Amphenol - Q2 2014

Transcript

Operator (participant)

Hello, and welcome to the second quarter earnings conference call for Amphenol Corporation. Following today's presentation, there will be a formal question-and-answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, this conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference co-host, Ms. Diana Reardon. Thank you. You may begin.

Diana Reardon (CFO)

Thank you. My name is Diana Reardon, and I'm Amphenol's CFO. I'm here together with Adam Norwitt, our CEO, and we'd like to welcome you all to our second quarter earnings call. Our Q2 results were released this morning. I'll provide some financial commentary on the quarter, and Adam will give an overview of the business and current trends. We'll then have a question-and-answer session. The company closed the second quarter with sales of $1.314 billion, and EPS of $1.9, exceeding the high end of the company's guidance and achieving new records of performance. Sales were up 16% in U.S. dollars and 15% in local currencies compared to Q2 of 2013. From an organic standpoint, excluding both acquisitions and currency impacts, sales in Q2 were up 7%.

Sequentially, sales were up 5% in U.S. dollars and 6% organically from Q1 of 2014. Breaking down sales into our two major components, our cable business, which comprised 7% of our sales, was up 2% from last year. The interconnect business, which comprised 93% of our sales, was up 17% from last year, reflecting the benefits of both good organic growth and the company's acquisition program. Adam will comment further on trends by market in a few minutes. Operating income increased $256 million from $224 million last year. Operating margin was 19.5% in the quarter, compared to 19.7% last year and 18.8% last quarter. The decline in operating margin versus 2013 is primarily due to the lower profitability level of the Advanced Sensors business acquired in late 2013.

As previously discussed, the acquisition is accretive on an earnings per share basis, but reduces the company's overall operating income percentage as the business currently operates at a lower level of profitability than the average of the company. We continue to be very excited about the potential of the acquisition and expect their operating income margins to improve over time based on the combination of their excellent management team, leading technology, and our strong operating discipline. The sequential increase of 70 basis points in operating margins over the first quarter of 2014 represents a very good conversion margin on incremental sales of 32%. This strong performance resulted from an increase in operating margins in the interconnect business based on excellent operating execution and cost management on incremental sales volume.

From a segment perspective, in the cable segment, margins were 12.7%, up from 12.2% last quarter and down from 13.8% last year, primarily due to the impact of market pricing and some impact from product mix. In the interconnect segment, margins were 21.6%, up from 20.9% last quarter and down from 22% last year. We're very pleased with the company's operating margin achievement, and we continue to believe that the company's entrepreneurial operating structure and culture of cost control allows us to react in a fast and flexible manner, thereby constantly adjusting the business to maximize profitability in what continues to be a dynamic environment. Through the deployment of these strategies, the management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance.

Interest expense for the quarter was $20.1 million, compared to $15.6 million last year, due to higher average debt levels resulting from the company's acquisition and stock buyback programs. Other income was $4.3 million in the quarter, up from $3 million last year, primarily as a result of higher interest income on higher levels of cash and short-term cash investments. The company's effective tax rate in the quarter was 26.5%, compared to 26.8% last year, and net income was approximately 13% of sales in the quarter. Earnings per share increased 15% to a record $0.99 in Q2, up from $0.95 last year, a very strong performance. Orders for the quarter were $1.32 billion, resulting in a book-to-bill ratio of approximately 1:1.

The company continues to be an excellent generator of cash, and cash flow from operations in the quarter was $181 million, or 102% of net income. For the six months ended ended June thirtieth, operating cash flow was $383 million, or 114% of net income. The company continues to target cash flow from operations in excess of net income. The company had good working capital management during the quarter. Inventory was $805 million at the end of June, up 4% from March. Inventory days were 81 days, consistent with March levels. Accounts receivable at the end of June was just over $1 billion, up 6% from March, and days sales outstanding declined 1 day to 70 days.

Accounts payable increased 11% to $534 million at the end of June, and payable days were up 4 days to 54 days. The cash flow from operations of $181 million, borrowings under the company's revolving credit facility of $120 million, and $60 million of proceeds from stock option exercises were used primarily to purchase approximately 1.4 million shares of the company's stock for $129 million, to fund capital expenditures of $52 million, and acquisition payments of $10 million in the quarter, and for dividend payments of $31 million. This resulted in an increase in cash and cash investments of $144 million during the quarter. At the end of June, cash and cash equivalents and short-term investments totaled $1.4 billion, the majority of which is held outside the U.S.

Total debt was $2.3 billion, bringing net debt at the end of the quarter to $900 million. At quarter end, borrowings and availability under the company's $1.5 billion revolving credit facility were $290 million and $1.2 billion, respectively. EBITDA for Q2 was approximately $308 million. At the end of the quarter, the company had 2.9 million shares remaining under its 10 million shares stock repurchase program, which expires in January 2015. As mentioned in the earnings release, the company's board of directors has approved an increase in the quarterly dividend on the company's common stock from $0.20 to $0.25 per share, increasing the yield to just over 1%. This increase is effective for payments beginning in October. From a financial perspective, this was an excellent performance.

Adam will now provide an overview of the business current trends.

Adam Norwitt (CEO)

Well, thank you very much, Diana, and I would also like to add my welcome to everybody on the phone here today. As Diana mentioned, I'm gonna highlight some of our second quarter achievements, and in particular, I plan to discuss the trends and progress across our various served markets. Finally, I'll make a few comments on our outlook for the third quarter, as well as for the full year of 2014, and we'll certainly leave some time at the end for, for questions. I'm just very proud that in the second quarter, Amphenol has set again, new records in sales and earnings per share and exceeded the high end of our guidance. Diana mentioned sales increased 16% from prior year and 5% sequentially, establishing for the company a new record of $1.314 billion in sales.

We're also very pleased that our orders reached a new record of $1.32 billion, with the book-to-bill just above one. Profitability, as Diana mentioned, was very robust in the quarter, and we generated strong sequential conversion margins, which led to an expansion of our industry-leading operating margins to 19.5%. Finally, I'd just like to note that with the board of directors approving the 25% increase in our company's quarterly dividend from $0.20 to $0.25, this is yet another very clear indication of the sustained financial strength of Amphenol. I'm just very proud of our global team.

These record results reconfirm the strength of our entrepreneurial culture, as the Amphenol management team was once again able to react quickly to the many, many opportunities that are being created by the electronics revolution, all while exercising the consistent discipline and drive necessary to create outstanding operating performance. The strength of our strategy of market diversification also was very evident in the second quarter. The Amphenol business remains extremely balanced and broad, with no single end market representing more than 17% of our total sales in the quarter. Turning to the trends and progress across those markets, the military market represent 11% of our sales in the quarter. Sales were down slightly from prior year and up slightly from prior quarter, as growth in military vehicle, airframe, as well as communications applications, was offset by overall reduced demand in other segments of the military market.

