Flex Ltd (FLEX) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Flextronics second quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Michael Marks, Chief Executive Officer.

Sir, you may begin.

Thank you.

Ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' second fiscal quarter ending September 30, 2005.

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 will need to click through the slides, so we will give you the slide numbers we're referring to.

On the call with me are Tom Smach and Michael McNamara.

As you know, I will retire as CEO of Flextronics and will resume the chairman position in January, at which time Mike McNamara, our Chief Operating Officer, will become the CEO.

When his announcement was made, we outlined the fact that Mike currently runs all of our core businesses EMS businesses, which have completed the recen--which haven't completed the recent divestitures, now represent almost our entire business.

As we prepare for our transition, I have once again asked Mike and Tom to handle the majority of this call to discuss our business.

Tom the start the call by going through the financial portion, then Mike will provide some commentary on the quarter and provide guidance, and I will wrap up with a few comments at the end, before opening it up to questions.

Go ahead, Tom.

Thanks Michael, and good afternoon, ladies and gentlemen.

Slide 2.

Please note that this conference call contains forward-looking statements within the meaning of the Federal Securities laws, including statements related to the success of long-term initiatives, new customer opportunities, revenue contribution from new customers, margin expansion, growth rate, profitability, anticipated use of available cash, cash flow, and cash reserves.

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

Information about these risks is noted in the earnings release in Slide 14 of this presentation and in the risk factors and management's discussion and analysis sections of our latest annual report filed with the SEC, as well as our other SEC filings.

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

Please refer to the schedules in the earnings press release and Slide 7 and Slide 13 of the slide presentation, which contains the reconciliation to the most directly comparable GAAP measures.

Slide 3.

Because of the previously announced sales of our network services and semiconductor divisions during the September, 2005 quarter, our financial comparisons are somewhat difficult to follow.

Revenue and profits from these divisions earned prior quarters versus part of the September, 2005 quarter for the periods up to the sale date and will not be included in future quarters.

After we give you the actual comparisons, we will summarize the results on an apples-to-apples basis by taking out the impact from divestitures.

Please pay particular attention to this slide, as it contains the results with and without the impact from our divested operations.

Revenue in the September, 2005 quarter was $3.9 billion, a decrease of 254 million from the year ago quarter. his decrease resulted from several items.

First, the semiconductor and network services divisions contributed $187 million of revenue in the September, 2004 quarter versus $108 million in the September, 2005 quarter, resulting in a $79 million less revenue on a year-over-year basis.

In addition, Siemens and Alcatel, two extremely important customers for Flextronics during the past several years, divested their cell phone business to Asian suppliers during the past year.

As a result, our September, 2005 quarter cell phone revenues from these two customers were approximately $250 million lower compared to our September, 2004 quarter.

We continue to believe that new program wins that are expected to begin volume production in calendar, 2006 will be the source of revenue growth in calendar 2006 and 2007.

Mike McNamara will address this more in a few minutes.

Slide 4.

During the quarter, Asia increased on a sequential basis to 57% of total revenue, Americas remains flat at 22%, and Europe decreased to 21%.

With regard to market segments, communications infrastructure decreased from 24% in the June, 2005 quarter to 22% in the September, 2005 quarter, primarily as a result of the divestiture of our network services division.

As expected, we saw a sequential increase in revenue from our computers and office automation segment, increasing to 27% of revenue in the September, 2005 quarter from 24% of total revenue in the June, 2005 quarter, primarily as a result of the back to school purchasing trend for inkjet printers, which are included in this segment.

Consumer decreased from 10% in the June, 2005 quarter to 9% in the September, 2005 quarter, as the June quarter benefited from end of life product bills for Xbox, while we began the ramp up of this product's next generation in the September quarter.

Handsets increased from 24% in the June, 2005 quarter to 26% in the September, 2005 quarter, as a result of on overall demand increase in this product segment combined with the ramp up a new program from Kyocera.

Industrial, medical, automotive and other decreased from 12% in the June, 2005 quarter to 10% in the September, 2005 quarter, as a result of the divestiture of our semiconductor division combined with demand reductions from one of our automotive customers.

Sony, Erickson and HP were the only customers in excess of 10% of total revenues in the September, 2005 quarter.

Our top 10 customers accounted for approximately 61% of revenue in the quarter.

Slide 5.

Gross margin increased 30 basis points to 6.8% from 6.5% in the year ago quarter.

Operating margin increased 20 basis points to 3.4% from 3.2% in the year ago quarter, representing the eighth consecutive quarter of year-over-year operating margin improvement.

Slide 6.

Excluding amortization, restructuring, and other charges, our September, 2005 quarter net income amounted to $101 million, which represents an increase of 3% over the year ago quarter.

Earnings per diluted share amounted to $0.17 in both the September, 2005 and 2004 quarters.

Slide 7.

During the September, 2005 quarter, after tax amortization amounted to $15 million and restructuring charges amounted to $45 million.

We also took a $15 million reserve against our accounts receivable from Delphi, who recent filed for bankruptcy.

Our total pe--prebankruptcy petition accounts receivable from Delphi amounts to approximately $45 million.

