Flex Ltd (FLEX) 2006 Q3 法說會逐字稿

Good afternoon, I would like to thank all participants for standing by.

Welcome to the Flextronics third-quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to your presenter, Mr. Mike McNamara, Chief Executive Officer.

Sir, you may begin when you're ready.

Good afternoon, ladies and gentlemen and thank you for joining the conference call to discuss the results of Flextronics third quarter ended December 31, 2005.

To help communicate the data on this call you can also view our presentation on the Internet.

Go to the investors section of our website and select Earnings Presentation.

You will need to click through the slides, so we'll give you the slide number we're referring to as we do our discussion.

On call with me today is our Chief Financial Officer, Tom Smach.

I'll turn the first part of the call over to Tom to go through the financial portion of our prepared marks.

I will then provide some commentary on the quarter, along with our guidance for the next quarter and then open it up for questions.

Go ahead, Tom.

Thanks, Mike, and good afternoon, ladies and gentlemen.

Please note this conference call contains forward-looking statements within the meaning of the federal securities laws, including statements relating to the success of our long-term initiatives, new customer opportunities, the success of the transition of the Nortel operations, the success of our investments in component, design, and ODM capabilities, along with our ability to increase our camera module market share, revenue margin growth, profitability, future restructuring charges, and anticipated use of available cash.

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

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

These forward-looking statements are based on current expectations and we assume no obligations to update these forward-looking statements.

Investors are cautioned not place undue reliance on these forward-looking statements.

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

Please refer to the schedules in the earnings press release and slides 3, 7, and 13 of the slide presentation which contain the reconciliation to the most directly comparable GAAP measures.

Slide three.

Because of the sale of our Network Services and Semiconductor divisions during September 2005, our year-over-year financial comparisons require some clarification.

Revenue and operating profits from these divisions are reflected in the prior year quarter and obviously are not in this December 2005 quarter.

After we provide the actual comparisons, we will summarize the results on an apples-to-apples basis by adjusting for the impact of these divestitures.

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

Revenue in the December 2005 quarter was $4.2 billion, which is a decrease of $90 million, or 2% from the year-ago quarter.

There are a couple things to keep in mind regarding this year-over-year revenue decline.

First, the December 2005 quarterly revenues included $228 million from the divested operations.

Excluding the prior year revenue from these divested operations, revenues grew 3% on a year-over-year basis in the third quarter ended December 31, 2005.

Another item to keep in mind regarding the year-over year-revenue decline is Siemens and Alcatel divested their cellphone businesses to Asian suppliers who brought the manufacturing in-house during 2005.

As a result, our December 2005 quarterly cellphone revenues from these two customers were approximately $300 million lower than in the December 2004 quarter.

New program wins during the year, such as Nortel and Kyocera, provided incremental year-over-year revenue that more than offset the year-over-year declines from Siemens and Alcatel.

Slide four.

During the quarter, Asia increased on a sequential basis to 59% of total revenue, America decreased to 21%, and Europe decreased to 20%.

With regard to market segments, communications infrastructure decreased from 22% in the September 2005 quarter to 20% in the December 2005 quarter, primarily as a result of the divestiture of our Network Services Division in September 2005, which was partially offset by continued growth in our Nortel business.

As expected, we saw a sequential decrease in revenue from our computers and office automation segment, from 27% of revenue in September 2005 quarter to 24% in the December 2005 quarter, primarily as a result of the normal seasonal trend in our printer business.

Handsets increased 26% -- excuse me, handsets increased from 26% in the September 2005 quarter to 30% in the December 2005 quarter, as a result of the seasonal demand increase in this product segment combined with the ramp-up of new program wins from Kyocera.

Industrial, medical, automotive, and other remained at 10% of total revenues in the December 2005 quarter, while the consumer segment increased from 9% in the September 2005 quarter to 10% in the December 2005 quarter.

Sony Ericsson and Hewlett-Packard were the only customers in excess of 10% of quarterly revenues in December 2005.

Our top 10 customers accounted for approximately 64% of revenue in the quarter.

Slide five.

Gross margin decreased 80 basis points to 6.2% from 7% from the year-ago quarter.

Adjusting for the divestitures, gross margin was 6.4% in the December 2004 quarter compared with 6.2% in the December 2005 quarter.

On a sequential basis, operating margin was 3.2% in both the September and December 2005 quarters after adjusting for the divestitures.

Actual operating margin decreased 50 basis points to 3.2% from 3.7% in the year-ago quarter.

The decline in the year-over-year operating margins after adjusting for divestitures can be attributable in part to the substantial investments we're making in the development of our component capabilities, which includes camera modules and power supplies, as well as our ODM capabilities.

We continue to invest in resources such as Research & Development, technology licensing, test and tooling equipment, facility expansions, and personnel requirements in order to aggressively grow our components capability.

These expanded vertical integration capabilities are part of the cornerstone of our strategy to improve our competitive position and to grow our profitability and shareholder returns.

Additionally, our margins were negatively impacted by startup and integration costs associated with our new programs such as Kyocera and Nortel, as well as many other new programs that are ramping in calendar year 2006.

Lastly, we continue to make significant investments to further enhance and strengthen our design capabilities.

Mike will elaborate on our investments shortly.

Slide six.

Excluding amortization, restructuring, and other charges, our December 2005 quarter net income amounted to $118 million which represents an increase of 2% over the year ago quarter.

Earnings per diluted share amounted to $0.20 in both the December 2005 and 2004 quarters.

The December 2005 quarter includes a $0.01 cumulative tax rate adjustment to bring the year-to-date effective tax rate to 2.3%, which is the effective tax rate we're currently estimating for fiscal 2006.

