Benchmark Electronics Inc (BHE) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Benchmark Electronics third-quarter 2008 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 call is being recorded. At this time I would like to turn the conference over to Don Adam. Please go ahead.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our financial results for the third quarter of 2008. I am Don Adam, Chief Financial Officer of Benchmark Electronics. Today we will begin our call with Cary Fu, our CEO providing a few comments on the market and the performance of Benchmark this quarter. And Gayla Delly, our President, will provide a more detailed discussion of third-quarter activities for Benchmark and our outlook for the fourth quarter. I will then continue with a discussion of our financial metrics for the third quarter in greater detail.

After our prepared remarks, Gayla, Cary 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 periodically reports that are filed from time to time with the Securities and Exchange Commission including the company's 8-Ks and S-4 filings, quarterly filings on forms 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 those projections or forward-looking statements in the future. Now I will turn the call over to Cary.

Thank you, Don. Welcome everyone. I want to start out today with a few comments about overall market; then talk about the performance of Benchmark team this quarter. As you know, the overall market experienced a significant slowdown. We are currently in a time of uncertainty because of liquidity and a financial crisis which is impacting virtually all the businesses around the globe.

As we note in our press release today, we saw the sudden slowdown of orders from our customers in late September. This was a globe-based downward trend impacting our revenue in reaction to the financial crisis unfolding at the end of the quarter. We have seen approximately 10% reduction in demand due to the first weeks of October although just this week we are beginning to see the trend stabilize and now are seeing some increased orders.

This is very difficult to forecast with precision any impact our overall market fall off on each of our customers. But we believe the weakness in the technology sector will continue in the near term. This is a marketplace and environment where we participate in today, so let me talk about how Benchmark's precision to take advantage of opportunity going forward in spite of our resolve this unusual time.

I am generally pleased with our Q3 performance. We appreciate it and thanks to our team for their diligence and commitments. The Benchmark team delivered improved operation metrics even in this down market. Our operating margin percentage was flat sequentially a great result given a $41 million reduction in revenue when compared to our previous quarters.

Earnings per share excluding the special item was within the guidance and was a better product mix and revenues slightly under our guidance. Our EPS per share of the quarter also met consensus. Benchmark continued to maintain their very strong balance sheet and net increase in cash and long-term investments, about $45 million in the quarter of the stock buyback.

Cash flows from operations plus the $76 million for the quarter. Bookings in third quarter continued to be very strong. We also see robust new outsourcing activity in the pipelines. The new business bookings, as well as potential opportunities will further diversify our customer base and provide a good foundation for the revenue growth in 2009.

Our team is continued to focus on alignment of resource anticipating and meeting customer needs. We also take the opportunity to drive (inaudible) and improve our efficiency and also expanding our capability. Now I'll let Gayla Delly talk about third-quarter activities.

Thank you, Cary. We were pleased with our overall operating performance. As Cary mentioned, we came in just slightly below revenue expectations for the quarter and experienced a better revenue mix in Q3. That, when combined with our operating efficiency improvements and our continued focus on maintaining our lower cost structure allowed us to produce the solid results for this quarter.

Our revenue diversification and the new program wins which we have spoken about over the past few quarters have been strong, but they were not strong enough to offset the macro downturn. The overall market slowdown began in early 2008 with reduced IT spending by financial institutions and has since spread.

Strong inventory controls and preservation of cash are priorities in many of the computing sectors' end customers. This has impacted the predictability and the accuracy of forecasting from our customers in that sector.

During Q3 similar trends experienced in Q2 were seen. We continue to see decreases in the computing and test and instrumentation sectors. Sequentially, when comparing the quarter ended June 30 to September 30, revenues from telecom sector increased 6%. Revenues from industrial control sector increased 1%, and revenues from medical sector declined 2%, and the computing sector decline was 12%. Test and instrumentation were down 26%.

Our new program bookings continue to be strong, and the trend in bookings is consistent with what we are seeing in sales with no new bookings in the computing or test and instrumentation sector. While we have seen the significant and continued deterioration in the computing sector, we have seen stability and growth opportunities from the non-tech sectors.

