Jabil Inc Q3 FY2024 Earnings Call

Greetings, and welcome to the Jabil Third Quarter of Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Berry, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Jabil's third quarter fiscal 2024 earnings call. Joining me on today's call are Chief Financial Officer, Greg Hebard, and Chief Executive Officer, Mike Dastoor. Over the next few minutes, we will review our Q3 results, provide an update on current demand, and preview our seventh annual virtual investor briefing. 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 today's 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 31st, 2023 and 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'll now hand the call over to Greg.

Thanks, Adam. Good morning, everyone. It's a great privilege to be a part of the call today. I'd like to begin this morning by walking through our third quarter results, where the team delivered approximately $6.8 billion in revenue, $265 million above the midpoint of the guidance range on better-than-expected growth in our connected devices and networking and storage end markets. Core operating income for the quarter came in at $350 million or 5.2% of revenue, an improvement of 40 basis points year-over-year. Net interest expense for Q3 came in better than expected at $64 million. This was due to lower levels of inventory during the quarter, reflecting improved working capital management by the team. From a GAAP perspective, operating income was $261 million and our GAAP diluted earnings per share was $1.06. Core diluted earnings per share was $1.89, $0.04 above the midpoint of our guidance range. Now turning to our performance by segment in the quarter. Revenue for the DMS segment came in at $3.4 billion, $65 million above our expectations, driven by better-than-expected growth within our connected devices business, offset slightly by the lower-than-anticipated revenue in our automotive and healthcare businesses. On a year-over-year basis, our DMS segment revenue was down approximately 23%, driven primarily by the mobility divestiture. Core operating margins for the segment came in at 4.6%, 50 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 $3.4 billion, approximately $200 million above our expectations, driven by higher-than-anticipated revenue in our networking and storage end markets in the quarter. Compared to the prior year quarter, EMS revenue was down roughly 18%, driven mainly by lower revenue in end markets like 5G, renewable energy and digital print, offset slightly by good growth in cloud. For the quarter, core margins for the EMS segment came in at 5.7%, up 20 basis points year-over-year. Next, I'd like to begin with an update on our cash flow and balance sheet metrics. Inventory at the end of Q3 came in six days lower sequentially at 81 days. Net of inventory deposits from our customers, inventory days were 58, which was a quarter-on-quarter improvement of four days. As a result of the team's good working capital management in the quarter, our third quarter cash flows from operations came in quite strong at $515 million, while net capital expenditures totaled $100 million, resulting in $450 million in adjusted free cash flow during the quarter. In Q3, we repurchased 3.7 million shares for approximately $500 million, leaving us with approximately $700 million remaining on our current $2.5 billion share repurchase authorization as of May 31st. We remain fully committed to completing the share repurchase authorization by the end of FY '24. We exited Q3 with a healthy and solid balance sheet with debt to core EBITDA levels of approximately 1.2 times and cash balances of approximately $2.5 billion. And as a management team, we are fully committed to maintaining our investment-grade credit profile. With that, let's turn to the next slide for our fourth quarter guidance. For Q4, we expect total company revenue to be in the range of $6.3 billion to $6.9 billion. Core operating income for Q4 is estimated to be in the range of $365 million to $425 million. GAAP operating income is expected to be in the range of $285 million to $355 million. Core diluted earnings per share is estimated to be in the range of $2.03 to $2.43. GAAP diluted earnings per share is expected to be in the range of $1.40 to $1.88. Net interest expense in the fourth quarter is estimated to be approximately $67 million. And our core tax rate for Q4 is expected to be 20%. Before moving to our full year guidance on the next slide, I'd like to provide a brief update on our net interest expense and core tax rate beyond FY '24. We now anticipate interest rates to remain elevated and expect our net interest expense to remain at FY '24 levels in FY '25 and be approximately $275 million. And for core tax rate in FY '25, we anticipate our core tax rate will be impacted by Pillar Two global minimum tax legislation. We will be required to adopt this only in FY '25. We are evaluating the impact this will have. As we sit today, we anticipate our core tax rate in FY '25 to be in the range of 22% to 24%. Now moving on to full year guidance on the next slide. For the year, we continue to expect $28.5 billion in revenue in the face of what continues to be a very dynamic demand environment. Compared with our thoughts in March, our expectations for growth in our automotive and transportation business have softened further. In particular, the market in China has been impacted due to overcapacity, resulting in a surplus of cars affecting local demand there and new global EV platforms that we originally expected to begin launching in the next 100 days or so have now shifted out several quarters. On the healthcare side, we see softness in medical devices, which we expect will create a headwind to revenue in the near term. These declines were offset by strength in connected devices and our AI data center end markets, which today are reported across industrial, cloud and networking end markets. All other end markets are largely in line with previous expectations. Given this updated end-market outlook, let's move to the next slide to review our FY '24 guidance. We continue to expect core margins for the year to come in at 5.6%, a 60 basis point improvement over the prior year. We also expect to deliver EPS of $8.40 for the year. And importantly, we remain committed to generating over $1 billion in adjusted free cash flow this year. With that, I'd like to thank you for your time this morning and your interest in Jabil. I'll now turn the call over to Mike.