Excluding the tax rate adjustment relating to previous quarters, EPS would have been $0.19 in the December 2005 quarter.

Slide seven.

During the December 2005 quarter, after-tax amortization amounted to $12 million and our restructuring and other charges amounted to $65 million.

After all these adjustments we reported GAAP net income in the December 2005 quarter of $42 million, compared to GAAP net income of $99 million in the year-ago quarter.

This resulted in $0.07 of earnings per diluted share in the current quarter, compared to $0.17 in the prior year-ago quarter.

Slide eight.

Return on invested tangible capital improved sequentially to 31.5% from 27%, while return on investment capital, which includes goodwill and intangibles, has improved sequentially to 10.3% from 9.5%.

Slide nine.

We ended the quarter with $1.08 billion in cash.

We reduced our total debt by $79 million during the quarter, by $225 million during the fiscal year-to-date and by $435 million during the last 12 months.

Net debt is only $427 million at the end of December 2005.

Including our undrawn $1.35 billion revolver, our total liquidity was $2.4 billion at the end of December.

Our debt-to-capital leverage ratio has been reduced from 27% at the end of December 2004 to 22% at the end of December 2005, which is our lowest level in almost three years.

Slide 10.

Cash conversion cycle came in at an industry-leading and all-time low of eight days versus 16 days last quarter.

Slide 11.

Depreciation and amortization amounted to $73 million and net capital expenditures were $45 million in the quarter.

Cash flow from operations during the quarter generated $214 million, including an increase of $39 million in the sales of accounts receivable.

Our fiscal year-to-date cash flow from operations has generated $647 million, including an increase of $54 million of the sales of accounts receivable.

Free cash flow, which is cash flow from operations less capital expenditures, generated $169 million during the quarter and $495 million during the first nine months of fiscal 2006.

During the December 2005 quarter, we invested $151 million in acquisition-related activity, which included an installment payment to Nortel in the amount of $76 million.

Additionally 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 $43 million in cash, taking our ownership percentage to 93.7% of the total company.

We also repaid a total of $76 million of debt during the quarter.

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

So we deployed the remaining divestiture proceeds.

The divestitures are $0.01 per share dilutive, although they have substantially improved our balance sheet by increasing our cash reserves and reducing our debt, goodwill, and deferred tax assets, which are very positive for the company on a longer-term basis.

I know many of you have been speculating as to whether we announced the share repurchase program, but the law has just changed yesterday, and we'll be addressing this matter at our board meeting next month.

Thank you very much, ladies and gentlemen.

I will now turn the call over to Mike McNamara.

Slide 12.

Thanks, Tom.

I would like to first review our operational and financial performance this quarter.

With regard to our transaction with Nortel, we announced today that both companies have agreed to reschedule the transfer of Nortel's remaining manufacturing operations from the March 2006 quarter to the June 2006 quarter.

The scheduled change was made to allow completion of several major information systems changes in Calgary that will simplify and improve the quality of the transition as well as operations after the transition.

Meanwhile, we're very pleased with our existing Systems Houses supporting Nortel in Montreal and Châteaudun, as these facilities are operating well.

In addition, the vertical integration transfers into the existing Flex factories is also progressing nicely.

We continue to see a significant amount of outsourcing opportunities that are broadly distributed across most end markets.

We are focused on growth opportunities that meet our most important financial requirement, which is return on invested capital.

We remain optimistic that a number of these opportunities will result in additional revenue and profits in the second half of fiscal 2007 and beyond.

As a result, we are investing heavily for this anticipated growth.

Our major long-term incentives continue to work well -- or our 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.

As a result we're investing heavily in plastics, metals, assembly capacity in Asia, as well as building, Industrial Parks in India and the Ukraine, and the manufacturing of logistics and repair operations in Juarez, Mexico.

Our printed circuit board operation continues to perform very well.

We are expanding our rigid circuit capacity in China with a new factory that we expect to come online in the December 2006 quarter.

Our new flexible circuit factory in China should begin volume production in the June 2006 quarter.

We are also making significant investments in our design capabilities.

For example, during the quarter, we opened a Beijing design center that has increased our cellphone design engineering by over 250 engineers.

We've also acquired WWL, a small but talent-rich Hong Kong and China-based company engaged in the design, development and manufacture of a variety of digital products.

We're also making organic investments in various technologies in our ODM and component businesses, including camera modules, power supplies, and various other components.

With regard to our camera module business, we finished the calendar year with an estimated 14% market share, which we believe puts us in the number one market position.

We added several factories throughout the year and have quadrupled our headcount.

We have diversified our customer base substantially and look forward to another strong growth year.

Until we get these new camera module factories to the proper efficiency and yield levels, short term profits are impacted, but we expect to see the profit benefit soon.

With regard to power supplies, we're making further investments in this business, which is in organic startup investment mode today.

We do not anticipate this operation to be profitable this coming year, however, it continues to yield great customer interest resulting in new design wins with multinational OEMs.

We strongly believe in our ability to create long-term value from these types of investments.

Lastly I'd like to highlight that we organize our company's resources around several focused market segments which is designed to bring more value and innovation to our customers, improve our competitiveness and increase our market share with our customers.

In order to enhance our revenue growth strategy, senior executives are being added to lead each of our market segments.

Obviously we're making significant investments in our future.

We think these investments will not only help us meet our revenue growth rate expectations by yielding better profit and return for our shareholders, but will also improve our competitiveness and enhance our capabilities.

Despite these investments, we anticipate that our capital expenditures will be below depreciation once again in fiscal 2007.

