Benchmark Electronics Inc (BHE) 2009 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Benchmark Electronics first quarter, 2009 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn conference over to your host, Don Adam. Please go ahead.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our first quarter results for 2009. I am Don Adam, Chief Financial Officer of Benchmark. Today we will begin our call with our CEO Cary Fu discussing the overall macro environment and how it is affecting Benchmark; Gayla Delly, our President will then provide a discussion our activities and performances in the first quarter and a look at our second quarter forecast; I will then follow with a review of our financial metrics for the first quarter. 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 future financial performance of the Company. We would like to caution you that those statements reflect on our current expectations and that actual results -- 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 Commissions, including the Company's 8-Ks 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 those projections or forward-looking statements in the future. Now I will turn the call over to Cary.

Good morning. First let me make a few comments regarding the macro environment in Q1 as well as today. In first quarter we saw the market continue to decline and cash control driving many of the decision making process around the globe. With this mindset many of our customers we serve witness a double digit or greater declines in revenues.

Our new program and new customer ramps contributed to our revenue streams softening the impact of the global based softness, however, not fully insulating us from senior revenue decline greater than we provided in our guidance. We have seen virtually all our customers impacted in one way or another by this downturn. Some were impacted by the pending M&A transaction or discussion. Some are -- some is by capital credit decline and some by overall liquidity crisis.

In Q4 we saw the primary impact was in the computing and semiconductor business. In Q1 the downturn was global based and adversely impacted most of our industry we serve with only telecom showing a slight revenue increase from Q4 due to new program ramps. I almost hedge to say it because the environment remains somehow unstable but based on the indication from our customers and updates over the past few weeks, the rate of decline and demand we have seen has stopped to slow down from the pace that we saw in Q1. It is our belief that this stabilization trend of those lows will continue further into Q2. We are continuing to work closely with our customers to try to understand the forecast. In this environment we remain focused on controlling that which we now control such as providing excellent service to our customers, pursuing new business including our M&A activities, managing our costs, maintain strong balance sheet and gauging heavily MPI activities to support our customers' new product introduction process.

During Q1 in order to stabilize our factory utilization rate we had to continue with our workforce reduction which is now totally approximately 17% of our total headcount over a year-to-year basis and our team all worked very hard try to control costs to maintain the financial matrix. Capital expenditures are only making for the long term item as well as for the critical item we need this point in time. We expect to see other restructure activities in Q2 which include 1 million to $2 million in restructuring charges.

During Q1 we generated positive cash flows approximately $64 million. We'll continue to (inaudible - highly accented language) a strong balance sheet and available cash is critical in this environment. We have approximately $454 million in cash and long term investments with virtually no debt. Our cash in the long term investment per share is approximately $7 per share at the end of March. We'll continue to vary our cash position and use of cash and allow our cash (inaudible) in M&A activity. Currently pursuing a strong M&A candidate is high priority on our agendas. Our team is strong. We are (inaudible) our management at this time diligently to emerge a stronger organization. Now I'll take the call to over Gayla Delly, please.

Thank you, Cary. Once again, as Cary said, we believe our teams have worked very diligently and effectively to manage our overall operating metrics and our performance during Q1 given the continued softness in demand. During Q1 we had revenues of $497 million, a decline of $85 million or 15% in comparison to Q4 of 2008. Our revenues for Q1 were short of our low end of guidance by $28 million due to the decreased demand from our customers. Even with this disappointing top line performance we still achieved a gross margin of 6.4% excluding special items because of better product mix and our continued cost controls.

There are signs of continuing outsourcing activity and we see a very active pipeline of opportunities in new program bookings. In fact, during Q1 we booked 12 new programs with current estimated annual revenues of 92 million to $125 million. You will note that these new program opportunities are with both new and existing customers within the industrial control, computing, medical and telecom industry sectors. Because of the current market conditions the timing in actual future revenues from these bookings are uncertain at this time, but we have already taken into consideration in discussions with our customers the average size of the programs that are expected to ramp and you will note that this program size has decreased characterized by today's overall demand levels which are reduced.

