TE Connectivity plc (TEL) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and thank you for standing by. Welcome to the TE Connectivity Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded and I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Third Quarter 2023 results and outlook for our fourth quarter. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. I also want to remind you that our Q4 results in fiscal 2022 included an extra week. In this call, year-over-year comparisons for the fourth quarter and fiscal 2023 are made excluding this extra week. Finally, during the Q&A portion of today's call, we're asking everyone to limit themselves to 1 question, you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Thanks, Sujal, and thank you, everyone, for joining us today. Before we get into the slides, and as I typically do, I want to take a moment to discuss our performance this quarter, within the backdrop of the market environment along with what we're seeing versus our last call 90 days ago. I am pleased with the execution of our teams in the third quarter with revenues that were in line and EPS that was ahead of our guidance due to strong performance across all 3 segments. Our Transportation and Industrial segments grew year-over-year which essentially offset the expected declines in our Communications segment. Our adjusted operating margins expanded 130 basis points sequentially without the benefit of any volume growth. We delivered on the actions that we've been driving to ensure margin expansion occurred as we move through this fiscal year. Also as important, you're going to continue to see the benefits from the strategic positioning of our portfolio around secular growth trends, including increased global production of electric vehicles, adoption of renewable energy, and applications for cloud and artificial intelligence. In the quarter, our orders of $4 billion are not only indicating stability in transportation and industrial but also in our Communications segment as well. I view the order trends to be a real positive, and they're reflecting the improving supply chains and reinforce our fourth quarter guidance, which I'll get into more details in a moment. As we've been sharing with you one of the key areas of focus this year has been working capital management as supply chain performance improves. Our strong free cash flow performance reflects our focus, both in the quarter as well as you see it year-to-date. Cash generation is an important part of our business model and year-to-date free cash flow was up 40% versus last year. Also, our capital strategy continues to remain disciplined, and we've returned roughly $1.2 billion of capital to our owners so far this year. Let me now provide some additional color on our markets and other updates since our last call. So on an overall basis, our markets are playing out as we expected. We have most of our key end markets in a growth or recovery trajectory, and we have a few markets that continue to cycle and these we previously discussed with you. Our view of transportation end markets remain consistent with our prior view, and we continue to expect auto production to remain roughly flat at approximately 20 million units per quarter globally. Our growth in the transportation area will continue to be driven by content outperformance and our leading global position in electric vehicles. Turning to our Industrial segment. We have 3 businesses that continue to have strong growth momentum. You continue to see our strong positioning in renewable energy with growth from both wind and solar applications. In commercial air, sales continue to grow as this market recovers and our medical business is benefiting from increases in interventional procedures. In our communications segment, while sales are down significantly this year versus last year's cyclical peak, our order trends are indicating stabilization at the current levels. And finally, I do want to reinforce that the way we think about long-term value creation remains unchanged. It's built on the pillars of secular growth trends that will drive increased content in the markets where we position TE. Strong free cash flow generation with discipline around how we deploy capital and leverage to enable margin expansion as we move forward. While our orders are indicating stability, we continue to see strong opportunities to expand sales, margins and earnings per share as we move forward. So at this time, I want to get into slides, and we'll discuss some additional highlights. And if you could turn to Slide 3, I'd appreciate it. Our third quarter sales were $4 billion, and this was in line with our guidance and down slightly year-over-year on a reported and an organic basis. We saw organic growth of 7% in our Transportation segment and 2% in our Industrial segment. Our communications segment declined due to the expected market weakness that we've been talking to you about. Adjusted earnings per share was ahead of our guidance at $1.77 with adjusted operating margins of 17.3% and these margins were up 130 basis points sequentially, as I already mentioned. The margin improvement from quarter 2 to quarter 3 was driven by our Transportation and Industrial segments as we are delivering on our commitment to expand margins from the first half to the second half of this year. Our earnings per share performance that was ahead of guidance was driven primarily by the stronger margin performance. As we look forward, we are expecting our fourth quarter sales to be approximately $4 billion and adjusted earnings per share to be around $1.75, which are both similar to our quarter 3 levels. Also similarly to our third quarter, we do expect year-over-year sales growth in our Transportation and Industrial segments and a decline in our Communications segment. Just moving away from the financials for a moment. I do want to highlight that we issued our corporate responsibility report, which we call connecting our world, and we've issued this report for over a decade. There are a number of initiatives that we're driving internally, and our goals are in line with our purpose as well as expectations from our customers. Key highlights in the report versus prior year includes an over 