Celestica Inc (CLS) 2010 Q3 法說會逐字稿

Good morning.

My name is Shannon and I will be your conference operator today.

At this time, I would like to welcome everyone to Celestica's third quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions) Thank you.

I would now like to turn the call over to Mr Paul Carpino, Vice President Investor Relations.

Mr Carpino, you may begin.

Thank you Shannon.

Good morning everyone and thank you joining for us on Celestica's third quarter conference call.

On our conference call today will be Craig Muhlhauser, President and Chief Executive Officer, and Paul Nicoletti, Chief Financial Officer.

This conference call will last approximately 45 minutes.

Craig and Paul will provide some brief comments on the quarter and then we'll open up the call for Q and A.

Copies of the supporting slides accompanying this webcast can be viewed at celestica.com during the call.

During the Q and A session of this call please limit yourself to one question and one follow up to ensure everyone on the call has an opportunity to do so.

You're welcome to get back in the queue after you ask a question.

Before we begin, I would like to remind everyone that during this call we will make forward looking statements related to our future growth, trends in our industry, our financial and operational results and performance and financial targets that are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially.

We'll refer you to our cautionary statements regarding forward looking information in the Company's various public filings, including Safe Harbor Statement in today's press release.

We refer you to the assumptions, risk factors and uncertainties discussed in the Company's various public filings, which contain and identify factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.

These filings include our Form 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission, which can be accessed at sedar.com and sec.gov.

Please note that we will refer to certain non-GAAP financial measures during this call, which include adjusted gross margin, adjusted SG&A, adjusted operating margin, or EBIAT, adjusted EPS, and free cash flow.

These non-GAAP measures do not have any standardize meaning prescribed by GAAP and are not necessarily comparable with similar measures presented by other companies.

We refer you to our press release, which is available at celestica.com, for more information about these non-GAAP measures, including a reconciliation of the non-GAAP measures to the corresponding GAAP measures if appropriate.

I'll now turn the call over to Craig Muhlhauser.

Thanks, Paul.

Good morning everyone.

Despite an overall stable business environment and strong revenue outlets for our fourth quarter, Celestica experienced some demand changes late in the third quarter.

Primarily, in our consumer end market which shifted demand into the fourth quarter.

While this shift impacted revenue and inventory performance in the third quarter, demand from our other end markets generally performed as we expected.

In spite of this volatility, Celestica delivered another quarter of consistent operating margins, strong free cash flow, ROIC of greater than 20% with strong execution and performance in support of customers throughout our global operating network.

We generated $81 million in free cash flow in the quarter and ended the period with $706 million in cash.

In August, we completed our acquisition of Allied Panels and commenced our stock buy back program where we spent $37 million to repurchase and cancel 4.7 million shares.

Given our strong cash position, consistent operating performance and increasing revenue growth, we continue to believe that deploying capital through our buy-back program reflects our confidence and the execution of our strategy and our ability to achieve our financial goals.

On the customer front, I would like to thank Cisco for their recognition of Celestica this quarter at their annual supplier appreciation day with two major supplier awards.

First, Celestica was recognized by Cisco with the EMS partner operational excellence award for delivering strong operational performance in areas of cost, quality, delivery and support, as measured by Cisco's EMS partner's score card.

The recognition was based on criteria such as our ability to launch major new product programs on time and to six sigma standards, as well as consistently scoring high marks in quality and customer support.

In addition, Cisco recognized Celestica with the second major supplier award.

The excellence in partner IT collaboration award.

This award recognizes the Cisco preferred supplier who implements a program, process or initiative that leverages integrated information technologies, to build a strong and agile supply chain that can support accelerated growth.

Our efforts included IT collaboration between Celestica and Cisco in areas such us our SmartOps inventory management implementation.

Enhanced B to B communications platforms in support of Cisco's growing business.

As well as, senior level collaboration and thought leadership with respect to business analytics, data warehousing and customer /forward solutions.

We believe these awards are further recognition of Celestica's unique ability and continuing commitment to meet the challenges of today's market for industry leading customers by delivering innovative end to end supply chain solutions that set the highest standards for our industry.

We continue to build momentum in securing new business in the key target markets, as evidenced by our fourth quarter outlook for strong sequential revenue growth of approximately 15% at the midpoint of our guidance.

This near term growth is driven primarily by recent large program wins in our server and consumer end markets, which are ramping on time and as planned.