There's no question that the overall military market remains uncertain, but nevertheless, we expect demand in the third quarter to grow slightly from these levels. We continue to expect this market to return to growth in the second half as volumes increase related to new programs on which we have higher content. We're very confident that our technology leadership and broad program participation positions us to benefit long-term from the expanding adoption of electronics in military hardware, as well as from growth in military hardware spending in emerging geographies. The commercial aerospace market represented 6% of our sales in the quarter. Sales in this market increased a very strong 26% from prior year and 4% sequentially, due essentially to increased jetliner production, as well as our expanded content on new airplane platforms.

In addition, we continue to benefit from the Ionix acquisition that we completed at the end of last year. While we do expect some normal seasonal moderation and demand in the third quarter, we continue to maintain a very positive outlook for the commercial air market in 2014 and beyond. We simply have an excellent and expanding position in this exciting market, and we continue to take advantage of the many new technology opportunities that are arising on new airplane platforms. In particular, as our new interconnect technologies are able to resolve an increasing variety of challenges faced by our customers who are designing and building next generation planes, we're confident that our position will continue to strengthen over time. The industrial market represented 17% of our sales in the quarter. We had extremely strong sales growth of 52%-..

which was supported by the Advanced Sensors acquisition completed at the end of 2014. We had also very strong organic growth of 16%, which was driven by gains in the medical, instrumentation, rail, mass transit, heavy equipment, as well as oil and gas segments. On a sequential basis, sales increased 8%, with growth in virtually all areas of the industrial market that we play in. We're especially encouraged by the breadth and balance of our industrial growth, which is a clear validation of our long-standing strategy of diversification across a broad array of segments within this important market. In addition, I'd like to note that we're very pleased to be seeing early and positive signs of the value of our newly acquired sensor portfolio to our industrial customers around the world.

In the third quarter, we expect further growth, despite what is a traditionally seasonally softer quarter, as we continue to make excellent progress broadening our technology offering while increasing our penetration of the many exciting growth areas of the industrial market. The automotive market represented 15% of our sales in the quarter. Sales in this market also increased a very strong 42% from prior year and 18% organically. We continued to benefit from the diverse range of new sensor and infotainment automotive products that are provided by Advanced Sensors and Tecvox, the two acquisitions we made at the end of last year. We also grew our sales organically with new products used in telematics and emissions management, as well as drivetrain control applications. On a sequential basis, sales grew by 3% in the automotive market.

Automakers continue to incorporate advanced interconnect and sensor products into a wide array of vehicle electronic systems, which is really creating great opportunities for our company. In addition, we're beginning to see interesting opportunities to leverage our interconnect and sensor product range together to create new solutions for automotive customers. Ultimately, we're confident that our broad, high technology offering will enable us to continue to outperform the overall automotive market. Looking towards the third quarter, we expect a slight increase in sales in what is also typically a more seasonally moderate quarter, and we look forward to an excellent 2014 and beyond for our expanding automotive business. The mobile devices market represented 16% of our sales in the quarter.

Sales in this market increased a stronger-than-expected 8% from prior year, driven by higher demand for products used essentially in mobile computing devices, including both tablets and laptops. While we had expected some sequential decline in sales coming into the quarter, in fact, we were able to achieve 6% growth over the first quarter, as we were able to quickly adjust our production resources in order to capitalize on higher levels of demand across a broad range of devices and customers. Looking ahead to the second half, we now anticipate a somewhat faster ramp-up of sales in the mobile device market, and thus expect overall sales to grow in the range of low single digits for the full year.

This increase from our previous expectations of a mid- to high-single-digit decline relates to a stronger-than-expected outlook on a range of existing programs, together with some benefit from new product launches. The mobile device market remains, no question, extremely dynamic. It is really only through our leading technology offerings, together with our outstanding and extremely agile team, that we're able to continue to react quickly to capitalize on any opportunities that arise to drive growth in this important market. The mobile networks market represented 12% of our sales in the quarter, and we executed very well in what is just simply an excellent quarter in the mobile networks market. Our sales increased a very strong 26% over prior year and 16% sequentially.

While this sales growth was strongest in Asia, in fact, our sales grew strongly in all our major geographies and was balanced across our wide range of both equipment manufacturers as well as our site materials sold direct to operators. While we continue to anticipate in the second half a somewhat lower level of demand, we maintain a very positive view of the mobile networks market for the full year 2014. We're very encouraged that our long-term technology investments across the broadest array of interconnect and antenna products has positioned us strongly to capitalize on accelerating next-generation mobile network deployments, and we look forward to continuing to build on this position in the long term. The information technology and data communications market represented 16% of our sales in the quarter.

As we had expected, sales decreased by roughly 6% from prior year on, on primarily lower sales of networking-related products. Sequentially, sales did increase slightly, as growth in servers and network products were partially offset by a moderation of sales of products that are used in storage systems. Based on our latest input from customers in the IT market, we do not expect any significant increase of demand in the third quarter, and accordingly, we continue to anticipate that our sales will be flat to slightly down for the full year in this market.

There are clearly some market uncertainties in the IT market, but despite these uncertainties, we remain very confident in our long-term position in the IT Datacom market due to our leading technology offering, our preferred supplier relationships with a very wide array of OEMs, as well as our fast-growing presence with direct with data center operators and web service providers. The broadband market represented 7% of our sales in the quarter. Sales declined slightly from prior year on a moderation of spending, in particular from U.S. cable operators, and increased, as we had expected, by around 4% from the first quarter.

While the market environment for traditional bulk cable continues to be challenged, and while the competitive pricing environment remains difficult, we are encouraged to see still emerging benefits of our product and customer diversification, which has enabled us both to grow our range of broadband customers while also offering what is a more complete interconnect product range. Moving into the third quarter, we expect sales in the broadband market to increase from these levels, and we look forward to maintaining a strong position in the broadband market. Well, looking back on the second quarter, I can just say again that we're just extremely proud of the entire Amphenol organization, who has continued to execute well in what remains a very challenging and dynamic market environment.

Our superior performance is a direct reflection of Amphenol's distinct competitive advantages, our leading technology, our increasing position with customers across a diverse range of markets, our worldwide presence, and our lean and flexible cost structure. But at the end of the day, the company's greatest strength continues to be Amphenol's high-performance culture, which gets reinforced every single day by the company's agile and entrepreneurial management team. Turning towards our outlook for the third quarter and the full year, based on constant exchange rates, as well as assuming stable economic conditions, and in consideration of our strong second quarter performance, as well as current expectations for the remainder of the year, we're very pleased to be able to increase our guidance.