It is important to recognize the considerable amount of judgment required to assess the ultimate realization of these prepetition receivables, and we will continue to monitor and reevaluate their collectability.

We've used our best judgement in determining the appropriate reserve, based on the information currently available.

The network services and semiconductor divestitures resulted in a pre-tax gain of $71 million.

We recognized a non-cash past expense of $99 million, resulting in after-tax loss on these transactions of $28 million.

The $99 million tax expense is a non-cash charge associated with the utilization of deferred tax assets.

After all these items, we reported a GAAP net loss in the September, 2005 quarter of $2 million, compared to gap net income of $93 million in the year ago quarter.

This resulted in zero earnings per share in the current quarter compared to $0.16 in the year ago quarter.

Slide 8.

Return on invested tangible capital improved to 27% from 25% last quarter and 24% in the September, 2004 quarter, while return on invested capital, including goodwill, has improved to 10% from 9% last quarter, and is equal to the September, 2004 quarter.

Slide 9.

We ended the quarter with a record high $1.2 billion in cash, up from $830 million last quarter and $695 million in September, 2004.

Total debt de--total debt has decreased by $197 million since last quarter and by $231 million since September, 2004.

Therefore, net debt has been reduced by $517 million since last quarter and by $687 million since September of 2004.

Net debt is only $439 million at the end of September, 2005.

Including our undrawn $1.35 billion revolver, total liquidity was a record high $2.5 billion.

Our debt-to-capital leverage ratio of 23% is equal to our lowest level in two and a half years.

Slide 10.

Cash conversion cycle came in at an industry-leading 16 days versus 20 days last quarter.

Despite the transition of facilities from to Flextronics, which includes complex communications infrastructure products, which, by their nature, have slower inventory turns, we've been able to maintain inventory at 41 days, which with along with good control over accounts receivable and accounts payable has resulted in this industry-leading metric.

Slide 11.

Depreciation and amortization amounted to $85 million and net capital expenditures were $54 million in the quarter.

Cash flow from operations generated $381 million, including an increase of $79 million in the sales of accounts receivable.

The aggregate cash proceeds received from the divestitures of the network services and semiconductor divisions was $519 million, resulting in a pre-tax gain of $71 million.

I want to emphasize that the cash proceeds of 519 million were received tax free, as the tax expense associated with these transactions is a non-cash charge associated with the utilization of deferred tax assets.

During the September, 2005 quarter, we invested $339 million in acquisition-related activity.

We made an installment payment to Nortel in the amount of $132 million.

As part of our previously announced plan to delist our Indian-based subsidiary, Flextronics Software Systems, previously known as Hughes Software Systems, we acquired a portion of minority shares outstanding for $107 million in cash, taking our ownership to 88% of the company.

The remaining cash acquisition payments relate to various earn out and hold back settlements from historical acquisitions, along with the acquisition of a Brazilian enclosure operation that we expect to produce a very good return on investment.

We also repaid a total of $200 million of debt during the quarter.

To summarize our cash flow for the quarter, we were quite pleased with the results.

Free cash flow, which is cash flow from op--excuse me, precash flow, which is cash flow from operations less Cap Ex, generated $327 million, which closely approximated the 339 million used to fund acquisitions.

The divestitures generated $519 million, which closely approximated the $200 million reduction in debt and the $320 million increase in cash.

As previously outlined, we expect to continue to use our available cash for working capital as needed, to fund positive MPV core growth opportunities or be redeployed back into our capital structure to maximize earnings and long-term returns for our shareholders, including further retirement of debt or repurchase of stock.

We have not yet repurchased any stock because we were restricted from doing so by Singapo--by Singapore law, which is scheduled to be changed in January of 2006.

Until we redeploy the remaining divestiture proceeds, the divestitures are one penny per share diluted, although they have substantially improved our balance sheet and reduced goodwill and tax deferred tax deductions, which are very positive for the Company on a longer term basis.

Thank you, ladies and gentlemen.

I will now turn the call over to Mike McNamara.

Thank you, Tom.

Slide 12.

Before I discuss guidance, I would like to take a few minutes to reflect on the quarter.

This quarter was particularly complex to understand, and we, therefore, tried to provide as much data as possible in order for you to understand the impact these moving parts had on our financial results.

Competitively, we are in very good shape.

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

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

We continue to believe we are executing very well on the controllable aspects of our business, and continue to generate good cash flow and operating profits.

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 revenue and profit growth in calendar year 2006 and beyond.

As outlined in the last quarterly conference call, new business wins at a ramping in 2006 and fiscal year 2007 include Nortel, a $2 billion program, Kyocera--a billion dollar program.

These new programs are going very well, and we continue to be bullish about the other new wins expected to ramp next year.

For instance, we have [indiscernible] for an increase in business from a number of handset customers, for both the EMS business and ODM products.

We're also making significant progress diversifying our printing and imaging business away from inkjet printers, but we expect only a $100 million in revenue contributions from these new programs in FY '06.

We expect more than one billion of revenue contribution on run rate basis from these new customers in FY '07.

We've also added three new server and storage customers, a customer that keeps computer and peripheral space, and will award a substantial increase in business from an existing customer in semiconductor equipment space.