We believe we're executing very well on the controllable aspects of our business.

We're extremely pleased with our working capital management, strength of our balance sheet, and cash flow generation.

We ended the period with $1.1 billion in cash and only $427 million in net debt.

We set an all-time best cash conversion cycle of only eight days.

Our capital expenditures continue to be lower than our depreciation and we continue to generate good free cash flow, which amounted to $495 million on a year-to-date basis.

Slide 13.

The March quarter is always a very difficult quarter with regard to demand visibility because post-holiday channel inventory needs to be cleared as next-generation product transitions begin for the next year.

The Nortel scheduled delay will adversely impact our March and June quarters, in terms of revenue and profitability.

We anticipate this delay to adversely impact earnings-per-share by a little more than $0.01 in both March and June quarters.

For the March 2006 quarter, we are currently expecting revenue in the range of $3.5 billion to $3.7 billion, compared to revenue of $3.4 billion in the year-ago quarter, excluding the revenue from Network Services and Semiconductor.

The reduction from our previous revenue guidance for the March 2006 quarter is entirely attributable to the Nortel schedule revision.

This revision -- this revised revenue guidance reflects a year-over-year growth rate in the range of 3 to 9%.

We are currently expecting earnings in the March 2006 quarter in the range of $0.15 to $0.16 per diluted share excluding amortization, restructuring, and other charges.

The reduction from our previous EPS guidance for the March 2006 quarter is also entirely attributable to the Nortel schedule revision.

Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.02 per diluted share, reflecting quarterly amortization expense and by an additional $0.01 to $0.06 depending on our final charges associated with the completion of our previously announced restructuring plan.

With regard to restructuring, we continue to believe that fiscal 2006 restructuring and other charges net of gain on divestitures will be in the pretax range of $100 to $125 million, of which we've already recognized approximately $92 million on a pretax basis throughout the first three quarters.

We are executing according to our previously announced plan and look forward to having this behind us.

In that regard we expect these activities to be part of our normal operating results next year.

Slide 14.

There are real risks of operating in this business, which includes a macroeconomic or technology slowdown, among other things, please pay particular attention to this slide in light of the current market conditions.

I will now turn the conference call to the operator for questions.

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

Thank you.

At this time we'll begin the question-and-answer portion of today's program.

[OPERATOR INSTRUCTIONS]

And our first come from question comes from Mike, I'm sorry, Matthew Sheerin, Thomas Weisel Partners.

Yes, thanks.

I'm hoping you can talk a little bit about your ODM initiatives and sort of the impact that's having, either positive or negative?

Yes, well we have several ODM initiatives and we continue to expand them over time.

The -- probably the biggest one that gets the most attention is the ODM initiatives around mobile phones, and one of the things that we did describe in our analysts' meeting late last year was that we did not execute well last year, and what I mean by that is, that there's usually a one-year delay in terms of the development of the product that we're going to use to go to market with and go compete with, a delay in when those revenues hit.

So, this year we expect to do about four million units.

Last year we did about four million units which -- so we did not have growth in a nice growth market.

We for sure lost money in those initiatives and one of the reasons that our profits are down a little bit, over the investments this year have been – and the changes this year have been actually quite substantial.

We've reduced our R&D expenses by well over a third, we've added 250 people in a Beijing design center -- we've added about 250 people in a Beijing design center, we've improved all of our processes in our industrialization, and the product categories that we've created for these -- for revenue this coming -- this year that we're in now, or this coming year of this fiscal '07, we expect to ship probably, we already have booked probably 11 or 12 million phones, so we anticipate in terms of what we've already booked for this year, assuming our customers hit their numbers, to at least triple our numbers and we expect to be well-positioned for the following year.

So we're extremely bullish about the changes that we made last year, the results that we have, the execution that we've-- that's been going on and, but right now it is absolutely contributing negatively from an earnings standpoint.

And once you do get that, ramp, Mike, what are the operating margin goals now?

I know you've, in the past you've talked about 6%, 8% in that business.

What is it now?

Yes, every one's a little bit different because it really depends on the amount of vertical integration that you can get into those phones.

Sometimes we can get all the verticals in, sometimes we can only get some.

But I would say that the cell phone market is very, very competitive and anything on the low end from 3% margins all the way up to about 6% is very realistic.

Okay.

Just to follow up on the Flex circuit initiatives, is that largely aimed at the handset business as well?

We anticipate it coming -- yes, I would say this first year we anticipate probably at least 80% of that demand coming through cellphones, not necessarily our own, but either our own or just some of these on the open market, there's still quite a bit of open opportunity for us to play there.

Gotcha, thank you.

Thank you.

And our next question comes from Brian White, Kaufman Brothers.

Okay.

Good afternoon.

Could you talk a little bit about, you talked about the EPS impact from the Nortel delay.

Could you talk a little bit about the revenue impact for the coming quarter?

Also, what is left in terms of payments and what square footage are you bringing on with Calgary?

Yes, so, for the March quarter, the impact in terms of revenue was roughly maybe $100 million.

A little bit more than $100 million.

And June, the negative, the decrease in revenue will probably be closer to 200 -- or about $150 million or so.

So we expect to lose $100 million in the March quarter, $150 million in the June quarter.

The capacity coming on -- I don't know exactly the square footage but we actually are not buying any buildings.

So what we will bring on will just be a pay-for-use kind of arrangement, so the size of the facility is probably a good 300,000 square feet or so but we don't have any long term commitments to the project.

Okay and then the payment, how much in payments are left?

There's about $200 million remaining all together and that's still spread out over the next four quarters or so.

Okay, thank you.