During Q3 we booked 13 new programs with an estimated annual revenue of $87 million to $115 million. These new program opportunities are with both new and existing customers and from the industries that we serve, which have remained strong including medical, industrial, controls and telecom.

It's interesting to note that many of the new bookings are design and development projects and are leading opportunities into new customers, and you might note that the bookings we identify are only those bookings which are programs awarded to date. We see revenue growth in 2009 and expect our growth will come from the non-tech sectors primarily as these sectors continue to outsource more and ship to providers with a strong balance sheet such as Benchmark.

In the future the tech sectors, which are more mature in outsourcing are not expected to show the same level of growth for Benchmark. We have not seen panic or cancellations from our customers, but we have seen hesitation coupled with a strong focus on inventory management and cash preservation and this has impacted our revenue.

Based on our outlook, we expect fourth-quarter revenues to be in the range of $600 million to $640 million. To maintain consistency with published analyst reports, our guidance has changed to now include the impact of stock-based compensation and the amortization of intangibles. So the corresponding earnings per share for the fourth quarter are in the range of $0.25 to $0.32 excluding only restructuring charges.

In these times Benchmark is looking at the changing environment and working on the alignment of our resources with future growth activities and opportunities ahead. We will be focusing on providing excellent service to our customers, and we believe that we are properly aligned and prepared for the additional outsourcing opportunities that this market will bring.

Now I will turn it over to Don to discuss our financial metrics for Q3.

Thank you, Gayla. We completed the third quarter of 2008 with revenues of $642 million and earnings-per-share of $0.36. Excluding special items, earnings per share were $0.32 per diluted share. Our earnings-per-share operating results for the quarter were within the guidance provided with our revenues being slightly below guidance. Our earnings-per-share results were also within the consensus for the quarter.

Please note that the Q3 '08 financial results contain four special items, they are as follows; stock-based compensation expenses of $384,000 or $306,000 net of tax, amortization of intangible assets $446,000, $284,000 net of tax, restructuring charges of $253,000 or $228,000 net of tax and a discrete tax benefit of $3.4 million.

To provide a more meaningful comparative analysis we will present certain financial information excluding these special items during this conference call. We will also 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 to our results excluding these items. Our operating margin for the third quarter was 3.6% excluding the special items noted earlier.

The margin was consistent with the second quarter even with a reduction in revenues of $41 million. Again, these solid operating metrics were due to better revenue mix during the quarter and our aggressive cost control focus.

GAAP net income for the third quarter 2008 was $24 million compared to $22 million for the third quarter 2007, excluding the special items net income was $21 million this quarter compared to $17 million in the third quarter of last year. Again, diluted earnings per share for the third quarter were $0.36. Diluted earnings per share excluding special items were $0.32. Diluted earnings per share for the third quarter of '07 were $0.24 excluding special items.

Interest income was approximately $1.7 million for the quarter. Interest expense was $378,000 and other expense, primarily foreign currency related was approximately $790,000. Excluding the special items our effective tax rate was approximately 10.7% for the third quarter. On a GAAP basis the effective tax rate was a benefit of 5% for the quarter primarily due to the discrete benefit recorded. Our tax rate has continued to benefit from favorable tax incentives and our expanded business levels in Asia.

Weighted average shares outstanding for the quarter were $66.6 million. Our cash and long-term investments balance was $389 million at September 30, which includes $48 million of auction rate securities classified as long-term. These securities were reclassified to long-term in the first quarter because of issues in the global credit and capital markets that have led to failed auctions with respect to our auction rate securities.

The unrealized loss on our auction rate securities at September 30 was $5.8 million due to changes in the market value for these securities over the last several months. Please note that the changes in the unrealized loss on these securities is reflected in accumulated other comprehensive income as a component of our shareholders equity.

Due to the liquidity and financial crisis that has strengthened over the last several months, we have been working hard to monitor the financial institutions and cash management vehicles we are using to invest our excess cash balances. We continually look at the overall credit worthiness of the financial institutions that we use in addition to investing our excess cash balances in vehicles where preservation of principle is a priority.

