Flex Ltd (FLEX) 2002 Q2 法說會逐字稿

FLEXTRONICS INTERNATIONAL SECOND QUARTER EARNINGS CONFERENCE CALL

Ladies and gentlemen thank you for standing by. Welcome to the Flextronics International second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the '1' followed by the '4' on your telephone. As a reminder, this conference is being recorded Thursday October 25th, 2001. Your speakers for today are Mr. Michael Marks, Mr. Bob Dykes, and Mr. Thomas Smach. I would now like to turn the conference over to Mr. Michael Marks, Chairman and CEO of Flextronics International. Sir, please go ahead.

Okay, thank you. Ladies and gentlemen, thank you for joining the conference call to discuss Flextronics' September results, which is the second quarter of our fiscal year ending March 31st, 2002. To help communicate the data in this call, you can also view a presentation on the Internet. Go to the investor relations section of our website and select 'Earnings Announcement Presentation.' You will need to click through the slides, so I will give you the slide number I am referring to. For those of you who are accessing the Internet, while you are doing that, I will read to you about our risks, though this is in slide two. Please note that this conference call contains forward-looking statements within the meaning of the Federal Securities Laws including statements about our expected operating results, financial trends, new customer program wins, results of our restructuring efforts, trends in our customer's markets, and the outlook of our business in the overall market environment. These statements are subject to attendant risks that can cause actual results to differ materially. Information about these risks is noted in today's press release at the end of this presentation and in our SEC filings. Slide 3. As stated in the press release, revenue was a quarterly record of $3.24 billion, up 5% from $3.08 billion a year ago. This also represents an increase of $134 million or 4% sequentially. Before amortization and one-time charges, operating profit was $103 million, net income was $73 million, and diluted cash earnings per share was ¢15. I will discuss the one-time charge separately. End market demand for our customers' products continues to be weak. With the exception of perhaps cell phones, most end markets continue to decline or operate at disappointingly low levels. Nevertheless, Flextronics has been achieving its growth through the addition of new customers and the expansion of programs with existing customers. The current economic slump is driving OEMs to accelerate their plans to outsource production and related requirements including full supply chain management and recognize the need to rapidly drive down their cost by having production in lower cost locations and in plants that have higher capacity utilization as a result of producing for multiple customers.

Slide 4. As a percentage of sales, gross margin in the quarter was 6.4%, SG&A was 3.3%, operating profit was 3.2%, and net income was 2.2% excluding one-time charges and amortization. Return on invested capital was 9.4% in the quarter. Slide 5. Our margins in ROIC are down this quarter both on a sequential and year-over-year basis. We are pleased to be making a solid profit during very tough times. We will continue to work to improve margins, reduce excess inventories, and closely manage our working capital and capital spending which should all lead to increased ROIC. Slide 6. Inventory turns improved as we promised, reaching 8.2 times compared to 7 times in both the previous and the year ago quarters. DSO improved to 48 days, down from 49 days last quarter. Slide 7. Excluding one-time charges, cash flow from operations was $135 million, which includes depreciation of $77 million and amortization of $4 million. Capex for the quarter was $121 million as we continue to expand in our strategic manufacturing centers. In terms of absolute dollars, inventory has been reduced by $367 million since the beginning of this fiscal year. Quarter over quarter, we reduced inventory by more than $100 million and receivables remained flat while revenues increased. We continue to acquire inventory to prepare for growth in the December quarter, but we are extremely pleased with this net inventory reduction. We have continued to sell excess inventory to customers. These inventory transfers are not recorded as revenues. We ended the quarter with $400 million in cash and a total debt to capital leverage of 26%. This leverage ratio continues to be one of the lowest in the industry and positions the company well to weather an uncertain market and to have financial flexibility to take advantage of some of the big opportunities in the pipeline.

Slide 8. We recorded a one-time charge of $399 million, which is slightly higher than the estimate provided during the analyst meeting earlier this month, as all of our estimates have now been finalized. As discussed in the analyst meeting, the three primary drivers of our one-time charge are first acquisition related plant closings, which accounted for approximately 30% of the total. These were primarily excess factories or distribution locations acquired in the DII group, JIT, and IEC acquisitions, most of which were profitable at the time of acquisition, but which did not fit in our long-term strategic plans. Second, rationalization of locations, primarily to our strategic manufacturing centers, accounted for another 40%. This relates to moving acquired expertise into the right locations for the future mostly in the enclosures and logistics business units. Third, the consolidation of excess capacity accounted for the remaining 30% of the charges. As the downturn accelerated, we became more aggressive in our plans to reduce capacity to bring it in line with revenue expectations to maintain profitability. As a result, we expect to continue to be profitable throughout this downturn. Slide 9. As I stated during the analyst meeting, we believe that our restructuring charges are behind us. The cash portion of the one-time charge approximates $100 million. The benefits of the restructuring will be realized over time and should increase profitably in future quarters. We are reducing overall capacity by approximately 4 million square feet or 20% and overall headcount by about 10,000 people or about 15%. Reductions of primary and high cost locations as customers are accelerating their transition of manufacturing requirements to lower cost regions, as a result we are continuing to add capacity and headcount in locations where we have a competitive advantage which is primarily in the lower cost locations like Mexico, Malaysia, China, Poland, Hungary, and Brazil.

At the same time, as we closed a number of facilities, I would like to tell you about an initiative which we think has a lot of potential for our future. In Scandinavia, where we have a number of facilities that serve smaller customers, we have created a separate organization, which we call Flextronics Regional Services. This group initially had three operations in Sweden and Norway and will run independently as a Flextronics Global offering. We believe this group, by focusing on the needs of smaller regional customers, will have greater operating margins in Flextronics as a whole and will be able to increase penetration in the region. If this mission is successful, we expect to expand this approach to other regions. Slide 10. As we have said, our production is shifting out of high cost locations such the US and Western Europe into lower cost regions such as Mexico, Eastern Europe, and Asia. We expect Asia to continue to grow in cell phone production shifts into this region. Slide 11. Because of the mix shift resulting from some multibillion-dollar new customer program wins, we have revived our segmentation into the following categories. Communications infrastructure accounted for 20% of year-to-date revenues. This includes cellular base stations, RF devices, PBX switches, multiplexer access switches, broadband devices, and fiberoptic equipment. IT infrastructure accounted for 22% of year-to-date revenues. This includes servers, workstations, storage systems, mainframes, hubs, routers, and switches. Handheld devices accounted for 31% of year-to-date revenues. This includes cell phones, accessories, pagers, and PDAs. Consumer accounted for 5% of revenues include set top boxes, audio and home entertainment, cameras, and home appliances. Computers and office automation accounted for 10% of revenues. This includes copiers, scanners, plotters, graphic cards, desktop and notebook computers, and related printers, projectors, monitors, and other peripherals.

