Earnings Call Transcript - JBL Q3 2023

Operator, Operator

Hello, and welcome to the Jabil Third Quarter and Fiscal Year 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Adam Berry. Please go ahead, Adam.

Adam Berry, VP of Investor Relations

Good morning, and welcome to Jabil's third quarter of fiscal 2023 earnings call. Joining me on today's call are Chief Executive Officer, Kenny Wilson; and Chief Financial Officer, Mike Dastoor. Please note that today's call is being webcast live, and during our prepared remarks, we will be referencing slides. To follow along with the slides, please visit jabil.com within the Investor Relations portion of our website. At the conclusion of today's call, the entirety will be posted there for audio playback. I'd now like to ask that you follow our earnings presentation with the slides on the website, beginning with the forward-looking statements. During this conference call, we will be making forward-looking statements, including among other things, those regarding the anticipated outlook for our business, such as our currently expected fourth quarter and fiscal year net revenue and earnings. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in the annual report on Form 10-K for the fiscal year ended August 31st, 2022, and other filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. With that, I'd now like to shift our focus to our third quarter results, where the team delivered approximately $8.5 billion in revenue at the top end of our guidance range. Core operating income for the quarter came in at $404 million or 4.8% of revenue. This is up 60 basis points on a year-over-year basis. Net interest expense in the quarter came in better than expected at $75 million, reflecting lower levels of inventory during the quarter, resulting in better working capital management by the team. From a GAAP perspective, operating income was $375 million and our GAAP diluted earnings per share was $1.72. Core diluted earnings per share was $1.99, a 16% improvement over the prior-year quarter and towards the upper end of our guidance range. Now turning to the segments. Revenue for the DMS segment was $4.35 billion, an increase of 13% on a year-over-year basis, driven by strength in our Automotive and Healthcare end markets. In particular, it's worth highlighting our Automotive business, which grew approximately 60% year-over-year as the team performed extremely well as volume, content, and brands continue to expand. Core operating margin for the segment came in at 4.1%, 30 basis points higher than the same quarter from a year ago, but down 50 basis points sequentially as typical given the normal seasonal pattern within our Mobility business. Revenue for our EMS segment came in at $4.1 billion, down 8% year-over-year and in line with our expectations. Also as expected, we saw a revenue shift in our 5G Wireless and Cloud business, driven by our previously-announced move to a consignment model for certain components within that end market. It's also worth noting that our Industrial business driven by global demand for renewable energy increased by approximately 30% year-over-year. For the quarter, core margins for the EMS segment were an impressive 5.5%, up 90 basis points year-over-year and 40 basis points sequentially, reflecting strong growth in Industrial and the aforementioned shift to a consignment model. Next, I'd like to begin with an update on our cash flow and balance sheet metrics as of the end of Q3, beginning with inventory, which saw a great improvement sequentially to 84 days. More importantly for us, net of inventory deposits from our customers, inventory days were 62 in Q3, an improvement of seven days sequentially. Our third quarter cash flows from operations came in at $468 million, while net capital expenditures totaled $212 million, resulting in $256 million in free cash flows during the quarter. In the quarter, we repurchased 1.9 million shares for $154 million, leaving us with $821 million remaining on our current repurchase authorization as of May 31st. With this, we ended the quarter with cash balances of approximately $1.5 billion and total debt to core EBITDA levels of approximately 1.2 times. In summary, the team delivered another impressive performance in Q3. In a moment, I'll turn the call over to Mike and Kenny to provide some additional thoughts on our performance in the quarter and update our outlook for fiscal 2023. But before I hand it over, I'd like to announce our fourth quarter earnings call and 6th Annual Investor Briefing scheduled for September 28th, where we'll lay out our strategy and our financial plan for fiscal 2024. Please mark your calendars. Additionally, from an Investor Relations perspective, we're going to be active in fiscal 2024 with meetings, factory tours, and end market deep dives, where we plan to discuss and showcase some of the growth drivers that we feel support our longer-term expectations. Please stay tuned. And thanks for your time today. It's now my pleasure to turn the call over to Mike.