Note that our interest rates have been significantly impacted by overall decreases in interest rates over the last quarter. During the quarter we repurchased $20 million of common stock. For the quarter our cash flow from operations were approximately $76 million. For the fourth quarter we are anticipating to generate $25 million to $50 million in cash flows, which would result in $150 million to $175 million from operations in cash this year.

Capital expenditures for the third quarter were approximately $6.5 million. Depreciation and amortization expense was approximately $10.1 million. Receivables were $415 million at September 30, an increase of $57 million from the last quarter. Inventory was $363 million at September 30. Our turns were 6.6 times for the quarter compared to 6.5 last quarter. Current assets were approximately $1.2 billion, and the current ratio was 3.4 to one in the third quarter compared to 3.1 to one in the second quarter.

As of September 30 we have $12 million in debt outstanding. This debt is primarily related to a long-term capital lease on one of our facilities. Comparing the third quarter of 2008 to the same period last year, the revenue breakdown by industry is as follows. Medical was 15% in 2008 compared to 12% in 2007. Telecom was 20% in 2008 compared to 16% in 2007. Computing was 45% in 2008 compared to 51% in 2007. Industrial controls was 17% in 2008 compared to 15% in 2007. And finally, test and instrumentation was 3% in 2008 compared to 6% in 2007. During the third quarter product revenues from our top customer were 14% of our revenue.

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

(Operator Instructions) Amit Daryanani, RBC Capital.

I just had a question. Cary, I think you were talking about starting to see a few signs of order stabilization if not a little bit of uptick. Could you just talk about is that trend sort of broad-based across your end markets or is that more dominant in the non-tech segments?

It is pretty broad-based. When you see the sudden slowdown in September I think a lot of customers kind of over reacted to the situation a little bit, and then after they reviewed the situation and the end demand from their customers, we now see people having new orders coming back in.

Got it. And I guess could you maybe just talk about what is the capacity utilization at this point, and if you do see further order deterioration let's say over the next few quarters, are there any thoughts on restructuring potentially?

We have about -- the capacity utilization right now is probably the low 60%, and you are aware we've been very focused on cost and the realignment throughout 2008. So that this point in time I don't anticipate any major realignment cost reduction at this point in time. But we do the cost control matters from time to time.

And just a final question -- I may have missed this -- but what was the CapEx for Q3, and what do you expect that for Q4?

$6.5 million for the third quarter; for the balance of the year we are about $35 million. So $5 million to $8 million for Q4.

Thanks a lot.

Jim Suva, Citi Investment Research.

I think I heard or maybe I misheard, Gayla, did you mention that you said 2009 sales would grow? And if that is the case, can you just help us reign in expectations? I think consensus is at double-digit growth there. Are you seeing that strong, and how do we triangulate around growth in '09 when it seems like a lot of your new business and new business bookings have been outside of computing and test and measurement -- I'm sorry outside of the computing and telecom which tends to make up the majority of your sales?

I don't think I would be unique in saying that the times we are facing right now are a bit unprecedented. And so as we said and I believe many others have said, and the marketplace forecasting and predictability is a bit challenging at this point. Simply put probably because of what Cary noted you see a very quick reaction to reigning in forecasts immediately at the end of September and then just in very recent days have seen some readdressing of what that appropriate level is for the marketplace in today's environment.

And then I guess the next thing to consider is what level of deterioration, if any, continues into 2009. But given a steady-state, based on the bookings that we have and the relationships and growth programs that we are supporting we believe that we will return to growth. I don't have that scoped in size right now; as to a percentage I do believe that we and our customers are readdressing that, if you look out across several of the different industries. I do believe that we will be muted in comparison to prior years, but I don't have a sizing of that now.

I think different people have called it modest in comparison to prior years, but I don't think there has been a definition, nor do I have one to give you currently at this time. What we are basing it on is the bookings we've had and that those programs are continuing to be supported and are expected to ramp to revenue, and they are not cancellations or panic seen by our customers. So that is the positioning that we are utilizing when we refer to the growth in 2009.

