Flex Ltd (FLEX) 2007 Q3 法說會逐字稿

Good afternoon, and thank you ,for standing by.

Welcome to Flextronics third 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.

Yes, good afternoon, ladies and gentlemen.

And thank you, for joining the conference calls to discuss the results of Flextronics third quarter ended December 31, 2006.

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

Go to the Investor section of our website, and select calls and presentations.

You will 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 over the financial of our prepared remarks.

I will then provide commentary along with guidance and then open it up to some questions.

So go ahead, Tom.

Thanks, Mike.

And good afternoon, ladies and gentlemen.

Slide two.

Please note that this conference call contains forward-looking statements within the meaning of the US securities laws, including statements related to revenue and earnings growth, the success of our vertical integration strategy, our ability to add necessary capacity, expected improvements in our SG&A expense levels, inventory management, operating margin, future cash flows, and return on investment capital, as well as the success of our long-term initiatives and related investments.

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

Information about these risks is noted in the earnings press release, on slide 15 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 forms and these statements.

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

Please refer to the schedules in this earnings press release, slide 7 of the slide presentation, and the GAAP versus non-GAAP reconciliation in the investor section of our website, which contains the reconciliations for the most directly comparable GAAP measures.

Slide three.

Revenue increased $1.3 billion or 31% from a year-ago quarter, to a record high of $5.4 billion in the December, 2006, quarter.

On a sequential basis, revenue increased $713 million or 15%.

Slide four.

Revenue from the computing segment comprised 11% of total December quarter revenue, which represents an increase of $21 million or 4% over the year-ago quarter.

And a sequential increase of $36 million or 7%.

Revenue from the consumer digital segment comprised 23% of revenue, which represents and increase of $191 million, or 18% over the year-ago quarter, and a sequential increase of $160 million or 15%.

Revenue from the infrastructure segment comprised 21% of revenue, which represents an increase of $236 million or 26% over the year-ago quarter, and a sequential increase of $66 million or 6%.

Revenue from the mobile segment comprised 36% of revenue, which represents an increase of $679 million or 53% over the year-ago quarter and a sequential increase of $426 million or 28%.

And finally revenue from industrial, automotive, medical and other segment comprised 9% of revenue which represents an increase of $163 million or 48% over the year-ago quarter and a sequential increase of $25 million or 5%.

Our top 10 customers accounted for approximately 65% of revenue in the December quarter, with only Sony Ericsson exceeding 10% of the total.

On a geographical basis, Asia increased sequentially to 64% of December quarter revenue while the Americas decreased to 20% and Europe remained constant at 16%.

Slide five.

Non-GAAP operating profit increased 29% from the year-ago quarter to $161 million.

As expected, gross margin declined 30 basis points on a year-over-year basis to 5.4%.

Offset by its 30 basis point improvement in SG&A as a percentage of sales, which set a record low 2.4%.

As a result, operating margin remained at 3% through both December 2006 and 2005 quarters, which was in line with our previously stated margin expectations.

Although we continue to invest heavily in resources necessary to support our revenue growth, we believe that we have significant cost advantage by leveraging SG&A more efficiently than our competitors, as evidenced by what we believe is an industry-leading SG&A rate of 2.4% of sales.

Slide six.

Excluding losses on divestitures, amortization, stock-based compensation expense and restructuring and other charges, quarterly net income amounted to a record high $136 million, which is a 15% increase over the year-ago quarter.

This resulted in earnings per diluted share of $0.23 in the current quarter compared to $0.20 in the year-ago quarter.

Slide seven.

After tax amortization and stock-based compensation amounted to $17 million compared to $14 million in the year-ago quarter.

There were no restructuring charges or other net charges this quarter, compared to $62 million in the year-ago quart.

After reflecting these items, GAAP net income amounted to $119 million compared to $42 million in the year-ago quarter.

This resulted in GAAP earnings per diluted share of $0.20 compared with $0.07 in a year-ago quarter.

Slide eight.

Return on invested capital improved 120 basis points to 11.5%, from 10.3% in the year-ago quarter.

We run our business internally based on ROIC and are very pleased with its continued improvement as ROIC now approximates our cost of capital.

While we continue to run our business based on the return of invested capital model, we have also presented an industry comparison of return on invested tangible capital or ROITC, which excluding intangible assets from the invested capital base.

We present this comparison only for benchmarking purposes, as many competitors have written off their goodwill and other intangible assets.

ROITC is therefore the only relevant return metric for benchmarking purposes.

Our ROITC was 28% in the most recent quarter which continues to be industry-leading.

Slide nine.

We ended the quarter with $909 million in cash.

During the quarter, debt was reduced by $240 million to $1.50 billion, which is the lowest level in three years.

Net debt, which is total debt less total cash was only $592 million at quarter end.