And finally, other accounted for 12% of revenues. This includes medical, automotive, industrial, and instrumentation products. Hopefully, by creating this broader diversification of product lines, it will help you better understand the diversification of our business. Slide 12. As expected from the ramp up to the new cell phone program, Ericsson is our only 10% plus customer. Revenues from the top ten customers over the last 12 months represented 62% of total sales. This remains one of the lowest concentrations in the EMS industry today. Slide 13. In addition to customer diversification, the company also actively pursues diversification by technology end market. We anticipate that our revenue base will diversify more as we experience significant growth from new customers who are in the early stages of adopting and outsourcing models such as the recently announced Xerox win. In addition, we continue to experience growth from existing customers such as Ericsson, Hewlett Packard, Motorola, Siemens, Microsoft, 3Com, Nokia, Alcatel, Siemens, Dell, and others. Slide 14. Despite the very poor end market environment, we won some significant business that is helping us weather the downturn. During the current year, we have announced substantial new program wins such as the Ericsson and Alcatel cell phone business, 3Com's network interface card business, specific product wins from Motorola, Hewlett Packard's large format printer or plotter business, and Xerox' office copier product line. In addition to the 2.5G programs that are currently in production, Flextronics has won production contracts for 3G-infrastructure equipment from Ericsson, Siemens, Motorola, Alcatel and Nokia. We have recently seen some signs of relief being given by governments in Europe to the systems operators who paid heavily for the 3G licenses in the past few years. We are hopeful that this relief could accelerate the 3G build out.

Until that time, 2.5G infrastructure build out continues, and we are very well positioned to participate in the growth of this business. OEMs are also expecting a sizeable increase in the shipment of database cell phones. We obviously have significant relationships with most major cell phone OEMs and expect to be involved in many of these programs. When you couple this with the underlying application growth, this could eventually stimulate the 3G-infrastructure build out as well. Slide 15. There has been a recent flurry of consolidations in the EMS industry, and we believe this activity has validated the model and strategic vision of Flextronics. The strategy is to provide customers end-to-end supply chain services that include product design, manufacturing, IT expertise, and logistics. With a global presence, we can derive customers with resources, technology, and capacity to optimize the global supply chain requirements. Recent large customer program wins have been based on this comprehensive service offering. Most of the sizeable opportunities in the pipeline involve complete end-to-end solutions as well. Over time we believe that selling a larger service offering will improve margins. Slide 16. To compliment our comprehensive end-to-end service offerings, we have concentrated manufacturing and low cost regions throughout the world and have one of the leading low cost supply chain solutions available in the marketplace. Our industrial parts play an important role in this strategy and provide customers with the highest value added services available in these locations. After our restructuring efforts are complete, we believe we will have better leverage capacity utilization throughout the world, which should also improve margins in the future. Slide 17. As we discussed at our analyst meeting, we are concentrating development on the smaller number of major manufacturing centers around the world. Centers that we will concentrate on complex infrastructure products are Texas, Mexico, Brazil, Poland, and North China. Centers that will concentrate on high volume consumer products are Mexico, Brazil, Hungary, Malaysia, and Southern China. Brazil and Mexico will handle both product types.

While we will continue to maintain and operate smaller regional manufacturing facilities around the world, expansion and growth will be concentrated in these full service manufacturing centers, which will benefit from large economies of scale to achieve the lowest possible costs. We believe our manufacturing center strategy is a differentiating factor for Flextronics. Customers are trying to drive down their costs for both complex and high volume product by having production done in lower cost locations that are capable of providing complete end-to-end services including full supply chain management capabilities on site. Slide 18. Now let me comment on what is in store for our business for the remainder of this year. In terms of guidance, we expect moderate revenue and earnings growth during the December quarter and the normal seasonal slowdown in the March quarter. Although Flextronics has been achieving its growth through the addition of new customers and programs, end market demand continues to be disappointing. As a result, we expect revenues of between $3.3 and $3.5 billion in December with earnings in the range of ¢15 to ¢18. Revenues should be another record, as we indicated during the recent analyst meeting. While some customer orders continue to deteriorate, we are also seeing a few signs of improvement, but we are hopeful that we can reach the higher end of the range. We will update this information at the mid quarter conference call. In March, we expect revenue and profits in the range of the September quarter. I should point out that this guidance is before any new program wins, which could occur in time to improve results in the March quarter. Printed circuit board fabrication and enclosure services continue to experience a tough environment resulting in lower sequential revenues and earnings. While there's short lead times in the multi PCB business, it is still possible that the total business will improve more quickly than currently anticipated. Our current results from these business units are disappointing. We are adding customers and expect good earnings leverage with even a modest increase in business. Because of the current economic slump and excess inventory levels in OEM channels, we continue to see frequent production schedules changes from our customers, and thus overall, visibility remains limited.

An encouraging note, however, is that activity in PCB prototyping and design services is increasing nicely, and these are normally leading indicators. Also, comments from customers suggest the possibility of upsides in the early part of next year. We continue to focus on improving all of our operating metrics during this tough period and are pleased that we are able to grow revenues and remain profitable during the most difficult environment of our short history of the company. We believe that this is the end of the beginning for our company, and we intend to emerge from this difficult environment in the strongest possible shape. Slide 19. There are real risks of operating this business that investors should appreciate, and we have laid out some examples here. Please pay particular attention to this slide in light of current market conditions. With that, let me turn the conference over to the operator to poll for questions. Please limit yourself to one question and one followup. Operator?

Thank you. Ladies and gentlemen if you would like to register a question, please press the '1' followed by the '4' on your telephone. You will hear a 3-tone phone prompt acknowledging your request. If your question has been answered and you would like to withdraw your registration, please press the '1' followed by the '3'. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from Helen Kane from Prudential Securities. Please go ahead.

Good afternoon. Could you give us a sense of what the capacity utilization level will be after the 4 million square feet capacity reduction?

Sort of, I mean it is not, we get out supply, but it is not a number we track that much, but we are taking out 20% capacity. So I think if you were to pick a kind of an average number, I would say something like 70%. In the printed circuit board business, which has its own unique characteristics, and I think you have seen some Sanmina announcements and some of the other things that you hear in the industry. That business is still in pretty rough shape, and so I would say that the capacity utilization is more like 40% there. It is increasing on the printed circuit board side. We are clearly past the trough, but on the assembly side, I would say something like 70% and maybe 40% on the printed circuit board side.

And in terms of your bad debt reserves, we have seen a competitor talk about some expenses that they had to take in the quarter for bad debt reserves, and I was wondering how you felt about the levels in terms of your reserves and if you feel like you have to take any expenses for bad debts from any of the customers going forward.

Yeah. I mean we have taken a modest amount in the one-time charges, but for the most part, it certainly is a tough environment where a number of companies have gone out of business. Flextronics, as is the case with most of the top tier companies, certainly for us, we don't have that many small customers, and the good news about the easy money period, which created a lot of companies, which probably shouldn't have been created, is that a lot of companies whose business turned south had cash and so we were able to collect all of our receivables. So we do not view this to be a major problem going forward. I mean most of our business is with the major multinationals, and they pay their bills, so we don't see that as a future risk.

Okay. Thank you.

Thank you. Our next question comes from Shelby Fleck from Morgan Stanley. Please proceed.

Thank you. Michael, could you just give us an update on how the business with Ericsson has transitioned over to Flextronics and a ballpark estimate of how much that contributed to revenues this quarter?

