Benchmark Electronics Inc (BHE) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you standing by. Welcome to the Benchmark Electronics third-quarter 2007 earnings conference call.

At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's Conference is being recorded.

At this time then, I would like to turn the conference over to Mr. Don Adam. Please go a head, sir.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our results for the third quarter of 2007. I'm a Don Adam, Chief Financial Officer of Benchmark Electronics.

Today, we will begin our call with Cary Fu, our CEO, providing a review of our third quarter, an overview of the current marketplace, and our outlook for Q4. I will then continue with a discussion of our estimates for Q4 and our financial metrics in Q3 in greater detail. After our prepared remarks, Gayla Delly, our President, Cary Fu and I will take time for your questions in our Q&A session. We will hold this call to one hour.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations and that actual events or results may differ materially. We would also like to refer you to Benchmark's periodic reports that are filed from time to time with the Securities and Exchange Commission, including the Company's 8-K and S-4 filings, quarterly filings on Form 10-Q, and our annual report on Form 10-K. These documents contain cautionary language and identify important risk factors which could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update these projections or forward-looking statements in the future.

Now, I will turn it over to Cary, who will provide a review of our third quarter, an overview of the current marketplace, and our outlook for Q4.

Thank you, Don. Good morning.

First of all, I would like to thank our team for continuing to remain focused on driving results for our customers during the third quarter of 2007. Although we are pleased with the efforts of our team, we're disappointed with our revenue and earnings results for the quarter that we're presenting to you today.

For the Q3 of 2007, our revenues of $673 million were approximately 8% below the low end of our guidance. This is very, very unusual for Benchmark, only the third time in our 20-year history where our quarterly revenue fell short of our guidance.

Q2 revenues shortfall was due to slower than anticipated product and program transitions as well as softer than projected demand. During the third quarter, we did not experience the normal inventory pull toward the end of the quarters. This is evidenced by the fact that we saw the decline in the revenue during Q3 in three of our five segment sectors that we serve. A portion of the softness was products and transition-related and not necessarily overall market softness. The cost of this revenue shortfall impacts the efficiency of our operations causing undue absorption of overhead and the margin deteriorations.

Based on the current customer and the market indications, we expect revenue ranging from $700 million to $740 million in Q4. As you can see from this guidance, we expect to bounce back in Q4 as we see some [level] of program transition turnaround in addition to the benefit of Q4 capital spending.

During Q3, we experienced several very positive trends I would like to highlight to you today. Number one, cash flow from operations exceeded our expectations and were approximately $66 million for the quarter and $227 million for the nine months ended September 30, '07. Number two, revenue concentration with our top customers declined to approximately 17% for the quarter; number three, the sequential decrease of SG&A expenses for the quarter by approximately 9%. And then number four, we saw the continued strong booking during the quarters.

We booked ten new programs during the third quarter with approximately $100 million to $125 million in potential annual revenues. This new program opportunity was with our new and current customers and (inaudible) our industry that we serve, including industrial control, computers, test instrumentation, and the telecoms.

We are pleased with the bookings we have (inaudible) the total during 2007. I expect the bookings to remain strong in Q4, based on the positive pipeline opportunity in front of us. We anticipate the revenue and earnings benefit of this new 2007 booking will begin to be realized in late 2007 and 2008. Please keep in mind that this is our estimate, and actual revenue may differ significantly.

At this point in time, I would like to turn the conference call back to Don Adam to provide a comment on our financials. Don?

Thank you, Cary. As Cary mentioned, based on our current indications from our customers, including new program ramps, we expect fourth-quarter revenues to be in the range of $700 million to $740 million. The corresponding earnings per share is in the range of $0.32 to $0.38 per share, excluding the stock-based compensation expense, expenses of approximately $800,000, amortization of intangibles of $447,000, and restructuring and integration costs of approximately $1.6 million due to incremental opportunities we see in leveraging our resources.

Please note that the earnings-per-share guidance includes the impact of our recently announced stock repurchase program.

At this point, we expect to incur restructuring charges, integration costs and amortization of intangibles of approximately $2 million during the fourth quarter of 2007. Please keep in mind that we are continuing to review our overall footprint and realignment opportunities.

Now, let me share some more of our actual highlights from the third quarter of 2007. During the quarter, we continued our positive trend in generating cash flow. During Q3, our cash flows from operating activities were approximately $66 million, which actually exceeded our expectations for the second half of the year. For the year-to-date period, cash flows generated were approximately $227 million. We anticipate this trend will continue and we expect positive cash flows from operations in Q4.