As a result of these new wins and stable demand forecast, for the balance of our customer portfolio, we expect these new programs to reduce some of the impacts of seasonality we have historically experienced in the first quarter.

And for this revenue strength to continue in 2011.

While we're currently experiencing faster growth in our consumer and server end markets, we continue to increase our investments in accelerating the growth of our industrial, aerospace and defense, and healthcare segments.

Which we are targeting to represent 25% of our revenue over the next several years.

Let me conclude my remarks with some thoughts on the current business environment and our financial outlook as we look forward to the new year.

In terms of end market demand, we continue to see stability in our end markets, although visibility continues to be limited.

On the outsourcing front, we continue to believe that Celestica's opportunities with new and existing customers are robust due to our strong execution and track record of delivering our commitments to our customers.

As we evaluate and pursue the best opportunities for Celestica, our focus is on partnering with those customers where our capabilities and future investments generate a fair return on our investments and value to our customers.

In addition, we are continuing to evaluate acquisitions in our target markets.

Such as, after market services, industrial, aerospace and defense and healthcare that will provide us with new and enhanced capabilities to further accelerate our progress in these important markets.

With new investments in our design and engineering services as a major driver for delivering more value to our customers.

And continuously improving our operating margin performance for our shareholders.

And as such, we are increasing our investments in those areas as well.

Our business is expected to grow more rapidly than we had previously targeted over the next few quarters, which will slightly modify the financial targets we detailed at the beginning of 2010.

As many of you know, our targets over a three-year period are to achieve a compound annual revenue growth rate of 6% to 8%.

Annual operating margin targets of 3.5% to 4%, and annual ROIC of greater than 20%, and annual free cash-flow of $100 million and $200 million.

While we continue to believe that these targets are consistent with our three year view of our business.

Timing, size, and mix of our recent program wins will create some new term changes when compared to these three year targets.

Specifically, we now anticipate that the revenue growth in 2011 will be in the 10% to 15% range, compared to our original three-year compound average annual growth rate target of 6% to 8%.

From an operating margin perspective, we anticipate over the next several quarters operating margins are likely to be in the 3% to 3.5% range.

However, we still view our operating margin target of 3.5% to 4% as our more normalized operating range.

And, we will continue to work to shift the revenue mix and the services we provide to achieve this objective.

Although our industrial, aerospace and defense, and healthcare businesses are expected to grow at a much faster rate than the overall company in 2011.

We expect this higher margin business to have a greater impact by the second half of 2011.

We are growing off a much lower revenue base as the new programs ramp to their full production volumes.

Lastly, given the accelerating revenue growth, while we continue to be focused on maintaining our leadership position in asset velocity, we expect annual free cash-flow to be at the low end of $100 million to $200 million range.

As the working capital needs associated with our faster growth rates and resource allocations align with our strategic objectives.

In summary, I'm very encouraged with the actions we've taken this year to strengthen our competitive position and the success we've had in securing new opportunities across the business.

As we enter this higher growth phase, we believe that Celestica will continue to demonstrate its ability to drive significant value to both our customers and our shareholders alike.

Now, let me turn the call over to Paul Nicoletti.

Paul?

Thanks, Craig and good morning.

Celestica delivered stable results in the third quarter, despite some revenue volatilities late in the quarter.

Revenue for the third quarter decreased 2% from the second quarter of 2010 and 1% from the same period last year.

The largest contributor to the sequential decline, as well the as the year-to-year decline, came from the consumer end market.

Sequentially, demand changes occurred late in the quarter shifting revenue into the fourth quarter.

On a year-over-year basis, where we were impacted by decline in the gaming console area consumer, where we chose to focus on higher margin opportunities.

Looking at our revenue by end markets and their sequential performance versus the second quarter.

Consumer was 26% of sales and was down approximately 9% sequentially.

Enterprise communications represented 23% of sales and grew by 3%.

Telecom was 14% of revenue and was up 6%.

Our server end market represented 13% and declined by 5%.

Industrial, aerospace, defense, healthcare came in at 12% of total of revenue and grew 4%.

Finally, storage was 12% of sales and down 8%.

Our top ten customers represented 71% of sales for the quarter and our top five represented 48% of sales.

We had one customer with sales of greater than 10% in the quarter, representing 18% of sales.

