Flex Ltd (FLEX) 2007 Q2 法說會逐字稿

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

All lines will be on listen-only until the Q&A session of today's conference. [OPERATOR INSTRUCTIONS] Today's call is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Mr. Mike McNamara, Chief Executive Officer. Thank you, sir. You may begin.

Thank you. Ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' second quarter ended September 30, 2006.

To help communicate the data in this call, you can also view a presentation on the Internet. Go to Investors Section of our Web site and select "Calls and Presentations." You will need to click through the slides so we'll 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 guidance and then open it up to questions. So go ahead, Tom.

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

I'll begin with slide 2. Please note that this conference call contains forward-looking statements within the meaning of the U.S. Securities laws, including statements related to the positive net cash generation from our disposal and leasing activities, demand trends and revenue and earnings growth opportunities, expected improvement in our inventory turns and levels, the success of our vertical integration and broad-based growth strategies, our ability to add capacity and develop our design capabilities, the expected returns from the cash received from the divestiture of our software development and solutions business and the success of our long-term initiatives and related investments.

These statements are subject to risks that can cause actually results to differ materially. Information about these risks is noted in the earnings press release, on slide 14 of this presentation, and in the risk factors and MD&A 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 obligation 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, slide 7 of this slide presentation, and the GAAP versus non-GAAP reconciliation in the Investors Section of our Web site which contain the reconciliation to the most directly comparable GAAP measures.

Slide 3. Revenue from continuing operations in the September quarter amounted to $4.7 billion which is a record high quarterly revenue result for Flextronics and represents an increase of 23%, or $894 million over the year-ago quarter. On a sequential basis revenues from continuing operations increased $643 million, or 16%.

Slide 4. Computing decreased $43 million sequentially and represents 12% of total September quarter revenue. Consumer digital increased sequentially by $181 million, or 21% and represents 23% of total September quarter revenue.

Infrastructure increased sequentially by $66 million, or 6% and represents 23% of total September quarter revenue. Mobile increased sequentially by $379 million, or 33% and represents 32% of total September quarter revenue and industrial, automotive, medical and other increased sequentially by $60 million, or 14% and represents 10% of total September quarter revenues.

Our top 10 customers accounted for 68% of revenue in the September quarter with only Sony Ericsson and HP exceeding 10% of the total. On a geographical basis Asia increased sequentially to 62% of total revenue, Americas remained at 22%, and Europe decreased to 16%.

Slide 5. On a sequential basis gross margin improved 10 basis points to 5.9%. SG&A as a percentage of sales remained flat at 2.8% and operating margin was 3.1%, which represents a 10 basis point improvement over the core EMS operating margin in the year-ago quarter.

Slide 6. Excluding gain on divestiture, amortization, restructuring and other charges, which includes stock-based compensation, quarterly net income amounted to $117 million which is a September quarter record and is a 15% increase from the year-ago quarter. This resulted in earnings per diluted share of $0.20 in the current quarter compared to $0.17 in the year-ago quarter.

Slide 7. After-tax amortization, restructuring and other charges amounted to $103 million in the quarter compared to $76 million in the year-ago quarter.

As previously disclosed, the Company recorded an after-tax impairment, lease termination, exit costs and other charges of approximately $83 million during the quarter ended September 30, 2006, primarily related to the disposal and exit of certain real estate owned and leased by the Company in order to reduce its investment in property, plant and equipment. These activities are expected to generate positive net cash of approximately $15 million through disposal and leasing activities.

The after-tax gain on the divestiture of the software business amounted to $171 million in the quarter compared to an after-tax loss of $28 million on the divestiture of the semiconductor and network service businesses in the year-ago quarter.

After reflecting these items, total GAAP net income for the current quarter amounted to a record high $185 million compared to a loss of $2 million in the year-ago quarter. This resulted in all-time record high GAAP earnings per diluted share of $0.31 in the current quarter compared to zero EPS in the year-ago quarter.

Slide 8. Return on invested capital improved 150 basis points to 11% from 9.5% in the year-ago quarter, while ROITC increased 210 basis points to 29.1% from 27.0% in the year-ago quarter.