Thank you.

And our next question comes from Carter Shoop, Deutsche Bank.

Thanks.

Just a quick clarification there, did you say that you're looking for the operating margins in the 3 to 6% range for the ODM handsets?

Yes, on the fully implemented, yes, anywhere from 3 to 6%.

And that's with all the components baked in there?

Yes, that's with all the components baked in.

Again, it depends on how many different components we actually do get in there, so.

Okay.

And then just a clarification, also on the Nortel deal.

It sounds like it's going to be roughly $100 million, out of the guidance for the March quarter, about roughly $0.015 due to the raised guidance there, I guess the mid point of your guidance before was roughly $0.17, now it's about $0.155.

So is that safe to assume?

Yes, we kind of look at it and view it as being almost all attributable to that.

We don't have exact numbers but roughly speaking it's, it's -- we've got --.

Fair enough, I don't want to get too anal here in talking to these numbers, and use hard numbers here, but just based on that math it implies about a 10% operating margin for that business.

I assume it's not coming on that high, but can you talk to what kind of operating margin profile that this is coming on at?

Are we at company averages for that now, or is it even above that?

Well, I think what you're excluding from that analysis is the fact that we have startup and integration costs over a longer period of time that are not being absorbed against our revenue.

Do you have those costs baked into the guidance before though, correct?

Well, no, because we expected incremental revenue to absorb some of those costs, so we're not only losing profit associated with the revenue stream, but the startup and integration costs are now occurring over a longer period of time and are more than what we originally expected.

Yes, they're actually extended, so we have to work on this thing for another three months with quite a sizeable project team, it just puts the whole thing into delay which drives up our expenses.

When did you guys find out about the delayed ramp here?

Is that a new development or--?

Yes, within--.

And Nortel just also announced it today as well.

Okay.

And it's been in discussion, but only concluded in just in the last few days here.

Okay, great.

And then, could we talk a little bit about the progress with components-- component sourcing with the Kyocera win, have we made any progress there?

How's that look there?

Yes, again it's -- that's a tough question.

There's really two, in terms of progress, that where we hope to contribute using all our resources to go improve the margins.

There's really two initiatives, one is the component sourcing, but the other thing is the ODM effort.

So we currently have between -- I don't know, five and eight phones in ODM development right now with Kyocera and, as a result of that, there's a whole variety of schedules of when that component sourcing comes on.

But we're clearly offered the opportunity to make quite a bit improvement.

Most of the product cycles that are coming onboard, you know, start coming in around June, July kind of time frame, where we would expect some of those phones to come in.

But they really do come in at a variety of different levels, trying to meet the September ramp.

Okay, and then just two more quick ones here on the ODM handset model.

Of the 11 to 12 million units you've already booked, are the majority of those with Kyocera?

Or is there several customers there?

No, there's multiple customers.

Kyocera is actually not the largest.

Really?

Okay.

And then, just lastly, obviously the ODM initiative has not really worked out to plan over the past several years and there's been a lot of execution issues and my understanding it's been a time-to-market issue.

What have you done to address that, to streamline the process of design to getting the phone to volume manufacturing?

Yes, I don't think it's just the time-to-market.

I think it's the product categories that we were going after, I think it's the diversity of the design organization, their ability to work together.

Part of being able to be successful whether it's time or cost is the ability to take it from design into volume manufacturing in an expeditious way and with the right yields, and I think some of those processes were challenged with some of the acquisitions that we've done.

And what we've done is we've consolidated those operations, we've centered the development of our GSM products in Beijing, we've centered the development of our CDMA products in Korea, we've built very substantial processes around industrialization and a number of different time to-market kind of products.

We've added some real good design expertise in terms of making sure that the products that we do come out with are timely and at the right price points.

So we've challenged our organization pretty heavily about the price points they need to achieve and I think we've been much more focused at how we go about going after the customer in terms of the -- even the sales processes we use and the information we share with customers and the openness we are with them.

So I think it's a combination of really a lot of things.

But there were a whole set of very specific activities and yes, I'd say last year, financially, was a train wreck, but operationally was exceptionally good.

So -- because there's a year delay.

In other words, all the activities last year is what's going to lead to 11 million phones this year.

So it's really a -- and hopefully we can do more than that.

It is only January, so we still have 14 months to go to try to book some of our additional products.

Okay.

Thank you.

There's whole range of things, but we actually had a good year last year operationally and a bad year financially.

Thank you.

And our next question comes from Todd Coupland, CIBC Oppenheimer.

Yes, good evening, everyone.

If you can just clarify the targeted effective tax rate for '07 please?

Yes, so Todd, we're still working on that, but I would use 7 to 10%, is probably our best estimate today.

Okay, great.

And how should we think about excluding Nortel seasonal ramp into the June quarter, given the visibility you have?

What type of balance should we look for?

And maybe just give us some color around that.

Thank you.

Yes, we actually don't see that much seasonality, so I'm not sure about the seasonal June ramp.

We see it incremental revenues in our results only because of the acquisition of the Calgary operation.

But in terms of real seasonality we've seen them to be generally pretty flat with the exception of December quarter where it peaks up.

Okay.

So we should expect to see, even with all the mobile handset programs coming in, we should expect to see the bulk of that in the second half of the year, second half of the calendar ‘06 year?

Yes, in terms of overall revenue increases, we'll for sure see -- yes, we should sure see some our programs hitting in September and a lot of hitting in December.

So -- okay.

But you asked specifically about Nortel, correct?

No sorry, moving away from Nortel.

You talked about the 12 million, or tripling of the unit volume in your mobile handset business?

Yes.

