Flex Ltd (FLEX) 2006 Q1 法說會逐字稿

Good afternoon and welcome to the Flextronics first quarter earnings conference call.

All lines will be on a listen-only mode 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'd now like to 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 the results of Flextronics' first fiscal quarter ended June 30, 2005.

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

Go to the Investor Section of our website and select Earnings Presentation.

You will need to click through the slides so we will give you the slide numbers we are referring to.

On the call with me today are Tom Smach and Mike McNamara.

As you know, at our investor conference in May, I indicated that I will retire as CEO of Flextronics and will reassume the Chairman position in January 2006, at which time Mike McNamara, our Chief Operating Officer, will become the CEO.

When this announcement was made, we outlined the fact that Mike currently runs almost all of the business outside of some operations that we are divesting.

As a consequence, I've asked Mike and Tom to handle the majority of this call to discuss our business, and I will wrap up at the end with a few comments and an outline of the progress we have made on the divestitures.

Mike?

Thank you, Michael and good afternoon, ladies and gentlemen.

If you go 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 transaction with Nortel, and our divestitures of FNS and Flextronic Semiconductor.

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

Information about these risks is noted in the earnings press release, slide 16 of this presentation, and in the risk factors and management's discussion and analysis section of our latest Annual Report filed with the SEC, as well as in our other SEC filings.

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

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

Slide 3.

Revenue in the June quarter was $3.9 billion, an increase of $17 million over the year-ago quarter.

During the quarter, Asia and the Americas increased to 50% and 22% of our total revenue, respectively, while Europe decreased to 28%.

It is interesting to note that revenue in the Americas has grown for eight straight quarters.

Our global capabilities are a competitive advantage for Flextronics compared to our Asia-only competitors.

The revenue associated with each of our market segments grew sequentially on a dollar basis, with the exception of IT infrastructure, which declined very slightly.

Additionally, our industrial, medical and other segment grew 34% year-over-year and is at an almost $2 billion annual run rate.

Sony Ericsson was the only customer in excess of 10% of revenues in the June quarter.

Our top 10 customers accounted for approximately 62% of revenue in the June quarter.

Slide 4.

Excluding restructuring and other charges, our quarterly gross profit amounted to $279 million, while quarterly revenues were flat, gross profit increased by $32 million, or 13% over the year-ago quarter.

Gross margin increased 80 basis points to 7.2%, from 6.4% in the year-ago quarter.

Slide 5.

Excluding amortization, restructuring and other charges, our quarterly operating profit amounted to $139 million, which represents an increase of $26 million, or 25% over the year-ago quarter.

Operating margin for the quarter was 3.4%.

This represents a 70-basis-point improvement year-over-year and is the seventh consecutive quarter of year-over-year operating margin improvement.

Slide 6.

Excluding amortization, restructuring and other charges, our quarterly net income amounted to $100 million, which represents an increase of $21 million, or 27% over the year-ago quarter.

This resulted in earnings of $0.17 per diluted share in the current quarter, compared to $0.14 per diluted share in the year-ago quarter.

After tax amortization, restructuring and other charges amounted to $41 million in the current quarter, compared to $4 million in the year-ago quarter.

As a result, GAAP net income for the June quarter amounted to $59 million, compared to $74 million in the year-ago quarter.

This resulted in earnings of $0.10 per diluted share in the current quarter compared to $0.13 per diluted share in the year-ago quarter.

Slide 7.

Return on invested tangible capital improved to 25%, from 18% in the year-ago quarter.

While ROIC has improved to 9%, from 8% in the year-ago quarter.

Slide 8.

We ended the quarter with $830 million in cash, up from $665 million at June 30, 2004.

Total debt decreased by $217 million since June 30, 2004.

This represents a net debt reduction of $382 million in the last 12 months.

Including our undrawn $1.35 billion revolver, total liquidity was a record high of $2.2 billion.

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

Slide 9, cash conversion cycle came in at 20 days, versus 19 days for the year-ago quarter.

As previously communicated, our transaction with Nortel was anticipated to increase our cash conversion cycle, due primarily to lower inventory turns associated with such a large, complex program.

Slide 10.

Depreciation and amortization amounted to approximately $90 million and net capital expenditures were approximately $53 million in the quarter.

Cash flows from operations generated approximately $52 million, including a $64 million reduction in the sale of accounts receivable.

Slide 11.

In addition to world-class working capital management, we continue to prove success at efficiencies, as well.

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

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

Compared to the last three fiscal years and the most recent fiscal quarter in which CapEx was less than depreciation.

