notes from flex (flex) 2016 investor and analyst meeting 2016 analyst day... · title: microsoft...

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MAY 17, 2016

DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved.

Notes from Flex (FLEX) 2016 Investor and Analyst Meeting

• The Fung Global Retail & Technology team recently attended the Flex 2016 Investor and Analyst Meeting, held at the company’s headquarters in Milpitas, CA.

• One of the meeting’s key themes was how fast the world is changing due to the Internet of Things (the IoT, which Flex terms “the Intelligence of Things”). In the investor meeting two years ago, CEO Mike McNamara declared that the world was changing; this year, he announced that it has already changed.

• Flex is uniquely positioned thanks to the broad range of industries it serves. The company can use its cross-‐industry knowledge to manage the design, engineering and manufacturing of new products, freeing entrepreneurs to focus on concepts and intellectual property. Flex is also diversifying its revenue mix, adding growth, predictability and profitability, and growing earnings much faster than revenues.

The Fung Global Retail & Technology team attended Flex’s 2016 Investor and Analyst Meeting, held recently at the company’s headquarters in Milpitas, CA. The key message was that Flex possesses unrivaled breadth and depth of technology across multiple industries. This makes it uniquely qualified to use technologies from other segments to enable companies get their products to market faster and to focus on their core intellectual property and business models. Company management said Flex is fine-‐tuning its business mix to offer higher growth, profitability and earnings growth for its investors.

Below, we summarize the presentations given by Flex’s management team throughout the day.

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Mike McNamara, CEO—Competing in a Faster, More Disruptive World

CEO Mike McNamara began his remarks with a slide that summarized Flex’s unparalleled size and resources:

• $25 billion in revenue

• 100 sites in more than 30 countries

• 200,000 employees, including 2,500 design engineers

• 50 million square feet of manufacturing and services space

In his presentation at the investor meeting two years ago, McNamara commented that “the world is changing,” meaning that the IoT (which Flex refers to as “the Intelligence of Things”) was coming. This year, he amended his comment to “the world has changed,” and outlined eight other forces that are changing the world, as depicted below:

Source: Flex

According to estimates from IDC and Cisco Systems, 50 billion devices will be connected to the IoT by 2020, and McKinsey & Company says the industry will have an economic impact of $3.9–$11.1 trillion by 2025.

Source: Flex

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MAY 17, 2016


McNamara said that Flex has identified 12 business areas that could each bring more than $1 billion in new revenue to the company:

Source: Flex

McNamara also said that Flex is the only company that has the platform, real-‐time information system, processes that accelerate innovation, and investments in the relevant areas of manufacturing technology (automation and robotics, machine-‐to-‐machine communications, 3D printing, advanced simulation, and visualization and augmented reality) necessary to manufacture products in these industries.

For its shareholders, Flex has undertaken two initiatives to raise margins:

• Portfolio evolution: Flex is growing its Industrial and Emerging Industries and High Reliability Solutions categories and reducing its Consumer Technologies Group and Communications Infrastructure and Enterprise Computing segments as a percentage of sales.

• Sketch-‐to-‐scale: This refers to the company’s ability to transform an idea (the sketch) into a finished product by handling all the design, engineering and manufacturing.

Management envisions its sketch-‐to-‐scale program growing from 7% of total revenue in FY13 to 21% in FY16 and then to about 35% in FY20.

Flex has seen 10 consecutive quarters of margin expansion, and is rewarding its shareholders by achieving steady return on capital, steady free cash flow and steady annual share repurchases.

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MAY 17, 2016


Jeannine Sargent, President of Innovation and New Ventures—Driving Flex’s Sketch-‐to-‐Scale Engagement

Source: Flex

Jeannine Sargent’s presentation centered on innovation at Flex, and she detailed some of the applications that have resulted from the company’s efforts at its innovation nodes in Silicon Valley, San Francisco, Boston, New York, Israel and Shanghai. Sargent highlighted the company’s:

• Internal Lab IX incubator: A participating company called OriginGPS has developed an IoT module that can be used in wearables, asset tracking and automotive telematics.

• Partnerships with other companies as part of its collaborative innovation platform: Partner Corning makes Fibrance, a light-‐diffusing fiber that can be used in automotive interior lighting, in fashion and apparel, and in safety helmets.

• Engagement with universities: Flex has cooperated with Stanford and MIT, leading to the development of products such as a nano sweat sensor that can be used in sports and fitness, patient care and military/industrial applications.

• Components and platform solutions: Flex has assembled various technology centers of excellence and competence. These centers have fostered the development of component solutions such as a notification module and wearable sensor patch that can be used in various products for Flex’s customers.

Sargent said Flex is partnering with IBM to add the power of IBM’s Watson artificial intelligence to its products. For example, a patient

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sensor that connects to the cloud can use IBM’s artificial intelligence to decide when to notify a physician about certain changes or information.

The company is also continuing to develop its sketch-‐to-‐scale process, whereby an inventor can submit a sketch of a new product idea, which Flex can then design, engineer and transform into a mass-‐manufactured product; the process frees entrepreneurs to focus on concepts.

Tom Linton, Chief Procurement and Supply Chain Officer —Competing with Visibility and Velocity

Tom Linton said that Flex’s global reach requires global, 24/7 visibility into the supply chain, which is about 90% digitized via the company’s Flex Pulse system. The system comprises four Mission Control–like Pulse Centers and more than 50 enterprise-‐grade applications, and more than 1,700 individual users. The Flex Pulse applications also run on mobile devices.