We now expect in the third quarter, as well as in the full year of 2014, the following results: We expect sales in the range of $1.32 billion-$1.35 billion and $5.21 billion-$5.27 billion, respectively. And for EPS, we expect for the quarter and the year in the range of $1.12-$1.15 and $4.35-$4.41, respectively. For the full year, this guidance now represents sales and EPS growth, excluding one-time items, of 13%-14% and 13%-15%, respectively, a very strong guidance. We're very encouraged by our strengthening outlook in sales and earnings, especially given the many continuing dynamics across the global economy.

Look, the ongoing revolution in electronics continues to create for us tremendous opportunities, and I remain extremely confident in the ability of our outstanding management team to continue to capitalize on these opportunities, both to grow our market position and to expand our profitability, and thereby to drive continued superior performance for Amphenol. Thank you very much, and at this time, operator, we'd be happy to take any questions that there may be.

Operator (participant)

Thank you. As a reminder, please limit yourself to one question and one follow-up. Our first question comes from Sherri Scribner from Deutsche Bank. Your line is open.

Sherri Scribner (Director, Senior Sell-side Equity Research Analyst)

Hi. Thank you, Adam and Diana. I wanted to just ask about what's driving the upside to the guidance. When you look at it, just looking through the segments, it seems like maybe mobile devices is driving some of that. You raised your outlook for the second half. I just wanted to get a sense of, is that the right way to think about it? Which areas are really driving the upside?

Adam Norwitt (CEO)

Yeah, Sherri, thank you very much. I think you put your finger on it. Mobile devices is certainly, of all the markets, the one that had the biggest change in terms of our outlook. I think the other markets, there are some small puts and takes, but, you know, as I mentioned, we certainly are very pleased that not only were we able to react quickly to what was essentially an unexpected degree of demand in the second quarter, but we continue to believe that that will translate into some higher levels than we had expected in the coming third quarter, as well as through the year.

Ultimately, you know, we go from having felt that that market would have been a kind of a mid- to high-single-digit decline to, you know, a low-single-digit increase on a year-over-year basis. So that's no doubt about it, of all of them, the most meaningful change in the guidance.

Sherri Scribner (Director, Senior Sell-side Equity Research Analyst)

Okay. And then, Adam, I was hoping to get your thoughts about the demand environment right now. I think in the press release, you said there's still a lot of uncertainty, but just wanted to get the sense of, do you think that things have gotten better? Thank you.

Adam Norwitt (CEO)

Yeah, well, thank you very much. I mean, I've said many times before that, you know, I don't fancy myself at all a macroeconomist, and, you know, we read the papers and, you know, there's no question that there remains still a lot of turbulence in the world. No doubt about it, some of our markets have, you know, a more fair wind behind them. If you look at markets like the automotive market and the industrial market, wireless infrastructure, you know, clearly, these are markets, you know, commercial aerospace, another one, where we are outperforming significantly, we believe, the end market, but the overall markets are performing well.

At the same time, you know, you just have to look at a cross-section of earnings releases from various OEMs in the electronics industry to know that not everything is going up and to the right. There continues to be, you know, a lot of dynamics in the market, you know, from every corner. And that's not to mention any, you know, kind of geopolitical things that happen, you know, or don't happen in time. You know, is the overall economy growing at a different pace of GDP? That I have no idea. You know, we're not commissioning studies about this, and I actually don't spend a lot of my time to look at, you know, what the GDP trends are. Is it a half a point better or a half a point worse?...

But we see a lot of opportunities ourselves to capitalize on that change, because at the end of the day, when there is dynamics, the agility of how we run the company and the agility of the culture of Amphenol has just so much power to take advantage of that change. You know, unexpected things that come from every corner of the electronics industry, these are the things that the Amphenol team is just so capable at taking advantage of. It's not taking advantage of here at headquarters with Diana and I kind of directing traffic. It's more, you know, having our general managers around the world really sensing out in real time when those dynamics are coming and taking advantage of them.

I think this quarter was a great example of our ability to really, you know, find those areas of strength, take advantage of them better than maybe others can do, and thereby to drive the results that you've seen.

Steven Fox (MD)

Thank you.

Adam Norwitt (CEO)

Thanks so much, Sherri.

Operator (participant)

Shawn Harrison from Longbow Research, your line is open.

Shawn Harrison (Senior Research Analyst)

Hi, congrats on the quarter. Sorry to maybe take a negative tone toward the mobile devices business, but the past two years, as you had positive, you know, expectations heading into the back half of the year, some surprises came out. I guess, what is different this year? Is there more content per device that you're seeing? It sounds like you picked up a little bit of share during the second quarter, but maybe just flesh out, you know, why this year will be different than prior years.

Adam Norwitt (CEO)

Yeah, no, Shawn, not, not a negative. We don't take it negatively whatsoever. I think what we have always said is the mobile devices market is extremely dynamic. I just, you know, to Sherry's question, you know, mentioned that we see a lot of dynamics around all the markets, but there's none that are more extreme than mobile devices. And, you know, we, we certainly don't feel that we are oracles in, in that market in terms of being able to always to predict perfectly what happens. At the same time, you know, our team is just very reactive. And so in the second quarter, it's true, whether that's picking up share, I mean, we were able to satisfy customers on a more, you know, expedient fashion than, than others were, and that can carry over going into into the second half, and we believe it will.

We're always prudent in how we look at this market. You know, we're not going to, you know, give forecasts, you know, to the penny in terms of what every rosy outlook that you may read in the media would be. So we're always very prudent in this market. I think when we looked last year at the change, there was a kind of a structural change in the technology of the products, and that led us to have a second half that wasn't what we expected it to be. We don't think that that's going to repeat itself. As we talked about, that was a one-time shift.

And I think, you know, looking at the second half today in the mobile devices market, and we feel that there, you know, we have a strong position, whether it's gaining share or not, it's already a very strong position. We're able to satisfy customers on the ramps that they have or on the increased demand that they have, and that serves us well going into the second half. And, you know, we'll see how it goes. Again, we're not, you know, perfect at picking where that market goes, but we are excellent at capitalizing on it regardless.

Shawn Harrison (Senior Research Analyst)

Very fair. And then, Diana, there's a $600 million piece of debt coming due in the middle of November. What are your expectations in terms of, will you refinance that? Will you pay it off with the credit facility? How should we think about that piece of debt coming due?

Diana Reardon (CFO)

Sure. I mean, I think we have options in that regard. We did, if you recall, do a debt offering in January of this year in anticipation of the fact that we had the maturity coming up in November, and, you know, to take advantage of the rates at that time, although rates are still quite low now. So I think we have options. One option certainly would be, you know, to refinance it with another bond offering, and another option is to use availability under our revolver, and we certainly have plenty of room there, and I think we'll make that decision as we go along here in the next few months.

Shawn Harrison (Senior Research Analyst)

But none of those accretive dynamics are included in guidance currently?

