May 10, 2015 Notes from Flextronics Investor Day: Sketch-to- Scale in the Age of Intelligence We attended Flextronics recent investor meeting, in which the company outlined opportunities in the Age of Intelligence, in which things will be connected to the Internet Flextronics possesses sketch- to- scale capabilities: the ability to guide a new product from general concept all the way through volume manufacturing The company is also the leader in wearable wristbands and the connected home today and says it is also leading the Next Big Thing, with activity in many new areas DEBORAH WEINSWIG Executive Director Head of Global Retail & Technology Fung Business Intelligence Centre deborahweinswig@fung1937.com New York: 646.839.7017 1
Investor Day: Sketch-to-Scale in the Age of Intelligence Executive Summary On May 6, we attended Flextronics annual investor meeting. In the meeting, the company discussed its strategy for the future and its commitments to delivering value to shareholders. In short, Flextronics is positioning its engineering and manufacturing capabilities to make itself a one- stop shop for the coming wave of objects connected to the Internet of Things, which it termed the Age of Intelligence. Flextronics has a unique capability take a basic product idea (a sketch) and assist the customer through the entire process of design, engineering, volume manufacturing (to scale) and logistics. The company is already the leader in products for the connected home and wearables, and it is now positioning itself as the future leader of the Next Big Thing, building on its ability to combine enormous innovation resources, cross- knowledge of technology in many sectors and supply- chain intelligence and knowledge. For its shareholders, Flextronics is improving its execution, operating discipline, and the company is pursuing attractive business models and generating cash that it is returning to its shareholders. Analyst Day Overview The well- attended afternoon meeting for analysts and investors was held on May 6 in New York. The meeting included a summary presentation from the CEO, which outlined the new opportunities that Flextronics sees in the Internet of Things (which it called the Age of Intelligence), followed by a view of its innovation activities, updates from its business segments and a financial update by the CFO. The opportunities from the Internet of Things emanate from many sectors healthcare, consumer, agriculture, energy and transportation in which Flextronics is a leader in manufacturing. The company sees itself uniquely positioned to deliver technology to these industries. Moreover, the company has a wealth of technology in product design, materials and manufacturing as well as extremely deep supply- chain capabilities. This enables it to take over many of these functions from those industries ( sketch to scale ), enabling them to focus more intensely on their core competencies. Finally, because quality metrics are essential in manufacturing, Flextronics also has applied many metrics to evaluate its performance, and the company is delivering on its promise to return cash to shareholders through steady share repurchases. The Age of Intelligence Is Now Flextronics management outlined four eras with associated growth in GDP per capita. The first three were the Industrial Age (from 1750 to 1850), when world GDP doubled every 100 years; the Modern Age (1850 to 1970), when world GDP doubled every 40 years; and the Information Age (1970 to 2010), when global GDP doubled every 25 years. We now find ourselves in the Age of Intelligence (2010 to present), in which global GDP is doubling every 15 years. 2
Figure 1. Average World GDP per Capita (USD) Sources: World Bank, Maddison Project, De Long- UC Berkeley, Flextronics IDC estimated that by 2020, the Intelligence of Things will result in 50 billion connected devices and a $7.1 billion total addressable market (up from 10 billion devices today.) McKinsey Global Institute estimates that adding intelligence to devices can create the following opportunities: Figure 2. Market Opportunities from the Intelligence of Things Market Opportunity Comments Healthcare $2 trillion Can bring a 10 20% reduction in chronic disease Consumer $1 trillion 100% growth in the number of connected devices Energy $500 billion 2.5 5.0% reduction in operating cost Transportation $200 billion A 25% reduction in vehicle damage cost Agriculture $100 billion A 10 20% increase in yields Source: McKinsey Global Institute The World Is Changing At the same time, Flextronics argues that the world of manufacturing is changing, a product of the complexity of global supply chains, higher regionalization, the growth of Asian original- equipment manufacturers (OEMs), faster product cycles, more disruptive products, new hardware OEMs, increasing innovation and concerns of corporate social and environmental responsibility, all leading to the Internet of Things (and playing to Flextronics strengths). 3
