Flex Ltd (FLEX) 2007 Q4 法說會逐字稿

Good afternoon, and welcome to the Flextronics fourth quarter and fiscal year end earnings results 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 have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr.

Mike McNamara, Chief Executive Officer.

Sir, you may begin.

Okay, thank you.

And the first thing I would like to do is apologize for the delay.

We seem to have some sort of telecommunication problems.

But we're happy to get started now.

So thank you for joining the conference call to discuss the results of Flextronics' fourth quarter and fiscal year ended March 31st, 2007.

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 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 through the financial portion of our prepared remarks.

I will then provide commentary, along with guidance, and then open it up to 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 U.S.

Securities laws, including statements related to revenue and earnings growth, success of our vertical integration strategy, our ability to add new capacity, new customer programs, expected improvements in our SG&A expense levels, inventory management, operating margins, future cash flows and ROIC, 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 our earnings press release, on slide 17 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, slides eight and nine of this slide presentation, and the GAAP versus non-GAAP reconciliation in the investors section of our website, which contains the reconciliation to the most directly comparable GAAP measures.

Slide three.

Quarterly revenue increased $1.1 billion or 32% from the year ago quarter, to a fourth quarter record high $4.7 billion, while quarterly adjusted operating profit increased 36% from the year ago quarter, to a fourth quarter record high $141 million.

Slide four.

Fiscal year revenue increased $3.6 billion or 23% from the prior fiscal year to a record high $18.9 billion, while fiscal '07 adjusted operating profit increased 21% from the prior fiscal year to a record high $570 million.

Slide five.

Revenue from the Computing segment comprised 10% of total March quarter revenue and decreased 11% from the year ago quarter.

Revenue from the Consumer Digital segment comprised 24% of revenue, and increased 46% over the year ago quarter.

Revenue from the Infrastructure segment comprised 23% of revenue and increased 19% over the year ago quarter.

Revenue from the Mobile segment comprised 31% of revenue and increased 53% over the year ago quarter.

And finally, revenue from the Industrial, Automotive, Medical and Other segments comprised 12% of revenue, and increased 47% over the year ago quarter.

Our top ten customers accounted for approximately 63% of revenue in the March quarter, with both Sony Ericsson and Motorola each exceeding 10% of the March quarter revenue.

On a geographical basis, Asia decreased sequentially to 60% of the March quarter revenue, while the Americas and Europe increased 23% and 17% respectively.

Slide six.

Adjusted gross profit increased 30% from the year ago quarter, to $277 million in March '07.

Due to the seasonal sequential decrease in revenue and resulting richer mix, gross margin increased 50 basis points on a sequential basis to 5.9%, offset by a 50 basis point sequential increase in SG&A as a percentage of sales.

As a result, operating margin was 3% in the fourth quarter, as well as in fiscal 2007.

This represents a ten basis point improvement from the year ago quarter, and is in line with our previously stated fiscal year operating margin of 3%.

Although we continue to invest heavily in resources necessary to support our revenue growth, we believe we have a significant cost advantage by leveraging SG&A efficiently and effectively.

SG&A as a percentage of sales declined 30 basis points in fiscal '07 to what we believe is an industry leading SG&A rate of 2.7% of annual sales.

Slide seven.

Adjusted net income amounted to a fourth quarter record high $122 million, which is a 24% increase over the year ago quarter.

This resulted in a fourth quarter record high adjusted earnings per share of $0.20, which is a 25% increase over the year ago quarter.

Adjusted net income amounted to a fiscal year record high $478 million, which is a 15% increase over the prior fiscal year.

This resulted in a fiscal year record high adjusted earnings per share of $0.80, which is a 16% increase over the previous fiscal year.

Slide eight.

After-tax amortization and stock-based compensation amounted to $23 million in the March 2007 quarter, compared to $13 million in the year ago quarter.

Restructuring and other net charges amounted to a benefit of $22 million in the March '07 quarter, compared to a $42 million expense in the year ago quarter.

After reflecting these items, GAAP net income amounted to $121 million compared to $43 million in the year ago quarter.

This resulted in GAAP earnings per share of $0.20 compared to $0.07 in the year ago quarter.