Including the revolver availability, total liquidity was approximately $2.3 billion, and the debt to capital ratio was 20%, which is near record low.

Slide ten.

Cash conversion cycle came in at 12 days, which is an improvement of two days sequentially and continues to be industry leading.

Inventory improved 4 days sequentially to 8.0 turns, up sequentially from 7.3 turns.

Receivable days improved three days sequentially to 32 days, while accounts payable days were reduced 5 days sequentially to 66 days.

Slide 11.

During the December quarter, we generated $350 million in cash flow from operations.

Depreciation and amortization amounted to $78 million in the quarter.

We are extremely pleased with our working capital management and we continue to drive an exceptional cash conversion cycle performance.

While sales increased $713 million sequentially, we were able to reduce inventory by $79 million during the same period.

CapEx amounted to $159 million, and acquisition payments amounted to $106 million.

Free cash flow, which is cash flow from operations, less CapEx, amounted to $191 million in the quarter.

Thank you, ladies and gentlemen.

As you turn to slide 12, I will now turn the call over to Mike McNamara.

Thanks, Tom.

Before discussing guidance, I'd like to provide insight on some of the highlights of our operational performance this quarter and the current state of the business.

Last year we initiated our strategy to accelerate revenue and profit growth in our core EMS business, which is realizing success for our company and for our customers.

A central part of this strategy is the organization of our resources around a market-focused approach which allows to us better serve our customers.

We are pleased with the results today.

For example, in the December quarter revenue reached a record high $5.4 billion which exceeded our guidance of $5.1 to $5.3 billion, non-GAAP net income reached a record high $136 million.

Year-over-year revenue increased 31% while non-GAAP operating profit increased 29%.

ROIC improved 120 basis points from the year-ago quarter and ended up the highest level in almost six years at 11.5%, which approximates our cost of capital.

Cash conversion cycle improved two days on a sequential basis to an industry-leading 12 days.

Debt was paid down by $240 million, resulting in a near record low leverage ratio of 20%.

Inventories were reduced by $79 million sequentially despite a sales increase of $713 during the same period.

Free cash flow amounted to $191 million in the quarter.

Operating expenses were reduced to a record low 2.4% of sales, which we view as an extremely important cost competitive weapon.

And lastly and perhaps the most importantly, our customer service ratings are an all-time high.

In light of the significant learning curve, costs and investments and new capabilities we have undertaken this year, we believe achieving operating profit growth of 29% during the quarter, which is roughly in line with revenue growth of 31%, is exceptional.

This is a testament to strong operational execution and our all-time high customer ratings.

Fiscal 2007 is a heavy investment period to support our broad-based growth.

The capacity expansions in China, India, Malaysia, Ukraine, Brazil and Mexico are progressing as expected.

Broad geographic expansion is required to enhance our position and competitiveness for each of the growing regions.

Additionally, we continue to expand our vertically integrated service offering, where we've been adding capacity in plastics, metals, PCBs, as well as introducing new capabilities in machining and LCD displays.

CapEx in December quarter amounted to $159 million.

We are now increasing our forecasted CapEx by $100 million to approximately $500 million in fiscal 2007.

Obviously making significant investments for the future.

And we will continue to wisely invest as required to build an increasingly stronger competitive position.

We continue to improve our fixed assets throughput and estimate the net fixed assets to sales ratio in fiscal 2007 will be approximately 10%, which is continuing to improve from a high of 16% in fiscal 2002.

We continue to make these investments to not only help us meet our revenue growth expectations while yielding better profits and return for shareholders, but to also improve our competitiveness, enhance our capabilities and provide value to our customers and increase our competitiveness.

During the high growth period, we think we are executing very well in the controllable aspects of our business and are extremely pleased with our continued excellence with our working capital management, as evidenced by our return on invested capital, strength of our balance sheet and cash flow generation.

Although there are still work to be done, we are quite pleased with our results and are very enthusiastic about the direction of the company.

We are currently ramping multiple large-scale customer programs which with a focus on execution and superior customer service.

In addition, we are working on continuous improvement in several areas of our business such as operating margins, inventory management and ROIC during this time of accelerated growth.

Slide 13.

In fiscal 2007 guidance.

While December quarter was better than expected in many respects, we think it is prudent to maintain and not to raise expectations for the fiscal year ended March 31, 2007.

We are therefore not changing our longstanding expectation and continue to expect revenue to increase by approximately 24% to approximately $19 billion, operating profit to increase approximately 23% and diluted EPS to increase approximately 15% to approximately $0.80 per share which equates to our 3% of operating margin target for the year.

Obviously there is a range around these estimates and we urge you to be conservative as the economy and demand trends are dynamic,

Slide 14.

March, 2007 quarter guidance.

As a result, March quarter revenue should be approximately $4.8 billion and diluted EPS should be approximately $0.20.