Once again, we expect little revenue contribution from these customers in FY '06, but we expect more than $1 billion in incremental revenue basis on a run rate basis from these customers in FY '07.

I'd like to remind you that these new customer wins will not only contribute to revenue growth next year, but also to margin expansion as we penetrate the vertical integration opportunities further, with Nortel, Seosora--Kyocera, along with most of these other new program wins.

While near term demand has slowed temporarily for the products we are supplying to our customers, we are investing heavily in the significant programs expected to ramp in calendar year 2006 and beyond.

While these investments are impacting near-term margins, we think margins will expand as these programs reach full potential.

Some of these investments include the Nortel immigration costs, Kyocera start-up costs and other program start-up costs.

We are investing in camera module capacity in both China and Malaysia, and we believe we will be able to capture 20% or more of the worldwide camera module demand.

Until we get these new camera module factories at the proper utilization and yield levels, short-term margins are impacted, but we exp--expect to see the margin benefits soon.

We're also investing heavily in metals, plastics, and assembly capacity in Asia. as well as building an industrial park in India, and a manufacturing logistics and repair operation in Juarez, Mexico.

The continued investment in our power sli--supply business has just yielded three design wins with major multinational OEMs in the printing and imaging enhancement segments.

Our [indiscernible] in foreign operations continue to perform very well, and we are expanding our rigid circuit capacity in China.

The new flexible printed circuit factory in China is scheduled to begin production within the next 60 days.

Obviously, we are making significant investments in our future, and we think these investments will yield higher margins and better returns for our shareholders, while improving our competitiveness and enhancing our capabilities.

Slide 13.

The September quarter is always a very difficult quarter with regard to demands visibility, because of the lack of activity and information flow during the summer months of July and August.

Beginning in mid-September, we began seeing forecast reductions for many of our customers, with the exception of handset customers.

This trend has continued through October.

As a result, we now expect modest growth in the December quarter.

We encourage you to pay close attention to these slides as we have tried to quantify the impact of the divestitures has on our guidance.

For the September, 2005 quarter, we are currently expecting revenue in the range of $4 to $4.2 billion, compared to revenue of four billion in the year ago quarter, excluding the revenue from network services and semiconductors.

This revenue guidance reflects a year-over-year growth rate of zero to minus--to 5%.

Please keep in mind that the December of 2005 quarter will be the last quarter that includes significant cell phone revenue from Siemens and Alcatel, so our comparisons moving forward won't be distorted by the impact of these companies divesting their cell phone business.

We are currently expecting earnings in the range of $0.18 to $0.20 per diluted share, excluding amortization, restructuring, and other charges.

Our guidance does reflect the$0.01 of dilution from the sale of network services and semiconductor divisions.

Excluding this $0.01 impact, we are expecting EPS growth of zero to 5% in the December, 2005 quarter, compared to the December, 2004 quarter.

For the March, 2006 quarter, which is the first quarterly comparison not affected by Siemens and Alcatel exiting the cell phone market, we are currently expecting revenues in the range of 3.6 to 3.8 billion, compared to revenues of 3.4 billion in the year-ago quarter excluding the revenue from network services and semiconductors.

This revenue guidance reflects a year-over-year growth rate of 6 to 12%.

We are currently expecting earnings in the range of 16 to 18% per diluted share, excluding amortization, restructuring and other charges.

This also reflects the $0.01 dilution from the sale of network service and the semiconductor division.

Excluding this $0.01 impact, we're expecting earnings per share growth of 6 to nine per--6 to 19% in the March, 2006 quarter compared to the March, 2005 quarter.

Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.03 per diluted share, reflecting quarterly amortization expense.

The timing and the amount of restructuring and other charges can not be estimated.

With regard to the margin impact from these divestitures, they have reduced future quarterly margins by approximately 100 basis points, SG&A as a percentage of sales by approximately 65 basis points, and operating margin by approximately 35 basis points.

Thank you, ladies and gentlemen.

And I'll now turn the call over to Michael Marks.

Thank you.

Let me just take a minute to try to summarize.

There's a lot of data here, and as we said in the call, lots of moving parts and difficult to make comparisons.

You know, what you have here is a relatively flat performance for over a year ago from this quarter and December quarter, you know, primarily resulting from the big--the huge downdraft from Siemens and Alcatel on the cell phones.

And as you can see from the numbers of the guidance going forward, we're saying that, at the end of the December quarter we're through that.

You can see we are now forecasting pretty good growth starting again in the March quarter, and we think that growth is going to accelerate through calendar year 2006 as these new programs come on.

If you will, a pause in what's been very good growth and improvement in operating profits and earnings over the last couple of years and, we think, with a relatively short period, two quarters of reasonably flat performance, that growth will resume again.

In the meantime, we're generating lots of cash.

We said we would, we are.

I think that our cash flow performance in the quarter was a little better than we expected, not including the divestiture, which obviously have put a lot of cash on the books.

For September, we generated a lot of cash.

In December, we expect to do it again.

In the March quarter of 2006 and on during--into the year, the growth and revenue and margins should be--should resume and, of course, we'll start to use a little bit more cash into working capital, which is what I think we all want to see.