Diana Reardon (CFO)

You know, I think the guidance would assume that we do, you know, some sort of refinancing, sort of coincident with the date of the maturity of the bond offering, but I wouldn't expect that whatever we do would have a very substantial impact.

Shawn Harrison (Senior Research Analyst)

Gotcha. Thanks so much.

Diana Reardon (CFO)

Sure.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

Thank you. Steven Fox from Cross Research, your line is open.

Steven Fox (MD)

Thanks. Good afternoon. A couple of questions just on some of the comments you've made so far, Adam. First of all, in the mobile devices market, talking about satisfying your customers quicker than others, can you just expand on what you were referring to and what kind of capabilities you seem to have gained that are giving you that advantage? And then I had a follow-up.

Adam Norwitt (CEO)

Sure. No, I mean, look, it just comes down to... since it is such a volatile market, Steve, that, you know, demand can go up and demand can go down very rapidly, and dealing with that is not easy. I mean, that can mean you've got to hire a lot of people, or you've got to, you know, do the opposite. That can mean you have to be, you know, you have to work in a way that's flexible from a capital standpoint, from how you set up production lines. I mean, there's just a whole host of things, and, you know, I can tell you that I'm not going to go into any details here because some of that is, you know, what I would consider nice, proprietary secret sauce about our success.

But at the end of the day, it comes down to a mindset. You know, the culture of Amphenol and our organization, as you know, probably better than anyone here, having covered the company for so long, we come down to general managers in the company, you know, 85 of them around the world, who run these businesses in real time, and they have all the tools at their disposal to make changes without having to go through, you know, layers upon layers to say, you know, "Can I do this, or can I not do this?" You know, in that market in particular, you know, the customers come to you at noon, and they need an answer by 12:30 P.M.

If you have to go through some approval process to say, Well, I'm gonna go hire, you know, another 150 people or 500 people, or I'm gonna go buy this machine, or I'm gonna do this, you have already missed the opportunity because someone else has given them that answer by 12:30 P.M. when they asked the question at noon. It's that real-time ability to respond that is essentially in the DNA of our culture and how we're organized, that serves us so well in that market. On the flip side, obviously, when there are downturns, as we've experienced in times past, it also serves you well because you can make quick adjustments, you know, to your resources to preserve the bottom line of the company, and thereby it makes that business sustainable.

Because if you get into a mobile device business where you go through these kind of convulsive ups and downs with restructurings and mass, you know, plant closings and other things, you know, that you're never going to be prepared for when that upside comes, because you're now recovering from the, the kind of massive change that you had to undergo at the last downturn. And so because we're able to do that in real time with general managers who make real decisions every day, it just makes it a much, much more successful, and it makes us more able to deal with that dynamic market.

Steven Fox (MD)

Great, thanks for that. And then just as a quick follow-up, with regard to the Sensor acquisition, I know you're not gonna provide details in terms of financials, but you did mention a couple of times that when you talked about industrial and auto, in particular, that you're already seeing opportunities to leverage that portfolio. I was hoping you could give us maybe some examples or just sort of guide us in terms of what you mean, and what kind of time frame that would be related to. Thanks.

Adam Norwitt (CEO)

Sure. No, thank you very much. It's a great question. And, you know, I'm not going to give specific product examples for obvious competitive reasons, but I can just tell you, I have personally been, over the course of the last quarter, to quite a number of customers because I wanted to sit in front of those customers and hear from them, you know, what they... How they felt about this and what they saw for the future. And I can tell you, it's really universal. They are so pleased to have us coming in as, you know, a company with tremendous resources, with a tremendous history, in particular, in high reliability, harsh environment products. I mean, we invented most of these harsh environment, high reliability products.

We have been the company, you know, for the better part of a century, who they recognize as that enterprise, and then to come in and bring together that core sensor technology that comes all the way from the sensor element to the ability to package it. That has been just such a wonderful story to tell and has received just a great reception. And these are customers in a wide variety of areas, in a wide variety of regions.

Steven Fox (MD)

Great. Thank you very much. Congrats on the quarter.

Operator (participant)

Thank you. Matt Sheerin-

Adam Norwitt (CEO)

Thanks, Steve.

Operator (participant)

Matt Sheerin from Stifel, your line is open.

Matthew Sheerin (Managing Director, Senior Equity Research Analyst)

Yes, thanks. Hi, Adam and Diana. Question, Adam, regarding the mobile networks business, mobile infrastructure business, where you've had strength and you're talking about a moderation. Is that just based on what you're seeing in terms of programs? There's been some semiconductor companies out there talking about some push outs in orders because of a mismatch of components, where there's some component shortages, which are gating production. Are you seeing any of that? Or, you know, what are some of the things you're seeing in terms of visibility there?

Adam Norwitt (CEO)

Sure. No, thank you very much for the question. I mean, look, mobile networks has been a very positive market for us this year, and I think we've been speaking consistently through the course of the year that we felt that there was, you know, probably more first half spending than second half. Now, all that being said, even with some moderation in our business in mobile networks in the second half, that would still be up quite significantly on a year-over-year basis. The shortages that you talk about, these aren't directly impacting us. I mean, most of these shortages that are being talked about around the industry have to do more with semiconductors, but clearly, they impact customers and their ability to procure all the components to make, you know, the cell site equipment.

You know, that, that can have an impact on, on our business as well. I think if you had asked me at the very beginning of the year, I probably would have told you that the, the second half would have a more pronounced downturn than the, the type of moderation that we're anticipating today. I think there has been some of that stretching out that you, that you mentioned. I think that may be somewhat more magnified in Asia, where there have just been, you know, a few very significant build-outs, which use a lot of components, and some of those components aren't. No one can make enough of them. None of those are our components.

We're doing a fabulous job to satisfy the increase in demand, and we have had really, you know, no issue to support what are, what are very significant increases in, in this business. I mean, if you think about it, you know, on a sequential basis in the mobile networks market, a 16% increase, you know, that's pretty significant to deal with in, in a, in a 90-day period, and we've had no problem to deal with that. And, you know, we look forward, and we feel very good about how that market is progressing this year. And one thing, you know, I, I think I talked about it last quarter, but I just want to re-emphasize. This was a very difficult market for the better part of two, three years, the mobile infrastructure market.

It would have been very easy to throw in the towel and just say: That's a bad place to be. Let's not invest. Let's not spend the time. Let's put our people elsewhere. Let's forget about those customers. We didn't do that, and we don't do that. That's not how we run our company. We knew that there was a pent-up demand and that one day, you know, who knows when that one day would be, but that one day there would be the requirement to upgrade the networks, and we wanted to make sure that we were well-positioned for that. I think this year, we're really, you know, realizing the fruits of, of that confidence and that persistence that we had in continuing to work in, in that market, which, you know, for the better part of three years, was not the most fun market to report upon.