Yeah. So the business that we won from Ericsson was a 100% of the business that was not in their China joint ventures. We are doing all of that business today. So 100% of the transitioned, there is some business in China joint ventures one of which has been moved over to us or is in the process of moving over to us and the other one has not. Those are a little bit more complicated arrangements because it is not necessarily Ericsson's business freely to move, but we have 90% plus of the business in place, and we are not breaking out the exact number because we are so much of their business that it gives you more information than they want us to give out. I think you have to ask them that. But on the other hand, it is certainly a substantial piece of business. They are the only 10 plus percent customer, and without that piece of business, I would just say the results would have been substantially lower during the quarter.

Okay. Thank you.

Our next question comes from Thomas Hopkins from Bear Stearns. Please proceed with your question.

Yeah. Good afternoon everyone. Michael could you, is it possible we will able to get these end markets reclassified maybe for quarter two or is that just not going to happen.

You mean for going backwards?

Yeah, so we will be able to see quarter to quarter.

We can absolutely do that. Tom would you take that next time. I think that it is a fair request. We broke out more markets than we used to because you'd have telecom market or telecom data comminuting, encompasses so many different kinds of products, and we thought we would give you more information, but I think we can go back at least a couple of quarters and try to reclassify that. Is that right Tom?

Yeah, sure no problem.

Okay. Is it possible to tell us what cell phones were in the quarter, in total? I know you've got Alcatel, Siemens, and Motorola, you had a bunch of different customers in there.

Yeah. I mean we can't. I mean the number we gave you know on handheld devices is 31%. So that's more cell phones than anything else, and we do make some pagers and certainly PDAs for Palm and Handspring, but that 31%, certainly the majority of it, is cell phone, so it's a good segment for it. It happens to be a segment that's doing better right now in the various end markets. In fact, I might take this opportunity to say it's a little bit funny for the December quarter. Our numbers are a little bit less than we had hoped a month ago. One of the reasons is that we have material shortages in some of the cell phone activities, and so we're probably going to not finish the quarter having shipped everything that there is demand for which is both good and bad news. It's certainly good news for we haven't had that for a while, but it will probably hold down another 100 million of revenue or so.

Okay. With respect to the gross margin that was 6.43 in the quarter and some of the restructuring efforts obviously are still ongoing and will pick up in quarter two. But should we be looking for the gross margins to be flat or sequentially improved in December?

Bob, do you want to answer that?

Well, I think that the margin might be up just slightly depending upon some of the mix changes that are going on. So we've provided some guidance there on the EPS and provided some revenue guidance so you can pretty well back into where the margins are going to end up. But there is certainly a range on the EPS numbers that we just provided, so I would say the margin would be flat-to-up somewhat.

Yeah. Okay. Great. And Michael, can you comment on your, you seem to have a unique franchise developing with Microsoft. Beyond the Xbox, they were talking about that tablet PC, I think. Is that a next year event or year after that, and can you just give us an update on your work on that?

I can. Actually, we designed it, so we're real pleased about it. It's a reference design, and so Microsoft has done a huge amount of work on the software side. Our relationship with Microsoft is excellent, as I think everybody knows, and they have been complementary about our work on the Xbox, which is obviously the major program going on. We did virtually the entire design of the product, and we built the prototypes, and what they're doing is basically offering that as a reference platform to the PC makers who then are free to adopt it or not adopt it, and they're free to use us to produce it or somebody else to produce it. So it's really early stages now to sort out whether that's going to be really good product classification or not. I think that if it does turn into a good product classification in the sense that a number of the major PC OEMs adopt it, we think we'll have some opportunities to produce it, but we don't have anything in the works at the moment.

Great, thank you.

By the way, let me, before we take the next question, on the gross margin side I mean clearly we're expecting improved gross margins over time. Whether we're going to get much done in the December quarter or not, I don't know, but there are a number of things that are working against the gross margin side, and particularly in the PC board business where we're actually losing money, that's clearly affecting our gross margin and that is going to steadily improve. Next question.

Thank you. The next question is from Herve Francois from CS First Boston. Please proceed.

Yeah, thanks. Michael, can you talk about the inventory work down that you had in the quarter? Do you expect that to occur again in the December quarter? And as well, are you seeing any kind of inventory work down I guess in a positive fashion that's really leaving the supply chain from the customers that you deal with as well?

Yeah, sure. We're very pleased about the inventory work. I mean I think when we first went into this downturn back in the March quarter, we had 10 inventory turns December quarter last year, which was industry leading at that time. Then everybody's inventory turns went down as we wound up with this glut of inventory, as everybody was surprised on the down side. And I think we were pretty aggressive. We went out there and said we expect to get back to 10 or 12, which is really our relatively near-term expectation. We expected to get back there pretty fast, and so we have steadily improved our inventory turns. We're pleased about it. We think we're going to get more turns in the December quarter. I mean we're very focused on it, which is one of the things you can focus on when demand is rougher. But not only do we expect to get back to the 10 times that we had as our high last December, but we definitely expect to exceed that number in the next calendar year. So we're in reasonably good shape there. From the customer side, it's a mixed bag. It really depends on which products. But I think that inventory in the channel is clearly better than it was a quarter ago and much better than it was 2 quarters ago. You have companies taking a lot of this inventory that is clearly excess or obsolete and throwing it away, so a lot of that's going on which obviously reduces inventory from the channel. Clearly the cell phone guys have worked through most of the glut that was out there. In Europe, I think I indicated a quarter ago that we're really seeing a lot of the channel pretty up, and that's clearly true. So now, on the cell phone side particularly for the European market, we're producing demand, and so our numbers have gone up a fair amount. As I indicated, enough to be cut a little bit short on materials, which is pretty good news. The telecom sector is still pretty rough. I don't think there's much doubt about it.

We see some signs of improvement there but there's still inventory around in the telecom sector, and I think there's still inventory around the datacom sector. So it's a mixed bag, and I think everybody is hoping that the December quarter with a little bit of increased demand from seasonal standpoint that the bulk of what's hanging around is going to be gone. That's our hope. We just have to see how it goes. September 11th didn't help this any, because anything that was going to the retail channel died for a couple of weeks and that made it a little bit worse. But we have not seen any long-term impacts from September 11th, so we're hopeful that as we go into the New Year, things will be a lot better from the inventory side.

Right. Can you talk about some of these new programs and as aggressive as you've been over the course of the year, as you will be over the next several quarters, where are you targeting a lot of your customers to put some of their new programs? Is it directly into the low cost campus that you have in China, or is it pretty much just dependent upon where they want you to manufacture?

Yeah, it's a mix of that. I think that almost all new demand, not all, but almost all new demand is in the low cost market such as the environment we're in. Our customers, they're not doing very well. There's a huge amount of pressure on to cut costs. Most of our customers have laid people off or are still laying people off. So the demand is almost entirely at the moment in the low cost areas, and so Asia, Eastern Europe, Guadalajara. Mostly which of those markets it goes into is just dependent on where the materials are coming from and where the end markets are. So for handheld devices and things that are small and ship easily, those are mostly going to Asia, but the larger products like set top boxes and Xboxes and so on, they tend to be done in the local market, either in Mexico to serve North America, or eastern Europe to serve Europe. I'd like to point out that one of the things that we've done, and we talked about this at the analyst meeting, is that the world tends to swing around. I mean last year, when business was great, everybody wanted stuff close and fast, and this year everybody wants it cheap, and it doesn't matter how far away it is. But that'll turn again, and when business gets better, there's going to be more of a mix. Right now everybody wants low cost. Next year there'll be a mix, they'll want some low cost and some local stuff, and that's why we continue to maintain facilities in the regional markets. They clearly have a long-term role to play with the company. But right now, I wouldn't kid you to say that everybody wants stuff in lower cost places for various reasons.