30% reduction in our absolute Scope 1 and 2 greenhouse gas emissions and currently, I want to highlight that 50% of the electricity in TE comes from renewable sources. I also want to note that we communicated our commitment to the science-based target initiative which enhanced targets for greenhouse gas reduction by 2030 that are inclusive of Scope 3 emissions. So with that as a quick background on Slide 3, let's move to Slide 4, and I want to talk about our order trends. On the slide, you can see the details on the moving pieces, but I do think the key takeaway is that our orders are reflecting stability in all 3 of our segments. And this is nice to say after some of the order patterns we've had over the past couple of years. And these orders reflect and reinforce our guidance for the fourth quarter. When you look at our transportation and industrial orders, they're both roughly flat from the second to third quarter. The real highlight is in where you see the changes in our communications segment where our orders increased 5% sequentially. And this is the first sequential increase in our Communications segment orders since the first quarter of fiscal 2022. So with that quick overview of orders, let me now discuss the year-over-year segment results that are laid out on Slides 5 through 7, and you can see the details, and I'll just talk about the high points. In our Transportation segment, sales growth remained strong, and it was up 7% organically year-over-year with organic growth across all of our businesses. Our auto business grew 9% organically, and we had growth in all the regions of the world. The strong performance continues to be driven by our leading position in electric vehicles, as well as electronification trends in cars and positive impact from pricing. While auto production is staying flat at about 20 million units per quarter, production of hybrid and electric vehicles are continuing to grow and right now reflect about 25% of total global auto production in our fiscal '23. As you know, we generate approximately 2x the content in electric vehicle platforms versus a combustion vehicle. So we expect our content per vehicle to continue to expand as we move forward and the increased adoption of electric vehicles. Elsewhere in this segment, our commercial transportation business, we saw 2% organic growth in the third quarter. And in our Sensors business, our 4% organic growth was driven by automotive applications as we see increased volumes from new design wins. At the margin level, in the segment, adjusted operating margins were 18.6% in the quarter, and this was up 130 basis points year-over-year and 200 basis points sequentially as a result of operational performance including the benefit of price increases. Now let me move over to the Industrial segment. At the segment level, sales increased 2% organically year-over-year but we had strong organic growth in 3 out of the 4 businesses in the third quarter. Our AD&M business, our sales were up 13% organically, and we're benefiting from the ongoing improvement in the commercial air market. In medical, sales in the quarter were up 11% organically, driven by ongoing increases in interventional procedures. Turning to our energy business. We continue to see momentum with 8% organic growth driven by renewable applications. The addressable market for TE and renewable applications has a double-digit CAGR and we're helping to enable utility scale, solar and wind farm deployments. Through our broad product portfolio, we are helping our customers reduce installation as well as maintenance costs and we expect our sales from renewable applications to be up double digits again this year. What's really nice in this business is that the current quarter continues to demonstrate the growth momentum that we've been delivering in this business which has had an organic sales CAGR of 8% since 2019. And finally, in the Industrial segment. In our Industrial Equipment business, our sales were down 10% organically. And this sales decline was driven by inventory digestion in the distribution channel and is being driven by improvements in the broader supply chain that we're all feeling. In the Industrial segment, adjusted operating margins were 15.8%, and these margins reflect the impact of the expected volume declines in the Industrial Equipment business. And I want to highlight that we remain committed to achieving our high-teen margins target for this segment. Now let me turn to the Communications segment. And in this segment, our sales were down 37% organically to $424 million, and it was slightly lower than we expected versus last year's cyclical peak, appliances and our Data and Device businesses are being impacted by market weakness and the ongoing consumption of inventory across our customer supply chain that we previously discussed with you. Despite this weakness in sales, we maintained adjusted operating margins in the mid-teens range at 14.2%. Based upon the order trends I talked about earlier, we believe communications revenue will be roughly flat to quarter 3 levels in the fourth quarter with adjusted operating margins remaining in the mid-teens. Now with the communications segment, I do want to look beyond the near term for a moment and really talk about what we get excited about, especially in our D&D business as it continues to have strong design win momentum in next-generation AI platforms. When you think about where we play, we focus on providing the high-speed, low latency connectivity to meet the needs of these next-generation data centers. Last quarter, we mentioned that we secured $1 billion in design wins for AI and certainly related server applications. And I just want to highlight for you this number continues to grow. We expect meaningful ramps of AI programs as we move through fiscal '24, with 50% more content in an accelerated compute AI platform versus a traditional compute server. The other key highlight is we're working closely with Cloud customers as well as leading semiconductor companies with reference design to call out our TE connectivity solutions. So with that, as a wrap up, let me turn it over to Heath, who will get more details on the financials as well as our expectations going forward.