Thanks, Greg. Good morning, and thank you for joining our call today. Before I jump to my prepared remarks, a couple of comments. I am truly humbled by the trust placed in me by Mark and the Jabil Board. For the past 24 years, Jabil has been my professional home and witnessing the company's journey from $3 billion in 2000 to $28 billion is a true testament to the care we offer our customers. As CEO, I'm excited and carry a tremendous amount of gratitude to steward an amazing team. As Greg highlighted, the team has executed well in FY '24 amid a dynamic environment. Considering this, we divested our mobility business, a key strategic decision; we're capturing growth in the AI data center space, and we're working towards our commitment to repurchase $2.5 billion of our shares, all while dealing with end-market softness in renewables, EVs and semi-cap equipment, which we expect to be short-term in nature. Yet when you take a step back and put it all together, the company remains resilient and on track and we expect to deliver on key metrics, including 5.6% core margins and strong free cash flow in excess of $1 billion on $28.5 billion of revenue. More importantly, we remain well-positioned to benefit from many of the world's powerful trends in areas like AI data center infrastructure, healthcare, pharma solutions and automated warehousing, to name a few. At the end of the day, the world needs complex manufacturing to enable innovation in nearly everything we do in our everyday lives. Jabil is at the forefront of providing solutions around a rapidly evolving technology landscape, with complex supply chains in an ever-changing geopolitical environment. As a management team, it's incumbent upon us to ensure we're focused on the right end markets, with the most innovative customers, thereby delivering incredible solutions. And I think it's safe to say we're right in the middle of that ecosystem today. Moving ahead, we'll continue to reshape our diversified portfolio and remain focused on growing new and existing value-added businesses, driving margins and generating free cash flow. Let me share where I've been spending my time over the last six to eight weeks. I've been focused on our customers, our investors, our suppliers and our people. Some of the key takeaways are as follows. From a structure standpoint, I've chosen an organizational approach that has served us well over the last decade with an intense focus on speed, precision and solutions. This focused approach, I believe, targets our ability to serve each distinct market effectively by creating domain expertise in our core areas and better positions Jabil for growth. From a capital allocation standpoint, we will remain committed to returning value to our shareholders by prioritizing organic investments in our business and aggressively pursuing share buybacks at attractive valuation levels. This balanced approach ensures that we can reward our shareholders while simultaneously investing in next-generation capabilities. All the while, we will take care of our customers and suppliers while treating our people here at Jabil with respect. Turning to the business side of things. As you recall, on May 20th, we chose to rescind our FY '25 guidance. And it's worth noting there was no singular issue that led to that tough decision, but rather three key factors. For starters, many of the end markets we serve remain soft and the timing of recovery in these end markets remains unclear, particularly in EVs and semi-cap equipment. We also expect to accelerate reshaping our portfolio away from end markets and geographies with less attractive risk and financial outcomes. As a result, our revenue in FY '25 may be negatively impacted by approximately $800 million. However, this will set us up to be a much stronger company in the years to come. And lastly, in FY '25, we now expect interest expense and the tax rate to be higher due to a push-out of interest rate cut expectations and the global minimum tax that Greg noted earlier. Over the next couple of months, the management team will be spending a lot of time reviewing our plans for FY '25 and beyond, and in September, I fully anticipate providing a full year outlook per usual with our normal color and commentary surrounding our strategy, the end markets we serve and our anticipated capital allocation methodology for the year. From an end-market standpoint, you will hear how we've aligned technology-driven capabilities in our intelligent infrastructure business to help not only hyperscalers but also silicon providers accelerate their own technology. Our manufacturing model leverages our automation capabilities to navigate the rapid growth in AI demand, how we're prioritizing growth in certain end-markets like healthcare and energy infrastructure, how we're helping retailers automate solutions in both the retail environment as well as warehousing to robotics, we'll also offer color on the businesses we anticipate deemphasizing in the future and of course, we'll do our best to provide our expectations around our roadmap for the timing of recovery in key areas like renewables, semi-cap, electric vehicles, connected devices and 5G. And when you put this all together, we'll describe how the seasonality has changed and how the capital intensity of our business has improved and the subsequent free cash flows we will generate, given our new mix of business. I am confident that the roadmap we develop will propel Jabil towards an even brighter future. I can assure you that all of these actions will remain squarely focused on driving margins higher in the long run and generating robust, sustainable cash flow, all while taking care of our customers, suppliers and people. Jabil's success is not the result of individual efforts, but rather a collective achievement of our entire team. Looking ahead, I'm excited about the long-term trajectory of the company. We have a strong track record of talented and dedicated leadership team, and a clear vision for the future. Together, we will continue to drive innovation, deliver value to our shareholders and execute for our customers. Before handing the call over to Adam, I would like to take a moment to say thank you to the entire Jabil team for your commitment and dedication to our customers, communities and to each other. Thank you for your time and for your interest in Jabil. I'll now hand the call over to Adam.