It's the natural thing.

We're in great shape.

The programs are coming along really well.

We are investing heavily, as Mike talked about, in ramping up a lot of new programs, and I think most of you who've been following our Company and our industry for some time, know that, when you have new programs in place, you don't--you don't really make money on them early, because you have a lot of investment in up front engineering and capacity expansion, all that stuff.

So that's all going on.

The Nortel program is going just as we had expected, doing very well.

Margins in that program will continue to increase as it matures.

So overall we think we're in very good shape.

We're nearing the end of my tenure as the CEO.

I think that we've got a very good run ahead of us.

Competition in the industry, you know, I think, as most of you know, we've talked about this, and many of you talked to Tom, know that the industry's kind of settling out into sort of winners and losers, and we think we-- we'll be able to continue to pick up share on some of the weaker players over time.

We're seeing that in the new programs we're winning and think that that's going to continue.

So we'll continue to generate cash.

With a little bit of luck here, we're going to be in a situation where we can buy back stock on weakness, which is what we have suggested we would like to do with some of the excess cash we're generating.

And we're hoping that we'll be in a position to do that beginning in the March quarter.

In the meantime, since we were not able to do that, you can see that we used some of the excess cash flow to buy back our stock.

We continue to improve our balance sheet and we're going to continue to do that over the next year.

With that, let me talk to you about the risks.

There are real risks of operating this business, which includes the macroeconomics or technology slow dow,n among other things.

Please pay particular attention to this slide in light of current market conditions, and that is Slide 14.

I didn't mention that.

As the operator begins to poll for questions, I want to mention we'll be hosting our fall investor and 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.

Thank you.

[OPERATOR INSTRUCTIONS] Our first question comes from Lou Miscioscia from Lehman Brothers.

You may ask your question, sir.

Okay, thank you. could you perhaps go into a little more detail as to just the flattish revenue on a quarter-to-quarter basis?

Obviously understand the things that you explained on the call that you sold some of your businesses and that Alcatel and Siemens cell phones had come off, but the cell phone numbers were actually not that bad quarter-to-quarter on the call.

And it seems that a couple of the other areas seem to be off more, you know, industrial, medical, obviously consumer--comm infrastructure, and so on.

Mike, want to do that?

Yes.

We clearly have seen some softness pretty much across the board in the customer base.

We were hoping some of the new programs we have coming on like Nortel and Kyocera would offset the down side of some of the big cell phone programs going away,and they continue to go away alternatively.

We had strength in the cell phone business, which--per your comment.

But at the same time, the rest of the business all--you know, a lot of them kind of across the port seemed to get a little bit softer.

So it's kind of what we said, as it came out of July and August and started getting visibility into September, October, we saw it getting a little bit softer over the last couple months.

There's no doubt we're in the middle of trying to deal with a little bit of that softness.

And I guess that has continued now into October, hasn't turned around and started to kick in yet?

Well, it definitely had in September and it definitely did in October, when we looked at it.

We'll take a another really big look at it in the first week of November, but for sure for September, October they were both disappointing months for us.

Okay.

Thank you.

Bernie Mahon from Morgan Stanley.

You may ask your question.

Hi, good evening.

Just following up on that briefly.

You said that in the middle of September there was some softness.

Could you specifically identify some of the end segments or was it really across the board in terms of consumer, printers, comm infrastructure or just provide a little bit more detail there?

Yes.

I think some of the--some of the segments may have been customer product specific.

It's hard to tell.

But without question with us, it was across the board.

It was reasonably linearly across the board.

It was just--everything was just a little bit softer in September than we anticipated, and everything was a little bit softer even than that in October, with the exception of cell phones, which showed very good strength.

And then just a question on the inventory.

It looks like you built a couple hundred million dollars of inventory at the end of the quarter.

Was that partly from taking on more Nortel assets or was it because lead times had stretched?

Why--I guess I'm just trying to figure out why you built inventory going into when demand was kind of softening.

Yes, it's a combination of things.

The Nortel block of inventory continues to increase for us.

We took on the operation in [Shutodun], which is a substantial amount of inventory.

And the other thing is we had a little bit of down side in some of our revenue expectations, as we just mentioned, a little bit of softness, which I think contributed to some of it.

I think there was a third effect, which is some of the new programs--some of the cell phone programs are actually being constrained right now by some components.

That created some inventory build for us, which had there not been any shortage problems--component shortage problems, we'd been able to ship those phones.

I think it's really a combination of all three of those things.

You think they're all about split evenly or was one of them maybe a little more dominant?

I think Nortel alone was a good 100 to 125 million, if I'm not mistaken.

I'd say it's probably right, Mike.

Probably half of it is Nortel related.

And then the rest is--it's hard to dissect it further than that.

Oh, no, that's great.

That's very helpful.

Thanks a lot.

Alex Blanton from Ingalls & Snyder, you may ask your question.

Good afternoon.

Hi.

Could you give us an idea of the--if we take the revenue that you're now forecasting for the year, which looks like it's going to be--you take the bottom of the range at 15.4 million and the top of the range is 15.8 versus 15.9 last year.