Mike Dastoor, CFO

Thanks, Adam. Good morning, everyone. Through the first nine months of fiscal year, the team has posted solid top-line growth, improved core operating income by more than twice the pace of revenue growth, and grew core EPS by 16%, while also expanding core operating margins by 30 basis points, a solid performance by the team. As you heard from Adam, our growth and improved profitability this year continues to be driven by areas of our business benefiting from secular growth like electric vehicles, healthcare, renewable energy infrastructure, and cloud. All-in-all, our solid performance year-to-date gives us excellent momentum as we enter the final quarter of FY 2023. With that, on the next slide, you'll see our fourth quarter guidance. For Q4, we expect total company revenues to be in the range of $8.2 billion to $8.8 billion. At the midpoint, this anticipates DMS and EMS revenue to be $4.3 billion and $4.2 billion, respectively. Core operating income is estimated to be in the range of $424 million to $484 million. GAAP operating income is expected to be in the range of $400 million to $460 million. Core diluted earnings per share is estimated to be in the range of $2.14 to $2.50. GAAP diluted earnings per share is expected to be in the range of $1.96 to $2.32. Interest expense in the fourth quarter is estimated to be $73 million which is lower than we forecasted in March, reflecting better working capital management by the team. Moving to the next slide where I'll offer an update on our end market demand assumptions and how these translate to our FY 2023 revenue expectations. At a high level, our assumptions remain largely consistent with our March update. We continue to be conservative in our approach given the current macroeconomic dynamics and expect strong growth from our secular markets to be slightly offset by lower demand in some of our consumer-facing markets and in Semi-Cap. In our Automotive end-market, EV growth continues to be robust, limited only by the pace at which we can scale up production across multiple geographies with several OEMs. In Healthcare, the outsourcing of manufacturing trend continues to play out as we are seeing increased activity with interest from multiple OEMs exploring our capabilities. Growth expectations for our Industrials business have also improved since March, driven higher by renewable energy infrastructure. Specifically, we're seeing good growth in solar inverters, smart meters, energy storage, and power and building management solutions. We now expect our Industrials business to be up more than 25% in FY 2023. This growth has been slightly offset by incremental end market weakness in our Semi-Cap business. In summary, we feel the outlook for our business is solid and expect demand across many of our end markets to remain strong. We now expect revenue for FY 2023 to be $34.7 billion, up 4% year-over-year which is $200 million, about what we thought in March. Considering this updated growth outlook, let's now turn to the next slide, to get a view of our updated guidance for FY 2023. Notably, we see income coming through with the increase to revenue. We now expect to deliver core operating income of $1.71 billion, a year-over-year increase of approximately 11%, while holding core margins at 4.9%. This 4.9% represents a growth of approximately 30 basis points year-on-year. With the additional income, we are now anticipating core EPS will be $8.50. We remain committed to generating more than $900 million in free cash flow this year. Beyond FY 2023, we expect our secular markets to continue to drive growth. I also believe our margins will continue to expand with the combination of our positive mix-shift towards higher-margin end-markets and operational efficiencies driven by automation and internal use of AI and ML technologies. In summary, the team is executing extremely well. I expect our strong momentum to continue into FY 2024, although we remain cautious and vigilant on the near-term macroeconomic conditions. With that, I'll now turn the call over to Kenny.

