Flex Ltd (FLEX) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the Flextronics Second Quarter Earnings Conference Call.

All lines will be on listen-only until the question-and-answer session of today's conference.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

I would now like to turn the call over to Mr. Michael Marks.

Sir, you may begin.

Thank you.

Thank you for joining the conference call to discuss results of Flextronics's second quarter ended September 30th, 2004.

On the call with he are Bob Dykes and Tom Smach.

You can also view a presentation on the internet. (inaudible) 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 sides so I will give you the slide number I am referring to.

Slide two.

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 demand trends, seasonality, anticipated revenues, operating margins, profitability, cash flow, working capital, inventory levels and the expected impact of our pending transaction with Nortel.

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.

Slide three.

Revenues in the September quarter amounted to $4.1 billion, which represents an increase of $635 million or 18% over the year ago quarter.

Excluding amortization, restructuring and other charges, net income for the quarter grew by 107%, $98.5 million, or 17 cents per diluted share compared with $47.5 million or 9 cents per diluted share in the year ago quarter.

GAAP net income for the September quarter was $92.6 million or 16 cents per diluted share, as compared to a net loss of $100 million or a loss of 19 cents per diluted share in the year ago quarter.

Slide four.

Excluding restructuring and other charges, gross margin in the September quarter increased 130 basis points, 6.5%, SG&A increased 30 basis points to 3.4% to sales the operating margin increased 110 basis points to to 3.2% compared to the year ago quarter.

GAAP gross margin and operating margin improved 190 and 200 basis points respectively, on a year over year basis.

Return on invested tangible capital improved to 23.9%,12.8% a year ago.

Slide five.

We ended quarter with $695 million in cash, up from $615 million at year-end, and up from $665 million last quarter.

Inventory turns remained at 11 times, while sequential inventory dollars only increased by $31 million.

Sales increased 7% on a sequential basis, yet inventory only increased 2% on a sequential basis.

Our leverage ratio is 27% down from 31% last quarter, and the liquidity increased 20% to approximately $1.45 billion.

Our drawn revolver balance declined from 536 million last quarter to $346 million this quarter end.

Slide six.

We continue to deliver an industry leading cash conversion cycle, which came in at 17 days for the quarter versus 19 days both the last quarter and the year ago quarter.

At quarter end we sold a total of $446 million in accounts receivable, compared to $463 million last quarter end.

Slide seven.

Depreciation and amortization amounted to approximately $85 million and net capital expenditures were approximately $87 million in the quarter.

Cash flow from operations generated approximately $98 million.

Equity proceeds provided $307 million in cash and were used to reduce borrowings and lease obligations by $190 million and to fund acquisition payments of $118 million.

Slide eight.

During the quarter, Asia increased to 52% of total production, while the Americas and Europe slipped to 15% and 33% respectively.

Computer and office automation segments included 26% of sales while hand held decreased 31% of sales.

Slide nine.

Both Sony Ericsson and Hewlett Packard represented approximately 13% of revenues.

There were no other customers in excess of 10% of revenues in the quarter.

Our top 10 customers accounted for approximately 65% of revenues in the quarter.

We are very pleased with our operating metrics in the quarter.To get a better picture of overall performance I think it is worthwhile to compare our metrics to all-time highs which were generally achieved in the fiscal year-ended March 31st, 2001.

I will use that period of time as a baseline for comparative purposes.

Slide 10.

We have increased September quarter revenues each year since 2000.

A period that includes the worst cyclical downturn in the history of the technology industry.

Because of our leadership positions in customer service and low-cost, vertically integrated manufacturing, and our design expertise, we increased quarterly revenues by $1 billion from 3.1 billion in September 2000 to 4.1 billion in September 2004.

Slide 11.

For the first time during the past four years, we have recorded positive GAAP profits for four consecutive quarters and we are committed to continuing this very important trend.

Additionally, our September 2004 GAAP net income of $93 million is the highest quarterly GAAP net income in our Company's history.

Slide 12.

Excluding restructuring and other charges, our operating margin was 3.2% in the September quarter of 2004, and has been steadily improving since the June 2002 quarter when it was 1.7%.

As we outlined at the analyst meeting a few weeks ago, our long-term objective is to exceed a 5% operating margin.

Slide 13.

With regard to working capital management, improvement in inventory turns and cash conversion cycle has been significant.

Inventory turns have improved from 7 times in September 2000 to 11 times in September 2004.

Cash conversion cycle has improved from 46 days in September 2000 to an industry leading 17 days in September 2004.

We believe we are managing working capital at peak efficiency level.