How much of that decline are the divested companies, roughly?

In round numbers, Alex, it's about 550 million to maybe $600 million, in that range.

550 to 600 for the rest of the year.

Well, total year-over-year.

How much of it was in the September quarter?

$79 million.

79.

You gave us that.

The rest of it's for the next two quarters?

Right.

Okay.

So if we look at what you're forecasting now, how does that compare with what you were thinking, let's say, three months ago when you were, I think, telling us that the year would be $0.80 to $0.90?

Based on your guidance now, it looks like the year's going to be $0.67 to $0.71.

Right.

I mean, your math is correct.

So what were the sales expectations?

I'm trying to get a sense of how much lower the sales are than what you expected three months ago.

Yes.

So we expected three months ago sales excluding--reflecting that divestiture impact of 16.4 to around 17 billion.

Yes. 16.4.

So there's about a--16.4 to 17?

Right.

So there's something like a billion dollars went away somewhere?

That's right.

Okay.

In the last three months?

Including some in the September quarter, I assume?

That's correct.

Okay.

So where in your business is the biggest part of that?

Can you discuss that?

Where is the decline from your expectations taking place?

I could try to answer that. you know, it's hard to really pinpoint to one thing.

I think the timing of the Nortel thing maybe slipped a little bit, some of the new program divestitures slipped a bit a little bit, kind of across the board.

I think there's a little bit of softness.

We mentioned some continuing softness coming in.

We actually weren't sure about July and August, and when we get into those periods, we usually just kind of hold the current guidance from our customers flat.

It came back in September, October a little bit lower.

So I think it's a combination of all those things.

We've seen, really, an across the board--for our kind of programs, we've seen an across the board kind of reduction, and I think it goes anywhere from--everywhere from consumer all the way through to the industrial and the infrastructure, everything really.

Even some of the automotive was affected, which we didn't anticipate.

So I think it's--I mean, with us, it was a very broad base, it wasn't just one thing that we can go point to.

Well, you are --

Let me add one more thing, Alex, if I can.

Yes.

And also, the deterioration from Alcatel and Siemens was faster than we had expected to be, to be honest.

So, we really expected--when Siemens decided to divestiture, we thought we were going to see more revenue for a period of time, and that's come undone pretty quickly..

Well, but you're looking ahead six months from now, and you're looking at significantly lower sales than most the December quarter and the March quarter than you had been originally been anticipating, because the total's down by a billion or more from what you originally had been anticipating.

So what you're--are you saying that you don't think there's going to be any pickup in these things?

Between now and the end of March?

I think we need to clear something up here, Tom.

We're not saying a billion dollars less revenue in the last two quarters?

No, no.

I'm saying that from three months ago your revenue expectation seemed to have slipped by something like a billion dollars.

Tom, did you -- can you --

I actually agree with that, Michael.

But for the year.

For the year, our old estimates were 16.4 to around 17.

Now, reflecting the September results with the remaining forecast, it's 16.4 to--or excuse me, 15.4 to 15.8.

That's about a billion dollars.

Yes.

Round numbers.

That's right.

But Alex I would --

That's not all in the September or even the December quarter.

There's a lot in the March quarter.

Even in September, you could argue it was 300 million, because our September guidance was 3.8 to 4.2 and we came in around 3.8.

Oh, sure, but you were with --

So, you're taking ranges here, and I would also like to remind you, Alex, back in June, coming off the June quarter when we provided the guidance, June was actually stronger than expected, if you'll remember that.

Yes.

But we're just looking from what you expect at the end of June going forward for the nine months.

Right.

So at the end of June, we had customers taking their forecasts up.

Okay?

And then it was somewhat stable in July and August.

Then beginning in mid-September, we saw a pretty ba--broadbased reduction in forecast demand from our customers.

Yes.

Would you expect then to continue forward?

Do you have a feeling this is the economy as a whole, the end markets, or you're losing some business to somebody else in the Far East or what is it?

You know, we--as broadbased as we saw the decline, we can't help but think there's probably some economic impacts here, some overall economic impacts.

We're not aware of any programs that we really lost.

We can't put our finger on anything like that.

We just think there's some general softness out there.

I think some of the programs are--might be our customer specific competitiveness in their marketplace.

There's probably a few programs like that that we don't necessarily see carry across to others.

So I think it's a combination of those.

There's really no event.

There's no real loss of customer outside of the Alcatel Siemens, which is all wrapped up this last quarter.

But it's pretty much across the board.

One final thing then.

Do you have any sense at all that the increase in energy costs in the economy, the increase for consumers and in that sector, transportation, is causing them to cut back on purchases of the kinds of things that you make?

Any sense of that?

Well, Al, just about an hour ago, the conference board came out with its consumer confidence index.

Yes.

And it fell to 85 in October, which is the lowest level since October of 2003.

Yes.

And it's the sharpest decline in 15 years.

Yes.

So it's hard for us to tell what all the drivers are.

I mean, certainly energy prices, rising interest rate concerns, job markets, unprecedented level of natural disasters.

At some level, it must have had an impact.

Yes.