Flextronics believes that it is uniquely positioned to supply to these markets, owing to its real- time information systems (which monitor visibility, risk and execution, and run on multiple platforms), its end- to- end services (including innovation, engineering logistics and knowledge of supply chains), and physical infrastructure (at a huge scale: 200,000 people working at more than 100 sites in more than 30 countries). Sketch- to- Scale Sketch- to- scale refers to Flextronics ability to take a general idea for a product (the sketch), design it, test it, prepare it for high- volume manufacturing and manufacture the product (using Flex s scale). The idea of the Age of Intelligence is that products in a diverse group of industries will need to be connected to the Internet, and Flextronics can readily supply this technology. Products for which Flextronics managed the entire process from sketch to scale are a diverse group, including network products for Palo Alto Networks and FireEye, room cleaners for Bissell, coffeemakers for KitchenAid, connected whiteboards for SMART Technologies, handheld glucose testers for FreeStyle, fitness watches for Pebble and the ChromeCast video adapter for Google. Sketch- to- scale also represents the endgame of Flextronics transformation from contract manufacturer to electronics manufacturing service (EMS) to end- to- end supply chain solution company with sketch- to- scale capabilities. In each stage, the total addressable market gets larger, from $524 billion as a contract manufacturer, to $950 billion as an EMS, to $1 trillion- plus currently. Its expected profitability is also higher. Broad and Deep Innovation at Flex Innovation was and remains major focus for Flextronics. For new product ideas, the company provides access to new technology building blocks, access to a development ecosystem, help in accelerating time to market, assistance in entering adjacent markets and access to its experienced design and engineering teams. Its investments and resources include more than 2,500 engineers, six product innovation centers, an innovation center and ICE segment, an interconnected technology center, a real- time supply- chain- monitoring system (in connection with software from Elementum) and numerous patents, technologies, and design wins, as well as more than $3 billion in revenue attached to new design wins. 4
Figure 4. Investing in Sustainable Innovation Innovation Investments 2,500+ engineers 6 product innovation centers Lab IX / ICE / strategic partnerships Interconnect Technology Center Real- time information solutions (e.g., Elementum) Source: Flextronics Flextronics Impact 7 technology centers of excellence (CoE) 130 technology building blocks 270+ patent applications filed in FY15 330+ design customers in FY15 1,000 design wins in FY15 >$3B FY15 revenue attached to new design wins with multiyear tail of ongoing revenue Its innovation ecosystem includes Flextronics Lab IX incubator, as well as relationships with industry consortia, universities, research institutions, centers of excellence, suppliers, OEMs and other startups. Flextronics has technology centers of excellence in sensors and actuators, human- machine interfaces, connectivity, smart software, batteries and power, flexible technologies and miniaturization, and security and computing. 5
To help its customers get their products to market, Flextronics offers experience and resources in design, prototyping, new product introduction, certification, manufacturing, distribution, reverse logistics, and tax and trade. Finally, Flextronics industry experience and knowledge is extremely broad, enabling it to identify and leverage technologies from a diverse group of industries, including automotive, healthcare, machine- to- machine communication, connected living, consumer electronics, energy, fitness/wellness, communications, and aerospace and defense. 6
New Markets Skating to Where the Puck Will Be A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. Wayne Gretzky Flextronics claims leadership of the connected home and wearable wristband markets, which are growing at compound rates of more than 81% and 300%, respectively. In wearable wristbands, Flextronics estimates its market share at 85%. More importantly, Flextronics says it is also leading the Next Big Thing, with many new vectors under development, driven by the Intelligence of Things. There is also a huge opportunity in the mechanical world; in the future, many mechanical devices will also be connected to the Internet, particularly in the medical and automotive sectors. Financial Presentation Three and Five In terms of financial performance, Flextronics has embraced three key commitments and five consistent financial principles. The three commitments are: 5 10% annual growth in net income Generating $3 billion $4 billion in free cash flow during FY13 17 And returning at least 50% of that cash to investors Its five financial principles are: Revenue growth Expanding operating profits Increasing earnings per share (EPS) Generating strong cash flow Maintaining a solid capital structure Thus far, one quarter into its fiscal 2016 business year, Flextronics is on track to meet or exceed all of these goals. 7
Deborah Weinswig, CPA Executive Director Head of Global Retail & Technology Fung Business Intelligence Centre deborahweinswig@fung1937.com Cam Bolden cambolden@fung1937.com Marie Driscoll, CFA mariedriscoll@fung1937.com John Harmon, CFA johnharmon@fung1937.com Amy Hedrick amyhedrick@fung1937.com Aragorn Ho aragornho@fung1937.com John Mercer johnmercer@fung1937.com Charlie Poon charliepoon@fung1937.com Kiril Popov Kirilpopov@fung1937.com Stephanie Reilly stephaniereilly@fung1937.com Lan Rosengard lanrosengard@fung1937.com Jing Wang jingwang@fung1937.com 8