecast for next year, and we believe we have sufficient opportunities to support this outlook moving forward.

Thank you. Our next questions come from the line of George Wang with Barclays.

Hey, guys. Thanks for squeezing me in. I just want to double click on the AI, you talked about revenue growing 20%, 25% kind of pre to north of $6 billion in FY '25. I just want to see if you can elaborate on the margin profile kind of within specific subsegments within AI. You talked about the GPU configurations, kind of the optics, switching transceivers power, are you able to rank order, at least in a high level how you think about margin structure in terms of taking order, which specific element within the overall AI envelope will garner the highest margin kind of vice versa.

So yeah, the AI piece, obviously, the different line items that we look at I said earlier, it's in cloud, it's a networking in storage. The margin is north of enterprise level margin. It's different. The rank order would be roughly sort of photonics would be the highest margin, AI switching gear would be next, switching and racks' configuration integration, etc. So overall, if you look at all these dynamics, the total margin plays north of enterprise margins. So again, that's what's giving us comfort for our margin in FY '24. That's what's giving us comfort for margins in FY '25 as well.

We have observed the significant players in the market and the increase in various capabilities. We are supplying other major cloud providers across a wide range of the capabilities we discuss. Additionally, I want to highlight what Mike mentioned. We have been working on enterprise switches for many years, and as that area becomes more commoditized, we have shifted our focus towards advanced switching technology that supports AI TPUs. This, combined with our efforts in optics, assures us that our margin profile is strong. I would also like to point out the investments we are making in data center infrastructure, which we had not historically pursued. We believe this presents a substantial profit opportunity for us in the long term.

Okay. Great. Thanks. That’s it for me.

You got it, George. Thank you.

Thank you. Our next questions come from the line of Samik Chatterjee with JPMorgan.

Hi. This is someone filling in for Samik Chatterjee. Thank you for taking my question. I wanted to ask if you could elaborate on the recent decline you’re noticing in the 5G sector. Is it related to specific customers or certain regions? Any additional details would be appreciated. Thank you.

Yeah. So what we see is we are seeing – and if you look at telco customers generally, pretty much all come out with a really, really soft outlook for calendar, we baked most of that in, but there is some continued weakness there and that’s North America and also across the world. The biggest impact in 5G was the rollout in India where, I mean, basically, the rollout stopped. So it’s paused. We don’t know when it’s going to restart. But there’s still a significant amount of radios that have got to be installed in the Indian market, so that demand doesn’t go away. It’s just paused. We are pretty much single sourced in India. We build those radios in our facility in Pune, which we found that facility and our company for 20 some years, so that performed really well. We’re doing a really nice job, and we’re just waiting for the gates to reopen and as we start to build and allow that and get that to be installed in the network, so that will come back. We just didn’t expect it to stop. I mean, completely stopped with no future demand we’ve taken the demand there for the balance of the year.

Thank you for your interest in Jabil. Please reach out to us if you have any further questions. Thank you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.