Flex Ltd (FLEX) 2004 Q2 法說會逐字稿

All participants will be able to listen only until the question-and-answer section of the conference.

This conference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would like to introduce your conference leader for today's call, Mr. Michael Marks, CEO of Flextronics.

Mr. Marks, you may begin.

Thank you, ladies and gentlemen, and thank you for joining the conference call to discuss the results of Flextronics's second quarter, ended September 30, 2003.

On the call with me today are Bob Dykes and Tom Smach.

I will communicate the data in this call.

You can also view a presentation on the Internet.

Go to the investor section of our Website and select Earnings Presentation.

You will need to click through the slides, so I will give you the slide number I am referring to.

Slide 2.

Please note that this conference call contains forward-looking statements within the meaning of the federal securities laws, including statements related to trends in our industry and end markets, future growth and new customer activities, seasonality, anticipated ODM activity, anticipated revenues, earnings leverage, operating margins and results, cash flow, profitability, risk and uncertainties regarding our litigation with Beckman Coulter, and restructuring activities, including resulting benefits and level of future restructuring requirements.

These statements are subject to attendant risks that can cause actual results to differ materially.

Information about these risks is noted in the earnings press release and in our SEC filings.

The term pro forma used throughout today's discussion excludes amortization, costs associated with the early retirement of debt and restructuring charges, as applicable and set forth in the accompanying slides.

Reconciliations of pro forma results to GAAP results are included in the schedule to the earnings release and in the investor section of our Website.

Slide 3.

Revenue in a quarter was $3.5 billion, which represents a sequential increase of $397 million, or 13 percent, over the June quarter, and an increase of $163 million, or 5 percent, over the second quarter last year.

Pro forma net income was $48 million, or 9 cents per diluted share for the quarter, which represents a sequential increase in pro forma net income of $27 million, or 133 percent over the June quarter, and an increase of approximately $8 million, or 19 percent, over the second quarter last year.

Including after-tax amortization expense of $8 million, restructuring costs of $45 million and debt retirement costs of $95 million, we incurred a net loss of $100 million on a GAAP basis, which is a 19 cent loss on a diluted per share basis.

Slide 4.

On a sequential basis, pro forma gross margin declined 10 basis points to 5.2 percent.

As expected, the weakening U.S. dollar had a slight adverse impact on our operating margin.

The slight decline in gross margin was more than offset by a large reduction in SG&A, which decreased 60 basis points to 3.1 percent of sales.

This represents a sequential decrease of more than 6 percent or approximately $7 million.

We are extremely pleased with our cost control and cost reduction initiatives, especially considering the increase in revenue.

Pro forma operating profit improved by approximately $25 million or 51 percent on a sequential basis, which represents a 50 basis point improvement.

Slide 5.

As I've indicated through much of this downturn, our balance sheet management continues to be quite good.

And the end of the quarter we had approximately $700 million in cash.

Our leverage ratio is 25 percent at quarter and liquidity was nearly $1.6 billion, which is one of the strongest in our sector after adjusting for near-term maturities.

During the quarter, we refinanced $492 million of 9 7/8 percent debt with $500 million of convertible debt that bears interest at 1 percent with a conversion price of $15.53 per share.

While this refinancing resulted in an early debt retirement charge of approximately $95 million, it reduces annual interest expense by more than $43 million per year, which increases annual earnings per share by approximately 7 cents.

Slide 6.

Inventory management was also very good, with turns improvement from 10.3 times last quarter to 11.3 times this quarter.

On slides 6, you can see the improvement in inventory turns over the past couple of years, with 7 turns in June of 2001, improving to 9.9 turns last September, and now it's 11.3 times this past quarter.

We continue to strive for 12 inventory turns.

Slide 7.

Depreciation and amortization was $83 million -- was approximately $83 million and net capital expenditures were $34 million in the quarter.

Pro forma cash flow from operations was $50 million, which excludes approximately $52 million of payments for restructuring charges and $85 million of early debt retirement payments.

Slide 8.

We continue to deliver an industry-leading cash conversion cycle, which came in at 19 days for the quarter.

This is a milestone for Flextronics, as it is the first time our cash conversion cycle reached the teens.

In addition to excellent inventory turns, DSO was only 42 days, while accounts payable increased by a day to 55 days.