Please note that the Q3 financial results contain three special items. They are as follows -- restructuring charges and integration costs of $1.5 million or $1 million, net of tax; stock-based compensation expense of $628,000 or $443,000, net of tax; the amortization of intangible assets of $447,000 or $291,000, net of tax related to the acquisition of Pemstar; and finally, the tax benefit of $6.5 million related to a previously closed facility.

Also note that Q3 '06 included special items which we have detailed in the press release. To provide a more meaningful comparative analysis, we will present certain financial information, excluding these special items, during the conference call. We will call your attention to the fact that these items are excluded when we do so. In today's press release, we have included a reconciliation of our GAAP results or results excluding these items.

Our operating margin for the second quarter was 2.6%, excluding the special items noted earlier. Of course, the shortfall in revenue caused an under-absorption of overhead and a lack of margin contribution.

GAAP net income for Q3 '07 was $22 million, compared to $29.3 million for Q3 of 2006. Excluding special items, net income was $17.3 million compared to $30 million in Q3 of '06.

Diluted earnings per share for the third quarter were $0.30. Diluted earnings per share, excluding the special items, were $0.24. Diluted earnings per share for Q3 '06 were $0.46 excluding special items.

Our ROIC was 8.1% for the third quarter of 2007.

Interest and Other Income was approximately $3.3 million for the quarter. Interest expense was $411,000. Other Income, which is primarily foreign currency related, was approximately $562,000.

Excluding the special items, our effective tax rate was approximately 17% for the third quarter of 2007. On a GAAP basis, the effective rate was a tax benefit rate of 20%. For the full year of 2007, our estimated effective tax rate is approximately 6% on a GAAP basis, and approximately 16%, excluding these special items. Our tax rate has continued to benefit from favorable tax incentives on our expanded business levels in Asia.

Weighted average shares outstanding for the quarter were 73.6 million. Our cash and short-term investments balance was $379 million at September 30. Our cash and short-term investments balance increased $155 million when compared to December 31, 2006. This increase is after reducing the acquired debt by $72 million during the year-to-date period.

For the third quarter, our cash flows from operations were approximately $66 million. Capital expenditures for the third quarter were approximately $2.2 million, as we continue to digest the recently acquired assets. Depreciation and energizes expense was approximately $11.2 million. Receivables were $451 million at September 30, a decrease of $50 million from the last quarter. Inventory was $382 million at September 30. Our inventory turns were 6.6 times for the quarter compared to 7.3 times in the second quarter. Of course, a portion of our inventory at September 30 was aligned to support a higher level of demand in Q3, which did not materialize.

Current assets were approximately $1.3 billion, and the current ratio was 3.3-to-1 in Q3, compared to 3.0-to-1 in Q2. As of September 30, we have $12.8 million in debt outstanding, all as a result of the acquisition. The remaining debt outstanding is primarily a long-term capital lease on one facility.

Comparing the third quarter of 2007 to the same period in 2006, the revenue breakdown by industry is as follows. Medical segment in 2007 was 12%; in 2006, it was 13%. Telecommunications segment was 16% in 2007, 11% in 2006. Computer segment was 51% in 2007, and 60% in 2006. The industrial control segment was 15% in 2007, and 10% in 2006. Test and Instrumentation segment was 6% in both 2007 and 2006.

During the quarter, we saw mixed signals from our customers in terms of end-market demand. Sequentially, when comparing June 30 to September 30, we saw revenues from the Medical sector decrease by 12%; Telecom increased by 2%; computers decreased by 16%; Industrial Controls increased by 6%; and Test and Instrumentation decreased by 28%.

At this time, I would like to open it up for the Q&A session. During the session, we request that you limit yourself to one question and one of follow-up question in order to allow enough time for everyone's questions.

Great. Thank you very much. (OPERATOR INSTRUCTIONS). Brian White, Jefferies & Co.

Yes, good morning. I'm wondering, Cary, could you talk a little bit about the product transition? How much of an impact did that have during the quarter versus end markets? Was this more concentrated in the high-end computing market?