This represents year-over-year revenue growth of approximately $1.3 billion, which is a growth rate of approximately 30% and an operating profit growth rate of approximately 40%.

I want to once again emphasize there is a range around these estimates and we urge you to be conservative as the economy and demand trends are dynamic, especially in the March quarter each year.

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

Part of our stock-based compensation expense includes restricted stock grants to executive officers that will begin to vest in April, 2007.

As a result, we would like to forewarn that you this will result in some income tax driven insider selling, and you should not interpret this as any indication of insider views on the present evaluation or outlook.

It is nothing more than insiders monetizing the shares to pay for the related income tax resulting from the vesting of restricted shares.

Although we are not providing guidance for fiscal '08, until next quarter, we would like to once again highlight that a long-term annual growth targets are for revenues to grow 10 to 15% and earnings to grow 15% to 20% Slide 15.

Risk factors, there are real risks of operating this business which includes a macro economic or technology slowdown among other things.

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

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

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

Go ahead, Angie.

[OPERATOR INSTRUCTIONS] Our first question comes from Alex Blanton with Ingalls and Snyder.

Your line is open.

Hi.

Good afternoon.

Hi.

A quarter ago when you, when you reported and I think the quarter before that, you talked about the margins in '08.

Not specifically, but you said that this year is burdened by the startup costs of this huge increase in volume and that those startup costs would stay basically the same in fiscal '08.

When you expect to ramp about the same amount of new business as you're ramping this year, so the startup costs would stay the same.

But you would get higher margins on the business that you're ramping this year so that you would have an increase in margins in fiscal '08, whereas in fiscal '07, the first year of the ramp, you're not getting it.

Could you update us on that situation?

Does it still look like that's going to happen?

Yes.

Yes, if you look at FY'08 versus FY'06, the actual margin deterioration was actually a little less than I anticipated, to be honest with you.

I expected - I mean it's basically, the operating profit year on year is just about flat.

And I expected that the, there to be a little bit more more pressure on the margins based on the startup costs.

The reason for that is we were coming off of three years of very, very moderate growth.

And we weren't positioned for such a strong growth.

So we added $4 billion of business this year from a cold start.

And I thought that would put some additional pressure on the margins.

In fact, this year, we fared a little bit better than anticipated, holding the margins roughly flat from last year is actually a notable accomplishment.

I do expect FY'08 to have less margin pressure because we're not coming off of a cold start.

And we worked very hard in FY'07 to put in the processes that are necessary to maintain and grow at a nice -- we've kind of always referred to our -- we set expectations that we think we can achieve long-term growth of 10% to 15% every year.

So I think we put in more prophecies this year, I know we did, that's going to allow us a little bit more sustainable growth and a little bit more repeatable execution.

So I think the margin pressure going forward is going to be relieved from the startup cost standpoint.

And that's what we thought we would have, some margin expansion.

But you're not quantifying that?

We put out a target that we'd like to see the operating profit grow 10% this year.

But in terms of a percentage basis, again, one thing we're going to stay very, very focused on is creating sustainable growth over time.

And we feel pretty comfortable that we're going to be able to grow the revenue 10% to 15% on operating profit, 15% to 20%.

That being said, we're not even in FY'08 yet.

So I think we'll get some more looks at it.

There's a lot going on with the economy right now it seems like, and this March quarter is the most uncertain for us.

So I think we'll get a better look at it over the next couple months and then when we come back in April we'll be able to give you a better idea of what it looks like.

Second question is, could you give us some color on what were the biggest pluses for you on the revenue side in the December quarter, Sony, for example, Sony Ericsson had a huge increase in sales, xbox was up, were those factors, and what else?

Yes.

Without doubt, Sony Ericsson is -- would be the biggest single contributor if we can pull something out.

But the overall mobile business itself went up quite a bit this year, year on year it went up 52% and even sequentially went up like 28%.

So it's pretty strong growth.

And just kind of across the board, we had good growth sequentially, whether it's our computing business or our mobile business or consumer or the industrial, medical, automotive, or infrastructure, all of them went up sequentially.

And of course all of them are going to be up year on year pretty substantially.

So I think, I think I'd like to see it's very, very broad-based.

And even if you look at our geographic expansion, where we're adding capacity, it's Brazil, Mexico, Hungary, Ukraine, not Hungary, Ukraine, sorry.

China, Malaysia, India -- I mean, all these places are generating pretty nice growth for us.

So I think it's kind of multigeography, it's a little bit multiple segment and one of the other things is we did add capacity in plastics, metals printed circuit boards all this year as well, so our largest vertical segments as well have all grown nicely this year.

So it's pretty broad-based.

Thanks, Mike.

Our next question comes from Steven Fox with Merrill lynch.

Your line is open.

Hi, good afternoon.

A couple questions.

Was there any pulling of business from that you expected to ramp or production schedules that changed with the March quarter versus the December quarter?