But the other thing is there is some evidence that some of our customers are not doing as well in the market place, potentially as well.

I think there's both -- I think they're both appropriate.

Because there are elements of the economy that are actually pretty strong that we can see.

So I think it's a combination of both, Alex.

I think it's some of the economic slow down because it is as broad based as it is, and I think in some cases, maybe some of our customers didn't do it, but I'm sure you guys will go out and do channel checks.

I mean, we can't think of anything we're losing or losing market share on or anything else.

Okay, thank you.

In fact I'm going to add something to that, which is--we don't like to talk about at Flextronics from a management perspective, we don't like to talk about broad, you know, macroeconomics.

That's for analysts.

There's all kind of hoop-la for them to do that.

It just always sounds like excuse making to us.

We tell you what we see, which is there has clearly been some across the board declines.

They're not huge.

There are some.

And it's our job to grow through that.

As you can see from the numbers that we're giving guidance on, even with that we're still expecting some pretty good year-over-year growth starting again in the March quarter.

We're comfortable we can do that with additional programs that we're winning and ramping up.

That's our jobs as managers is to offset weakness in individual companies or individual sectors for the economy, as a whole, and find ways to grow our business.

I think we're going to be able to do that after a relatively short flat period.

Okay, thank you.

Carter Shoop from Deutsche Bank, you may ask your question.

Great, thanks.

Two questions here.

First can you talk about the deterioration quarter-over-quarter for Seamans and Alcatel?

How big of a decline are we talking about here?

It was $250 million.

That's sequentially?

No.

That was year-over-year.

Sequentially what was it?

I really don't have the sequential number.

Would it be like 25 million or something like that in?

Somewhere at 25 million, maybe a little bit more, but obviously somewhere in that range.

I don't know the exact number.

Can we talk a little bit about the current capacity realization for the firm?

I know guys you announced a new facility in India, building a new facility in Mexico.

I've heard recently that you're looking to expand in New Hampshire.

Can we talk about real capacity realization right now and expectations for future construction?

We're not actually building any capacity in New Hampshire, that's for sure.

We're expanding, and we'll continue to expand in virtually all locations in China.

We'll expand printer circuit board capacity this year. and probably next year flexor capacity we'll expand flexer capacity, we'll expand metals, both plastics and metals, in both north and south China and we'll be looking--we just brought on several hundred thousand square feet this year in China, which is almost all full and we'll--we'll probably expand another 700 or a million square feet in China this coming year.

India, as you mentioned, is correct.

Juarez, we're bringing out some capability and so, kind of virtually, all those markets are in need of capacity.

A lot of it is, we just see what the future looks like, and it looks pretty robust for us.

Some of these programs take a little bit longer.

And one of the things we've said in the past is we're starting to get a longer look at what our future bookings look like, our future revenue look like because we're so early engaged in the processes now, much earlier than ever before.

What that means is a longer period for start-up costs, and we might be working on programs for nine months, even 15 months, before they really mature.

This is kind of new for us and kind of a result of us bringing on all our components and our vertical technologies, as well as the design capability that we have.

As far as restructurings, we've done bits and pieces.

This is also a reason some of the revenue has come out.

We've actually sold a couple operations in Sweden in the last quarter, which we did in June.

We sold an operation in Italy.

At the end of June, we are in process of closing an operation in France.

We closed an operation in Finland just about two months ago.

A lot of this stuff is actually nickel and diming some of the revenue out of our business, as well.

So we -- we'll continue to tweak things here and there, but most of the restructuring that we have underway is contemplating a lot of that, and the risk that we have, which has particularly been in Europe in terms of overcapacity, is actually falling away very quickly and very nicely.

So when we look out into calendar year '06, what do you expect for restructuring charges?

In the $50 to $100 million range, do you think that's accurate?

It's hard to tell.

It sounds like a lot to me.

I don't know what's left in the restructuring.

Maybe Tom can --

Carter, you asked in calendar '06?

Correct.

Yes.

I think that does sound high, as well.

We really don't forecast what level of future restructuring, if anything, we have that far in advance.

So we'll certainly let you know when we know.

Okay.

Great.

Maybe a last question here.

Do you have the percentage of sales for Sony, Erickson and HP in the September quarter?

Yes.

So, we--we're going--starting last quarter, we just started identifying them as greater than 10%.

And that's because our sales increases or decreases for those customers, they'll correlate directly to their revenue activity because there's changes in inventory.

We've gotten too many questions with people trying to reconcile our change in the revenues to that particular customer, to their revenue performance.

So both were in excess of 10% of revenues, and we're just going to leave it at that.

Thanks.

Let me add one thing--one other thing.

You have to keep in mind the depreciation in the quarter was 85 million and capital expenditures were 54 million.

So in fact we are less than replacing the equipment.

The 54 million shows up as we're going to build a place in Juarez and we're going to do stuff in India and all that kind of stuff, but you have to remember that depreciation's coming out at even a higher rate.

Net, net, we are reducing plant and equipment, not increasing it.

Next question.

Terry White from Kaufman Brothers.

You mentioned [ indiscernible ] if I look at my model here, even excluding the divestiture [ indiscernible ] I'm just curious if [ indiscernible ]

We're sorry.