Our focus continues to be our differentiation based on our execution and service model. Amid the current turmoil we still expect to gain opportunities with both new and existing customers as they seek solid supply chain solutions and we see additional opportunities for outsourcing. Given our solid financial performance and our strong balance sheet, we are confident in our ability to flexibly support the needs of our customers. Until the overall market rebounds we will continue to monitor and control our costs while investing in the future.

During Q2 we anticipate further restructuring costs in the range of 1 million to $2 million and we will also look forward to planning to emerge a stronger organization when this down cycle is over. Based on our outlook we expect second quarter 2009 revenues to be somewhat flat with Q1 and in the range of 460 million to $520 million. The corresponding earnings per share for the second quarter are in the range of $0.13 to $0.21 excluding the restructuring charges. Also with the continued limited visibility and overall uncertainty in the economic environment, we will only provide guidance for the second quarter at this time. Now I'll turn it back over to Don to discuss in more detail the financial metrics for Q1.

Thank you, Gayla. We completed the first quarter of 2009 with revenues of $497 million these revenues were short of our revenue guidance of guidance of 525 million to $570 million provided during our last conference call. Again, the continued broad based soft demand has continued to impact our customer's orders. Our earnings per share excluding restructuring charges were $0.16 which were within our guidance provided. Again these results were acceptable given the decreased revenue from the prior quarter of $85 million in from our guidance.

Our results for the first quarter of 2009 include one special items restructuring charges of $1.1 million. These restructuring charges incurred during the quarter were primarily severance related and were due to our continuing evident to realign our global resources based on our customers and their demands which continue to be impacted by the ongoing global economic slowdown and resulting changes in demand requirements from our customers. To provide a more meaningful comparative analysis we will present certain financial information excluding the special item during this conference call. We will call your attention to the fact that this item is excluded when we do so.

In today's press release we have included a reconciliation of our GAAP results to our results excluding the special item. Our gross margin for the first quarter was 6.4% excluding special items compared to 7% for the fourth quarter of 2008. At the current revenue levels our gross margin exceeded our expectations due to better product mix and other operating efficiencies. However, the overall lower margin was due to decline in revenues of 15% from the prior quarter and a high level of MPI activities.

Our operating margin for the first quarter was 2.3% excluding the restructuring charges. This operating margin was down from Q4 due to the overall decline in revenues from the prior quarter. Excluding the special items net income was $10 million compared to $22 million in the first quarter of last year. GAAP net income for the first quarter was $9million compared to GAAP net income of $22 million in the same quarter last year. First quarter diluted earnings per share excluding special items were $0.16 in 2009 compared to $0.32 in the first quarter of last year. GAAP diluted earnings per share were $0.14 in the first quarter of 2009. Interest income was approximately $839,000 for the quarter. Interest expense was $351,000 other expense was approximately $396,000. Our effective tax rate was approximately 10% for the first quarter of 2009. The weighted average shares outstanding for the first quarter were 65.3 million on a GAAP basis.

Our cash and long term investments balance was $454 million at March 31, which includes $47 million of auction rate securities, classified as long term. The unrealized loss on the auction rate securities at March 31, was $5.9 million due to changes in the market value of these securities. Please note that the changes in the unrealized loss on these securities is reflected in accumulated other comprehensive income as a component of shareholders' equity. We continue to monitor the financial institutions and cash management vehicles that we use to invest or access cash balances. We continually monitor the overall credit worthiness of the financial institutions that we use in addition to investing our cash balances in vehicles where preservation of principal is the priority. Note that our interest income has been significantly impacted by the overall decline in market rates of interest.