As previously stated, restructuring and other net charges generated income of $22 million in the March '07 quarter, as a result of the realization of a cumulative foreign currency translation gain on the disposition of a foreign entity.

The $22 million net gain was treated as a nonrecurring item and excluded from our adjusted EPS of $0.20 in the March '07 quarter.

Our previously stated strategy is to use these types of nonoperating gains to offset restructuring and other charges incurred from time to time.

Slide nine.

After-tax amortization and stock-based compensation amounted to $80 million in fiscal '07, compared to $56 million in the prior fiscal year.

After-tax restructuring and other net charges amounted to $61 million in fiscal '07 compared to 180 -- $189 million in the prior fiscal year.

The divestiture of our software business generated an after-tax gain of $171 million in fiscal '07 compared with an after-tax loss of $31 million on the sales of the semiconductor and network service businesses in the prior fiscal year.

After reflecting these items, GAAP net income amounted to a record high $509 million in fiscal '07, compared to $141 million in the prior fiscal year.

This resulted in a fiscal year record high GAAP earnings per diluted share of $0.85 compared to $0.24 in the previous fiscal year.

Slide ten.

Return on invested capital improved 60 basis points in fiscal '07 to 10.4%, up from 9.8% in the previous fiscal year.

Slide 11.

We ended the fiscal year with $715 million in cash.

During the year, we repaid $122 million of debt, which was reduced to $1.5 billion at year end, and is at the lowest level in four years.

Net debt, which is total debt less total cash, was $787 million at March 31st, 2007.

Including the revolver availability, total liquidity was in excess of $2 billion and the debt-to-capital ratio was 20% at the end of the fiscal year, which is near a record low.

Slide 12.

Cash conversion cycle came in at 15 days, which continues to be industry leading.

Inventory increased $27 million sequentially, as inventory fell to seven times on the seasonally lower sequential sales.

Receivables decreased $152 million sequentially, as days sales outstanding increased four days sequentially to 36 days.

While accounts payable decreased sequentially to $306 million, as days payable outstanding increased eight days sequentially to 74 days.

Slide 13.

During the fiscal year, we generated $276 million in cash flow from operations.

Depreciation and amortization amounted to $327 million in the fiscal year.

CapEx amounted to $569 million, and acquisition payments amounted to $356 million during the year.

Thank you very much, ladies and gentlemen.

As you turn to slide 14, I will now turn the call over to Mike McNamara.

Thanks, Tom.

Before discussing guidance, I would like to provide some comments on our fiscal year performance.

Overall, I am very proud of our Company's performance and the hard work and contributions of our employees and management across the globe in making it a very successful year for Flextronics.

Fiscal '07 was a year of transition.

In my first year as CEO, I wanted to take a fresh look at our organization and leverage its existing scale and capabilities to accelerate revenue growth and enhance profitability, while narrowing our focus to only those businesses that created substantial synergy.

We embarked on a market-focused strategy that was designed to enable our Company to execute better, quicker and more accurately in an increasingly complex environment.

We quickly expanded our executive team through the addition of five new executives.

And in doing so, we added innovative thinking and expertise that enhanced our value creation for our customers and created the necessary executive bandwidth to scale rapidly.

We accomplished the Company's growth objectives, as revenues grew by $3.6 billion, or 23%, to an all time record high of $18.9 billion, and our operating profit grew by 21%, while achieving our annual operating margin target of 3%.

It is important to note that of the $3.6 billion of revenue growth in fiscal '07, approximately $3 billion of it, or more than 80% of this growth, was organic program wins with customers that did not come with any factory acquisition, such as Nortel.

We are obviously capturing market share, and I feel this growth is a confirmation by our customers of the Company's strengths and ability to meet their market demands.

We will continue to be intensely focused on growing our market share with an appropriate return on capital.

We are very pleased that we also met our fiscal '07 EPS commitment of $0.80, which is an all time high and an increase of 16% over the prior year.

Despite a heavy investment cycle, the Company's return on invested capital increased by 60 basis points to 10.4% in fiscal '07, which is the highest level in six years.

This is further confirmation that our incremental growth is generating an ROIC.

As good as the annual results are, the improvements in quarterly operating results accelerated throughout the year.

