Flex Ltd (FLEX) 0 Q0 法說會逐字稿

Good afternoon and welcome to Flextronics' fourth -quarter and year-end 2005 earnings conference call.

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

Today's call is being recorded.

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

I will now turn the call over to Mr. Michael Marks, Chief Executive Officer.

Thank you, sir.

You may begin.

Thank you, ladies and gentlemen.

Thank you for joining the conference call to discuss results of Flextronics fourth-quarter and fiscal year ended March 31, 2005.

On the call with me today is Tom Smach.

To help communicate the data in this call, you can also view a presentation on the Internet.

Go to the Investors Section of our Web site and select "Earnings presentation".

You'll 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 anticipated capital expenditures, revenues, operating margins, taxes, profitability, cash flow and cash reserves, new customer opportunities, and the expected impact of our pending transaction with Nortel.

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

Information about these risks is noted in the earnings press release, on Slide 19 of this presentation and in our latest annual report filed with the SEC, as well as in our other SEC filings.

In addition, throughout this conference call, we will also use non-GAAP financial measures.

Please refer to the schedules to the earnings press release, which contain the required reconciliation to the most directly comparable GAAP measures.

Slide 3 -- revenue in the fiscal year ended March 2005 was a record $15.9 billion, which represents an increase of 1.4 billion or 9.5% from last fiscal year.

Revenue in the March quarter was $3.6 billion, which represents a decrease of $155 million or 4% from the year-ago quarter.

Slide 4 -- excluding restructuring and other charges, our quarterly gross profit amounted to $263 million.

Our quarterly revenues were down 4%.

Gross profit increased by $24 million or 10% over the year-ago quarter.

Gross margin increased for the sixth consecutive quarter to 7.3%, which also represents a 15-quarter high.

This represents a 30 basis point sequential improvement and a 100 basis point improvement on a year-over-year basis.

Slide 5 -- excluding amortization, restructuring and other charges, our quarterly operating profit amounted to $118 million.

This represents an increase of $20 million or 20% over the year-ago quarter.

Operating margin for the quarter was 3.3%.

This represents a 70 basis point improvement on a year-over-year basis and is the sixth straight quarter of year-over-year operating margin improvements.

Slide 6 -- including amortization, restructuring and other charges, our quarterly net income amounted to $95 million, which represents an increase of $22 million or 31% over the year-ago quarter.

This resulted in earnings of $0.16 per diluted share in the current quarter compared to $0.13 per diluted share in the year-ago quarter.

In the first three quarters of the year, we estimate our annual tax rate at 10%, excluding amortization, restructuring and other charges.

Our tax rate for the year ended at 7%.

As a result, the fourth quarter reflects a positive adjustment for the first three quarters of the year in order to bring the annual rate to 7%.

The fourth-quarter adjustment amounted to $9.8 million, or less than $0.02 per diluted share.

Excluding amortization, restructuring and other charges, net income for fiscal year 2005 amounted to $388 million, which represents an increase of $154 million or 65% over last year.

This resulted in earnings of $0.66 per diluted share in the current fiscal year, compared to $0.42 per diluted share last year.

GAAP net income for the March quarter amounted to $74 million, which represents an increase of 58 million or 364% over the year-ago quarter.

This resulted in earnings of $0.12 per diluted share in the current quarter compared to 3% (ph) per diluted share in GAAP earnings in the year-ago quarter.

GAAP net income for fiscal 2005 amounted to $340 million compared to a loss of 352 million last year.

This resulted in GAAP earnings of $0.58 per diluted share in the current fiscal year, compared to a loss of $0.67 per diluted share last year.

Slide 7 -- return on invested tangible capital improved to 25% from 19% in the year-ago quarter, while ROITC has improved to 8.5% from 8% in the year-ago quarter.

I will discuss these metrics in more detail shortly.

Slide 8 -- we ended the quarter with $869 million in cash, up from $615 million last year.

Including our undrawn $1.1 billion revolver, total liquidity was almost $2 billion.

Our debt-to-capital ratio of 25% is equal to our lowest level in two years.

Slide 9 -- we continue to deliver an industry-leading cash conversion cycle, which came in at 14.6 days for the quarter versus 16 days in the year-ago quarter.

As previously announced, during the quarter, the Nortel Systems integration house in Montreal was transferred to Flextronics.

As expected, this higher mix program adversely impacted our working capital metrics on a temporary basis.

We acquired $227 million in inventory as part of this new program transfer.

Excluding this impact, inventory turns would have been 10 times and our cash conversion cycle would have been 12.4 days.

However, it's important to note the effect that -- that the effect on these metrics from Nortel is mitigated on a cash flow basis by longer payables, which are part of the agreement with Nortel.

Over the next several quarters, both of these metrics should reverse somewhat.

Slide 10 -- depreciation and amortization amounted to approximately $92 million and net CapEx was approximately $61 million in the quarter.

Cash flow from operations used approximately $64 million, including a $220 million seasonal reduction in the sales of Accounts Receivable.

The $217 million sequential reduction in cash resulted primarily from the retirement of our Eurobond that had a coupon of 9.75%.

For the fiscal year, depreciation and amortization amounted to approximately $352 million and net capital expenditures were approximately 290 million.

Cash flow from operations generated approximately $724 million, including a $130 million increase in the sales of Accounts Receivable.

Slide 11 -- in addition to world-class working capital management, we continue to improve fixed asset efficiencies.

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

Our annual CapEx increased to $290 million in fiscal 2005, as we bought out some remaining operating leases that expired during the year.