Slide 9.

Customers continue to move their production to the lowest cost locations, and as a result, Asia and central Europe have been growing.

Slide 10.

For the current quarter, Sony Ericcson represented approximately 12 percent of revenues and Hewlett-Packard represented approximately 14 percent of revenues, due to their new product launches for the back-to-school season.

Our top 10 customers accounted for approximately 68 percent of revenues in the quarter.

Slide 11.

Clearly, business conditions are beginning to improve.

As we discussed in the mid-quarter call, there are some component shortages occurring in many product areas as customers increase orders compared to earlier plans.

Of course, not all customers are the same, nor are end markets all the same.

But we feel comfortable suggesting that overall conditions are generally better.

Industrywide restructuring activities and cost reductions are continuing and there is still pressure on margins.

But there are many new products being developed and customers are focused on their markets improving in coming quarters.

Certainly, the industrywide restructuring and improving end market will eventually improve pricing.

Our ODM business is doing quite well.

At the analyst meeting, we showed you a number of programs, and I can say that we are production constrained this quarter in virtually all product categories.

We believe next year will be very good for us in this part of our business, and as we have asked discussed many times, this should improve margins over time.

We continue to believe that our business will return to more normal operating characteristics, with improved margins over the next two to four quarters.

The industry continues to be consolidated and restructured, and we believe that this will work its way to conclusion in this time frame.

Slide 12.

This brings me to our own restructuring activities, which fall into a couple categories.

The first is the debt restructuring which I discussed earlier.

The second relates to the after-tax restructuring charge of approximately $45 million we reported in the September quarter, all of which relates to the restructuring plan we previously announced.

Some activities are costing us a little less than expected, and in some instances, we are cutting a little deeper than expected, but all in all, I would characterize our initiatives as pretty much on track.

Our updated estimate of remaining restructuring charges to be incurred during the remainder of our current fiscal year, which is the next two quarters, is in the 50 to $60 million range, which approximates to 8 to 10 cents of GAAP earnings per share.

I'm now going to talk about the Beckman Coulter losses.

Please refer to our Form 8-K, currently on file, for detailed information on the case, as I don't want to repeat that today.

What I will say is that barring any settlement in the interim, post-trial motions to correct the verdict are scheduled to be heard by the trial court judge on November 25, and we would expect the court to rule on these motions sometime between that date and December 1.

We continue to believe, as we indicated in our press release, at the analyst meeting and in our Form 8-K, that as a matter of law, this judgment should ultimately be substantially reduced.

However, because of the inherent unpredictability of litigation, there are always a range of outcomes on our post-trial motions, including setting aside all or some of the punitive damages, which could result in an appeal by the other side; the granting of a new trial; or sustaining a sizable judgment requiring us to appeal.

We have had outstanding support from our banks and investors, who have pledged to stand behind us to provide what we expect to be needed for us to go on to appeal.

As we previously stated, we're prepared to enter into negotiations to settle the matter at any time, although no negotiations are currently underway.

Slide 13.

Just a bit about our outlook.

So obviously, our top line and bottom line exceeded our estimates for the quarter, and we think this trend should continue in the December quarter.

We currently think reasonable expectations at this point are for revenues of 3.6 to $3.9 billion and pro forma earnings of 13 cents to 15 cents per share in the December quarter.

This represents an increase from the bottom end of the range of 2 cents in pro forma earnings per share.

For the March quarter, we think the seasonal decline will be slightly than the March quarter of last year, when revenues declined by more than 20 percent and pro forma earnings declined by over 60 percent, due to the post-holiday demand adjustments.

Accordingly, based on a similar product mix as last year, we think March 2004 revenues will decline 15 to 20 percent on a sequential basis and pro forma earnings should decline 40 to 50 percent.

We want to emphasize that visibility is difficult for the March quarter, as we don't really know what the all-important sell-through will be for the holiday season, so please be prudently cautious when estimating the March quarter.

That is about it.

It is view of the management at Flextronics that next year will be improved over this year in a number of important ways.

The industry will be nearly finished with major restructuring, excess equipment capacity will be substantially reduced, and demand will be better.

With the expected increase in profits from ODM, logistics, design services, and network services, we believe that Flextronics is well-positioned for growth in revenue and profit.