For example, fourth quarter revenue increased $1.1 billion or 32% from the year ago quarter, to a fourth quarter record high $4.7 billion, while quarterly operating profit increased 36% from the year ago quarter.

The fourth quarter revenue growth of 32% compares to 31% in the third quarter, 23% in the second quarter, and 6% in the first quarter.

Obviously, this accelerating trend will not continue at this pace forever.

Our balance sheet is in good shape, with over $700 million in cash and no short-term debt maturities.

We repaid $122 million of debt during the year, thereby delevering the balance sheet to a near historical low debt-to-capital leverage -- capital ratio -- leverage ratio of only 20%.

We continue to lead the industry with our management of working capital, and ended the year with a cash conversion ratio of 15 days in the March quarter.

Operations generated a positive cash flow of $276 million for the year, which we are proud of in light of the annual revenue growth rate of 23%.

We expect to generate positive free cash flow of $300 million to $400 million in fiscal '08, which is after estimated CapEx of approximately $350 million.

Another objective at the beginning of the year was to expand our low-cost geographic capabilities to not only help us meet our revenue growth expectations while yielding better profits and return for our shareholders, but to also improve our competitiveness, enhance our capabilities and provide value to our customers that increases their competitiveness.

We spent $569 million in CapEx in fiscal '07, primarily to expand our operations in China, India, Malaysia, the Ukraine, Brazil and Mexico.

This investment was funded through the $580 million of cash generated from the divestiture of non-core operations.

This is the first time in five years that our annual CapEx exceeded depreciation.

We expect to be able to leverage these investments into the next year, and therefore expect that CapEx will be roughly equivalent to depreciation in fiscal '08.

On the acquisition and integration side of the business, we concluded the Nortel acquisition this year, with the integration of the Calgary facility.

We also added significant businesses from new customers, such as Kodak, Agilent, Verigy, Cisco, Juniper and many others.

We also expanded and enhanced our vertically integrated service offering, where we have been adding capacity in plastics, metals, rigid PCBs and flexible circuits, as well as introducing new vertical capabilities in machining, LCD displays and power supplies.

We expanded our base of design engineering by over 1,000 people this year, in a variety of segments and verticals.

We have become more powerful and have invested aggressively, yet thoughtfully, all while maintaining our operating margins.

We are very well positioned to compete into this next year.

Another key element improvement that doesn't get highlighted in our financial results is the development of our key management of our Company to ensure we can manage the growth that we are experiencing.

As I have mentioned before, we have hired or promoted executives in all of our market segments.

These individuals have developed infrastructure around them to ensure we can continue to meet our customer requirements, as well as effectively managing growth.

As a result of this management development, our long serving president of Asia, Peter Tan, will be able to retire on June 30th.

Under Peter's outstanding leadership and wisdom, we were able to grow our Asia operations to more than $11 billion in revenue and more than 60,000 employees.

I, along with the rest of the Board and the management members would like to thank Peter for his incredible service, and the personal commitment he has made to ensure this explosive growth in Asia was managed successfully.

While I am pleased with these results and I believe they are a testament to our strong operational execution, I can assure you that we are not resting on our past accomplishments.

We are very enthusiastic about the direction of the Company, but there is still work to be done.

We are currently ramping multiple large-scale customer programs 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 15.

While our end market demand was a little bit weaker than expected in March quarter, we still significantly outperformed the overall market, as our March quarter revenue increased $1.1 billion or 32% from the year ago quarter, while quarterly operating profit increased 36% over the same period.

As good as the 32% revenue increase was, demand for some high-volume products and much of the IT and telecom infrastructure projects came in a little lighter than expected.

As a result, we think it is prudent to be conservative for the forward-looking guidance, as we now expect a softer demand environment through the first half of the fiscal -- the current fiscal year.

That being said, we believe our new program wins should allow Flextronics to continue to outperform the overall market, no matter how the actual demand environment plays out.

For the fiscal year ending March 31st, 2008, we expect revenues to increase 10% to 15% and adjusted EPS to increase approximately 15% to 20%.

This guidance remains consistent with our long standing annual growth targets.

The purpose of providing you with this range of estimates is to allow for those of you who have a more bearish view on demand to model the low end of the range, and for those who have a more bullish view on demand, you can model the higher end of the range.