We continue to expect CapEx to be about $200 million and depreciation to be about $300 million in FY06, which should generate $100 million of cash flow this year.

I will discuss, specifically, expansion activity shortly.

Slide 12.

Before Michael discusses guidance, I'd like to take a few minutes to reflect on the quarter.

The quarter included a one-time tax benefit of $3.2 million, as a result of renewing our Malaysia pioneer tax status for the next 15 years.

We continue to expect our tax rate to be in the 7% to 10% range for the year.

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

Competitively, we are in great shape.

Our major long-term initiatives continue to work well and we continue to see customer adoption of our vertically-integrated EMS services, which incorporate design, components, manufacturing and logistics.

The ability to provide all of these activities from our industrial parks is a big competitive advantage.

Our pipeline of potential opportunities continues to be robust.

We remain optimistic that a number of these opportunities will become reality over the next several quarters and will provide additional growth in calendar 2006 and beyond.

Some of the new programs came in a little bit faster than expected in the June quarter, which drove revenues to the high end of our range.

Despite the higher new program revenue, operating margins didn't improve due to typical new program start-up costs, as it normally takes a couple of quarters to achieve full profitability on these new programs.

Let me put our new customer activities in perspective.

Excluding divestitures, we expect FY06 revenue growth of approximately $1.4 billion, using the mid-point of our revenue guidance.

In order to achieve this revenue growth, it includes the recovery of approximately $1.1 billion in lower handset revenue from certain customer market share losses, meaning we are expecting to ramp up approximately $2.5 billion of new business in FY06 and we expect even more growth in FY07.

New business wins that are ramping up in FY06 and FY07 include Nortel, a $2 billion program, and Kyocera, a $1 billion-plus program.

In addition, we expect business from a number of handset customers, from both EMS businesses and ODM products.

As mentioned in the last quarterly conference call, we are also making significant progress diversing our [inaudible] imaging business away from inkjet printers.

While we expect only $100 million of revenue contribution from these new programs in FY06, we expect more than a billion dollars of incremental revenue contribution on a run rate business from these new customers in FY07.

We've also added three new server and storage customers, 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.

Once again, we expect little revenue contribution from these customers in FY06, but also we expect more than $1 billion of incremental revenue contribution from these customers in FY07.

As you would expect, we are very busy working on the infrastructure needed to support this growth.

We're adding almost 1.5 billion square feet -- I'm sorry, 1.5 million square feet in Asia, for domestic activities, two clean rooms in Asia for component activities, three factories in Asia for Multek, along with many other expansions around the world, such as adding approximately 350,000 square feet in Latin America.

Slide 13.

In addition to the infrastructure activities just mentioned, we are also working on the Nortel infrastructure requirements.

We continue to expect total Nortel revenue to exceed $1 billion in fiscal 2006, growing to in excess of $2 billion in fiscal 2007.

We expect that the remaining system houses will be transferred from Nortel to Flextronics in multiple phases, finishing during the March 2006 quarter, consistent with our last update.

Each facility -- each transfer is subject to the customary conditions and regulatory approvals.

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

We did make an installment payment of $63 million in the June quarter.

To date, we have made total payments of approximately $140 million, leaving an estimated balance of approximately $500 million to $550 million that we expect to be paid in installments over the next five quarters.

I am going to turn the remainder of our prepared comments back over to Michael.

Okay, thanks.

Slide 14.

As previously announced, we have entered into a definitive agreement to merge our network services division with Telavie, a company wholly-owned by the Altor 2003 Fund, a Nordic private equity firm.

Flextronics will receive an upfront cash payment, deferred, and contingent payments and will also retain a 30% ownership stake in the merged company.

We've also entered into a separate agreement to sell our semiconductor division to AMIS Holdings, the parent company of AMI Semiconductor.

Both divestitures are progressing according to plan and are expected close during the current quarter.

We expect to receive approximately $550 million in cash.

When we announce financial results for the September quarter, we will update you on the specific impact on our balance sheet and income statement, as a result of these divestitures.

We expect to use our available cash for working capital as needed, to fund core growth opportunities, or be redeployed back into our capital structure.

We intend to finalize the use of available cash after we complete the divestitures, taking into account current market conditions and a comprehensive analysis of our options to maximize earnings and long-term returns for our shareholders.

I want to emphasize that divesting some non-core activities does not mean we are moving away from our vertical integration strategy.

Vertical integration activities that complement our EMS capabilities currently include design, which includes original product design, or ODM, components, printed circuit boards, enclosures, and logistics and reverse logistics.