Slide 14.

In addition to world class working capital management, we continue to improve fixed asset efficiencies as well.

Annual CapEx, reached a high of $711 million in fiscal 2001 and a low of $181 million in fiscal 2004.

While we expect our annual CapEx to be approximately $300 million in the current fiscal year as we buy out some remaining operating leases that expire this year, we expect to reduce fiscal 2006 CapEx to below $200 million, which will be a source of additional cash flow next year.

Additionally, CapEx was almost $500 million more than depreciation in fiscal 2001.

Compared to the last two fiscal years, which CapEx was less than depreciation.

We expect in trend to continue for at least the next 2 fiscal years.

Last, we are increasing throughput on fixed assets as revenues continue to grow and the fixed asset base continues to [technical difficulty] fixed asset to sales ratio was 15% in fiscal 2001 and 16% in fiscal 2002.

Compared to 11% in fiscal 2004.

At the end of the September 2004 quarter, this ratio was approximately 10% and we expect it to fall below 10% in fiscal 2006.

Slide 15.

Most important, cash flow is significantly better today compared to our most profitable quarter since fiscal 2001.

This chart shows GAAP net income less net capital expenditures, which is defined as CapEx, less depreciation.

We exclude changes in working capital from this analysis as cash conversion cycle is how we measure working capital management.

As can you see, GAAP net income less net CapEx used $154 million in September 2000 compared to generating $82 million in September 2004.

While profits are returning to record levels, cash flow is much improved.

Slide 16.

As a result of these operational improvements, we achieved a record return on invested tangible capital of 23.9% in September 2004.

When margins reach our long-term objective, we foresee this metric exceeding 30%.

Slide 17.

Now, let me turn to guidance.

I will break this discussion into two segments, the first to address specific guidance for the next two quarters and the second to discuss longer term trends that apply to 2006, which begins April 1st, 2005.

As end markets can change quite often, we will provide specific guidance for only two quarters out.

We would like to at least give you ranges around what we expect to achieve in fiscal 2006.

For the December quarter there are two changes from previous guidance.

The first, as previously announced, is that we will have only design revenue from Nortel, which is relatively small in the December quarter.

We have indicated that the push out of Nortel's systems integration business will reduce revenue and earnings slightly.

I will provide more information about Nortel in a moment.

The second change is that end markets are not as robust as we anticipated in both the consumer and communications segments.

The end markets are not terrible, just flat to slightly up.

This may be a result of some inventory reductions or it could be nothing more than some caution based on oil prices, the election and so on.

In either case, we see that as not that big a deal, at least for Flextronics.

As we described in detail in New York last month, we are very optimistic about the outlet for our design, network services, ODM and component businesses.

The assembly business we see strong growth with multiple new customer wins in the pipeline, along with the Nortel deal.

And we have multiple initiatives underway to ensure that we continue to improve profitability in each of our businesses.

The good news here is that those initiatives are working and our margins are continuing to improve.

As a result, we expect revenue to increase modestly in the December quarter and margins should improve beyond what we had previously expected.

Excluding approximately 2 cents per share for the cost of Nortel activities that we had expected to be offset with Nortel revenue.

That means the revenue range we expect is 4.1 to $4.4 billion with an earnings range of 18 to 21 cents in the December 2004 quarter.

For the March quarter we will start to see revenue from Nortel, which will again be slower to ramp than previous guidance.

For the earnings adjustment should be approximately 1 cent, as indicated in our press release when we announced the delay.

Our look at end market demand in the March 2005 quarter is pretty solid, so this brings us to a current outlook of revenues in the range of 3.8 to $4.2 billion and earnings in the range of 15 to 18 cents.

Now let me move on to longer term trends.

As I said at the recent analyst meeting, I am extremely bullish about this Company and I hope from the current results, you can understand why.

We are managing the operating metrics at peak efficiency.

Earnings and margins have been improving every quarter.

We're close to an all-time high for adjusted quarterly net income and earnings per share.

We hope to reach those milestones during the next fiscal year.

GAAP net income is at a record high, as is the all important return on tangible invested capital.

In fact, because of our 24% ROITC, we are performing better than other best in class companies.

We have a number of initiatives underway that should drive these numbers even higher.

So of course our management team is bullish.

In talking with investors it seems there are some common views about Flextronics' industry position and some disparate views about Flextronics' future.

The common view is that Flextronics is leading the industry in just about every metric that matters, revenue, profits, inventory turns, cash conversion days, low-cost foot prints and perhaps most important, customer satisfaction.