Brian, I will take that question. I probably do not have a specific number to identify one versus the other. That's a hard number to get to. But what we saw was some of the program transitions did not ramp as rapidly or to the size that we expected them to during the quarter, and the trail-off of some of the maturing products did accelerate, so I believe that was part of it. The overall market demand, when you look at the five industries that we break our revenues down into, you can see that the three industries that were impacted by softness, the Test and Instrumentation, Medical, and Computing, really probably had different going on. Test Instrumentation has shown some softness for a couple of quarters and expect that to continue. Medical has been more impacted by some of the regulatory involvement, in general, in that marketplace. Computing is more by the actual ramps, new programs and timing of the like of that.

Okay, would you say high-end computing was also soft?

No. Even within high-end computing, I believe there were some mixed signals. Not having the direct end markets as our customers, I might be reading into it, but I think some of the impacts of financial services could likely be seen because they seem to be big users of some of the types of equipment. That's my interpretation and belief in the marketplace, because you still see some of the products having strength and others of them not taking off or growing at the ramp that you would expect.

I think the point of confidence that we see and the market indications we see is some of the strength that's expected to come back for Q4, as well as our overall customer relationship strength as we support some of the new product ramps.

Okay. Just on the Medical market, you had FDA delays that impacted you earlier this year and continued in the September quarter. I think there were four programs. Can you just update us? There were two that were going to ramp in the December quarter and then two in '08. Do you still expect that?

As we said, we don't expect some of the revenue stream to start back until 2008, so that's still our visibility at this point in time. As with all type of involvement with third parties, we will not be in the point of control there, but that is our anticipation.

But Gayla, do you think any of them will ramp in the December quarter?

I do not believe those will ramp in Q4.

Amit Daryanani, RBC Capital Markets.

Just looking at the guidance, it was nice to see the revenue. The margins seem to be snapping pretty well, but I think one of the concerns people have is, given the trends in 2007 where numbers have really going down every quarter, could you just talk a little about what is your comfort level and confidence with the guidance we have this time around? Maybe how you are better (inaudible) your confidence in the guidance this time around that we don't fall into the situation over the last three quarters again?

I think we have good confidence with some of the ramping because we have been ramping it some of the programs for a couple of quarters, and as you get more behind you, you get more confidence. Where we have visibility is into the information that customers provide us, and feel strong, based on that. The part that we always are going to be a bit uninformed on, if you will, is how well the customer's read on the marketplace is.

So I'm one step removed from the end customer really knowing how their spending patterns are. We see it through the eyes of our customers and it looks like Q4, as you see from our guidance, is still showing good, strong growth in the product transitions being more effective in the fourth quarter than they were in the third. Remembering the third quarter always has a weakness, just general seasonality, and may not be the best time of the year in any point for new product ramps.

Okay. Just in general, Q3 typically, you have been extremely back-end loaded with September being a big chunk. Is Q4 a little bit better front-end loaded to some degree since December probably slows down?

You know, for a certain segment of the products that we support, I would say that it's typically back-end loaded. Is it more back-end loaded than not? I don't know. I for one would believe that Q4, with spending, is probably one of the ones that is back-end loaded. So September really is when people are coming back from vacation, so that's how that quarter gets impacted by it. Q4 is probably more by capital spending budgets. So, I probably see those as similar as to the patterns, but I haven't done specific analysis on a week-by-week basis or anything.

Just finally, looking at your guidance, looking at the new win expectations you have, it sounds like things are starting to bottom and we should see some good improvement in Q4 and beyond. Just given that scenario, I'm wondering. Why don't you guys come out and do a much more aggressive buyback and kind of make a better statement to the Street to some degree? Did you explore that option, and if so, why didn't you do it?

What we really did was size the buyback early on in the year, and we will continue to perform based on what we saw at that time. As we go into future periods, we will look again at any appropriate buybacks or other activities. But I don't see that any specific knee-jerk type of reaction is appropriate. We have had strong bookings, had some product transition challenges but overall the buyback was separate and apart from any of those activities.

Kevin Kessel, Bear Stearns.

So I guess my question is, with your largest customer coming in at 17% in the quarter, I imagine that was somewhat of a surprise in terms of that level -- of reaching the level. Maybe you could just tell me.

As we had indicated, we expected overall for the year for the revenue to be stronger for our top customer. Q3 did not have that as we go through some product transitions but again as you appreciate and as we always have indicated, we can't get into detail on any specific customer and respect that and have to (inaudible) confidentiality. Again, I will leave it to say that we feel we have a good, strong relationship and we will continue to have the opportunity to participate in existing and future generations. We will work to do an excellent job to continue to win those opportunities.