At this time, we are not proceeding with any other divestiture plans, although we will continue to review our options regarding non-core businesses over time.

Slide 15.

With regard to current demand trends, I would characterize it as being consistent with our summer seasonal expectations.

We are experiencing a normal and, as expected, July and August and expect things to strengthen as we move into September.

For the September quarter, we are currently expecting revenue in the range of $3.8 billion to $4.2 billion, and earnings in the range of $0.18 to $0.21 per diluted share.

For fiscal year 2006, we are currently expecting revenue in the range of $16.4 billion to $17.5 billion, and earnings per diluted share in the range of $0.80 to $0.90.

These ranges are the same as we provided at the analyst meeting with the exception that the revenue range has been widened to reflect the pending divestitures.

Earnings estimates are unchanged.

Slide 16.

Risk factors are real risks of operating this business, which includes macroeconomic or technology slow down among other things.

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

As the operator begins to poll for questions, I want to mention that we will be hosting our fall analyst meeting in New York City on November 8.

Additional details on the meeting will be forthcoming.

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

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

Operator?

Thank you.

We are now ready to begin the question-and-answer session. [ OPERATOR INSTRUCTIONS ] Our first question comes from Scott Craig of Banc of America.

Hey, good afternoon.

Michael, can you maybe discuss how much you have assumed for those divestitures as we go out -- or I guess how much have you taken out of -- of guidance to sort of help us clarify --

Yeah, sure.

And secondly, just as -- I guess we can go with that and then I will follow up.

Okay.

The -- the range of revenue we gave in -- at the analyst meeting was $17 billion to $17.5 billion.

Now the range we're giving is 16.4 to 17.5.

So, we just changed the low end of the range by $600 million.

There's some movement in these numbers because we're not exactly sure when we're going to close them.

So, we will be able to tighten up things when we do the September number.

But that's about -- that's the low end of the range, come down about $600 million.

But revenues were better in this quarter than we had expected and that could continue, so, we might still have the same revenue, we will just have to see.

All right, and just a follow-up on all this new business that you guys have been booking and expect most of it to ramp in fiscal '07.

Is this type of business going to be ramped, you know, by halfway through fiscal '07 or more late '07?

Can you maybe provide just a little bit of color around that on what you see now?

Thanks.

Sure.

Mike, why don't you do that one?

It's -- we're actually making quite a bit of progress across a broad set of industries.

And some programs are more complex than others.

So, it's really a range across things.

We don't expect everything to be hitting, you know, right in April of -- of, you know, at the beginning of our FY07.

We actually -- some of the programs are actually very substantially, very complex and actually require a lot of design content.

So, typically those programs tend to take a little bit longer to ramp.

I would say it will be across FY07 as opposed to everything will be done and ready and fully ramped by the beginning of FY07.

So, it's really a broad range of industries -- so, it's really not a real clear answer to be able to give you on that.

Just to add something to that, you know, some of the ramps, of course, are taking place now.

I mean that's why the -- that's why the revenue we've been able to offset the decreases in handsets and, of course, Nortel is, you know, well under way in terms of its ramp and it's just pretty steady between now and next year.

So, I think they've kind of come in in different periods of time, but some are starting now.

Thank you.

Uh-huh.

Our next question comes from Lou Miscioscia with Lehman Brothers.

Okay, thank you.

Michael, could you maybe go in and help us out a little bit more with inkjets and cell phones?

I think both these areas have been impacted to a certain degree.

I think we're pretty familiar -- [ indiscernible ]

Mike, could you hear that?

I lost --

No, I couldn't, it was all static.

Lou, we could only hear the beginning of that.

I did hear you say that could we talk to you about inkjet and cell phones because they've been impacted, you know, by a number of things.

I think we can speak to that without really understanding the rest of the question.

Do you want to talk about that, Mike?

Yeah.

You know, inkjets themselves, we're actually experiencing pretty steady demand.

We don't anticipate any major changes from one year to the next.

So, I'd call that pretty stable.

With the pretty good upside coming next year for, you know, a variety of different kind of inkjet kind of programs and even, you know, laser and other technologies in the printing and imaging space.

On the mobile phone, you know, quarter on quarter from last year, we're down pretty substantially.

You know, we expect that to completely reverse itself by December quarter.

So, in other words, we expect by the time we have December quarter, we expect our mobile business to be the same place it was last year and fully recover from some of the downsides and a lot of that is being offset by either new EMS and ODM wins or its being offset by some of the Kyocera business coming in.