The Company posted GAAP earnings for the third quarter of $35.4 million, or $0.15 per share, which included restructuring charges of $5 million.

This results compare to a GAAP loss of $600,000 or $0.00 per share for the same period last year.

Adjusted net earnings for the quarter were $46.3 million, or $0.20 per share, compared to adjusted net earnings of $44.3 million, or $0.19 per share for the same period last year.

Adjusted gross margins were 7.2%, compared to 7.1% for the third quarter of 2009.

Adjusted SG&A was $56.3 million, or 3.6% of revenue, compared to $54.7 million, or 3.5% of revenue in the second quarter.

Adjusted operating margin was 3.4%, unchanged from second quarter of this year and our adjusted tax rate was 10%, which is a tax rate we expect to carry into the fourth quarter.

Finally, pretax return on invested capital was 22.9%, compared to 23.9% in the second quarter.

In terms of a restructuring update as of September 30, during the quarter we recorded $5 million of restructured charges and to date have recorded $155 million of the $175 million restructuring program announced in 2008 and 2009.

We're coming to an end of these restructuring activities and expect to complete them by the end of this year.

Moving to our working capital, inventory was up $87 million for an increase of 13%, compared to the second quarter of 2010.

This increase reflects the significant program ramp expected in the fourth quarter where revenues and mid point of our guidance expected to grow 15% sequentially.

This resulted in inventory turns of 8 times.

Cash-flow from operations was $90 million and free cash flow was a strong $81 million.

CapEx for the quarter was $16 million, consistent with our run rate at approximately 1% of annual revenue.

As a result of this higher inventory, cash cycle for the quarter increased three days to 35 days, while accounts receivable and accounts payable days were unchanged from the second quarter.

Moving to the balance sheet.

Cash increased $22 million and we ended the quarter with cash of $706 million.

Our $200 million credit facility also remains undrawn and fully available and the Company continues to have no debt outstanding.

We utilize our strong balance sheet this quarter by spending $37 million to repurchase approximately 4.7 million subordinate voting shares for cancellation at an average price of $7.99 per share.

These share repurchases are part of our normal course issuer bid, which allows us to repurchase up to 18 million shares, or approximately 9% of our outstanding subordinate voting shares.

During the quarter, we also paid $11 million to purchase 1.3 million shares in the open market for employee equity base incentive programs.

As a reminder, the total number of subordinate voting shares we may repurchase for cancellation under the buy back program is reduced by the number of shares purchased for employee equity base incentive programs.

As of September 30, approximately 12 million shares are available to be repurchased under our buy back program and we expect to be continuing to repurchase shares in the fourth quarter.

In terms of our fourth quarter guidance, we are guiding one of the largest sequential revenue increases that we have seen in many years.

As Craig noted, new program wins in our server and consumer segments are expected to drive a 15% sequential revenue growth at the midpoint of our guidance.

We anticipate revenue to be in the range of $1.7 million to $1.85 billion, which would represent $150 million to $300 million sequential revenue increase.

While we're not giving guidance for the first quarter of 2011, we currently anticipate that some of our new ramping consumer and server business is likely to reduce some of the revenue seasonality dip we typically experience in the first quarter.

For our adjusted earnings per share in the fourth quarter, we anticipate a range of between $0.20 and $0.26.

As Craig outlined, the stronger revenue growth from the server and consumer end markets will keep operating margins in the 3% to 3.5% range over the next several quarters, but anticipate our returns on invested capital to remain above 20%.

On a GAAP basis, we anticipate a $0.05 to $0.12 per share negative pretax impact on earnings for the following items.

Quarterly stock based compensation, amortization of intangible assets, and restructuring charges.

In summary, we are confident in our strategy, which is showing high revenue momentum, strong execution in customer satisfaction and we believe we'll show increased earnings momentum during 2011.

This, along with an exceptional balance sheet and our ability to invest additional capital, will drive long term value for our shareholders.

That concludes our formal comments and our third quarter results.

I will now ask the Operator to open up the call for any questions.

(Operator Instructions) We'll pause for just a moment to compile the Q and A roster.

Your first question comes from the line of Brian White from Ticonderoga.

Your line is now open.

Okay.

Good morning.

When we think about the consumer push out into the December quarter, about what size was the program and what is -- what market is it related to?

Hi, Brian, good morning, it's Paul.

We're not going do quantify the size.

Suffice it say, we gave a range of guidance.