We're obviously very pleased with the continued improvement in ROIC. We continue to run the business internally based on ROIC, and we only use ROITC for external benchmarking purposes as unlike Flextronics, many of our competitors have written off their intangible assets, goodwill and deferred tax assets.

Slide 9. Cash increased $154 million sequentially to over $1 billion while total debt decreased $66 million sequentially. As a result, net debt decreased $220 million sequentially and amounted to $701 million at quarter end. Including the revolver availability, total liquidity was approximately $2.4 billion and the debt to total capital ratio was 24% at quarter end.

Slide 10. Cash conversion cycle came in at 14 days versus 16 days for the year-ago quarter.

Slide 11. In the September quarter, depreciation and amortization amounted to $82 million and net capital expenditures were $195 million. Cash flow from operations generated $49 million in the quarter despite an inventory increase of $371 million.

We do not believe the inventory increase resulted from softening demand that will hurt our future revenue expectations. The inventory increase relates primarily to the anticipated revenue growth in the December 2006 quarter.

In addition, as we have previously discussed, Nortel was an extremely large, complex, low-volume program that was expected to increase our inventory and compress our inventory turns. Now that the Nortel transition and integration is complete, we can now start with the continuous improvement phase of that relationship. We have specific action items to reduce our overall inventory for all customers by 300 to $400 million over the next three quarters.

Thank you very much, ladies and gentlemen. As you turn to Slide 12, I will now turn the call over to Mike McNamara.

Thanks, Tom.

I'm going to be rather brief in my commentary because we are hosting an analyst and investor meeting in two days on October 26th in New York City when we plan on getting into a much more strategic overview of the Company. The management presentations will begin at 12:00 p.m. Eastern. A live Webcast of the presentations will be available at www.flextronics.com.

I will limit my commentary today to the financial results for the recently completed September quarter. Obviously, we are quite pleased with those results.

Revenues from continuing operations reached a record high and increased 23% on a year-over-year basis and increased 16% on a sequential basis, while non-GAAP net income increased by 15% on a year-over-year basis and increased 12% on a sequential basis.

Operating margin in the core EMS business improved 10 basis points on a year-over-year basis and gross margins improved 10 basis points sequentially. We ended the quarter with over $1 billion in cash and ROIC improved 150 basis points during the quarter to 11%.

Our growth is very broad-based. We are continuing to add capacity in China, India, Malaysia, Ukraine, Brazil and Mexico to support the growing manufacturing requirements. In addition to a broad geographic expansion, we expect to have double-digit annual growth rates in each market segment.

In our verticals, we are adding capacity in plastics, metals, PCB and new capabilities in machining and LCD displays through the pending IDW acquisition which is subject to their shareholder approval.

Capital expenditures in the September quarter amounted to $195 million. We expect Cap Ex to be approximately $450 million and depreciation to be approximately $325 million in fiscal 2007. This increased level of Cap Ex is required to support our forecasted 25% year-over-year growth in revenues in fiscal 2007.

The ability to provide vertically integrated EMS services, which include design, components, manufacturing and logistics from our industrial parks remained the big competitive advantage for Flextronics. We remain firmly committed to the competitive advantage of vertical integration along with the continuous development of our design capabilities in each of our major product categories.

We continue to make considerable investments to support these initiatives along with the infrastructure necessary to support our accelerating revenue growth. We think these investments will not only help us meet our revenue growth expectations while yielding better profit and return for shareholders, but will also improve our competitiveness and enhance our capabilities.

As a result of focusing our efforts and resources on improving the Company's overall profitability and the significant growth opportunities in the core EMS business, we divested the network services and semiconductor businesses last year. In addition, we divested the software business last month for a pretax gain of $181 million.

By monetizing all of these non-core assets at an aggregate pretax gain of approximately $250 million, Flextronics has generated cash proceeds in excess of $1 billion. These proceeds will be invested to support our growth strategy.

Other substantial benefits from these divestitures include more than a $100 million reduction of deferred tax assets and approximately a $1 billion reduction in goodwill and intangibles, which significantly increases the Company's tangible equity and therefore enhances our financial position.

