Yahoo Finance

One, the deep-rooted mature supply chain that's foundational to China. Two, many of our customers don't see a reasonable payback associated with such a move. And three, a decent percentage of our China revenue is for final consumption in geographies other than United States.

With that said if the landscape shifts and customers change their mind Jabil is well position to author and implement safe and practical solutions, which best serve the needs of our customers. In fact, I believe JBL is positioned better than most especially when considering the commonality of our IT systems embedded throughout our seamless network of factories around the globe.

Now turning to slide four. Let's take a look at our third quarter results. The team generated core operating income of $186 million on revenues of $6.1 billion and core earnings per share of $0.57. This was in line with our guidance and 24% higher than last year Q3 to Q3. Within our EMS segment, we saw 26% revenue growth year-on-year, which is driven by cloud, point-of-sale, 5G and wireless and our industrial sector. Our DMS segment delivered a core operating margin of 2.6% for the quarter, representing a 130 basis point improvement year-on-year.

When I step back and I look at the first nine months of the year. I see further demonstration of our financial stability. All-in-all another fine quarter. Michael will provide more detail around our quarter and speak to our forward guidance during his prepared remarks.

So, moving to slide five, you'll find the specific areas that currently have management's attention. These priorities are the foundation from which we serve our customers and our shareholders.

With that let's take a look at slide six where you will find the first area of focus, which is market and product diversification. This colorful pie chart represents a wonderful building block of our story. Within the company, we speak frequently about the importance of diversifying our business, but diversification for the sake of diversification has little relevance.

What is relevant is knowing that as we become less dependent on any single product or product family, we realize much improved reliability around our cash flows. With this improved reliability comes greater simplification of the business. Enhancing our ability to execute. Our results in fiscal '18 and thus far in '19 gives us confidence that our approach is working.

I'll now turn your attention to slide seven where a key element of our strategy is the natural growth of our new business wins. Today, our execution has been sound and our performances ahead of plan. This gives us a high degree of confidence that this $2.4 billion new business will have a favorable financial outlook in fiscal year '20. Just as we committed at the beginning of the year.

For today's call I want to provide an update on our collaboration with Johnson & Johnson medical device company. But before I speak to the slide, I'm pleased to welcome our new team members from the cities of Elmira, Brandywine and Monument. The three J&J factory locations we transferred over to Jabil during the quarter. These new colleagues now join their peers from Torres and Albuquerque and becoming an integral part of our team and again welcome to all. In terms of the collaboration itself, I'm happy to report that both Wave 1 and Wave 2 are now complete and completed on time.

Wave 3 will be next and we trust that will also be very successful and completed on time. Our revenue forecast for this business remains in the range of $800 million to $1 billion for fiscal year '20. Thanks to everyone involved. The teamwork between Jabil and J&J has been sensational.

Now turning to slide eight. If you consider the midpoint of our Q4 guidance provided today. Fiscal year '19 remains intact and consistent with the commitments we made at the beginning of the fiscal year. Specifically, revenue looks to be $25.3 billion for the year. Core operating income would expand to $875 million at the midpoint of guidance, up 14% from a year ago.

And we're on target to deliver $400 million of adjusted free cash flow, an uplift of 60% when compared to fiscal year '18. Altogether fiscal '19 is shaping up to be another nice year. As we move through the fourth quarter, our goals remain unchanged, putting us in good light for next year.

Speaking of fiscal year '20, let's jump to my final slide, slide nine. When I think about the tremendous progress we've made, I conclude that our business is solid and on firm ground, financially, operationally and commercially. Much like last September, we plan to have another investor briefing as we head into fiscal year '20. This briefing will be held on September 24th via webcast. We'll open the session by reporting our fourth quarter and full year results.

Followed by a review of our priorities and highlighting how they will positively impact fiscal '20. Add to this a discussion on end-markets and observations specific to the macro environment as it presents itself at that time. Michael conclude the September session by offering a fiscal '20 financial outlook. As we prioritize margins and cash flows, Michael layout how we plan to increase free cash flow roughly 25% year-on-year fiscal '19 to '20. Expand core operating margins and provide another year of double digit core EPS growth. Mike will also break down the shape of the year by quarter in terms of expected core EPS contribution.

Finally, we'll wrap up the September session by sharing a well-balanced capital return framework for which we remain fully committed.