Great. That's extremely useful. And maybe as a quick follow-up, would that then imply that margins will probably bottom or trough out in the December quarter if I triangulate some modest growth in '09 for sales and the utilization that Cary pointed out too? Would that lead one to believe that margins should kind of trough out in December quarter?

I believe with the range of revenue that we have given for Q4 and the guidance that we've given that we do not anticipate further deterioration in 2009; again barring any additional further deterioration in the overall marketplace.

Okay. Thank you very much, and congratulations on hitting good profitability.

William Stein, Credit Suisse.

Regarding the credit markets, some people are concerned about the company's ability to make payments, and your receivables, your days sales outstanding were good in the quarter. I'm wondering if you saw that change at all in October? So far in the month to date? And if just if you have seen any trends that are abnormal in that part of your business.

We certainly have always kept a close eye on that, and we are not seeing any changes in payment terms or customers stretching out payments or what have you. So it has really been characterized as sort of business as usual at this point.

William, one of the things that you will notice we have quite a strong portfolio of customers, and we probably since 2001 have almost been approaching our book of business similar to the banking industry kind of post bubble. It became very important for us to look at the credit risk that we were undertaking when we were signing up for inventory and receivable cycles with customers.

And in talking about the bubble and immediate post bubble, can you compare 2001 environment to today with regard to predictability and your ability to forecast the business?

The primary difference, of course, is the financial institution card being thrown out on the table. In 2001 that wasn't the issue. There was the ability for strong companies to look to the banks to support their growth needs and their funding requirements. Now when they look to their banks they may not find anyone picking up the phone. So the environment is very different in that regard.

I think the end result of how that plays out is going to be a little bit different for each entity because although we see very strong balance sheet, the way in which each company determines is appropriate to expend that cash may be very different. And I think the investment in R&D is very important and we see many customers continuing that in the technology sector.

Let me just try that a different way. If you think back to, let's say March, June, 2001 versus today, can you compare the amount of, let's say the length of backlog or forecasting that your customers were giving to you in a reliable fashion and something you felt you could rely on. Is that a shorter time window, less visibility today or more?

Well, let me kind of answer this way. If you look at 2001 when the tech bubble hit, we saw like Gayla said, we saw a lot of cancellations immediately. And this time we are not seeing that. We see a lot of hesitation, very conservative the way they place orders, but we do not see a [ball based] cancellation cycle we saw in 2001. I even recall, I don't remember the day maybe it was March or whatever the time was when it hit, we definitely see quite a bit the immediate cancellation and try to reconcile inventory, liabilities and so on and so forth. At this point in time we have not seen any of those activities happening yet.

Okay. Thank you.

Kevin Kessel, JPMorgan.

What I was just trying to reconcile here is when I look at the overall business, I see it down 8% on a year-to-date basis through three quarters. But then what I think, what I note is interesting is when you parse out your largest customer, the business largest customer is down 32% again year to date, three quarters versus three quarters. Whereas the rest of the business is down only 1%. I know you are going through product transitions with that customer. I also know some of your larger platforms are going to go end-of-life in the beginning of January. But at this point it doesn't appear as if you have been, you've won the next generations of maybe some of these platforms based on at least the guidance that you are providing for December. Can you just help me understand the real disconnect there between what is happening there versus the rest of the business?

As always, Kevin, I am going to avoid talking about any specific customers because I don't think that is appropriate. What I do think that you will see is specific to IT spending is that there is a severe level of pricing pressure in the competing segment for the solutions that are being accepted, whether it is server storage, whatever. And in some cases I think those are probably trending to ODM type solutions and targeting more software solutions being offered by some of the solution providers. And so I do not have specific breakdown and understanding of the revenue trends for each of the customers, but I do believe that there is a trend towards commoditization in that specific sector.

And just so I understand, Gayla, wouldn't it be possible for Benchmark to offer that value-added design resource that the ODMs are offering for some of these servers if you already have the capabilities around the configuration and the direct order fulfillment?

I think it probably depends on how low you go on the scale of the type of server. Some of the servers will and solutions on any IT product, will closely look towards a PC type of a product very soon. And as it gets down to that realm I think that there will be solutions that are very competitive that we will not participate in.