Typically we would, at a minimum, expect to come in at the midpoint of that guidance.

As you can see, we essentially came in at the low end.

I won't say much more other than that.

You know that our concentration is consumer -- is very weighted in the high growth area of SmartPhones, which is a great opportunity.

That aside, obviously has some volatility to it.

Okay.

And when we think about your enterprise related programs, whether it's networking, server storage, it looks like pretty lack luster trends in the September quarter, should we expect that to continue into the December quarter?

Brian, I think as we mentioned in our comments, we are in the midst of ramping some pretty sizable programs in the server area.

So, when we look at overall concentration and shifts in the portfolio, I think it's fair to see the server arena will represent a larger percentage going into fourth quarter and probably into the first couple of quarters of 2011, as well.

That aside, I think that the overall consumer enterprise calm storage areas will kind of stick where they are from a percentage terms.

The offset will likely be in areas such as telecom.

Were we saw some good growth in the third quarter.

But as we talked about before, it's pretty choppy and really relates to specific build out or orders that some of our customers have.

Okay.

To remind me, why did we see server and storage decline in what is typically a strong September quarter?

Yes, Brian, again.

Just for the mix of programs we have, as I said, when we look in fourth quarter, given the new program wins, we'd expect those areas to show some growth.

But why did they fall in the September quarter?

Nothing specific, Brian.

Just representative of the customers we have and the mix that we have in that portfolio.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Sherri Scribner of Deutsche Bank.

Your line is now open.

Hi.

Thank you.

Craig, your guidance for fiscal 2011 revenue growth of 10% to 15% is significantly higher than the revenue growth you have seen this year and the past few years.

It sounds like you're expecting a number of programs to ramp in server and consumer expected to be strong.

I was hoping to get a little more color on why you're so confident that you can grow revenue in that range next year?

Well, frankly we've had a very, very strong 2010 and bookings in new business looks very, very encouraging as the size of the programs, the nature of the programs that we're booking are significant changes in source and strategy, where customers are consolidating to fewer suppliers and we're one of those suppliers.

The other one what's encouraging, but not really evident yet is the rate of bookings in the industrial, and the aerospace and defense.

You see the fourth quarter momentum start to build.

We go into the first quarter of next year.

Paul mentioned typical seasonality is going to be less than what you're used to with Celestica.

Getting off to a strong start is going to create a very nice profile of revenue growth for the full year and based on the execution, track record that we've established over the last four years, as well as the quality of our customer base, we are very confident, which is why we are talking about it, frankly.

Very encouraging as we mentioned.

We're going to see faster growth over the course of the fourth quarter for the first time this year in our industrial, healthcare, and aerospace and defense business and largely organic, and we expected that to continue throughout the full year of 2000.

Albeit from a lower base, but significant traction over what we experienced in 2010, coming out of a tough year in 2009.

We're ramping up design and engineering investments to strengthen our core.

We're investing in sales and management resources and the new verticals, and we are accelerating, dramatically accelerating the progress.

Again, albeit from a small base and after market.

So, the vectors, the momentum, what's encouraging is the momentum in the Company and as we mentioned in the call, we've just got to get the -- as we get traction in those newer segments, the mix of the Company takes us back to the target margins.

Okay.

Just following up on the traction and the industrial segment, you commented that this next quarter, the fourth quarter, you're going the see operating margins will be a bit weaker because of the mix.

It sounds like that mix will also be a modest drag in the first half of next year.

Would you expect to return to your longer term targeted operating margin range 3.5% to 4% in the second half of 2011 as we start to add more industrial programs, or what are you thinking about in terms of 2011?

Exactly, Sherri.

That's exactly what we would expect.

Okay, great.

Thank you.

Thank you.

Your next question comes from the line of Alex Blanton of Ingalls and Snyder.

Your line is now open.

Good morning.

Good morning.

Good morning.

Getting back to the consumer sector again, one of your competitors reported yesterday that actually their seasonality had changed in the other direction in the consumer market.

I realize that it's not the same product mix.

But what they said was that there was a bigger ramp up in the September quarter than they had previously, and therefore less of an increase in the fourth quarter, quarter over quarter, and that one of the reasons for that, and they got specifically asked about this, was that customers are relying on the oceans for transportation more than in the past.

And so they have to ramp up earlier in the year in order to get their products to the North American markets.

So, could you comment on the seasonality that you observed?