Great. Thanks a lot.

Our next question comes from Patrick Parr from ABN Amro. Please proceed.

Michael, since your certainties are out there that you're seeing a few signs of improvement in some of your end markets, I think one of them I guess would be cell phones. Could you give us any other color as to what you're seeing?

Yeah, I can. I guess that's sort of the question on that, we've spent a lot of time thinking about what to say in these scripts and stuff like that, and our numbers are forecast for the next 2 quarters are reasonable, actually we feel pretty good about a little bit less than we had hope a month ago, but not too bad. It's a little bit hard to predict because what we're seeing is we still have some customers cutting projects and cutting out products that haven't been particularly successful, or reducing demand, because they find that they still have more inventories than they had hoped to have, and that's sort of depressing. It's kind of the continued deterioration. On the other hand, we are seeing some clear improvements in a number of areas. So cell phones are pretty straightforward. It's also the season for cell phones. They'll come off again in the March quarter some, but I've been meeting with the customers in the last week, and it's pretty clear that there is some real improvement in demand there. On the infrastructure side, the telecom infrastructure side, this is the segment that's been the roughest on most of the major players in our business and certainly on us. We do a lot in that space. And it's a kind of a double whammy for Flextronics because it's a lot of our business and the telecom sector uses a lot of printed circuit board capacity, and so as that market's gone down, if that's what really created this, it's really terrible utilizations in the circuit board side. And so what we're seeing is we're seeing some continued cutbacks in some of the programs. We are seeing some slight increases in number of other programs. What's happened with the 3G is that 3G has clearly moved out and everybody wound up with, all the companies wound up with too much debt and not very much demand.

What we're seeing is that the demand on the wireless side particularly continues to go up, and the wireless systems are deteriorating, and we are seeing now some increases on the GSM and 2.5G. So GSMs, you see that the GSM systems which is the bulk of the cell phone infrastructure, the wireless infrastructure, is getting overloaded and people are beginning to, at least in some sectors and some customers, going back to start to beef up those systems. As the 3Gs moved out, there was an announcement just yesterday by Sony that they were going to invest more in the 2.5G. We're beginning to see some phones there and some infrastructure improvements on that side as well. These are early steps and early stages and you don't know if this is the beginning of a broad recovery or is it just spots here and there. We tend to believe I'd say our opinion is that we're going to see some improvement in that market as early as the March quarter. It's still a bit of a guess. But the signs suggested that that's the segment we may start to see some upside.

Just a followup. The other thing that I heard, these regional service centers that you're piloting up in Scandinavia, are these like NPI centers...

No, they're not.

... that serve little customers and then if they want to go big volume, shift them into your 8 super sites or what are they exactly...

That's exactly it. So what happens is, I mean we do 80% or 85% of our business with major multinationals. It's really big programs. But there are lots of good customers. I mean, they are able, they typically have higher margins, and they are good companies. They just don't do hundreds and millions of dollars of business. And so what we're really doing with the regional services group is creating a second style of going to market, if you will, where we'll be focused on these smaller companies, and they won't be required to have everything look exactly like the other big factories do around the world and all of that, and they'll really be able to pay attention to those customers. We're sort of at a crossroads. We have to say, you know, we're going throw small customers or not, and what we decided is to take a couple of these factories that are doing a good job serving the smaller customers and saying let's make this a focused activity, and we're actually optimistic. Those factories are making money, the customers are happy with what's going on, and we simply can do more of that by focusing on it. So that's what that is. It's a bit of an experiment, but we think it will work.

Okay, great. Thanks.

Our next question comes from Kevin Richardson from Blumberg Capital Partners. Please proceed.

Hello? Chris, could we please take another question?

Thank you. Our next question comes from Lou Miscioscia from Lehman Brothers. Please proceed.

Yes, when I look at the footprint that you actually printed over here at 8.8 in the low cost areas, I think, if I have my numbers correctly, your global footprint right now is somewhere in the 15-16 range. So roughly are you saying that that 50%, a little bit more than 50% right now, is in low cost areas?

That's right.

Now, after the restructuring, could you give us, I guess, the breakdown and when you think that might be done?

When the restructuring will be done?

Yeah. I know you're trying to move obviously some of your footprint onto the 4 million square feet off of the high cost areas, but you're going to be doing some building also in the low cost areas at the same time.

We are. So I think that when we're finished here and I'd say that the right timeframe to think about completing the restructuring would be the June quarter next year, so over the next 9 months, and I'd expect we'll have two-thirds of our manufacturing in low cost locations and a third in the higher cost.

Okay, great. Now, some of the deals like Xerox and I guess SBI had a couple of wins with IBM and Nortel have come out of the deal pipeline. Have more deals come in to replenish that? And would you give as the range for that? And I guess, just looking in the near term between now and the end of the year, do you think any of those big deals will end up coming out?

Yeah. There is just an awful lot of conversation. I think that some of these deals, Japan is clearly opening up. We've talked about that before. You're seeing two or three deals happen in Japan. There is probably an endless pipeline. I think that Japan is going to add some fuel to our market over the next 2 or 3 years. There are clearly other activities going on in that market. Most of these companies that you seeing deals like if you look at ours, I mean, Xerox, we got most of their manufacturing. There is some other stuff there that's potential to come out. I mean HP continues to move stuff out. They now have no printer business left in-house, but they have PCs and Unix stations and variety of other stuff. So there is more to come there. There is more to come from Motorola. There's more to come from Siemens. There's more to come from Alcatel. So it's not just a pipeline that's specific big deals as much as it is that almost all the companies are continuing to look for ways to do more of this. Do I think there'll be more announcements between now and the end of the year? Absolutely. This is a pretty good pace of these things. I mean you hardly go 2 or 3 weeks now without somebody announcing a company or other. So we have a number of things in the pipeline. We are optimistic that we will close more of them before the end of the year. We're still optimistic that we'll have a chance to improve our March quarter numbers based on some new stuff that's potentially in the pipeline. So it's just a big amount of backlog to come, and of course, somewhere in here, the demand is going to really turn up, and then you're going to see everybody calling and raising their numbers instead of lowering them.

Okay, then my final question is on the board fab business in that on the Sanmina call yesterday, they guided just flat to up, but then they also had some wins so you could make the case that they actually didn't see any pickup in the board fab business. It's really just some new wins that could lead to growth quarter-to-quarter. So it sounds like, is it some of the cross-selling you've been able to do that turned your business or is it actually just demand starting to pick up in the fab area?