Kenny Wilson, CEO

Good morning, and thanks for joining us today. As you heard from Adam and Mike, our business is in good shape and the team has executed well this year in what continues to be a dynamic operating environment. The success we are seeing across our business is a key proof point of our team's ability to leverage multiple capabilities across disparate end markets, as we continue to diversify our service offerings, underpinning our improving financial performance. Let's turn to the next slide where you'll see our updated outlook for fiscal year 2023. We continue to expect good year-over-year growth and operating leverage this year, which gives us the confidence to raise our expectations for core EPS by $0.10 to $8.50. At the same time, we remain highly focused on delivering more than $900 million in free cash flow. It also sets a firm foundation for further margin and free cash flow expansion as we look to fiscal year 2024. In fact, when I look at the growth in our business this year, it's worth highlighting that nearly 60% of our portfolio comprises markets with strong secular growth, specifically, electric vehicles, renewable energy, healthcare, and 5G and cloud. Our Automotive business continues its healthy growth rate as the team navigates multiple complex program introductions, increasing both our scale and addressable content per vehicle. Jabil continues to be extremely well-positioned to support our customers as they accelerate their transition to EVs in the coming years. And in our Industrial business, we are supporting customers as they navigate the rapid transition towards clean energy. Over the last several years, we've invested heavily in capabilities to support energy storage, energy conversion, and grid-level power management solutions, which are now being deployed across multiple months at scale. Although we are in the early days of growth in this space, as government policies like the Inflation Reduction Act in the US mature and scale, Jabil is extremely well-positioned to support our customers in the coming years. In Healthcare, we continue to capitalize on the trend to outsource manufacturing, and our credibility with some of the leading OEMs in this space has positioned us well for future growth. Another area that is increasingly coming into focus for us is in the AI and ML space. This has implications both on the growth side of our business across multiple end markets, but also has the potential to drive efficiencies across our internal processes and factory network. As it relates to our internal processes, we are capturing data and using the latest toolkits to help improve our operations. We don't view this as a new initiative. We know the next step in the continuous improvement path we've been on for many years. Our operating system naturally drives us to simplify, standardize, optimize, and automate processes, and this in conjunction with our enhanced ability to mine big data ultimately drives sustainable improvements. In September, the Jabil team will go deeper in all of these areas at our Investor Briefing. At that event, we plan to offer our fiscal year 2024 financial outlook as we continue to prioritize growth in core margins and cash flows. Specifically, we will lay out how we plan to increase revenue while also expanding core operating margins beyond 5%, and we plan to increase free cash flow by continuing to invest in growth. We provide another year of solid core EPS growth, and finally, provide an update on our capital return frameworks. In closing, I feel strongly that we have the right team, capabilities, and diversified portfolio to support strong momentum into the final quarter of fiscal year 2023 and beyond. And none of this would be possible without a thriving and unified Jabil culture that is as strong today as it has ever been. Thank you for joining us today and your interest in Jabil. I will now turn the call over to Adam.

Adam Berry, VP of Investor Relations

Thanks, Kenny. Operator, we're now ready for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question today is from Ruplu Bhattacharya at Bank of America. Your line is live.

Ruplu Bhattacharya, Analyst

Hi, thanks for taking my questions. Jabil has reported strong ROIC or return on invested capital over the past few years. It looks like over the past few quarters, it's been really strong. I mean, we calculate above 30% ROIC. This quarter was strong as well. Can you remind us what ROIC you target and what are the factors that will influence this going forward?

Mike Dastoor, CFO

Hey, Ruplu. Yes, the ROIC that we reported is in the 30% range. We normally target in that 25%, 30%. If you look at our working capital management, the way we use our invested capital, our CapEx, and all the factors that makeup invested capital, we're extremely disciplined on that. The returns are coming in. So, the numerator and denominator on the ROIC calculator or the ROIC calculation is actually quite robust and strong, and you can expect those levels of ROIC going forward as well, Ruplu.

Ruplu Bhattacharya, Analyst

Thank you, Mike. As a follow-up, I'd like to ask about the semiconductor capital equipment market. Currently, that market is weak, and your revenues are down compared to last year. However, this segment has margins that are higher than the corporate average. Do you believe you have sufficient capacity in this area to capitalize on an eventual market recovery? Additionally, what factors should be considered when deciding to increase capital expenditures in this segment?