And secondly, can you just describe the $100 million increase in CapEx, what's that related to?

Yes.

Yes, I don't know if there was any pulling.

It was a little bit better than we anticipated.

And to tell you the truth, we have such a broad customer portfolio that people are always trying to hustle to make their December quarter, and do the pull that's necessary.

And so I think December quarter more than anything else, we have to execute a lot of pull-ins for our customers.

You know, whether it's any more or less than anticipated or was typical or seasonal, not sure.

But you know we did have the typical fury of trying to meet customers' expectations around the December quarter.

So we're kind of pawns to them.

As you know in terms of, we have to build what they're looking for.

So I don't know if it's any more or less or different than before.

But it's, I think I call it the typical December quarter.

And the $100 million is really across the board.

We probably invested $100 million this year in our multiprinted circuit board operation.

And I mentioned we're adding plastics, we're adding metals capacity all around the world.

We're adding surface mount machines.

I don't know how many lines we've added, but a very substantial amount, a couple hundred million dollars worth of investment there and we did bring out about 4 million square feet of capacity in terms of capital.

So really across the board, it's just planned equipment.

Great.

And I don't think there's much else.

Thank you very much.

Our next question comes from Brian White with Jefferies, your line is open

Yes, good afternoon.

Mike, you talked about the environment being dynamic.

You had a great quarter, you ramped a lot of programs.

What markets, if had you to dig down deep or types of businesses were a little slower than you thought in the December quarter?

And are there any concerns in certain markets moving forward?

Probably you know probably the lowest was, if could I think about two things that I think are, we would have liked to have seen more growth, it's hard to be thinking about the growth when you're growing this much.

But we would like to have seen computer be stronger.

For us, so I think that was a little bit below expectations.

We anticipated being in single digit growth rates for the year.

We grew it about 7% sequentially so we would have liked to have seen a stronger finish on that.

I think infrastructure really showed a little bit of softening.

I actually felt we had a little more cushion and a little more upside on the infrastructure pieces.

So it seems to us that a little bit of of that is slowing a bit.

And I don't know if that's because of all the mergers going on in the industry or if the industry itself is a little slower.

I think there's a lot of information out there in the marketplace that maybe that's a little bit softer.

If I think about two segments, those are probably what worried me the most.

And then for this quarter, mobile and consumer, we don't need to be worried about.

Because mobile is, it's always unpredictable in the first quarter and the consumer business is also very seasonal.

So, this is probably the most unpredictability going into the March quarter.

But you know, we have to be pretty happy with the broad-based growth that we did have and that we did overachieve expectations at $5.4 billion.

So we're not really unhappy with any segment.

I mean, they all had growth rates year on year and sequentially.

Okay.

And just, Mike, when you say infrastructure you mean telecom, that's what you're talking about?

Yes.

It's mostly in telecom.

I'm just curious, you know Jabil's acquiring Taiwan Greenpoint to getting more involved in casings.

What are your thoughts in that area?

Are there any capabilities you still need in the casing area?

Yes.

We're always looking for more capability.

The biggest -- we have quite a bit of plastics, specifically we have an entire division that does nothing but the mobile phone, plastics and some of the related parts.

We don't have much in the way of metal, metal technology, as it relates to casings, the metal casings.

And that scenario that's obviously growing very, very rapidly over the years and it's it's something that we're not participating in.

So that's a place that we should look to broaden our portfolio and we're always looking for ways that might be the best way to go about that.

We have a lot of plastics capability already.

We're adding quite a bit of capacity.

We're just in the mobile division we're adding multiple pan lines in another 50 to 100 machines over the next 6 months.

So there's still quite a bit of growth in the existing business.

But once you get out in the specialty finishes like metal and such, we're always looking to increase our confidence there.

So that scenario that we'd like to strengthen up.

Okay.

Thank you.

Yes.

Our next question comes from Carter Shoop with Deutsche Bank.

Your line is open.

Hi.

First question, on the high-profile new program ramp.

There's obviously a large communications customer, Motorola and also on the networking side, Cisco.

Can you talk about those ramps in regards to, are they fully ramped by the end of December quarter or is that going to be something that goes into the March quarter for you.

Yes, I think there's probably six or eight reasonably sized programs that is will keep ramping through the March quarter I think it's what's going to help a little bit of softness in the normal seasonality that occurs in March for us.

But I don't think those programs just like ramp and then they're done.

Hopefully there's some sustainability to them and hopefully there's some continued penetration into the customer base with a lot of these programs.

So I actually view them a little bit more positively that some of these are almost customer acquisitions as opposed to program acquisitions and I think it puts us into a position to be more successful, to continue to penetrate additional programs with those customers.

So I don't view them as one-off kind of ramp.

Something like a Kodak -- excuse me.

Something like a Kodak, we did that last year.

It was actually to acquire all the camera, all the digital cell camera business.