Yeah, I'd say it's mostly inventory runoff to be truthful about it Lou. I think that the downturn, what happened in the PC business and, I think we've talked about this before, the segment is as bad as they get and it's because of lower back playing demand, and Sun Microsystems and EMC and Juniper Networks and those kinds of companies use much more fab capacity than the size of their revenue indicates because they have these big complex multi-layer boards, and that business got pretty rough, and everybody just cut their orders down, and it's been pretty dismal. Now, you have some inventory bleed-off, and so people are running through their inventory. I mean, you look at Sanmina numbers and our numbers, I mean they've clearly moved into a loss in that business. They're down dramatically, and it's a pretty simple, people say, don't ship me anything for a while, and clearly, they are selling stuff. But now what's happened is inventory runoff is happening and people are beginning to see signs that they want to start buying again. In addition to that, we are clearly aggressively cross selling in our company, and it's having an impact, no question.

Okay. Thank you.

And I just want to congratulate you Lou.

Our next question comes from Rick Shane from Robertson Stephens. Please proceed. Mr. Rick Shane from Robertson Stevens, please proceed. One moment please. Our next question comes from Jerry Labowitz from Merrill Lynch. Please proceed.

Yes. Michael, you talked about material shortages for the cell phone area. Can you tell us what type of material?

Most of it really has to do with custom stuff because, the general commodity stuff is still readily available, prices have continued to fall, so it has mostly to do with parts you can get out of molds and things that are really just limited. And I think that the major issue is not having enough mold capacity, and it's hard to increase that in the near term. So that's most it, a little bit of basic.

And when we look at your margins, the shift in margins, is more of it due to mix or is more of it due to vertical integration activities you're involved in?

You mean the fact that margins are down?

Yes.

Yeah, it's pretty straightforward. It's just capacity. I mean if you look at the impact of our overall company gross margins by what's happening in the printed circuit board business where we're losing, I mean, clearly we're losing money. We have very low gross margins. We are losing money. So that has an impact, and that's at the capacity utilization. On the assembly side, it's also pretty much capacity utilization. It's not pricing issues. It's that our factories aren't running 24 hour a day, 7 days a week like they used to and like we are used to having. We think we are going to get back to that reasonably quickly. That's why we took out a lot of capacities so that we can get...

But, as you shifted the served markets, you now have a bigger percentage of business in handheld. Is there a margin difference in that business?

Yeah, there is. With any, it is not just handheld, it's any high volume, the high volume consumers, inkjet printers and handheld cell phones and so on, carry lower gross margins and higher inventory turns. So what you see there is some impact on the margins and some impact on inventory turns. Clearly, the datacom, telecom sector which has been very difficult, particularly the telecom sector, carries higher margins, also low inventory turns and other characteristics, but it would certainly be helpful to see that market come back some. It has been depressingly weak, but as I indicated we think that we're covered again to that now.

Thank you.

Our next question comes from Bill Cage from First Union. Please proceed.

Thank you. Hey Michael. Can we go back to printed circuit board side of the business? I think I heard from you that you're seeing lead times, I am wondering if that is a regional issue or a layer account issue. Could you expand on those comments?

Yeah. I think there are 2 areas on the circuit board side. One is that the prototyping, the quick turn stuff, is we're very busy. We are actually in our Irvine facility having to turn some business away. I mean we're running full out. That is a very good sign for an upturn in that business. The second are is we are increasing our demand pretty rapidly in China, so that part of the business is good. It is profitable. It is growing week-by-week, month-by-month. The more complex back playing operation in Roseville and our high layer account location in Germany, those are the weaker ones because those are the ones that have been serving the datacom, telecom sector, and even those are starting to improve some, so that's why we're clear that we have seen the bottom there.

What about pricing?

It is improving, as you'd expect. I mean it is obviously improving, I mean it is certainly improving in the prototype side where our Irvine factory was probably half full 6 or 8 week and you take anything, I mean everybody will take whatever you can get when your factories are really empty. We are not in that mode anymore. So we are seeing some improvement in pricing. A lot of capacity has come out the circuit board business. Sanmina took a bunch out, a number of companies are taken out. We took out our Austin factory, Viasystems has taken out a bunch, and so on. When capacity utilizations would drive prices, and so it is very good news for us to see a lot of capacity come out for 2 reasons. One is there's less overhang of capacity in the market. The second is that it will take a much smaller market when it turns to get back to full utilization and good pricing, so we will definitely see signs of improving pricing over the next few months.

And have you noticed stabilization either in October or back in September?

Actually, yes. I mean the thing is not only the circuit board business, which was tougher but pretty much across the board. I mean we are at a place now where we used to win a new customer and every time you get a new customer and another customer would go away and you would not get any increases in revenue. Right now, we are kind of in a place where we are getting some decreases, but we are getting some increases also and so it's reasonably stable overall.

Thank you very much.

I want to make other comment about gross margins which Jerry asked about. The other thing about margins is we are starting a lot of new programs in this company, and so revenues are increasing some now like what we're used to. There certainly is a higher degree early stage programs, which in and of themselves carry lower margins just because there's more cost starting these things up. So that also should improve over time. Next question.

Our next question comes from Michael Morris from Salomon Smith Barney. Please proceed.

Yes, thanks. Good afternoon. Michael, I want to pick up the thread of low cost production, and there is clearly a big push in that area by the whole industry, and yet, we know that direct labor is not the preponderance of cost of goods. So could you talk a little bit about that dynamic and what the other benefits and savings that might be generated from producing in a low cost location?

Absolutely. So the big issue there is you are exactly right about labor. The difference in labor cost is made up by the difference in logistics cost. So you get lower labor content, but you get higher cost of moving the goods, and those things tend to offset each other. The big issue is 85%-90% of the products are materials and you get lower cost of materials in these other locations. A part of the reason why we have just had a record revenue quarter and some of the competitors have not is because the industrial parks that we've driven allow our customers to get lower material cost and lower logistics cost in the low cost locations. So we decided long ago that true labor cost is not what gets you there. You have got to have low cost materials because that is where all the money is, and we have been able to put together groups of suppliers in these low cost locations and so we can drive our material cost and that is what makes it happen, end of story.

And then I guess I'll just follow up on that thread and ask, given your intention to move to 8 very large centers of manufacturing, does that change the way in which you are managing your global procurement?

It certainly will. I mean we have certainly changed our thinking about that. One of the reasons we have decided to go to much larger centers is because you aggregate your material use in those large centers, and that us gives the opportunity to manage inventories better. So let me give you a concrete example of this. Everybody is trying to go vendor managed inventories so you ask your vendors to put the inventory in a hub located close to you so that you can get higher inventory turns and better logistics management and all that. You give 100 sites in 40 countries and you ask customers to hub that. That's virtually an impossible task. If you have 60% of your production and 60% of the material usages in 8 locations that is much easier to accomplish because you have much more materials going in. It is much more cost effective for the vendors to support you in that way and that was one of the big drivers for doing this. Get away from having $80 and $100 million factories all over everywhere with their own procurement teams and their own logistics management issues and just reduce a number of locations and make all of that cheaper and more effective, and we are not there by any means, but we're certainly headed there.

Great. Very helpful. Thanks.

Our next question comes from Paul Fox from Banc of America Securities. Please proceed.

Can you hear me okay? Last quarter, you said that the printed circuit board situation cost you about ¢5. Can you talk about what do you think the swing factor could be there over time as you recoup the losses? And then Bob, a question for you, what do you think the cash cycle goal should be for the company?