But, you know, the current quarter, we are experiencing some pretty good downside on that.

Okay.

And then just maybe 10% customers in the quarter?

I'll answer that, Lou.

We had one 10% customer and that was Sony Ericsson and that was just north of 10%.

Okay.

Thank you.

Our next question comes from Brian White of Kaufman Brothers.

Yes, good afternoon.

Could you talk a little bit about maybe some of the demand trends in July?

One of your competitors came out and indicated that things slowed notably from June.

Yeah, we haven't -- I don't know if we've really experienced that.

You know, July is always down a little bit, I think just because of the vacations and such and some of the downsides in Europe, but we haven't seen it being anything outside of being very typical.

So, you know, we think the demand stems, while they're not fabulous, I mean we think they're pretty stable.

We're not seeing any real surprises in any of the other sectors outside of the mobile phones, which are more customer-specific.

And so we think things are -- what we see is pretty reasonable stability of the markets.

And Kyocera, which is the first quarter to have a full revenue impact from that program?

We will be probably 80% full in the December quarter and we would be 100% full impact by the March quarter.

Okay, thank you.

Our next question comes from Shawn Severson of Raymond James.

Thanks, good afternoon.

Could you talk about where you stand as far as CapEx?

With the new business ramps coming in, you have a lot of revenue coming in, and say the next 12 to 18 months, I mean is there any expectation for a significant expansion in capacity over the next 12 months?

Well, we are expanding quite a bit of capacity, but we're actually able to -- we still anticipate, as mentioned earlier, that we expect the range to be somewhere around $200 million of CapEx that we'll spend and we're, of course, depreciating about $300 million.

We actually expect, even along with these ramps, that we are going to be able to stay in that range.

So, it's possible that some programs ramp faster than we think or there's more benefit -- higher revenues associated with the programs that we don't anticipate, which could cause more CapEx, but basically the $50 million a quarter that we're spending now is to provide growth for these -- for these additional programs.

We've always had a pretty strong base of buildings and -- and equipment.

It's -- we've never really become very dated in our equipment sets so it provides a lot of growth for the long-term.

So, there's not a huge replacement cycle necessary at flex and a lot of what we're using that $50 billion for is for growth.

And so all the businesses coming in, that's all -- none of that includes any assets, then, obviously, it's just going to be regular incoming business, organic business.

Then, if you look out towards the, you know, the European markets, specifically, is what I'm getting at, is there a lot of deal possibilities out there today?

Or has the OEM divestiture market really -- really taken a break?

You know, there's -- there's still some deals out there.

We're in the middle of some of some those transactions ourselves, with Nortel, which is going on.

I think it's certainly slower than it was back in 2000, 2001, 2002.

It's clearly slowed down, but there continues to be pockets of divestitures, so, I don't think that's actually going to go away.

I think it makes it a little bit harder, especially in Europe, to make some of those deals work for us because some of the conditions we put on taking those -- those additional divestitures are kind of rigorous.

But they're still out there and I would expect there to be some to continue overtime.

Great, thank you.

Our next question comes from Alex Blanton of Ingalls & Snyder.

Good afternoon.

Could you comment on the -- the data com -- I'm sorry, the telecom business in the June quarter, based on your percentages on your slides, $936 million versus $795 million, is that additional Nortel business?

That's up 18% quarter-over-quarter.

Or is that something else?

Because you're not adding -- I don't think you added any new sites, did you?

No.

Can you take that, Mike?

Yes.

The -- the -- some of the communications and IT infrastructure tend to get kind of run together a little bit.

So, it's hard to separate those out entirely, but for sure in the communications, we're seeing very, very nice growth.

And a lot of that is becoming from Nortel.

But we also have a pretty nice position with some of the other customers, including Ericsson's and Nortel and others.

On the IT infrastructure, this is actually a relatively small segment for us, as you know.

And the -- you know, and it's actually a growth area for us, I mean we actually anticipate making pretty substantial progress in this segment.

I mean it's a segment that we've been investing in, trying to diversify in and it's an area that we're focusing on.

So, I would say that the IT infrastructure is going to be a pretty substantial growth area for us.

This is the datacom part?

Yes, well, datacom and servers and storage and those kinds of markets, really all three -- we feel we're a little underpenetrated in those markets and we actually are very focused on those markets and we view them as being all upside to us.

So, even though the markets can be relatively flat, we think we can take a pretty good increase as a result.

So, the strength in those markets is more than just the addition of Nortel?

Yeah, I mean I think everything's -- I don't consider them to be really strong.