Matthew Sheerin (Managing Director, Senior Equity Research Analyst)

... Okay, that's very helpful. And just as a follow-up, regarding the mobile devices where you are seeing strength, and I know you've got basically three customer segments there, Adam, with a mobile computing and smartphones and tablets, and I know that that dynamic has changed so much for you in terms of the breakdown. Could you give us an idea of where you're seeing the strength? Is it across all those three segments? And give us an idea of the breakdown within those segments of that business.

Adam Norwitt (CEO)

Sure. I'm not gonna, unfortunately, not gonna give you the breakdown strictly, and that's something that certainly we, we try to keep, you know, somewhat closer to our vest relative to customers and competitors. But I can tell you that the strength in the quarter, as I mentioned in my earlier remarks, we saw more coming out of mobile computing devices on a year-over-year basis, coming really from, you know, mobile computing devices, which is a range of things, you know, tablets, laptops, e-readers, Ultrabooks, you name it. On a sequential basis, we actually saw, you know, more strength coming out of, of smartphones and also some on, on laptops and maybe less out of things like tablets. And looking forward, I think we have a positive outlook really across the board for, for those on a sequential basis.

If we look at kind of the second half to the first half, where, you know, we certainly have a strong expectation for sales growth, I think we would see that growth really across all the areas.

Matthew Sheerin (Managing Director, Senior Equity Research Analyst)

Okay, thanks a lot, Adam.

Adam Norwitt (CEO)

Thank you, Matt. Appreciate it.

Operator (participant)

Amit Daryanani from RBC Capital Markets, your line is open.

Amit Daryanani (Managing Director, Equity Analyst Enterprise Systems and Hardware and Electronic Supply Chain)

Perfect. Thanks a lot. Good afternoon, guys. Two questions from me. Maybe, Adam, just on the mobile devices side, you know, historically, you've had volatility that's typically been related to one customer. Do you think the strength you're seeing, the ramps you're seeing, is more than just one OEM? Are there multiple customers that you're excited about, or is it just one customer-driven ramp?

Adam Norwitt (CEO)

Sure. Thanks, Amit, for the question. I think, you know, we have never said that volatility in that market is related to one customer. I think what I've always said is, you know, there are always different leaders in this market over history, and we've seen many companies cycle through the leadership position, and we've dealt with that regardless of who has been there, and we've grown our business consistently, regardless of that. As we look towards, you know, the strength in our business, I would tell you that it's certainly not just one customer. We're working with a lot of customers in that market. There's a lot of, you know, companies who are establishing what I would call, you know, unique niches of strength in various regions, and we have a great position with all of them.

Amit Daryanani (Managing Director, Equity Analyst Enterprise Systems and Hardware and Electronic Supply Chain)

Fair enough. And just as a follow-up, Diana, you know, conversion margins were north of 30%, I think, this quarter on a sequential basis. You're guiding for better than that, I think, in September. How much of that is being driven by maybe accretion or integration from the Sensors acquisition versus other tailwinds that you're seeing? And can you sustain the 30% conversion margins beyond June and September, really?

Diana Reardon (CFO)

Sure. I think that we, as you point out, we did achieve good conversion margin in Q2, and I think just, you know, on a long-term basis, the company has a very good track record of strong conversion margin and strong profitability achievement in a pretty diverse set of environments. This particular conversion margin in Q2 was in line with what we expected for the quarter, and the guidance in the second half for Q3 and Q4 is also actually consistent with the guidance that we had last quarter. It's just on now a higher level of sales. In the Q2 conversion margin, you know, was largely attributable to just great operating execution in our Interconnect business.

In the second half of the year, you know, there's some small contribution from, you know, some expected improvement in some of the acquisitions from last year. But I would say, largely, the improvement in ROS and the stronger conversion margin is just coming on a very strong operating execution on the base business. And, you know, the drivers of that strong profitability are, you know, really an unrelenting focus on cost, attention to the top line in terms of which new business, you know, we choose to participate in, making sure we stay on that high end of technology, and therefore, can demand appropriate value from a pricing perspective.

So you know, while there is some small contribution, I wouldn't say that we're expecting in the second half of the year to have the acquisition, you know, reach what we would consider its full potential to be. That would go out beyond 2014.

Amit Daryanani (Managing Director, Equity Analyst Enterprise Systems and Hardware and Electronic Supply Chain)

Got it. That's really helpful, and congrats on a good quarter, guys.

Diana Reardon (CFO)

Thank you.

Adam Norwitt (CEO)

Thanks, Amit.

Operator (participant)

Thank you. [audio distortion], your line is open.

Speaker 14

Hi, thanks for taking the question. I'm wondering if you can comment on the M&A environment today, and the pipeline, and maybe also comment a little bit about product category that you'll be going after. You recently acquired the sensor business from GE, and I wonder if that's gonna be a particular focus going forward. Thank you.

Adam Norwitt (CEO)

Yeah, no, thank you very much. Obviously, M&A has always been for us a real core component of the company's expansion strategy, and we've been doing M&A, you know, for a long, long time, you know, more, certainly well north of a decade, decade and a half. And during that time period, we've acquired just so many fabulous companies. And last year, and if you take the last two years, we acquired 10 companies in two years. And we continue to have just a very vibrant and strong pipeline, and we continue to look at M&A, not as well, we're only going to go in one direction, or we're going to go after this space and technology, but rather we believe there are great M&A opportunities across the various markets that we serve.

If you just look back, you know, over a 2-year period when we made those 10 acquisitions, those 10 acquisitions were across, I think, 5 or 6 of our end markets. So there was not at all a kind of a doubling down on one or another one of our markets or on one or another of our technologies. At the end of the day, what we look at from an acquisition is we look at, at sort of three simple things. Number one, first and foremost, is management. We look for companies that have great leadership, leadership of people who want to continue with the business, who - and we want them to continue with the business, who will operate in the Amphenol organization as the entrepreneurs, just like our other 85 general managers do in such an effective fashion. Next, we look at technology.

We want companies who are really high technology providers, people who solve problems for their customers in whatever space they may be in. And then finally, you obviously want companies who have a complementary market position to our own. And, you know, despite the size of Amphenol and the breadth that we operate in, there's still just a wide array of potential acquisitions and potential companies that can fit those kind of three litmus tests that we have. You know, you notice what I didn't talk about is, you know, hurdle rates and things like this, because that's not how we run our acquisition. We pay fair prices for things. We certainly look for acquisitions to be accretive, you know, in the first year.

But ultimately, we believe that if you have the right people and you have the right technology, and you're doing that in a complementary fashion to our own, that's going to be a very, very successful acquisition program. It's shown to be such over many, many years, and we believe for many years to come, it will continue to be a great asset for the company.