In closing, I like our strategy. We're clear on our mission and our priorities and what we're doing is working. Our team is experienced and the discipline we're showing is reflective in our results. I'd like to once again extend my thanks to everyone here at Jabil and all our new employees from J&J and to all of those on the call today.

With that I'll now turn the call over to Mike.

Michael Dastoor -- Executive Vice President and Chief Financial Officer

Thank you, Mark, and good afternoon. I'm very pleased with the performance in both segments during Q3.

During the quarter our teams executed extremely well delivering solid year-over-year core operating margin expansion on strong double-digit revenue growth. Our solid Q3 results are yet another proof point that our diversification strategy is working.

Net revenue for the third quarter was $6.1 billion, an increase of 13% year-over-year. GAAP operating income was $140.9 million and our GAAP diluted earnings per share was $0.28. Core operating income came in $11 million better than the midpoint of our guidance during the quarter at $185.8 million, an increase of 24% year-over-year, representing a core operating margin of 3%.

Turning to interest and tax. Net interest expense during the quarter was approximately $58 million above previous expectations driven mainly by the timing and scale of our ongoing new business awards. Our core tax rate for the quarter was 30.4%, approximately 300 basis points above expectations driven by the geographical mix of earnings.

In summary, core operating income came in stronger-than-expected offset by higher interest and tax expense, which negatively impacted the quarter by approximately $0.04. Altogether, this resulted in core diluted earnings per share of $0.57 in line with expectations.

Now turning to our third quarter segment results. Revenue for our DMS segment was $2.1 billion down 6% year-over-year. This was mainly due to continued weakness in mobility demand offset by strength in our healthcare and packaging businesses.

In Q3, core operating income for the segment nearly doubled on a year-over-year basis to $54.9 million and as a percentage of sales improved 130 basis points to 2.6%. These impressive results highlight our improved business mix and once again underscores the tremendous progress we've made in our diversification efforts.

Revenue for our EMS segment increased by 26% year-over-year to $4 billion. We continue to see exceptional growth in EMS associated with our new business wins in 5G wireless, cloud, and automotive. Core margins for the segment declined 50 basis points year-over-year to 3.3% due primarily to continued softness in the semi-cap space and cost associated with our new business awards.

Next I'd like to outline our updated expectations for revenue in fiscal year '19 by end-market. Within DMS, we now expect slightly higher growth within edge devices and accessories. Our expectations for mobility and healthcare and packaging remain consistent with our outlook in March. Given our updated outlook, we now expect core operating margin for DMS to come in at 3.9%, a 20 basis point improvement from a quarter ago on slightly lower revenue of $9.9 billion.

Turning to EMS, we anticipate stronger revenue in our print, point of sale, 5G wireless and cloud end-markets. Within our semi-cap business we now anticipate the weakness to persist into the second half of calendar year '20. Given our updated outlook, we now expect core operating margins of 3.2% on slightly higher revenues of $15.4 billion.

Turning now to our cash flows and balance sheet. During the quarter, our days and inventory remained elevated mainly due to timing differences and came in below expectations at 64 days, a decline of only one day sequentially. I am confident as we move into Q4 and beyond inventory levels will contract to below 60 days as growth moderates and the component market continues to normalize. Cash flows provided by operations were $5 million in Q3 and net capital expenditures totaled $229 million. Core return on invested capital for Q3 was 14.7%, an improvement of 180 basis points over the prior year. We exited the quarter with the total debt to core EBITDA level of approximately 1.9 times and cash balances of $694 million.

Turning now to our capital return framework. Since the inception of our capital return framework in June of 2016, we have returned approximately $1.4 billion to shareholders including repurchases and dividends. We remain committed to balanced capital returns and look forward to outlining a capital allocation framework for FY'20 in September.

Turning now to our fourth quarter guidance. DMS segment revenue is expected to increase 4% on a year-over-year basis to $2.5 billion, while the EMS segment revenue is expected to increase 22% on a year-over-year basis to $4.1 billion. We expect total company revenue in the fourth quarter of fiscal 2019 to be in the range of $6.3 billion to $6.9 billion for an increase of approximately 14% at the midpoint of the range.

Core operating income is estimated to be in the range of $215 million to $275 million with core operating margin in the range of 3.4% to 4%. GAAP operating income is expected to be in the range of a $169 million to $235 million. Core diluted earnings per share is estimated to be in the range of $0.76 to $0.96. GAAP diluted earnings per share is expected to be in the range of $0.47 to $0.71. The tax rate on core earnings in the fourth quarter is estimated to be in the range of 27% to 29%.