Kenny Wilson, CEO

Hey Ruplu, it's Kenny, and good morning. Yes, that's a great question. I was just reading an article this morning about AI and its relation to the semiconductor space, particularly regarding wafer fabrication equipment and the expected demand increases through 2024, 2025, and 2026. Our perspective aligns with yours; we believe that while the market is currently slow, it should pick up likely in the second half of 2024 and beyond. We focus on diversifying all end markets, and we’re well-diversified in this market as well, from front-end to back-end. We have been expanding our global presence in anticipation of the demand surge expected later next year, and our team is well-prepared to support our customers as demand rises. We feel very optimistic about our position in the semiconductor capital equipment sector.

Ruplu Bhattacharya, Analyst

Okay. Thanks for all the details. And congrats on the strong execution in the quarter. Thank you.

Operator, Operator

Thank you. Next question is coming from Matt Sheerin from Stifel. Your line is now live.

Matt Sheerin, Analyst

Yes, thank you, and good morning. I wanted to dig a little deeper on some of the end market commentary, particularly on the consumer side. It looks like you actually took up your connected devices guidance a little bit for the year, but still down double-digits. Are you seeing any signs of consumer bottoming here or any outlook that gives you some confidence that you're going to get back to growth at some point?

Kenny Wilson, CEO

Yes, I believe Mike conveyed this effectively in his prepared remarks regarding our cautious stance on the near-term macro environment. We are extremely well-diversified in the connected devices sector, and while we experienced some unexpected positive outcomes in Q3, we still view the situation as unstable and inconsistent, and we think we are currently at a low point. Additionally, I would like to point out that we saw an increase related to COVID, and our performance is likely aligning with the levels we experienced in 2019, 2020, and 2021. That said, we have secured more than our fair share of opportunities in this area. Therefore, as the macro environment improves, we anticipate a rebound in connected devices. However, at this moment, our visibility is limited, and we are proceeding with extreme caution.

Matt Sheerin, Analyst

Okay. Great. Thank you for that. And I also wanted to just talk about the inventory reduction that you've seen and the general supply environment. I know you've had some headwinds certainly in Auto, EV, and some other markets, are you starting to see some signs of supply easing or is that still a gating factor in Auto or some of your other businesses?

Mike Dastoor, CFO

So, Matt, the inventory did go down by seven days sequentially, and the team has done a fantastic job. I think last quarter I had mentioned, I expect inventory to sort of bounce between 60 and 65 days in the short-to-medium term. We're seeing that coming through. In the longer term, we can take it down into the mid-to-high 50s, we're confident of that. But the supply chain remains patchy. It is sort of easing in a lot of areas, offset by constraints in others. So if you look at Automotive, you look at Semiconductors, you look at any power-related components, MCUs, all of them seem to be still in a constrained situation. So, we are seeing a mixed bag here on the supply chain side. The golden screw issue is still there. That's not gone away, although it's easing a little bit. So the best way to characterize this is, it is easing, but nowhere near normal yet. So, just something to keep watching, we're focused on it. And we'll continue to evolve out with the supply chain changes.

Kenny Wilson, CEO

I have a comment on that, just to support that of Mike's and just to give you some context. So, we are tracking, in the semiconductor space, the automotive semiconductors, and whereas 12 months ago we were tracking 1,200 components that were classed as golden screws for different assemblies, that number is probably half now as the number that we're managing, so it's down a lot, but it's still an issue for us that we continue to navigate. So, it's getting better for sure, but it's not gone yet.

Matt Sheerin, Analyst

Got it. Okay. Thanks very much.

Kenny Wilson, CEO

You're welcome.

Operator, Operator

Thank you. Next question is coming from Steven Fox from Fox Advisors. Your line is now live.