And would it be possible just to give an idea then to investors like you guys have done in the past, in terms of where you expect the largest customer to trend over time so everyone's expectations can kind of be somewhat aligned? It has obviously come down now to 14%. I am wondering if you guys see it eventually becoming a less than 10% customer; or if in fact you think it will destabilize or what the situation is.

Again, I am not going to go into specifics, but I can see kind of two paths that can be taken depending on what kind of product offerings any of our top two or three customers in the computing sector will take. Depending on what decisions they make in this very difficult time, I believe we can have continued to have strong relationship and offer solutions if they have the products that are well suited for Benchmark, or if they choose to go to more of a commoditization then I can see our revenue declining.

So I think the path is probably unclear at this point given the current market and how long that provides pressure to that marketplace I could see it right now. But I don't need to be a doom and gloom pessimist either.

I got it. And just on margins, you guys had mentioned a couple times mix was favorable to you in the quarter, and your margins held up very well. It looks like even in your guidance they are also holding up very well considering the top line pressure you are seeing. So when we think about mix, should we then be thinking about your telecom industrial medical or more your telecom and industrial segments are the areas where you have an overall richer mix of business?

Yes. I think if you look at Q3 to Q2 I think certainly our percentage amongst those has increased. [Until] you get a bigger value-added component on those type of products, which lends itself to better margins.

Okay, and then just lastly on the new wins that you mentioned, Gayla, I think again I am also trying to reconcile where if any of the wins that you guys have described in a material way have been either delayed, the ones that have been mentioned over the last four quarters or potentially maybe in some cases things get canceled. I don't know -- that sounds like that hasn't been an issue. You guys have won close to half a billion over just the last four quarters. So you would expect that to be helpful forward but at the same time it was even a greater number if you look back four quarters prior, and that doesn't seem to have materialized even considering some declines that we've seen.

I think a couple of points there, Kevin, I think in general what we have seen, as you noted, is not cancellations. The projects are continuing to go on path. Also one of the areas of note is that we have been more involved at the very front end stage of products in the design engineering phase and those are longer cycled projects. So we do see some longer ramp to volume plays that we are participating in as we get involved at the front end.

So some of those revenues are still to come in the pipeline; and in some cases to the extent that they were in the computing sector and potentially even test and instrumentation, those sectors have been so hard hit with the demand declines over the last nine months that volume has not come to fruition.

So the third point probably is to make is that we are seeing in the mix of the new programs that we've announced, some very strong new customer names that we are adding to the mix that we are seeing opportunities to participate in that really give a good momentum for growth going forward. So that is just playing out between the industries and, I do think that yes, it is taking longer to ramp to volume primarily because of the stage at which we are entering into the relationship.

Thank you so much.

Brian White, Collins Stewart.

If we look at the December quarter, what markets do we think will grow sequentially?

I would hesitate to forecast specifically by industry in this current marketplace; typically we would all say okay, computing is stronger in Q4. In this environment it may show some increase, but I don't know it is going to show the growth that we would tend to have. But outside of that, I don't know that I am prepared at this point to specify the industry momentum. But we do still expect that the industries where we have booked new business, industrial controls, medical and telecom that those will continue to be stronger in the midst.

Okay, and when we look at 2009 you said you think you can grow in 2009. What end markets do you think will grow? Where is that growth going to come from next year?

The same; I feel like I am a broken record, but I think it will be the same industries that we are going to continue to see growth in because that is where our bookings have been. Now that is all predicated upon, as I said, my not indicating that there will be growth in computing. Hopefully and maybe I am actually wrong and computing actually shows some strength and return, but at this point that is not what is factored in.

Okay, and just where are we on capacity expansion plans? I know, Cary you had spoken about further expansion in China. Where are we in that process?

Well our China facility should be online this month, and again, that is a trading, a moving from a leased facility to our own facility. It really is given better capacity in the not really increasing footprint significantly. Actually this is another way you control costs, be sure you align your resources and the capacity to the customer needs.

And our Thailand facility was done in the first part of the year 2008. That is already done, and the only newer facility, will be new leased facility coming on line will be Romania, will be first quarter next year. Again, that is another newer, more modern facility. We will move from the old leased facility to a new one. So I guess the focus is trying to get a better efficiency footprint, and not increase the footprint significantly.