As we move into the final quarter of FY'19, I am confident in our team's ability to execute and efficiently manage working capital and generate strong cash flows. Working capital improvements will come mainly to the combination of improved inventory levels as growth moderates and the component market continues to normalize.

These factors give me confidence in our ability to deliver adjusted free cash flows of $400 million for the year. In summary fiscal '19 is shaping up to be a great year and we hope to build upon this positive momentum in FY'20. Moving forward, I expect growth in both earnings and free cash flow will come through meaningful margin expansion and improved working capital efficiency.

I'll now turn the call back over to Adam to begin Q&A.

Adam Berry -- Vice President, Investor Relations

Thanks, Mike. Before we begin the Q&A session, I'd like to remind our call participants that per our customer agreements, we will not address any customer or product-specific questions. We appreciate your cooperation. Operator we're now ready for Q&A.

Questions and Answers:

Operator

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Adam Tindle with Raymond James. Please proceed with your question.

Adam Tindle -- Raymond James -- Analyst

Okay. Thanks, and good afternoon. I just wanted to start, Mark. It looks like you're on track for the $3 EPS target that you talked about around three years ago based on this quarter and guidance. At the end of last fiscal year you gave a navigational beacon of $4 of EPS and a free cash flow number per share that implied a similar amount. So, the question is, I'm just hoping that maybe you can reflect on the obstacles related to the $3 that looks like you're on track to achieve and how the path to that $4 navigational beacon may be similar or different. It sounds like Mike kind of mentioned obviously margin improvement and cash flow improvement for the $4 whereas the $3 was more revenue growth. So, if you could just touch on those dynamics to start that would be helpful?

Mark T. Mondello -- Chief Executive Officer

All right. Well, good multi-question for question one. I think the best way to think about it Adam is as follows. I think all year back starting in September we've been talking about $400 million of free cash flow margins at about 3.5%, core EPS in the neighborhood of three bucks. If you take the midpoint of our guidance, sum everything together, I think, it sums it like $2.97 or $2.98, which I think puts us squarely in the neighborhood of three bucks. So, check the bucks to that.

What I'm pleased with is, at the beginning of the year, we thought operating income would be about $850 million. I think we took that up either in the second quarter call, first or second quarter, December or March call, we took it up to like $865. And now if you take the midpoint of our guidance it's all the way up at $875. So, one of the things I'm really pleased with is, is the operational earnings power of the company is stronger than we thought, and I thought we had some pretty aggressive numbers at the beginning of the year. As I think about where the company is headed in fiscal '20 and '21, maybe a really simplistic way to think about the company financially.

Our tax rate overall for this year is higher than I'd like. That's just a direct calculation in which both geographies, jurisdictions incomes generated, I think, that will normalize back to a more normalized level as we move forward to '20 and '21.

In addition to that our interest expense is a little more fluffy for lack of a better word than we thought it would be beginning of the year, we thought interest expense would be in the $210 million maybe $215 million range, it's probably going to be more like $225 million for the year that will normalize as well, if I think of one of the reasons -- one of the ways I look at interest expense for the company is kind of as a percentage of EBITDA we're probably 150, 200 basis points higher than what I'd call normal.

But that's a bit intentional and what I mean by that is, we've taken on what I think is very, very good new business wins that's come very naturally to us. I use the term in the slides this time kind of natural growth it wasn't forced and so what I think of is very short-term it's a bit of trade-off of interest expense on a temporary basis being a little higher than we thought. But it really sets the foundation nicely for fiscal '20 and '21. If I think back to the navigational beacon, I think, I shared two slides back in September.

One was a navigational beacon where I thought we'd get to or on a path to 4% operating margins. And then I showed kind of a fiscal '21 outlay where I thought we'd get to about $3.80 in earnings also with very good margins.

So, I think, what we'll be able to share with you in September is our plan is a little bit ahead of schedule and I think we'll be able to share with you that by taking on a little bit more interest expense in '19 as you start seeing where we're going in 20 and then '21.

As I said in my prepared remarks, one is as I think you're going to see -- continue to see double-digit growth on the core EPS line. I think free cash flow next year will be in the range of about $500 million. And again we'll continue to press on margins. So, again all-in-all if I think about what we said we do at the beginning of the year where we're at today really, really pleased with the earning power on a core up-line and certainly the journey for us is to get the company to $4 a share in earnings as well as 4% margins.