Steven Fox, Analyst

Hi, good morning. Two questions from me as well. First off, thanks for the extra disclosure on Industrial and Auto. On the Industrial piece, I was wondering if you could give us a little more color as to how Jabil is differentiating in those markets. I know some of the programs you mentioned you've been in for quite a while, what's sort of changed beyond the secular that's driving that 40% growth? And then I have a follow-up.

Kenny Wilson, CEO

Yes, so, thanks, Steve. So, firstly, we get through a process every year, Steve, where we will look at our long-range plan, and we plan out three, four, five years. So, this hasn't just suddenly appeared as an opportunity for us. We've been looking at this for a long time. Brent Tompkins who runs that group has been really, really focused on, we need to develop capabilities to support things like grid-level energy storage, which would be new for us just from a scaling perspective, but also leaning into the things we've done historically in the EMS side of our business. So, it's been a little bit over, like for example, we opened a new facility in Salt Lake City. So, that's been a few years in the making, it's pretty much full now, we're looking to expand that with multiple customers which is good. So, it's really just been leaning into our customers' roadmaps, looking at the capabilities that we have, augmenting that with other capabilities and being able to support things like, as we mentioned, grid-level energy storage which we see as a key area for us, smart power conversion, and energy management, so we're feeling pretty good that we've got the right capabilities developed to be able to support our customers for the foreseeable future.

Steven Fox, Analyst

Great. That's super helpful. And then just on the Auto sort of an opposite end of spectrum financial question, which is, the growth is tremendous and it doesn't seem to be hurting the overall margins at all. But can you give us a sense for how that's possible, and yes, I would imagine that these aren't mature margins whatever you're producing within the Auto sector when you're growing 60%, so just sort of maybe give us a little perspective on that. Thank you.

Kenny Wilson, CEO

Yes, Steven, the positive aspect of the Auto industry for us is its complexity, which makes it challenging for others to engage. You've seen our facilities, and our capability to introduce products on a global scale with consistent quality standards and complex automation is demanding. As you transition quickly, you can lean into the margins in the short term. When Mike mentioned the margins being below expectations during the ramp-up, they eventually normalize above corporate averages. We're beginning to navigate that, although we are also launching new products and expanding our presence. The way we deploy and ramp up new products globally will influence our margin effectiveness, but I believe we're managing it well. We are optimistic about our future. Additionally, we are actively working with multiple OEMs globally, which enhances our confidence in future opportunities.

Mike Dastoor, CFO

And Steve, I would like to add that the product lifecycle in the automotive sector extends to six or seven years. As we delve deeper into the automation advancements that Kenny mentioned, it truly aligns with long product lifecycle products like automotive. Operational efficiencies continue to enhance margins even beyond the effects of the end market. It's important to note that a longer product lifecycle correlates with higher operational efficiencies due to automation, which in turn raises margins.

Steven Fox, Analyst

Great. That's all very helpful. Thank you.

Operator, Operator

Thank you. Next question is coming from Shannon Cross from Credit Suisse. Your line is now live.

Shannon Cross, Analyst

Thank you very much. I wanted to talk a bit about the Healthcare business. Clearly, you've done well with the relationship and that business continues to grow. I'm wondering where you're seeing the best opportunity looking forward, because I would assume this will be a pretty solid grower given demographics and everybody needs, unfortunately surgeries as they all get older. So if you can just provide a bit more there and then I had a question on margin. Thank you.

Kenny Wilson, CEO

Hey, Shannon. Nice to hear from you. Yes, so we approach Healthcare with three kind of areas of focus. Firstly, we've got really good relationships with our current customer base and we look to expand that with whether it's in the med device, diagnostic, and pharma. What we see a lot in each of those areas is the need for connected healthcare, so those opportunities, whether it's continuous glucose monitoring or sensors have us well-positioned. We feel quite bullish about our ability to grow that. I will tell you also that healthcare moves at a slower pace than some of our other businesses. But we've got credibility and we're having more discussions about kind of B2B where there's opportunities for us that are not in the same scale as our JJ MV deal that we did, but we see opportunities come in for us in the longer term.

