Flex Ltd (FLEX) 2006 Q4 法說會逐字稿

Good afternoon and welcome to the Flextronics 4th Quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Mike McNamara, Chief Executive Officer.

Thank you, sir, you may begin.

Good afternoon, ladies and gentlemen.

Thank you for joining the conference call to discuss the results of Flextronics' 4th quarter and fiscal year ended March 31, 2006.

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

Go to the investors' section of our website and select Calls and Presentations.

You'll need to click through the slides, so we will give you the slide number we are referring to.

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

I will turn the first part of the call over to Tom to go through the financial portion of our prepared remarks.

I will then provide some commentary 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.

Slide 2.

Please note this conference call contains forward-looking statements within the meaning of the Federal securities laws, including statements related to the prospected divestiture of our software development solutions business, and the expected gain and returns from the divestiture.

The potential growth, opportunities, and our core EMS business, the success of our market segment approach, the Nortel agreement, revenue margin growth, the success of our long-term initiatives, our investments in component design and OEM capabilities [and] in our manufacturing facilities, new customer opportunities, profitability, 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 press release on slide 20 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 in our other SEC filings.

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

Investors are cautioned not to 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, 6, 7, and 8 of the slide presentation, as well as the GAAP versus non-GAAP reconciliation in the investors section of our website, which contain the reconciliation of the most directly comparable GAAP measures.

Slide 3.

As previously announced, we have entered into a definitive agreement to sell our software development solutions business to KKR.

In addition, we successfully divested our network services and semi-conductor operations earlier in the fiscal year.

Because we retained an ownership interest greater than 20% in the network services business, we used the equity method of accounting for this investment, and therefore to not report this as a discontinued operation under GAAP.

However, the software and semi-conductor divestitures meet the reporting requirements for discontinued operations under GAAP because we are retaining less than a 20% ownership interest in the businesses.

We will use the cost method of accounting for the software investment, and we have no continuing ownership interest in the semi-conductor business.

Therefore, under GAAP, our discontinued operations include software and semi-conductor, but not network services.

Revenue in the March 2006 quarter for the core EMS business which excludes software, semi-conductor and network services was $3.5 billion.

Which is an increase of $198 million or 6% from the year ago quarter.

In addition, to the $3.5 billion of core EMS revenue, $66 million of software revenue has been classified as discontinued operations in the March 2006 quarter.

Therefore, non-GAAP revenue, which includes continuing and discontinued operations, totals $3.6 billion, which is the mid-point of our previously provided guidance.

Slide 4.

During the quarter, Asia decreased on a sequential basis to 56% of total revenue, Americas increased to 24% and Europe remained at 20%.

With regard to market segments, communications infrastructure increased sequentially from 20% of revenue to 23% in the March 2006 quarter.

As expected we saw a sequential decrease in the computers and office automation segment from 24% of revenue to 22% in the March 2006 quarter, primarily as a result of the normal seasonal trend in our printer business.

Revenue from handheld devices decreased sequentially from 30% of revenue to 26% in the March 2006 quarter as a result of normal seasonality.

IT infrastructure increased sequentially from 6% of revenue to 7% in the March 2006 quarter.

Industrial, medical, automotive, and other increased sequentially from 10% of revenue to 12% in the March 2006 quarter, while the consumer segment remained at 10%.

Sony Ericsson, HP, and Nortel all individually exceeded 10% of total revenues in the March 2006 quarter.

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

Slide 5.

On a sequential basis, gross margin in our core EMS business increased 30 basis points to 6% in the March 2006 quarter.

On a year-over-year basis, operating profit for the core EMS business increased 4 million or 4% to $104 million in the March 2006 quarter.

Slide 6.

Excluding amortization and restructuring charges, net income amounted to $98 million in the March 2006 quarter, which represents an increase of 3% over the year ago quarter.

Excluding these same charges, net income per diluted share amounted to $0.16 in both the March 2006 and 2005 quarters.

Slide 7.

During the March 2006 quarter, after-tax amortization amounted to $7 million for continuing operations and $4 million for discontinued operations.

After-tax restructuring charges amounted to $45 million.

As a result, GAAP net income per diluted share was $0.07 in the March 2006 quarter.

Slide 8.

Return on (indiscernible) tangible capital improved to 29.7% in the March 2006 quarter from 24.9% in the year ago quarter, while return on invested capital, which includes good will and intangibles, has improved to 9.6% from 8.5% in the year ago quarter.

Slide 9.

We ended the quarter with $1 billion in cash and certificates of deposit.

Including our undrawn $1.3 billion revolver, total liquidity was $2.3 billion.

Net debt is only $596 million at the end of March 2006 and has been reduced by $270 million during the last 12 months.

Our debt to total capital ratio has been reduced from 25% at the end of March 2005 to 23% at the end of March 2006.

Slide 10.

Cash conversion cycle came in at an industry-leading ten days versus 15 days in the year ago quarter.

Slide 11.

Depreciation and amortization amounted to $327 million and net capital expenditures were $251 million in the fiscal year.

Cash flow from operations during the year generated $591 million.

This includes over $124 million of cash payments associated with our restructuring activities over the past 12 months.

Cash flow from operations, less capital expenditures generated $340 million of free cash flow during the year.

During fiscal '06 we invested $649 million in acquisition related activity, which includes payments to Nortel of $270 million.

The divestitures of our network services and semi-conductor businesses generated $519 million of cash during the year.

Slide 12.

As previously announced, we've entered into a definitive agreement to sell our software business to KKR and a transaction valued at approximately $900 million.

Upon closing, Flextronics expects to receive in excess of $600 million in cash and will hold a $250 million face note with a 10.5% paid in time interest coupon which matures in eight years.

Flextronics will also retain a 15% equity stake in the business.