Adam Tindle -- Raymond James -- Analyst

Okay, that's helpful. And I'll keep it to one part on a quick follow-up more near-term on EMS revenue guidance for the Q4 quarter. You've had a number of customers experiencing weakness in the old E&I segment. So, just maybe hoping that you can talk about the build up for EMS revenue in Q4 because it looks still fairly healthy obviously year-over-year is benefiting from ramps. But I'm just thinking on a normal seasonal sequential basis, it seems pretty stable versus the customers who are experiencing some weakness. So, helping, just trying to understand where the delta lies in terms of the strength you're seeing? Thanks.

Mark T. Mondello -- Chief Executive Officer

Yes, I think, one thing that's really cool is, we are seeing weakness in legacy EMS business. We kind of have our EMS business broken up into two sectors kind of enterprise infrastructure and then our engineering solutions group.

I think we'll confirm that we're seeing some weakness in legacy E&I customers and yet if I look at the numbers and I'd have to go back and check this out. I might could have this wrong, but I think the midpoint to where we guided you and shown down the slides where EMS revenue is going to be midpoint of guidance for 4Q.

Again I'd want to go check it, but I think that might be a record quarter in terms of revenue for EMS. And in fact you roll that in with DMS, I think, it might be a record revenue for the company overall midpoint of guidance. So, I think, that just speaks to what we're up to which is we've got deep pockets of weakness we've been talking about semi-cap on the EMS side we've been talking about mobility on the DMS side.

And then we've got kind of this dither of different pockets of divots and weakness scattered through as you framed it some of the legacy customers and yet revenue for Q4 both on the EMS segment as well as the company you're going to be at record levels. So, again, I think it speaks volumes for what we're up to in terms of the diversification of the business.

Adam Tindle -- Raymond James -- Analyst

Yes. Thank you very much.

Mark T. Mondello -- Chief Executive Officer

Yes.

Operator

Our next question comes from the line of Steven Fox with Cross Research. Please proceed with your question.

Steven Fox -- Cross Research -- Analyst

Thanks. Good afternoon. Two questions please. First of all, Mark, the outlook for 5G and cloud has increased significantly since the beginning of the year. Can you maybe just provide a little bit more of a detailed walk on why you're having so much success there and what you would attributed to? And then secondly, you guys seem to be operating from a different playbook than the rest of the industry. There's a couple of competitors that are seeing their stock price incredibly depressed versus just a year ago. And I'm curious as to how that may affect you going forward if it does at all it seems like the model is developed over the last few years to be a lot different than maybe a lot of the competitors? Thanks.

Mark T. Mondello -- Chief Executive Officer

Thanks, Steve. So, on the 5G cloud, I think, there's a couple of catalysts there. One is if I could start with 5G there's tons of being -- tons in the media. 5G is pushing to the left. No, it's not. Maybe it is. 5G is coming. I think it's going to be transformational. There's lots being written about the tensions between Huawei and the US. I can tell you just in general our legacy wireless business is about as planned maybe a little bit stronger.

On the 5G side, we're really, really pleased with our partners. I think they position quite well in the overall infrastructure rollout for the US and Europe, and we're fortunate to be right in the middle of that. So, today we've taken, I think, a reasonably slightly conservative outlook for our 5G business, but all-in-all we feel pretty good on how we're positioned and we'll see where that goes.

On the cloud side our team has built good partnerships with the hyper-scale folks as well as some of the smaller folks. And our solution is we've talked about it before. It's an asset light solution. I think the main thesis around it is, rapid configuration, significant reduction in overall network invested capital for all parties involved.

And it seems to have been adopted embraced. And as we sit today in relatively good shape, I think, you're correct again I don't have the exact numbers in front of me, but 5G and cloud, I think, at the beginning of the year combined we said we'd be in the range of $3 billion.

And I think today -- it's in the range of closer to $4 billion. So, that's just illustrative of a lot of hard work success in terms of generating some new business and then winning some market share from maybe a few other players on the 5G side. In terms of what we're doing. I appreciate the compliments.