And how big is the China facility, the new China facility?

It is about, I believe 250.

Okay, and where is that, Suzhou, or --?

It is right in the same business park. And we definitely see a tremendous increased demand in our China facility. I guess the way we look at it is we can see the a lot of reported industry reports have about China slowing down, everybody move out of China. But for the higher mix productions it is actually a more demand in China because it is more and more end user using the product in China. So our facility in China will be supporting not only the PCBs as well as the final system build for the customer product to be used in China.

And what type of market is it going to focus on?

Same thing, we talk about the industry controls and even some medical customers, and some telecoms and the -- not a whole lot of computing yet -- but the interesting thing we definitely see a good demand for medical, industrial control in China. China is expanding their requirement for help as well as the industry new building new requirements.

And you are saying you are going to sell this into China or is it for export?

It is (inaudible) -- I think we are getting more products to be used in China.

Okay. And just finally what is capacity to utilization right now?

All I can say is low 60%.

Sean Hannan, Needham & Co.

Earlier, Cary, you had indicated that the business activity is picking up and I just wanted to see if I can drill into that. How is it that you folks actually qualify this? Is this "activity", and how are you actually measuring that? Is that kind of versus the last couple of months or sequentially or versus year-over-year?

New business activity is based on two things. One is the business we will book. Second thing will be the opportunity in the pipeline and the level of interest from our customers. I have been in this business for a long time. Whenever you get into a slowdown period time, at a certain point of the cycle the outsourcing trend actually picking up, and what you are seeing today. We are seeing customers looking there internal capacity and decided to outsource, even partially or completely. And because the cost controller, cost measurement they had to do. So based on activity we got and the programs we are seeing in this quarter we definitely see a very robust opportunity and coming end of Q4.

Thank you. The reason I ask is if we look back over the last number of quarters I think that you folks have seen some challenges in meeting your topline guidance. And so what I was trying to get a sense of is what further comments you can provide in lending some confidence to what you are outlining for expectations on the top line for December, as well as perhaps some growth in '09.

It is definitely a challenge to forecast, and this is very difficult environment. And we are conservative. We have been trying to predict the market situation. And as I discussed in the early prepared statements, we saw approximate 10% reduction in demand in less than two weeks. Right after September slowing down. So it is difficult to get those numbers into your forecast. And we try to be conservative as we are, and at this point in time we definitely see some new orders come back in, and hopefully we're conservative if it captures the overall market segment. It is difficult.

We will get as close to 100 customers out there and everyone have a different requirement, and a different business climate at this point in time. And my models today focus on what we try to do and adjust your cost behavior very quickly to the market demand. I am fully convinced with all the new business we are booking and as well as the opportunities on the table, and the longer-term projects will be maturing out or some of the newly acquired projects could be revenue potential, that should lead to a potential increase in revenue for 2009.

Okay, thank you. And then lastly, since engineering or some of the R&D and development projects are becoming a larger number within some of the bookings and wins, is it possible just to provide us with a little bit more granularity to understand the makeup of these wins that you had in the quarter? You had outlined a couple of segments. Is there a way to provide some numbers around those segments and specifically whether they were engineering or programs?

It's certainly difficult, and I don't really have the information in front of me. But if you look at a certain program we definitely have a number of those opportunities in the engineering development phase. The interesting thing like Gayla commented earlier, all the 13 programs are come from non-tech sectors, non-computing sectors as well as from the test and instrumentation sectors. That means that is the direction we are going with. And hopefully will give us additional revenue for the coming years.

That's great. Thanks very much.

Sherri Scribner, Deutsche Bank.

I was curious if you could give us a little bit of guidance in terms of the SG&A. I know you've done a number of restructurings since you are taking costs out. Should we -- I see you looking at the trend; SG&A has been coming down. Should we expect SG&A to continue to trend down, or is it sort at the level that you would expect it to be going forward and into fiscal '09?

In terms of the fourth quarter I would anticipate that the SG&A would be relatively flat with what we saw in Q3.