Okay. Then in the past, you've referenced where you thought they would be in terms of a percentage of sales for the full year. Does that still hold? I mean, would you expect to remain at these similar levels, or is it what you said in the past, which is I think more like a 25% level?

Well, I guess hindsight is kind of 20-20, so now that I bake in the 17%, I will take it down and say it will be in the low 20s, probably, for the overall year.

Okay. Then the other question here is, just so I can clarify, on the Medical, if I'm not mistaken there were four medical programs you guys had cited in the past that were in various stages of going through FDA's I guess circumstances. I think, last quarter, Cary had mentioned that he thought two were going to ramp in December. If I heard you correctly, Gayla, you are saying that those two are not going to ramp in the December quarter; now it's more likely all in 2008?

Well, I guess, for planning purposes since December is so close to a quarter end, would say there's a slight possibility but it being October and I haven't heard anything, even though the FDA may release or go through their activities, it may not be something that ships out the door and converts to revenue for us. So I would say I wouldn't count on it being part of our revenue stream. Maybe that's the best way to indicate it at this point in time.

We may see some pickup in Q4, but it's not going to be significant.

But in terms of what the general delays (inaudible) that's completely out of your hands?

(multiple speakers) in the medical type of environment, since most of the situation is [out of hands], but we had a pretty good indication for the timing of the program ramps and the release and we still feel pretty comfortable we should see some significant benefit in early 2008.

Okay. Then just the last thing is going back to your computing. You know, so you look at your largest customer who was down quite a bit on a sequential basis. It still indicates, if my numbers are correct, I think your overall Computing segment was down 16%, sequentially only, which indicates growth of at least $10 million of sequential growth from others. So is that just broad strength coming out of the rest of that group, or is there just one or two particular new program ramps that started to effect the quarter, or what?

Again, as I indicated in my earlier comments, I think you saw mixed signals in different segments. IT is a big bucket and there are points of strength in different ends of the spectrum on IT spending. I think you've seen that and others that have announced also in that area where they've seen similar kind of phenomenon. So I don't think I would pretend to be the expert, but yes, we've seen some points of growth and other product transitions that have not ramped to expectations so far.

In addition to that, we are adding some new customers into the computer sector, so computing sector (inaudible).

Jeff Walkenhorst, Banc of America.

I'm wondering if so maybe looking -- so we know that the Computing segment remains a little bit sluggish and there's program transitions and visibility sounds like it is somewhat limited. In medical devices, it sounds like that is pushing out into December and Test and Instrumentation still a little bit weaker, but it looks like your Industrial Controls segment had some sequential revenue growth of maybe 10%, 11%. It also looks like your midpoint, your new program wins -- I calculated 112, 113 million -- would be up 70% from last year, and given strong bookings in kind of the first two quarters, tack on another solid quarter of bookings in September, that does seem to point to a better outlook for both the fourth quarter and 2008. I mean, are you comfortable? Are you confident that we will see a return to growth and actually specifically organic growth in early '08?

I think that, as you see from all the points that you highlighted for me and encapsulated there, that yes, we've had very strong bookings; we have some good product ramps. Interestingly, as you also pointed out, Industrial Controls, I think that's probably driven a lot by the oil and gas market and the strength as it drives a lot of the industrial controls there. So I believe we had laid a very strong foundation for a good year.

What I do not have visibility and we're not giving products now for 2008 -- I don't know the macroenvironment of which way I would call that and I don't have a crystal ball on that right now. I've seen, again, others, as they have gone out with their earnings releases, not take a firm standing and yet some to seem to be bold. I think we've done a very good job of managing that which is in our control and booking a very strong backlog of business, and we will see how the macroenvironment supports it from there.

Okay, that's helpful, Gayla. I guess a critical question would be, have you seen -- given kind of it seems like more negative macro data points, have you seen any cancellations or order pullbacks of your earlier reported bookings for the first half of '07?

No, I'm not even under sure I understood that question, but think the answer is no. Earlier reported book? So, no, the bookings, as we expected, have maintained intact. What is the next question really is the transition time and the ramp time, and how rapidly do those actually convert to revenue? Sorry, I wasn't quick on understanding the question there, but no, we still feel very good about the booking of business that we've had and we will continue to look to see those ramp on a timely basis in 2008.

Okay, so just to summarize, the customer activity has not changed, given the macroenvironment, the bookings. The customers still have their plans to ramp but I guess there may be some question around the timing of when that ramp really occurs.