By purchasing these operating leases, we now have much greater flexibility to move capital equipment around the globe to further improve our fixed-asset efficiencies.

Additionally, CapEx was almost $500 million more than depreciation in fiscal 2001, compared to the last three fiscal years in which CapEx was less than depreciation.

We now expect CapEx to be about $200 million and depreciation to be about $300 million in fiscal year '06, which should generate $100 million of additional free cash flow.

Slide 12 -- during the quarter, Asia and Europe decreased to 47% and 33%, respectively, while the Americans grew to 20%.

It's interesting to note that revenue continues to increase in the Americas, which is a competitive advantage for Flextronics compared to our Asia-only competitors.

Slide 13 -- SonnyEricsson represented approximately 13.9% of revenues.

There were no other customers (indiscernible) 10% of revenues in the March quarter.

Our top 10 customers accounted for approximately 59% of revenues in the quarter.

Slide 14 -- before discussing guidance, I would like to take a few minutes to reflect on the quarter.

In many ways, we had a great quarter.

Competitively, we are in terrific shape.

Our major long-term initiatives continue to work well.

These include our industrial parks, vertical integration and design activity.

Our pipeline of potential opportunities continues to be quite robust.

We are optimistic that a number of these opportunities will become reality over the next several quarters and will provide additional growth moving into the calendar 2006.

In terms of revenue and operating profits, we did less than we had expected.

The revenue shortfall was primarily from a significant and more-than-expected decline in handset revenues of $483 million on a sequential basis.

Two customers declined by almost $400 million this quarter, compared to the March 2004 quarter.

These two customers have incurred product share losses in the markets in which they operate.

It is expected that this will continue to hurt our comparisons in the next couple of quarters.

While we expect to show a year-over-year decrease in revenue again in the June quarter also primarily from a reduction in handset revenue, by the September quarter, growth from other customers, including some new revenue in the handset category, will allow us to return to overall revenue growth.

As I indicated, despite a revenue drop, we again improved gross margins and opening profits, which is particularly difficult when revenues decline.

As I indicated, taxes were 7% for the year, lower than we have seen previously.

The good news here is that, going forward, we are estimating potentially lowered taxes and will be suggesting a range of 7 to 10% for FY 2006.

Our lowered tax rate often gets overlooked when analysts compare our results to competitors, yet it is a source of continuing competitive advantage for Flextronics.

Now, let me turn to the all-important issue of new customer activity.

The quarter we just completed was potentially the best quarter ever in terms of being selected for new business from both new and existing customers.

I'd like to outline these in a little detail, because I think it will again help investors to understand that short-term swings in customer demand are out of our control but the long-term revenue is under our control.

In the handset space, we have been selected for an increase in business from a number of customers for both EMS business and ODM products.

In the second half of this year, these new programs will allow us to recover some if not all of revenue that has dropped in this category.

In the printing and imaging space, where growth has also slowed, we added four new customers, which are expected to generate approximately $1 billion in new business when the relationships mature.

Much of this new business is in the laser printer area, which will further diversify our business in this category.

We also added a substantial new server customer, a customer in the computer peripheral space, and we were awarded a substantial increase in business from an existing customer in the semiconductor equipment space.

Together, along with Nortel, these new customers are expected to generate significant new revenue, some of which begins in the September quarter, most of which will begin with new products introduced in calendar 2006.

After a relatively short period with declines in revenue, we should be right back on track with revenue growth in the September quarter and we now foresee revenue growth in the second half of fiscal 2006 and fiscal 2007 that should be better than we have seen for the past five years.

Slide 15 -- now, let me provide an update on the Nortel transaction.

We have decided it is in the best interest of both companies and the related supply chains to spread out the remaining factory transfers to Flextronics.

While this will have an adverse impact on Flextronics' revenues in our 2006 fiscal year, it should have a minimal impact on earnings and most importantly should actually improve cash flows because of the associated invested capital reductions.

In addition, our margins expectations for FY '06 have increased as a result of this revenue reduction that this activity carries a very low margin because of the high material content in system integration revenue.

It is currently expected that the systems houses in France, Calgary and North Ireland will transfer to Flextronics in multiple phases during fiscal 2006.

What we're talking about here is a delay in capturing the systems integration revenues, which involves a very high material content that results in high pass-through revenues with low margins and profits.

However, there will be no delays in transitioning the vertical integration elements of this program, which is where almost all Flextronics' margins and profit opportunity resides.

With regards to Nortel revenue expectations for Flextronics, we generated less than $100 million in revenues in fiscal 2005 when the Montreal systems house transferred to Flextronics in February, and we expect total Nortel revenues to exceed $1 billion in fiscal 2006, growing to an excess of $2 billion in fiscal 2007.

In addition to the scheduled revision, improving cash flow and margin expectations for the current fiscal year, it also spreads the revenue growth over two fiscal years rather than one.

Of course, each facility transfer is subject to customary conditions and regulatory approvals.

They are currently discussing the timing of the cash payments to Nortel based on the expected change to the original schedule.

Slide 16 -- this slide is particularly important, as it shows virtually all of the financial metrics that we use to drive our business.

As annual improvements in these metrics sometimes get lost in the barrage of quarterly details, I thought it would be worthwhile to walk through some of the most important metrics shown here.

I will summarize some of the information for those of you who are not viewing this slide, but the data is so important that I encourage each of you to go to our Web site and look at these numbers at your leisure.

For each metric, we are displaying actual results for fiscal year '03, '04 and '05 and a minimum expectation for fiscal year '06.

First, let's look at revenue.