We have been and we continue to take share from our competitors.

The disparate views come from investors when they try to estimate how fast we can grow revenue, how far and how fast we can expand our margins.

Given our size and industry leading operating metrics, it is not reasonable it assume we will be able to grow net income in excess of 100% as we have the past three quarters.

However, we believe that we can sustain earnings improvements in the 20 to 30% range over the next several years.

That is probably in excess of the majority view of our current investors although less than some of the published research reports that expect Flextronics to grow earnings by 30 to 45% in fiscal 2006.

Many analysts have introduced estimates for fiscal 2006 of around a dollar per share, which is a figure that we used as our longer term goal a couple of years ago.

That would represent about 45% EPS growth year over year, which is higher than the 20 to 30% growth range that I would characterize as reasonable for a period that ends 18 months from today.

We are however, moving closer to reaching that goal and as you know, we have now established a long-term objective of around $2 per share.

The pace at which we achieve that target depends on growth in end markets, the success of integrating Nortel, and the rate at which we can achieve growth in our higher margin businesses, including design services, ODM initiatives and further vertical markets like power supplies.

I am satisfied with the progress we are making in each of these categories and feel reasonably sure that we will achieve longer term success in each area.

As I talk with investors, I have developed an understanding that some earnings models for next year are based on taking this year, adding Nortel, then adding another fairly big increase for other customer.

The reality is that Nortel is a huge and very exciting opportunity for Flextronics.

It involves approximately $2.5 billion of additional annual business, which is a lot to absorb, even for a company our size.

That alone represents annual revenue growth of 15%.

We have literally hundreds of people, many of them our absolute best, completely dedicated to Nortel.

Virtually every one of our major campus sites is preparing for new business and IT, procurement, and HR activities are underway around the world.

We intend for this be to the very best transfer of major business that we have ever undertaken.

I just wanted to remind everyone that Nortel alone represents major growth and a significant effort for fiscal year 2006.

That's about it.

I have been running this Company for 12 years, and we have never performed this well.

We have continued to growth ahead of us and a significant amount of activities to drive up margins.

Our model is working.

And the Company is executing.

Now let me turn the conference call over to the operator to poll for questions.

Operator?

If you like to ask a question, you may press star one on your touch-tone phone.

If you're using speaker equipment, you may need to pick up the handset before pressing star, one.

You will be prompted to record your name.

If you wish to cancel your question, you may press star, two.

Once again, that is star, one if have a question and star, two to cancel.

Our first question comes from Brian White with Kaufman Brothers.

Good afternoon, Michael.

Good afternoon.

When we look at the March quarter outlook, does that include incremental revenue from the Nortel transaction?

It does.

Okay.

And about how much are we assuming in there?

That I don't know.

Tom, do have you that information?

It's approximately a hundred million dollars, Brian.

Okay.

And when we look out at the December quarter, I think that was supposed to be a $100 million of Nortel and that's not going be to there.

Right.

Where are we seeing this softness?

You're saying looking into the December quarter we're seeing softness in consumer and communications and that's the reason for the delta there?

Yeah, I mean, because March still looks pretty solid, I mean it looks to me like, you know, -- I mean, it's hard to know.

I think what I said is really what I believe, which is it's not that big of an event.

Communications is a little bit softer than people had expected.

I think you see that from other company's earnings expectations.

And I think what we're seeing is some caution built into the December quarter numbers because I don't think the December quarter is going to have the build up that we would expect for the seasonal adjustment, but neither do we see a big drop in the March quarter.

So I think some that have is just caution built, you know, built into not expecting too big of a Christmas, not having too much of a build up.

That's the best we can tell.

I can't really see too much more.

It's not like we're seeing some big downturn because the March numbers look pretty solid, as I said.

Just mobile phones, it sounded like they were going very strong up until September and it looks like they declined sequentially.

Kind of what happen there?

Yeah, I don't -- again, I don't think there's much to these trends to be honest with.

I mean, cell phones were very strong in the earlier parts of the year.

We expect them to be up a bit in the December quarter.

Not so much -- I think you've got some share shift activity and just, you know, for Nokia was a little bit weaker in the first part of the year.

They've come out a little bit stronger and I just don't think that -- I mean, we look at the overall business, you know, I mean, there's not magic about the quarters.

It looks pretty solid to us.

I think it's no more than that, just changes in, you know, who's winning a little bit of market share here or there, and it looks like it's going to continue to be pretty solid.

Okay.

Thank you.

Sure.

Thank you.

Our next question comes from Stephen Fox with Merrill Lynch.