It's primarily Nortel.

But we're not seeing -- like I said before, you know, just in kind of the general demand trends, I mean we view them to be pretty stable.

We don't view them to be substantially up or substantially down, but no surprise, we're pretty much on track.

Okay.

The other question is going back to something that was asked a couple of minutes ago, your competitor, Celestica, referred to not only demand trends in July, but demand trends for the entire quarter.

It's a little bit early to be talking about September, but they said their indications from customers were that demand for the entire quarter was going to be soft.

Now, it doesn't sound to me like you're seeing anything like that.

Is that correct?

For the whole quarter, not just July.

Yes.

Oh, yes.

I mean we -- again, we -- we don't know exactly how the quarter is going to turn out, but we have pretty good visibility within the quarter and, you know, we're not -- we're not nervous or concerned about the overall industry trends.

We think they're reasonably stable and maybe it's just the product lines that we're in or maybe, you know, we're less nervous over the more traditional, seasonal kind of July/August slowdown that we see in some cases, but we're actually not alarmed to see a downside and maybe we're just making some progress.

We seem to be making progress with the exception of this quarter's mobile phone results.

We're actually, you know, making a lot of progress in a lot of these markets so we're actually pretty bullish on them.

Okay, thank you.

Not the actual industry, but just maybe our progress within those industries.

Good, thank you.

Our next question comes from Steven Fox of Merrill Lynch.

Hi, good afternoon.

A couple of questions.

First of all, you mentioned how your winning business from some of the Taiwanese ODMs.

Is there any sense since the analyst meeting that that opportunity has increased?

And can you describe some of your successes there recently?

Well, we don't like to go into details about those kind of customer wins, particularly with the Taiwanese guys.

But what I would say is we were -- we've provided some bullishness over the opportunity within that marketplace over the last couple of quarters and in our off-site and we continue to see the same kind of trends.

I mean, we view the business opportunities in Taiwan as being high.

Part of those opportunities are a result, not just on our geographic manufacturing footprint and some of the relationships we've built up within Taiwan, but part of it is also the fact that we can penetrate these companies with components and so it gives us another dimension by which to go into the Taiwanese guys and make progress.

We continue to be very bullish about the opportunities in Taiwan and I would say it's really across multiple customer -- potential customers and multiple industry segments.

Okay.

And just looking at the change in the Chinese currency policy, can you discuss, maybe, the near-term effect on your business and then maybe longer term if this turns into a consistent revaluation of the currency over the next 12 months or so?

Those are two different questions.

Tom, can you take the first part of that?

Sure.

So, so in the short-term, with the devaluation of the dollar against most Asian currencies, it puts a little bit of an increase in our cost base, to the extent that we sell in U.S. dollars and procure costs, such as labor, and maybe some local procurement, in Asian currencies.

So, we've done some hedging around that stuff.

Ultimately those price increases need to get passed back through the customer.

That takes a few quarters to run its way through the whole system.

But I -- I think between hedging and being long in some currencies we're going to be able to sustain the next couple of quarters without any material, noticeable impact in our results.

So, we feel okay about it and, ultimately, the costs need to get passed back through the customer.

So, I will take the second half of that if you don't mind.

So, you know, it's an interesting -- it's an interesting issue, of course, it's not unexpected.

I mean we've been planning for some kind of revaluation and, of course, nobody really knows whether this is, you know, going to be a 2% change for a long time or whether that 2%, you know, with the -- with the basket of currencies and floating and so on that China is allowing, whether that doesn't turn into something more significant over time.

We view this, essentially, as a big opportunity for Flextronics.

We've been pointing out in a number of calls, you know, for a year now, and in the -- and in the analyst meetings, that, you know, we're growing our business in the Americas.

We view that the increasing -- potentially increasing costs in Asia to be an advantage to our Company.

We talk to customers all the time about this, that -- that the more global the requirement is for the customers, in other words, the more flexibility they need in their manufacturing system to be able to move around as costs change, the better that is for Flextronics, which has, I mean we may be the best positioned of any company in the world today in terms of having such major operations in all the major markets.

And so we -- we actually would like to see a little bit of a move back from -- from everything moving to Asia.

We're seeing that.

We've now had eight quarters in a row of increasing sales in the Americas -- increasing revenue in the Americas.

So, we think in the longer term, some increase in cost in China is probably beneficial to us.

That's very helpful, thank you.

Yep.

Our next question comes from Bernie Mahon of Morgan Stanley.

Hi, good evening.

Good evening.

Question on the new programs that you're ramping.