Shannon Cross, Analyst

Great. From a margin perspective, I understand that the mix of revenue significantly influences margin movement on a quarterly basis. As a follow-up to what Steve asked about in Auto, can you discuss some of the other margin changes you've observed within your sub-categories, such as networking or industrial as it shifts more towards renewables? This would help clarify what's happening behind the scenes regarding the margins. Thank you.

Kenny Wilson, CEO

Yes. Yes, sure. Let me take a swing at that and then Mike can help also. We are around, if I look year-over-year, we're up 60 basis points. And obviously, we think we've got 40 basis points for the year, so we're feeling pretty good about our margin profile and trajectory. We think that our Automotive and Healthcare should be above corporate averages. We think renewables will be, we mentioned that Semi-Cap being lower, we think that actually covers and that helps us. And we've done a lot of tidy up in the rest of our business to make sure that we're running good operations. If we run good operations, then especially operations, then we think we can give our customers good value. So, I don't know, hopefully, that's helpful. Mike, you got any comment?

Mike Dastoor, CFO

I just had one sort of macro comment. I think more than end market secular trends are obviously driving a huge growth prospect for us, but above that sits the whole outsourcing of manufacturing as a trend as well which drives margins. If you look at the complex design requirements we have today, the dynamic supply chain market, the manufacturing at scale, and multiple geographies with strong local knowledge, localization of manufacturing, regionalization of manufacturing, and then you have automation driving a lot of this forward as well. So, that by itself is driving this entire outsourcing of manufacturing as a trend, which then leads into stickiness, which then leads into margin expansion as well and I would suggest that almost all of our end markets that we present here are seeing some sort of change in behavior from an industry standpoint. And specifically, for Jabil, from a capability standpoint as well. So, all good drivers of margin going forward, Shannon.

Shannon Cross, Analyst

Thank you.

Operator, Operator

Thank you. Next question is coming from Paul Chung from JP Morgan. Your line is now live.

Paul Chung, Analyst

Hi, thanks for taking the questions. So, nice progress on inventory, and your free cash flow conversion kind of continues to grow from 2021 level kind of rebounding there and guide for growth suggests kind of improved pace there, maybe potentially hitting free cash flow north of $1 billion for the first time. So, how do you think about the pace into 2024 and some of the dynamics across working capital?

Mike Dastoor, CFO

We will provide guidance on free cash flow for 2024 in September, Paul. The team will be focused on improving margins and free cash flow, which we plan to use for buybacks since we believe we are still undervalued. We expect free cash flow conversion to continue to improve, along with changes in working capital dynamics. However, a reduction in inventory does not guarantee a direct increase in free cash flow because there are other factors, such as accounts receivable and accounts payable, that we are managing effectively. Overall, we anticipate free cash flows to increase annually moving forward, and we will share more details in September.

Paul Chung, Analyst

Okay. Great. Thanks for that. And then separately, are you starting to see evidence of some deflationary impact on components and which end markets are you seeing some bigger impact there and how do we think about the impact on revenue and margins into 2024 as kind of prices ease? Thank you.

Kenny Wilson, CEO

Yes. We're not really seeing that, I mean there is puts and takes sometimes, Paul and it's not something that we're overly concerned about and it's not something that we think is going to impact our outlook for 2024. We think that we'll drive to north of 5% margins for 2024, obviously, we'll update that in September, but yet it's not something that's occupying a lot of our thoughts right now.

Paul Chung, Analyst

Okay. Great. Thank you.

Operator, Operator

Thank you. Next question is coming from Melissa Fairbanks from Raymond James. Your line is now live.