So given that you don't expect the business ex-Nortel to increase in June, should we expect to see the bulk of those handsets in September and December of ‘06?

Yes, yes, September and December.

But don't necessarily anticipate that these are all going to be incremental revenue.

While it's incremental ODM business and it validates our model, some of that business is going to be protection of existing models, so some of these are replacing existing models that maybe the customers would have done themselves otherwise.

So it allows an opportunity for us to design in our verticals, and as a result of that, maybe get increased margin, but it doesn't necessarily mean it's pure incremental business.

Okay.

Does that make sense?

Effectively what we're doing with our ODM business, part of it is, the design in our verticals get more margin, and to drive the top line, but part of it also is if we it didn't have it, it would be difficult to protect the business that we have.

So in order to give us some idea on the incremental potential, are you able to size that for us?

Yes, really the question then is, what is the incremental cellphone business next year, and we have a good idea what that is, and we're pretty bullish about it, let's put it that way, but I don't want to make any projections because it seems we always come back in here low on our projections after a while, so I'd kind of like not to put a number on it, but we actually expect our cellphone business to grow very, very nicely in FY '07 versus FY '06.

Okay, great thanks.

Thank you, and the next question comes from Bernie Mahon, Morgan Stanley.

Hi, good evening.

Hi.

Just a quick question on the guidance for March.

It seems like at the midpoint of the range it is down 15% sequentially, but if you look at December it was only up 8%.

So it seems like demand is a little bit weaker even excluding, kind of the Nortel kind of being pushed out.

Could you just talk about maybe what segments are driving most of that weakness or if it's -- well, and if it's Siemens and Alcatel going from X number of dollars down to zero as they were brought in house, kind of the status there?

So Bernie, I had a little trouble following your math there, but our prior guidance for the March quarter was $3.6 to $3.8 billion, and we lowered that range by $100 million to 3.5 to $3.7, so the entire reduction in our guidance range was all attributable to Nortel.

Okay, excluding that, I guess I'm just asking, the guidance is for down, yet at the midpoint of the range 15%, you were up, say 11% sequentially.

I guess could you just talk about what's driving the weakness in the March quarter?

Yes, so I would say that's pretty traditional seasonal adjustments going in the March quarter.

I would say 15% down sequentially in March is more or less normal.

I'd kind of add that, we've had some reductions, as you know, in Siemens and Alcatel which were kind of offset by some Nortel and Kyocera on average, but I'd say most of our wins that we've talked about really don't hit until the second half of the year, I think that's pretty consistent with what we've been saying.

So I think, in general, as a result of that, it's nothing inspiring in the March quarter, but we're obviously positive about the end of the year here when these things start kicking in.

All right, that's great, thanks.

Thank you.

And our next question comes from Alex Blanton, Ingalls & Snyder.

Good evening.

I wanted to ask first about the wins that you announced last spring and how they are shaping up now for entering into production as opposed to what you had originally expected.

Now, we've already talked about Nortel, but we're talking about Kyocera which has already started.

Is that in line?

And then there was $1 billion worth of -- or excess of $1 billion worth of printer business from four OEMs I believe.

And there was another $1 billion, or in excess of $1 billion from five OEMs, including three server and storage companies, one peripheral company, one semiconductor company.

So the total of all that including Nortel, of course, is about $5 billion, but it was scheduled to come in in calendar 2006 and 2007, so could you update us on how those things are tracking?

Yes.

That one's kind of a tough answer as well.

So I would say on average, I think one of the things that we mentioned in a lot of these programs, we worked with the design.

We worked with designing in a lot of verticals so as a result we were very, very early on the process.

I would say on average, all these things are moving along, creating a lot of expenses for us.

I would say on average they're a little bit slower than normal.

It's kind of, we were kind of moved towards the speed of the product introductions as it relates to our customers.

So I'd say on average we're probably a little bit slower, Alex, and maybe a little bit softer.

We still anticipate all of them hitting full by the end of 2007 -- calendar year 2007.

We're predominantly at full rate so we're still pretty positive that they're going to hit it, but we don't know our customers' marketplace enough and these are products that are pretty far out there.

So I would say, on average though, it's a little bit slower and a little bit softer than what we were originally understanding the programs to be, but they're all moving along and we're working on them, and we're also looking at a number of other programs that we're pretty positive on.

Okay, but when you say softer, you mean less volume?

Yes, probably just, instead of X amount in fiscal year 2000 -- or sorry calendar year 2006, maybe it's Y amount, maybe it's whatever it is.

They're all different.

Some are coming in right on schedule and some are being delayed so we're probably working eight or 10 different programs, so it's hard actually hard to-- they're all just kind of on different schedules.

But you haven't mentioned any new ones.

These were nine months ago, and I think that you mentioned these and what about this past few, three months, any more like this come in?

Yes, we're going to try not to -- you know what, when we get these programs and they start six or nine months out, rather than talk about them, and have to come back and explain why they're delayed or slow or anything else, we'd rather just book them and start running them and then you'll hopefully see the revenues popping in.

So we're going to be a little bit quieter about what's coming and when it's coming because it always seems to be a little bit slower and a little bit softer than what we anticipate.

Okay.

So we're just going to go book them and then we're going to show you results.

Okay, the second part of my question is, relates to the segment breakdown that you gave us, the percentage of sales if you translate that into dollars.

And I know this isn't exact because you haven't given us the decimal point on those percentages so there's some variation because of that.

I wish you would you'd give us the decimal point -- the first decimal point so these would be more accurate in the future.

But, at any rate, it shows that industrial, medical, and other, in the December quarter was 419 versus 555s a year ago.