I think what we're doing is working, I think, it's a combination of our structure, our approach. I think we're on to something here with this diversification strategy. Again, you think about our company, we've got some deep pockets of softness and yet we're able to take our core operating income and grow at 14%, 15% year-on-year on the operating line and again, I think, it's due to the hard work of the team. But, again, I also think it's a fundamental to our overall strategy. So, at a high level, I suggest, we've got a lot of hard work to do. We've got to keep our nose down and serve our customers. But I think a lot of it has to do with our structure and our solutions and at least for now it seems to be working. So, we'll take it.

Steven Fox -- Cross Research -- Analyst

Great. That's very helpful. Thank you.

Mark T. Mondello -- Chief Executive Officer

Yes. Have a good day.

Operator

Our next question comes from the line of Paul Coster with JPMorgan. Please proceed with your question.

Paul Coster -- JPMorgan -- Analyst

Yes. Thanks for taking my questions. I've got two questions, Mark. First up the revenue guidance for the fourth quarter is quite a wide range. I'm just wondering what assumptions have gotten into that? And the second question is notwithstanding your quite reassuring comments on China. I'm just wondering, if there's any vulnerabilities or component shortages or other issues that have arisen that you're navigating for yourself or on behalf of your customers?

Mark T. Mondello -- Chief Executive Officer

Yes. Thanks, Paul. On the revenue guidance -- we kind of used -- Paul we kind of used a standard range plus or minus 10% to 12%. I think, it's -- I think it's been that way for a while, we haven't really changed it much.

In the fourth quarter -- we've got to be careful because in the mobility sector we're always -- we're always ramping new products and things could go bump and then we don't anticipate that here. If we wanted to, I guess, we could probably narrow the range a bit, but I kind of like the safety of a little bit of a wide range. If you look at our performance in the last 12 quarters or so, we've been -- we've been pretty close to the center points of the range and haven't been in the outer limits certainly not on the downside.

So, there's not a whole lot to that other than kind of consistency for the last 20 quarters or so in the range as we said especially the fourth quarter again where we're going to ramps. In terms of China, I think, back to my prepared remarks there's just been a lot of questions and we felt like we'd get out in front of it early on and in some commentary.

And again truth be told today, we have lots and lots of scenario planning going on with customers. I feel really good because we've got some of the greatest brands on the planet that really, really trust us to run lead for them on their scenario planning and what if scenarios.

But even with all the scenario planning going on, I just -- we're just not seeing a lot of customers moving existing production. There is some customers where they've made some choices maybe to ramp some of their new products and other geographies.

I think that's really healthy. It's really good for us because it continues to help us balance factories and factory loading. We're not seeing a lot of component shortages and certainly component shortages get any worse than they were two, three quarters ago. If I had to scope that out for you Paul, I'd say that the components stress and strain and shortages probably peaked about two to three quarters ago.

We're actually seeing the overall supply chain globally start to normalize. I think we -- if things stay the same, I think, the supply chain normalizes fully by the fall time-frame of 2019, which might be earlier than we had anticipated.

And I think the other thing for us is all-in-all not too many customers picking up moving out of China, but I said in my prepared remarks, if that happens, if things were to worsen. Jabil, I think, is one of the best companies on the planet to help these brands largely around the fact that we've got an excellent global footprint.

We've got about 50 million square feet of manufacturing space, but I think the real interesting thing in all that Paul is our factories are all weaved together with a very common IT system and that's really, really beneficial to the customer.

So, again, we'd like things to get settled and settle this soon as possible between the US and China. But again I think we're in relatively good shape either way. I would close out that comment to say if things got really, really bad either short-term or long-term, I think, it's going to be tough on everybody us included, but let's hope that doesn't occur.

Paul Coster -- JPMorgan -- Analyst

Very good. Thank you.

Mark T. Mondello -- Chief Executive Officer

Yes. Thanks, Paul.

Operator

Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Hi, thanks for taking my questions. I have one on DMS and one on EMS. The first one on the diversified manufacturing services. I was just wondering if you can just comment on the revenue and margin performance. I mean revenues were better-than-expected and margins significantly improved. So, what drove the outperformance. Any color there would be beneficial and do you have any revenue shift from 4Q into 3Q?

Mark T. Mondello -- Chief Executive Officer

That question was surely around DMS, correct?

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Right, only on DMS.

Mark T. Mondello -- Chief Executive Officer

Okay. I heard you say two. So, let me address that and then we can come back to your EMS question, Ruplu. Yes, I'm pretty excited about the results in DMS. So, we expanded margins. Q3 is always a little bit of a soft quarter for us. We have product ramps going on in the mobility space.