James Kisner (Equity Research Analyst)

Thanks, and congrats on the quarter.

Adam Norwitt (CEO)

Thanks so much.

Operator (participant)

Mike? Mike Wood, Macquarie, your line is open.

Michael Wood (Associate Director)

Hi, thank you. Also to follow up on the, M&A question, how are you currently viewing making additional acquisitions in the sensor market? Do you need to first integrate Advanced Sensors, or do you have the capacity to make other acquisitions in adjacent connector products? And if you could also comment on the size of sensor opportunities out there in the market.

Adam Norwitt (CEO)

Sure enough. Thanks very much, Mike. Look, we have capacity to make a lot of acquisitions. I think we showed it last Q4. We made four acquisitions in a short time period, and we didn't expand our little headquarters staff here to do that. So there's capacity to make the acquisitions is not a question. So we would not at all restrict ourselves from making another sensor acquisition, given the fact that we just acquired the GE business, you know, just over half a year ago. So we will continue to look for companies across the board in interconnect and sensors and antennas and other things that we do. And we're very confident that that will bear fruits over time. The other thing, you know, you ask about size, and I mentioned the various criteria that we use for acquisition.

Size is not one of those criteria. So we have the capacity and we have the wherewithal to buy companies really of any size, subject to the fact that they fit into our other criteria of having good people and great technology. And I think that, you know, we have a wonderful financial capacity to do those acquisitions. And to the extent that there are companies of a greater size, we would not shy away from pursuing them if they were the appropriate companies to buy.

Okay. Could you also comment on how much your cable business is now, the specialty growth that you were pursuing versus the more commoditized product? And is that pricing pressure limited to certain areas of that, cable business?

Sure. I mean, we don't break it down by products so specifically. Again, competitive reasons are important to be sensitive to here. But what I can tell you is, you know, both with the Holland acquisition that we made a couple of years ago, as well as our internal development efforts, we have a much broader array of products today beyond just cable on reels that we sold for so many years. And, you know, one can imagine that the growth profile of the business, it would not be surprising for you to learn that, you know, those kind of products grow at a somewhat faster rate than do the bulk cable products.

Michael Wood (Associate Director)

Okay, thank you.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

Thank you. Jim Suva from Citi, your line is open.

Jim Suva (Managing Director)

Thank you, and congratulations to you and your team at Amphenol. I have one question for Adam and then one question for Diana. So I'll just take them in that order. Adam, great results, but when we do look at the details underneath this, you know, I think there's still a few little areas of potential improvement, and I want to see if you're aware of them or if you're, you know, seeing that there's the potential to improve on it or what your course is, not specifically regarding the cable products. I believe it's about 7% of your company, so not a big part. Most of the questions previously asked were on the other bigger parts.

But on the cable parts, you know, you're hitting kind of multi-year high in sales levels, but your profitability is kind of the opposite direction, not hitting multi-year highs. So is that more excess industry capacity? Is that more pricing by competitors? Is it product misplacement, or how come we're not seeing with you hitting multi-year high in sales there, not better profitability? And then for Diana, on the dividend increase, you know, I believe, and I personally feel that M&A and organic growth, I guess organic growth first and M&A second, is the best use of cash. So to see your dividend increase, is that just simply you want to have a rule of thumb of kind of a 1% dividend yield going forward? Or is that the M&A opportunities are less, or how should we think about the increase in dividend?

Adam Norwitt (CEO)

... Yeah, Jim, thank you for those, obviously, two excellent questions. Relative to cable, I mean, I just talked about our strategy in cable, which is really to work to diversify our products. I've spoken many times about the fact that, you know, the cable environment, the pricing environment has been a very challenging environment for quite some time. It continues to be a very challenging environment. We continue to be a company that is very disciplined, and we will remain disciplined in our cable pricing. But, you know, when you have a market which is so concentrated, you know, we're also not just going to, you know, let the market totally slip through our fingers. So, you know, we will always let the leaders in that market set the price, and we will follow that.

As I've always said, by the time the sun is set, you know, we don't let a price increase fall through our fingers. But at the same time, you mentioned it very well, it's become a much smaller portion of the business. It's an important part of the business to be in the broadband market per se, because, you know, we have our cable product segment, but the broadband market remains, you know, one of the most important areas in terms of delivering high-speed data to customers' homes. And so we remain very committed to that market, even if the cable products margins are certainly lower than we would like. And you can bet that our team will continue to work towards getting those margins up.

Diana Reardon (CFO)

In terms of the second question, Jim, I think that, you know, there certainly has been no change relative to the company's strategy regarding capital deployment. You know, we've had a very consistent strategy for many years now, and from a, you know, prioritization perspective, you know, certainly while we do prioritize the acquisition program in terms of using the financial strength, we also feel that a flexible and balanced approach is equally important. I think if you would look at the historical pattern for the company, whether you look at 2013 or you look sort of back over the last five years, you know, we've typically about half of our free cash flow, and I think we've generated something along, you know, $2.6-$2.7 billion over the last five years in free cash flow.

About half of that has gone to fund the acquisition program, which has been a very successful program and added a lot of value for the company, and the other half of that has gone back to shareholders. And that return of capital to shareholders has been a balance of stock buyback and the dividend, which really, you know, didn't get, you know, to any real amount until 2013. So the dividend is very much a part of the strategy of having a flexible and balanced approach. The increase that we announced, you know, brings the yield up to about a 1% yield. In the context of the approach that we have for that balance, we think that that's an appropriate level for the company.

But, you know, the prioritization of the capital deployment has not changed, and certainly, the acquisition program is still, you know, from our perspective as a management team, you know, the best, best source of long-term growth and profitability enhancements for the company.

Jim Suva (Managing Director)

Thank you. Congratulations again to you and your team at Amphenol.

Diana Reardon (CFO)

Thank you.

Adam Norwitt (CEO)

Thank you very much, Jim.

Operator (participant)

Thank you. James Kisner from Jefferies, your line is open.

James Kisner (Equity Research Analyst)

Hi, thanks for taking my, my questions. Just a quick clarification: Did you guys buy any companies in the quarter? Just saw on your cash flow statement, you spent $10 million on acquisition. I don't think I heard you say anything about that, maybe that's a prior announced acquisition.

Diana Reardon (CFO)

Yeah, we had a couple of payments that related to some previous acquisitions, and we had a very small acquisition, I call more of a vertical integration of a very small company that didn't rise to the level that would be talked about.

James Kisner (Equity Research Analyst)

Great. And separately, just on the military piece, I'm not sure if I heard you guys right, that you said you're seeing some growth on hardware spend in emerging geographies. I guess I'd always thought of this business as pretty much a domestic and Western business. Just want to understand your exposures there and, you know, what particular geographies, you know, you might be exposed to in military other than the U.S. And I guess I'm just kind of wondering, you know, longer term, if there's conflicts around the world, could you potentially see, you know, some benefit from that? Thanks.