Slide 16.

June quarter revenue should be approximately $4.8 billion to $5 billion.

Adjusted EPS should be approximately $0.20 to $0.22.

This represents year-over-year revenue growth of 18% to 23% and year-over-year diluted EPS growth of 11% to 22%.

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

Before I move into the Q&A segment of our call, I want to remind everyone that I told you on our last earnings call in January that part of our stock-based compensation includes restricted stock grants to executive [offers] that began to invest in April 2007.

As a result, I stated that this would result in some income tax driven insider selling under 10b5-1 plans, and it should not be interpreted as any indication of insider views on valuation or outlook.

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

You should expect to see some additional selling in May as additional shares are vesting.

None of the selling is material to the options and shareholders of these insiders.

Slide 17, risks.

There are a lot of real risks of operating in this business, which include the macroeconomic or technology slowdown, among other things.

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

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

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

(OPERATOR INSTRUCTIONS) Louis Miscioscia, Cowen.

I guess my question has to do with the pricing and I guess the competitive environment.

We have obviously a lot of EMS companies that are still in the process of restructuring.

But it seems like every time the Sanmina and Celestica and Solectron restructure, they end up not getting any kind of margin accretion, which makes it difficult for everybody then.

I mean, how are you seeing the pricing environment?

Has it changed that much?

And what do you see I guess going through the rest of the calendar year?

Well, I view this to be an incredibly competitive market, not only amongst more traditional North American EMS providers, but also the competition that continues to come up in some product categories in Taiwan.

So I view it as being exceptionally competitive.

I don't view it really as trending one way or another.

I always view it to be very aggressive.

And I think to make money in this market place under this competitive position, it's -- I think it's difficult.

And it's challenging.

And I think you have to run at pretty high utilization levels and have to be pretty effective about how you go at it.

But I don't think that it's trended either positively or negatively in any way.

I just think it's continuously competitive.

Let's tie that into return on invested capital.

Because even you all with what you're doing, one of the better ones here in the industry right now, from a performance standpoint, are only basically at your WACC.

Do you think in the new fiscal year you'll be able to get meaningfully above your WACC?

Well, one of the things that is driving down our ROIC numbers is the amount of goodwill that we are carrying over from the bubble.

And the only way to earn on that is to -- the only way they can make up for that is to really to run volume through and have the new incremental volume coming in at higher ROIC than the existing.

So you can see that our ROIC goes up every year.

It's slight.

We are carrying a pretty good boat anchor with the goodwill.

And if you look at our ROITC numbers, our tangible capital, we are by far in excess of anybody in the industry, and I think we might be even in excess of Taiwan.

So I think earning on the tangible assets that we have is -- we are already best in class.

I think we need to earn incrementally on all new business, as it comes in.

But we are carrying a pretty significant goodwill component that a lot of the other North American EMSs have written off.

Okay, great.

And one more quick one, hopefully.

You mentioned that if you are bullish on demand, go to the high end of your revenue range.

If you are less bullish, go to the low end.

So I guess, what would you describe I guess tech-ish kind of demand at the midpoint, like growth of 3% to 4% kind of tech percent or something higher than that, or -- ?

Yes, that's hard for us to be able pick a number like that.

I think the only thing that we can say generally about the market is certainly this front half is a lot softer than we anticipated back in December, and we are obviously hoping that there's some recovery in the back half.

But clearly we didn't -- we didn't -- we definitely are a lot softer than we anticipated even in the March quarter.

We actually expected to over-achieve our target of 4.8%.

Okay.

Thanks.

Good luck on the new year.

Tom Dinges, JPMorgan.

Just a quick one here.

Talk about the cash cycle a little bit.

Obviously, you have gotten some good torque out of that.

You made some big investments this year in fiscal '07.

Now in fiscal '08, you are looking at ratcheting that back a little bit.

Tom, what are going to be some of the main levers here?

Because if I just kind of back into it, obviously net income is going up pretty nicely for you guys.

But it looks like maybe working capital velocity would probably change a little bit.

I'm kind of wondering where you are thinking the cash cycle itself is probably going to end up for the year?

And then I have got a quick follow-up.

Yes, so that's a good question, Tom.

