Adam Berry: Thanks, Kenny. So there was a lot here today. And in closing, I’d like to quickly summarize some of the key messages. Our second quarter results and our fiscal ’24 outlook are largely in line with the guidance we provided back in December, with the exception of the impact from two specific end markets, including renewable energy and 5G wireless. And despite our lower outlook for ’24, positive demand signals in the market, along with new wins, higher core margins due to mix shift and the accelerated buybacks from the proceeds of the mobility transaction give us confidence in fiscal ’25 which is why we chose to maintain our $10.65 core EPS target. Thank you for your interest in Jabil. Operator, we’re now ready for Q&A.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Steven Fox with Fox Advisors. Please proceed with your questions.
Steven Fox: Hi. Good morning. Two questions from me, if I could. I guess, first of all, on the cuts within 5G and renewables programs. Can you give us a sense for why you think this is the last time you’re going to have to come back and cut those numbers? Like, what are the indications, not just through the fiscal year, but through maybe the calendar year from customers on that front? And then secondly, on the better margins that you’re targeting now, I understand the mix shift, but maybe a little bit more color on like the biggest mix shift drivers if we exclude the mobility math from that? Thanks.
Kenny Wilson: Hi, Steven. Thanks. Good morning. Yeah. Let me take that, the question on demand. I mentioned in Q1 when we’ve seen the broad-based demand reduction that we’ve got a process where we do we’re pretty intimate with our customers in terms of their forecast, looking at inventory and inventory in channels. We called that right across all of our end markets with the exception of the 5G telco space and renewables. And there’s a couple of specifics there. So Mike mentioned the India issue here, and I think what we see here is that although, we said, there was a substantial pullback. In effect, what happened was the rollout stopped with — basically with no input from the Reliance in this instance. So when we look at that, there’s no indication of that and basically, we’ve baked into our number now going forward.
So we’re comfortable that everything else in the telco space, we’ve seen and we understood. This was just a gotcha in India. We’re not forecasting or expecting that to recover in this year. So we think we’re pretty safe there. In the renewable space, again, we’ve been working with the customer through calendar Q4 into Q1. And what we decided to do there is that basically, the inventories in the channel, and it’s not going to be sold through. So we’ve reduced the build plan, they’ve register what they’re going to ship. And what we’re seeing is that the inventory in channel now is now reducing. We haven’t forecasted a covering that this year also. So we’ve been very, very conservative. Also, just as we look to ’25, we’ve been very conservative, and we’ve modeled those run rates going forward into ’25.
So when you look at what we’re talking about in ’25, we don’t expect these two end markets to recover. So we think we’ve been appropriately conservative.
Steven Fox: Great. And then on the margin question?
Michael Dastoor: Hey, Steve. Yeah. So obviously, the mix shift does have a huge impact. We’ve replaced a lot of our legacy networking and storage business with higher margin AI related business there, obviously, AI by itself in the cloud space, although, you don’t see it in the revenue line item because of the consignment effect, the volumes are up considerably in that particular line item. So there’s a big margin play coming through on the mix shift that you suggested. And on top of that, we’ve done a lot of cost optimization. If you go look back at our — I think on the call maybe earlier in the fiscal year, we talked about a stranded cost and footprint optimization restructuring that we’ve taken then. The fruits of that are showing up in the second half of the year.
Obviously, we had Q2 was a little bit of a transition quarter for the cost optimization effort. But that’s coming through. And then if you look at some of the cost recoveries that we’re getting from our customers, even though revenues are down, we are — we have been successful in getting cost recoveries because of the sudden nature of the cut. So all of that plus Q3, Q4 had some ramps in there. Obviously, as the revenue is pushed out, we don’t have to have those ramps. And then I’ll just remind you, ramps are at a much lower margin in those initial quarters when we’re moving up on that revenue line item. So that gets pushed out a little as well. So a combination of all that, Steve, gives us really good comfort. I think we said 5.3% to 5.5% margin.
Previously, we’ve actually taken it up, not just to the high end. We’ve taken it beyond that, and we think it’s going to be more in the 5.6% range, and we feel really good about that.
Kenny Wilson: Yeah. I have a follow-up to that also, Steve, and we’ve been talking about this and obviously, with yourself. But I think Slide 17 is a pretty good pictorial view of why we’re confident that our margins in the longer term will be robust. Historically, we would be in the server space here when I think back three, four, five years ago. And then what we’re trying to show here is just how as well as being vertical in terms of going to asset like rack assembly that’s been hugely successful for us. But if you look at everything else interest we’ve gone from being a legacy enterprise switching to accelerated switching that supports AI with the awards that we won recently. Optical transceivers or pluggable transceivers in this instance that we got a lot of horsepower from the Intel deal that we just closed.