It has increased each year from $13.4 billion in FY '03 to what should be more than $17 billion in fiscal year '06.

While this revenue growth is modest and while we expect acceleration in this metric later this year and into next, the other metrics to us are far more important.

Excluding restructuring charges, gross profit increases from just over $700 million to more than $1.25 billion with gross margins increasing from 5.4% to more than 7.2%.

Even better, operating profit increases from $270 million to more than $630 million with operating margins increasing from 2% to more than 3.6%.

Excluding amortization, restructuring and other charges, earnings per share goes from $0.31 to $0.42 to $0.56 and to what we now project will be between $0.80 and $0.90 in the current fiscal year, in line with current consensus estimate.

The growth rates and trends for GAAP EPS look even better.

Slide 17 -- with regard to cash flow and returns on capital, we have presented information on earnings, capital expenditures, depreciation and cash flow before working capital changes, which is a measure we use internally to quantify the cash generated to invest back into the business for future growth.

We expect to generate in excess of $585 million in fiscal year '06, which is a 43% increase over last fiscal year.

The slide also includes ROITC, or return on invested tangible capital, as well as ROIC, which is return on invested capital.

While we run our business based on an ROIC model, we present ROITC for external reporting purposes because, unlike most of our competition, Flextronics has not written off goodwill in its past.

So, comparing our ROIC to our competitors' is not a relevant measure.

As a result, ROITC is a current benchmarking metric to use.

In any event, you can see that our returns under both metrics are improving very nicely.

Again, let me encourage you to look at these numbers in more detail later.

Slide 18 -- now let me talk about guidance for the June quarter.

In June, we're currently expecting revenue in the range of $3.7 billion to $3.9 billion and earnings in the range of $0.15 to $0.17.

As noted, the price decrease is based almost entirely on a decrease in handset revenue, along with the push-out of some of the Nortel revenue.

While we are not providing specific guidance for the remaining quarters in fiscal year '06, from the previous discussion, you will note that we expect to be at or slightly above consensus earnings estimates for the remainder of the year.

Now we'd like to address a final but very important issue.

The Board of Directors and management of Flextronics believe that the market value of our company is far below what it should be, based on margins and earnings growth, cash flow generation and with respect to our very strong competitive position.

We're feeling very good about our company and believe that there is a disconnect between what we see and what our investors see.

In an effort to fill that gap and give you a better understanding of how our business works and the strength that underlies our company, we intend to do several things.

First, beginning with the analyst and investor meeting on May 12, we will provide more financial information on our various operations.

Specifically, will break our revenue and financial performance in our core EMS operations, which includes design services and ODM products, assembly and logistics.

We will also provide this data for Multek, which is our printed circuit board operation, for the India-based software products and services operation, our silicon design operation, network services and a rapidly growing cellphone components operation, which includes camera modules and Tannis (ph) lenses and TFT displays.

We believe that, by looking more closely at the details of these various activities, the investment committee will better understand how we are increasing margins and cash flow to build shareholder value.

At a recent meeting, our board reviewed analyses of these noncore EMS operations and has recommended that we evaluate the strategic and financial contributions of each of these businesses and related strategies to increase shareholder value, including potential divestitures, IPOs, spinoffs or otherwise.

Also, I want to remind you that our shareholders have authorized us to buy back up to 10% of our stock per year and our Board has approved the use of excess cash to do just that.

While we are not instituting a specific stock buyback program at this time, we will certainly use that option prudently as cash allows.

With a slower asset purchase schedule at Nortel, the cash flow expectations from the business in fiscal 2006 and the potential sale of some of our assets, we anticipate having cash in excess of what will be required to operate our business.

Slide 19 -- there are real risks of operating this business, which includes a macroeconomic or a technology slowdown among other things.

Please pay particular to this slide in light of current market conditions.

Before I open the call up for questions, I wanted to point out that, earlier this month, FTSE and ISS recently issued a joint press release to announce ratings information on their corporate governance index series.

This rating system evaluates the overall quality of a company's corporate governance policies.

We are pleased to note that Flextronics was named in this release as a highly ranked company for our corporate governance practices.

This reflects, in part, our commitment to uphold the highest ethical standards in corporate governance.

Please see our Web site for additional information on this.

Lastly, in the coming months, we will increase our external communications regarding our long-standing corporate citizenship efforts to demonstrate to investors, to customers and other interested parties our commitment to social responsibility.

Our corporate citizenship efforts are broad in scope with a focus on disaster relief, medical aid, education, environmental protection, health and safety, and the support of the communities in which we operate around the world.

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

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

Operator?

Thank you.

We're now ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS).

Brian White with Kaufman.

Yes, good afternoon.

Michael, could you talk a little bit about, you know, why you saw margin improvement in the quarter and you know, on a revenue basis, a little bit lower than what people are expecting -- why you expect continued improvement throughout fiscal '06?

Yes, there is actually a number of components to it.

One of the reasons that we wanted to present all of this trend information, you know, over a four-year period, including our forecast, is to show that this is a very steady improvement; it's not a this quarter -- you know, as we said, six quarters in a row now of increasing margins and operating profit.

It comes from a number of things, frankly.

Partly, it's just better running of the business, you know, downsizing operations that are not profitable and so on; it comes from the other activities that we have been engaging in aggressively to grow our margins, which includes design services, you know, logistics, ODM products, you know, Multek performance and the circuit board company is doing fabulously well; network services has improved quite a bit; the software business from India is growing in very strong profits and as you roll it all up, we just keep getting better and better at this.

I guess the key message I'm trying to indicate is this isn't a one quarter event; it's been going on for three years.