Well, thank you, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on the third quarter financials. Adjusted operating income was $692 million with an adjusted operating margin of 17.3%. GAAP operating income was $630 million and included $53 million of restructuring and other charges and $9 million of acquisition-related charges. Year-to-date, we have taken $208 million of restructuring charges, and we continue to expect full year restructuring charges to be approximately $250 million as we continue to optimize our manufacturing footprint and improve the cost structure of the organization. Adjusted EPS was $1.77 and GAAP EPS was $1.67 for the quarter and included restructuring and acquisition and other charges of $0.10. The adjusted effective tax rate was 18.2% in Q3. For the fourth quarter and for the full year, we now expect our adjusted effective tax rate to be approximately 19%. Importantly, we continue to expect our cash tax rate to stay well below our adjusted ETR for the full year. We can get you to turn to Slide 9. Sales of $4 billion, were down 2% reported and 1% on an organic basis year-over-year. Currency exchange rates negatively impacted sales by $42 million and adjusted EPS by $0.05 versus the prior year. Adjusted operating margins were 17.3% in the third quarter, expanding 130 basis points sequentially despite lower sales driven by margin expansion in our transportation and industrial segments. We have continued to drive productivity and cost initiatives and have implemented the price increases that we discussed in prior calls. Our pricing is now fully offsetting the impact of higher input costs. Turning to cash flow. In the quarter, we once again demonstrated strong cash generation model of our business with cash from operations of $779 million. Free cash flow for the quarter was approximately $615 million. And through the first 3 quarters of the year, free cash flow was approximately $150 million, which is up 40% year-over-year and roughly a $1.2 billion return to shareholders through share buybacks and dividends. As you may recall, I indicated that we would look to drive our own inventory levels lower as we saw performance improving in our supply chain. We have been able to deliver improvements to working capital, which has contributed to our free cash flow performance this year. As a result of our actions and strong profitability, we expect free cash flow conversion to approach 100% this year. We continue to remain disciplined in our use of capital and our long-term strategy remains consistent, which is to return approximately 2/3 of our free cash flow to shareholders and use about 1/3 for acquisitions over time. Before I turn it over to questions, I want to reinforce that the strategic positioning of our portfolio is enabling us to deliver strong results from secular growth trends. In our Transportation segment, we expect to deliver high single-digit organic revenue growth this year. In our Industrial segment, we expect double-digit organic revenue growth in 3 of the 4 businesses for the year. In our Communications segment, we continue to generate strong design win momentum in AI and Cloud applications. We are delivering strong operational performance, including the work we have done on our cost structure and price actions to offset inflation enabling our first half to second half margin improvement and EPS expansion as we expected. Overall, this sets us up for a strong finish to the fiscal year and a good step-off point as we enter fiscal '24, which as you know, begins in October. We remain excited about the opportunities we have ahead of us to drive long-term growth, margin expansion and value creation for all stakeholders. So now let's open it up for questions.