I can give you the swing on the circuit board side. I mean, from the best we have done to the worse we have done, it's ¢8 a share, and I think that we can easily expect ¢5 or ¢6 of swing on the circuit board side over the next 3 quarters, I would say. I mean, once we get back to reasonably full utilization, so I do not think it will get as high as it was in terms of profit margins and all that because it was a bit crazy at the end of last year when people want to pay anything for anything, and we are not going to get back that anytime soon, but to think about ¢5 or ¢6 of swing, really if it weren't for that, I think our numbers would be stunning, but it is. I mean that is part of the business and that's where it sits, so I think we will show pretty steady improvement there. Bob, can you...

Your question for me was what should the cash flow will be for the company?

No, the cash cycle, the...

Well, we are going to be improving from the current numbers that you see in this presentation. We've got like inventory turns of 8 going to about 10, but I think that the pace may have seemed to have the way this company progresses is that over the last 5 years or so we have had a model that would allow us to grab about 40% year-to-year without having to add extra equity from the equity market. We can just add debt and stay within the ratios, etc. So the internally generated profits, etc., we are going to have to grow around 40%. As we move forward though and look to, we're quite effectively putting more and more of our inventory into these vendor managed inventories hubs, we are going to be substantially improving that. So I think that over the course of the next two you are going to see that our ability to grow the company without taking any equity is going to rise about 40%. So it is not to say that today if we grew at a higher rate than 40% on the quarter-to-quarter basis we might need some equity that over the next year or so I think that we are going to have a much higher growth capability without picking up equity. I think more specifically so than the number will be at the moment, but we think that we're going to be quite effective at moving our inventory into these vendor managed inventory hubs.

What about the receivables? You see them making an improvement there?

Yeah, what we see is very slight today, that is, it has been pushed up a little bit because of some of the issues we're having with our customers but I think that we'll get back down to into the 40 days, I think over the next year.

Thanks.

Okay, the next couple of quarters I would say.

Thanks.

Our next question comes from Michael Zimm from Goldman Sachs. Please proceed.

Yes, good afternoon. Michael, I just wanted to expand on a point that I think you made in your prepared comments regarding the offering of your full suite of services and how over time you would expect that to lead to higher margins. Can you give us a sense of where you are now on that? When you offer a full suite of service for a particular program, is that right now a low average margins and...

No, it's not. I'm sorry. I cut you off there. Did you get your whole question in?

Yeah, no, that's fine.

Okay. Yeah, we have been very, I mean we're thrilled with the business that we have been winning and how much of this full suite of services we're winning. I think if you look at where we are in terms of offering that and winning the ability to do all of that, we really got started with the Ericsson cell phone announcement, which we just took over in April. So we're 4 or 5 months into it. We had the same things with Alcatel, the same things with the number of the programs that we've won. So where we are is we're in very early stages of implementing all of this, and so implementing it has some additional costs. I mean, there is IT cost to put all the links up together. There is transition expense. There is a lot of consulting type expense on both sides. So we're very early in the adoption of the overall model. We're moving nicely into winning business based on it. But I think before you really have to start working smoothly and feel the impact of some higher margins for us you'll be looking at it in part of the June quarter next year.

Okay, great, and just a followup for Bob. Assuming that you have a constant product mix, and I know that that's a big assumption, with the restructuring, at what level of revenue would you expect to maybe get back to an 8% gross margin?

No, I don't want to predict that number on that basis. I think that the way we're going to get back to an 8% gross margin is that the new additional services that we're adding is really going to help drive up our product margins. That's going to be a key change. I think that lot of the extra business we've been getting is in the consumer goods area where the ROIC, our return on invested capital, is just as strong as it's ever been, but it just is going to have a lower margin business. So I think investors shouldn't be concerned about the lower margins coming from that type of business. But I think that you will see that the margin will come up because of the extra services that we're adding, and we're working those inventory numbers down because we're still sitting on a bunch of excess inventory and so that will improve our ROIC across the board. So there's really I think the way is to look at the way the business is going to improve. If you look at our SG&A, we continued to reduce it this quarter versus last quarter. Some of that was sitting on a lot of extra SG&A that we can spread across, and I think that the factory, as Michael had mentioned, will be running at fairly lower than optimal capacity utilization in the factories, but we're going to be increasing that over time, I think, with business that isn't necessarily going to by itself improve the margins. It's going to increase our ROIC is what you should really be looking for.

Okay. Michael, were you going to add something to that?

I was, but I lost my string of thought. Actually, no, I was going to add a couple of specifics. So we have clearly higher margins in the circuit board business. So having that business be down hurts gross margins. The other place that we have really good gross margins that's improving is in the design side of the business where the margins are quite a bit better than the regular assembly work and that business has picked up very well in just the last couple of weeks. So we're looking to get some better contribution there over the next couple of quarters.

Michael and I are in Europe operating at midnight time. I've got to apologize, should apologize. Of course, the PCB business is really dragging, I might just add, at the moment, so there will be definitely a turn around in that area just from higher revenues.

And Bob, you had mentioned that you did expect services, just in general, the addition of services for your customers to improve your overall margins outside the design services. What other services are you thinking about?

I'll answer that one, because it's everyone. So enclosures has higher margins, circuit boards has higher margin, logistics has higher margin, design services has higher margin, circuit boards have higher margin, so as all those things improve...

And the summary of it just is the businesses have higher margins so when you layer one on top of the other you get a compounding effect because you are not necessarily adding to revenue, you are often adding services one underneath the other.

Okay, so we're mainly talking about, sort of, adjunct product related things. How about the network installation services business? How would that factor in?

Yeah, let me address that. That's actually the best of the businesses we are in, in a lot of ways. It's a lot like design services. It's almost a consulting business in certain areas of it, and as a group we picked up telecom global services is one way. There is essentially no capital and fairly high margins as long as you have the revenue there, and we have a lot of activity in that marketplace and think that we can expand that business over the next year or 2, pretty dramatically, and that should definitely help not only in margins but it's low capital requirement which is the best of all worlds. It's starts to looks a little bit more like a software company, higher margins and not a requirement for capital. So we are putting a lot of effort into that market at the moment.

Okay, great. Thank you very much.

You bet.

Our next question comes from Jim Savage from Thomas Partners. Please proceed.

Hi. That's Thomas Weisel Partners.

You don't need to say that Jim.

Thank you Michael. The $100 million portion of the charges that's cash charges, has that already been accrued into the balance sheet?

Yes.

It is. So we have already taken that $100 million out?

No, no. That's...

Go ahead Bob.

No, it's not all out right now. That will come out over the next couple of quarters.

Okay, and the Xerox acquisition when is that scheduled to close?

Oh, that one closes in pieces, and we originally expected the first franchise to close the first of November, and we now expect the first parts to close in the first of December, so that also took some revenue and a little bit of profit out of the December quarter. The second set of closings we originally thought were going to be in February, they are now going to be in March, and there is some little pieces that get added a little bit later than that. So substantially all of it will be done by the end of March but a little bit later than we originally thought, and it's strictly just regulatory approval.

Then what's the revenue impact of that going to be in the March quarter?

Well, in each quarter it's probably 100 millionish. No, not the cost, but the revenue impact.

That's what I think, about a 100 million a quarter.