We think it's going to continue to go on.

We are just running our business better, you know?

Part of it is a mix thing; part of it is bringing on more customers who are -- you know, in which we are earning better margins; part of it is, you know, a decrease in some business that has lower margins and overall.

These are the metrics we are driving, much more than revenue or product or product categories.

But we do this day in and day out around here, look at all the different ways we can grow the margins and profits.

We are doing a good job of it; we're going to keep doing it.

Alex Blanton with Ingalls & Snyder.

Good afternoon.

Michael, a few weeks ago, Jaybill (ph) (indiscernible) had a meeting and gave a figure of $22 billion for the opportunities they had, saying that they would probably count on getting about 20% of that, so that leaves 80% for the rest of you.

There were 12 projects worth $1 billion each in the pipeline.

Can you size your own pipeline?

I assume there's some overlap with theirs.

Sure, it's probably the same thing.

That's probably the same thing.

I mean, you know, one of the things that everybody realizes, you know, there's less and less players in our industry and you know, more and more everybody sees more or less the same opportunities.

Okay, so your pipeline would be of the same magnitude?

Yes, I would say so.

I mean, you know, that's a -- you know, pipeline is not a very definable number because -- I mean, they are not exact numbers, but we have said, on every conference call I think for the last three or four years and continue to believe that there are more Nortels in the pipeline, for sure.

I, you know, indicated today, we've had the best quarter that we can remember, in terms of booking new opportunities and you know, we've probably booked half a dozen or have been selected for half a dozen customers just this quarter alone that we think are $250 million and up.

I'm not naming things that are 50 million.

These are all 250 million and up; a couple of them are probably $1 billion-plus that we just got this quarter.

You know, Nortel is 2 billion-plus; everybody knows about it, which was last year.

There's just plenty more of this.

We've been trying to say, I mean it's true that revenue growth has been modest during the last couple of years for our industry, mostly because there have been some real shrinking markets and you have to grow your way through that, but as I indicated in my remarks, we think we're going to show faster revenue growth in the second half of '06 and the full year of '07, faster revenue growth than we've seen for five years.

That is a reflection of a robust pipeline and our ability to win more than our fair share of it.

Okay.

These are real numbers.

I'm not concerned about them.

The second question -- you indicated about $1 billion transferring to Nortel -- from Nortel next year.

Right.

But you have transferred some of that vertical stuff already.

That's right.

So wouldn't that come out of the $1 billion?

I mean, that would be an inter-company sale at that point.

Yes, that's right, Alex.

The $1 billion that we are saying for fiscal '06 is -- and there's no double counting of that.

And so --.

That's a net figure --.

That's correct; that's a net figure.

So that is over and above whatever vertical stuff you've already transferred?

It includes what we've already transferred.

The $1 billion is -- remember, the only had $100 million in fiscal '05, total.

What we're saying is total fiscal '06 should be around $1 billion, which includes vertical integration and some systems assembly.

But some of that has already transferred, so it wouldn't increase your revenue by $1 billion?

Well, there was 100 million, so you could say that that would be 900 million of additional.

Oh, okay, so 100 million will have transferred; you'll get 900 net increase?

Right.

What you should realize is that, in the March year, we only closed one of the -- one systems assembly operation from Nortel; we closed it relatively late in the quarter as well, so you know, there just hasn't been that much.

It's a total of 100 million from Nortel and including what's already transferred, the total for '06 is expected to be about 1 billion.

Okay.

I will take up the question off-line.

That's fine.

I will just add to that for everyone else's edification, by the end of this fiscal '06, it will all be transferred, so you know, it will be increasing as we go through the year and then in '07, we expect it to be more than 2 billion.

Scott Craig with Banc of America.

Good afternoon.

Just two quick questions here -- first on the Nortel.

Michael, can you talk a little bit about the profitability ramp of that, because you touched on the revenue ramp?

Then secondly, with regards to spinning out assets or IPO (indiscernible) and stuff, can you help clarify that?

Because you guys have spent a fair amount of money buying some of these assets and building up a nice vertically integrated platform and now it sounds like you kind of want to get a little bit away from vertical integration.

Maybe I'm just hearing that wrong, so if you could maybe clarify that, it would be helpful.

Sure.

Let's see.

First of all, on the Nortel stuff, as we indicated, the bulk of the '06 revenues is going to be vertical integration revenue as opposed to systems assembly, although a portion of it is systems assembly.

Both of those pieces of business are profitable for us, but the vertical integration activities are more profitable.

So, this is a business, when it's fully matured, that 4 to 5% operating profit in the range of the rest of our mature businesses (sic), but that's heavier weighted out to the vertical integration and less heavily weighted to systems integration.

So you know, it really comes out exactly like that.

We had 1 billion in '06 and another billion, and extra billion in '07;

I think we get more profit out of the first billion than out of the second billion, but I think the second billion is going to be good business, too, so I wouldn't get overly focused on that piece.

But the vertical integration stuff is going well and clearly, Nortel sees a big advantage from that, so we're just crunching ahead.

You know, the Nortel thing is really on track, you know, it was just too ambitious.

I mean, as we talked -- too ambitious to try and do $2.5 billion over what was essentially -- the original plan was over three months and this is more rational but what we've transferred is going fine and this will all continue to work out well.

In terms of the -- I mean, your question about IPOs and spin-offs and all that kind of stuff is an appropriate one.

You know, we have a very specific strategy that we've built up and we're not planning to undo that.

We think the strategy we have is very good.