This year is no different. But I've got to tell you the current team we have in place running that business today is doing an outstanding job on cost management, some factory relayouts, the ability to maybe to ramp product a little bit more efficiently, more cost effectively. And then the other part on the DMS space is, you take a look at our packaging and healthcare growth, even if you took it back say 3Q of '18 versus 3Q of '19 the growth in healthcare and packaging has been substantial on a percentage basis.

And when you think about the margin structure and the overall business in that area that certainly was a contributor. So, again, the revenue being up, it was I think DMS revenue for the quarter was up a little over $100 million not immaterial, but not substantial not all that uncommon.

But what's really exciting for me is the margins on DMS. We're starting to get a better blend quarter-on-quarter and not so much volatility, and again I think that's a good statement to our strategy.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Yes. That makes sense, and thanks for the color on that. Then from my second question on EMS. I guess you have a lot of new programs that are ramping. I think the slide on fiscal '19 core operating margins suggested 3.2%, which is slightly lower than what you had before. I know you're not giving guidance for fiscal '20, but just conceptually as these programs ramp. Is there any reason to think that EMS margins in fiscal '20 can't be higher than what the 3.2% that you're projecting for fiscal '19. So, any puts and takes there would be helpful? Thank you.

Mark T. Mondello -- Chief Executive Officer

Okay. I'll try to get myself not wrapped up or get myself in trouble or too far ahead of everything. So, I think, we're going to roll that out with quite a bit of detail in September. But I'd be highly disappointed if our EMS margins aren't higher than 3.2% next year, and I think we'll show you a path that you'll be pleased with September.

But again remember at the beginning of the year, I showed a chart, it was something along the lines of our base business in the company for fiscal '19 would be in the margin range of about 3.7%. And then the new business wins, and at the time, Ruplu, we thought across the company the new business that we were taken on would be in the $2 billion range of which the vast majority of that was in EMS.

I think if you look at the numbers today the new business platforms are going to be bumping up against $2.5 billion. So, decent growth there. Very select growth, intentional growth, and growth that we've been very selective in kind of letting the leash out on.

And we said at the beginning of the year, that business would generate about 1%. I think Mike either the last call or the December call that kind of framed out and said look we're going to have a lot of investment in the front half of the year on a lot of this business growth, and then it's going to start to normalize in the back half of the year. And again it's rough numbers if you take a look at the EMS margins, Ruplu.

I think blended for Q1, Q2 first half of '19 EMS blended out at about 2.3%, 2.4% back half of the year for EMS is going to be blended probably closer to 4%. So, again, I think, we're on -- an appropriate trajectory and again, I think, you and your peers will be pleased with what you hear in September in terms of our EMS margins for '20.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thank you so much for the color. I appreciate it.

Mark T. Mondello -- Chief Executive Officer

Yes. You're welcome.

Operator

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

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Yes, thanks, and good afternoon. Just following up on the questions related to the strong growth you're seeing in EMS and specifically on the cloud area. I know there's been some big share gains you've made some big investments in that space, but I know that there's -- it's lumpy in terms of a limited number of very big players particularly the hyper-scale players. How diversified are you within that space in terms of your customer base?

Mark T. Mondello -- Chief Executive Officer

Yes, Matt. So, this question came up in kind of a similar format last call. Not going to get into the number of brands we serve and then it was asked about brands and then we're asked about hyper-scale versus the small folks. We won't get into any of that, we may get into that more in the September call.

The one thing though that is pretty cool about that business is we've made lots of investments on a variable basis in terms of engineering and process. But in terms of fixed cost, if I was going to contrast that say with our mobility business that is heavily fixed cost weighted, our fixed cost investments and for that matter working capital investments on the cloud business is what maybe for lack of a better word statement whatever it's very, very asset light.

So, it's very flexible, we can ebb and flow as volumes go up and down. We don't have the stress and strain of the load of large fixed assets in that business which by the way is a gem in terms of our solution and the potential variability that business going forward.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

So, the swing factors there would be really working capital then and then maybe some variable labor costs or assembly related costs?

Mark T. Mondello -- Chief Executive Officer

That's right. I would characterize it as that business is -- as a high degree of a variable cost infrastructure, which we can ebb and flow quite quickly. So, I feel comfortable with our solution being well matched with that marketplace.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Okay, great. And then your commentary on free cash flow improving 25% or so next year. Is that also kind of a function of working capital coming down? I mean, I know, you're going to, you plan to grow your operating profits, but you also talked about the component environment being more favorable and plans to bring down inventory your working capital. Is that how we get there and also I guess CapEx?