For the first quarter our cash flows from operations were approximately $64 million. Capital expenditures for the first quarter were approximately $4.7 million. Depreciation and amortization expense was approximately $9.7 million. Receivables were $338 million at March 31, a decrease of $84 million from the last quarter. Inventory was $345 million at March 31. Our inventory turns were 5.4 times for the quarter compared to 6.3 times in the fourth quarter of 2008. This decrease is a direct result of the decreased demand from our customers and a lack of an inventory pull in March as evidenced by the fact that we fell short of our guidance for the quarter. Current assets were approximately $1.1 billion and the current ratio was 3.7 to 1 in Q1 compared to 3.4 to 1 for the last quarter. At March 31, we had approximately $12 million of debt outstanding which primarily related to a long term capital lease on one of our facilities.

Comparing the first quarter of 2009 to the same period last year the revenue breakdown by industry is as follows. In 2009 medical was 13%. It was also 13% in 2008. Telecom was 23% in 2009 which compares to 17% in 2008. Computing was 44% in 2009 which compares to 51% in 2008. Industrial controls was 19% in 2009 and 14% in 2008 and finally, tests and instrumentation was 1% in 2009 and 5% in 2008. Revenues from our top computing customer were 13% for the first quarter of this year.

At this time I'd like to open it up for the Q&A discussion. During the discussion we will 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) We'll go to the line of Jim Suva with Citigroup. Please go ahead.

Great. Thank you very much. Cary, in your prepared remarks you mentioned that you were seeing end demand pressures which everyone is very aware of as well as some M&A pressures that impacted revenues. Can you talk about, how much of it was demand related versus how much of it was M&A related and is that M&A just a hesitancy by customers to put in orders or is it M&A of some of your, I guess can you just explain some of what you meant by the M&A comment and quantify it?

Well, it's certainly difficult to quantify the pure impact of the M&A-related activity, but the base on the -- our experience whatever is the M&A activity the demand tends to be impacted by hesitation by our customers, customers to place orders and the -- for last quarter we see several customers have been impacted by M&A activity in the process. We know that there's some impact. It's certainly difficult to quantify that.

Okay. Do you expect a little bit more headwind from the M&A activity next quarter, also?

We'll probably have some. I think we'll probably bake that into our projection already and we of course, we have to be cautious about this situation. I think the impact usually is at the beginning of the M&A process. Once the process continue into the process, you will probably see improvement on the demands, so.

Great. Thank you very much.

And next we'll go to the line of Brian White with Collins Stewart. Please go ahead.

Yes, hi, Cary.

Hi, Brian. Good morning.

Can you just talk about with the Oracle Sun transaction what type of communication you've been able to have with either Oracle and Sun.

As you can probably appreciate, Brian, it's not our position to speak and due to the sheer confidential nature of any transaction we're going to have to refrain from having any commentary. You'll see this and other M&A transactions coming up in this environment, so we really can't add any color for you there. You'll have to look to one of the parties to participate in a conversation there.

Have you been able to talk with the companies, though?

Again in a normal ongoing conversation you can expect that we have with customers but beyond that I don't have any specific color to add to it.

Okay. And when we look into the June quarter, Cary, maybe talk a little bit about what market looked better and what markets look weaker in the June quarter versus the March quarter.

We usually don't give a guidance by industry, but can I give you some just kind of trend we look at. We definitely see a favorable trend in the medical side and the telecom sides, okay? And the -- but we do also see a soft trend for computing and industrial controls.

Okay, thank you.

Next we'll go to the line of [Brian Jones] with RBC. Please go ahead.

Morning. Thank you. Do you plan to repurchase any shares in Q2 and I think you have about $78 million left on the program that was announced last year, if I'm correct, and I wondered if you plan to utilize any of that in Q2.

Yes. I think one of the things that we certainly are looking at given our cash position is, best use of cash. As Cary indicated during the prepared comments that, we're looking at M&A activities strongly. We will also continue to look at repurchasing shares again. It's sort of a dynamic process, so that's certainly one of the things that we're considering for the upcoming quarter.

All right. And then my follow-up question, I was wondering if you could talk a little bit more about the inventory balance because I thought that would have been down a little more given the sales degradation quarter over quarter but it sounds like it might just be a timing issue?