Visibility into its global supply chain has enabled Flex to reduce its lead time to 59 days, Linton said. With $3.45 billion worth of inventory, one day’s improvement in inventory is worth $58 million in cash to the company.

Mike Dennison, President, Consumer Technologies Group —Transforming the CTG

Mike Dennison said that Flex’s Consumer Technologies Group saw $7.0 billion in revenue in FY16 and $4.6 billion in revenue excluding the Lenovo Smartphone business, which is being wound down through June 2016. This figure includes more than $1 billion in revenue from the wearables segment (which has grown by 90%) and more than $0.4 billion in revenue from the connected-‐home products segment (which has grown by 100%).

The division sorts its marquee customers into three groups: core; strategic; and innovative, connected and emerging technologies (ICE). In the pyramid graphic below, the higher levels generally should offer higher growth and higher profitability:

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MAY 17, 2016


Source: Flex

The graphic below illustrates the growth areas in consumer products that Flex is targeting.

Source: Flex

Dennison highlighted Flex’s partnership with Nike, for which it has developed a state-‐of-‐the-‐art automated production line. Shoes are coming off the line this quarter and are expected to be a meaningful contributor to Nike’s revenue in FY18. He also talked about the Wink line of connected-‐home products (which Flex acquired in November 2015), the Brita water filtration pitcher that automated ordering of new filters from Amazon, the fully automated line of Valve gaming controllers, smartwatches for Fossil and Sonos home audio products.

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MAY 17, 2016


Paul Humphries, President, High Reliability Solutions—Differentiation Through Solutions and Technology

Paul Humphries said the High Reliability Solutions division develops products for automotive and medical applications. The two graphics below illustrate the explosion in the number of products that Flex has developed in these segments, sorted by year.

Source: Flex

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MAY 17, 2016


Source: Flex

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MAY 17, 2016


Humphries detailed trends in automotive technology and their respective sizes and growth rates, as shown below.

Source: Flex

He also detailed trends in medical technology and their respective sizes and growth rates, as shown below.

Source: Flex

The High Reliability Solutions segment is expected to be one of Flex’s fastest-‐growing segments, Humphries said, with revenue growth rates exceeding 10% from FY17–FY21.

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MAY 17, 2016


Doug Britt, President, Industrial and Emerging Industries—Bringing Industrial and Energy into the Smart and Connected World

Doug Britt said that Flex’s Industrial and Emerging Industries segment serves several enormous markets, as depicted in the graphic below.

Source: Flex

Britt noted that Flex’s Centers of Excellence focus on both general technology and specific technologies for industrial applications, such as:

• Appliances

• 3D printers

• Lighting components

• Energy solutions, particularly solar

Source: Flex

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MAY 17, 2016


Caroline Dowling, President, Communications Infrastructure and Enterprise Computing—Managing Through Industry Transformation

Caroling Dowling said that Flex’s Communications Infrastructure and Enterprise Computing segment generated $8.8 billion of revenue in FY16, with growth by segment as follows:

• Compute, storage and data center—up 10%

• Optical—up 15%

• Communications—up 9%

• Networking—flat

• Traditional server/storage—down 25%

Notwithstanding the mixed growth figures, Dowling said the segment leads in many areas and is developing technology for several key future areas:

Source: Flex

Dowling reiterated Mike McNamara’s point that “the world has changed.” She said maturity cycles have shortened to three to four years from six to eight years previously, and that the telecom industry is moving to open designs called Open Compute Solutions. Still, Dowling said the segment has launched more than $2 billion worth of new products at eight manufacturing sites for 19 customers. Moreover, the segment is booking an increasing share of revenue from sketch-‐to-‐scale products and is targeting about 30% of revenue from sketch-‐to-‐scale in FY20, up from 3% in FY13.

Chris Collier, Chief Financial Officer—Portfolio Evolution and Margin Expansion

Chris Collier highlighted recent financial performance in terms of four metrics:

• Sustainable operating profit: growing at a 9% CAGR from FY14–FY16.

• Profitability: adjusted EPS is growing at an 11% CAGR during the same period.

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MAY 17, 2016


• Resilience: $1.9 billion of free cash flow has been generated.

• Consistency: the company has repurchased $1.3 billion worth of shares during the same period.

Collier said Flex is looking to change its revenue mix so its four segments will be roughly balanced in FY20, with average product lifecycles growing from about four years in FY16 to about six years in FY20. To accomplish this, the company has increased R&D spending while exercising disciplined capital spending.

To offer greater earnings growth for its investors, Flex is targeting:

• Higher-‐growth businesses and

• Higher-‐margin businesses, while

• Returning cash to shareholders via buybacks.

Thus, the company expects 3% revenue growth from FY16–FY20, which should result in greater than 10% growth in operating profit and greater than 12% growth in adjusted EPS, offering substantial earnings leverage.

Source: Flex

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MAY 17, 2016


Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

John Harmon, CFA Senior Analyst HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 2470 LONDON: 242-‐246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 NEW YORK: 1359 Broadway, 9th Floor New York, NY 10018 Tel: 646 839 7017 FBICGROUP.COM

notes from flex (flex) 2016 investor and analyst meeting 2016 analyst day... · title: microsoft...

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