So could you comment on that, it's about a 25% decline?

And then, computers and office automation is down 4% sequentially from the third quarter. 100.5 versus 104.9, and why is that?

There doesn't seem to be any seasonable upswing there.

And where is the printers?

You mentioned printers were up seasonally, where is that?

So, the printers are in computers and office automation, Alex, and we said it's down slightly because of the seasonal trend for printers, so --.

Seasonal was strong in September, then?

Well that's when the back-to-school seasonal launch is.

Okay.

So it's not really a year-end seasonality?

It's really more back to school-- while it's still strong in the December quarter, it's a little bit stronger in September for back-to-school launches.

Okay, and what about the industrial, medical, and other?

Yes, you know what, I am going to confess that I think you stumped me on that one, I'm going to have to come back to you on that, Alex.

I've been more focused just looking at seasonal trends in this chart.

I suspect that -- let me just look into it.

I don't know, I'm not going to speculate.

Sometimes when you have an other catch-all some something moves out of there and goes into one of the other segments during the year and that can be -- happen too.

Yes, I think maybe, I agree with you 100%, Alex, that other category is a lot of stuff and as soon as it matures into something meaningful it goes and kicks into the appropriate category.

If I can make a comment on industrial, medical, and automotive, I think they're all up year-on-year.

I'm real confident they're all up year-on-year, and I think you're probably seeing more the effect of the other category.

Okay, well, you can get back to me offline, thanks.

Thanks, Alex.

Thank you.

And our next question comes from Lou Miscioscia of Lehman Brothers.

Okay, thank you.

I was hoping maybe you could comment on the June quarter, in the sense of, you mentioned that Nortel, to some degree, is going to come out of the numbers.

Would you expect that June now with the new March guidance will be flattish, both top and bottom line, respectively, or do you think that, due to some of the other programs that you had talked about ramping up, it would be higher, sequentially?

Yes, so, for sure, our philosophy, Lou, going forward is, we are going to provide quarterly guidance, just one quarter at a time.

But just to frame our thinking, while not providing guidance, we do think both the top line and bottom line in June will be sequentially higher, but we're not prepared to give any guidance for that quarter, but our expectations is, both top and bottom line will be higher sequentially.

Okay, quick one on an update.

The law that passed in Singapore, maybe if you could just could help us out?

What actually happened, what would your thoughts be going into the, I guess, talking to board on the stock repurchase?

Well, so the law changed yesterday and that allows us to buy our stock back with -- so long as we have positive equity, not just retained profit, so obviously we have a great deal of net worth in the company.

So that just allows to us buy stock back.

Mike, I don't know if you want me to answer this.

I would just say generally speaking, we're extremely bullish about the organic growth opportunities that increase both profits and opportunities that we can generate in incremental return on invested capital of 20% or more on those revenue opportunities.

We have deployed a significant amount of cash back into our capital structure already through debt reductions, which we think delevers our balance sheet and increases net income through reductions of interest expense.

During the script, I highlighted that our total debt was reduced by $435 million during the last 12 months.

So with regard to our cash, Lou, our primarily objective is to fund positive net present value core growth opportunities.

To the extent that we have more cash than investment opportunities, we would seriously consider a stock buyback.

And as I have said, we're going to discuss this with our board last month.

But the message that I'm trying to give you here is we're extremely excited about our pipeline of opportunities and as Mike highlighted, we're expanding rapidly in making some sizeable investments in order to meet what we see as high growth opportunities.

Mike, do you have anything else to add?

Yes, I think, we kind of get the sense that people would like to see us buy back some of the stock as a sign of confidence and such, but in order to do that we have to do a pretty sizable -- we would have to put a pretty sizable chunk back in in order to move the needle, so to speak.

And we were probably more inclined to do that a quarter ago, and we're probably getting a little bit less inclined, as Tom said -- not less inclined, but we're going to go through the options and talk a lot about what are the possibilities and the options for us doing that, because we also like that and find it attractive to buy back stock.

But we're finding, our number one priority as Tom said is -- to the extent that we can find good organic growth opportunities that drive our top line and drive for appropriate return on capital, and that's a much preferred model.

And we're still thinking we're a growth company here.

And even though we've only grown about 5% over the last three years.

Alternatively we see a lot of possibilities of how we can expand the market for us and be able to participate in it and we're becoming increasingly thoughtful about making sure we have enough cash to fund the working capital going forward.

Okay.

That's helpful, thank you.

Thank you.

And our next question comes from Jim Suva, Smith Barney Citigroup.

Great thank you.

When we talk about Nortel and coming in after the June quarter, any confidence you can give us about, indeed, will that then transpire in the June quarter and are we going to see any more headwinds after that, or is the $0.01 EPS dilution for that just through the June quarter and then we go positive accretiveness thereafter?

So, that's -- for us to commit to that would be very difficult for us.

We've come in here quarter after quarter after quarter saying, "We've slipped something with Nortel, we've slipped something with Nortel," so I would say when it happens, it happens and you guys will be the first to know.

But if we do slip it again, it would cause some additional deterioration in both the revenue and the profitability.

Once again, our expenses would go up as we continue to work on the transition and we'd have a lack of revenue and opportunities for profit growth as a result of it not transitioning across.

So, we don't know.

If it doesn't transition across, it has a whole different set of implications for the goodwill and the cash payments made and such.

So, we're all very, very bullish about it moving forward.

I think Nortel is, but I just -- we just have to really see it.

We’ll certainly be ready in the June quarter, but we still have to -- we have to get the switch pulled, and that still needs to happen.