So it was kind of a more of a one-off event.

But I think a lot of these other customers, like you mentioned Motorola and Cisco, are customers that is I hope we can continue to penetrate over the years.

Okay, great.

And the follow-up question, sales are up about 15% sequentially and SG&A on an absolute basis is actually down a little bit.

Can you talk about some of the drivers there in the quarter and how sustainable is that current level?

Yes, SG&A, and what was the first comment?

Just the sales were up so much sequentially, like 15% sequentially and then SG&A on an absolute basis was down.

And break down 2.4%.

I'm curious what the levers there are that help you keep it a SG&A so low and also is that sustainable?

Yes.

Well, it was a big quarter.

So coming off at a 5.4 rate and then going into a 4.8 rate.

We're not going to flip a switch and turn all that SG&A off so it will come back a little bit.

We are running our SG&A so that we can create cost competitiveness.

We think we can run our business with a very, very aggressive SG&A rate.

We run very, very efficiently and lean as a company, we try to take out massive amounts of bureaucracy and the levels of management we have I think are quite a bit lower than the normal company.

So it allows us an opportunity to get the SG&A out.

So we're going to drive to that.

So the question is, is it sustainable?

I'm not sure if it's sustainable at 2.4%, but we for sure don't ever anticipate it going back into the threes.

In fact, we could probably run it all next year averaging probably close to 2.5%, I actually don't know the number yet, so don't quote me on that.

But we're working very hard to make this a competitive advantage to us.

So, yes, I think it's sustainable.

Not necessarily at 2.4, but our long-term growth rate, too, is to have this thing approach 2.

Not sure we're ever going to get there, but we're going to try real hard to make that happen.

And a lot of that is going to be driven by some of the volumes.

So, the -- the other comment on sale, is that sustainable?

You know we had a good sales quarter, we've had a good sales year.

You know, I like to think that the strategy that we put in place, the operating system and some of the execution that we're seeing right now create some bit of sustainable advantage to go compete in the marketplace.

And so I do think we've set up our system to be able to continue to grow the business and so I definitely feel very, very comfortable that we'll be able to continue to grow 10% to 15% unless the economy falls apart.

Our next question comes from Tom Dinges with JPMorgan.

Hi, good afternoon, guys.

Mike, a quick one for you.

When you talked about you're running at about 10% net fiscal assets to sales.

Is that kind of a level that you think you're going to be able to sustain, that top line growth there after the big heavy investment year that you've got here, or do you anticipate maybe a little bit of investment, still sort of spilling out at least maybe into the first couple of quarters the next year or so?

And then I have a quick follow-up for you.

Yes, I think we had a little bit of a step-up this year in terms of investments.

My best example I can give is Multech where we actually brought in $190 million of business.

Or, sorry, invested $190 million of capital into that business, including 2 printed circuit board fabs, and I think it steps up that.

It's a step that we have to come across.

I think some of the investment that we put in place in Mexico and Indian, even some of it in China, is a little bit of a step.

But we're continuing to expand in some of the locations as well.

We're actually still looking at CapEx that we're looking to invest for this year.

I actually expect CapEx to be a little bit higher in the first half of this year.

Kind of the continued momentum that we've had.

And then would I kind of expect it to taper off at the back end.

And the question is, what does that do in terms of our revenue as percent of sales?

And I think we actually will dip down into maybe into the 9range.

But I think it ends up pretty, really starts to flatten out at that point.

So maybe there's more improvement.

But it's starting to deteriorate.

Okay.

And then a real quick one for Tom on the cash flow side.

You guy did a lot better than you were expecting.

Just real quickly, one of the levers here looks like receivables relative to obviously the sales growth for the quarter was a lot better than expected.

Was there something perhaps on the linearity side or is this some of the things that Mike had alluded too, a little more lean and mean on the procedural side and actually doing a better job on the collections?

Well, I think our past due receivables were at an all-time low during the quarter.

If not an all-time low then certainly near it.

But I would also point out that as I think everyone is aware, we have a receivable sale program and with the higher level of sales, we also sold a higher level of receivable.

So I think, you know, on an operating basis, we keep past due accounts very, very low.

World class, in my view.

And with the higher revenues we just sold a little bit more receivables as well.

Okay.

That explains it.

Thank you.

Our next question comes from Bernie Mahon with Morgan Stanley.

Your line is open.

Hey, good evening.

Hi.

Question for you on the inventory side.

So you work it down about $70 million in absolute dollars in the December quarter.

And, Tom, I think last call you had said you planned to work it down $300 to $400 million through the June quarter.

Could you just give us an update on how you stand there.

Do you expect to work it down in an absolute basis in the March and June quarter, maybe how much and in what segments, as well?

Yes.

I think the, we are looking to work it down.

It's obviously going to depend a lot on the revenue level to be, that actually drives it a little bit more.