We expect this transaction to be slightly accretive to our fiscal 2007 GAAP earnings per diluted share.

The pre-tax gain on the sale is expected to be approximately $175 million.

This transaction is expected to close during the summer and we will update you on the specific impact on our balance sheet and income statement at that time.

We are not proceeding with any other divestiture plans at this time, although we will continue to review our options.

Thank you very much, ladies and gentlemen, I will now turn the call over to Mike McNamara.

Thanks Tom.

Slide 13.

Before discussing guidance, I would like to take a few minutes to reflect on the results of our fiscal year ended March 31, 2006.

In terms of revenue and operating profits, we did less than we expected in FY06 and I'll tell you why and how we plan to reverse this trend in fiscal '07 and beyond.

But first let me remind you of some of the positive highlights of fiscal '06.

In my opinion, we had a very smooth and successful CEO transition.

As you know in December 31st, Michael Marks retired as our CEO and became a non-executive Chairman.

We planned and executed this transition in a very collaborative manner and I would like to thank Michael for his leadership and support he has provided to not only me personally, but also to our customers, suppliers, and employees.

When we first began planning this transition, we performed a comprehensive review and evaluation of the strategic and financial contributions of each of our operations and related strategies to increase shareholder value.

We decided to focus our efforts and resources on the reacceleration of significant growth opportunities in our core EMS business which includes, design, vertically integrated manufacturing services, components, and logistics.

As a result during the year, we divested our network services and semi-conductor businesses and recently announced the definitive agreement to sell our software business.

By monetizing these non-core assets at substantial gains, over carrying values, Flextronics will have generated cash proceeds in excess of $1.1 billion, assuming the software transaction closes as expected this summer.

Other substantial improvements to our balance sheet from these divestitures, assuming the software sale closes, includes approximately a $135 million reduction of deferred tax assets, and approximately a $1 million reduction in good will and intangibles.

While it would significantly increase as the Company's tangible equity and therefore enhances our financial position.

In addition, we will have retained ownership interest in both software and network services business which should provide additional cash and potential future upside when monetized.

To sharpen our focus on the rapid increase in growth we expect in our core EMS business, we have organized our Company's resources around several focussed market segments, which is designed to bring more value and innovation to our customers, improve our competitiveness, and increase our market share.

As a result, senior executives have been added from the outside or promoted internally to lead each of the following seven market segments.

Computing, mobile, consumer digital, industrial semi-conductor and white-goods, automotive, marine and aerospace, infrastructure and medical.

Beginning in the first quarter of fiscal '07, we will begin reporting our revenue by these new segment categories and discontinue the revenue segments reported on slide 4.

Fiscal 2006 was a very strong year in terms of incremental business wins from both new and existing customers.

I think you should begin seeing this in our revenue growth rates in the second half of calendar 2006 as there were revenue offsets we had to work through in our most recent fiscal year.

Such offsets include such things as the Nortel transition delay, Siemans and Alcatel divesting their cell phone product lines, and new product ramps that commonly ramp up slower than expected.

In addition, because we are engaging customers much earlier in the new product design and development process, ramp up to the next generation volume production takes much longer.

At the start of the year, we originally thought the Nortel transition would be completed before the end of fiscal 2006.

While this program has been delayed several times since our discussions began 2.5 years ago, we exceeded our $1 billion Nortel revenue objective in fiscal 2006.

There's still one more system house to be transferred that is still being worked on by both parties.

As a result, we still have a little more than $200 million of remaining installment payments to be paid to Nortel, ratably during the rest of the current calendar year.

Slide 14.

Total revenue from hand-held devices declined from $4.9 billion in fiscal 2005 to $4.1 billion in fiscal '06.

This year-over-year revenue decline was primarily due to Siemans and Alcatel divesting their cell phone business to Asian suppliers who brought manufacturing in-house during our fiscal 2006.

As a result, cell phone revenues from these two customers in fiscal '05 were more than $1 million higher than in fiscal '06.

A new program [Win with] Kyocera offset some, but not all of the year-over-year revenue declines from Siemens and Alcatel, however, total quarterly rev -- hand-held revenue was more than 6% higher in March 2006 compared to March 2005, which is the first time in more than a year that quarterly hand-held revenue grew on a year-over-year basis, and we expect this trend to continue.

In fact, we expect hand-held revenues to grow more than 25% on a year-over-year basis to a record high level at FY '07.

I would now like to review some operating metrics at the end of fiscal 2006 that we think demonstrate that we're executing on the controllable aspects of our business.

And I'm on slide 15.

Return on invested tangible capital has continuously improved each year from 7.9% at the end of fiscal '03 to 29.7% at the end of fiscal '06.

Return on invested capital has also improved each year from 4% at the end of fiscal '03 to 9.6% at the end of fiscal '07.

Cash conversion cycles also continuously improved each year from the 36 days at the end of fiscal '02 to ten days at the end of fiscal '06.

We have generated more than $1.1 billion of cash from operating activities and divestitures during fiscal '06 and expect to generate another $600 million from the sale of software in fiscal '07.

Net debt, which is the total debt less cash and CDs, has improved from $1.1 billion at the end of fiscal '04 to $596 million at the end of fiscal '06, while cash and CDs have increased from $424 million at the end of fiscal '07 to $1 billion at the end of fiscal '06.

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

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

Slide 16.

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

Annual CapEx reached a high of $711 million in fiscal '01.

Our annual CapEx decreased to $251 million in fiscal 2006.

But as you can see in this slide, we are playing to invest heavily for the reacceleration of significant growth opportunities in our core EMS business.

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

We expect CapEx to be about $400 million and the depreciation to be about $325 million in FY '07.

We are also increasing the through-put on fixed assets as revenues continue to grow and fixed asset base continues to decrease.