Okay, and then, as a follow-up, can you give any additional color on what you exactly mean by completion of several major information systems?

Is this just getting them on to your consistent system or is there more behind it than that?

Yes, it's just a combination -- there's a combination of systems involved.

There's their order entry systems, there's the manufacturing systems, there's our systems and it's a pretty complex environment because of the nature of all the different product categories running in there, because they have wireless and enterprise and other things.

So there's actually a whole set of complications associated with this computer transition.

So it's just a variety and it's both of ours, and we're both working pretty hard together to go make that happen.

There's no particular issue, it's just we want it to be bulletproof when it comes across and we're making sure that it's bulletproof, and when I say we, I mean not just Flex, but also Nortel.

Okay, thank you.

Thank you.

And our next question comes from Tom Hopkins, Bear Stearns.

Yes, good afternoon.

Could you guys talk about how sticky you think your market share is, that your top five customers there have obviously been some new qualifications with Microsoft, in terms of vendors, and vendors -- another potential vendor has been qualified at Sony Ericsson, your number one customer.

So could you just talk about how sticky do you see your market share and if you expect any material shifts the first half of this year?

Well, there's no -- If we look through the top customers, Sony Ericsson, HP, Motorola -- none of these have any requirements to use us.

They only use us to the extent that they believe that the value and the service we provide them is as good or better than anybody else.

So there's not -- I wouldn't say there's a lot of stickiness.

The question is what's the relationship with these customers.

I think Sony Ericsson, it's very good.

We have -- anticipate that we'll be building this next year.

They're very thoughtful and process-oriented, and we're very, very happy with the allocation that we've received.

As they grow larger and larger they're going for sure going to use more than us.

It's just kind of a fact of things.

Kyocera is one of our bigger customers.

We view that a little bit stickier because we have a multiyear deal with them so we really feel good about that and I think Kyocera has been doing pretty okay in their marketplace now.

Hewlett-Packard, all I can say is we've been doing $1.5 billion of business with Hewlett-Packard year after year after year.

I think the relationship is good, I think it's very strong, I don't worry about that and I actually hope we can expand that relationship into the other product categories where we're very under-penetrated, so actually, I view there as being more upside with HP than downside.

Microsoft has basically taken their product as it's become mature; it's basically now become kind of a PC box and it's highly -- and they run it like a commodity.

So the opportunities for sure will be there.

Just because we're a pretty key supplier of theirs and preferred supplier.

As it becomes more commoditized it becomes challenged from a profitability standpoint.

So, from that standpoint, we'll probably do the same amount next year and the profitability will be not fabulous.

Motorola, we have a huge relationship with, and we're pretty positive on that relationship, we're actually very positive on that, we do everything from printed circuit boards, we do camera modules, we do infrastructure, we do mobile phones, we do plastics.

It's such a broad engagement, probably encompassing eight or 10 countries that, we view that to be -- they have no obligations to use us, but I think it's pretty strong.

And Xerox also is a very, very strong relationship and I think that's very positive.

Okay.

Let me ask the question another way.

Looking at this $4 billion, I'll just call it $4 billion, looking at this $4 billion quarterly run rate you have right now.

Do you see anything, market share wise in the top five, that would a year from now make it different?

Biggest risk?

Sony Ericsson, HP, I'm just looking over our top guys.

Who is the other one, Nortel.

Nortel, Motorola, Kyocera, Xerox.

No, I don't.

For the top six customers I see very little risk based on what I know from a relationship standpoint.

So if anything were to change it would be the basic demand in the business.

It wouldn't be market share related.

That's correct.

Okay, great, Thank you.

The only risk I see is, we still have another factory at Nortel to bring across which we haven't done yet, so that's what I would see is the -- just because we haven't done it yet.

Okay, thanks.

We view it as being more upside in the other accounts.

Thank you, sir.

Our next question comes from Steven Fox, Merrill Lynch.

Hi, good afternoon, couple questions.

First of all, on the profitability, excluding Nortel, is there anything that you see that can offset the investments and that you can wind up with higher margins say, two to three quarters from now?

And then secondly, just, do you have an off-balance sheet receivable number, Tom?

Yes, do you want to answer the first part of the question?

Yes, on margins, yes, I do.

I think one of the benefits of being the number one provider in camera module business, it gives us an opportunity to manage the supply base in an aggressive way.

I think it gives us a lot more cycles of learning and I think we will solve our efficiency and real issues there.

I think we know how to do it.

We build a lot of them today, more than anybody in the world.

So I think we know how to do it, know what we need to do in order to get that profitable.

So I actually think there could be a good contribution by the second half of the year in camera modules.

In things like power supply business, some of the other business, I actually do not see that -- I think it's still an investment process.

And you have to remind, our cumulative investment is power supplies is probably going to be $15 million, and normally what we've done in the past is gone out and spent a couple $100 million for a power supply company with a bunch of goodwill and this is something what we're trying not to do, and what that does, as a result is, it creates some expenses, as we start up these businesses.

But we think in the long run it's a much better return model.

So I think that won't do much, but then again I don't think it's going to be that much of a drain on our business.

I think the more -- so I do think in December quarter, December-March quarter we could see the benefit of some of our ODM programs come along.

The camera module business becoming more profitable, which is a large revenue business now.

And I can see some of the effects of these things.

Just specifically on that, what is the restructuring, do you think yet, in terms of cost savings, the charges that you have been taking or is that already in the -- is the savings already in the numbers?

Yes, there's no incremental benefit associated with that, so whatever we have assumed for profitability now, that's already assuming the benefits of the restructuring.

Okay.

And then just that off balance sheet number, Tom?