You mentioned you're heavily weighted to SmartPhones, is there something different about that.

And also you alluded to -- during your opening remarks to the gaming console business, but I didn't get quite what you said there.

It seemed like you indicated that you might have given up some business there because of the margins.

Well -- this is Craig.

Let me start with that and then I'll turn it over to Paul on the specific comment regarding the XBox.

In general, the portfolio of consumer products that we've got is weighted in SmartPhones and set top boxes to a significantly lesser extent in things like gaming and certainly other consumer devices.

So, SmartPhones are enjoying a tremendous growth.

We are serving tremendous customer and obviously the volatility in that space is the rate of new program ramps that fill the, as I'll say, as products go through the life cycle and we certainly are putting those on oceans today.

It's a very regionally based strategy that is very responsive to end market demand.

So, I can't speak to that specific comment, but -- so what we see is a growing base of consumer business and the grounding there is are we on the right programs that are successful in their end markets.

As we mentioned prior to this, we're launching three new programs and we continue to feel confident in the quality of our portfolio.

The other aspects of our business, gaming, would be at the very far end of being able to influence that, it's largely repair.

The other one would be in set top boxes, which is a much smaller, but growing segment of consumers.

These tend to be very stable outputs.

Therefore, where as gaming, in our experience when we were involved in the production of the units, was a very spikey Christmas kind of driven holiday season market, and as a result of that created things anomalies.

I'll let Paul speak to the comments he made in his remarks.

Hi, Alex, it's Paul.

Allow me to be a bit more specific.

Historically, as you may know, the gaming area was a large portion of business for Celestica and that business seasonality wise, third quarter was the largest quarter as you started to ramp for the US holiday season.

When you look at our consumer revenue year on year, we are down about $100 million.

While at the same time, we've been booking significant programs in consumer, so specifically in SmartPhones.

So, year on year basis really what that reduction is, is our choice to kind of walk away from that gaming console as far as new manufacturing is concerned, that just didn't fit the margin profile any longer than what we were driving towards.

As Craig mentioned, it's an area that we have interest in but mostly in the areas such as repair where the revenues are smaller, so just trying to provide a bit more color on what's going on a year over year basis.

You are saying that you were manufacturing the consoles a year ago and now you're not?

That's correct.

And then in the SmartPhone area, you're seeing new customers, three new customers in the fourth quarter, is that part of the reason for the increase?

Three new programs as we mentioned.

Three new programs.

Correct.

That didn't affect you in the third quarter?

Correct.

So, you're not seeing the same?

No, we're seeing a totally different profile.

Profile.

Okay.

Thank you.

Thanks, Alex.

Your next question comes from the line of Shawn Harrison of Longbow Research.

Your line is now open.

Hi, good morning.

This is Gausia Chowdhury calling on behalf of Shawn.

I was just wondering in regards to the fourth quarter guidance, could you just provide some more detail maybe by end market as far as what will be above of below the 15% midpoint.

Do you expect any markets to maybe sequentially decline?

Good morning.

It's Paul.

I think per my comments earlier, generally what I would expect to see is the server area grow faster than 15% and/or the telecom area to be a bit lower than 15%, all other segments, as far as where we expect them to be right now, recognizing there's a range, should be about the same overall weighting of the Company.

Okay.

Thank you.

Thank you.

And also if you could just maybe provide some guidance on the interest expenses that you are looking at.

Did you say interest?

Yes.

Don't expect any meaningful change in the interest in Q4 from what you see in Q3.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Louis Miscioscia from Collins Stewart.

Your line is now open.

Hi great.

Could you maybe help us out on the operating margin front?

Thank you for the guidance that you gave, but should we think of it starting off the new year, obviously on the low end of the range, just having a normal seasonality and ramping as you get some of these new programs ramped up and also has demand and improve throughout the year?

Hi, Lou.

So, yes, I think as we mentioned, we expect there to be lower seasonality than we've experienced in the past, but we'll still see some reduction into Q1 and I think it's fair to say there's still leverage in the model.

So, if revenue comes down slightly, we'd expect that margins would be impacted.

Q4 guidance range implies a 3.3% operating margin, with revenue decline, I think it's fair to say we would expect there to be some downward pressure on that.

Great.

And the revenue range that you gave us, could you maybe give us a thought as to, do you hit the high end of the range basically if the organic or the macro economy is good, or is that just more wins and maybe you haven't won already coming in as you roll out in 2011?