The fixed asset to sales ratio was 16% at the end of fiscal 2002 and has since decreased to 10% at the end of fiscal 2006.

We expect this trend to continue in FY '07.

Our major long-term initiatives continue to work well.

And we continue to see customer adoption of our vertically integrated EMS services which incorporate design, components, manufacturing, and logistics.

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

As a result, we are investing heavily throughout capacity in China, India, Ukraine, Brazil, and Mexico.

Our printed circuit operation continues to form very well.

We are expanding our rigid circuit capacity in China with a new factory that we expect to come online in the December '06 quarter.

The new flexible circuit factory in China should also begin volume productions in the September 2006 quarter.

We're also expanding our existing HDI factory in China.

Obviously, we are making significant investments in our future.

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

Slide 17.

We continue making significant investments in our design and vertical integration capability.

For example, as previously disclosed last quarter, we opened a Beijing design center and have now increased our cell phone design engineering by over 300 engineers at this location.

We have 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 other technologies such as TV tuners.

With regard to our ODM business, we now expect to more than triple our cell phone units shipped to five different customers in FY '07 to approximately 17 million units, up from last quarter's estimate of 12 million units.

These units span 14 different platforms with over 4,000 variants.

In addition, we currently have six new ODM phones in development which can generate significant unit volume growth in FY '08.

We're very pleased with our progress in this business unit.

With regard to our camera module business, we finished the fiscal year with an estimated 15% to 18% market share, which we believe puts us in the number one position.

We have diversified our customer base substantially and expect significant revenue growth in FY '07.

As you can see from this slide, camera module profits in FY '07 were adversely affected, impacted by start-up costs.

We added two new camera module factories during FY '07 and have increased our headcount by almost 4,000 people.

We experienced poor utilization rate and yields in the camera module factories as they ramped up from almost no revenue in FY '05 to approximately $500 million of revenue in FY '06.

We expect to be able to absorb these start-up costs and cross back over to profitability in FY '07 with further margin upside in FY '08.

We believe we will build the critical mass in the camera module business in FY '07 to be able to expand research and development activities in other various component technologies without adversely impacting future operating results.

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

Because Multek is more mature, we are able to better absorb start-up costs in R&D investments from our factory expansions, and are realizing strong profitability in this business unit.

We expect to replicate this model in ODM, camera modules, and other component technologies.

Longer term, we ultimately expect the rate of earnings growth in these businesses to exceed the individual revenue growth rates.

Slide 18.

We will continue to provide guidance for only one quarter at a time.

For the June 2006 quarter, we're currently expecting revenue from continuing operations, which excludes the software business in the range of $3.7 billion to $3.9 billion.

Assuming a tax rate of 7% to 10% next year, we're currently expecting total net earnings in the June quarter to be in the $0.16 to $0.17 per diluted share, including the discontinued [indiscernible].

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 and tangible amortization expense and stock-based compensation expense.

When we decided to divest certain non-core assets and move to a market segment approach, we anticipated this strategy would allow us to achieve substantial growth in our core EMS business.

As a result, the mix of our business is undergoing a change.

We are seeing a significant amount of out-sourcing opportunities in our core EMS business that are broadly distributed across most end markets.

We are focused only on the significant growth opportunities that meet our financial requirements.

Many of these opportunities are high volume programs that typically involve lower margins initially with the potential for margin enhancement over time as we increase our vertical integration.

We remain optimistic that a number of these opportunities will result in additional revenue in the second half of calendar 2006 and beyond.

As a result, we will be ramping up our investment in start-up costs for such things as head count, equipment, and factory expansions, that are required for this anticipated growth.

Slide 19.

We also recently announced that our Board of Directors has authorized the repurchase of up to $250 million of our outstanding ordinary shares.

There are a number of attractive opportunities to deploy our cash in a manner which maximizes earnings and long-term shareholder returns.

We expect to invest in working capital to support the rapid increase in growth we expect in our core EMS business.

Other attractive opportunities include paying down debt or repurchasing stock or a combination of both.

This slide demonstrates in overly simplistic manner, why we will invest in profitable revenue organic growth first as compared to buying our shares back.

This slide shows that a $250 million stock buy-back would be about $0.01 accretive to FY '07 consensus estimates versus investing the $250 million in revenue but we can earn a 15% return on invested capital, which would generate approximately $0.04 of accretion to FY '07 consensus estimates.

Of course, we could do both if liquidity allows.

Slide 20.

There are real risks in operating in this business which include the macro economic or technology slow-down among other things.

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

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

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

Thank you.

We will now begin the question and answer session.

[OPERATOR INSTRUCTIONS]

Our first question comes from Alex Blanton with Ingalls Snyder.

Your line is open.

Hi.

Good afternoon.

Good afternoon.

Before I ask the question, guys.

We didn't get the press release until about a quarter after 4:00, I don't know what the problem was, but it doesn't give you a lot of time to crunch the numbers before the call starts.

You ought to take a look at either getting it out earlier, perhaps or maybe having the call at 5:00 so we would have a little more time to prepare.

Now, my question is, first on the segment, the first segment on the slide, industrial, automotive, medical, and other was 12% of the sales versus 13% last year.

That's a sector that's been doing well, been a lot of new business written in the past year.

So I'm wondering why your sales in that sector were down?

It was down about 8% if you use those percentages.

So, Alex, we haven't spent much time analyzing that piece.

We've been in the market segment transition for the last six months, where we've recategorized these different segments and the different business units within these segments; and to be honest with you, we've been so focused at looking at the data in that way, I can't give you an exact answer of why the industrial, medical, and automotive was down.

We view each of those to be pretty robust segments for us going forward.

In fact, we've built -- we've actually taken industrial, medical and other -- and automotive and actually have broken those into three different business segments going forward.