Yes, so we sold almost the same level this quarter as last level in terms of asset securitizations, $257 million, and $184 million of that was received in cash proceeds.

Great.

Thank you very much.

Okay.

So maybe we'll take one more question.

Thank you.

And our final question comes from Michael Walker, Credit Suisse First Boston.

Thank you.

Nortel, in prior quarters, you have given us on your slides, you've given expected Nortel revenues for fiscal '06 and '07.

I'm wondering if you have those numbers now?

Well, I actually don't remember breaking out those revenues specifically for you, Mike, but I would say in terms of fiscal '06, the delta is about a little bit more than $100 million as a result of the push out that we anticipated some revenues in the March quarter that didn't happen, and about $150 million would come out of fiscal '07 because of the scheduled reduction as well.

So whatever numbers you were using for Nortel, just back out about a $150 million in fiscal '06 and '07.

And that gets to my second question, I'm confused as to why the Nortel hit would be bigger in June than it is in March.

Well, because we expected a full June quarter revenue load, because we expected the factory to transfer over late in the March quarter.

So there's a partial quarter impact in June and bigger impact or, excuse me, a partial quarter in March and a bigger impact in June.

Just the timing of what our expectation was versus when we think it'll transfer over now.

Okay so assuming Nortel is still a $2 billion piece of business and you can confirm or deny that, do we expect to hit that full run rate i.e., in the 6 to $700 million range per quarter by sometime in fiscal '07 or is that now more of a fiscal '08 time frame?

Well we're definitely not gearing up to hit 6 or 7 million a quarter, or 600-700k a quarter, is that what you said?

Well yes, because you had been saying 2.5 way back, you kind of guided that down to greater than 2, so I was kind of estimating somewhere in the 6 to 7, but it sounds like it might now be 2 which would assume 500.

Is that what I should be thinking?

Again it really depends what -- we'll have all the optical, the wireline, and the enterprise business, so whatever that runs with Nortel is what it'll be, substantially.

There's a few programs -- they have some freedom to do a few things with a few programs outside of that, but generally it's just a question of what they're going to do.

But I think, conservatively, I think you ought to assume it's a $2 billion program and we'd be running at that run rate by the month of June.

And just the last question on the margins.

It looks as though the margin, the margin decline, September to December was a little greater than can be explained entirely by the divestitures.

Is that's the case and if so, can you just tell us what the influences were there?

Yes, it's definitely not just divestitures.

We are --- I think I mentioned, we're struggling with our, particularly with our mobile ODM investments that are absolutely losing money, our camera module business is for sure losing money.

Our power supply business is losing money.

All of these are negative.

We've added a lot of testing on the camera modules.

We went from 1,000 people at the beginning of the year to 4 or 5,000 at the end of the year, we went from one factory at beginning to three factories at the end, and we had to build clean rooms.

It's a massively intensive process.

We probably had five design wins at the beginning of the year and at the end of the year we're probably in 50 different phones with multiple customers.

So the complexity of the business when we drove towards this high growth and getting into the 14% market share was real fast, a lot of learning curve, a lot of new people, a lot of new facilities, a lot of investment, and we just weren't able to make money, but we chased the revenue.

We also mentioned the ODM piece from a financial standpoint, we just didn't do well last year.

Operationally, in terms of positioning ourselves for this year, we did a great job, so I think that's -- but nonetheless, from a margin standpoint, it's negative.

So you take all the ODM investments and the component investments and they are actually contributing negatively as a bundle, so it's actually taking the base CMS and printed circuit board margins down when you put it all together.

Is there a quarter where we can start looking forward to Windows components, the modules, the power supplies, will start to break even and contribute to margins?

Yes, we go from four million -- four million pieces in ODM to 11 or maybe more.

Maybe it's not that high, maybe it's nine, but once you hit double and triple those volume levels, those investments absolutely pay for themselves.

Camera modules, we absolutely -- we actually intend to be profitable even starting this quarter, so even though our revenues are going to be down, we actually have greater efficiencies and yield improvements this quarter as a result of the work we did at the end of last year, We actually expect that business to start turning, at least break even this quarter.

I think power supply is going to be another year.

It's a complicated business.

We have to bring an on a lot of IP and know how.

We actually just hired a general manager for that business who we're really excited about and we also have some better leadership in that business so I think -- but it's not -- we don't anticipate that being profitable this coming year.

So that's still going to be an investment for us.

So I'd say it's starting to turn and I think it'll still be a little bit of a drain these first couple quarters March and June and then I think we'll start to see some of the benefits towards -- as we get into the later quarters.

And that's when we also expect to see some of the volume coming online, some of the additional revenue.

Mike, I think it's important to understand that strategically we've made the decision to invest in certain of these businesses organically even if it hurts our short term profits.

So we're doing it organically rather than investing in acquisition and goodwill premiums.

And we think in the long run, and actually even in the short run, it's much easier to achieve our ROIC requirements from these organic investments than through acquisitions, so that's a strategic decision we made and we do think that's in the best interest of our shareholders, and that's what is going to create more value than acquiring these capabilities externally.

And that doesn't mean we won't do acquisitions, because we'll continue to do acquisitions that accelerate our learning in certain product categories where we need the expertise, and don't want to bring it on, or it's too complicated to bring on from an organic strategy, but we're going to try a lot harder to be more precise with those acquisition investments and try to keep the goodwill down and get our return on capital up.

Thanks a lot.

Okay.

Thanks, thanks, everybody for joining, we'll close it off at this point, and we'll see you again next quarter.

I'd like to thank everyone for participating in today's teleconference call.

And have a great day.