Yes. I think certainly when you're getting inventory in the channel and then you start seeing the drop in demand that we continue to see throughout the quarter, it's hard to turn off the faucet, so to speak. So what happened is really the shortfall in revenues that we had really resulted in us having the inventory sitting on our balance sheet at the end of the quarter.

All right. Thank you.

And next we'll go to the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Hi, thank you. I just wanted to follow-up on the inventory question. In terms of classifying the inventory on your balance sheet, is that longer lead time items? I guess I'm just a bit surprised that inventory wouldn't have come down with the revenue. Is that stuff that you bought early in the quarter with some expectations of deals coming through or maybe you could give us a little bit of color on, how long lead time items those are and what you expect for the second quarter in terms of does that inventory level come down?

Well, I think in terms of the second quarter looking at turns I think we're certainly expecting improvement. How much an improvement is a little bit difficult to say but, kind of going back to my previous comment, listen, you align your supply chain up. There's lead times of varying length, but as we continue to see orders decline throughout the quarter, throughout the quarter you can't necessarily turn those off immediately. So it's previous comments that is what happens is, it's a timing issue and again I think if you look at the Q2, we wouldn't expect an increase in the terms, but in terms of putting a specific number on it, we're a little hesitant to do that right now.

Would you expect on an absolute basis that it would come down?

I would say yes and I would think the turns will increase.

Okay. And can I just ask a clarification? Are you no longer stripping out the amortization costs? You just mentioned restructuring as the only item that you're stripping out. It looks like you're not stripping out the amortization.

No, we're not stripping out stock options or amortization. Those are included in our guidance.

Okay. Thank you.

Okay.

And next we'll go to the line of William Stein with Credit Suisse, please go ahead.

Thank you. I'm wondering if you can talk about priority for cash use. Cary, I think you mentioned that you were pursuing M&A candidates as a high priority today. Is that right and, if so, can you detail the kind of transaction you'd be looking to do?

We have been, I think the stock market, there's definitely some good opportunities out there and again we're locking for -- at this point in time we're not looking for skill related transaction. We tend to be very focused, very focused on skill-related target and either expanding our scope, our service and maybe even getting a little bit into the vertical type activity. So the good thing about it is this market, the valuation of the target is actually coming down and that's where we'll spend our credit effort, try to look into a potential opportunity. That's probably the focus we're on at this point in time besides the transactions tend to be smaller and the skill related transaction tend to be in the -- the volume tend to be higher.

And when you say vertical capabilities, are you talking about design or component manufacturer?

I don't think we'll get into the component manufacture. We'll probably expand our scope either from design or provide a little more in the, expanding the scope a little bit, maybe just sticking some other things like that.

Great. One other thing. I'm wondering if you could talk about the trend of bookings throughout the quarter. For example, was March booked to bill, did it approach 1.0? Did it improve throughout the quarter, any comments on that would be very helpful.

Well, book to bill, is kind of -- I think from the book standpoint it was definitely over 1.0. The challenge is a lot of bookings are based on forecast. The forecast could be adjusted accordingly in a downturn fairly quickly. You look at in Q1 we're actually giving you the guidance in February and definitely throughout February in the early March we saw that projection of forecast coming down, but definitely the booking is up, is picking up. As I would say earlier, we do see this stabilization process, although it's very slow and basically we're giving the guidance for a flat quarter compare Q2 to Q1. I think that process will be, probably continue and one of the thing we talk internally is the inventory level and the supply chain situation and we see certainly high activity try to reduce the capacity through our supply chain. One area we're looking very closely this point in time is can we able to market this comeback, will the supply chain be able to react, how quickly? So that's kind of being something we're watching very closely.

Like we talked earlier, the MPI activities tend to be leading additional new business. We're engaging very, very heavily in the MPI activity and that means our customers are not giving up on the new product introductions and that, like Don's comment and for the quarter our margin was actually impacted by such a heavy MP activity for the quarter.

Helpful. Thank you very much.

Thanks.