Because we think the growth that we're seeing, and maybe just some of our other wins haven't come through and shown yet.

We actually think they're -- they each justify their own segment out of the seven segments, so we're actually quite bullish in the future and I guess I can't exactly respond to that.

I'm just looking at so much of the data differently now.

What are those new segments you'd mentioned?

You went over them too -- very quickly?

Alex, before Mike does that, I would just like to add.

We do have one customer that provides certain automotive parts that had a financial situation in terms of filing bankruptcy, and I will say that we experienced a revenue decline from a very large customer in that category.

But I'm not going to say who it is.

Okay.

There was one customer that was down substantially the last couple of quarters.

Yeah, well somebody supplies Delphi.

Alex, we'll get a look at that and we'll send you an e-mail on that.

What are those segments again, the new ones?

Computing, mobile, consumer digital, which we consider things like (indiscernible) imaging and digital cameras and those kind of consumer products.

Fourth category, industrial, semi-conductor and white goods.

Fifth category, automotive marine and aerospace.

Six, infrastructure and seven, medical.

Okay.

So I think, what we said in the call as well as that going forward, we're going to be able to start reporting on -- in those market segments -- in those categories, so you'll see the revenue and the breakdown and the pie charts built around those segments.

And I can assure you, we'll be (indiscernible) in as to when those are going up and going down and what the reasons are as we have real good targets and goals and expectations around each one of them now.

But they're a little bit different of a slice.

Okay.

Second question when you divested the software business on April 16th, you issued a release in which you twice referred to accelerating growth.

Reacceleration of the growth rate and increased growth rate and you intended to invest some of the proceeds in that.

And you've talked about that, but you haven't done a lot to quantify that.

There were a number of new wins announced about a year ago by the Company, and you went over those in some detail.

Including, there was $2 billion from Nortel we already had and then there was another $3 billion you mentioned a year ago in Kyocera and in a couple of $2 billion pieces that would be ramping over the next two years.

And you gave the time frames, but since then we really haven't had much to go on.

Could you give us an update of that and of what you presented a year ago in terms of ramp-ups and also, what's been added to it since then?

Having one quarter of guidance doesn't give anyone very much visibility.

Yeah, well, we get a little uncomfortable providing more than one quarter of guidance.

We have such -- a little bit of variability in our market, and we just kind of have chosen that we're not going to be promotional about our future and we're going to pretty much let the results speak for themselves.

This next quarter, we're going to see some increase in revenue levels, somewhere between 3.7 and 3.9 as the way it looks now.

And then kind of what we've always said in the past is the second half of this year, we expect the top line to grow pretty nicely.

In fact, probably three months ago we were thinking that we're going to spend about $250 million in capital and we now expect to be spending about $400 million in capital in FY '07.

Is that capital expenditures or does it include working capital?

No, that's just capital expenditures, that's no working capital increase.

So we anticipated this growth in the second half, we -- when it comes it really comes and we didn't want to be promotional like I said.

But we're anticipating that that second half will happen and I think you'll see some of the revenue substantially increasing in September and December.

And I think March, I think it will carry on through to the March quarter.

I think you'll see that, we haven't quantified it.

A lot of the September quarter business is -- it's still a little bit of a show me thing, and we kind of have to wait on that consumer market cycle to kick in September.

But I can say we're pretty confident in it, to the point of putting up quite a bit of square footage and buying quite a few--purchasing quite a bit of capital to support it.

That's sequential growth you're talking?

Sequential, year on year, kind of everything.

But it's sequential from the 3.7 to 3.9?

Oh, yeah, definitely.

Okay, that helps, thanks.

Our next question comes from Jim Suva with Citigroup, your line is open.

Great, thank you.

I have a clarification question and then a quick follow-up.

On your guidance of 3.7 to 3.9 as well as EPS, I want to be clear.

Does that indeed exclude any software revenues in earnings?

Jim, it excludes the revenues from software.

Okay.

Okay, and that's going to be somewhere in the range of $70 million-ish next quarter.

But it does include the earnings from the software, because total earnings include discontinued and continued operations.

So it will be -- discontinued operations will contribute about $0.015 of the total earnings guidance.

Okay.

But it is included, obviously, that gets included in total net income.

And then second, could you give us an update -- last quarter the Nortel, Calgary facility, I believe you said was pushed out from March to the June quarter.

Can you give us an update on the timing of that and how is it going?

Yeah, so based on the many delays and changes we've had over the last two years, I think you guys have seen those and I think we've disappointed often by thinking that revenue was coming at a certain time frame.

And it was always slipped -- it always seemed to slip.

I don't know how many times we slipped the system house, but it's probably five or six, I would think.

So for us to guarantee that the system, how's it going to close when it closes, we just can't do that.

There's always been so much uncertainty in this program that we can't guarantee what it will or won't do.

We just need to keep working towards it, and -- which we are -- and we'll let you know when it closes.

Okay.

Thank you.

Our next question comes from Steven Fox with Merrill Lynch, your line is open.

Good afternoon.

First another clarification, Tom.

On slide 4, the percentages, those are based on sales including discontinued sales?

Yes, yes, Steve, that's total sales.

Okay, and then, Mike, just on the comment about 25% revenue growth and hand sets, you sort of break down the proportion coming from having Kyocera as the full year and your new ODM wins and whatever else the other proportion is from?

Yeah, I think it's probably mostly new wins.

There's probably a small amount coming from Kyocera.

So Kyocera we transitioned over last year, and we were probably fully running in July or so, maybe August, we were at full run rates with Kyocera.

So we did get about nine months of that revenue in, and we ended up getting kind of the big block of it, which goes from August to December.

So I think Kyocera may have an extra $150 million this year relative to last year or so.

And then the rest is all of the customers, so I would say it's substantially driven by either further growth with the existing customers or just new customers.