I think, Lou, it has more to do just with the fundamental demand for the products we have.

So, I won't even make it as broad as macro, I think it's really programs we have and which devices or which boxes the customers are buying that I think puts us at the high or the low end of that.

Great.

One question on the same topic, as you look at the revenue range that you have given us, that doesn't imply that you have to win more businesses, all of the businesses that you normally won and you obviously you already have?

Just for clarity, Lou, what period are you talking about?

2011.

I think we look at our book and obviously, as you know, it's mostly forecasts that the longer you get out it's more questionable.

Right now based on everything we see, some of that is new programs that we won this year that are ramping, programs that we have today that we continue that we expect we'll continue.

We, of course, expect to continue to book new business, but that certainly is not the main driver as to what is going to be the 10% to 15% range of growth.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Brian Alexander of Raymond James.

Your line is now open.

Thanks.

Sorry if I missed this earlier, but in terms of the confidence that the consumer business push out that you saw in Q3 is just a push out and not reflective of overall weak demand from your largest customer or other customers in that segment.

What drives that confidence, because it's really more of a timing issue?

Hi Brian, it's Paul.

We have good visibility to the order book and candidly we see what's there.

And we put a range around it.

So, as you can see, we could have given a pretty wide range for Q4, but suffice to say, we want to make sure that at a minimum hit the midpoint of that range and our guidance would reflect what we think is a balance view and be mindful that we came in at the low end this quarter and that's not something, to state the obvious, that we want to repeat.

We feel pretty good about on balance being able to deliver the revenue within that range and that's what we're working towards.

Were there push outs on the server side too or was it really just consumer and the server business was expected to mostly ramp in Q4 originally?

Largely on the consumer side, I think per Craig's comments, the other markets, generally on balance perform stable basis.

There's always demand changes here and there, but I think if I had to pick one area to talk about it would be consumer.

Is it fair to assume if we look at the delta between your long-standing target revenue growth of 6% to 8% versus the new outlook at 12% to 15%.

Is most of that delta the new server cut of business that you want?

Brian, just you said 12% to 15%.

I'm sorry, 10% to 15%.

Yes, no problem.

Yes, listen, our objective as far as the portfolio being in the higher margin commercial aerospace, healthcare, industrial segments is unchanged.

That's the direction we want to go and get the weighting of the Company 25% there.

We've been very successful with some existing customers on winning some sizable programs.

They're bringing the revenue up.

They have a different margin profile.

They're great pieces of business with great customers.

As far as where we see our model going eventually, that aspect is unchanged.

Finally, I think you said the server business would be expected to grow more than the midpoint of your guidance 15%.

Any way you could put more color on that?

If I look historically in Q4 sequentially your server business has grown in excess of 20%, that's when you weren't necessarily ramping a new large program like you are now.

I'm just wondering why we wouldn't see growth significantly above 15% and what you're implying there.

Yes, Brian I'm not going to quantify it.

I think it's difficult to look at historicals given that we have this new program which is sizable.

So, again, all I'll say that's an area that we expect to grow about 15%.

I think your mental math is correct and that it will be a big increase, but we're not going to quantify it.

I guess what I'm getting at, you're confident that your relationships with your customers in server and storage arena outside of this new win are intact and that there's no market share shifts that are affecting you?

Yes.

Okay.

Thank you so much.

Thank you.

Your next question comes from the line of Ryan Jones of RBC Capital Markets.

Your line is now open.

Hi, Thanks.

I actually just had two quick ones.

Last quarter I think you had a 20% customer, I was wondering if that exposure was also about 20% or more this quarter or is it below 20%?

Ryan it's 18% this quarter.

18%, okay.

And then tax rate for Q4?

We expect the adjusted to continue to be 10%.

Okay.

That's all I have.

Thank you.

Thank you.

Your next question comes from line of Todd Coupland of CIBC.

Your line is now open.

Good morning, everyone.

Hi, Todd.

I jumped on the call a little bit late, so I apologize if this was covered.

What margin range are you expecting on the 10% to 15% revenue growth and what kind of profile over the years should we expect?

Hi, Todd.

We talked that, our model is still the 3.5% to 4%, but for the next several quarters, we'd expect it to be between 3% and 3.5%.

Okay.

Is there any scenario -- sorry, what would be the scenario that would sort of keep it at the 3% range?