Adam Norwitt (CEO)

Yeah, well, thank you very much. Look, we are not trying to capitalize on world instability, so let me say that very much, at the front end here. You know, we certainly hope that there aren't conflicts around the world, and we, you know, we do our little, little piece to make sure that's not the case. But relative to emerging geographies, I've talked about this actually for quite some time. I mean, when we go back to, you know, the military market as the, as the various, you know, U.S.

and, and European-driven conflicts were winding down, I've talked a lot about the fact that we continue to see an offset to that overall reduction in the military spending environment from two areas.

One is the expansion of electronics in the military, and we see that very much so, much more electronic content, even if it's among a lower pool of spending. And then the second is those emerging geographies who continue to invest and continue to spend money on upgrading their militaries. Now, obviously, as an American company, we're not going to do business with certain geographies. You know, there are places like China and Iran, obviously, as a U.S. company, you don't participate with. Those are all hands-off. But there are a lot of countries around the world where you do work, and you do work with them, and we have worked with them for many, many, many years. I mean, we've been in India for the better part of 43 years as the leader in the Indian military hardware.

We've been in Israel for around, you know, the, essentially, the history of Israel and the history of Amphenol. You know, places like Brazil, places like, you know, Malaysia, Singapore, you name it. You know, there are many, many places around the world who are actually increasing their degree of military spending and, at the same time, increasing the electronic component of that in order to modernize their militaries. And that's something that we continue to see. We continue to have, you know, excellent presence in many of those places. Many of those are also working through U.S. manufacturers of equipment or European manufacturers of equipment. So we get some benefit just through the traditional U.S. and European defense manufacturers, but we also have a lot of presence direct with, you know, with indigenous companies in all of those regions.

I think, you know, the reputation that we have as really the world leader in this space, you know, the technology trends that are in this space, also serves us very, very well as we look to capitalize on whatever growth opportunities there can be from these emerging geographies.

James Kisner (Equity Research Analyst)

Great. Thank you so much.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

Amitabh Passi from UBS, line is open.

Amitabh Passi (Senior Technology Equity Research Analyst)

Hi. Thank you, Adam. I had a couple of questions on, a couple of your key markets. First one, automotive, 18% year-over-year organic growth. I think unit production growth is probably in the low, maybe mid-single digits. You know, and I think we all understand the content growth story, but I wanted to understand, are there other factors at play here? Maybe you're seeing a firmer pricing environment, maybe you're gaining share, or do you think we've kind of hit an inflection on just the rate at which content is growing in automotive that continues to propel, this segment at a pretty stellar rate, particularly over the past few quarters?

Adam Norwitt (CEO)

Yeah, no, it's a, it's a great question, Amitabh. I mean, we're just very proud of the progress that we've made in the automotive market. You know, if we just take a historical perspective for Amphenol, you, you may recall, if we go back, you know, 5.5 years ago, automotive was, I think, in, I think it was Q1 of 2009, it was like 6% of our sales.

Amitabh Passi (Senior Technology Equity Research Analyst)

Yeah.

Adam Norwitt (CEO)

And now, here it is, 15% of our sales. And that growth has come really from two parallel initiatives. One is to develop new products that can capitalize on the expansion of electronic functionality in the car. And so, you know, we've done that just so well, getting in front of, you know, exhaust management, you know, drivetrain, onboard electronics, telematics, infotainment, you name it, where we work very carefully and very closely with customers, you know, at all tiers in the automotive world, to really, you know, help them to enable new systems. It wasn't necessarily that we were taking share out of someone else's hands. It was that we were helping to enable new functionalities in the car with our existing, you know, capabilities to make, you know, strong interconnect products.

And sometimes these weren't even just simple piece part components, but they were complex interconnect systems. And that's something, from an organic standpoint, that we've just done an outstanding job of. And then in parallel, we've made some excellent acquisitions over that same time period, where we've really broadened the range of products that we sell into cars around the world. And then once we, you know, we make those acquisitions, but they don't just join the company and sort of stay in a static position forever. We work with them to cross-sell into customers, to work with them to help to enable next-generation systems, bringing together the technologies within our Automotive Group. And I think those efforts all collectively have resulted in us, you know, achieving the results that you've seen for several years running, including this quarter.

I think 18% growth, no matter how you slice it, is outperforming the market organically-

Amitabh Passi (Senior Technology Equity Research Analyst)

Right

Adam Norwitt (CEO)

... by probably quite a wide margin. And we believe that we've just laid a great platform here. We're clearly not the leader in this space, nor do we aspire to be the leader in this space, but we want to be a strong participant who works very much in those high-value, high-technology, new electronics applications.

Amitabh Passi (Senior Technology Equity Research Analyst)

Then just as a quick follow-up on your IT Datacom segment, I think for the past couple of quarters, you had also started to talk about trying to diversify your customer base, maybe serving some of the cloud service providers directly. Where are we in that process? When do you think it starts to move the needle and maybe serve as an offset to some of the pressure you're seeing with your existing OEM customer base?

Adam Norwitt (CEO)

Sure, no, it's an excellent question, and certainly, this has been a big initiative for us for quite some time. You know, I can tell you, we have in our company a lot of operations who work with what I would call service providers. And that's a really unique asset that we have in the company, understanding how service providers work as opposed to how OEMs work. And they are extremely different in what they care about, what their priorities are, what the predictability of their spending patterns are. But, you know, I think we have a great head start on that because of our, you know, kind of cultural awareness of how to work with those companies and our ability to kind of, you know, tack differently and to work with those customers when we've been so accustomed to working with the OEMs.

You know, the IT market is a very dynamic space. You know, you just got to look at a few of the earnings releases that have come out recently, and then you compare that to some of the earnings releases of service providers and look at the capital that they're spending. There's a massive disconnect that is happening in that market. And so there's no question that the success in the future is going to be tied very much to our success in broadening the customer base. And I can tell you that we're doing a fabulous job of that so far. It's early days because I think the market is in flux somewhat, and so as that transition happens, you know, how the service providers, you know, to what degree do they take control of certain things?

To what degree do they cede control to the traditional OEMs? That whole lay of the land, if you will, is still very much in flux. But however it shakes out, we're going to be well positioned for the long term.

Amitabh Passi (Senior Technology Equity Research Analyst)

Okay, excellent. Thank you.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

Thank you. Mark Delaney from Goldman Sachs, your line is open.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thanks very much. I appreciate the opportunity to ask a question. On mobile devices, can you talk about to what extent you've been able to capitalize on strong growth of 4G handsets in emerging markets?