Thanks, Mike, Greg, and congratulations to each of you on well-deserved new roles. I look forward to working alongside both of you. Before we move into our Q&A session, I'd like to take a few minutes to broadly summarize some of our key messages you heard today. First off, our fiscal '24 outlook is on track with the update we provided in March and subsequently reiterated in May. Notably, this includes $8.40 in core EPS, 5.6% core margins and $1 billion-plus in free cash flow. And as we move through Q4, we fully anticipate completing the balance of our $2.5 billion share repurchase authorization. As we turn our attention to the end markets, we remain fully committed to our year-over-year growth plans in our AI data center end markets in both fiscal '24 and '25, which today are reported across our cloud, networking and industrial end markets. At the same time, we're actively evaluating our portfolio to see if there's any opportunity to further optimize, as Mike just described. And for early modeling purposes, please keep in mind that our seasonality in fiscal '25 will be reflective of the mobility divestiture. As such, our quarterly earnings progression will be more like that of our EMS business, where we typically earn 40% in the first half of the year and 60% in the second half of the year. Interest expense in fiscal '25, although rate dependent, is shaping up to be approximately $275 million. And our core tax rate is expected to increase from fiscal '24 to fiscal '25 as a result of Pillar Two global minimum tax legislation. And finally, and just generally speaking, Jabil remains extremely well-positioned to benefit from a recovery in many of the end markets that have proven to be headwinds in fiscal '24. And while the timing remains uncertain, the ultimate recovery will lead to solid revenue growth, further margin expansion and even more cash flow generation on an already installed capacity. We look forward to updating you on these matters and more at our seventh annual investor briefing, which is tentatively scheduled for September 26. Operator, we're now ready for Q&A.

Today's first question is from Ruplu Bhattacharya. Please go ahead.

Hi. Thanks for taking my questions. Mike and Greg, congrats on your new assignments. Mike, what do you see as the biggest opportunity for Jabil over the next year and what do you see as the biggest risk? And Greg, a similar question to you as CFO, what are your main focus areas for the next year?

Thanks, Ruplu. I’ve been the CFO for six years, and my primary focus has always been on margins, free cash flow, and utilizing that free cash flow for buybacks. We believe we are still undervalued, which is a significant aspect of our capital allocation strategy that will continue along with our emphasis on margins and free cash flow. We are in the right end markets, but there are some areas we are not currently in, and we'll be exploring those opportunities. Currently, we are experiencing some softness in certain end markets, but we expect these markets to recover in the long term. I'm not saying this recovery will happen in the next one or two quarters, as we have seen the recovery timeline shift further out. From an opportunity perspective, the key factor is the widespread adoption of AI in various sectors. As a hardware company, this demand for AI will necessitate hardware upgrades, and we're positioned well in the relevant end markets. I anticipate that the AI trend will eventually benefit us, although it may take a couple of quarters to see that materialize as the current focus is more on data centers. However, I expect this trend to expand across all the markets we serve in the long run. Regarding risks, I think the timing of the recovery is crucial. There are mixed signals both externally and internally about the pace of recovery, with some suggesting it might be slower than we had hoped and others indicating it could be alright. We plan to spend the next few months determining our approach, which is part of the reason we withdrew our FY '25 guidance. We will provide more detailed insights during our analyst briefing at the end of September.