Can you just talk a little bit about how vertically-integrated they are?

And maybe versus some of the new programs from, I don't know, maybe a year or so ago?

Yes, I will.

And it's actually one of the reasons we're having some slow ramps -- I shouldn't say slow ramps, but they're much more vertically integrated than they were say two years ago and I would say, you know, by a factor of 2 or 3.

It's substantial -- most of the programs that we're bringing in today are vertically-integrated programs.

And there's a much higher percentage of programs that we're bringing in today that are designed, have design content in them, as well.

So, we're getting involved earlier and the vertical activities we're getting involved with as a result of that, as well, are more robust.

So, typically the programs coming in are vertically-integrated programs.

It's one of the reasons it takes a little bit longer to get ramped up so we're getting involved a little bit sooner.

So, we're actually in our new product pipeline getting more visibility, as opposed to less visibility as a result of that.

Okay.

And then in general, just because they are more vertically-integrated, would the margin structure be a little bit higher and we would expect margins to trend higher as you ramp these?

Well, we hope so.

You know, each -- depending on the program, different -- whether the mechanics are printed circuit boards or assembly or other components, they each carry their own margin structure, that's kind of unique to that business.

So, the bundle of the -- of them tend to carry a higher margin structure, that's correct.

That is the whole idea around our investments in these activities.

All right, now that makes sense.

And just two clarifications.

Tom, could you just say the dollar amount of Nortel business that came in incrementally in the June quarter?

And then also can you give the specific percent of the Sony Ericsson -- I think typically you give the specific percent.

Yeah, so the only thing that we disclose are customers in excess of 10% of revenues and Nortel, obviously, is not there yet.

So, we're not going to give quarter-to-quarter Nortel revenue precise dollar amounts.

I would say there's higher revenue from a combination of both increased vertical-integration, transfers into Flextronics, along with the Montreal factory was transferred mid-quarter last quarter so we had only two months of revenue and we have three months of revenue from the Montreal facility this quarter.

With regard to Sony Ericsson, we have historically broken out the exact percentage of revenues, total revenues, and we've decided not to do that because it's rather unconventional.

I think if you look back, all of our competitors don't pin the precise percentage of total revenues for more than 10% of customers.

They just identify who they are.

And Sony Ericsson, obviously, would prefer not to give that much granularity by us with their business.

I will say, maybe, for the last time and we will just identify it as more than 10% going forward, it was a little bit more than 12% this quarter.

But I think from now on, you can anticipate us just identifying it as a 10%-plus customer going forward.

That's great, thanks a lot.

Sure.

Our next question comes from Thomas Hopkins of Bear Stearns.

Yes, good afternoon, everyone.

Michael, can you talk more about Europe?

I know you and Michael McNamara talked about the overall end market tone relative to the Celestica comments.

But there's been some back and forth on decelerating growth in Europe, you know, from companies like Phillips.

Just looking at your European exposure and some of the changes in your customer base, obviously, Siemens being a less significant customer, how are you guys feeling about Europe going into the second half of the year?

Mike, you can do that.

Yeah, we're actually -- Europe is a tough market for us, for sure.

You can see the Americas undergoing pretty substantial growth and consistent growth quarter after quarter.

You know, at the same time, Europe has gone down to what I think was -- I think we said 28% of revenue going forward -- or in this quarter.

So, that's down from where it was in the past.

I would say on average, Europe has pretty muted demand.

I think the environment over there is not anywhere near as bullish as it is in the United States, nor does it anticipate the growth that you're seeing over in Asia and, you know, geographically, would be clearly a worry spot for us.

You know, alternatively, you know, we're just dealing with those -- those changes as -- as they come up.

We've reduced our European footprint very substantially over where it was two or three years ago, and are continuing to work to get it in balanced, but it is a challenging environment over there.

There is no question.

Okay.

Great, then just a follow-up.

Michael, can you -- at the analyst meeting in San Francisco, beyond the steps that you outlined, you talked about, potentially, looking at other business units, different ideas, IPOs, spinouts.

Any further thinking on some of your other units like Multek and some of your handset components and the software company, et cetera?

Yeah, sure, you know, we have a tender offer out, you know, to -- to pick up the remainder of the software company.

The one segment of our business that's publicly-owned.

We don't own all of it.

We have not come to terms with the shareholders there, and may or may not.

If we -- if we're able to buy the rest of that, it will give us a little more flexibility there.

But we're not in a hurry.

That business is doing fine.

You can see the, you know, we don't break it out specifically at Flextronics, but you can also see some of the stuff we report for the unit in India.