Slide 14.

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.

In addition, please refer to the risk factors included in our Form 8-K regarding the Beckman Coulter losses.

With that, let me turn the conference over to the operator to poll for questions.

Please limit yourself to one question and one follow-up.

(OPERATOR INSTRUCTIONS) Stephen Savas of Goldman Sachs.

Obviously, you guys have very strong working capital management and inventory turns are leading the industry.

I was wondering if you could comment on the impact of your push to increase distribution and logistics services and what the impact might be on your balance sheet metrics?

For example, do you own some of those finished goods inventory if you do the distribution and logistics?

We do.

It's one of the things we talked about at the analyst meeting.

These inventory turns are across the whole business.

The inventory turns in the logistics business are considerably worse -- considerably lower -- 4 or 5 times.

If we didn't have that business, these turns would be 13 or 14 times -- I haven't done that calculation, but clearly better on the manufacturing side.

So we are attempting the best we can, to not own inventory in our logistics business.

Sometimes we can do that, sometimes we cannot.

We would prefer to operate that business on a fee for services arrangement, but where we're also doing the manufacturing, it is logical for the customers to want us to just own the product all the way through, and so in some cases we do carry finished goods.

In the cases where we do, we are trying to keep that to a relatively low amount.

And we are relatively new in the logistics business, so this is something that will change over time.

But we are going to certainly continue to work to improve the working capital matrix in that business as well -- working capital metrics, I'm sorry.

So then going forward, kind of the next twelve month basis, is it safe to assume you're between 10 and 12 where you have been running, and that you'll have sufficient improvement elsewhere to offset the increasing business that you do in distribution and logistics, the drag?

Yes, I think that is the case.

Our distribution logistics business is now up to about $1.5 billion, and so we have already offset that.

And as I indicated, we will work diligently to reduce the working capital requirement in that part of the business also.

So that could improve and actually help drive the overall turns up a little bit.

Thank you.

Michael Morris of Smith Barney.

Michael, the weakness of the dollar was something you referenced in your opening remarks, and I guess just as a practical matter, could you quantify at all the impact on your gross and operating margins from the weakening of the dollar?

And then I have a follow-up on that topic.

Yes, sure.

You know, we have gone through the numbers.

It was a slight impact -- not really very much.

It is sort of interesting because where we had a negative -- where we had a clear negative result is our Multek printed circuitboard factory in Germany, which most of the contracts there are in dollars.

So, as if we hadn't had enough problems in that business in the last couple of years, that was a reasonable negative.

On the other hand, we have our network services business improved some because a lot of that business is in Europe and so on.

So it's a pretty complicated interaction because of materials and whether things are in dollars or euros and all of that.

So the only real quantification we have is we believe it was a slight negative, not really meaningful.

My second question is a lot more speculative, I think, and there's a lot of pressure from Washington on China right now to let the dollar-yuan peg float, and a lot of people believe if that were to occur that the yuan would probably appreciate against the dollar.

I wondered if you had done any scenario analysis, and I'm assuming that the impact on the P&L would be fairly minimal if the costs were passed on to your customers.

But how much could the yuan appreciate, do you think, before the advantages of producing in China would start to wash out and customers might start to look elsewhere for production?

I think that is a very good question, Mike, and it is a complicated question, and I have personally been spending a reasonable amount of time talking to our customers about it so that we can model what their reactions are going to be.

My personal belief -- and this is just a personal belief, so I want to make sure you all understand that -- my personal belief is that this will happen.

It is almost sure to happen at some point.

I don't really expect it to happen in the near-term.

But we are asking major customers of ours to model this stuff through with us so that they can let us know what they are going to want to do, what they are going to want to do if there is a major change here.

And I think that there's a couple of issues that are important here.

First is a lot of things can't be moved anymore because the materials infrastructure is in Asia, and so some product that we've talked over the years on these calls at our analyst meetings -- you know, people produce in Asia not just because of low-cost labor but because that is increasingly where the material supply is, and in those cases the prices will just go up, I mean, and we'll pass them on to the customer, then the customers will pass them on.

There are some customers -- I was actually talking to a customer just today who said that their reaction would be to move more of the business around in Asia, to move into -- more into Thailand or into Malaysia and places, and of course we have big manufacturing in Malaysia; we don't have so much in Thailand.