[ Abbie ], can you please give the instructions for the Q&A session?

[Operator Instructions] We will take our first question from Chris Snyder with UBS.

So Q3 top line only met the guide, but despite a higher level of auto production, can you just talk about some of the offsetting headwinds there? And then also what -- some more color on what really drove the strong step-up in margins. Obviously, a step up was expected, but this was much more significant and then just lastly, any puts and takes into Q4 at the segment or end market levels.

Sure. Thanks, Chris, and thanks for the question. First off, on the first part of your question, we met our overall guide on the top line. And you're right. In transportation, we were a little stronger, but communications was a little bit weaker. We've been talking for many quarters now about, hey, as we go through some of the supply chain correction and market weakness around cloud, we thought we'd be in the $450 to $500 million range, and we thought this past quarter, we'd be closer to that $450 million. And our Communications segment came in a little bit below that and our transportation revenue, which was stronger, really made up for that. So on your first part of your question, on really the margin front, let's just -- to move it up a little bit. We knew we had to do margin opportunity as we march through the year. We had the price cost element, that as we talked about in automotive, that was going to be on a lag basis. We did get those in place. I think you're seeing the benefit of that, and we said we could get our transportation segment back up to where it's at today as we get later in the year, and that's been accomplished. I also think there's been good operating performance in our Industrial segment, even in light of our biggest and higher profitability business unit, their industrial equipment has some destocking occurring. So I think that was a very good performance there. And the other element is as communications is cycling down here in both businesses, we've been able to maintain the mid-teens margin even on lighter revenue. So I do think, to my prepared comments, I am pleased with the execution that we know we teed up for you all earlier in the year came through. Now when we go to next quarter, really, with the order trends that we're seeing, it does look like the segments will be very similar next quarter to where they were this quarter. Auto production is going to be flat, and we expect transportation revenue look similar to quarter 3, similar to IS and CS, right now with where we see the order patterns, we expect margin to be similar. So the guide is very consistent with what we just did, and that's some of the stabilization that I talked about. And on the EPS side, we're just a little bit lower in quarter 4, and that's really due to tax and FX, so it's nice to be able to show some of the stabilization as we wrap up quarter 3 and go into quarter 4.

Our next question comes from the line of Wamsi Mohan with Bank of America.

It's really nice to see the operating margin improvement here in transportation that you guys alluded to earlier. But I was wondering if you could, Terrence, maybe double-click on some of your inventory comments. How much more inventory digestion do you think is ahead of us, especially in industrial equipment and how much more production do you think is also left in Data Devices?

Yes. Thanks, Wamsi, and thanks for the question. I guess the first thing is, I know we talked about destocking and the same benefit we're driving in cash flow as supply chain gets better. It is important. We're not in a bubble where not only our supply chains are getting better, but our broader customer supply chains are getting better. And I think really where you see it in our results are the 3 business units we have, 2 in CS and 1 in IS, is where we feel it the most. And that's really where we have distribution channel involved and certainly, things aren't as much of a direct-direct relationship. So in transportation, we don't feel there's any supply chain to work off. We don't see impacts of destocking and you see that in our performance and you see the growth in all 3 businesses. In the other businesses, while TE does do about 20% of its revenue through distribution, the business, as you mentioned, appliance and D&D, in CS as well as industrial, they do about 40% to 50% of their revenue through distribution. And what we've been seeing is we do see a broader supply chains improve, we see our distribution channel partners adjusting their inventory levels to get to more normal demand. And let's face it. If lead times, people are hitting lead times and people don't need to go to distribution [ of filing ] something to complete a build, they won't have to do that. So it is a natural effect in our business when you have this, but I think we have to realize it is a good sign that supply chains are improving. I think where we are, certainly, industrial has gotten to it a little bit later. I think we still have a quarter or 2 that we need to work through in these businesses is our best guess and guess what, that is a guess. But I do think there'll be a point in time where our revenue in those businesses, especially go through distribution, get closer to demand. But right now, we're building less than what demand is as inventory works down.

Our next question comes from the line of Steven Fox with Fox Advisors.

I was wondering if you could dig in a little bit more into the cash flow numbers. Like you said, they're up a lot. How sustainable you see cash flow going forward? And maybe what does it mean in terms of your capital allocation? It seems like it's not changing right now, but how does it influence you in a rising rate environment and then within that, if you could touch on just the M&A environment, that would be helpful also.