In addition, we have retained ownership interest in both the software and the network services business which should provide additional cash and potential future upside when monetized. These divestitures have helped us to focus immensely on our core strategies which has helped us achieve the current revenue acceleration.

It is important to note that we'll no longer have income from the discontinued software operations as it ended in September when the software business was sold. But we will begin to generate interest income on the $250 million PIK note we retained as part of the sale transaction along with the investment returns on the cash proceeds received from the sale.

And lastly, for those of you who haven't had a chance to see it yet, Nortel filed an 8-K this afternoon disclosing, among other things, that our agreement with them has been amended to restructure certain purchase agreements by Nortel. The amendment does not affect our revenue expectations under our deal with Nortel. We still expect Nortel to generate in excess of $2 billion of revenue for Flextronics.

Slide 13. For the December 2006 quarter we are currently expecting revenue from continuing operations to increase approximately 25 to 30% on a year-over-year basis in the range of approximately $5.5 billion to $5.3 billion and diluted EPS to increase approximately 10 to 15% on a year-over-year basis in the range of 22 to $0.23 excluding amortization and stock-based compensation.

For the fiscal year ending March 31, 2007 we continue to expect revenue from continuing operations to increase somewhere in the range of 25% on a year-over-year basis to approximately $19 billion and diluted EPS to grow in the range of 15% on a year-over-year basis to approximately $0.80 per diluted share. Obviously, there is a range around these numbers and we urge you to be conservative as the economy and the demand trends are dynamic.

GAAP earnings per diluted share are expected to be lower than the December quarter guidance provided herein by approximately $0.03 per diluted share per quarter for quarterly intangible amortization expense and stock-based compensation expense.

Slide 14. There are real risks of operating in this business, which include a macro economic 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 over to the operator for questions. Please limit yourself to one question and one follow-up. Operator?

Thank you, sir.

Thanks.

[OPERATOR INSTRUCTIONS] One moment, please, for the first question. Your first question is from Bernie Mahon from Morgan Stanley.

Good afternoon. Question for you on the inventories.

So you've built that up over the last year, probably over $1 billion. I know Tom had said obviously Nortel impacted that. Could you kind of break out how much of that excess inventory, either sequentially or over the last year, is from Nortel?

And then when you say you're going to be able to work it down 300 or $400 million over the next couple of quarters, you know, what market is that coming out of? Is that strictly the communications market or is there other markets where you probably have some excess inventory?

Yes. So we want to work total inventory down 300 or $400 million and that's really a broad-based, you know, across all of our segments and all of our different businesses.

The Nortel in particular is, we now have about $800 million of Nortel inventory, which is pretty substantial. And if we look at inventory turns themselves, they're substantially different, whether they're, you know, Nortel-based or if they're the total company.

So, you know, we have programs working with Nortel to improve those. We have our own programs working to improve those. And we do, we believe we have a good understanding of how we can get 300 to $400 million out of this market.

One of the things, too, that is just going to be a phenomenon of doing more and more vertical integration and also doing more and more of the more complex products which we tend to do more and more of as the quarters go on, is that they tend to carry a little bit lower inventory turns as a result. Not as low as what we're seeing today and we actually expect this quarter to be the turnaround quarter for us. But we think we've got good line of sight of how to get 300 or $400 million out of this.

Okay.

When you said there's about $800 million in Nortel, do you think you can get that down to 500 or $600 million or is it close to 600 or $700 million over the next couple of quarters?

And then just the makeup of the inventory as you kind of increase the vertical integration, is there more kind of component inventory like semiconductors or printed circuit boards or is it more finished goods at this point?

No, the two real drivers that will improve inventory turns over time will be the Nortel and, yes, I do believe that 500 to $600 million is the appropriate range that we can get to and I think it probably takes three quarters to get there.

And then the other inventory, you have to remember a lot of the inventory that we have today is really to fund the growth that's coming up and to fund all the new programs that we're winning and bringing on and we can't ship product until we first buy it and put it into inventory and convert it and very often from within the hub.

So a lot of what we're doing is not only supporting the new inventory, the inventory for the new program startups, but we're also supporting just the general growth rates that we're seeing quarter-on-quarter.

Okay. Thanks a lot.