It's really going to be all about inventory improvement.

We have a lot of internal plans to accelerate our inventory turns throughout the year.

With the pull back in demand, that made it a little bit more challenging here in the March quarter, obviously.

I've always encouraged you guys to model a cash conversion cycle of 15 days.

We've historically been underneath that target for many, many quarters now.

You can see that it's kind of trending up toward that target right now.

But I think if we hold the cash conversion cycle of 15 days or below, we are world class in any industry, not just the EMS industry.

So I'm comfortable if you just assume a cash conversion cycle of 15 days, or a day or two better than that.

Okay.

Great.

And then, Mike, with the big expansions that you guys have made over the course of this year, where are you guys looking at expansion?

Is anything significantly new on the horizon with the CapEx you're planning on spending?

Or is this going to be simply expansion of some of the sites that you guys were already talking about over the course of the last year?

Yes, I think there was a little bit of a kind of a step function, if you will, in terms of the facility expansion to get ready in all these different regions.

And in addition to that, we added some capacity in printed circuit boards.

And really the incremental CapEx, there's still a little bit of that hangover that's going on into this year.

But really, it's to buy the equipment to fill out some of these sites, and we probably have probably $200 million, which I would almost call as practically as maintenance capital, if you will.

Just replacing some really old lines, things like that.

So it's really maybe the way you guys should think about it is like an incremental $150 million.

And it's really to fit out the facilities that we've invested in over the last year.

Okay.

Thank you.

Brian White, Jefferies.

Okay.

I'm wondering if you could talk a little bit about some of the trends you saw in the quarter.

Did the quarter start off slow, pick up?

Or was it slow and got worse as it progressed?

And maybe talk a little bit about April.

Yes, I would say it started slow in, like, January, and then just kept slow all the way through to March.

So I think we actually had probably three down cycles.

Like I mentioned, we actually geared up for having a pretty good March.

And it's one of the reasons that we had some disappointment in our inventory turns numbers this quarter, is we actually anticipated revenue being a little bit higher.

So I think we saw it kind of deteriorate for the first few months, maybe January, February, March.

We saw it stabilize in April.

So this last forecast cycle, we actually saw a stabilization of that number, and we did not see any more deterioration.

So, it seems like there's a little bit of adjustment.

Oftentimes there is in March.

Some of the adjustment is not industry.

Some of it is just what the particular product cycles we are in with our customers, which are not necessarily industry problems.

And I think we're starting to see it stabilize a little bit, and that's why we have a little bit of positive hope for the second half of the year.

And what markets look the most promising as we enter the June quarter?

Well, we think telecom will pick back up.

That was a little bit soft for us.

We think -- sometimes it's hard to see if it's just a -- if it's a March slowdown, or if it's really an industry problem.

We always experience a little bit more in March than others, because we tend to be a little bit more consumer driven.

But between some of the infrastructure products picking up and some of the customer ramps that we have that are independent of industry or economy, but just new business, and as well, we'll assume that the cell phone market turns around a little bit.

I think between all of those things, we are hoping -- I mean, those are the real key categories, I think.

And Mike, what are the dynamics in the mobile phone market in terms of pricing units?

How are you managing through this?

I assume that's one of the reasons for the shortfall in the March quarter relative to your internal protections.

Yes, exactly.

How do I find pricing and everything?

Same as it always is, it's rough.

I just don't see it getting much worse.

To me, we are already priced at the bottom of a reasonable return.

And I just can't see it getting much -- deteriorating much from that.

We have a lot of verticals and such that can help support those price points, particularly in that category.

And so I think it's extraordinarily competitive, but I don't think it gets any worse.

I don't think it really gets better, either.

Great.

Thank you.

Bernie Mahon, Morgan Stanley.

Question for you on the gross margins, Tom.

So they were up 50 basis points sequentially in the March quarter.

Is that all because of the mix shift away from handsets and consumer, I guess?

And then how should we think about that over the next couple of quarters?

It seems like it should start to increase just as your revenue grows.

You've made these investments in the second half of calendar 2006 and you just kind of get increased utilization there.

Is that the right way to think about it?

Yes, it really is.

And of course, it depends on the growth rate as we move through fiscal '08, as well, and how that changes the product mix shift.