Yes. I think the other thing, the dynamic of -- of course we know in our industry, it's actually probably even stronger booking opportunities and stronger sales opportunities out there, but I cannot bifurcate for you how much of that is related to our specific industry scenario with some of the consolidation versus a normal environment. It feels stronger; it is stronger; I don't know what the root cause of the strength is.

Tom Dinges, JPMorgan.

Just a couple of quick housekeeping items, because a lot of my other ones have been answered. Tax rate expectation as we look forward, and then maybe if you want to hazard a guess, what we could expected for '08 just as you guys continue to move some business into tax jurisdictions where you've got more favorable tax provisions?

Well, I think, for the fourth quarter, you'll see it stay right around where it was for Q3, that 16% to 17% range. I think, looking forward, I would expect for '08, although we haven't necessarily done the calculation, but you know, (multiple speakers) how about that?

(multiple speakers). Okay, that's fair. Then can you also just talk a little bit? Obviously, with the slow down at the end of the quarter that you guys saw, you probably did have some inventory that you weren't able to flush through. You did talk about having at least positive cash flows, significantly better than I would call positive this quarter. Can you talk about perhaps what you could see pull out of that inventory number, offset maybe by some of the stuff that you're expecting that could ramp not until the first quarter of '08, like you talked about with some of the medical stuff?

Well, in terms of the cash flow of $66 million, you are correct in that we had projected around I think $50 million for the balance of the year. So going back to your inventory question, I'm still a little confused. How much -- how much of the -- why don't you repeat it? I'm not (multiple speakers) --.

What I'm trying to look for is a number. Is it $20 million, $30 million that you kind of feel like you could have shipped with the shortfall in the numbers at least, offset by -- obviously you've got some stuff you have to preposition because of ramps that you would have expected to hit in the fourth quarter. I'm trying to look for a number of where the inventory essentially is going to go.

Well, I think if you look at the terms for the quarter, we came in around 6.6. Our overall range is -- target is really 6.5 to 7. It's certainly on the low end of that, but you know, I think having shipped it, we would have seen some marginal improvement. But in terms of -- I haven't went back and said okay, we had 20 million that should've went or etc. I mean, it's a little bit more complex than that but I think, in terms of the overall goal for inventory, we are certainly within our range, be it on the lower end.

Okay. Then one question for Gayla, because it was discussed earlier about the product transitions and the acceleration of maturing products. You had already talked about that you got pretty good confidence in the bookings that you've already had; it just is a matter of the transition time, if I heard you correctly. But maybe you could help us understand a little bit the notion of the maturing products peeling out of the revenue stream a little bit faster and maybe just some context around why you think that's necessarily happening. Because I always think of it -- you know, the business is kind of declining every year because you've got costs down and products maturing, and it sounds like that happened a little bit faster this quarter than you guys were even anticipating or maybe faster than what has happened over the long-term.

Again, this is probably an area that clearly our customers are more adept at speaking to. But any time you are introducing a new gadget, product into the marketplace, anticipating the reaction and timing of reaction from customers is a bit of a dynamic that I don't know anyone has infinite wisdom into. Sometimes the market show favoritism and cling to the old, and sometimes they hesitate to buy any of the mature products and stay waiting for the newer products.

So we are there to support the customers through whatever transition takes place. If we are supporting the strong products as they ramp into the marketplace, we will see the strength and there maybe a lull in any given quarter as those products transition. We've seen before; it's probably most profound in the IT sector. You probably don't see it as much as specifically in industrial controls. Actually, you do see it in Medical; you see a very strong ramp when new products are introduced into the medical field. Then as they tail-off after whenever period of time there in the marketplace, there's a lull before a new product steps in. So it's common, but there's not always anticipated down to a specific quarter or a specific sizing.

Jim Suva, Citigroup.

Can you maybe give us an update about kind of month to date indications of demand? Have they stabilized as far as the linearity goes, versus, say, last quarter, maybe how last quarter the linearity shook out versus your expectations?

I guess, as you can see, our guidance we are providing today is based on that which we see up until today with indications from customers. So it isn't like we took a reading at September 30 and shut it down and quit getting any input. We've kept our eyes on the marketplace, kept our eyes on the indications from customers in providing the guidance that we've given for Q4.

No, exactly, but I was referring to a little bit more about, say, July/August, July versus August versus September, and now kind of October -- linearity, kind of how it's been kind of trending from your demand, what you see?