So I think the answer is we don't really know yet.

We haven't heard definitively from our customers what they would want to do.

We are beginning to do our own internal modeling to see what impact we think it would have.

Ultimately, I think it is not going to have very much impact on us.

There will be some moving around, more than likely.

But the positive is that these are the kinds of issues that make companies like Flextronics more valuable in the eyes of the customers because we have flexibility.

We can move products from China, we can move them to Malaysia, we can move them back to Guadalajara to Eastern Europe.

In my conversations with the customers, they view this as a huge advantage of working with us.

And I think that this would actually, if there's any disruptions around China, would help us with respect to the competitors that are China-based only, which I know some people on Wall Street have been concerned about and we haven't been particularly, but this would help us there as well.

I just have one last question on pricing.

Over the last few months, Flex has suggested that pricing was bottoming and that you believe that pricing would improve over the next few quarters, even if demand stayed relatively anemic.

I just wondered if you could refresh us on your thinking there?

I think that's clearly -- that's clearly our view.

Times will tell.

I think in the printed circuitboard business for sure, as we said last call, pricing is going up.

It is going up across the industry and that is what makes this stuff work.

The pricing in printed circuitboards is clearly going up and some of the component commodities.

You know, in terms of our industry, our direct competitors, we don't think we are going to see meaningful improvement in margins until the excess capacity is gone, and that still exists.

I think we said at the analysts meeting that we have been out buying used equipment because we're out of equipment for all intents and purposes, and we're primarily buying that equipment from our direct competitors.

So until that evens out, I don't think we are going to see too much improvement in margins.

But we do expect that will happen.

I mean, in my remarks, I say two to four quarters, I think that will happen.

I do know we as a company are continuing to be very vigilant about our gross margins, and as we are running out of equipment, to be careful not to take on programs that will require us to buy equipment for which we won't get a satisfactory return.

So we're already well advanced in our thinking about that, and we just need a little help from the rest of the industry.

Once this happens, I'll point out -- you know, I've been asked over the last couple of years during the downturn a lot by investors, as the conditions of the industry change permanently to where there can't be better margins -- and I have always been a believer in the business cycle.

And in the business cycle, when you have a downturn, you have excess capacity, prices get brutal.

And when you have an upturn and people are busy, prices get better.

And I see nothing to suggest that won't be the case this time.

In printed circuitboards, which is a good proxy -- I mean, a year ago, everybody wanted to slit their wrists, us included, under the assumption that there would never be an improvement in price.

And obviously, we are in the very early stages of recovery and we're already getting some pretty substantial price increases in some categories of product.

So this'll work its way through, assuming that the recovery continues as expect it to.

Thanks very much.

Louis Miscioscia of Lehman Brothers.

Michael, there was recently I guess an acquisition or a small acquisition in this industry where Celestica is acquiring MSL.

And could you give us any thoughts -- do you think that this is the beginning of a trend in the industry where maybe some of the mid-tier guys start to go (indiscernible), maybe even two of the top-tier guys actually get merged?

And do you think this is more of a one-off?

I guess also if you could throw in there whether you think this is a cost-cutting thing, as when HP acquired Compaq, or is there something strategic here or in the mid-tier space?

Yes, well, in terms of the strategy between Celestica and MSL, you just have to ask those companies.

I don't think I could comment on what their reasons for doing the deal were.

I don't view it as one-off.

I view this as part of a trend that started already four years ago.

I think that -- this is a business, the companies have gotten big, it is a maturing industry to a certain extent.

I think it is natural to see continuing consolidation, which there has been.

This just happens to be the first one in a year or so.

I don't have all the dates in the top of my mind.

But absolutely this is a trend towards further consolidation, and I think that you're going to see the mid-tier more or less disappear as the mid-tier tends to disappear in every industry as it consolidates.

And you'll have good, small companies that provide a service that customers really want that always survive and you will have the big guys who always survive.

And the middle tier always winds up pressured.

So this is to me pretty natural.

There aren't very many mid-tier players left and I guess that one or two could decide to stay on their own for the long-term but my bet is that most of them will be merged with somebody sooner or later.

And I would that you will see at least one merger among two top tier guys, but I don't think that is going to happen real soon.