Yeah, I mean, we are getting a month away, it's roughly a $100 million a month so you know there's about a $100 million that will drop out of December that we were expecting and $100 million that'll drop out of March that we're expecting.

Okay. I guess the other thing is in terms of your operating cash flow expectations for the December quarter, do you have any idea what you think you are going to be doing in terms of generating cash?

You want to answer that Bob.

Well, we are still anticipating revenue growth, and it will depend upon business wins would be the big variable because we have some revenue growth, and we will continue to drive down our inventory, maybe get some improvement on the receivables, and so one of that would naturally generate positive cash flow, but if we get some good customer wins, then

We're going to use it.

We'll use it. Right. Actually we hope so. Exactly, so...

But I am assuming that you are not going to, that even good wins you are not going to close during the quarter, you are not going to actually expend the capital during the course of the December quarter if there is something that hasn't been announced yet?

That's certainly true. We're maybe anticipating some big wins there, but...

I think we are going to have solid earnings, we are going to have the usual cash flow depreciation, capital expenditures is probably going to be low in the December quarter because we are finishing a bunch of the enclosure factories and so on that we talked about at the analyst meeting. But the capital expenditure should drop. So I mean we're expecting inventory to improve again so...

So there will be a reduction in overall working capital and reduction in overall working capital even with slightly higher revenues.

That would be our expectation.

Okay, great. Thank you.

You bet.

Our next question comes from Shawn Severson from Raymond James. Please proceed.

With the new strategy you are taking out with your manufacturing base, how is this going to change the way you pursue new business, in terms of your willingness to take on additional assets or exactly how that process may be different now with the very clear new strategy on your behalf?

Right, I mean we are turning down more than we ever did because we are serious about this approach, so for example, I know that we talked about this at the analyst meeting. When we took on the Xerox business, we took on four factories in the regions that we want to be and turned down a number of facilities that were not in those locations network pretty effectively. We are talking with customers all the time, and it is pretty clear what our strategy is about this. So I do not want to be on record as saying that we are not going to take on any facilities from anybody in higher cost locations, but the bars gone way up. That is really the issue. We are looking at some stuff in Japan. We do not have a factory in Japan, and we want to, and we expect to. So we will do something there some time in the next four or six quarters, I would guess. Beyond that, there is lots and lots of factories for sale on locations we do not want to have them in. So it is just not likely you are going to see much from us there.

Can you help me to understand whose factories you might want or who has factories that are in attractive locations that might be in the pipeline, like say Motorola or Alcatel? Could you kind of tell me who has stuff that you want versus those who have a pretty bad asset base right now?

Well, I mean, it is pretty straightforward. The places where it is easiest for us to take on additional assets are in the low cost locations and so you say who wants to unload factories in low cost locations. Most of the OEMs want to unload their factories in the high cost locations first and in the low cost locations second. Having said that, from Xerox, we took on a factory in one of the high areas in Brazil and in Malaysia. So those are clearly factories in low cost locations that are acceptable to us. They are the regions we want to operate and so on. If you take a look at the European OEMs, it is pretty straightforward. Mostly European OEMs have their factories in high cost locations, so those are more difficult. US companies tend to have them more spread around. I mean, the US companies do not have so many factories in the difficult locations which are in the western European countries, which are difficult not just because of cost structure but because of the labor cost issues. I do not mean the cost of labor. I mean the difficulty in downsizing and so on. So the European and the Japanese OEMs are the ones that have the toughest ones to deal with at the moment, and we talked with many of these customers. Lots of them are our friends and our big customers. And so we are just looking through what we should be doing together and what we are not. But our conservations are flavored heavily by this approach to do we want the business and the big manufacturing centers, and so we are saying no to a lot of the stuff.

And then this briefly what's the transition risk for your customers' existing business as you take on the strategy and move the business? Is this an easy thing to do or a very complex thing to do?

In the factories of our own that we are closing, it is pretty straightforward because we have control there. We get the customers' permission, and we say we are going to move it from here to there, and we are the receiver and the shipper, if you will. When we transition from existing factories or where the OEM is closing an existing factory and transitioning to one of ours in the major manufacturing centers, those are tougher, because they are the shipper and we are the receiver, and the people in the factories who are the shipper do not generally enjoy this very much because they are usually shipping their jobs along with it. So those are tougher, but it is not too difficult to move the stuff out of our own factories that we have been closing and moving the stuff over.

Right, thank you.

Thank you. Our next question comes from David Parrish from Dain Rauscher. Please proceed.

Yeah, good evening. That's Dain Rauscher. Assuming the product mix remains the same over the next few quarters, where might we expect to see operating margins come in, given the restructuring initiative?

Yeah, I think not really. The guidance that we are giving includes the effect of the restructuring. So we have seen endless numbers out there, and we just gave guidance for the coming quarter, so that only reflects the effects of this restructuring, and as I indicated, we expect some margin improvement in the December quarter as you see from those EPS numbers. In the March quarter, we are laying that with numbers very similar to the September quarter because there is always a cyclical downturn that we are expecting, which we may upset with some good new customer wins. So we are actually pretty optimistic about where the March quarter will come in. But right now, we are thinking more like the September quarter. So you see a bit of an up and a down, and then as we roll into the next year, we are expecting that the economy will start improving and that our PCB business will have turned around and we'll be starting to get some good margin improvement by coming into the June quarter of next year.

So the restructuring initiative that will be complete in the June quarter, so we should have the full benefit from that in September. Is that right?

You will see most of the benefits already in the December quarter because we cannot take reserves, for example, to lay people off unless we actually tell them. So the extent that we got factory closings in those one-time charges, we have actually put that into place during the September quarter.

Okay, so we should...

I would like to add something here and...

...in the March quarter?

Yeah, let me add something here and let me explain something about the returns on the restructuring because I see that some companies go out there and say this is how much more money we are going to make. We do not think about it that way. I would like to make it clear that we have taken our capacity because revenue is less than expected. And what that does, it does not just make you more profitable; it keeps you from being less profitable. It keeps you from carrying overhead that you would not have because you do not have the sale. So the sales are less, you take the capacity out. That in itself does not improve your margins. It keeps them from getting worse, and so a lot of the questions all around now that we are taking out some capacity, how much higher margin is going to go, and we are going to see our margin improvement not from the restructuring but from an increase in business overall, and we are seeing some effect by not having lower margins now by taking this capacity out.

Okay. Could you also comment on the increase in payables in the quarter and kind of what the factors are that are influencing that?

Tom, do you want to talk about that.

Sure, that's just strictly a timing issue is to win inventories received doing when it is vouchered and then when it is scheduled for payment. So your payables will just go up and down in a normal course. There is nothing unusual there at all.

Okay, thank you.

Okay. How about if we take two more and then call it a night? It is very late for us over here in Europe.

Thank you. The next question comes from Alex Blanton from Ingalls & Snyder. Please proceed.

Hi Michael.

Alex you always wait till the end to ask your questions.

That sort of adds to it. Okay, first a short one. There was talk a week ago about a company called Telia, Swedish Telecom's operator Telia to sell five units to Solectron and the network installation area sales of about 4 million a year, but nothing has been announced on that. Do you have a comment on that?