Good afternoon.

Good afternoon.

A couple of quick questions on the cash flow.

Uh-huh.

A $118 million for acquired business was recorded.

Can you break that out a little bit?

Was that all associated with the previously announced acquisitions?

I believe it was all associated with the announcements that we discussed at the analyst meeting.

Do you have anything to add to that Tom?

Yeah, it was Frog (ph) and Hughes and Chaldal (ph).

Okay.

Great.

And then just on the office and computing segment that had a nice lift in the September quarter, was that -- was there any new programs there or can you provide any highlights on what happen there?

Yeah, and I think that -- that also probably has something to do with the flattening, you know, of the December quarter and not much of a decrease in the March quarter.

And because the printing and imaging portion of our business, which as you know, we have a number of customers in that area, that has -- that has moved to a -- you know, to an introduce a new products and fill the pipeline in the September quarter, you know, and typically, in the March quarter as well, not in the December quarter.

And that is not how that business is always run.

And so I think that as we -- as we give guidance going forward, we'll probably adjust a bit more for that.

And that's really the reason.

So that comes off some in the December quarter and then it's typically pretty strong in the March quarter.

That just has to do with how the pipelines get filled in that business.

Thanks a lot.

Uh-huh.

Thank you.

Our next question Scott Craig with Banc of America.

Good afternoon.

Good afternoon.

On the margin front, you guys did good job there.

Can you help us understand how much of the margin increase sequentially can be broken into volume increases and potentially some mix changes?

Because the mix was a lot more favorable from a margin standpoint than I would have thought because your hand-held business was down so, if you could maybe help me understand that a little bit.

Yeah, I mean, I can just give you some sort of generic information.

I mean, we're obviously extremely pleased about the developments from a margin perspective in the Company.

You know, I think that a couple of calls ago, maybe the last call, I was talking that I know that a number of analysts and investors were saying that had is a cyclical peak, you know to margins and it clearly isn't.

Our margins have been going up every quarter now for quite some time.

And you know, it's a function of a lot of things.

I mean, it's a function of mix to a certain extent but -- and this quarter, you know, mix is -- you know, mix isn't the biggest piece of it.

It's a small piece of it.

Because you have -- you know, you have hand-helds you know dropping some but you have, you know, printing and imaging increasing and those have very similar margins.

So those are sort of offsets to each other.

So there really wasn't much of a mix difference this quarter.

What's working is two things.

One is you know, is operational efficiencies that we just continue to drive at the -- you know, at the factory level, but the single biggest reason for the increase margins, not only this quarter but coming up, is all the other initiatives that we have going on.

I mean, working very hard, our network services group was more profitable this quarter than it's been in the past, and design services are doing better, and so on.

The vertical integration piece is working fine.

Circuit boards have been very strong as we talked about at the analyst meeting.

You know, those are higher margin businesses.

So what you're really seeing is the strategy that we've been driving around vertical integration, design services, operational efficiency just continues to kick in and do a little bit better.

If you look at where we stand now at 3.2% operating profit, you know versus 1.7% two years ago, we're still planning to drive this to 5%.

If you look at that, that's not going to happen by mix.

Because margins you know, margins in the end markets, you can get a little bit of gain in mix and we'll get some margin increase when Nortel is in place, once it's mature in the beginning Nortel is actually going to depress margins because it -- you know, it doesn't really contribute to profitability in the near term.

It does of course contribute to overheads, which is why we have a little bit of reduction for the next two quarters.

But in any case, the big driver in this Company to operating margins going forward is going to be all of the businesses activities we're engaged in that are not the assembly business.

At the assembly level we are operating very efficiently.

Probably as efficiently as we can.

We can take some overheads down a little bit and we have programs in place to do so we can get a little bit of gain.

We can get a little bit in mix but the primary driver is going to be these other business.

Okay.

Thanks a lot.

Thank you.

Our next question comes from louse Miscioscia with Lehman Brothers.

Thank you.

Michael could you just go to fiscal '06?

Some of us did have higher earnings estimates and I guess we were probably modeling modest increases in gross margin but probably just better operating margin.

Is it basically just, I guess Nortel as you sort of just said, looks like it's going to come in and hit the operating margin line as it takes a few more quarters, you know, three four to get it ramped up?

Yeah, let me elaborate a little bit because obviously this is an important question.

Let me start out by saying that we're not providing guidance for '06.

We're providing guidance for two quarters out.

You know, our business changes month to month.

You know, the September quarter started off a little bit slow, finished pretty strong.

December quarter, a little bit slower.