Sure, Steve, this is Heath. I'll take this question. First of all, we're pleased with our cash flow performance this year. Year-to-date, our free cash flow is $1.5 billion, which, as I mentioned earlier, is up 40% year-over-year, and we've had pretty consistent results as we -- each quarter as we work through the year. A little -- a big chunk of that to answer your question about sustainability of that type of performance builds on what Terrence just talked about, and that's stability. And if you think about -- there are times, particularly over the past couple of years, when we've had to flex our working capital, particularly inventory, to handle all of the volatility that's out there in the various supply chains, both uncertainty from our suppliers as well as differing order patterns from our customers. And the last thing we're going to do is be in a position to hold our customers up. So we've had to flex inventory. So now with the visibility improving that's tied to some of the supply chain improvement out there, we've had the ability this year and particularly through the first half of this year to reduce inventory levels, bring our days on hand back more in line. There's a little bit of work to do in a couple of our businesses. But for the most part, we're getting to a better place. And that working capital management has really driven our ability to drive free cash flow improvement year-over-year. So we feel good about that. We feel good in general about our ability to sustain that going forward. In terms of overall capital allocation, which was the second part of your question, was we're fully funding capital expenditures. We have not cut that back demonstrably. Most of our CapEx goes towards new products and new applications. And that is still real, and that is still happening, whether that's on the EV side or some of the AI opportunities or things within our Industrial segment. So that's been fully funded. That is unchanged. And then when we start thinking about outside of investing in ourselves, the opportunities out there around the M&A environment, listen, it's always going to be a bit dynamic in terms of what's coming to market and what's available. And we always take the approach that are we the right owner for something that fits strategically well for us and then do the financials work. And I feel like I say that's just about every quarter. But at any given time, we're looking at about half a dozen things. And most don't get across the finish line for one reason or another, but we're active in that process. And there's been some things that, that you'll continue to hear us talk about over time, I still believe that M&A will take up about 1/3 of our free cash flow. But it's lumpy. It's not a straight line in terms of linearity of how that's deployed. So short answer, no change in our capital allocation strategy. We feel good about where we are from a balance sheet perspective and it allows us to play offense going forward.

Our next question comes from the line of Matt Sheerin with Stifel.

Terrence, I wanted to drill down a little bit more on the opportunities in AI in your comments. It sounds like you've got a strong relationships with key customers and semiconductor suppliers. But could you talk about the competitive landscape and the edge you have over competitors? And could you also size up the market opportunities for us perhaps as a percentage of your overall cloud revenue?

Sure, Matt. Thanks for the question. And let's face it, we like data anywhere because typically, you need a connection to occur. So when you think about the core of what we do, whether it's data, power or some sort of signal that's where we see opportunities. And anywhere data goes is an opportunity for us. When you think about AI, though, there's one thing to move data, but when you think about the high speeds that this is at as well as the low latency you need, it's really an extension of what we've been talking about from a cloud perspective. There's one thing to have a data connector. There's another thing to have a high speed that can handle what these GPUs are throwing off as well as make sure that you not only have to compute, you also have to move the data, you also have to store the data and how does that all stay in sync. And that's really -- there is a number of us in the world that do that very well because you're at the cutting edge of technology, and you not only need to design with the people that build the architecture, you need to be very close to the semi companies that are making these next-generation chips that everybody is all excited about. So when you look at it, I sort of view it's the next step of where cloud went, and we're just taking it up a level of speed and certainly, with the adoption of AI that we all hear about, it's exciting for us. So from a product set, when you look at what we do, we have sockets that actually the GPUs and the CPUs go into. You do need something that takes that semiconductor and connects it into the Board, our high-speed backplane products that actually make sure how the signal moves around. And then you get into things like DAC cables and so forth that actually make sure you're connecting different parts of the rack and boxes together, and we've had opportunities on all of those similar to we talked in cloud. And what I really like is our position that our team has built that is both with the semi customers as well as the ones that are working on the architecture, which are also the cloud guys really has positioned us well. And like I said, we have over $1 billion of wins. They probably will go out over a 4- to 5-year period as they ramp. So -- and the momentum is still building on the win side. So once we work through some of the market correction, we're working through in a place like D&D, I think you're going to continue to see the ramp of these programs probably be more in the middle of our fiscal '24 that will be more visible to you. Some of it's in our revenue already. But the launches will be more in '24 based upon the launch schedules of our customers and through the architecture build-out. And we're really excited about the wins we have and also the problems we're trying to solve with our customers, which is really, in essence, what our engineers do.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

I realize the company only formally guides 1 quarter at a time. But given that we're now in your fiscal fourth quarter, I'm hoping you can provide some early thoughts on fiscal 2024 and how you're currently thinking about trends by end market for next year?