If we get any kind of stability or softness in the revenue growth, you know, we also kind of hope doesn't happen, but you know, if we get any softness we for sure will drive more inventory out of the system.

So giving a flat scenario, we'll be sure be able to take a couple million out.

We think there's a lot of opportunity in our infrastructure business to get some out, but we're going to work real hard.

We did a lot of organizational changes and we actually had a lot of disruption to the standard operating system, if you will.

And we're going to work to tighten down the system quite significantly this coming year.

So I think it's going to yield some nice improvements in terms of inventory turns.

But it kind of depends on revenue more than anything else.

If June looks like a good quarter for us and we're going to go start a ramp again, we're going to have to buy inventory to go fund that ramp.

But all things being equal, I'm pretty certain we can get that $300, I think we talked about getting $300 million out by June and I think all things being equal in terms of a pretty, if it's just pretty modest revenue growth, I think we will be able to get $300 out.

That's helpful.

Again, relative to inventory turns and not certain.

And Mike I just think it's important to clarify that that $300 million objective was based on a same level of sales.

Right?

It's kind of the same-store sales basis, if you will.

Okay.

And then just what parts are those that are in inventory?

Is that just kind of across the board in terms of semi conductors, passives, connectors, boards?

I mean is there anything that you probably have a little bit too much of that you need to work down more than another part?

I would say not.

I think it's more of a -- no, there's not any real one item that's driving it.

Again, I think if you look in the segment, it's more infrastructure.

Infrastructure has more opportunity and has lower inventory turns because it's just such a complex business and there are so many different components that go into making infrastructure products.

So it's not any one thing to go focus on.

We would not attack it by going after certain commodities.

We would attack it by going after programs and efficiencies and overall components getting fed into hubs and just more efficient supply chain getting our integrated supply chain solution a little bit tighter.

So we kind of approach it on a generic basis, as opposed to a commodity specific basis.

I wouldn't think you would target it to any particular component.

All right.

That's very helpful.

Thanks a lot.

Our next question comes from Lou Miscioscia with Cowen and Company.

Your line is open, sir.

Okay, thanks.

Mike, I wonder if you could go into a little bit more detail and just reevaluate I guess [inaudible] from a competitive standpoint.

Especially obviously with everything you guys have done and continue to do with a vertical situation standpoint, and obviously the ongoing acquisitions through that area.

Maybe start with Hanai but then obviously compare it to the other three that aren't doing as well, and then maybe Jabil, I guess it dipped it's toe in there.

Maybe some thoughts there?

Yes Well, you know, we're, I guess we think about the competitors a lot.

But most of what we're trying to focus on is to build competitive offerings that allows us to be the choice all the time when the customers are looking for a solution.

So our thoughts competitively are to build a stronger portfolio of capabilities.

It's one of the reasons that we added LCD displays and machining, we did an acquisition called Aiwo which gets us into the, gets us a little more know-how into the computing space.

And we've also done some other programs, other small kind of acquisitions to bring up capability and know-how.

So we're focused at bringing broadening our toolbox.

At the same time we're trying to focus more on making our operations a little bit more product specific if you will.

So we can create real value within a particular product category, whether it's a mobile phone or whether it's an infrastructure product, so we're working on the systems and the processes and the operations associated with that.

So we think this is what gives us competitive advantage.

So, you know, when we think about competing against the other guys, obviously Hanai is a real tough competitor, we're not going to take him on in the PC space, and that's a place that I think they continue to go and dominate I think.

We are going to go start picking around in terms of the computing with some of the new capabilities we've brought out.

So they're going to continue to be a tough competitor.

We have a much broader infrastructure around the world which gives us a also bit of advantage in terms of doing worldwide programs and taking things all the way from a concept and design all the way into repair and distribution on the back end on the worldwide basis.

So we're going to continue to refine those capabilities.

And as far as competing with some of the US CMS guys, one of the things that we've had a big transition in the last two years is that in fact we probably do more low-volume high-mix complex products than anybody in the world today.

So, we've, with the Nortel acquisition, with some of the [Verigee] acquisition we did, we've got now Juniper and Cisco and such.

And you put all those together and it brings a product offering that's very, very strong.

So the spaces that have been traditionally owned by the big US CMS guys like telecom and high-end computing, are places that we now feel that we have as good a product offering, maybe even better to go after those kind of spaces.

So I think what we've done over the last year and a half is really transition ourself into that high-end complex space.

And I think that's going to help us compete a lot against the big US CMS guys.

So I think it's hopefully going to change the game as much as we can.

I think it's one of the reasons we're having a little bit of success.

Okay.

Two quick follow-ups, more housekeeping, I guess, you mentioned that ROIC is going in the right direction.

Obviously glad to see that.

If you could just give us a whack there and any thoughts on CapEx in '08?