I mean, within you know, -- I mean pennies within a quarter can change -- I mean, pennies in earnings per share can change in a relatively short period of time.

So what we're trying to do here, and you know, I know because the market tends to be so focused on, you know, these earnings numbers that it's difficult to do what we're trying to do.

But all we're saying is this -- Next couple of quarters, pretty solid.

Our numbers are strong.

We see the numbers continuing to come in about like we expected, give or take a penny or two, which is sort of always going to be the case, I think.

We have built in growth that a lot of people don't have, coming next year.

So we know that from Nortel.

Clearly we've had a -- we've had a one to two quarter shift in those increases.

So you have a little bit of depressed -- you know, depressed number in the early stages.

But really what I'm trying to do, really what we're trying to do is something different from modeling it to that exactness.

It's like this, the -- we're now making real money.

I mean, were making, you know, $100 million after tax.

Our numbers, we expect them to -- we expect to have record profit numbers in the December quarter.

We think we're running the business well and so we're not coming off of bad numbers when we get into next year.

We're not coming off pretty strong numbers.

What we're saying is this -- the S&P 500, if you look at the average S&P 500, the growth expected to be 11% next year, that's what -- that's what's modeled in those numbers.

If you take the top 10% of the companies, the largest companies in S&P 500 are modeled at 10% growth next year.

And what we're saying is 20 to 30% is 2 to 3 times what other well operating companies are doing, and we think that in terms of setting reasonable ranges of expectation, those are the ranges to use.

We are not saying we can't earn a dollar.

We've been very -- we've been very clear about how we would get to a dollar.

We're driving to that.

We have all kinds of internal -- all kinds of internal programs.

You know to get there, to get to $2 and we just spent a bunch of time at the analyst meeting and saying we have a target of $2.

We're going to get there over some period of time for a company our size operating this well, you know, to be modeled -- for people be to modeling 45 or 50% EPS growth year over year is not a reasonable expectation.

What we're saying is use 20 to 30% if you're building models out that far.

We're perfectly comfortable if people want to build their models 2 quarters out all the time which is the guidance that we'll give specifically.

If you want to take a look at a trend for year more than that, and as I pointed out in my text, talking about you know, 18 months from today, which is really difficult, it's not just calendar year.

We're talking about 2006 fiscal year, which is six quarters out.

You can't -- you can't predict that kind of stuff with all the uncertainty that's out there.

But let me be clear about this.

We -- we have good growth in place.

We have good pipelines.

The Nortel stuff is coming along.

You know, we are taking market share.

We think we're going to continue to take market share.

We think we're going make $1 a share, whether it's fiscal 2006 or time shifted a couple of quarters from that.

We think we're going to make $2 a share.

You know, I've spent a lot of time talking to investors an analysts over the six years -- six months to a year where people are saying this is the best they can do and it's obviously not.

Because each quarter we continue to do better and we're going to do better again next quarter.

And we just couldn't feel any better about our business.

That having been said, you shouldn't be modeling 45% growth next year.

You should be modeling 20 to 30%.

When we get closer we're going add another quarter every quarter.

So in January we'll tell you what we think June looks like which will be the first quarter of '06.

If we think that's going to be much better, we'll tell you then.

But it's soon to use numbers like that as place keepers.

Let me flip over to one last question and a completely different topic.

Sure.

There's an article in the Times a couple weeks ago about how running out of tankers to ship oil around.

I was just curious if there's any concern that you might have, as both the price of oil goes up and literally the capacity of ships starts to maybe get tighter as obviously the production of China just goes through the roof given that 50% of your production is from Asia.

Yeah, I mean, that's an interesting question Lou.

I think that -- I'm surprised to be honest, I'm surprised that there has not been more disruption, not because of the oil prices because -- I mean, oil shipped on different kinds of ships than our products are shipped on.

But I'm surprised that with the continuing growth in production in China that we haven't had more shipping dislocations.

Because I've talked about this in the past.

I mean, an inability of ships to get in and out of Shanghai as quickly as other ports for example, because the Shanghai's not as big a port as Hong Kong and Singapore and as production is shifted or grown -- I wouldn't say shifted, but has grown more the Shanghai area, I'm surprised that we've been able to manage that as effectively, we the industry -- electronics industry has been able to manage that effectively.

So far there haven't been any real disruptions.

I think that going forward we have a belief, and we talked about it a little bit at the meeting, we have a believe that over time this shift to China specifically, not just Asia, but the shift to China specifically will back off some.

And I think -- because you will have higher cost of transportation and higher costs of security, and in the longer term, there will probably be some adjustment in the currency.