And it's largely ODM-related wins?

In terms of the new wins?

Or is it split evenly?

How would you describe that?

Well, the ODM business is substantially up.

Last year we did probably four to five million units and this year we expect, as I mentioned like 17.

So there is going to be a portion of that.

Sometimes our own ODM business even cannibalize some of the existing business so the programs that we're doing ODM on are the next generation programs, which, maybe in the past, may have been designed by one our customers, where we're designing it this time.

Sometimes that's incremental business in terms of revenue, sometimes it's not.

But it's -- we're actually experiencing, I would say, a pretty much across the board expansion of each of our existing customers, and I think we've probably added four or five customers, as well.

Great, and then Tom, real quick, option expense in dollars for the quarter coming up?

It's going to be about $8 million per quarter.

Thank you.

Our next question comes from Bernie Mahon, Morgan Stanley.

Hey, good evening.

Good evening.

Question for you on the component side of the business, it looks like from the one chart, knowing what the operating income was for the first three quarters of fiscal '06, that the losses in fiscal '07 actually accelerated.

And then you'd said that you expect to get back to profitability there in fiscal '07, is that going to be more of the second half of the year, or is it going to be more in the June time frame?

Can you just provide some context around that?

Yeah it's -- when does it occur, it's probably really -- that appreciation in terms of profitability, it's probably occurring, sometime as we speak now.

I would say, so I would say it's already making the transition and the cut over.

So it's a good point.

Last year we were hoping to have a lot of these component businesses to actually increase margins as opposed to decrease margins.

Last year they decreased margins.

As you can see from that chart, we've had such acceleration in the revenue from year on year that we just had to absorb this.

We added many customers and we had an enormous amount of design wins.

Each one of these camera modules, you kind of have to win one by one and it was just too much for us to handle adding the fact to that and the people and utilization.

This year we expect it to be kind of at EMS margins as you can see, and then next year we expect it to be not only contributing, but we expect it to be solid enough and have a high enough revenue and profit base that it can actually fund the R&D activities of other component businesses without adversely affecting our results.

Right, but I guess just to clarify, so were the losses in the March quarter, were they around $20 million there?

And do you think you get break even kind of in the first half of the calendar year?

Yeah, we're probably still -- I mean I don't know exactly how much we lost.

Again you're talking about the component business or the roll-up of the components and the ODM businesses.

The components business, how you used to break that out?

Yeah, just the components businesses is only losing probably $5 or $6 -- $4 or 5 million per quarter.

And when will that be--

In March.

I think that transition is easily in September, maybe even in the June quarter.

Alright, that's helpful, thanks.

Yep.

Our next question comes from Kevin Kessel with Bear Stearns, your line is open.

Hi, good afternoon.

Mike, your slide with Nortel, it mentioned that you guys exceeded the $1 billion expectation for the fiscal year, is this contract still on target for $2 billion overall side?

Yeah, we actually anticipated about $1 billion this year, we ended up at about $1.25 billion.

Maybe we were a little bit conservative in terms of our forecasting.

This year that rate has grown so we're actually at a run rate that's higher than that $1.25 billion right now.

And to the extent that the system houses close on schedule, then I would say we'll still be on track for that $2 billion number.

But again what I said before, you just never know because there's just been so many delays and changes that we just for sure don't want to warrant that's a done deal in any way.

Right, and part of that deal was clearly you guys sourcing components for both printer circuit boards and enclosures, and I think you guys were able to do some of that early on, and then maybe some of it has been delayed as Calgary's been taking more than expected time to close.

After Calgary closes, first, can you actually detail what you expect Calgary to add in terms of maybe on either a quarterly run rate once closed or on an annual run rate?

And then, what do you expect in terms of additional components to still flow into Flextronics from other potential suppliers?

Yeah, so, it's a tough question.

We probably have Nortel in like ten different countries and a pretty complex supply chain as you can imagine, so it's hard to boil that down to one answer.

The Calgary facility itself is expected to add around close to $800 million of revenue on an annual basis.

And there are a variety of different components that we participate in.

Whether it be the mechanicals or the assemblies or the Board or whatever, and it's hard to say exactly what that adds or doesn't add.

From our standpoint, it doesn't add much revenue.

Either alternatively, it's meant to as it goes into these system houses, it provides some incremental margin gain.

So, we don't know exactly what that number looks like and the timing, as the timing continues to change and tweak, along with whatever market conditions that Nortel has is in the status of their orders and whether they're ramping or not ramping, etc.

So it's hard to say, except we're on track at this point.

Assuming the system house closes to do about $2 billion of revenue.

Right, and just so I clarify, I think what you're saying then is Calgary is roughly $800 million annually, right now obviously those components will be flowing into the systems house regardless of who supplies them.

But once you're able to maybe get yourself either approved on the AVL or what have you, then maybe the mix actually becomes richer over time as Flextronics might supply those verticals.

Exactly, and some of the verticals, even today, we are supplying to Calgary already.

Right.

Right.

Why we're at even above the $1.25.

Maybe we're at a $1.5 billion run rate right now so the incremental revenue will really only be 500 if you look at it from that standpoint.

Originally when this deal was announced back in 2004, I thought you guys said that roughly half of the overall value of the deal you expected to be potential component content that you could supply.

Does that still hold true, and if so, what do you think it is just today based on the run rates you've got?

Yeah, I think the original expectation was around 1 billion.

I think that's right.

And I think we anticipated that it would take three years to get there when we first started.

Now, granted there were a lot of delays through that period.

But I suspect right now we're probably half way, probably about half of that volume are in verticals at this point.

So about $500 million

Yes.

And then last thing is, maybe this is a question for Tom.

Is any part of Calgary currently factored into your topline guidance for the June quarter?