I don't see anything unusual. The only difference is probably, July has July 4 in there that starts out the quarter and you don't have that in October, right?

Okay. Then a follow-up on your China building status -- can you update us on that?

I will let Cary do that.

Actually, we delayed (technical difficulty) we talked about (inaudible) in the last quarter call. We are trying to delay the building slightly due to the softer market, also, the newly acquired assets, so we still at this point in time anticipate to open the facility in the second half of 2008.

Will Stein, Credit Suisse.

I'm wondering if you can comment, Gayla, on the telecom end market. We haven't heard much about that. I think there's some pretty volatile or atypical seasonality that you tend to see. So I'm wondering if you could comment on what you see as the outlook for that market in Q4 and then in 2008?

You probably point out a good point. We certainly spent some air time talking about telecom when it wasn't going strong and we weren't seeing growth, but we probably haven't done an adequate job of giving it equal air time as we have seen it kind of regain. We've added customers in that; we've seen some strength in that. We've seen probably some differentiation of products, probably making it more muted as to identifying what is truly telecom versus IT because of some of the capabilities that are being added into the product sets.

But as we look at our customer base, you can see that we have shown growth in all of this year In telecom and see Q4 still hanging strong for the customers that we serve. We don't break down our forecast going into next quarter for you by industry, but I don't see any points that would lead me to believe that our base of telecom would be weaker at this time.

So I think flat to up, is that -- is it fair to say that? I know you don't provide guidance on a sector by sector basis. I want to just -- it happens to be quite volatile. One Q4 is up 20%, 30% and as I look back at history, and another one is down by a similar amount. So I'm just wondering. If we are not expecting it to be down, are we expecting it potentially to be a big contributor to sequential growth that you're guiding, or perhaps a smaller contributor?

Again, I see them as kind of a stable, slow-paced growth but I don't see that as being significant in Q4, but we have continued to add to our customer base and feel good about that.

Okay, great. That's helpful. Now, when I take that data point and look at Medical, which we previously expected to rebound pretty materially in the December quarter, it implies that a lot of the sequential increase is coming from the high-end computing, presumably your top customer. Is that fair to say, that essentially the rebound in sales, in other words, is coming to a great degree from your top customer? Is that fair?

I think we expect, just in general, Computing is stronger in Q4. That's what the marketplace has consistently shown over the years. Again, I don't speak to any specific customer but we see that in computing.

In fact, each marketplace typically would have strength in Q4, I believe. I don't have all of the fact patterns right in front of me to say that factually for any number of years, but off the top of my head, my recollection would be that almost every industry shows pretty good improvement in Q4.

Okay, then maybe one other quick on, if I might? I'm wondering if you can highlight or remind us as to the priorities for uses of cash at this point, just given the volatility that we've seen recently. At the same time, you have a very good cash position. Maybe you can just kind of walk through that again with us. Thank you.

I think you'll continue to see us investing in our growth with existing customers. You've seen we've done an excellent job this year of managing our working capital and having the cash flows from operations. But make no mistake, as you will recall, last year, we were having the same conversation as we were investing heavily in supporting the growth patterns that we had for customers, so that, too, can be pretty volatile. As we look to some of the ramps, we will probably see some cash utilized in our business, which we would expect will continue to look at the opportunities for M&A and then we will see what the appropriate use of cash is, if any, above and beyond that as we look into the future. So, I don't think there's any change in our use of cash.

Steven Fox, Merrill Lynch.

A couple of questions -- first of all, on the guidance, what kind of SG&A assumptions should we make? You did a nice job of getting SG&A spending down last quarter. Are you able to maintain that level in dollars? How should we think about that?

I would expect that the SG&A would remain pretty consistent with Q3, in terms of dollars.

Okay. Then secondly, it seems like your guidance is implying that margins just basically snapped back to where they were before the third quarter, so everything else -- I guess that implies also that everything else in the quarter, operationally, was not the problem and it was just the pure volume miss that you got surprised by at the end of the quarter. Was there anything else, positive or negative operationally, or am I reading this right, I guess?

Yes, I mean, essentially what happened is -- with the shortfall, as Cary indicated before -- is with the shortfall in revenue, we just didn't get the velocity and we just -- what happened is just that under absorption of overhead. So you know, with the bounce-back in revenues, we expect the margins should bounce back.