Yeah. Hi, Ruplu, it's Greg. Just to reiterate some of the things Mike just said. Definitely expanding operating margins will be a key focus, continuing to generate strong free cash flows, as you saw quite a strong Q3 we had, and then return capital to shareholders. We continue to be super thoughtful on this and believe share repurchase is still a great use of our cash for Jabil.

Okay. Got it. Mike, you talked about AI. I mean when I look at things, AI is getting to be a very competitive space. And so how do you see Jabil's investments in AI trending over the next few years? And do you think margins on the AI side trend lower or higher than the rest of the business, given the increased competition?

I agree with your assessment. There is significant competition in this space. Currently, our focus in AI is primarily on server rack equipment. When we consider data center infrastructure, we are also addressing power, cooling, and value-added services related to these data centers. Although there may be a temporary slowdown in margins, we anticipate a recovery as we advance our AI data center strategy. Additionally, we are exploring related areas such as silicon photonics and OSAT packaging. We have a lot of initiatives in mind from an AI standpoint. While margins may not see a significant increase immediately, we expect them to dip and then rebound quickly.

Okay. Maybe I'll try and sneak one more in. You talked about some weakening of the auto and the healthcare space. And also on semi-cap, I think you've said that it's weaker than expected. When do you expect a recovery in these? And if revenues continue to be weak, what are some of the levers you have to continue to drive margins and free cash flow? I think you've said margins are a focus. So what are some of the levers you have on the margin and free cash flow side, given if revenues are weak? Thanks for taking my questions.

Certainly. In the auto sector, we're noticing some weakness, especially regarding China, where there's an oversupply issue. This situation is affecting our manufacturing both for local sales and exports, causing delays in the electric vehicle recovery process. For the semiconductor capital equipment market, we initially anticipated a full recovery by December 2024 or January 2025, but that timeline is now shifting. China remains a key player in this market, and while there is movement of inventory into China, much of it is from existing stock. We expect to see an impact from Jabil starting around mid-2025. As for margins, we believe these markets will eventually recover, and we are not in a severe recession that would necessitate shutting down facilities or cutting costs drastically since that would hinder us during the recovery. There may be some temporary margin effects, but our overall positioning will be strong once recovery begins. Currently, we are capable of managing revenues between $30 billion and $33 billion, but we anticipate that FY 2025 revenues will fall short of this range, leading to excess capacity. We prefer not to reduce capacity at this stage and instead aim to be prepared for the recovery while acknowledging potential short-term margin impacts, ensuring we are well-positioned for long-term success.

Okay. Thanks for all the details. Congrats again on the new assignments.

Thanks, Ruplu.

Thank you. The next question is coming from Steven Fox of Fox Advisors. Please go ahead.

Hi. Good morning and congrats, Mike and Greg on your appointments. I guess I had two questions. First of all, just following-up on those last comments, Mike, I mean the guidance for Q4 implies you hit that magical 6% operating margin number. So I'm just curious if you could put that number into context. You just described a lot of seasonality and some mixed markets. So, like, how sustainable is 6% as more of a Q4 number versus like something that's ongoing as you think out to next year? And then I had a follow-up.

Thank you, Steve. I believe there is definitely some seasonality that we experience in nearly every Q4, leading to higher margins. Adam pointed out that for fiscal year '25, we anticipate that the second half will outpace the first half due to our mobility divestiture. There are still some fixed cost recoveries in play, and when those recoveries occur without corresponding revenue, it does affect margins. I don’t think we will maintain a 6% margin; that’s not feasible in Q1. Historically, margins tend to decrease in Q1, remain steady in Q2, and then improve again in Q3 and Q4. So while the 6% margin includes some one-off factors and isn't sustainable for the first half, we expect to see similar seasonality in margins for Q3 and Q4 of next year.

Great. That's helpful. And then in terms of your prepared remarks, I guess there's one area I was hoping you could dig into a little bit. You mentioned with your second point, some reshaping geographically end-market is on the table now for next year. Can you just sort of expand on what you saw in your last six to eight weeks that makes you want to sort of, I guess, change strategy just incrementally a little bit? Thanks.