Melissa Fairbanks, Analyst

Hi, thanks, guys. Congrats on another great quarter and really great working capital management. I just had a quick question on the interest expense, because it does have such a big impact on the core earnings. We're going to see it tick a little higher in the August quarter. I'm assuming that's driven by the inventory requirements tied to seasonality, first of all, is that correct? And then second, what should we expect for interest expense beyond August, maybe on a more normalized basis?

Mike Dastoor, CFO

So, Melissa, just to clarify, our interest cost in Q3 was $75 million. The guidance we provided for Q4 is in the $73 million range. So it's not going up, it's actually going down a little bit. I think we continue to benefit from working capital management. The team is highly focused. Some of the golden screw issues are easing, not as much as we'd like, but still on the right path. So, all-in-all, we feel that that sort of a run rate, especially in the first two or three quarters of FY 2024, might be that sort of run rate for the entire year in FY 2024 as well.

Melissa Fairbanks, Analyst

Okay. Sorry about that. Little modeling snafu there. Maybe just as a follow-up, it seems AI is a hot topic these days, so I wanted to be sure you had the chance to talk about it. In the slides, you highlight cloud and AI/ML automation as being some of the growth drivers for 2024. You talked a little bit about the automation side of things, but maybe address what you're seeing in cloud and AI?

Kenny Wilson, CEO

Thank you, Melissa. I’ll take this one because I just returned from visiting our facilities in Asia and was truly impressed by the advancements we've made, particularly since I hadn't been there for a few years before the pandemic. The improvements in our internal processes through automation, robotics, and AI have been remarkable. We have significantly reduced the workforce involved in our processes by leveraging automation and AI technologies to support these enhancements. While some may believe that AI is overhyped in the short term, we're confident it will prove beneficial in the long run. However, integrating advanced networks requires substantial teaching for large language models, and there are many prerequisites regarding processes and cloud requirements. We expect this segment to grow over time. Our ability to produce sophisticated networks and cloud devices that need liquid cooling and high-speed optical interconnects is a result of our long-term development efforts. This positions us well for future growth in the cloud market, allowing us to combine various capabilities from different parts of our business to assist clients utilizing large language models in AI. While we anticipate some initial challenges, we believe it represents a significant growth opportunity for us in the future.

Melissa Fairbanks, Analyst

Great. Thanks very much.

Kenny Wilson, CEO

You're welcome.

Operator, Operator

Thank you. Next question is coming from Mark Delaney from Goldman Sachs. Your line is now live.

Mark Delaney, Analyst

Yes, good morning, and thank you for taking the question. You mentioned you're planning for a challenging macroeconomic environment in 2024. As you see things today, are you thinking the macroeconomic environment is incrementally more difficult next year or is it more of a continuation of the kind of challenges you've been seeing?

Mike Dastoor, CFO

Hey, Mark. Just to clarify, I think the words I used, we're just being cautious and vigilant. There's a lot of chat around consumer end markets, we've seen some of that. It's a little bit patchy, it goes up, it comes down; for instance, Q2 was down, Q3 was actually up for us from a consumer standpoint, we're not seeing anything major in any of our end markets that would give us any concerns. I was just being cautious and vigilant, that's the only meaning behind my comments there. If you look at the secular markets that we're in today, all growth-oriented, the EV, healthcare, renewables, 5G, cloud, they're all moving in the right direction, so I don't think that gets slowed down by macroeconomic conditions that much, it might be instead of growing by double-digits, maybe it grows by single-digits. But overall, we're not seeing any of that right now. We just want to be cautious and vigilant.

Mark Delaney, Analyst

That's helpful. Thank you, Mike. And my other question is, as you're seeing such good growth in certain markets like EVs and renewables, are there steps you have to take operationally in order to continue that growth, either more factory capacity, finding more labor and other constraints you may be running into given that the growth rate you've been undergoing in a couple of those key markets? Thanks.

