Rob Mionis: Yes, I’ll start off with that. Mandeep, finish the second quarter dynamic in terms of enterprise up in the 20s. The main driver is really tough comps from a year ago. What we’re seeing in the second quarter is also storage demand declining, but we’re seeing very healthy steady demand from compute as well. We’re also, as we mentioned earlier, happy that comps was up significantly, and CCS is up significantly as well.
Mandeep Chawla: Yes. Dan, what I would say is that the enterprise revenues, especially as we go into the second quarter, continue to increase on a sequential basis. And as we did talk about, the demand signals continue to be healthy. We do serve a number of customers on the server side, but I think what’s important to look at comes in enterprises side is as we up-level it to total revenue with our hyperscalers, we’re seeing that growth continuing. They’re shifting CapEx now and then from one type of product deployment to another, but overall continuing to see strong top-line growth with hyperscalers in aggregate.
Daniel Chan: Thank you.
Rob Mionis: Thank you, Dan.
Operator: Thank you so much. Your next question comes from the line of Matt Sheerin of Stifel. Your line is now open.
Matt Sheerin: Yes, thank you. A couple of questions for me, please. One, Mandeep, just on the balance sheet, I saw that the inventory — gross inventory was down and net inventory was down, where your cash deposits were also down, yet you’re growing significantly. So, could you talk about the dynamics going on there? And given the growth in the hyperscale business, are you seeing a shift in terms of consignment inventory that you’re not passing through your COGS?
Rob Mionis: Thanks for the question, Matt. So, yes, strong working capital performance, happy with the free cash flow that we generated, $65 million, happy that we’re able to raise the overall free cash flow number for the year to $250. We want to continue to monitor how healthy our conversion is, and we’re comfortable with the conversion ratios that we have. And we try not to say it anymore, but as you know, over five years of positive free cash flow every quarter. Under the covers, as you’re hitting on it, we are seeing some unwind on the inventory side as we were anticipating. Our inventory turns are improving, and it’s really a function of continuing to be collaborative with our customers and seeing lead times come in. Lead times on semis as well as passives are now under 20 weeks, which is allowing us to do some of that unwind.
The deposits were also unwinding, again, as expected because we were always working with our customers saying as long as lead times are really extended how do we come into a model where they can help fund some of that. As they’re coming in now we’re happy to return the deposits and still generate positive free cash flow. Your point on inventory build, from a dollar perspective, inventory may go up as we go through the year, but we’re very focused on turns. And we don’t think that the turns are necessarily going to take a step back. And then in terms of consigned, non-consigned, nothing really to note in terms of any differences.
Matt Sheerin: Okay. Thank you for that. And I wanted to just ask a question on the competitive landscape. Obviously, you’re gaining market share, particularly with the one hyperscale customer. There is some concern that we’re seeing more competition from your North American EMS peers, but also, obviously, from the ODMs in Asia. Could you talk about your competitive edge and whether you expect your large customer to bring on other suppliers and what does that do to your dynamic in that relationship?
Rob Mionis: Yes. Hi, Matt. This second sourcing in the EMS ecosystem is nothing new. What typically happens is, new programs are single sourced from the onset, and over time as the technology matures, a second source is brought into the equation, usually enabling the primary source to introduce next generation products. And this is currently at play in some respects. There’s a competitive dynamic where a second source is being brought on to help our customers. In other cases, we’re the benefactor of being a second source to some of our competition, so it goes both ways. Also I would add that on HPS products, there’s a little bit of a different dynamic at play. HPS products are typically single sourced for the life of the program.
And that’s given the stringent qualification process. And also next generation products typically are awarded to the incumbent, assuming strong initial performance, because switching costs are also prohibitive. And again, within our AI/ML data center offerings, a lot of our high value EMS programs are transitioning to HPS products over time because of the value add we’re able to bring into the equation, which we think is a competitive edge versus our EMS peers.
Mandeep Chawla: Matt, maybe just to add on one point, which is, as we all know, the pie continues to get bigger. The CapEx spend across the top hyperscalers who we all support is growing materially this year. Everyone knows that. The expectation is that, there’s going to be a good level of growth going into next year as well. And so, as the pie continues to get bigger, our revenue with the hyperscalers is also continuing to grow. When second sourcing is happening on less complex products, the positive way to look at that is, it allows us to redeploy capacity to the more complex products. And the more complex products are what Rob just mentioned, whether it be HPS or heavy engineering content. And so, there had not been any dynamics on the competitive landscape, I would say, that has surprised us. It’s really playing out as expected.
Matt Sheerin: Okay, great. Just in line with that, are you still — you’ve talked about being sort of exclusive in terms of the AI/ML programs, is that still the case with your big customer?
Rob Mionis: No, I wouldn’t say so. I would say, it’s on a program-by-program basis, Matt. Some programs were exclusive, some programs were not, and those dynamics, as I mentioned earlier, might change over time. [Multiple Speakers] through the product life cycle.
Matt Sheerin: Got it. Okay. Thanks very much.
Rob Mionis: Yes.
Mandeep Chawla: Thanks Matt.
Operator: Thank you so much. Your next question comes from the line of Thanos Moschopoulos of BMO Capital Markets. Your line is now open.
Thanos Moschopoulos: Hi, good morning. If we look at your CCS growth in the quarter outside of your largest customer, that growth rate has been up there a bit more subdued. Is that just a function of how you’ve been prioritizing capacity to have to do with perhaps some tough year of your comps on the programs you’re exposed to those other hyperscalers or any color you could provide be helpful?
Rob Mionis: I’ll start off and I’ll let Mandeep finish. But it’s not a function of capacity. I would say, we do have ample capacity at our sites, and we’re also building forward, investing forward, to make sure it stays that way. As mentioned in the script, our Kulim factory just came online, and we have additional Thailand capacity that’s coming online in the second half of 2025, but currently ahead of schedule. It really has to go with the buying patterns and capacity expansion plans of our hyperscalers. They all have different investment cycles and different expansion plans, so it’s kind of their bio rhythms and we’ll be able to kind of happy to support each of them. Some are heavier this year, some might be heavier next year.