But it's a good business for us and we're not in any particular hurry.

All of these businesses are good.

Multek is just doing terrifically.

It's as strong a circuit board business as there is.

In the world, I think Mike indicated in his comments, that we're adding some capacity to Multek and so on.

We haven't decided to do anything, but we like the business.

The same is true of cell phone components, that's in an earlier stage, but the business is also doing very well.

We're extremely busy and ramping, so, we like all of these businesses and I think that, you know, we -- we will continue to evaluate what the markets look like for these things, as well as the value that we perceive them to be in terms of winning these vertically-integrated programs.

As Mike indicated, you know, most of the stuff we're winning has these elements in it.

And in the businesses.

So, we're certainly not going to -- remember, we have no plans to divest anything else and in terms of taking a company public or something, you know, if we thought there was substantial gain to the shareholders there without reducing our opportunities to bring in new customers, then -- then we will take a look at that.

And we intend to do that.

We intend to do that, you know, over the next year and we're not in any hurry and if there's something that makes sense to us, we will have a look at that.

Michael, why do you think your other U.S.-based vertically-integrated competitor is not having the success at cross-selling components the way you guys are?

Yes, I'm glad you asked that question because I was going to make a couple of comments at the end.

We've been doing this for a long time now, been public for 10 years.

Many of you are new to the story.

Many of you have listened to our story for some time.

You've really got two issues going on here.

I think they're the important ones.

One, is we clearly have a consolidating industry and if you look at -- take another consolidating industry is cell phones, you know, there's been lots and lots of players, clearly they're left all the time.

And the consolidation of the cell phone business has not worked in Flextronics's favor.

It made it more difficult because some of our customers have, you know, have been the consolidatees, if you will.

You know, that's happening in the EMS business.

It's something we predicted.

It's something you can see.

There is clearly a difference now in -- in the companies and some of them are growing, you know, we don't have to name the names, everybody knows them.

Some companies are growing in this environment.

Some companies are not.

I think it's actually fairly predictable at this point.

And the other aspect of it, and it's really in part and parcel to the same issue, is just execution.

You know, we have invested very heavily in our vertical integration.

You know, we have a style of doing business that's different from our other vertically-integrated competitors, with the exception of Foxcom, for the most part, which operates similar to us, which is, our vertical integration all takes place in the same physical locations.

It's a very critical difference to having a -- from having a bunch of businesses in different locations that are essentially elements of vertical integration, to having what Flextronics has, which is those elements of vertical integration all in the same physical locations.

It took a long time to do it.

We had a lot of restructuring to get there.

You know, it required a bunch of closure factories -- closure companies, then we closed a lot of those factories on purpose, moved those into the industrial parks, and now we have these major sites in every continent that have all the vertical integration in one place.

That's very difficult to compete with.

And Foxcom, which has done very well with that approach in Asia, is quite a bit behind us in terms of doing the same thing in both Europe and the Americas.

So, I don't see how -- unless companies make the same level of investment Flextronics has made, and really works at executing and getting all of these things working, I don't see how they can do the same things we're doing.

That's why you're seeing us win more business and it's why we're one of the winners in the consolidation.

Great, thanks.

You bet.

Our next question comes from Todd Coupland of CIBC World Markets.

Good evening, everyone.

Good evening.

Are you able to disclose to us the divested companies' impact for the September quarter?

In terms of revenue?

No, we're not.

And the reason we're not, the only aspect of our guidance and presentation is not, you know, exact and that's because we don't know exactly when we're going to close them.

We have regulatory approvals and stand-alone audits and so on, going on.

And, you know, together, this is, you know, roughly a billion dollars of business and so depending on when -- when the two transactions close can have a reasonable, you know, variability and what the results are.

We do expect them both to close in the September quarter, so, by the end of the quarter, we will be able to give you that and we will.

We will give you a breakout, both of what the impact was on the September quarter and what we expect it to be on the December quarter and going forward.

We just don't have that information yet.

Okay.

And, secondly, it seems like Nortel and Lucent have consolidated their EMS supplier base.

Is this an accelerated trend that you're seeing?

Should we expect more of this?

I would answer that, if you don't mind, by saying something similar to what I -- to what I indicated -- just in my remarks a few minutes ago, which is, yes, we think this is a consolidating industry.

We think that where typically customers have used, you know, four or five, you know, potential EMS players in the past, that in the future they're going to use two or three.

Or in some cases one or two.