And the reason is, in terms of the top ones, I think the mid-tier guys have been more or less talking about potential mergers for a couple of years now.

But in the top tier what you have now is with an improving market and stock prices are up, you know capital is relatively inexpensive, all of the major companies have access to capital.

I think you've probably got a few years to go here before any of the top tier guys decide that the industry is consolidated enough that they ought to be in a merger.

But that is just an opinion.

I think -- the sense that further consolidation in the industry because it is maturing, I think this industry is going to be like every other major industry where you are going to consolidate down to no more than four or five key players and then a host of small companies that fill the niches and we are clearly headed there.

Great.

One follow-up would be on the ODM business.

Can you sort of bracket, I guess your expectations for what kind of revenue you expect in your December quarter?

And also any clarity I guess you mentioned a couple of different product categories, I mean can you start maybe defining some of the product categories?

I know that you did review a lot of them at the Analysts' Day but I just wasn't sure which ones might be more significant or maybe the top three most significant ones?

Yes, I'm not going to break out the revenue for the December quarter because we are not going to get down to that level of granularity.

I will tell you that, as I said in the opening remarks, we are production constrained in the December quarter anyway so it is a matter of getting enough materials.

We're clearly not going to meet the demand we have in the December quarter.

As you know, the products that we are doing ODM work in are primarily consumer products and summer is a particularly strong demand quarter in any case.

But we think this demand is going to stay strong for us next year.

The primary categories we are in really, as you know, are cell phones, camera modules and those are the areas that we are in very strong demand right now.

Then there is a number of other categories that we are just beginning to get into, but they're not meaningful.

So it is primarily those categories, and we're just very busy and very pleased about the results.

Thank you.

Alexander Blanton of Ingalls and Snyder.

Just a clarification.

When you said production constrained in all product categories, were you just talking ODMs or across the board?

No, ODMs -- just our ODM stuff -- the camera modules and cell phones.

Why is that?

Why are we production constrained?

Yes.

Wouldn't you have excess capacity elsewhere you could use?

Well, no.

I mean, it is not just capacity; it is materials.

A lot of the orders the product have just been released, and a lot of it is just leadtime events.

We are struggling to get memory, we are struggling to get enough test equipment in place, we are struggling to get enough displays and we are actually struggling to get enough printed circuitboard.

There is a shortage of printed circuitboard in that category of product.

So most of it has to do with not a shortage of capacity per se, but just not enough leadtime to get out everything everybody wants to get out, which is kind of a nice problem to have for a change.

While we're talking about PCVs, how is that for you this quarter -- did you become profitable or not, and what about December?

In the September quarter -- we were profitable in September, not profitable for the quarter, as we indicated at the analyst meeting.

And our expectation for December quarter is slight profitability.

Okay.

CAPEX was 34 million versus 32 million the quarter before.

Dover Corporation, when they reported earnings -- they sell the Universal SMT line, said that CAPEX of North American EMS companies or purchases by them of the SMT line strengthened substantially in the third quarter -- North American EMS companies.

And I asked, for example, who, and they said, well Flextronics said they were going to do something along that line, and so you can figure they were one of them -- or something along those lines.

But it doesn't show up in your CAPEX number.

Could you comment on that?

I can't really commit on whatever they said, but we are not -- we do not buy new Universal equipment anyway.

So we would not be the guys that they would be referring to this year.

We bought some odds and ends back in the past, but they're not a major equipment supplier, so we're not responsible for --

Whatever they said --

Next year might be different.

But anyway, in terms of the September -- any comments about the September quarter, I don't think we had an impact for Universal.

No, we are, in terms of CAPEX, we are being very aggressive about moving products around.

That's one of the reasons I had Mike McNamara spend so much time on this issue at the analyst meeting, to give people a flavor for just how detailed -- in what a detailed manner we run our business and where we have excess capacity to move it around, and we've been doing a lot of that.

We are talking to suppliers now about next year, pricing for equipment next year, because we will be back into the new product market.

Right now, we're buying used product where we can, and that's working pretty well.

So this will work its way through.

I think that the equipment guys -- and I've been talking to a couple of them myself, and they are seeing some improvement.

But I think those guys will see much more improvement another four quarters out when the rest of the industry catches up to where we are and everybody needs to buy equipment.