Todd Coupland of CIBC World Markets, you may ask your question.

Good evening, everyone.

If I look at the segmented results, it looks like there was a little bit of upside in handsets from what I was expecting offset by a little bit lower telecom and consumer digital. Can you just talk a little bit more the about the trends in those three segments?

Yes. September was up pretty nicely for mobile and consumer digital, as you mentioned. I think our industrial, automotive, and medical were also really pretty strong with the sequential 14% growth.

The computing and infrastructure, a little bit slower, but they actually are the ones that are not as prone to the seasonality and they're a little bit, bringing those programs on is a little bit more measured in terms of how fast you can ramp those programs.

So I think we'll continue to see nice, steady growth out of both infrastructure and computing. But they're a little bit lower than what we, well, I won't say they're lower than anticipated, lower than the other ones, but consumer digital and mobile tend to be very seasonal oriented.

Okay.

And then just in terms of the outlook for mobile, you had talked about, I think, 10 or 12 million units getting to that kind of run rate in 2007, fiscal 2007. Do you still feel with the programs you have that you will get there? Can you just update that view?

You mean in the ODM business?

Yes.

Actually we're expecting more than 10 to 12. We're expecting more than more like 15 to 17. And then I think what we were targeting for next year, actually, we're not targeting, I mean I think what we were mentioning is probably about 30 million next year and we think those are both pretty much on target. I mean, there's a little bit of changes around those, but I'd say those are substantially close to target.

Okay. Great. Thanks a lot.

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

Good afternoon.

Good afternoon.

On the seasonal, I mean on a quarterly basis, quarter-over-quarter, your seasonality is carrying your sales up $500 million at the midrange in the December quarter. What are the biggest drivers of that, do you think, Michael? In the $500 million, what's going up the most quarter-over-quarter?

Well quarter-to-quarter we're having real good successes in our mobile phones, of course. We've got a pretty big program win that recently came on with Kodak and Juniper starting up.

We have a number of programs we really haven't announced yet that we'll see take it up. But overall, even to take out the seasonality if you look on a year-over-year growth rate, we're still anticipating every one of our market segments to have well over double-digit growth rates. So it's really pretty broad-based.

And the other thing that's pretty broad-based is the geographic footprint. What we said in the comments that Tom made earlier is that we're seeing both Asia being pretty steady or growing a little bit and America is actually keeping up with it.

So we're actually seeing some pretty good geographic growth out of the Americas and it's actually keeping up with the growth rate that's occurring in Asia in terms of a percentage basis. So we're actually seeing broad geographic growth, we're seeing broad segment growth and the other thing is we're also adding capacity in plastics, metal, PCBs in the assembly business that we're even on the particular commodities, we're seeing pretty broad-based growth there.

It's not just one thing and it's pretty even, pretty balanced with the exception of mobile and consumer digital being, picking up the seasonal trends.

Okay.

And on those new programs, what kinds of products are you talking about? Are you doing, have you won new set-top box programs, for example? Have you got new cell phone? What kinds of are we looking at? Why haven't you announced them?

Mostly because we haven't pushed our customers to announce them.

Okay.

And our customers aren't excited about doing it. But over the course of, say, the last six months, we picked up three really nice set-top box deals.

Obviously with the 33% growth in mobile this quarter, we've not only seeing some incremental demand out of existing customers, but there's some additional demand that's coming in, either new program wins from the existing customers or new customers. But we still haven't been pushing our customers real hard to make the announcements in that most of them are sensitive about that.

And we also have a pretty good kickup in cameras. Both in, you know, we've brought in the business to do all the Polaroid digital still cameras and we did do the announcement on the Kodak cameras, which are pretty substantial programs, so the digital still cameras alone are probably running close to 20% worldwide market share in those. So all of those are really contributors.

20% market share. Thanks, Mike, we'll see you on Thursday.

Yes.

Louis Miscioscia from Cowen, you may ask your question.

Okay. Thank you.

Mike, could you get into some more detail in the computing sector? I guess you have desktop PCs, notebooks, servers in there. Is there anything that sort of was dominant in, I guess, looking like you had a pretty weak quarter on a quarter-to-quarter basis?