And next we'll go to the line of Alex Blanton with Ingalls & Snyder. Please go ahead.

Good morning.

Good morning.

You just reported sales down 27% year-over-year. So Elastica down 20% yesterday and Sanmina, I mean this morning and Sanmina down 22%. So the end market or the sales declines for the EMS companies are quite substantial and it seems to me exceed what is happening at the end of market. That would mean that there's inventory reduction going on among your customers. Can you hazard a guess as to the extent of that and if their orders return to their sales rate, would it mean an increase in your orders -- their orders to you and by how much?

Alex, you have a very good understanding of how the markets work and where we are in the supply chain. Clearly we see that we get the impact both of the lower level of demand and the inventory correction that our customers are effectuating to align their balance sheet as the preservation of cash is critical. So as Cary mentioned, one of the things that we continue to work with our customers on is both identifying and anticipating the market stabilization and trying to anticipate when the markets come back, what the impact on the supply chain will be because throughout the past few quarters of downturn there has been capacity taken out of many points in the supply chain which will make the spring back to action more challenging in different points. So the inventory reduction that's taken place throughout the channel will no doubt elongate some of the lead times and we will expect that to have an impact, but yes, we do expect that when the demand levels come back, that the -- us and probably others in the EMS marketplace will see a more favorable impact more readily than the OEMs do simply because of the timing of how the production works.

Well, I guess what I'm really asking is in comparison with the 20 to 25 or 27% declines at the EMS level in the sales right now, what's the decline of actually demand -- final demand, okay? Final demand is clearly not down 20, 25% in a lot of these markets. It's down less than that but you're seeing the effect of the inventory. So I'm trying to figure out, what is the difference here?

We've looked across the customer vase and it varies pretty dramatically. I'd say from 7 to probably 25%. So you see in some markets, say in server markets, some of them have even within certain sectors within computing it can be from 17 to 25% and different -- in telecom it varies pretty significantly. So we were unable to discern a valuable number that we could point to and had a lot of discussions here with our team to try to identify was there something we could point to that was the end market degradation, but I don't think we were able to solidify a specific point. I guess suffice it to say that the demand decline to have -- vary significantly at the end market level.

Thank you.

And next we'll go to the line of Sean Hannan with Needham & Company. Please go ahead.

Yes. Good morning, thank you.

Good morning, Sean.

So on your prior call you folks had talked a little bit around some product lifestyle cycle transitions that were occurring in your medical business. Cary, you had indicated a little bit earlier that, among the more favorable outlooks within your business medical is among them. Is that lifecycle, is the bulk of that lifecycle transitioned? Obviously it's always something that goes on, but is the bulk of that now something that's behind or how should we think about that?

Well, our medical business definitely impacted in Q1 by the product transitions and it really is probably not unusual whenever you have a new product introduction, it goes through the process and we believe at this point in time that particular transaction for those couple customers is over with and we see a bounceback in the demand for Q2. That's why we projected a more favorable revenue pattern from medical side and there's a timing, not saying that medical, the industry is not impacted by the overall demand for the market. It's definitely impacted by it, but the overall drop in the revenue from Benchmark in Q1 has pretty much contributed to the project transition and it's all over with and should be bounce back in Q2.

Okay. That's very helpful. And then separately if I look at bookings, I think over -- we've gotten around this topic a lot on the call he today. Bookings have been pretty solid for your folks over a number of quarters as well as a couple of years. You've had some different headwinds that have maxed this such as the macro slow down and going back further, the accelerated end of life programs that you had at your large customer. If you look at your mix today and views within the market, can you share your thoughts on the time frames, the extent to which they could possibly be stretched from the period where you actually win a program to then shipping a product? In essence, how has this changed because I think traditionally people have thought about this as kind of a 6 to 12 or 9 to 12 month time frame where you start to have revenues materialize. So any color around that could be helpful.