Adam Norwitt (CEO)

No, no, that's an excellent question. I think, you know, we don't talk specifically about individual products, but no doubt that, you know, next generation, whether that's called 3G, 4G, LTE, TD-LTE, I mean, I'm sure there's other acronyms that I'm missing here. You know, those are clearly driving the, you know, some of the growth in the overall space. I think, you know, I mentioned in the past many times that, you know, when we work in the mobile device market, we work there with a very simple framework, which is we're going to participate in those devices where there's value in our product, and usually, that translates into where there's value in the hardware.

I think what we have started to see in handsets, in particular, is certain companies who have realized that it's just not enough to put, you know, either an Android or a Windows, you know, operating system in your phone and sell it kind of as a blank box. And thus, there is differentiation happening, you know, competitive differentiation happening among certain customers, and that includes customers in less developed or emerging markets. And China, you know, is one place. Whether China is emerging anymore, I don't know, but certainly, that's one place where there is a lot of competition happening and where there are, you know, kind of domestic companies, not the global name brands, who are competing on the performance, the functionality, the kind of use of the product relative to the hardware, not just the software.

And those are areas which, you know, have the potential at least to create for us an opportunity to expand our position. So I think from that standpoint, you know, long-winded answer to your question, I would say yes, that does create an opportunity, whether it is just 4G, that I wouldn't be so sure of. But if there are new devices with new functionality, then no doubt about it, that can create for us an opportunity.

Mark Delaney (Managing Director and Senior Equity Analyst)

Understood. Thank you for that. And for a follow-up question, I'm hoping you can elaborate a little bit more on some of the order trends you were already discussing in mobile networks, and if you could discuss any differences you're seeing there between connectors and antennas, and then what some of the underlying drivers of the trends are between units, pricing, or increased content per system.

Adam Norwitt (CEO)

Yeah, no, I mean, I'm not gonna get into specifics about the various products that we sell into that market, but I can tell you that, you know, we have a very broad offering, and I think I mentioned in my early remarks that we're very pleased with the growth, you know, across the board, whether that is our direct sales of interconnect products to OEMs, our sales to operators of both interconnect products as well as antennas. We're very pleased with the contributions from all of those, and I think we have a very balanced business across both the products as well as the channel, the ultimate channel through which we sell our product. And I think we've seen strong order trends across the board.

You know, the thing that is unique this year in the mobile infrastructure market, besides just that the overall capital spending seems to be more favorable than it has been in several years past, is that the fact that you're seeing growth and not insignificant growth on a global basis, not just concentrated in one or another of the various geographies. I think that is something that is unique. I personally believe it's just because consumer pressure, that they want those devices to have, you know, fast video with no latency. You know, now that they have TVs sitting in their hands, they want to be able to use these TVs that are in their hands, and that's putting a lot of pressure on operators on a global basis to be competitive.

And when you have one operator in one place who says: Well, now I've got the fastest, you know, LTE or 4G or whatever you call it, you know, immediately, the other one's got to react, or else they're going to start to lose customers, and it's expensive for them when they lose these customers. And so I think, you know, that has been a real tipping point, you know, with the prevalence of the devices that now drives over all those investments. And, you know, as it comes back to just our position, we, we have just an outstanding and very broad technology position on interconnect products, on antennas, on cable assemblies, on connectors, you know, RF, fiber optics, high speed, you name it, you know, the, the full range of products that are used in these very advanced, new systems.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thank you very much.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

Our last question comes from Wamsi Mohan from Bank of America. Your line is open.

Wamsi Mohan (Managing Director)

Yeah, thank you. Good afternoon. Adam, you mentioned last quarter that you expected sequential ramps in the back half in mobile devices. Clearly, that's proving out to be a lot stronger now. So would you characterize that the upside is coming from upside demand forecasts from programs that you were prior expecting to drive that sequential strength? Or would you say these are completely new wins and products that you did not expect 90 days ago? And I have a follow-up.

Adam Norwitt (CEO)

No, no, thank you very much for the question, Wamsi. I just very simply would say it comes from a combination of all of that. I think that, you know, we have better demand on existing, and we have, you know, better expectations for some new products, and that's the, I think, a very simple answer to the question.

Wamsi Mohan (Managing Director)

Okay, thanks, Adam. And, can you remind us how much of your revenue goes through distribution now? And is there a plan to change your go-to-market for the sensor products? Are the system designers and buyers the same for the interconnect and sensor products, or do you need to build some infrastructure and change go-to-market for that? Thanks.

Adam Norwitt (CEO)

Yeah, no, it's an excellent question. First, relative to distribution, it's about 12% of our sales goes through distribution. We have no, you know, top-down initiative to say, well, now we've got to change all of our channels relative to sensors, or we got to, you know, take full advantage of whatever strength that we have. Obviously, to the extent that we have some customers or distributors who are interested now in the sensor products that we can offer, simply because they're now part of Amphenol, we're not going to let those opportunities, you know, go by the wayside, so we will take advantage of them.

Relative to your question about inside the customers, whether that is always the same person, you know, as I mentioned earlier, I've gone to a number of customers since we've made the acquisition, you know, strong customers that we had previously, as well as customers who, with whom the advanced sensor business is strong. And I would tell you that it depends... I think there are some customers where it is not at all the same people, and I think in general, the engineers are not the same people. But ultimately, you know, from a procurement, a strategic procurement standpoint, it usually all ends up at one, you know, one top of a pyramid.

The thing that I have seen and alluded to it earlier is even those engineers who, let's say, are just a sensor engineer, or conversely, are just an interconnect engineer. It appears, from my conversations with them, that one of the greatest frustrations those individual engineers have is the challenges that they face with, you know, the sort of corresponding technology. So in other words, you know, you have an interconnect engineer who's having to design things for a system that incorporates a sensor. He doesn't really understand that sensor. Now that you can come in as a company like we now can, and sell that, you know, together with our sensors engineer, our interconnect engineers, you can really solve a big problem for that person.

Because interestingly, a lot of our customers are really big companies, and they don't necessarily communicate internally as well as we can necessarily communicate internally. So you can help to actually bridge some of the gap in those challenges across the two portfolios. And, you know, we've seen the same in years past. You know, antenna engineers don't tend to be connector engineers and vice versa, and that has served us extremely well as we've gone to customers to be able to solve the comprehensive system problems that they face.

Wamsi Mohan (Managing Director)

Thanks a lot, Adam.

Adam Norwitt (CEO)

Well, thank you very much, Wamsi, and I, I think, we have no further questions. So I'd like to just take this opportunity to thank you all again for spending your time with us here today, and hope it's not too late to wish that you have at least some degree of rest this summer for all of you on the phone today. And we look forward to talking to you again here in about three months.

Diana Reardon (CFO)

Thank you.

Operator (participant)

Thank you. Thank you for attending today's conference, and have a nice day.