Yes, we actually had some, I think we're in a product transition on some of our stuff and I think that was a little bit a part of it but we just didn't have any upside. We really didn't have much strength in the computing business.

We had, like I said, we were in the product transition on one of the products which probably impacted probably 30 or 40 -- probably $30 million of business that we'll pick up this quarter. But in general, it hasn't been a rapidly growing segment for us, we're doing a lot of investments in that area, we brought in a company called Iwill where we completed an acquisition which does server design and brings in a lot more capability for us.

But in general, we haven't found that market to be real vibrant at the moment, and so we're expecting it to go up this quarter. December quarter we expect a sequential growth of about 8% so we'll start to see a little bit of it pick up, but it's been a little bit slower for us, I think.

Can you also give us a comment, I guess, when we started this quarter and you raised guidance to 4.7 to 4.9, you guys came in at 4.7 and we're actually looks like $2 million or $3 million away from actually missing the low end of the range. What were the factors, I guess, that you were thinking three months ago that would have put you at the higher end or at the lower end, I guess, and then comparably how did things flow out?

Well, this quarter, you know, my view of this quarter is it tends to be the most difficult to forecast and the reason for that is you have to put out your guidance at the beginning of the quarter, you're still right in the middle of vacation and you don't quite know how the season is going to come on. And particularly the mobile sell-through, we have a real struggle understanding how much of it's really going to go.

There's a lot of new products that go out during these timeframes. And a lot of times in mobile components we're chasing parts. So there's a lot of competition as these mobile phones ramp up to go get those parts and sometimes that is a real struggle for us.

But in any case, I think it just happens to have the least reliable quarter in my view is the September quarter because we have to forecast it in July.

And the other thing is, just remember, I mean at a 4. -- if we were targeting 4.7 to 4.9 or call it 4.8 in the midpoint, to come in at 4.7 is not a real big variation off of, it's just such a large revenue base that $100 million of revenue isn't really much of a statistical swing.

I actually want to emphasize that point, Mike, is you guys have to keep in mind, keep some perspective around the size of our company now. And when you're talking about a $100 million fluctuation in revenue estimates, that very much is in the normal day-to-day changes in demand. Nothing unusual there whatsoever.

I also want to emphasize that we also reconfirmed our fiscal year estimates of approximately 25% fiscal annual revenue growth to about $19 billion for the year. So whether we did 4.7, 4.8 or 4.9, I really want to emphasize to everybody on this call, that is absolutely in the day-to-day normal course of what we see in revenue fluctuations.

There's pushes and pulls occurring every day and the difference between 4.7 and 4.8 in revenues is only 2% and we just cannot be more precise than that. So I think you just need to give us a little bit of cushion when we give a range out there. We really do mean it's a range and we're not implying that it's the midpoint of the range.

So we're very happy with our revenue growth. It grew 23% year-over-year, 16% sequentially. So I don't want to be defensive, I'm just trying to keep some perspective around the numbers.

Okay. Great.

When we look to December, is it mostly seasonality that would swing you between the high and the low end or is it ramping programs, too? Thank you.

No. We'll pick up some seasonality, of course, but we're still seeing the programs ramping without question. It's one of the reasons our inventory turns are suffering a little bit.

And also, if you do the math, as Tom mentioned, on the $19 billion it also says we're going to come through March pretty strong. We expect that to be a pretty good revenue quarter and while there's normally a typically a 15% decrease in revenues as a result of the seasonality, we're going to see that substantially reduced this year because we'll be continuing to ramp those programs on in through March. So maybe it's half and half.

Okay. Thank you.

Jim Suva of Citigroup, you may ask your question.

Great. Thank you.

So when we look about your cash balance, which of course was helped due to the sale, can you give us a little bit of update on your use of cash going forward? I know you have a stock buyback that's authorized but I don't believe you've done any stock back.

Are there any plans to use that or is that just something that was an announcement with no real weight behind to use it or do you intend to use cash to grow the business and what are your plans there?

Yes, Jim, thanks for asking that question, it's a good one.

When we announced the authorization of stock buyback, that certainly was a possibility at the time. Since that time, we've announced significantly higher revenue growth. We have seen, as you know, a significant reacceleration of revenue growth.