Mike Dastoor, CFO

Yes, we need to expand our operations in the Americas, Europe, and Asia for the EV sector. We definitely have to grow our presence in certain regions. The healthcare sector is more stable, but the overall trend is still upward. In renewables, we have just opened a new factory in the US and will continue to expand when necessary. We are being very thoughtful and disciplined, as we do not want to over-invest in capital expenditures. We are carefully monitoring trends to ensure they are sustainable in the long term and not just temporary hype. So, to answer your question, yes.

Kenny Wilson, CEO

And I call it a follow-up on that, Mark, also is that we always talk about having a single instance of ACP in our company and that, for example, becomes critically important. As we look to get requests from customers to introduce new products, introduce them across multiple geographies, having that single instance of ACP is critically important, but more than that, we'd be JJ Creadon and his teams are looking at making sure that our factory network operates consistently with the same processes. We got a kind of unified table culture as I mentioned. So, our ability to incubate new business or new capabilities in one part of the world and then be able to deploy that at scale across the rest of our network really lends itself to our model. And so we're feeling quite bullish that we're really well-positioned to support the needs of our customers as you know, in the world where geographical manufacturing seems to be more invoked.

Mark Delaney, Analyst

Thank you.

Operator, Operator

Thank you. Next question is coming from David Vogt from UBS. Your line is now live.

David Vogt, Analyst

Great. Thanks for taking my question, and good morning. I just want to go back to the AI automation conversation. I know you're probably going to provide a lot of color on this in September and I know it's early days, but when you think about sort of the end markets in your customer base, obviously there's going to be some technological shifts in what's happening, whether it's in the data center or the network stack, how does that work with you and your customers in terms of you potentially winning new types of businesses for new technological sort of changes effectively and generally, what are the lead times in terms of from concept discussion into deployment? And then I have a follow-up on margins, which I can maybe just roll in here as well. So, it sounds like near term, the opportunity is for your own efficiency gains from automation going forward in fiscal 2024 from AI potentially, is that fair? Is that a fair way to think about the business next year? Thanks.

Kenny Wilson, CEO

Yes. So, for sure, and if I don't answer this question, David, like there was a lot there. So, for sure, internally, I mentioned previously that, you know, there are internal processes we will simplify, optimize, standardize, and automate. We've been doing that forever. This helps us accelerate some of that as I had mentioned. So, we see that this is definitely going to be help us from our ability to introduce new products, ability to be more efficient, and therefore drive margins. So, for sure, we see that. And in terms of engagement with customers, I mean, we don't see any one of our end markets that isn't going to be favorable for whether it's in autonomous driving or in healthcare or whatever, and the relationships that we have are quite deep-rooted with our customers. We access their technology roadmaps in conjunction with them to help them introduce new products. So I think that the model, this isn't going to change the model that we have engagement what we have with our customers, like we got our technical expenses which will be felt then across the company, are actively engaged with customers looking at their roadmaps and how we can support them, so I think for sure that there'll be some acceleration there. But for us, it's almost business as usual as it comes to engaging with our customers.

David Vogt, Analyst

No, that's helpful. Can I just ask a quick follow-up along those lines? I know it's early days, but do you feel that some customers might reconsider their spending and roadmaps for existing products to take advantage of this significant long-term trend in AI, possibly de-emphasizing any legacy offerings?

Kenny Wilson, CEO

I don't think so. I mean, I think that when people talk about that's been hyped in the short term, I think it's been hyped pretty much in the short term. I think everyone who has been involved in our industry and the industry, you know, AMD talked about it yesterday, NVIDIA, I mean, they haven't just woke up yesterday and decided this it's a good idea, they've have been working on this roadmap for multiple years, so I think there's a little bit of hype in the press. But to those who are involved in the industry, I think it's just like a continuation of the roadmaps we've been working on.

David Vogt, Analyst

Got it. So, it sounds like it's an additive. That's helpful, Kenny. Thank you.

Kenny Wilson, CEO

Yes, yes.

Operator, Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Adam Berry, VP of Investor Relations

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