Sure. So, Steve, I've always been focused on margins and free cash flow. I think you've seen that over the last six years. We continue to prioritize margins and cash flow. If we see some level of accounts where one or two of these metrics don't shape up too well, we're looking at it from a reshaping our portfolio, sort of away from some of those end markets and geographies as well with less sort of attractive risk and financial outcomes. So it spread out a little bit. I would look at legacy networking as one of the areas where you see this, the legacy networking going down, you will see the AI piece replacing some of that. So you'll see an increase in AI, but you will see a little bit of a decrease on the legacy networking piece as well. Again, this positions us really well. So I'm not saying margins will jump up in '25 because of this. But over the long-term in FY '26 and beyond, the margin structure will improve along with better cash flows. I think Greg talked about free cash flows coming in really strong in Q3. We continue to be focused on free cash flows going forward because that's where we think the valuation lies is in the free cash flow.

Great. That's helpful. Thank you.

Thank you. The next question is coming from George Wang of Barclays. Please go ahead.

Guys, congrats on the new role. So I have two parts. Firstly, you mentioned the 3Q driven by connected devices and the networking storage, you also raised the full year forecast subsequently for the two segments. Just can you talk about kind of what's driving better kind of results and outlook for the connected devices and networking? Just, is this a kind of industry growth or kind of share gains?

I think it's probably neither of those. It was a little bit of conservative forecasting from our perspective. If you see connected devices over the last maybe a couple of years, post-COVID, it's been a little bit down and we've always sort of tried to make sure that our forecasts are accurate. In this particular instance, the numbers came in, I don't think we're seeing a big jump-up in the end-market, but I think the whole impact in Q3 was mainly because of the conservative forecasting that we sort of anticipate.

Got you. Just a quick follow-up, if I can. I just want to confirm, is it still $6 billion AI revenue for FY '25? You guys talked about in the prepared remarks, you didn't really change the forecast. So I just want to confirm, it's still $6 billion. But also like I just want to hone in on the power and cooling, you guys talked about some of the value-add. Obviously, power cooling has been a massive shortage with higher margins. So can you talk about your differentiation and some of the initiatives on the table from Jabil's standpoint to capture the kind of inherent sort of shortage and the kind of the demand associated with power and cooling in the data center?

Let me address the power and cooling question first. We are observing that legacy data centers are undergoing retrofits. During this process, we are exploring ways to provide services to data centers, specifically from a cooling distribution unit perspective. In terms of new installations, older systems tend to use liquid to air cooling, while newer setups are moving towards liquid to liquid cooling. We have the internal capabilities to support this transition, and we plan to pursue smaller, capability-driven transactions in this area. The main goal is to enhance our services related to server rack integration and the overall infrastructure of data centers. I believe this will serve as a significant differentiator for us.

Okay, thank you.

Thanks, George.

Thank you. The next question is coming from Matt Sheerin of Stifel. Please go ahead.

Good morning, everyone. I wanted to explore your comments on networking and the strength of your customer base. You mentioned potentially moving away from some legacy business, which I assume refers to the traditional OEM market. I understand that you have a growing customer base in data centers and hyperscale, especially on the server side. Are you also collaborating with these customers on network products like switches? Can you clarify what you are doing for these partners in networking?

That's a great question. You're correct that we're moving away from the legacy aspects of networking, which are being replaced by advanced AI and liquid-cooled switches. We are actively involved in this shift. If you look at our silicon photonics segment, we're focusing on the entire transceiver business that aligns closely with this area. Overall, consider our networking and storage efforts as a transition from outdated networks to a new era of networking and switching, where we will heavily invest in the new technologies. However, the legacy business will decline somewhat during this process.

Okay. And then on the networking side, we're seeing some of your peers have an ODM model where they're actually doing custom work for customers and others are building to customers’ design. Are you going through both routes or mostly on the more traditional EMS side?

I think it will be a hybrid approach. We're not going fully ODM. At this stage, we will definitely continue in the EMS space. Historically, we've avoided competing directly with our customers, and we plan to maintain that stance, Matt.

Thank you. Regarding the balance sheet and your forecast for next year's net interest expense, could you discuss your capital allocation strategy? I know you have conducted substantial buybacks, but why not reduce some of the short-term borrowings or debt to alleviate that? Additionally, while your inventory days have significantly decreased, they still remain higher than the levels seen post-pandemic. What efforts are underway to address inventory or working capital to lower that net interest expense?