I just don't know a lot of $15 billion technology companies that are going to grow their revenues by 25% this year. So I think you should realistically think that a stock buyback is off the table when we're growing revenues 25% a year.

And as Mike said in the script in his prepared comments, we very much intend to deploy the proceeds from the divestiture into continuing to grow our business. So when we're growing 20, 25%, 30% a year, I think we will conserve our liquidity to reinvest in the growth.

Okay.

Then as a follow-on, earlier, Mike mentioned that the September quarter tends to be the most problematic with vacations for forecasting and holidays and things like that. Does that mean that the December quarter that you indeed have meaningful more visibility into this revenue outlook than, say, September?

Yes, I actually think by October we have a pretty good look at what that looks like. The one thing that always ends up being a little bit of an unknown to us is the mobile phone demand which is a big part of our numbers, but outside of that, I think by the time October comes, I think people pretty much have a little better understanding of what the season's going to look like.

And again it's not really vacations and that in July that are the problem, it's just that people don't know how the Christmas season is going to, and the seasonal season's going to look like in July. I mean even independent of vacations and things like that. So I think December's a little bit more reliable in terms of, or a little bit more predictable, I would agree with that, yes.

And with that predictability, you have a give and take, September came in at the low guidance but you're maintaining your full-year outlook. So which quarter then picks up that excess that we didn't see the September quarter? Is it December or March or kind of spread between the two?

Well, I think you have to kind of back into it, Jim, and the answer would be March. We're pretty comfortable with our revenue range for December quarter, as Mike said, we have pretty good visibility around that.

You know it is a range so it could be a little bit better, of course, or it could be on the low end again. But what that definitely implies is March would be better than normal seasonality and that's primarily because of the new programs that we're ramping up in the March quarter, Jim.

Okay. And last question.

On operating margins, do you think you can maintain around 3, 3.1 here or does the revenue ramp make it so we have to take a step back into the 2.9 range?

So what I said last quarter and I'm going to say the same thing this quarter, I think for the December and March quarters, you could expect operating margins to be around 3% plus or minus 10 to 20 basis points. I think for the year, we'll be able to hold operating margins at 3% for the fiscal year. But for the last two quarters of the year, plus or minus 10 to 20 basis points around the 3% range.

Thank and you good job on the operating margins.

Thanks, Jim.

Kevin Kessel of Bear Stearns, you may ask your question.

Hi there, guys.

Mike, earlier you mentioned that ODM phones for this year you were expecting I think you said 15 to 17, and if I recall, I believe the last quarter you guys were looking for 17. So has there been any change in terms of that overall outlook?

Yes, again not really. I mean, we really don't know what they will sell or what they won't sell.

I said 15 to 17. I probably should have put a range. I don't have a range on it next year, either. I just said 30.

17's our best guess and what it looked like two quarters ago it's actually still our best guess. It could easily trend down to 15. I think the range around probably keeps getting tighter because we get farther and farther into the year.

But we do expect it to hold pretty nicely and like I said, better yet, we just, our next year is just looking very, very strong in terms of the ODM business coming up here. So we're continuing to be very positive about how that year is going to develop as well. So I think we're pretty much on track

When does that business hit breakeven or has it already reached breakeven?

Probably sometime around 13, 14 million phones I think is what we consider breakeven. We're heavily invested in three pretty broad platforms and so we have a very, very substantial presence in the overall business. That overall ODM business is probably about 1,000 people, we think it's probably the best in the world today and it's heavily invested. So I think the breakeven's about 13, $14 million.

The question is when does that hit? It's kind of sometime around now. You know, we'll be a lot back-end loaded on these 15 to 17 million phones and, but I think you're predominantly hitting pretty close to now.

Okay.

So through September do you have a number, a rough number of where you were for the end of September?

I do not but I wouldn't be surprised if it's more than 5 or so, 6 maybe. That's just a guess, I actually don't know that number, I'm sorry.

And then lastly in terms of, you guys have, I think in the past, spoken about what you expect the margin profile to be for these ODM phones. Can you just update us on that?