We have a lot of pieces here; we have -- some of those pieces are more valuable to our customers than others; some of them are valued more highly by investors on a stand-alone basis than they might be valued as a part of our company.

What I'm indicating is we're going through looking at all of that and if we can increase shareholder value and maintain our competitive position by selling off an asset or two or taking something public, you know, we will do that.

So we're not making any specific commitments to do it, but you know, all companies, when they get to our size and you know are constantly looking at their assets to make sure that they have the right mix, and that's what we're doing and we think there's a couple of things we could probably create some more value to our shareholders if they are sold or separated or maybe just a piece of it is sold.

So that's what we are going to look at.

Steven Fox of Merrill Lynch.

Good afternoon.

Just a follow-up on that question, just to clarify -- when you talk about spinning off assets, would it basically be either involving components, software or the network integration business?

Yes, I'm just not going to give any more specific information than that on today's call.

What we will do at the analyst and investor meeting is we'll give you a lot of information about these businesses; we will give you some financial information; we will give you some strategic information; we'll take each of the sections of our business that we are able to talk about separately.

We are going to give you information about what's the underlying revenue profitabilities the business saw, what the competitive dynamics are in them, which things work best with our business, which things work less-well with the business.

You know, we've done this before, and we've broken out, you know, we've broken out -- we've showed you the Multek numbers before; we've show you the network services business, logistics business, some economics around ODM.

It's pretty clear to us that, just from going around the country and talking to investors and talking to analysts, that we are somewhat a hard company to understand, and we are absolutely committed to making sure that the investment community understands the various pieces.

I mean, I always get questions every quarter when I'm out talking to investors about how are we improving margins.

I say, we are improving it the way we told you we're going to improve it, but it seems difficult to understand and we are going to try to provide much more information around this and how we think about these segments.

I mean, we couldn't be more pleased with our own performance in terms of, you know, just growing margins, growing profits.

GAAP earnings are now very close to non-GAAP earnings.

Cash flow is good.

Our cash gets better every quarter and our stock goes down every quarter.

So, while we are not panicked about that, we are not driven to slit our wrists by watching our stock go down.

We do want to make sure that investors understand that we are committed to our shareholders and to creating value here to shareholders and to customers.

We don't intend to sell off pieces of our business that we think customers want to buy from us altogether in one package in order to drive the stock price up.

That's not what I'm suggesting.

So we're going to give you a lot more information, try to give you as much transparency to our thinking and what's behind these things and talk to you a little bit more about which things we think we might be better off turning to cash and using that cash to pay down debt or buy back stock or make acquisitions, or invest in deals like Nortel.

So, that's our plan.

Michael, this may be a question better left for the meeting as well, but the Hunhai (ph) spin out, how much does that affect your strategy, or how does that change the competitive environment in your opinion?

Well, I don't think it changes the competitive environment in our opinion at all.

It is the kind of -- it is one of the options we see, which is if you know about that and maybe not all the investors on this call know about this -- and basically what (indiscernible) did was they took a portion of their business, which was everything connected to cellphones, cellphone assembly, plastics, some other things -- which is a very fast-growing business and they sold a portion of it to the public and you know, got a very high valuation for it.

That is a good, solid approach to creating value where investors like focus.

Oftentimes -- not every investor but a lot of investors prefer to buy -- to invest in companies that are more focused in their strategy, and that's what they've done.

That is absolutely a potential for us.

I don't think it changes much, to answer your question.

We still (indiscernible) control the business, they still consolidate the business into their corporate results, and they still sell it as though it's a part of their business.

If we were to do something like that, we would do the same.

That's only one option we have, but I think it's good that you pointed that out, that investors know that that is potentially a way of increasing the overall value.

It's particularly valuable in a business -- like today, if you look at the EMS business, everybody, not just Flextronics but even the competitors that are not doing as well as us, everybody is improving their cash flow, improving their margins, improving their balance sheet, and the stocks just continue to go down.

I mean our stock today sells at about eight times cash flow.

Part of what happens in that environment is people go, that's just a bad business!

I don't want to invest in it; it's a bad business.

When I believe fact we don't think it's a bad business, and there are certainly elements of it that have just staggeringly good fundamentals, and so -- you know, high-growth, high margins and all of that.

So it is certainly an appropriate strategy for management and Boards of Directors to look at.

Are there pieces you can separate that have characteristics that are more attractive to investors, like Foxcon (ph) did with their cellphone business, as a way of creating more value?

That's really what we're -- that's one of the things we are considering, and I don't think it changes much competitively.

Thomas Hopkins of Bear Stearns.

I hate to beat -- continue on the same issue.

What potentially, A, would be the relationship with a division that was IPO-ed was spun-out?

Would they continue to be a supplier?

Would they be a priority supplier?

Then, B, what do you do with any cash resulting from any transaction like that?

Well, for the first part of your question, this is way premature.

We haven't engaged in any IPO activities of anything.

What we are pointing out in today's call is that we understand investors' concerns about our business.

We hear them, I should say.

I guess we don't understand them, because we just continue to improve profits and margins quarter-on-quarter, year-on-year, but -- and all we're pointing out is that this is a potential opportunity for us, so I'm not going to talk about that because we haven't identified anything.

We are just nowhere near being able to answer the question that you've asked.

I will, on the other hand, answer the second part of your question, because I think it's important.

We are generating a fair amount of cash.

A lot of the cash we're generating is more than we need to invest in our business.

What we did this last quarter was we bought back $200 million of debt.

You know, I talk to investors that say, why did you buy back debt instead of buying back stock?

I think that's a perfectly legitimate question for investors to ask.