Then one question I would love to revisit now, if you don't mind -- which is why isn't your business a 5% operating margin business, and what do you have to do to get it there?

Well, I think, clearly, with our long-term goal with operating margins have been 4.5 to 5, which we in the past have hit. You know, clearly with the opportunities or challenges we've faced this year with melding the operations with our recently acquired company, along with softer market demand, we've had to look and streamline our operations to get there. It doesn't happen overnight, but again, long-term, we're still -- our target is still 4.5% to 5%. I think, for the quarter, what we are anticipating is we can get -- you know, for the first two quarters, we were at 4.2%, so even given the acquisition, we did pretty well. So you know, certainly it fell off a little this quarter but we anticipate 4.5% to 5% long-term.

Any way you could sort of give us a guide post, what type of revenues you think you would need to do a 5% margin? Or is that just too dependent on mix?

Too many dependent factors there.

Rich Kugele, Needham.

Just one last question just to take to a step back again -- certainly 2007 was a mixture of dealing with adding Pemstar with the subtractions of second sourcing and the medical issues and other segments, as we've all discussed. But if you take a step back and you look at the EMS industry as a whole, you've been able to outgrow the space historically because of your business model and your customer relationships. Is there any reason to assume that, as you head into 2008, that we shouldn't see a more normalized growth rate on the top line?

This is Cary. I guess from -- going back to the earlier comment, we have in Q1, Q2, the year 2007 is a year transition for us. We have set a goal to have slight revenue growth and that should reduce t he dependency of the top customers and have a slight EPS growth. Unfortunately, it was a Q3 revenue shortfall. We will not (inaudible) the EPS growth but we are still very focused, tried to achieve the first two goals, because it's the revenue as well as the diversification of our customer base.

With a lot of new programs we've booked for the years, and we're definitely (inaudible) we have the opportunity to regain the growth pattern we had in the past. It's not easy. Therefore, when you have that a significant adjustment in revenue from one customer, you're still able to maintain the status quo. I mean we work very hard on that and I think with everything -- (inaudible) all settles down, we should have a good pace to grow from there.

(OPERATOR INSTRUCTIONS). Brian White, Jefferies.

I'm just curious. How late in the quarter did you see the softness? Was it right at the end of the quarter, or did you start to see it in August or September, early September?

No. As Don mentioned in his prepared comments, or actually Cary, I guess, usually you would see a quarter-end push for inventory demands coming through from customers and right up to the end. So it's at the very end that we saw that not take place or didn't see that I guess properly say (inaudible).

Okay, so maybe the last couple of weeks. In terms of market share, are you sure there were no market share shifts?

I guess I'm not sure, because I don't know specifically all of the products that our customers have and what the revenue stream was on all of those. Again, I only take the responsibility for our numbers, and I know about the steadiness and opportunities within the relationship, so feel very comfortable with that. But no, I don't know the portfolio of products and what the revenue stream was from each of those portfolio of products.

Okay. Just Don, if we look at the share count, you bought back stock in the September quarter; maybe that takes off 1.5 million shares. How should we kind of model the share count in the September quarter? Where should we think about --?

Let me clarify one thing, Brian. As you look from our share count in the press release, I think you can see the share count was not impacted significantly, if any, in the third quarter. It would be impacted in the fourth quarter for the buyback, so the share count, as Don said in his prepared comments, is impacted in fourth quarter.

So how should we think about it, though, for the fourth quarter?

For the fourth quarter, probably about 1.2 million shares.

Okay, so decrease it by 1.2 million?

Correct.

Okay. If you buy back more, then we will decrease it more, I guess? Because you've already purchased stock, right?

Correct.

All right, thanks.

Jim Suva, Citigroup.

You did a great job on explaining the velocity and leverage and overhead issues, operating and profitability. Has there been any change to the competitive pricing environment or terms as you are ramping up all what I view year as a meaningful pipeline of new wins?

No. I think competition is always there. It's one of the things that really drives our teams to excellence, that challenge us to continually do better. I think we have done a very good job -- don't expect competition to go away and quite frankly don't want it to go away. We feel very comfortable, don't see any unique dynamics going on that consolidation probably provides additional opportunities. We will take one more question, operator.

Thank you. Actually, at this time, I'm showing no further questions in queue.

We thank you for your time. We know it's a very busy day for earnings calls today. We will be in the office if there's any follow-ups. Thank you.

Great, thank you. Ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's Executive Teleconference. You may now disconnect.