But I would expect it to begin to slightly improve.

Last week, HP announced a logistics project with some Taiwanese ODMs to improve the delivery of the products, and that was set up separately from whatever they are doing with your logistics group.

Why was that?

Did you have an opportunity to bid on that business?

What happened there?

When you say what happened there, you have to understand, this is an $80 billion Company.

They have all kinds of activities going on.

They are very aggressive -- HP is very aggressive and a really good customer from this perspective -- in trying to work through cost reductions in the way they do their business.

I mean, they are very innovative, we have a lot of projects going on with them.

We have become -- no question, we have become an absolutely major logistics supplier to them.

We took over their big operation in Memphis -- we took over a million square feet or something.

And we have lots of logistics activities going on between us.

So that is going great.

I mean, it can't obviously be every project they have everywhere.

They are going to naturally -- our customer is not just HP.

Our customers are naturally going to try to drive steamlined logistics with their manufacturing partners, which is what we're all trying to get to.

I would point out that we -- like with Sony Ericcson, we do all of the logistics management for them, including all of their ODMs.

All of their ODMs come through -- their ODM products come through our distribution centers.

With HP, it can't be that way because there are just too many different product types and too many different logistic systems, but I wouldn't read anything negative into whatever they said about this, because we are really, really busy with HP on logistics activities.

Okay, thanks.

Let me add one other thing about -- one additional thing to Alex's question about CAPEX, which is I'm sure that it is not lost on you guys, particularly the ones who came to the analyst meeting, that we are driving the details of our business right now extremely aggressively and I think extremely well.

And so we talk about working capital management and equipment utilization and managing CAPEX and so on.

On the CAPEX side, we have very tight controls over this, because as I indicated today, the capital expenditures during the quarter were 34 million and depreciation was in the 80s -- and I have it right here -- $83 million I think.

That represents a reduction of the capital base that we are using to drive revenue in the Company by another $50 million.

And every quarter we have been doing this now for several quarters and we expect to continue to do it, which means that we are driving -- not only are we improving our profits, but we are improving our return on capital.

And we intend to continue to do this quarter after quarter after quarter.

Next question.

Thomas Hopkins of Bear Stearns.

The 13 percent sequential growth quarter-to-quarter is fairly high.

Certainly you outgrew your customers in the quarter.

If I look at last year, the whole EMS group is basically flat and their customers are flat in September.

Could you break down where the sequential growth came from, and then talk about it in terms of any new outsourcing that occurred in the quarter or recently startup of new programs?

Yes, I don't have a breakdown in front of me from where it came from.

We are taking a quick look here.

But we have been increasing our market share with customers.

I think at the analyst meeting and in the mid-quarter call last quarter, I think what we said is that we are particularly well positioned as a Company now and we're taking a little bit of share.

We have added some new customers that we talked about.

At the analyst meeting, I think we showed a dozen new customers that came in this year, and clearly that is adding to it.

Our standard customers are increasing with us.

I think we are gaining shares with Hewlett-Packard.

You have increases in some of the consumer products like the Xbox, which grow in the September quarter over the June quarter.

So I think it is really a function of all of those.

And I think -- I'm happy about the question because I think the answer here is really related to the fact that we are well positioned, so we're getting more share in the customer base we have, we are getting more new customers, and of course we're getting some benefit of seasonality.

I mean the seasonality begins to pick up here in August and September months.

In terms of additional outsourcing, we're still very actively engaged with customers.

I guess I'm a broken record on this, but I think we are still a pretty long way from having to grow at the same rate as our customers, because almost every customer we have of any size is looking at outsourcing additional product that is currently being manufactured inside.

So I would be surprised if we don't continue to grow faster than our customer base because of that characteristic.

Okay.

Following upon the March quarter, you guys kind of touched on it at the analyst meeting and I spoke to Tom about it.

And then you mentioned it again today, that while there will definitely be a March drop-off, without a doubt, given your mix in consumer and handsets.

I think last year was between 20 and 21 percent sequentially, and it looks like what you're guiding to now it will be down 14 percent sequentially.

So it's about a 7 point difference, even though your handset HP printer and Xbox stuff is probably bigger in volume than it was last year.

So what is going on there again?

Is that more new outsourcing that you're going to see in March versus December, or is there something else that might account for that?