Thanks, Mark. And I also appreciate you giving a caveat that we only guide for 1 quarter. So anything I'm going to give here will be qualitative about what we see and some insight because, I think I probably talked about some and Heath talked about some already. So first of all, starts off, it is nice to see the stability that we're starting to see in orders and communications that tick up, so I do think the comments start with that sort of as a backbone. It is important that some of the destocking we talk about in some of our businesses, that will work off. I can't tell you the exact date that will be done. But that will -- while that's a headwind now, that will be something as we get into next year will be a tailwind for those businesses. I also think when you look at transportation, specifically, our transportation growth this year is going to be driven by automotive, is in the low double digits. That's on pretty low production growth and it has the content that we've always talked to you about and then a little bit of price on top of that, really, you should expect on top of what auto production is we'll be in that 4% to 6% next year because we won't have the additional price increases unless material would go up more. And so in transportation, we still see content being the driver into next year. I think the only thing that we're watching real time is, in our commercial transportation business, we see some signs in China and North America, that being a little bit slower. So that's one market we're going to keep an eye on. And then when you get into the Industrial segment, you think about the 3 units that I talked about on the prepared comments, Commercial aerospace is not going to be slowing down in the recovery, and it's one area that we're still playing catch up. Medical interventional procedures, we feel good about, and you're seeing a strong growth there. And renewable applications, we would continue to expect strong growth momentum there. And once we work through the destock and industrial equipment, we'll get back to some of the growth that we've been showing you. And then in the Communications segment, it really is around the destocking and then the AI programs kicking in. So having the stability, I think, you see the secular content drivers, we still expect it will be a slow global economy. But really, when you look at these content levers that we've been talking about, will really be the drivers as we get into next year and hopefully the inventory destocking winds down.

Our next question comes from the line of William Stein with Truist Securities.

First, sort of a supply chain question. You've given us a pretty good bit of information already about where you're seeing destocking and such. But like to draw the comparison to some of the semiconductor suppliers who in this cycle was very effective at taking that extended lead time situation as an opportunity to constrain what they were delivering into the channel so that they didn't run into this problem. And I wonder if there are any lessons learned from that? I know every cycle is a little bit different. But as you think about this going forward, is that a potential opportunity to improve the business to constrain what you ship into those guys, so you don't wind up in the situation.

So a couple of things, Will. I just want to give a contrast between semi-LAN and what we do because I do think there is an important difference. Semiconductors had some lead times that were well out over a year. I would tell you, when you look at what we do, our lead time typically on average, could be 6 weeks to 12 weeks. And while we had supply chain challenges, I think the bigger challenge was not as extending lead times, it was meeting lead times. And when I think about the service levels we're at today, which our direct customers feel other than maybe in the aerospace market, our service levels are back to pre-COVID levels from a shift to request element. So I do think there's a big difference on lead times and certainly the semiconductor fab process is very different than the connector process. But I do think while we are around the same trends and we may have stocking and destocking effects, the lead time disconnect between a semiconductor and a connector is very different, and ours is much shorter. We did constrain demand in certain areas where we knew we were ahead, you take our clients business, we did not add capacity for our clients business to be permanently at a $1 billion run rate. We were trying to manage through our various channels. So I think you're always going to have elements of a little bit of stock and destock where you have more channel activity. Let's face it, we build the orders. When we're getting orders, we don't say, well, this is a real order and this is a fake order. Every order is real because there is a customer that's asking for something someplace, so I actually feel pretty good how we manage through it. I'm also pretty proud when you look at our communications segment with where their margin is running on how much their revenue is all, I think it also proves we've improved the profitability substantially in that segment when we're at maybe a cyclical low, that really gets us back to where we can take the margin back up to what we talked about when we target for the segment more like 20%. So there are lessons we think about. I'm not sure it relates to the semiconductor processes as much as how we manufacture.

Our next question comes from the line of Christopher Glynn with Oppenheimer.