Yeah. Hi, this is Greg. So yeah, I think there's a few parts to that question. I'd say first on interest expense and share buyback, we definitely look at the two combined and making sure we have the most effective EPS results from that. Interest expense, we do see rates continuing to stay elevated for most of the calendar '24 and into '25, so being conservative on that number. From a working capital perspective, I think we've been doing a really good job. We do see our debt inventory in the 55 to 60-day range. And we do see some cyclicality of that during the year and intra-quarter. So obviously, this quarter, we had a good number that hit. But one thing to remind you as well, we do have inventory deposits that do offset some of that pickup and we do just look at our gross inventory coming down. So, we're continuing to be very focused on net inventory and getting it down closer to 55, but there is some cyclicality on that. On the share repurchase, we are committed to completing our $2.5 billion share authorization in Q4. We do need a new Board authorization as we go into '25. So stay tuned for that. But looking to get our WASO into the 110 to 113 range by the end of FY '25.

And, Matt, if I can just add, provide some more color on the interest. If you go back to FY '23, so not this year, but previous years, our interest was in the range of $150 million. I think if you look over time, it was in that range. I'm not suggesting we go back to $150 million. Today, it's at $275 million. But as interest rates start coming down and we have a full-year impact of that more towards the end of our calendar year '25, you'll see interest start going down quite a bit as well because $275 million is not going to be the norm. It's going to continue to go downwards. It won't go back to $150 million, but a low-200s is highly possible and all of that just drops directly to the EPS line.

Got it. Okay. Thank you for that. And just if I can just sneak in a last question regarding the $800 million headwind you talked about for next year, most of that coming from end demand weakness. But is there a part of that also coming from deselecting customers, as you said, as you reshape the portfolio? Could you break that down for us?

Much of this is related to renegotiating with customers rather than simply selecting or deselecting them. The figure I mentioned was $800 million, which is part of our strategy. As I've noted previously, focusing on margins and free cash flow is central to our operations. We are in the process of restructuring our portfolio away from markets and regions that present less favorable financial and risk profiles. A significant factor in this is legacy networking. Essentially, we are recalibrating our numbers. Looking at other markets, they are not just experiencing softness; the anticipated recovery is being delayed further. Therefore, other markets will suffer declines, but no major adjustments are happening in that regard; the $800 million I referred to is likely a result of these adjustments. We can expect some revenue impact as the recovery timeline continues to extend.

That's very helpful to clarify. I would imagine that $800 million in revenue, given that margin and return profile, is below your company average. So, in other words, that would be accretive to the business?

Absolutely. I'm not suggesting that fiscal year '25 will experience significant growth due to this. I mentioned that we are positioned for revenues of $32 billion to $33 billion. However, our actual revenues will be considerably less than that. This means we'll have some overcapacity, which we will need when conditions begin to improve. It would be short-sighted to try to address our current additional capacity. Yes, there will be some margin improvement in these businesses from a company perspective, but keep in mind that we are facing a bit of an overcapacity issue as well. Consider this an opportunity; when the market rebounds, it will significantly impact our margins. We aren’t sure if this will happen by the end of '25 or in fiscal year '26, which is why we've requested additional time and retracted our fiscal year '25 guidance. We will provide more insight at the end of September as best as we can.

Got it. Okay. Thanks so much.

Thank you. The next question is coming from Mark Delaney of Goldman Sachs. Please go ahead.

Yes. Good morning, and thanks for taking my questions. First, a follow-up on the $800 million of revenue that the company is looking to deselect. Can you help us better understand what the margin profile is of that? I know you said it's below the corporate average, but is it just above breakeven, low single-digits, slightly below corporate average? Any more color on the EBIT margin associated with that $800 million would be helpful.

The margin is below the enterprise level, and it’s not solely about the margin. We also consider the free cash flow profile, as both metrics are essential for our success. One aspect we are analyzing is risk. Financial metrics must align, and we also need to account for risk in various global regions and end markets experiencing a downward trend, which is shifting our perspective. The margin, as I mentioned in response to Matt's earlier question, will be below expectations. Therefore, we shouldn't anticipate a significant increase in margins in 2025 due to this situation. There is some overcapacity affecting margins, which will take time to resolve. I expect to see an improvement in the margin towards the end of FY 2025 or even in FY 2026. Thus, we are looking at a mid to long-term return on this investment.