So we plan our business at Flextronics around continuing to build capabilities, particularly in eastern Europe and in Mexico, which is where the shift will come.

We're in quite good shape in those places.

We have big operations.

And at some point any of these kinds of dislocations, whether it be because of oil tankers or because of, you know, shipping in and out of Shanghai or just because of general transportation costs, at some point this will normalize a little bit and you will see some movement into these other regions of the world and we're well set up to accommodate that.

And predicting it beyond that is hard to do.

Okay.

Thank you.

You bet.

Thank you.

Our next question comes from Patrick Parr with UBS.

Good afternoon.

Good afternoon.

Michael, with the Nortel business coming in around the 2.5 billion range, plus or minus for -- and most of it now looking like it doesn't show up until '06, that would kind of give you 15% top line growth built in.

Right.

Your comment about this being a massive undertaking is a point well taken, but I'm wondering, you know, do have you a bandwidth constraint then in terms being able to pitch additional business or take on additional business?

Well, the answer is sort of.

I mean, it's a hard question to answer.

That's why I actually wanted to make the point because I read some of the things that people write and it's like, that's 15% as though those somehow put to bed and so then we could have another 10 to 15% no problem.

You can't do that.

Right.

That's the point I was making.

We have -- we have a lot of capacity in the world, so the bandwidth tends to be kind of people driven in the sense of -- I mean if somebody else came in and said, we have another $2.5 billion of business we would like you to take next year, I think it would be fair to say we would not be able to do that.

I mean, to take on another massive increase is -- you know, we'd have to time shift it a little bit because you got all kinds of activities going on all these factors as I pointed out.

If you get more -- you know, cell phone business that comes in or more printer business coming in, there's no constraint there at all.

Because you're talking about the same people, the same systems, you know, the same processes, so there's really no bandwidth constraint there.

We run that business very effectively as can you see from the numbers.

Okay.

But when you talk about -- everybody has to remember that, you know, prices drop every year, so you know you're always replacing, just to be on par to have the same revenue year over year, have you to replace, you know, 10 to 15% of the business anyway, which we've done very effectively and some of the competitors have not.

That's why the revenues have dropped a bit.

But -- so you already have just to be at revenue -- at revenue even, have you to have growth in the basic customer base, which we expect.

If you bring on major new customers, which at our size, you know, have you to have either a bunch of smaller customers or a couple of really big ones, you just can't layer that right on top because the customers won't want you to either.

Customers aren't going to come and go here's a billion and a half, could you please ramp that when they know we're in the middle of a big ramp already.

This is not an enormous event, but I want to remind everybody that this is a big undertaking and we want to make sure we do it exactly right.

You're probably talking about a couple of quarters shift before you can -- you know, some of these places could take on additional business.

So it's sort of a half -- half answer.

But there are some limitations for sure.

Okay.

Great.

Thank you.

Uh-huh.

Can I -- just remind everyone that the guidance is shown substantial growth over the Nortel business as well, so we are picking up business from various smaller customers and general customer growth as well.

So there is some good growth over and above Nortel that is not going to be stretching our resources too much.

That's right.

Thank you.

Our next question comes from Steve Savas with Goldman Sachs.

Thanks very much.

Good evening, Michael.

Good evening.

I guess I wanted to just follow up on December guidance and kind of your macro comments there.

Your guidance is essentially flat up to 7%.

I think last week a competitor kind of got it to the narrow range of down 5% to up 7%.

Uh-huh.

But what their comments were on the macro environment was unusually high volatility and unusually low visibility in the macro environment.

I know mix of business is different for what you have, but it sounds like you disagree with that characterization.

I don't know if I disagree with it.

I don't view it as highly volatile and I guess I do disagree with it.

I don't -- I mean, there's some volatility.

Let me see if I can add a little bit texture.

First of all, you know, we're bigger than most of the other guys.

So everybody should remember that we have more of a spread of business naturally.

I mean, we naturally have a little bit more of a governor built into ups and downs, if you will, because if you know, if you have 50% of the business with three customers, one of those customers you know, comes in with some bad numbers, it's pretty hard to recover.

Ours is not that way.

Hand-helds were down some in the September quarter but printing and imaging was up.

Classic advantage of having a very broad base.

I think that -- I think that the communications industry being flat is pretty known at this point.

I mean, I've seen -- you know, I don't spend as much time looking at some of this stuff as I'm sure some of you guys do.

But most of the announcements out of the infrastructure guys have been flat up to 5% is what their expectations are.