Mark T. Mondello -- Chief Executive Officer

Hey, Matt, I'll take, I'll catch my breath for a minute and let Mike take that one.

Michael Dastoor -- Executive Vice President and Chief Financial Officer

Hey, Matt. So, the increase in free cash flow for next year is a combination of improvement in margin, obviously, our EBIT goes up and working capital normalizes. I think I mentioned in the past that inventory is at a higher level than we'd like it to be.

Each day of working capital, each day of inventory is about $60 million. So, you see improvements coming through on an annualized basis of just one or two days and you're getting there. We're about -- I'd expect a completely normalized inventory run rate to be around 55 days, right now we're at 64. I think we'll be down to 60 relatively soon in Q4 and going forward, if we take a day or two out the free cash flow number 25% sounds highly achievable.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Okay. And Just quickly did -- have you given CapEx guide for next year yet? I may have missed that.

Mark T. Mondello -- Chief Executive Officer

No, you didn't miss it. We haven't given it. But we'll be talking about that in September for sure.

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Okay. Very good, and congratulations.

Mark T. Mondello -- Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Steve Milunovich with Wolfe Research. Please proceed with your question.

Steven Milunovich -- Wolfe Research -- Analyst

Thank you. Well, many of the semiconductor companies had predicted a second half bounce-back this year. You guys had pushed out your semi-cap improvements to 2020. And now you're pushing it out to the second half. So I guess what are you seeing that's causing you to do that and how much confidence do you have in that?

Mark T. Mondello -- Chief Executive Officer

I don't know that we have a high degree of confidence in it. We have as much competence, Steve, as our market intelligence would tell us we've got great relationships with big brands there, and again remember our capital equipment both front-end and back-end.

So, we pay a lot of attention to both. I actually think that we're starting to frame-out time-frame and period for recovery is pretty consistent with the overall marketplace. So, I think, I'd be surprised if people are going to start seeing a big recovery in semi-cap by this fall.

I think our take anyway has been that the market there was a small probability that we'd see some degree of modest recovery in the fall in '19 that probably won't happen, I think, the modest recovery is a start if anything very late in calendar '19 and we'll start picking momentum up for recovery in early '20 and into the say late spring early summer. The nice thing is, I think, the snap back on that business isn't going to be a step function. I think it will be a improvement over time. So I would hope to see our semi-cap business start to perform better in our 1Q of '20 and then see the gradual progression from there.

Michael Dastoor -- Executive Vice President and Chief Financial Officer

Hey Steven when Mark mentioned EPS growth rates of 10% plus and free cash flow plus 25% in FY'20 the semi-cap issue is already being considered in that.

Steven Fox -- Cross Research -- Analyst

Okay, excellent. Thank you.

Mark T. Mondello -- Chief Executive Officer

Yes.

Operator

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

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good afternoon. Thanks for taking the questions. First was on healthcare, if I recall, properly this year the J&J business was supposed to be about $200 million and the slides have it for $800 million to $1 billion for next year. I think it supposed to go from around EBIT break-even to 2.5% to 3% EBIT margins next year and I was hoping to just better understand what needs to be done in order to get the margins up to the targeted range and what kind of linearity there maybe that's achieved?

Mark T. Mondello -- Chief Executive Officer

Okay. Thanks, Mark. Yes, I think, the one thing I feel very good about is, we came out with the announcement of the deal very, very early in the year.

And if anything I was going to say nothing's changed, but actually there has been change and it's all been changed to the positive. There's different waves of transference of capability leadership people and insights. Those are all to plan or ahead of plan.

And the difference between this year and next year is, so I think you're spot on. I think revenue this year for the overall relationship will be in the $250 million to $300 million range. I think that next year we'll still be in the $800 million to $1 billion range.

I think this year will be close to break-even maybe a hair above, but I think it's fair to say break-even all around. And the next year, I think, your numbers of 2.5% to 3% makes sense. And again I would see that as a natural slope up from there as we move to fiscal '21 and beyond.

And the biggest issue is again the complexity and just the overall magnitude of the business in terms of IT systems bringing the teams over payroll administrative types of things. The safety part of it is we've acquired an excellent team. So, unlike other transactions where we have to scramble around add headcount, train inexperienced. We acquired a fabulous group of people. On my prepared remarks today, I talked about the second wave of three sites coming on board.