I don't think there's any changing of the timing on this product, transferred to us. There could be from 6 months to 18 months depending type of product, right, but the charge that you have is doing the transition time demands get so soft and the anticipated revenue ramp did not occur. Of course, the only question was, what is -- what are we seeing a EMS revenue drop more significantly than customer dropping and the answer was because a lot of customers have a (inaudible) software and hardware business but you're looking and a lot of customers today doing is cash preservation is so important for them and a lot of customer will take a compound inventory out of process. They are trying to reduce their inventory in their discretion channel. So we are kind of seeing a double whammy from the demand side number one, from the end market there's softness, number two, is a -- from an adjustment downward from the channel inventory. That's what we'd see a bigger decline on revenue on our EMS books comes out in customers but one of the things the trend is picking up, so we should see the benefit but not only from the pickup from the end market pickup as well as the backfield channel for our end customers.

So there's really no evidence overall in terms of customers or various segments that are coming back to you and instead revising their plans for launch dates and pushing that out?

No. In fact, one of the things that we might add that we see is we're getting involved in the engineering and design phase and earlier in the ramp of the product. So that probably is the other key factor in determining the timing of the ramp. So I don't see that they are, kind of changing their mind midway through the cycle of ramping the product, but we are getting involved earlier and the ramp to volume is happening at a lower level of volume when it meets the market.

That's very helpful. Then lastly, if you could venture to guess and I don't know if this might be for you, Don, current utilization levels?

Probably around 60%.

Okay. Thanks very much.

Okay.

And next we'll go to the line of [Steven Fox] with CLSA. Please go ahead.

Hi. Good morning.

Good morning.

I guess I'm still a little confused on the dynamics behind the new product introductions. Are you saying that you have not seen much of a slowdown in new product introductions even during the last couple quarters and, if so, is it that you're ramping for products but then you're not seeing them go to volume? I'm not quite sure how the economy has affected the NPI. So maybe we can go over that a little bit more.

Yes. Let me say kind of an even starting before that point because it's probably an important factor to consider. As you may recall, Benchmark has probably one of the strongest most rigorous credit reviews in conjunction with accepting and engaging with customers at the outset. So by virtue of that we have a pretty solid set of customers with some strong financials. As a result of that, I believe, the customer base that we have are able to make R&D decisions and move forward with those as a long term investment in their future and have the ability to continue even through the downturn in funding and bringing new products to market.

So having said that as the backdrop, we do see that our customers as we see new products being brought to market that they are continuing with those and investing those, understanding the cost pressures that are out there looking at what impacts and how those need to manage the product as it is being developed to ensure that it meets the right cost point before it's brought to market, but we are not seeing significant abandonment of R&D ventures. So hopefully that helps frame that for you.

Yes, no. That's very helpful. Thank you.

Next we'll go to the line of Brian Alexander with Raymond James. Please go ahead.

Thanks. Just to go back to the inventory. Sorry to beat this one to death. But if the rate of the sales decline that you saw moderated throughout the quarter and you expected sales to decline sequentially by about $40 million just using the midpoint of your guidance when you entered the quarter and you're not expecting any sequential growth in June, I'm still not clear why the inventory would not have come down in the quarter is. If you could just be more specific on the nature of the inventory either by end market or composition?

Well, I think first thing -- I don't think we said it moderated during the quarter. I think what Cary indicated is that the declines after we gave our guidance in early February, the rate of decline continued. I think when we're talking about moderation of the forecast, we're really talking about the first several weeks in April. So there wasn't a moderation of the forecast in February or March.

Let me probably have -- approach it at a different angle from the inventory standpoint of view. You have an inventory plan for the quarter and you drive the inventory to that and of course, if we're driving inventory at a high revenue plan and one of the challenges in the downturn is the mixed change throughout the quarter and as the demand was so soft the end customer tried to realize the revenue as much as they can. There's a lot of changes in the mix throughout these last couple three, four weeks of quarter and that processes can return the inventory. He had to acquire new inventory in support of customers and also the MPI activity we got we talked quite a bit about it. Those are activities driving a lot of inventory into the process, but it's not getting relief into the production cycle. And a somewhat longer lead time (inaudible) had to be engaged to start acquiring them.