Helpful color. Thanks for that, Mike. And then my second question was around hybrids. You mentioned in the presentation that you have some ability to grow with hybrids, not just with BEVs. Can you double-click a little bit more, talk to us around where Jabil is participating in hybrids and to what extent you have the design wins that would support growth in hybrids as some of the traditional OEMs are planning to grow faster in hybrids over the next few years? Thanks.

I believe when discussing electric vehicles, my main point was that we are neutral regarding the success of either electric vehicles or hybrids. If you examine the areas we are involved in, such as software-defined vehicles, this technology is applicable to all types including combustion engines, hybrids, and electric vehicles. Our battery management systems are relevant for both electric and hybrid vehicles. Additionally, the connectivity aspects we offer also span across these three automotive categories. Furthermore, in the realm of automated driving, with technologies like optics, cameras, and advanced driver-assistance systems, we remain indifferent to which technology ultimately prevails. We are optimistic about the future of electric vehicles, acknowledging that they are currently facing some temporary challenges related to pricing and battery range. Once these issues are addressed, we expect electric vehicles to rebound. My overall message is that whether it’s electric vehicles or hybrids, there will always be some timing differences in our projects as we secure contracts in the hybrid sector. Nonetheless, the future growth of our electric vehicle business remains unaffected by which technology comes out on top.

Thank you.

Thank you. The next question is coming from Samik Chatterjee of JPMorgan. Please go ahead.

Hi. Thanks for taking my question. This is on behalf of Samik Chatterjee. I wanted to ask about your outlook on connected devices, networking storage, 5G, cloud, and so on. A significant amount of AI revenue is recognized in these markets early. Can you clarify how much of the increase in the outlook is attributed to AI compared to the traditional recovery in these markets? I also have a follow-up.

In the other end markets, Greg mentioned three that are currently influencing us from an AI perspective. For the remaining end markets, it's still a bit premature for us to assume any AI elements. However, it's clear that AI is on the horizon and will affect all these end markets. We anticipate hardware refresh cycles will occur across several of our end markets, but at this moment, we are not incorporating that into our assumptions. As we move forward, we'll begin to include some of those expectations. To directly answer your question, there is very little to no AI presence in any of the other end markets at this point.

Okay. And another one will be on operating expenses. So I believe since the revenues were quite higher than the midpoint of the guidance this quarter, but operating expenses, which is something which I believe drove the operating margins to be below the midpoint of guidance. So what exactly was driving the higher operating expenses? And what's your confidence on bringing this to track for strong 6% margin next quarter? Thank you.

Yes, Samik, we're observing a mix in recent trends. There is some seasonality involved, but it's primarily related to the mix.

Thank you. There's no questions.

Thanks, Samik.

Thank you. The next question is coming from David Vogt of UBS. Please go ahead.

Hi. This is Andrew on for David. I wanted to ask a question about your wireless business. As we've moved past the elections in India, have you seen any signs that that business might pick back up?

At this stage, not really. I think there's been a large-scale deployment of 5G already in India. There is definitely hope that they can monetize that and progress after seeing some returns. They are almost 75% to 80% rolled out. I don’t believe we have significant expectations of a recovery in India following the elections at this time.

Got it. And I just also wanted to follow-up on the comments about the softness you saw in the healthcare segment. I think you said it was in the medical devices part of that business. I'm just wondering if you could expand on what was driving that softness? Is it macro? What are you seeing there?

When we refer to softness, it's important to recognize that it's just one aspect among the various activities we engage in across the healthcare sector. If you examine the GLP-1 drugs, their performance is extraordinary, continually increasing. We are very well-positioned to operate within that area. However, there is an opposing impact affecting surgeries and medical devices. Nevertheless, we have numerous other avenues to explore, including diagnostics, orthopedics, pharmaceutical solutions, and other medical devices. Therefore, the impact is relatively minor. While Greg highlighted that this is particularly relevant for our fiscal year 2024, we are encountering some short-term challenges because of it. It's essential to remember that the GLP-1 segment will continue to expand, with capacity constraints being the main issue, as implementing that capacity requires time due to the extensive automation involved in the GLP-1 area.

Thank you.

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

That's it for this call. Thank you very much. If you have any further questions, please reach out. We will be happy to talk. Thank you.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.