Yes, it really depends on the phone and it depends on how many of our verticals we get in there. So we can actually get on a real low-end phone where we're not required to use the, our, we don't use our verticals, you know, it might be down around a 2 or 3% range and then if we get all of our verticals loaded in on the little bit higher-end phone it can probably run 5%.

Okay. Thank you very much.

Tom Dinges of JPMorgan, you may ask your question.

Hi, good evening, guys.

Tom, any change to your expectation for the full-year on operating cash flow? Last quarter you had said probably about breakeven for the full-year and then, obviously, with the Cap Ex you'll consume a little bit but you did generate a little bit of cash this quarter. And then I had a quick follow-up for Mike.

I would say if anything on the margin, it's probably a little bit better than what I said last quarter. As you pointed out, it was maybe slightly better than expected this quarter. So what I said last quarter was cash flow from operations of around breakeven.

I'm comfortable taking that breakeven estimate up to about $100 million for the year. So let's say I expect it to improve by about $100 million over my last quarter estimate. So that would be cash flow from operations of positive $100 million and then Cap Ex of around 450. So free cash flow negative 350.

Okay.

And then, Mike, you talked earlier a lot about the capacity additions that you guys are making in a lot of various regions and there's obviously been some newspaper articles that have been out there about the significant hiring that you're doing in places like China and so forth.

Maybe you'll do a little bit more of this on Thursday but I'll just throw it out there, just sort of, where are you in that process, when does the full impact of a lot of that cost hit, have you passed the halfway point there and now you expect over the next couple of quarters and obviously into next year to get some leverage off those costs and also the learning curve especially off the employees?

Yes, that's a tough question to answer. We probably have 3 million or 4 million square feet going up and we have capacity going up in plastics, enclosures, PCBs, the whole bit. So it's hard to say exactly when you cross the threshold.

What Tom kind of mentioned is that in terms of margins, we do anticipate the next two quarters to be a little bit tougher. We still expect to come out the whole year at about three points.

I would expect in June of next year that we would be substantially through most of our ramps and hopefully we'll find more and more business to go ramp more, of course, but I think in June of next year we kind of keep up. We've probably hired in the last 12 months, we've probably hired 20,000 people and we've probably brought online maybe half the 3 million to 4 million square feet but we still have to keep putting it in.

We're going to experience an accelerating March, and so I'm kind of hoping that we catch up with the learning curve and the inventory turns and all that. Really, I'm hoping that we can get through that by June of next year.

In terms of Cap Ex that we've spent, we've probably spent about $275 million out of the 450. So call it a little bit better than half-point. But I'd like to think that things normalize by June quarter.

Okay. Thank you.

So operator, why don't we take one more question and then wrap it up?

Thank you, Brian White of Jefferies & Company, you may ask your question.

Okay. Good afternoon.

When we look at the mobile phone market typically growth rate on a sequential basis accelerates. Are we going to see that in the December quarter or did we grow so quickly in the September quarter that the growth will not accelerate?

No, we actually, September to December quarter we should see some pretty substantial mobile phone growth.

Okay. So above the 33% you just did?

Well it won't be 33% but it will be like 20%.

Okay. And if we look at the computing market, is that something that's going to bounce back in the December quarter?

We think computing is going to be up around 8 or 10%. And then I think on an overall year basis, we'll probably be up about 15%, last year to this year.

And then I think our next year, our FY '08 will probably be, we should have pretty substantial growth rates. We'd be pretty disappointed if it wasn't around in the 20s.

Eastman Kodak deal, what was the revenue contribution in the September quarter, if any? And then what is the contribution in the December quarter?

Yes, September was --

Very, very small.

Very little. We closed that right at the end of September, Brian, so it's, I think we had 11 days of revenue or something like that. So call it nothing.

We actually thought we'd close that earlier, by the way. That was one of the things that we thought we'd be able to bring into the September quarter. We only had about 11 days and then, so we'll start seeing that in the December quarter, really.

What type of revenue, a couple hundred million in the December quarter?

You know, maybe about 150 or so. I don't know that number off the top of our head here.

Okay. Great. Thank you.

Okay. Thank you very much. I appreciate everyone's attention.