We did that because it was expensive debt and we wanted to improve the leverage ratio on our company.

So the question is if we have -- you know, we believe, as I said in my comments, we believe we're going to generate cash again this year in excess of what we need.

Just in (indiscernible) operations.

If we sell (indiscernible) assets, we will have even more cash in excess of what we need.

Then the question is, what do you do with that capital?

It's a good question.

The answer, in my view, comes down to there's one of three things.

You either invest it in your business where you can, either because you have growth in the business -- and we are expecting growth.

I want to make sure everyone understands that.

We are expecting faster revenue growth in the future than we've had in the past couple of years.

That takes working capital.

You know, we could invest it in Nortel-type deals.

We're talking to companies all the time.

There will be some of those.

You can invest it in acquisitions if you want to use cash.

So clearly, that's our first choice -- would be to reinvest the excess cash in our business to make it stronger, grow faster and so on.

Second and third uses of cash are to pay off debt and to buy back stock, and I think that the -- which of those one might choose to use, we might choose to use as a company will depend on a couple of things.

It will depend on the maturities of the debt, you know, how much premium you have to pay, if any.

If interest rates go up and the debt goes down, that's obviously a good use of cash to actually make money as opposed to lose money buying back debt like we did this last quarter.

Buying back stock is something you want to consider when your stock is trading where it is today at eight or nine times cash flow; that's a good purchase.

AT 25 times cash flow, that may not be a good purchase.

So all we can do is say those are the three potential uses of cash.

We do expect to have more cash than we need; we do expect to deploy that excess cash in one of those three ways.

We do not plan to just build up cash and let it sit on our balance sheet.

Just a follow-up -- on the handset business, we've seen that Nokia obviously had a very strong quarter and they may have taken some share from Sony Ericsson and Siemens.

Do you feel you have a grip on that?

Are you frustrated that you guys haven't had a primary handset relationship with Nokia?

Is there something there that we don't understand?

Because it seems you are preeminently set up to be the top handset EMS partner with Nokia.

Sure.

Let me just address the handset market, just in general. (indiscernible) that's a very good question, and I am prepared to answer your specific question.

You know, one of the things that we feel good about is we had an unbelievable drop in revenue, quarter -- you know, we did $400 million less business with two customers in the quarter we just finished than we did a year ago.

That's an enormous drop and yet we made up most of that revenue with other customers and we more than made up the profit; we actually showed an increase in margins and profits during the period of time and -- (technical difficulty) -- (indiscernible) I don't know how investors all have to (indiscernible) both by whatever their own orientation is, but from our standpoint, we can't control what happens to end markets.

This is going to happen from time to time.

You know, good companies deal with it and you know, which we have, make money, make more money, keep on going.

We have some periods.

You know, if you look over the last couple of years, you know, most quarters, we've beaten revenue and earnings expectations, and some of that was by rapid growth of some of these customers -- some of the handset -- I'm talking about handsets specifically.

You know, if you remember the first half of last year, Nokia was losing share; they didn't have a flip phone.

If you go back to the December quarter, you know, before that, Motorola lost a bunch of share because they didn't have cameras, and then Nokia, the first half of last year, lost a bunch of share because they didn't have flip phones and now Nokia is taking market share.

It's a very aggressive market with aggressive players, and they will go up and down.

That's really out of our control.

This down was a little bit surprising, but only by magnitude, not by direction.

As I've indicated, we are winning a bunch again and we think we're going to most of that revenue back before the end of next year with some other customers and other activities.

With respect to Nokia -- and you know, you don't get every customer in the world.

You know, we don't have Nokia as a handset customer.

We have Nokia as an infrastructure customer; we have Nokia as a handset accessories customer.

We don't have Nokia as a handset customer, you know.

Wish we did, wish we had every customer, because that would make our business more diversified and more robust.

You know, in the printing and imaging space -- I will come back to your question in a second -- in the printing and imaging space, we've had primarily one customer and we grew really well with that customer.

Then the customer -- you know, the growth slowed down a bit and we just added four new customers, so I think we're going to be in fine shape.

You know, Nokia -- we work on Nokia all the time.

We have a great relationship with them.

We do work with them in our network services business and in a bunch of other categories.

They have not selected us for handsets, and I think that's primarily because they have three handset suppliers.

I agree with them that they don't need a fourth.

So, this is kind of how our business works.

If one of the three that they have stumbles, you know, we are their calling on them all the time.

We continue to do more in the ODM market; we continue to do more in accessories and all of that stuff, and we hope they will pick us someday.

But sure, I mean, we wish we had business with Nokia because, right now, they are going up and you know we are not participating in that.

I will point out that, of the top seven cell phone OEMs in the world, five of them are customers of ours, and that's the good.

I'd like to have seven.

We kind of feel bad, both for our customers and for ourselves, that a couple of our guys lost share this quarter, but it will turn around.

We're not panicked about it.

Bernie Mahon with Morgan Stanley.

Good evening.

A question on the gross margins -- so they were up 30 basis points eventually, despite obviously the revenue shortfall.

I know there was a bit of a mix shift there, but could you just go over maybe some of the other components?

You know, was it more software business, or how the printed circuitboard business is running, and just kind of how you can put together that 30 basis points improvement?

Yes, sure.

I mean, it's kind of reiterating what I said earlier.

I want to point out that we did this gross margin increase during a very large down sequential quarter and of course, we're always down sequentially in the March quarter.

But one of the reasons we provided this trend chart for you is we are expecting gross margins to go up from here, not down, so this is not a one-quarter event.

I think it is important that everybody understands that there's lots of activities that contribute to it.