Is that just lower revenue or a skewing in the mix cost on the ramps, maybe just talk a little bit about that.

Sure.

Todd.

I think the margin at this point, given where we are, as far as we've executed the majority of our restructuring, the network is performing at very high levels.

I think the margin profile is very, almost entirely dependent on the revenue mix that we have.

So, what could cause -- what could cause the margin to be lowered was your question, if the, if the consumer and server arenas do much better than we expected, then that will change the mix.

The overall revenue will be higher, the earnings will follow it.

The margin may be lower.

I think that would be the thing that would change it.

Short answer is, it's really more about the mix of revenue now and which end market, and as you know, they have different margin profiles.

Good businesses, similar rates, but different margins.

Okay.

Last question, I just want to be clear on this consumer point you were making on the third quarter.

So, is the shift that these three programs didn't hit Q3 and you thought it was going to, or that existing programs demand was below your expectations, but now that's going to be made up in Q4 because you have three new programs?

It was a combination of the two, frankly.

It was the programs that we have, demand was slightly below where we expected, but the three new programs that we were launching we expect a major traction in some of the early major traction associated with those programs is expected now in the fourth quarter, largely due to either engineering changes, software upgrades or late editions of those programs as we go through the quarter.

So, launches were slightly delayed to make sure the quality of the product was what it needs to be.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Gus Papageorgiou from Scotia Capital.

Your line is now open.

Thank you.

Just on the consumer side, again you mentioned three new programs, can you tell me, are those programs with existing of new customers and are they -- if they're with existing customers, are they with new products or new geographies?

They are for existing customers.

They are for new products, or I'll say upgrades.

It's the next block of the existing products, but a new product in that sense, product upgrades.

And it's for new geographies as well.

Great.

Thank you very much.

Your next question comes from the line of Naser Iqbal from Salman Partners.

Your line is now open.

Hi.

Just have one question just to beat this dead horse to death, just on the margin, should we think that after the first half of 2011 it will be in this lower margin profile 3% to 3.5%, and the second half could go back to the normal 3.5% to 4% is that how we can think about that?

Yes, that's exactly how you can think about that.

Okay.

Thanks, a lot.

And congrats on those program wins.

Thank you very much.

(Operator Instructions) Your next question comes from the line of Jim Suva of Citigroup.

Your line is now open.

Good morning, gentlemen.

This is [Aussie] here on behalf of Jim Suva.

Good morning.

Good morning.

Question on your CapEx expenditures looking into 2011, should we expect any ramps there as you are ramping up your revenues to the 10% to 15% range?

No, we'd expect CapEx to continue to be in our 1% to 1.5% of our revenue you saw this year.

It's being lower than that and even the ramp for fourth quarter, if there was significant CapEx, we would have to already made it.

So, on a going rate, we're in good shape.

I expect CapEx to be between 1% to 1.5% and no real changes to that.

Okay great.

Also your operating -- your SG&A expenses, I know you have been holding it pretty well in the mid $60 million range for the most of this year.

How should we look at that in 2011?

I think you should expect to see it around $60 million a quarter, generally where we would expect it.

And this is including the significant design engineering investment that you are doing, that you alluded to earlier in the call?

Yes, those design investments, we would like to fund outside of SG&A.

We have been making some through 2010 as well.

I think our comments were just reflecting that area we continue to expect to invest in.

As you know, we do not break those out right now.

That's something that we may consider if they become more significant.

Okay.

Thank you.

Thank you.

Shannon, we'll take one more call, question briefly.

Your final question comes from the line of Robert Young from Canaccord Genuity.

Your line is now open.

Good morning.

I was hoping you could provide some comments about quality of the supply chain.

Are there any areas of component tightness shortages, lead times, maybe highlight certain areas that might be difficult or have repaired themselves in the last quarter?

Well, I think in general we see slight improvement.

Significant areas that are on the watch list would be custom components.

We would also be looking at supplier lead times, memory, power, passives, would be in those categories and obviously we're looking at an improving situation so in general we anticipate many of the challenges that we're able to meet over the course of last year or so are mitigating, but obviously maintain strong vigilance there.

All right.

Thank you very much.

Thank you.

Okay.

Well, I'd like to thank everybody for their interest and we look forward to the continued conversations.

Obviously thanks for joining the call.

Thank you.

This concludes today's conference call.

You may now disconnect.