And I think we see that.

So I think that this quarter and the December and March and for that matter '06 are probably today look a little bit different from what those companies had thought they would look like last summer.

But again, I don't think that's a huge change.

I mean, you know, whether it's flat to up 5% as opposed to up 5 to 10% is not that big of a -- of a move for us.

The consumer side is -- it's a little bit slowed down.

But again, I wouldn't say it's that volatile.

I mean, we can see it.

We just have a pretty good what this quarter is.

That's why we're giving guidance around it, the numbers that we see for the March quarter are pretty solid.

So I don't think it's highly volatile, really.

It slowed down.

If you look at September -- I think everybody on this cull understands that these things sort of ebb and flow, and you know, the September -- the September quarter in July started out a little bit slow because there was all these announcements and flurry of bad news at the end of June and maybe people got a little bit more cautious but that went away pretty quickly and September month come in -- September quarter came in very solidly for us and for a number of others.

Okay.

And then just quick clarification, when you say communications, is that telecom and datacom or -- Or one being weaker?

No.

Its telecom and datacom.

For us, that's more telecom than datacom just because that's a much bigger segment for us.

You know, we do very little work with Cisco and they're a big player in the datacom market.

When people ask me about that, I just always remind everybody to see what Cisco is saying.

Right.

But it's more telecom and I'd say it's a little bit weak but it's not terrible.

I'm not really feeling like these numbers are too terribly weak.

They're just down a little bit.

Okay.

Great.

Thank you very much.

You bet.

Thank you.

Our next question comes from Thomas Hopkins with Bear Stearns .

Good afternoon.

Just looking at March, it looks like with the guidance you've given here on the revenue side, that you're down about 5 .9% sequentially, which is very low for you on the kind of mix of business you have when you look out into the March quarter and you look at you guys historically.

Is that some of the other acquisition revenue, some of the smaller ones that you've done coming in in the March quarter that's going cushion you a little bit or is it because you're not going up as much in December?

Yeah.

Its really because we're not going up as much in December.

I think you're just seeing -- I think this year -- it's different every year.

This year I think it's going to be reasonably flat, up a little bit December over September, down a little bit in March over December.

And I think that's how people are planning their businesses, you know, just to be, you know, on the cautious side.

And you know, the good news, the good news for us, and I'll just take this opportunity to say it again is, you know, we're really starting to make some money now and you know, so we have -- so we're guiding to relatively flat, you know, slightly up revenue in December, but you know, a very good EPS gain again.

And so same for March.

So we're really in a position now where we're earning on the business we have.

We are being more careful about business that we've got.

We're not -- you know, we are not chasing revenue that doesn't come with margins.

We're raising prices where we can.

Things I didn't talk about in today's call but I talked about previously.

We're quite happy to have revenue growing and earnings growing more.

And we're really driving for margins and cash flow now and it's working pretty well.

Okay.

Maybe you or Tom or Bob could -- if you look at Hughes and Chaldal (ph) and some of the other smaller things you've done, can you give us a ballpark for December and March in terms of revenue increments?

I certainly can't and I guess I don't really want to start breaking out those numbers.

I would say that -- I mean, Hughes' numbers are public.

Right.

And it's roughly a $100 million company.

I don't know exactly what they have forecast for December and March but you can see those.

I don't want to get more granular than that, other than to remind investors what we said at the analyst meeting, which is, you know, we aren't doing anything these days that we don't think can increase our margins.

And so that's clearly going to continue to have an effect on the company over --

Okay.

Thanks.

You bet.

Thank you.

Our next question comes from Shawn Severson with Raymond James.

Good afternoon.

Good afternoon.

Michael, was there anything that was maybe a bright spot in the outlook for December or was it really universally weak or was anything doing a little better than expected in your outlook?

Yeah, I mean, you know, profit margins.

No, I mean, in terms of like the end market or your mix of business.

Yeah, I mean, the thing is you -- to be honest with you, I don't think could take much judgment from, you know, -- I mean, from a quarter that's, you know, relatively flat to up a hundred million or something, I think that you know, hand-helds will be a little bit stronger, printing and imaging I said will be weaker because of the seasonal effect has now moved forward a little bit.

But other than that, most of the changes we see are just pretty modest and would be more company-related -- or I wouldn't think there's any big trends in there.

Okay.

And then as you look into March and you know, I know you said that said that you still think the March quarter is be looking okay.

What I'm trying it figure out is it okay on a sequential basis and that you know, the December quarter of course is going to be a little bit light on the revenue side or are you seeing something out there in March that actually shows kind of a -- you know, sequential increase in some of your programs or what makes you think March is better?