Specifically, our network services business is better; our circuitboard business is better; our software business is better; some of the design business is better.

We are growing our camera module business and we are more profitable in the core manufacturing part of the business, and we are more profitable in the core manufacturing part of the business because we have ongoing Six Sigma activities, because we have ongoing drivers all around the Company to buy better, to be more efficient, to (indiscernible) customers that we don't make money on, and so on.

So I mean it's a good question.

It's hard to not sort of sum it all up by saying we're just running the business better.

We've been running the business better now for a few years.

I think it's important for investors to hear this -- there's no smoke and mirrors here!

The restructuring, w -- had big restructuring; we had lots of differences between GAAP net income and non-GAAP net income.

That's gone away.

We are a very focused company on driving normal business activities and we're doing it quarter-by-quarter and we intend to continue to do so.

Then, just -- so with the revenue shortfall, I know you have some revenue coming on in the second half of the year.

Do you think you will have to restructure the business at all?

I know some of your competitors are doing that.

What do you think about North America and Europe?

That's a good question.

The answer, fundamentally, to your question is no.

We don't think that there is -- we don't think there's any restructuring that we have to do because of the revenue shortfall.

You know, we -- and I think we've said this consistently -- we did absolutely the bulk of the restructuring we think we need for a very long time.

We got that behind us a couple of years ago.

Actually, last year, if you look at these comparisons of just in the fiscal year we just ended, in the early part of the fiscal year, we still had a bunch of restructuring charges, and so we had pretty big negative GAAP losses.

You know, I wouldn't say that anybody should consider that we are 100% done with restructuring because, you know, situations change here and there.

You know, Europe has been more troublesome I guess for everybody in our business, and it has for us, too.

It's possible to imagine that we would want to close a couple of operations there over time.

You know, North America, we are pretty stripped down; we only have three relatively small operations in the U.S. and then a big operation in Mexico.

But even in Asia, you know, from time to time -- I would say that, from time to time, you could expect a small amount of restructuring.

But anything big or anything having to do, whether it's (ph) a short-term drop in handsets, not at all, absolutely not at all.

All right, thanks a lot.

That's great.

Todd Coupland with CIBC.

Yes, good evening.

I know you've talked about the margin trends, but could you just give us some idea on what are the levers there and if there is risk to the margin, what should we be watching for?

I think it's pretty straightforward.

I mean, if there's any risk to margin, it would be in falling revenue.

I mean, if our revenue holds up the way we see it holding up, our margins are going to be fine or going up.

I just don't think there's a lot of risk there.

Okay, great.

Thanks a lot.

Chris Whitmore with Deutsche Bank.

Michael, I wanted to come back to the new business wins that you expect to ramp in the back half of the year.

I think you said four laser printer or four printer programs totaling 1 billion.

What if we were to take the entire list?

What do you think the annual run-rate would be once fully aggregated?

Well, you know, I mean I'm not going to give you that -- answer that question other than to say that if you take those four, which I gave a number on for specifically, along with all the other customers and the Nortel, I mean what I -- the message I wanted to send -- and I think it's an accurate message -- is that we expect revenue growth after two quarters of year-over-year down revenue growth, which is the March quarter we just finished and June quarter, we expect these things to kick in, we expect revenue growth to start and we expect 2007 to have better revenue growth than we've had for the last five years, so you can go and do the math on that.

The reason we're not being more specific than that are the obvious ones; you are talking about lots of new things; you're talking about projects.

While they are big projects, you know, they are -- they have expectations of when they will come on; they could be slower and some of the products could be less successful.

You know, we are not trying to get everybody focused on this particular customer or that particular revenue dollar.

We are trying to get everybody focused on the fact that our margins will go up as our revenue goes up.

We are expecting our revenue to go up and we're expecting it to go up faster than it has in the last several years.

I think that's as broad a message as -- or I should say that's as specific a message as we are willing to send at this point.

Fair enough.

If I can just follow up?

In terms of ODM business, it sounds like you have some momentum on the handset side.

Can you provide an update regarding your success taking ODM to other product areas?

Yes, I can a little bit.

Sure, that's a good question.

Handsets are the complicated business.

We have parts of the handset ODM business that are not doing as well as we had anticipated.

We have some parts of the handset business where we're still busy actually that we can't figure out how to manage all of the business that we've been able to win.

We are ramping it up in certain areas, and so that's been a mixed market for us, but overall, we're feeling pretty good about the direction we're headed.

We consider the camera modules to be an ODM business.

It's a platform that we've created that are adjusted slightly to meet the needs of our customers that have business growing very rapidly; it's doing really, really well.

We are increasing our business around the printing and imaging space in ODM.

As we've won a bunch of new customers, as I indicated in the call today, a lot of those customers' wins have to do with design activities we are engaged in, so that's another very successful market for us.

You know, we are just in the early stages of beginning to do some work around data communications, and we see some really good opportunities in that area, but it's not a contributor at this point, but we think it will be a contributor in '07.

David Pescherine with Smith Barney.

Good afternoon.

Michael, can you just clarify for us what the new Nortel ramp will look like too the year in terms of when revenues will come in and then also the payments?

I know last quarter you gave us a schedule of the payments by quarter, so can you do that again?

I can't.

It's a good question.

I expect we will be able to do it on the call next quarter because we're just working out the details of that.

We have a rough-scheduled plan for when the plant transfers will be.

We're still negotiating exactly when the payments will be.

They're some uncertainty around the actual transfers because you have unions and various approvals involved and so on.