Those teams are every bit as exceptional as the first two factories in Torres and Albuquerque. And then the other thing that's just kind of amazing to me is we felt like we were going to gather really, really good marketable capabilities as part of this deal and those capabilities and what we plan to do with them are well ahead of expectations. So, it's pretty exciting.

Steven Milunovich -- Wolfe Research -- Analyst

Yes, thanks. Thanks for that. And my follow-up on the free cash flow guidance for next -- for this year, but what's implied for next quarter. Mike I know you talked about taking an inventory days down to 60 or below. I think with the higher revenue that doesn't drop that much of a change in inventory dollars quarter-to-quarter given the higher volumes that are projected. So, maybe just a little bit more detail on what drives the increased working capital from a dollars perspective for next quarter to get to the free cash flow guidance? Thank you.

Michael Dastoor -- Executive Vice President and Chief Financial Officer

It's just a combination of all working capital metrics. If you go back last couple of years, Q4 has been an extremely strong quarter from a cash flow perspective. If you take that as a percentage of revenues Q4 of this year is extremely consistent with those trends. I feel really good it's a combination of all working capital, it's a combination of the EBITDA that we'll be generating and all of the metrics that make up the free cash flow number.

Operator

Our next question comes from the line of Jim Suva with Citi. Please proceed with your question.

Jim Suva -- Citi -- Analyst

Thank you. I only have one question. But I just certainly hope the answer is not both. And the question is and you have clearly honorably and impressively outperformed your peers for revenue growth. So, the question is, is that mostly come from your partnership with customers who had seen their new product ramps and share gains or has there been execution issues by some of your competitors that you've been more agile to take advantage of again congratulations on the great growth, which is clearly stronger than your peers.

Mark T. Mondello -- Chief Executive Officer

Well thanks, Jim. I appreciate the compliment. I don't want to comment on our peers. I think we have, I think, we have plenty in front of us to focus on. I do think, Jim, there's a differentiation with our IT systems. I said in my prepared remarks and I put it in there intentionally. Our team has really experienced and sometimes with experienced people get a little tired. You know what our team is experienced and fully wound-up, clear on the mission, clear on what our priorities are.

I think our structure is outstanding in terms of decisions. We're making speedy decisions. I would tell you that even with the uplift and operating margins this year going from $850 to $875 again a 14% or 15% growth and in core operating income year-on-year.

With the growth we've put on top of the company. One of the things we pride ourselves on is our factories run really, really, really efficiently and really well. I think we've got a little bit of creaking going on with some of our factories because of the growth.

I bring that up because the good news is our factories performance is only going to get better next year because growth won't be as great. And then you add to it the fact that the growth that we've taken on and again we've said this over and over and over again it was really good selective growth that adds great capabilities to the company and the growth that we have is growth rate in our sweet spot that we can execute on.

So, again, I don't have an opinion or maybe I have opinions, but not opinions I'd want to share with our competition. I got a lot of respect for the challenges they have, but I really like what we're up to and I like our path forward.

Jim Suva -- Citi -- Analyst

Thank you so much for the details and clarifications. It's greatly appreciated.

Mark T. Mondello -- Chief Executive Officer

Yes. Thanks, Jim.

Operator

Ladies and gentlemen we have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Adam Berry for any closing remarks.

Adam Berry -- Vice President, Investor Relations

Thank you for joining us today. This now concludes our event. Thank you.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 54 minutes

Call participants:

Adam Berry -- Vice President, Investor Relations

Mark T. Mondello -- Chief Executive Officer

Michael Dastoor -- Executive Vice President and Chief Financial Officer

Adam Tindle -- Raymond James -- Analyst

Steven Fox -- Cross Research -- Analyst

Paul Coster -- JPMorgan -- Analyst

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Matthew Sheerin -- Stifel Nicolaus & Company -- Analyst

Steven Milunovich -- Wolfe Research -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Jim Suva -- Citi -- Analyst

More JBL analysis

All earnings call transcripts

More From The Motley Fool

• 10 Best Stocks to Buy Today

• The $16,728 Social Security Bonus You Cannot Afford to Miss

• 20 of the Top Stocks to Buy (Including the Two Every Investor Should Own)

• What Is an ETF?

• 5 Recession-Proof Stocks

• How to Beat the Market

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.