In terms of that closing.

Anything at all?

Yeah, I think our range is sufficient to cover whether it's -- whether it closes or not, Kevin.

I'm comfortable with the range with or without it.

Great, okay, great, and I guess the very last thing is your handsets seem to be down maybe a little bit more than expected in the quarter.

Obviously you see a lot of seasonality, but a lot of people out there are actually seeing quite a bit of less seasonality in handsets in this March quarter.

Was there a particular reason, maybe some end of [lifes] on other platforms or customers moving around or anything that might have contributed to that?

Not really.

I guess we - it might be that the product cycles, of the particular products that we're doing, some products are very, very hot.

Maybe we don't have the same mix of those as others, but we're way bullish about our cell phone business.

I mean, very, very bullish.

We've added a number of customers, our ODM wins are turning around.

Our revenue should go up.

At least $1 billion this year over last year in terms of what we already see.

It might be a little bit of a dip, but fundamentally, the diversity and the number of wins, the type of products we're building are all very positive for this year relative to last year.

So I think it will come back just fine.

Alright, thank you.

Our next question comes from Lou Miscioscia with Lehman Brothers, your line is open.

Okay, thank you.

Mike, it looks like you've--obviously doing a lot of different things over there at Flex.

Maybe you could maybe just sum up any of the other strategy changes that you're in the midst of, obviously going to these different sectors that you're attacking the market.

And I guess, some of the sales, obviously just wondering if that was actually at your impetus to sort of get back to running the core business.

And then maybe if you could also comment on Multek?

I know the press release said most like (indiscernible) or nothing more, but obviously, that's a crown jewel at the Company and what the thoughts are for it?

Yeah, so when we look at the -- I think we're getting a lot of traction for those market segments.

And what we've done with these market segments, we've just integrated them into almost entire business units, which -- where they have the design all the way through to the -- potentially the operational control.

And it allows them an opportunity for them to focus ODM products, etc. on their core business within that segment.

And so, we're carrying on with that strategy, design is an important part of our strategy.

We continue to view that's valuable in terms of adding value to the customer, but also as well to be able to design our supply chain.

And also we have the design in our verticals.

So that strategy has not changed.

It's just that we've integrated all of those functions into each of the business units, where before we kind of ran them in a functional way.

So I think there's a -- so I think that's real positive.

We continue to grow component technologies, the component technology that we believe can have tremendous amount of value over time, just in terms of their own market value.

To the extent we ever decide to monetize it.

And at the same time we can use them as vertical integrations into any one of these market segments.

So we will continue to do that and identify and develop components and bring them into a business to the extent that they are, that we feel we can create value for the customer and be able to get a competitive advantage in the marketplace.

So I think that -- that's certainly a corner stone of going forward and the market strategies allows us just a lot more focus, a lot more know how, a lot more knowledgeable investments about how we go at it.

And certainly, hopefully, the guys running these businesses can attack the market with a lot more intensity.

On the Multek front, Multek is certainly a crown jewel today as it relates to operating earnings.

It's continuing to grow its top-line very, very effectively, continuing to grow the bottom line very effectively, we're adding a lot of capacity.

We don't anticipate that to change in the near horizon.

We continue to see very nice revenue growth and very nice profit growth.

We also find this to be quite synergistic with the rest of our business, and one of the things that Tom said earlier, we're not planning on breaking this out going forward because our thinking is that we'll probably just keep this and integrate it into our existing business like it is today.

We find a lot of synergy with it.

And as a result of these findings, as long as we can find synergy, we'll probably keep them internally.

Alternatively, if the market cap of printed circuit boards go up to about 30, we'll probably be a seller.

Okay, then one quick follow-up on a different topic.

Nortel's going through a pretty big evaluation internally.

Maybe you could comment on any initial reads you might be getting on that, and just how you feel about them obviously as a strategic customer of yours going forward.

Yes.

So as you know, Nortel's gone through multiple management changes, and we'd be on our third since trying to get this deal done.

And I think I said once before, I don't know if it was the analysts or others, but it's kind of a miracle that this thing is still moving right along here.

But Nortel has a new management team now.

They have a new supply chain strategy, and they are for sure out testing the markets -- place in terms of competitiveness and pricing and that sort of thing.

Alternatively, we have a contract, and to the extent that something changes away from our contract or anything, we'll certainly let you know, but we have certain contractual provisions about what's allowable, what's not allowable.

We do not have rights to all of the business as you probably know, but certain pieces of it and certain amounts.

But yes, without question we are aware that the new management team is out trying to sort out its own supply chain strategy and doing a lot of testing of the marketplace.

Okay, and how are you feeling so far with how it's going with respect to just you all?

Once (indiscernible) I don't think there's any real (indiscernible) of changes.

I just think we have to wait and see what that looks like.

Again, it sometimes we have -- the contract requires different things, sometimes we have competitiveness clause, sometimes we have -- they have rights to go take the business, sometimes we've had this contract for 2.5 years, maybe they'll want to cut deals and move one thing but not another.

Those are all--we'll just continue to work Nortel and be the best we can to be a good customer.

Okay, thank you.

Our next question comes from Michael Walker with Credit Suisse, your line is open.

First a question on the model Looks like in terms of your guidance since discontinued operations for June that you are guiding for margins to be up pretty substantially about 30 basis points, it looks like sequentially.

What's driving that?

Well, Mike, I think we have a range of expectations out there.

So I'm not sure exactly what your particular assumption are on revenues or profits, but I think it just depends on if you're using the low point of revenues and the high point of earnings or vice versa.

So I think there's a range of potential outcomes on margins and you can sensitize it using revenues on the high end and profits on a low end and vice versa to get the range of market expectations.

What are the key influences or drivers of margins in the June quarter?

Well, that's a broad question.