So the inventory situation is pretty timing and I think we are still, target our inventory turn between 6 and 6.5 and we'll probably see that in maybe not quite next quarter, we'll probably coming back in Q3 but nevertheless there is no inventory issue. It's all pure timing and mix changes, the NPI activity and forecast changes all relate to it and sometimes you can't react that fast and I'll probably give you another analogy was you look at the Asics and the fab on the Far East sides, you can see their utilization of the supply was dropped 30% utilization to 60% just in a couple months. So it's a very dynamic environment, a lot of movement within the inventory cycle, but I guess what our inventory position today is related to a lower volume output compare our forecast inventory plan is also the mix changes from program to program for our customer to realize revenue and on the top you had MPI activity which was driving some additional inventory. You're not going realize the revenue until next quarter or so.

That makes sense. Just to follow-up on the computing segment, I believe you mentioned that that was perhaps below seasonal in terms of your outlook for June. Can you just talk about how broad based that is? Is it more servers than storage? Is it more customer specific or is it pretty broad based?

It seems to be pretty broad based at this time and not specific to any customer or any one sector within computing. I think once again cash is king and we've seen before in downturns that the computing sector seems to be one that for capital spending is able to be held off a little bit longer by CFOs as long as they have the infrastructure in place they're able to hold back on issuing those TOs more easily than they are some of the specific manufacturing equipment or other equipment in the backbone of the operation. So it's clearly a back office rather than a revenue generation for a lot of companies.

It doesn't seem like you're being overly conservative in light of some of the M&A activity that's occurred in your customer base.

I don't know what overly conservative might be. I mean we're just trying to take into consideration, as we always do, all of the factors and data points that are available to us when we put together information. We aren't expecting in any customer that an M&A transaction would either create a level of exuberance in the marketplace, nor would it create a train wreck in any near term immediate point in time.

Great. That's helpful, Gayla. Thanks.

And next we'll go to the line of Brian Jones, RBC. Please go ahead.

Hi, thanks, just one quick follow-up. I was wondering if you could speak about your expectations for SG&A next quarter and some of the additional actions that you'll be taking as mentioned earlier?

I think in terms of the addition -- I think you probably should expect to see SG&A be relatively flat for the quarter. I think in terms of actions, as we've indicated we've reduced our workforce by about 17%. Again we will -- the additional restructuring charges that we're forecasting we have taken actions and as we have over the last two or three quarters, we'll continue to take similar actions if need be.

So I guess to recap a little bit on that, our actions are really aligned to balance the operating model to the revenue stream. We clearly don't like layoffs, but in today's environment they're a fact of life and we want to do as many as we need to do but as few as possible and we're using all of the different types of controls in place that others are using to allow us to basically align for the future. So business is always a balance and we want to be responsive to the current day environment, what we see out there, but we also want to plan for the future. And so as we support the MPI activities, as we ramp, you see the impact on inventory, the same thing will likely play out as having an impact on the percentage of SG&A that we carry, so in whole dollars it will not continue to decline and the percentage will be a little bit higher than we would expect it to be when our revenue throughput picks back up and we see a turn around in the marketplace.

Thank you.

And next we'll go to the line of Brian White with Collins Stewart. Please go ahead.

Don, I may have missed some of this but how should we think about the tax rate for the June quarter and also moving forward? And then just depreciation and CapEx for 2009?

Well, I think in terms of tax rate, 10 to 11% is kind of what we've got modeled. I think in terms of the CapEx as Gayla indicated and Cary on the call, CapEx right now is at absolute necessary we're looking at about $20 million for the year, pretty much about the same run rate we had in Q1 at this point.

Okay. And depreciation would just be similar to what we saw in the March quarter?

Yes. I would expect in the $10 million range.

Okay. Thank you.

And I'm showing no questions in queue.

Thank you all for joining our call today. We'll be available in the office if there's any follow-up.

And, ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.