It's a good question.

This is always a particularly dicey thing to try to give information about, because -- and we know there is a lot of seasonality.

I think there is a couple of issues here.

One is that last March was particularly brutal because, if you remember, we had an outstanding December quarter last year -- I mean it was well above our expectations, well above our guidance and well above what other companies did in that period.

And that turned out to be a lot of channel building.

And in the March quarter there was more of a drop-off.

What you really saw last year was some of March's business wound up in the December quarter.

We don't think that is as dramatic this year.

We think that companies are more cautious, just from having learned from last year -- that is one thing.

Clearly, the underlying demand in the cell phone arena is stronger, with a lot of new product development and so on, so we think that some of that product will hold over into the -- the drop-off won't be as severe in the March quarter.

We have our ODM products, which we have not very much happening in the December quarter, and -- obviously much more than September, but just getting started.

So we don't think that the ODM portion of our business will drop off in the March quarter, which will help offset it.

And we're also seeing some increases in the datacom and telecom area, and those are market segments that don't have the severe drop-off that the consumer products do.

So I think when you add all that up, we think the drop-off is going to be less.

Are you putting all of the ODM business and handheld devices in that category or are the camera modules in consumer?

How is that being classified right now?

In consumer.

So we'll put the different -- as we get into categories that are different, we will put them in the appropriate category.

So the ODMs that are handsets are in hand-held devices and the camera modules are in consumer?

That is correct.

Okay.

Thanks.

Steven Fox of Merrill Lynch.

Could you talk a little bit about the IT infrastructure segment?

Is there anything going on there from an end market?

It looks like it was down again this quarter.

And then secondly, any comment on Hon Hai's acquisition of a Motorola facility from a competitive standpoint?

Yes, let me take the second question first.

The Hon Hai acquisition from Motorola was a pretty reasonable transaction, I think, from both company's sides.

Hon Hai is clearly moving out of the realm of being a China only competitor and expanding their capabilities around the world.

And to be honest about it, we think that is fine.

They had a need to get in Mexico.

As you know, we already had major operations in Mexico.

We were not interested in adding to our base of factories in Mexico and they needed one.

So I think from both company's standpoint that was a very reasonable transaction.

Competitively speaking, Hon Hai is a very good player in the business.

We compete with them in a lot of the consumer categories particularly; we hold our own against them quite well.

In some cases they take a little from us or we take a little from them.

But what you are seeing more is that the big, high-volume customers are splitting their business between us and them and we think that's pretty healthy.

We think that is actually expanding the amount of business that is available to both of us.

So I think that's fine.

Hon Hai also required a plastics company, and they are doing the same kind of things we are doing -- we think that's fine.

I think the more complicated their business gets, the more difficult it will be to run their business, as it is difficult to run ours.

And so we are particularly happy to compete on that straight up in the marketplace.

I'm sorry, could you repeat the IT question?

I think I lost it.

It was down sequentially.

I was just curious if that was market related or was that more Flextronics related?

How would you describe trends in that segment?

I think that was more Flextronics related.

We had -- one of our customers moved some of their business away from us.

They had three suppliers and decided that two were enough and wanted to their product line.

And they moved that out in the quarter and that is all that was.

Thank you very much.

Joseph Wolf of Banc of America Securities.

There was a Dow Jones report this morning, Michael, about Alcatel potentially selling its handset unit.

And if you're unable to comment specifically on the article, could you just walk us through the Flextronics relationship with Alcatel on the handset production and distribution right now, along with the geographic location of all of that?

No, actually, I won't go into that much detail.

What I'll tell you is that Alcatel is a major customer of ours in a number of categories.

We have been a big player with them in the cell phones.

We have an excellent relationship with them.

What I have said about cell phones in general I will repeat, which is as follows.

We do an awful lot of cell phones.

We do work for lots of the players.

There are share shifts that go on and our business has been very stable, and part of the reason for that is one company's share drops and Alcatel is one of the companies whose shares dropped, but other customers that we do work for, they pick up that share and we get it on the other side.

So there has been an awful lot of speculation about Alcatel, what they will do and won't do in this space and in other spaces over the last couple of years, and they are the ones who have to make the comments about it, not us.

Just a follow-up on the handset market in general then.