Maybe not even, if you can't give us a dollar amount, just directionally compared to this year.

I don't know if we can -- can you comment on ROIC?

Our objective on ROIC maybe you can answer this tom, is we are just going to keep grinding away at it.

And we think there's an opportunity to do that.

We think inventory turns is an opportunity for us.

A/R and A/P are probably pretty stable.

But we can for sure grind away at inventory turns a little bit and I think we can grind a little bit away at our fixed assets relative to sales.

So I think our objective is to keep inching it up.

And as far as CapEx, you know, I would guess we're going to end up doing -- it really depends on when we really get serious about setting our FY'08 outlook, but you know, we do still anticipate 10% to 15% growth and on the basis we have it's still about $2 or $3 billion, maybe, that's still going to require some CapEx.

So I would suspect it's going to be somewhere in the -- on I almost think the $$500 range if I was to guess at this point.

Maybe you have a comment, Tom?

I don't really have a comment on CapEx, but to answer Lou's question on weighted average cost of capital, Lou, it was 12% at the end of the quarter.

And our ROIC was 11.5%.

So I like Mike don't want to really set an objective for next year, other than to say, if cash conversion cycle improves, mainly through inventory turns and throughput on the fixed asset basis improves like Mike said, which we expect it hopefully to fixed assets to sales ratio go down around 9%, our asset efficiency is improving on both the working capital and fixed asset side along with improving profit.

As Mike said longer term we expect to be able to grow profits 15 to 20%, so improving profits on the lower asset base will definitely yield a higher return on invested capital.

It's improved for six years in a row now.

And I don't think that we've really reached the potential.

Our long-term objective is ROIC of 15%.

Okay, great.

Good luck on the new calendar year.

Thanks Lou.

Thanks.

Our next question comes from Kevin Kessel with Bear, Stearns.

Your line is open, sir.

Thank you.

Mike as I'm just looking back at the guidance of 4.8.

I know you guys stated you are not changing anything, you want to remain prudent.

When you look at that sequentially, looks down double digits at this point, I think you guys have spoken in the past that you expect less seasonality as a result of all these programs, Mike, that you talked about, the 6 to 8 that will ramp throughout March.

Was it in fact just being prudent here or are you actually thinking maybe it is a little more seasonal, things were pulled forward a little bit?

Well, one thing is, we had a little bit of base, we had a little bit of a base creep on the December quarter because we actually anticipated doing like 5.2 and we came out at 5.4.

So we were actually, you know, maybe it's being prudent, maybe it's just looking at what we're seeing in terms of some of the data we see in the economy and such.

But we set this objective trying to hit the 19, we are working hard to try to hit that.

Sometimes a little bit of January revenue creeps into December and someone is trying to, we talked a also bit about that before, some of the OEMs are trying to goose up their revenue and have a good December quarter and do some pull-ins.

So it's hard to get any more precise than this.

In fact, you know, just being plus or minus a couple hundred million on such a large basis is really in the noise to be honest with you.

And so you're kind getting to levels that I don't know, maybe the spread around this thing is, we think there needs to be more of a spread as opposed to less of a spread, and we actually think that's normal behavior.

So that what you're saying is in terms of the range, you're referring to the range actually might be getting wider, you think, as opposed to narrower?

It's probably always a little bit wider in March just because there's just more uncertainty going into March than there is any other time of the year.

So, but, no, it's just kind of what we see.

We've held pretty stable at the 19, what we see right now is it rolls up about 4.8.

And you know it's where we think we're going to be for this quarter.

So, again,it -- I don't know what I'll tell you except that's just what it looks, it's pretty stable and pretty consistent.

Great.

Just turning to handsets quickly.

When do you guys get a real good sense for what your customers saw in terms of sell through, and then do you still expect Motorola to be above 10% customer links per order?

And can you just update us on the ODM business, whether or not it hit break even?

Yes, I think -- I'm kind of glad you brought up the ODM.

The -- yes, I think we do still anticipate Motorola being a 10% customer.

Might have been rolled up and tried to look at it that way in the latest numbers, but you think it's probably a 10% customer or substantially close.

If it's not 10%, it's probably going to be real close.

The -- you know, as far as the ODM business, we've talked a lot about talking about focusing on these ODM phones.

As we have transitioned our business over the last year and a half into these market segments focus, one of the thing that is we've done is we've completely aligned all the design and operations and sales and everything into a bundled business unit.

And the purpose of the design guys in the ODM business are becoming more and more,they're just less and less focused on just producing a complete phone like we always talked about how many ODM phones are you going to do?

It's really an ODM phone, it's a CDM, it's providing a customer with a flip, as an example.

Maybe the end objective is to create a flip, which is not a complete phone.

But there's starting to be a real migration towards, it's not really an ODM phone, it's like an ODM or a customer-designed phone or it's a jointly customer-designed phone, or it's a sub assembly of a phone.