The Montreal systems house that we took over in the March quarter, we expected it to happen earlier in the quarter than it did.

There's just moving stuff around and we don't have it completely tied down but we will tell you when we do.

I'm not trying to dodge the question.

We just don't have the answers more specifically than the broad brush I gave you.

Okay, that's fair enough.

Then looking at the SG&A line, it looked like the dollars were flat quarter-on-quarter.

Is that a hold-over from some infrastructure that maybe was put in place for Nortel that you weren't able to absorb?

Should we expect that to decline over the next couple of quarters or how will you leverage that line?

Yes, I think it's a good question.

We think we will drive it down as a percent of sales.

We will probably drive the dollars down slightly, but you know, your entire SG&A, they way you run your business doesn't drop in the March quarter just because revenue drops, so that's really what you should expect.

Actual dollars dropping, you know, is a result of a long-term, very hard effort.

But as the revenue is expected to kick up and perhaps substantially so, we think we will be able to hold that line around where it is, which of course will drive that (indiscernible) down as a percent of sales and drive margins up.

That's the plan.

Great.

Then just a final question -- you talked about a very robust pipeline and all of your peers have been talking about that.

Could you maybe just give us some color on specific end markets that you think are actually much more primed for big outsourcing over, let's say, the next one to two years?

Obviously, telecom and datacom was what you got -- you know, you got the last decade.

What are you really seeing as the big drivers over the next one to two years?

Sure.

I can answer that question, and then I will take one more after this.

The way to think about that -- there are really aren't that many markets here that are sizable.

I mean, you have the sort of PC and server market, you've got the handset market, you've got printing and imaging and you have datacom and telecom.

Those are the major markets.

You can look at consumer but it's normally a subset of those, and you can look at automotive, which is happening nicely, but it's still a relatively small market.

So it's not really an end market as much as it's customer specific.

If you look at where the major outsourcing activities have come from, they've come from companies that are not generally -- have come from companies that are struggling in their businesses.

You know, the big outsourcing project that we've done in which we're -- Ericsson, which is now Sony Ericsson, Xerox, Nortel -- those activities are initiated when the companies weren't doing as well as they wanted to.

Fortunately, you can see that Sony Ericsson since that has done really, really well and Xerox since then has done really, really well and we expect Nortel is going to do really, really well.

So the way to think about that if you're investors and want to understand where it's coming from, it's most likely to happen in big chunks from companies that are struggling.

I think you can get -- you can find companies struggling in each category.

So if you kind of did a matrix -- if you were to do a matrix of who is struggling and who has got a lot of their manufacturing in-house, you can assume that that is a high likelihood that that company will likely do more outsourcing.

That doesn't mean that the companies doing well won't do it as well, but that's where I think the bigger chunks are going to come from.

We see companies like that in every category.

I think you could argue that there is more now than ever because the technology markets are more maturing, there's more companies that are kind of doing okay but are really looking for ways to increase their margins, and this is on everybody's list and they are looking for ways to increase cash and increased margins.

That's why I think we are all feeling pretty bullish, because we're talking to companies that want to do more.

That's very helpful -- (multiple speakers).

Okay, one more question.

Thanks!

Mike Walker of First Boston.

Just a quick question on the organic end market environment -- it looks like you're looking for organic business to be up about 3% or 3 to 4% in fiscal '06, which is about what it was last quarter as well.

I'm just wondering what your kind of overall viewpoint is on how demand is tracking.

Yes, I will -- and that's also a good question that nobody else has asked.

You know, end markets are okay, they are just not great.

I think that, you know, we don't have much more data than you see in everybody's reports all the time.

There's just not rapid growth.

They're some customers that are doing very well.

There's obviously, as we were indicating, some big pieces of business coming our way, which are mostly, mostly inside of companies, a little bit that are transfers from other companies.

But I think the big driver for the EMS industry, over the next year or two, is going to be more of that new business coming into the industry rather than rapid growth -- rather than rapid end market growth -- because I don't see it.

I mean, you do have a lot of unit growth in some of the end markets, but the ASP declines are offsetting it pretty much.

So, I think your number of 3 or 4% of end-market growth is probably about right.

I mean, what we are forecasting, what we said is that we would do -- that we would do more than $17 billion in '06.

We did 15.9 billion in '05.

You know, I think, you know, it's 17.5 billion which is probably a more likely number.

That's 10% growth year-over-year, and you know, a 3% market, that means we are winning new business or taking market share or both.

I think that's reasonable to expect and we would hope, as I indicated, that '07 will have faster growth than that.

So that's where it's going to come from.

It would be nice if everybody -- all of a sudden, there was this massive demand across the board but we just don't see it.

I don't think any of you see it either, so that wouldn't be new news.

Thank you very much.

I would encourage two things for the people who are on this call.

One is to attend our Analyst and Investor Day to the extent that it's doable.

It's out here in California this time of the year instead of in New York.

We are going to try to give as much information as we can, much more than we can give in a 30-minute call like this.

I really would encourage, again, everybody to go look at these numbers -- if you were not following our call on the Web site or even if you were -- to look at all this trend and data.

These are the numbers we're going to be talking to the investment community about over the next year.

We are just absolutely focused on the basics of our business to grow all the important metrics.

We're growing them nicely.

EPS up 50% this year and the year just finished over the year before, and we're expecting it to be up at least 30% in '06.

We think those are stunning numbers and we think trading at eight times or nine times cash flow doesn't register those kind numbers.

We're going to try to make sure everybody understands them and hope that helps a bit.

Thanks very much for listening in.

We will talk to you all soon.

Thanks.

Bye.