Okay.

And as I want to point out our SG&A percentage has stayed pretty close to the 3.3% range throughout the year, I think 3.4 in Q1 and 3.3 in the last two quarters. I would expect no significant changes in SG&A for the upcoming quarter.

Okay, and then in terms of cost savings, do you expect to see further cost savings in the operations from the actions you've taken in the past, or have we pretty much seen the cost savings that we are going to see at this point?

It is something that we look at continuously. If we don't identify cost savings and that's the end of it, we continue to evaluate our operations and always look for ways to identify efficiencies and that process won't stop. As Cary just mentioned, when the market changes our teams are ready to go and make those changes rapidly.

Okay; I guess I'm trying to figure out are we going to see gross margin expand anymore. It sounds like gross margin was helped this quarter by mix and it sounds like going forward the mix particularly the telecom and the medical and the non-compute stuff is going to help the gross margin. But are you also getting a benefit of that from cost savings or is that purely a mix issue?

Cost savings also. As I mentioned, we are going to have both cost savings and efficiencies that are going to be driving the improvement. So I guess the other way to frame it, Sherry, is the fact that yes, we have had ongoing actions to align our cost. And some of those have happened such that the benefit is in forward quarters.

That's helpful. And then final question in terms of the strengths you are seeing in the telecom market. Is that an end market comment, or is that more your positioning in the customers you have there and the products that you are providing? Maybe a little more color.

It is primarily customers taking market share and expanding with new customers, so I don't see -- yet when we step back and look at it -- telecom, no. It is really the result of us growing in that segment not telecom itself having great strength.

Okay. Thank you very much.

Steven Fox, Merrill Lynch.

A couple questions. Can you talk about the amount of end-of-life activities you saw during the quarter and whether it was unusually high? And as you look out to growing sales next year, I guess one of the concerns would be that if the environment stays like this that a lot of new products that you may be involved with just see a slower ramp to market. Can you comment on the risk of that happening also?

I guess if I understand your question correctly, what is the timing risk of ramps in a soft marketplace. I think the reality is ramps may take longer, just as the market readiness may change during the time period in which it is being launched. As the end-of-life I haven't yet seen any changes in the products as to what was expected for end-of-life. As we've said in previous calls end-of-life timing always seems to be challenging for customers. Sometimes we go through end-of-life two and three times and products don't seem to really end-of-life once.

But I haven't seen a flight to where customers are currently trying to end-of-life a new level of programs as a result of the downturn; if I am anticipating what your question really was, no, I haven't seen that customers are just slashing and burning products right and left.

Okay, and can you just revisit or reiterate your plans for cash now? It seems like a number of CFOs are pulling in their horns on previous expectations for use of cash whether it be buyback, acquisition, given the environment -- what would you say about your priorities for use of cash?

I think as we've mentioned throughout the call, certainly preservation of cash is important. Given where we are now our expectations to generate another $25 million to $50 million in Q4 plus our revolver availability. We certainly think we have an abundance of cash to, number one, certainly meet our operating needs and number two, satisfy our customers as to our ability to provide them a continuous supply. So in terms of questions, again just anticipating in terms of the stock buyback we will continue to evaluate that like we always have, and again, just look at what we expect to generate in cash and where we are today.

Following the question from an M&A point of view we are looking very aggressively to whether there be some good assets out there and because of the solid financial position we have, we have the luxury of looking at some activities, some other player can't, so that is something we are also looking very closely. The recent liquidity crisis today will probably see more opportunity coming up in the first part of next year, if this liquidity situation does not improve. And that will give us some opportunity to take on some assets which will provide a long-term value to the company.

Thank you.

Mike Nery, Nery Asset Management.

I would just like to applaud you, first of all, for the stock buyback. Based on what you are saying versus what the stock market is saying with regards to your stock price, it seems to me that it is a good value at this point and I would encourage you to keep buying back stock. If next year, if you are wrong and revenues decline, wouldn't accounts receivable and working capital turn into even more cash on your balance sheet?

That is correct.

What is your base level CapEx for the next three to five years if you weren't to grow?

Generally $30 million to $40 million.