We have a lot of different businesses, but I think, what are the key drivers?

I think camera modules are still our components business is still not contributing.

But kind of in the transition period this quarter where it probably will.

The ODM businesses are still a drain on us in that mostly 17 million phones will be back end loaded, not surprisingly they'll all be out to hit kind of the September season, or predominantly out to hit the September season.

How much growth?

We have a lot of capital coming in, which we even didn't even anticipate three months ago.

We are planning on growing the business quite a bit.

We're getting a lot of traction with our strategy.

And depending on how much that grows, will kind of depend on whether or not we're going to have an impact of start-up costs or not.

If it grows nicely and steadily, the start-up costs will be negligible.

Alternatively if we have some accelerated growth, we could easily end up adding a lot of people and a lot of facilities, and a lot of equipment and be suffering a little bit of start-up costs, which would put a near-term downward pressure on margins.

I think it just kind of all depends on the bundle.

And there's just a lot of different levers that we're managing.

We do have a couple of new facilities coming online with Multek which will be a little bit underutilized right up front.

Because they come online just over the next couple of quarters here, but we're very confident being able to fill those up pretty quickly.

Very, very confident.

Near-term they'll be a little bit underutilized this year.

So I think there's a lot of investment and I think it's almost a little bit of transition as we -- as we now focusing our core EMS the opportunity that we're seeing are really strong, really strong.

Just as a second question, in terms of how you expect to use your proceeds from the divestitures, the capital that you have, you had a slide that says if you can find opportunities that return 15%, that would be better than doing a stock buy-back, which is certainly true.

But just noticing that on a continuing operations basis, your operating margins are 2.9%.

They haven't been there since the end part of 2004.

So we've kind of struggled to come up with those kinds of opportunities in the last two years.

Do you expect to be still heavily engaged from an acquisitive standpoint on the design/non-core assembly site?

Or are you really going to dial down and focus on assembly and components?

We're going to focus on creating dominant market positions in each one of those segments.

And each one of those different segments is going to have a little bit of a different answer about how it creates a dominant position.

But in some cases it's going to be -- need to be more design intensive.

In other cases it may need more verticals to support it.

I think the answer's a little bit different depending on where you go.

We'll talk about in a holistic view, we'll continue to do acquisitions, but I think they'll be substantially less than what we've done in the past.

I think our appetite and a lot of our existing infrastructure is actually getting more robust.

So I think the amount of things that we need to acquire are less and less as we go through the year, so I think to the extent that we do find an acquisition that allows us to -- within those segments to go dominate, we will for sure do an acquisition.

Just as we did the WWL acquisition last year.

The consumer market -- or last quarter, sorry.

We just didn't have much in the way of digital cameras and audiovisual devices and those sorts of things.

And this allows us a full platform of ODM products and ODM design capability to take advantage of that.

I would expect that to transition into really strong growth in those kind of products in the EMS way.

So I think each one is a different answer, but we will continue to look at acquisitions, but I think we'll be less acquisition-active, and I think we'll be more focused on those acquisitions and I think we're going to end up having a tremendous amount of organic growth opportunities and complemented by acquisitions but probably to a lesser extent.

Okay, thanks a lot.

Mike, I guess the other thing I would like to add on the operating margins this quarter.

As you know in the March quarter of seasonality drives your revenue base down, in fact sequentially, we're down almost $600 million.

So that drives our SG&A percentage up as a percent of total sales.

So sequentially our gross margin actually improved by 30 basis points, SG&A dollars remained about flat, but the SG&A as a percentage of sales actually increased by 40 basis points.

So I think as we move away from the seasonal down quarter in March, get that revenue line back up to a more normal or growing level, you'll see that SG&A percent lever back right down to getting close to 2.5% as we move through the year.

That's good.

Thanks a lot, Tom.

Our next question comes from Matt Sheerin with Thomas Weisel Partners, your line is open.

Yes, thanks.

I would just like to, sorry about this, but just go back to Nortel again.

It sounds like your guidance doesn't really reflect any incremental business from Calgary.

Does that imply then that there's a chance that it may not happen at all this quarter, or do you have any visibility into that?

Matt, as you know, we take a broad range of potential expectations across a very large revenue and customer base.

So we try to roll off some sensitivity analysis in terms of what a likely outcome is in the aggregate.

We put revenue guidance out there, so I don't think you can ask us to respond what a particular customer's doing in the aggregate revenue range that we have out there.

I just don't, it really just doesn't work that way.

Well, I bring it up only because it's been an issue quarter after quarter.

And this is the first time where you're saying we're not going to give any indication until it's done, whereas previous quarters you've talked about it.

And I guess that's the concern.

I don't think that's it.

We're trying to get the -- it seems like every time we've adjusted Nortel, or every time we've (indiscernible) Nortel, we've come back to you and said our revenues are going to be down, our profits are going to be down because of Nortel.

What we're trying to do is to build a range that whether it comes in or it doesn't come in we have a range sorted out that we have confidence in that we can deliver some predictability.

Nortel's not the only swing in this whole set of revenue.

There's a lot of revenue there for next quarter, $3.7 billion to $3.9 billion.

Nortel's going to swing it $150 million.

There's a lot of other pieces out there that have a lot of variables to them that can make up for it, as well.

We just tried to provide a range that we have flexibility that continued to hit it, independent of what happens with Nortel.

Fair enough.

And so you are talking about an incremental $200 to $400 million or so in revenue.

Could you give us an idea then of where you would expect sequential growth?

Obviously there's some seasonality coming back in handsets, but are there other areas where you are looking for growth quarter-over-quarter?

Yes, I think we'll start seeing -- so independent of Nortel, let's set that on the side, for sure handsets will be up, for sure printing and imaging will be up slightly, I think the industrial medical automotive block will be up.