Well, as I said and I don't think there's more data to add here.

What I believe and I'm not sure that we can really know to be honest with you, but I think that you have just a flattening of December a little bit better March because that's how companies are planning their business, given the oil prices and the -- you know, the election, all of that business, but there's just not anything -- I think this looks fine.

Whatever the G&P is is growing, 3% or whatever they're going say, it feels to us there isn't really much change there.

There's plenty of data that economists have out there.

So I don't think there's anything more you can glean from our numbers.

I wanted to clarify, when did you sort of see the change in the outlook for December, was that you know, solely in the month of September or was it, you know, earlier than that?

You know, I couldn't say.

There's too many data points that go into this.

Some data points you get, you know, earlier.

Some you get later.

Some change all the the time.

You take guess about -- you know, when customers tell us what they're going to do we make our own guesses about what we think that's really going to be because some customers always miss.

Some customers always surpass and it's just a whole lot of days that accumulate.

Great.

Thank you.

I want to point out that some of that strengthening in the March quarter relative to the December quarter is due to new program introductions that are underway that just happened to hit in that quarter and in the Nortel introduction a ramp up as well.

So it's just somewhat unusual March quarter.

It normally drops off but we have these other factors that are giving it some strength this time.

Okay.

I'll take one last question.

Thank you.

Our next question comes from David Fishrun (ph) with Smith Barney

Great.

I won't ask a question about guidance next year.

But maybe we can talk a little bit about the design business and the components business.

You talked about the ODM getting to a $750 million run rate this year and maybe a billion and a half next year.

So can you just help us understand and I think that you had mentioned that you were maybe resource constrained at the analyst meeting.

Can you help us understand what types of investments maybe you still need it make into next year or have all the investments been made now and now you are just waiting for the revenue to come in.

I would say they're being made.

I mean, we're not going to increase our expenditures at this point.

So when you say resource constrained, is -- what I said is all the resources that we have are fully booked.

That continues to be true.

And just an amount of resources that we are willing to commit to these activities.

We could -- you know, we could add resources, and we are in some places, but we're very busy and so that -- so the expense level won't go up, or maybe it will go up a little bit.

I don't want to make that blanket of a statement.

But the guys are all busy and we will be introducing products, you know, towards the middle part of next calendar year.

And we're just balancing frankly we're balancing the amount of investments we're willing to make for the amount of profits we want to make as a company, just like I think everybody does and we're satisfied.

We've taken some pretty big bets and we've been losing money developing these resource and now we're making a little bit of money.

We are betting some new money in some communications areas.

But we're not going ramp up the expenditures so I think that part of the -- probably the biggest part of the margin increase that we would hope to have next year will come from the fruition from some of these programs.

So in terms of the new products that you're talking about, those are products outside of the handset market then?

That correct Michael?

That's correct.

Then just kind of a little bit on the other components in the PCB enclosure.

Same type of question.

You're talking about PCBs running near peak profitability.

Right.

So as you look out for the next year or two, any additional capacity needed and maybe how much head room is left in the margins there?

Yeah, that's -- print circuit boards are is the highest margin in those categories.

We have some capacity.

We've added some with Chaldal (ph)l.

We've expanded the -- we've expanded the marketplace we can go after.

Capital expenditures in that business are light.

They've been very -- you know, we've made lots of investments in the past.

It's mostly maintenance.

I would expect that the depreciable asset base will drop in that business over the next year.

At some point, probably by the end of '06 we'll have to make a decision whether we want to -- if the business continues to do well, we'll have to make a decision whether we want to make another major capital investment there.

I mean, I think with what we've got in place with a little bit of capital we can still grow earnings in that business by another 40 or 50%.

I think before we have decide to build another whole factory and decide to spend another $70 million or something.

Great.

Thank you very much.

Okay.

No problem.

Okay.

I'm going to just end with saying that you know, we'll -- you know, we will work with people who want to have -- who want to put longer term guidance in place or longer term models in place I would say because again, I want to remind everyone that really guidance for '06, at least as we see it.

This is just talking about what the trends can look like.

The business is operating great.

I mean, you know, investors and analysts make their own decisions based on the numbers out there but as far as we're concerned, we're kind of clicking on all cylinders right now.

We're generating a lot of cash.

Margins are going up.

We feel great about the business.

As you know, we're not doing mid quarter calls.

The next time we'll have this forum will be after the December quarter and hopefully that will be a good one as well.

Thanks a lot for joining in.

Bye now.