Okay, so you have substantial excess cash on your balance sheet still?

As we mentioned, in today's environment cash is certainly very important to us and as well as our customers.

Okay, and I have another question. In terms of -- you mentioned this a little bit -- in terms of the general outsourcing trend, how much of the market has been outsourced versus how much is remaining to do, and what is the pace of that happening currently?

That is really dependent upon the specific industry sector that you are addressing. So if you look at computing that is a very mature in outsourcing; telecom is probably more mature in its outsourcing. Industrial controls, medical, test and instrumentation, those vary, but have not been fully outsourced. So I don't have a blanket answer that applies to all of the industries, but that is just a snapshot of how we view each of them.

Okay, so if you were to say computing and telecom are pretty much done; the remainders, are they half done? Are they a quarter done? How far along are they?

I'll pick one-third. I really -- it varies dramatically. And I guess one way to think about it is look through the OEMs that you know, and see how many of them still have manufacturing sites as part of their portfolio. And it is just, it varies greatly.

Okay, but just on the outsourcing piece, so if the macro economy does whatever it does, let's say it's flat over the next three years. So computing and telecom don't grow and there is no additional outsourcing to be done, but then medical, industrial controls, test and measurement, you are talking about one third of your business that could very well double over that period. Am I looking at this correctly?

Yes, I guess in one regard. But remember, even in computing and telecom, even though they are mature as I stated earlier telecom, that is (technical difficulty) growing for us because of new opportunities and new customers. So while I say that they are more mature in outsourcing we are still seeing good opportunities there. So there is not one easy way to address it or answer it because we see whether it is the scope of services or whether it is the level of outsourcing. I guess it is maybe too simplistic to say, but until the organization OEM's are more of a virtual company, there is additional opportunities for us. So it really is about what level of service we can provide and solutions, value-added opportunities we have there.

Probably another point of view (inaudible) would be if you look at most our customers are capital equipment type of customers. And those customers outsourcing is kind of lagging behind a consumer related product. So from an outsourcing opportunity because of the type of customer we are engaging with we will definitely have a better opportunity even in the slow times.

Okay. Because the stock market is valuing you not only as if you are not going to grow, but as if even your net current, your working capital isn't even worth what it is on your balance sheet for. And I'm trying to understand the disconnect because you seem like --.

We are, too.

I guess that we have visited a lot of customers, and several of our customers have the same question and I cannot predict what the stock market is doing. And our cash share today is $6 shares and this doesn't make a whole lot of sense to me but again, whatever it is, it is. We need to be focused on what we are doing and deliver the results and handle the environment to better than anybody else and that is our focus. And I cannot be -- we are not going to run the company because of Wall Street is up and down. We are going to continue to focus on what we try to do and deliver results and expand our capabilities and upgrade our teams. And when this all ends the market rebounds again, we will have a better team to handle the growth.

Good. Well, and not to predict the stock market, but if you feel that you have a good business and it is worth at least what it is on your books for, I would encourage you to continue to buy back stock and do that like you have been. Thank you very much.

Thank you for the input.

Brian White, Collins Stewart.

I just have a question on the tax rate; what should we be using for the fourth quarter and then '09?

For the fourth quarter probably -- I use about 10% to 11% as our estimate. For next year at this point, I would estimate 10% to 11% again.

And just clarification, you guys mentioned potential growth in '09. We know it is a tough market, but potential growth, does that -- any acquisitions or is that organic?

We look at organic, Brian. The reason I am saying that is we definitely have several interesting opportunities for our customers, consider taking the internal opportunity (inaudible). There is probably a lot more scope (inaudible) there is a better opportunity when the market is slowing down. A lot of OEMs will look at (inaudible) opportunity and so we are looking for organic potential to the growth. But nevertheless we are still looking at the acquisitions, too. But that is not including the number we talk about.

And is there a particular market that you are looking at for the acquisition in terms of served market to get into?

I am not going to get into a buying capacity or buying a location. We are more looking for unique capability to expanding our service scope. That is what we are looking at.

Okay. Thank you.

We have no further questions in queue at this time.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's executive teleconference. You may now disconnect.