Sort of. There is a lot of rumors that go around, and we try to announce that we talk about stuff when it is happening. There have been a bunch of rumors around Telia. They are in conversations with a number of companies about some divestitures, and beyond they, have not done anything, and the rest is just rumors.

Okay, as soon as this week they expect a deal but nothing happened. Secondly, the guidance for the December quarter, 3.3 to 3.5 million. What you said so far is that that's been cut by a 100 million by shortages in cell phone enclosures. Did I hear that right?

Sort of. I said that some shortages and most of the shortages in the cell phones are around this, around the cabinet, so yeah, you put that together about right. That is about a 100 million. Xerox is about a 100 million. So neither of those are really negative events. They are just timing events. I mean the cell phones we do not ship in the December quarter, presumably will go into March. Xerox will pick up a little bit late. So that will cost us probably 200 million.

Right. But even so, there is additional, there is incremental Ericsson business. Is any incremental Xerox business, less anticipated incremental Hewlett Packard business, 3Com business, Motorola business, and the Xbox, and yet at the bottom end you have got sales virtually same as what you just reported for September quarter. Are you trying to get back in the mood of where you beat the numbers every quarter or could you comment on that?

We would sure like to be there Alex. I mean, so the thing is the way things look right now we would expect to be at the high-end of the range. The reason we have a range is because people do keep canceling stuff. I mean there is some deterioration in some of the customers, and we are offsetting it with other business and that is why we had record revenues in September. We expect that record revenue in December, and most of our competitors are not because we have added this new business. At some point, the deterioration in certain of the markets is going to stop, and then we are going to get back to beating the numbers. We're pretty bullish about the way things are here. I mean we have won all this business and the end-market stuff that's weak is weak for everybody, and you can see it in everybody's numbers, but we are still growing the business. The Xerox thing has nothing to do with the deterioration and the cell phones are actually the good news, we are just not going to get it all out, then the range would be 3.5 to 3.7 which would be great, right where we expected it to be when we had the analyst meeting, and so now it is down by a little bit. But all your point now is something that's true which is there is still fair amount of weakness in the numbers in the segments. We are trying to be conservative. We are lowering the guidance a little bit, not a lot. We certainly hope, as I've said, we think there is an opportunity to be at the high-end of this stuff, and that's where we want to be, but we are only three weeks into the quarter and everyday you get some wins and some losses that, and we don't know where it is, so we are just trying to be conservative and realistic, that's where we're at.

One more point on that, Microsoft has estimated that they will need 1 to 11/2 million Xboxes by the end of December from you guys. Is that volume in it the low end of their range, 1 million instead of 11/2?

I cannot comment on that. One of the things you have to remember is that there is a launch coming up there and there has got to be a lot of units at launch, and so some of those units are already in the September quarter, and who knows. I mean I can't give you the numbers because it is not appropriate for me to give you the numbers.

Well, I am not asking for the numbers. I am just asking are you using the low end of their range as your guidance.

We are giving as our guidance about what we expect. It could be better, it could be worse. We hope it will be better, but our guidance assumes what we really think is going to happen, so we picked the number that we think is the number we are going to get out, and we are not playing games there.

Okay, thanks.

One more question.

Thank you sir. Our next question comes from Chris Whitmore from Deutsche Banc. Please proceed.

Good evening. A couple of questions back to the last series of questions actually. If we were to remove all the incremental outsourcing wins and new program wins, what do you think your organic business trends in aggregate would be sequentially?

I can, this is a rough number, but I would say that the end markets have decreased by about half. And so if you look at some of the competitors that have not had as many wins and look at what's happening in the end market, we are all impacted about the same by the end markets, the big companies, because we all have lots of customers in common, and the end markets have dropped dramatically. The printed circuit board business is less than half of what it was in the December quarter, it's maybe a third of what it was in the December quarter, and a number of companies at least have their business, so it is probably 50% to 60%. So if we did not have all these new wins that Alex just pointed out, we would be actually 2 billion instead of 3.5, and that's why we are feeling pretty good. I mean it's nasty to watch your order book deteriorate by half in 3 quarters and still be able to show record revenues. So we are pleased with how it is going because it is going to turn. This happens, and our customers' business isn't down half. Most of them are not, some of the companies are down a good 40%. If you look at Nortel and KDSU, and Cisco and some of them are really down by that much and that rolls right through the disappoint base. But in any case, this is going to improve, the inventory is going to bleed off, the market is going to turn, and it is going to be great when it happens. And we think this is going to happen in the foreseeable future. In the meantime, we are making solid profits, and we are growing our revenue because of the new wins, and the way we feel about this is this is a very rough market, and we are still just doing fine. I mean would we like to be making more money, sure we would, and we would like to have revenue ranged between 3.5 to 3.7 instead of 3.3 to 3.5. But on the other hand, that's going to be a record revenue quarter for us and the profits are going to be solid but unspectacular, and in this environment, we are feeling pretty good about that.

And just if you were to look into your crystal ball, September to December, what do you think that would be? And then in the March, what do you think that will be just sequentially in aggregate the end market, sequential for business?

I think it will be down in the December quarter from the September quarter. I think that's pretty much given in the numbers when you look at what Alex just pointed out about Xbox and some Xerox and some of the new stuff. So the end markets in the low end of our range is about flat to where we are, so by definition, that means that the end markets are going down. And I think the end markets will do down again in the March quarter not because the business is deteriorating but because it is the March quarter and all the consumer products sell less in the March quarter than they sell in the December quarter, but we expect that the end market demand will be on the upswing by the June quarter next year, and we are going to be, these will be much happier phone calls. I mean we think this is going to happen. We are not predicting in our numbers an upturn, but we are going to get an upturn when we don't expect it, just like we got a downturn when we don't expect it, and I think that's what the markets are partly and the markets are seeing that things are stabilizing and people are starting to assume that one of these days you are going to get on the call and we will beating the numbers like we used to, and we think that will happen in the next year.

Great, just tied to that, if you look at the improvement you are seeing in your board business, is it fair to assume then that's mostly does from an inventory adjustment versus sell through in the end markets?

Yeah, because the end markets are still very weak and particularly in the areas, I mean we make a lot of cell phone circuit boards, but cell phone uses a circuit board that is 2 inches x 3 inches and a Sun workstation uses 24 layers of 12 inches x 18 inches. So you lose one of those boards and you have to make 1000 cell phones to make any difference. So the big markets when Juniper and Sun and Cisco and Extreme Networks and EMC, when those guys start having uptakes, the PC board business is going get very healthy very fast.

And in the meantime, we are getting a lot of design work there, that's really what's keeping us very busy.

Exactly.

Great. Thanks very much.

Okay, thank you all for listening, and as we indicated, Bob and I both are in Europe, we will be back next week. You can call in and talk with Tom or Laurette if you have followup questions. We will do the mid conference call back when we normally do it, so about the third week of November. We will give you an update, and we'll have much more visibility about the December quarter. We think the bias is likely to be on the upside rather than the downside, but we are going to just have to say we don't want to be misleading to anybody. We want to be conservative and let you see what we see, but we are certainly hopeful that it won't be too long before we get back to beating the numbers that are out there. That's what we hope for. So thanks very much for tuning in, and we will talk to you again in about a month. Thanks very much.

Ladies and gentleman that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.