We actually-- we couldn't understand that question.

Just looking at the sequential growth in the quarter, adding back the divestitures, this is the slowest [ Indiscernible ] you guys have had in almost [ indiscernible ] decades.

You mentioned business slowing [ indiscernible ] recently.

When was the last time you saw business slowing to this degree?

Was it 2001? 2002?

Hey, Brian, there is a lot of static on your phone.

We cannot understand you, so we're going to ask you to go out of the queue and come back in.

We're sorry.

Operator, why don't we go to the next question.

[OPERATOR INSTRUCTIONS] We have Michael Walker from First Boston.

You may ask your question.

Thanks.

I want to talk about margins a little bit, if I could.

First just some clarity on why they were down 40 ba--why the gross margin was down 40 basis points sequentially, despite revenues being relatively flat from June to September, was that all mix related?

And, secondarily, you had talked about some targets previously, gross margin being over 7.2 by the end of the year, operating over 3.6.

Is that still doable?

And just kind of a larger question here.

You've talked a lot about ramping programs, which hurt margins.

You talked about ramping factories, which hurt margins.

What happened to ODM?

What happened to printed circuit boards?

Is there a reason for us to really assume, realistically, that margins are going to be increasing in the next six quarters?

Okay.

A lot of questions there, Mike.

So the sequential decline in gross margin, 30 basis points of that decline can be attributable to the divestiture activity, and the remaining would be attributable to the start-up costs that Mike has outlined.

Operating margins, gross--divestitures are adversely impacting the operating margins.

We're getting a benefit on SG&A reductions from the divestitures, so there's very little operating margin impact from the divestitures.

As we said on the call, in the future quarters, Mike, on a full quarter basis, not for the September quarter but going forward, future quarters gross profit will be impacted by 100 basis points from the divestitures.

We'll pick up 65 basis points of SG&A and operating margins on a full quarter basis will only go down 35 basis points, as a result of the divestitures.

Of course, then we would pick up additional earnings from either reductions in interest expense from debt buybacks or a reduction in shares outstanding through stock repurchases.

I think what we need to stay focused on is that while the gross margins are going to go down as a result of these divestitures, alternatively the net profit is going to hold relatively steady once we redeploy the cash in the way we decide to redeploy it.

These businesses carry very, very high SG&A rates with them.

We have to make sure we don't get too focused on the gross margin and stay more focused on the operating profit, which is more applicable.

The second part of the your question is do we realistically anticipate these to go up time and the answer is, yes, you should.

We are right in the middle of a very substantial restructuring.

The amount of business--if you take a billion dollars of cell phones out that's already running, the learning curves already paid for, and to take it out and replace it by a bunch of smaller, more complex programs is very dif--and new programs is very difficult, And this is all effecting, and we're still able to achieve the 3.4% operating profit for this quarter, but it would be better.

And do we anticipate it get can better next year?

We think so.

A lot of these programs that we've run have already been underway for some period of time, which includes Nortel and Kyocera will be at full learning curve by January.

But we won't be fully invested in the vertical integration activities until we get to the next cycle of their products.

So to go get the component technology, such as plastics and camera modules and those kind of things designed into the next generation phones is what's really required to go ma--you know, achieve a maximum profitability in these programs.

A lot of that work's going on now.

I think that work will carry on until the first half of next year.

I still think we'll earn very respectable margins like we are today.

Without doubt, going forward, we actually do anticipate--we're making a lot of investments in technology that we've mentioned, the duplex circuits and printed circuit boards, all of which have higher profit margins than the regular business.

We actually do expect the margins to be going up and, without doubt, the investment profile is built around those margins going up.

The other thing I might want to add, you know Michael mentioned about doing $54 million of capital this quarter and taking 85 million of depreciation amortization.

A lot of those investments are investments in higher-margin technology kind of programs that take a little bit longer to mature, but they're building us a competitive position for the future.

When we think about what it takes to go compete long-term in the marketplace, these things are absolutely required.

And we're still able to take all these investments, and still be able to generate a delta between delta between depreciation and amortization, and then Cap Ex the net--and then number's still generating $30 million a quarter of cash flow.

So we actually think it's nicely in balance.

Okay, thanks.

Scott Craig from Banc of America, you may ask your question.

Thanks, good afternoon.

From the debt buy-back side of things, you guys bought back it looks like around $200 million this quarter.

I'm sorry if I missed this.

Do you expect to buy back some more debt in the near term, given that you have not been able to buy back stock or probably won't be able to buy back stock until next year?

Would you use up most of the proceeds on debt, most of the proceeds from the divestiture on debt?

And then secondly, within the comm business, the telco business, Nortel was ramping this quarter, and I think Mike McNamara outlined at our conference recently that it was running around a $1.2 billion runrate roughly If I strip out that ramp, it looks like the comm infrastructure business was down 20% quarter-over-quarter.

Can you provide more flavor maybe geographically on where we saw most of the weakness or any kind of flavor around that business?

Thanks.

Scott, I'll take that.

The last question first.

The comm infrastructure was down primarily as a result of the divestiture of the network services business, which was all comm infrastructure type revenue.