Could you tell us, if you look at the trend towards color and towards camera phones, what percentage of the handsets that you're producing right now are in that color or camera category?

Yes, again, I really can't give you that level of granularity.

I mean, I would say that we are doing extremely well in the cell phone category in terms of the number of customers we have, the different kinds of product lines we're in.

Now we're getting into the OEM business; we're getting to component level stuff around camera modules and so on.

We are very well represented across that whole class of customers and products.

Okay, great.

Thank you.

Todd Coupland of CIBC World Markets.

I just wanted to ask you a little bit about the handset business.

It looks like Sony was up quarter-to-quarter in line with your revenue growth, which I guess might imply that some of the other handset customers were a bit weaker.

I know you had had a program ramping with Siemens.

Can you just talk a little bit about what is going on with your other handset customers?

Did Siemens not come in as strong as you would have hoped?

I'm sorry.

You know I can't answer this question.

I just have to remind everybody.

I'm starting to get a bunch of questions again about specific customers and who is doing well with what.

And you know, we go through this every once and a while and I just have to remind everybody -- we're not going to give you information about our specific customers, because they all don't want us to and you need to go and ask those guys.

So I just can't give you more information about that.

Fair enough.

Just over to the ODM side, some of the component guys are talking about 13, 14 percent of their components going to the ODM market.

If we look out to next year, is this a reasonable percentage as a percent of your handset business?

You know -- the truth is I don't know the answer to that question.

So I'm not really dodging the question, because we are in very early stages here and there is lots of different technologies around cell phones.

And you know, we have just started shipping CDMA product and a little bit of GSM product.

This is a very complicated market.

We are nearing the completion of an acquisition which is going to add hundreds more designers.

We have made a very clear and concerted effort, and I think we have indicated to all of our investors as such, that we intend to be a major player in this market.

It is a higher value-added portion of our business; it is a higher margin portion of our business; and we are going to try to drive as much of our business into that business model as we can for the obvious reason that it increases margin.

So what percentage that turns out to be, we will tell you after we know.

You spoke about strength in telecom and communications.

Can you just talk a little bit about specifically which end markets you are seeing a pick up there?

Thanks.

Same issue.

So I would say there is some across-the-board stuff.

Again, this is stuff you can see by reading what the announcements are in terms of what the telecom guys are saying.

But we do business with almost all of the major telecom hardware players, and in general, I would say that there is beginning to be some improvement in that market.

And I think it is pretty well written about.

We will see again how long it lasts, but this has been three years of down, down, down, down, and we're definitely seeing some signs in certain categories it's moving up.

We don't do a lot of work in wirelines.

One thing I can tell you -- most of our work is on the wireless side, and I think there is a lot of action in that.

There is a lot of WiFi hardware and so on.

So I think that will be pretty good.

I'm going to take one last question.

Michael Walker of First Boston.

I just have one question, which is that I'm kind of surprised that SG&A is basically about the same level as it was a year ago; in fact, a little bit lower, despite the layering on of the ODM business.

So I'm trying to figure out if that kind of initial ramp of ODM-related R&D and infrastructure is mostly behind us or do we expect some more of that to filter in to SG&A?

Actually, I'm glad you asked that question.

A very good question for me to end on.

I mean, there is a lot more SG&A and R&D from the ODM stuff, and we have offset with substantial cuts in the SG&A side in our Company.

We are right now in the process of going through our Company from top to bottom and making sure that we have squeezed out everything that we can squeeze out, even though revenue is going up and the business is starting to improve, because we want to make sure that we don't get sloppy here as a Company and leave things in place that should have gotten squeezed out in the downturn and didn't, because now the pressure is off because business is starting to get better.

We are very happy with our performance this quarter, but this is not great performance.

This is still 2 percent operating profit -- we have a long way to go here.

And we have taken this opportunity the last couple of quarters to really take a bunch of costs out, and your question -- the answer to your question is that that's where it came from.

We have substantially reduced the SG&A in the Company, and we're going to continue to do this for another couple of quarters.

So we think we can take some more costs out yet.

We need to, basically.

We are going to get profits back to where you all expect them to be as investors.

That's what's underway.

Okay, thank you very much.

Talk to you again in six weeks.

Thanks for dialing in.

Bye now.