I think it's pretty --

I would say almost every segment will be up, maybe IT infrastructure will be kind of flattish.

But that's a very small segment, Matt, and I think everything else will be up sequentially.

Okay, and just lastly on the ODM, it sounds like the unit ramp is going nicely.

Can you give us an idea of once you ramp $17 million, is that profitable?

And what gets you -- what unit number gets you to sort of mid-single digit operating margin that you've been targeting longer term?

You know that probably gets us pretty close to profitability, I would say -- our target profitability.

But again, it needs to ramp and it hasn't yet and it's pretty much back-end loaded.

We're chasing a lot of the, like I said, the August kind of release cycle that a lot of these products are on.

And the other thing when we say $17 million, just to put a word of caution in there, that's what we see today, that doesn't mean we can't book more, keep in mind.

But it also is no guarantee that these units will sell through like our customer thinks they will.

We don't have control of that piece, we just listen to what they tell us, so it could be up or down from there.

Kind of the important part is, we ended up getting a broad base of design wins.

We've got them ramping, we've got a good strong forecast, we'll start hitting in September and December, you'll see them then.

And we think we have a pipeline of, kind of either one or just about one, or kind of getting the wink from the customer that completely absorbs all R&D expenses and such.

So, hopefully soon enough here, we won't have to be complaining about that at all.

But we are today still.

But we've got a nice pipeline and we're looking really strong.

And that -- by the way, that FY '07 pipeline that I talked about of $17 million, a lot of that has carry-over into FY '08, and there's also design wins for the FY '08 period that we're working on today.

So it looks real good to us.

We're very pleased with what we've done with ODM.

Okay, thank you.

Why don't we take one more question?

Our next question comes from Daniel Adamson with Pilot Advisors, your line is open.

Hey, guys.

How are you doing?

Hi, good.

On this handset business, the $17 million.

Obviously we can only guess as to how many they'll actually sell into the market, or whatever, but we did four million or so in the last year, and we look at it and say, can we say okay, if we do half of what you guys think you can do of 17 (indiscernible), do we at least get to break even on this business model?

Probably not.

Probably not.

So breakeven you think is more than around the 12 million units?

Yeah maybe 12 to 15, it's - we think for sure we're breakeven next year for the entire year.

I'm not just worrying whether or not we're going to be breakeven for September-December kind of period.

Next year we anticipate definitely being breakeven.

So I think this year will be a transition year from us as we go into that.

Based on what we can see -- we'd say probably 8 million is pretty, that would be really, really, really conservative, although you're right, you never know what'll happen.

But then again, it's still April and we're still selling, so there's still opportunity here to actually grow that number as well.

So we'd be equally bullish on both sides of that number.

What exactly should I think about the sort of the loss from this ODM, cellphone handset business, whatever you want to call it, for fiscal '06?

What was the burn on it?

Mostly an investment, we ended up, decided the R&D costs were out of control last year.

We took a lot of our operations in Europe where there was a tremendous amount of design being done and we moved a lot of that competence into China, so we probably ramped down Europe last year by probably 150 or 200 people -- probably 200 people.

And we've ramped up Beijing, China of about 300 people.

So operationally we went into a real transition year.

This year we've kind of gotten rid of that, what I would call additional burn that occurs in Europe and now we just need to get the products booked by the Beijing design center sold in the marketplace.

So just to put a number on it, is it fair to say that you lost at least 10 to 20 million on this business in fiscal '06?

Yes, it would.

So you could have a swing at least like that.

And then on, lastly, on this Nortel.

I understand what you said, Tom, and it makes sense, but if you knew for certain -- I think it's fair that I just clarify this.

If you knew certainly without a doubt that Nortel was going to transfer on May 15th or whatever, mid-May, that would be roughly 100 million of sales, and I know this is really not in the big scheme of things, this doesn't matter.

If you certainly you were getting that 100 million of sales you would not adjust your revenues upward, at least a little bit wouldn't you?

On your guidance if you knew--

Well, I wouldn't, Dan, as you know, you just have to have cushions and offsets.

There's pushes and pulls through the whole customer base.

If it comes in and contributes to revenue at the level you're suggesting, maybe it provides an offset or maybe it ends up being upside, but I think we're comfortable with the range.

And we think that's our best estimate that we can give you at this time.

And not to beat a dead horse, which I'm certainly doing.

But if you look at this Nortel thing, it's obviously -- several questions are asked.

It's a very important overhang here on your Company and your growth.

If you look at Nortel, and your discussions with them and as close as you must be to some sort of idea of a day when it was supposed to transfer, is there anything different between these discussions and qualitatively that gives you any sense of more confidence or less confidence or anything qualitatively?

I would just say qualitatively over the last two plus years there's been continuous delays and we're just not going to give any guarantees, and we'll let you know exactly what happens when.

Okay, fair enough.

And my last question, and I was only supposed to have two, but my last question is on the ramp-up of all of this stuff that's going on and the investments going into it.

You have to assume a small amount of burn for the back half of fiscal '07 on the new revenue, I think that's the only way to do it, right?

You have to think about a little bit of burn from the new business and then a huge incremental swing in fiscal '08.

Is that the way you guys think about it?

That's exactly how we look at it.

We look at it as, if we get -- if we have a good back half of the year here, we'll have some of these costs to bring it up.

And it usually takes time to drive in our verticals and we would anticipate it would all be an investment for next year.

At which point we should have quite a pop in top-line if we're right.

The street number that's out there right now, it's got to be at least somewhere in the area where you guys are thinking, is that true?

Well, Dan, as you know we only give guidance one quarter at a time, so we'll answer that question next call.

Alright, I gave it a shot, thanks, guys.

Thanks.

Take it easy.

Thank you for your participation.

You may disconnect at this time.