Okay?

With regard to future debt and stock buybacks, we're going to be very opportunistic and very patient around this stuff, so I do think it's reasonable to assume that we're going to be in the market during the quarter buying some debt back, but that is conditioned on what the prices and the--of what the prices of both the stock and the debt.

So, we--this Singapore law was scheduled to change in September and got delayed three months, so we think we'll be able to buy stock back beginning in January.

If that means our stock is at such a level, we'll just sit on the cash and wait till January to start buying stock back, that is something certainly we're going to evaluate.

So I think it's reasonable to assume that we'll be buying back debt, depending on what the market value is.

And I hate to say that because that will probably drive the pricing a little bit higher, make it a little less attractive, people knowing that we're in the marketplace doing that.

We are going to be keeping an eye on the stock price and the date upon which we could go in the market and start buying stock back.

So we're patient.

We are opportunistic.

And we are going to deploy the excess cash in the manner that best increases the return for our shareholders.

Just to follow-up on that comm business, excluding the Nortel ramp and the impact of the divestitures, what did the comm business do in the quarter, Tom, roughly?

I'm not getting too specific here.

I don't think I have that data available at my fingertips, Scott, but you could attribute around $80 million of the sequential decline.

Actually maybe more on a sequential basis, maybe a little more than $80 million associated with the divestiture of network services.

There's also a little bit of semiconductor revenue in the comm infrastructure space, as well.

The rest would just be attributable to some of the broad-based demand fluctuations that Mike spoke about earlier.

Alright, thanks.

Thank you.

Tim Lane from North Star, you may ask your question.

Yes.

I have a little bit of a lead-in to it. which is I'm just wondering if maybe executive management's fairly consistent overestimation of the momentum of the Company's business is sort of filtering through the culture of the Company and is resulting in this consistent misforecast of the outlook.

I have a few examples.

Quarter revenue missing by 5%, EPS by 10% and then characterizing Flextronics as a winner within the industry.

And I'm just wondering what executive management is going to do in the near term to try to correct this cultural issue.

For example, is executive management willing to suspend its own variable bonus compensation to--until it forecasts and accurately hits its forecast for financial metrics?

Thank you.

So I think we'll let Michael talk about the culture, but I'll talk a little bit about the numbers that you referred to.

So our revenue--reported revenue in the September quarter was $3.88 billion, and our guidance was 3.8 to 4.2 billion, so that is in the middle, toward the lower end but certainly in the middle of our guidance expectations.

In June, the high end of our revenue guidance was 3.9 billion, and we did $3.9 billion of revenue in the June quarter.

So I guess I would dispute a little bit the fact that we've overestimated the expected revenue in the near term.

Obviously, the further you go out in time, the more difficult it is, and we can only give you the best information we get from our customers at the time that things change and we try to let you know when things change.

But I think in June and September, our revenue estimates were inside our range of expectations.

Michael, do you have any comments about the --

Yes, I do.

I'll add a couple of things.

First of all, cash flow was way above forecast.

It's interesting that when you have periods of time like this and you get inappropriate questions like we just got, the market tends to--many investors tend to focus on it's great when earnings are going up and cash is going down and now earnings are flat, cash is going way up, and I would suggest to the listeners that you follow the cash because, if you look at how much cash is being generated by the companies out there, I think you're going to find that we're clearly one of the winners.

Flextronics has a long history of compensating executives based on performance.

When we don't grow earnings, we don't get bonuses.

If anybody wants to go and check, there was a period of time a few years back when the Flextronics executives all gave up all of their salary in exchange for stock options, and today the stock is below that stock price, so everybody gave up a year of salary to show our respect for the need to provide performance and so there won't be any bonuses this quarter and depends how the future is.

We will do that appropriately, and I actually think that question was inappropriate.

We'll take one more question and then call it a day for today.

Tod Coupland from CIBC, you may ask your question.

Good evening.

Are you guys--with respect to the Nortel ramping, are you guys in a position to give us an idea how much incremental revenue is expected from Nortel in the December and March quarters?

Well, what we've said, Todd, is we expect total Nortel revenue for the year to be in excess of a billion dollars, and we continue to believe that estimate's appropriate and that really hasn't changed.

So we picked up a facility in late August, kind of.

There's one month of revenue from the facility we picked up in the September quarter, and then we have one more facility in Canada that we expect to pick up sometime in the March quarter.

And, therefore, we think by the end of the fiscal year, all of the factory transfers will be complete at that time.

So for the year, it's a little bit more than a billion dollars incremental revenue, and I don't think we really want to split it out by quarter.

Okay.

And I know you gave only two quarters of--of outlook.

I guess we should assume that September and December quarters should--you know what?

I'll pass on that question.

Thanks very much.

Okay.

Thanks very much.

We understand that we've suggested that growth is going to start again after the December quarter.

That's obviously something we're going to have to show you.

We're going to continue to generate cash and we're going to deploy that in effective way that Tom talked about.

We appreciate your calling in.

We hope to see many of you on November 8 in New York and we'll look forward to talking to you again.

Thanks for calling in.

Bye now.