And we don't care what those pieces are, as long as we can create some value and be able to drive, you know, pay for our people and be able to drive higher margins with it.

So what I'm trying to say is the ODM business is starting to migrate into, it's just more of a customer co-design kind of business.

Where you draw the line between what's an ODM and CDM becomes more and more difficult maybe going forward.

So we're going to spend less time talking about absolute numbers and more time talking about just how the mobile business is evolving.

Because that in the end is the objective of the ODM guides, is to help grow that business for us.

And as you know, that business grew like 48% for us last year, 53% for us.

It's growing about 50% this year.

Right, I understand.

But then does the 30 million units you referred to in the past still apply or does that not apply?

Yes.

I'm just going to quit talking about them, but what I can tell you, just to try to get back to perspectives in terms of what we said before, is we felt we'd be online to do 30 million phones for this coming year.

And we actually think we've got pretty solid orders for 20 million of those 30.

So we think we're like right on track.

But what I'm saying is going forward is I want to get off the absolute number because it's starting to get hazy as to what's an ODM phone, what's a CDM, and how do you count half phones?

And then on the sell-through, what do you think about that? when do you guys think that you know what your customers' sell-through is?

Yes, I guess we're getting more data in as we speak.

I think the -- we usually start getting -- we don't get much of everything in the first couple weeks and then we really start to see whether there's changes in the third week or fourth week or after that.

But then, of course, that gives you an indication of what inventory looks like maybe.

But there's also the competitive response to that inventory, which still plays out during the quarter.

So in other words if someone does have a lot of inventory, do they go take down price and go compete in a different way.

So I think it still evolves through the quarter, and but I think it's, if I can look at what cell phones look like, I mean, they're, you know, substantially not very much different than expectations.

Right.

And just housekeeping, Tom.

Did depreciation dropped this quarter.

And I'm looking at CapEx.

You know, this year and next year's CapEx that you guys end up at 4 to 5, $400 to $450.

You would spend more in this year and next year than you spent in the last four years total in CapEx.

So I'm just trying to understand where should we expect depreciation to go here and how did you take it down in the current quarter?

Sequentially?

Yes.

So, it's just the timing of when certain asset fall off, Kevin.

So clearly, with our investment levels during the current fiscal year and next, you can expect depreciation to migrate up higher.

You know, right now just in round numbers, depreciation is running around $70 million a quarter.

And I would expect it to be somewhere in the mid to high $70s per quarter next year.

Okay.

Thank you.

Okay?

So maybe we'll take one more question, Angie.

Okay.

Our last question comes from Jim Suva with Citigroup.

Your line is open, sir.

Great.

Thank you and congratulations.

Can you give us a little bit of color on a lot of the cell phonemakers have been talking about a mix shift toward a lower-end of cell phones as opposed to the higher end.

How does this impact Flextronics and the profitability of such?

Well, the, we don't see a substantially different profit percentage on high-end phone versus low-end phone.

Which is typically what our customer sees.

So from that standpoint, from a profitability standpoint, it's substantially the same.

I mean, we drive to an ROIC model, we price according to an ROIC model and as a result, it kind of levels out.

We don't get any technology breakthrough because we're manufacturing something that is a higher cost item.

We don't necessarily get higher profit from that.

The --so where it really affects us is just in terms of revenue, more than anything else.

So if we're shipping a $25 phone instead of a $75 phone, we're going to have a lot less revenue.

So if there's a big shift, then we're going to have, we'll have less revenue.

But the same profit percentage associated with that.

So if there is a big switch, and more and more phones go into lower ends and we built more and more $25 phones than the $75 phones, it's going to have hit on it, it will be impact on our revenue.

Okay.

And then as a follow-up for your gross margins, which came down -- I assume it had to do with seasonality and the mix of consumer, should we expect as in past years, you know, a nice bump in gross margin next quarter like 30 or 40 basis points?

No, I don't think so.

We're pretty focused on operating profit.

And the gross margins don't, we're actually thinking about operating profit is a metric we're driving to.

So if we can keep operating profit flat during these high-growth periods and maybe be able to take it up, as we catch up on our learning curve costs and improve our operations, then that's what we're going to focus on and not necessarily focus on the gross margins themselves.

So I'm actually not even -- maybe you have a comment on what you see as gross margins doing, Tom.

Yes, I don't really want to give specific guidance, but that definitely, SG&A will lever up as a percent of sales because of the sequential decline in sales and gross margins likewise will go up to offset it.

So Mike is absolutely right.

Operating profits we're still targeting 3% for the year.

And that will be in the March quarter pretty constant with what it's been for the last couple quarters, but gross margins will increase a little bit in March and offset by higher SG&A as a percentage of total sales.

Great.

Thank you, and congratulations.

Okay.

Thanks, everybody.

This will conclude today's conference call.

You may now disconnect.