I think that's part and parcel, too, consolidating industry, and we think we're benefiting from that, and we think we're going to continue to benefit from it.

And I guess the next logical question from that, if that, in fact, is happening, does it make sense for -- for tier 1 mergers, or do you think the share shifts will just move around and you will have winners and losers?

Well, I think what have you right now, you have share shifts going on right now.

That's reasonably obvious.

You can see in the numbers that there's some share shifts going on.

Most consolidating industries have, you know, I mean you don't have consolidation without -- without some mergers.

You know, there's not that many players in the world.

I think -- we count, you know, really less than 10 players who can really play on a global scale today.

We think that's probably -- there are probably going to be a couple of mergers, I would say, in the next year or two.

Really depends on what the weaker companies decide to do.

They have a choice of, you know, of going after merger opportunities, or they have the choice of continuing to invest in their business and grow them, and I would suggest that of all the tier 1s, there is really nobody that has a balance sheet -- that has a weak balance sheet.

So, I don't think we have to have mergers, because I think everybody has strong enough capital structures that they can continue to play.

The weaker players are generally making a little bit of money.

So, they're really going to have to decide.

From Flextronics's standpoint, we're very comfortable with the position that we're in.

We're clearly taking share.

We've had, you know, to recover from a pretty big downside in some of the cell phone customers, but that's going to happen.

You know, that's the business we're in and that will continue to happen over time, but clearly we're winning share, now we're winning some real share in the infrastructure part of the business, which we're very pleased about, and we will just wait and see how that is.

We, ourselves, are not actively pursuing any kind of mergers and we will just continue to watch the landscape and see what makes sense.

Great, thanks a lot.

You bet.

We will take one more question.

Our next question comes from David Pescherine of Smith Barney.

Great, thank you.

Good afternoon, gentlemen.

So, Michael, can you talk about the Nortel ramp.

With a billion coming in this year and a billion expected next year, can you talk about how margins may be impacted from the initial $1 billion ramp, and then, also, as we move into next year, I think you've talked about a difference in the type of business that's going to move this year and next year.

So, any headwinds you might see with Nortel as we move into next year?

I will let Mike answer that.

I will just make one comment, which is -- I think one of the things that Tom and Mike and I and our management team are the most pleased with about our progress, as a Company, is that our margins have gone up now for seven straight quarters and, you know, that's not an accident.

We work hard at it.

It has to do with running our business better and with, you know, consolidating more business in the industrial parks and having more vertical integration and so on.

So, we're making good progress on that and I think we will continue to be able to do that.

Mike, you want to deal a little bit more specifically with that question?

Yes, I sure can.

The speed at which you achieve full profitability after these projects is really a function of how complex the program is.

And the Nortel program is particularly complicated because we're moving the mechanicals, the electricals, the regular PCPA assembly, that is, the repair, a lot of the distribution activities, we're centralizing and coordinating and there's just huge start-up costs associated with it.

Most programs take about six months to hit maturity and, you know, a program like Nortel could take longer to hit.

When I mean maturity, I mean a full -- you know, our target profitability objective.

Nortel takes, probably, a little bit longer, it's a little more complicated and the task we're undertaking is a little bit more sophisticated.

You know, Nortel alone, you know, as we ramp it up, we're probably in at least, you know, 10 different countries with Nortel today.

And that includes a whole variety of different assembly and vertically-integrated activities.

So, there's just been a huge activity and cost associated with it.

So, I think -- I think the answer is yes.

With any of these programs, as they hit maturity and reach full ramp, you will see increasing profitability and we're seeing that with Nortel.

We're suffering a lot of start-up costs associated with it toda, and we will continue to have some of those start-up costs, but over the next, you know, six quarters, those costs will continue to go down on almost a quarterly basis.

But it's still four to six quarters out.

Great, thank you.

Okay, I think we'll -- we'll wrap it up there.

I will just make a couple of quick comments at the end.

In keeping with the global nature of our Company, Mike was talking to you from Asia, Tom Smach is in San Jose and I'm in Europe.

That's why we're kind of sending the questions back and forth.

We're not all in the same room.

We are feeling good about our business, as you can see.

You know, it's a solid, diversified business, we're able to take the shots we've taken in the cell phone business and continue to move on, so, we think the business is pretty stable.

We haven't changed our guidance for the year and we look forward to talking to you in September.

We would encourage as many of you as possible to join us on the eighth of November in New York when we get to get into the stuff in a little bit more detail and show you more numbers and all that.

So, we look forward to the talks with you in the fall and thanks for joining in.

We will talk to you soon.

Bye now.