And the March quarter is traditionally a little bit richer mix, so the margins are a little bit higher.

And as the higher volume consumer-type programs come back and held -- and handsets start strengthening throughout the year, as they normally do on a seasonal adjusted basis, that will compress the gross margins a little bit.

But overall, I think the key metric to look at is operating margins, Bernie, because, SG&A will fluctuate with revenues on a seasonal basis, as will as gross margins, as we saw in the March quarter.

So we are looking for margins to improve next year.

And we'll just have to see how that plays out relative to the various components being the gross margin, the SG&A, and how that falls out for operating margin.

But we do expect it to improve.

The operating margins.

Yes.

Just to follow-up on the inventory.

You talked a little bit about it before.

It was up a little bit on an absolute dollar basis sequentially, it sounds like because the demand was a little bit weak.

As (technical difficulty) demand comes in line as planned for this June quarter, could you quantify at all how much you would expect to work down?

Are we talking $100 million, $150 million?

Or not quite that much?

I don't think we really want to put an objective out there because we clearly missed our March quarter objective.

But if revenues come in pursuant to our guidance, we would expect some improvement in inventory.

I just don't want to put a target out there and set ourselves up, but for sure we are internally driving toward improvement.

All right.

Sounds good.

Thanks a lot.

Kevin Kessel, Bear Stearns.

My question actually, Tom, is also on the operating margin.

Before, you had stated that the operating margin target for this upcoming year would be 10% growth operating margins, year-on-year.

And you were able to hit your 3% target for the year.

Does it still stand, the 10% year-on-year growth of operating margins?

That's still our goal.

Obviously, with a weaker environment in terms of demand in the first half, it makes it a little bit more challenging to make progress as we originally expected in the first half.

I think there will be some progress in the first half.

We expect to make it up, any lost ground in the second half of the year.

So that is still our objective for sure, Kevin.

We are working absolutely with laser focus on hitting that operating margin improvement target for the year.

We are not backing off of that.

Okay.

Thank you.

And then in terms of the SG&A levels, I guess I was surprised to see SG&A dollars up as much as it was on a sequential basis, given the revenue decline.

Can you help explain that, or -- ?

Yes, sure.

So as you might remember, we acquired IDW the last month of the December quarter.

So what you are seeing is the incremental flow through of the IDW SG&A dollars that we didn't have a full quarter of last year -- last quarter.

The $6.5 million then, or so?

Most of it, yes.

Most of that.

But in general, wouldn't you expect the SG&A to come down just on a core basis, with the revenue dropping the way it does seasonally, or no?

Most of that SG&A you should really look at as fixed.

I mean, we would have go do specific cost reductions to take it out.

There's a little bit of a variable component in that, but we try to keep that infrastructure in place because we are going to be increasing our revenues in the June and subsequent quarters, as well.

So we try to keep most of that as fixed infrastructure to the extent we can.

Okay.

And then just lastly, I was surprised to see Computing down sequentially about 21%.

Can you help us understand why?

And then, when do you actually expect that segment to ramp, because I think you guys have spoken in the past about that segment, looking for good growth.

I think Mike has mentioned over 20% growth, but so far, it seems to have delayed or stalled.

There's a couple of -- I don't know, I would say we are a little bit disappointed.

It was a little bit soft.

I mean, for sure it is soft in this last quarter, and it's the only segment where we did not have double-digit growth over the previous year.

So that's kind of what we kind of [hope] and pretty proud of the fact that we get all these segments running at double-digit growth rates, and we did not get that one growing that way.

I think it's -- we are really, really pleased with the progress that Computing is making.

And even though that there was a downturn there, we do expect this next year is -- which is I think what you've heard from me in the past, we expect it to grow a good 40% this coming year.

So FY '07, FY '08, we expect about a 40% growth rate.

So we think that it's very healthy.

We are booking projects very nicely.

We are very pleased with the leverage we are getting off of the Iwill acquisition.

I mean, to be honest with you, we couldn't be more pleased, except for the fact that we had a little bit of a downturn in some of the existing customer programs.

But I kind of view that as a quarterly one-off, and I think our Computing strategy is intact and healthy.

And I'm definitely looking forward to a 40% growth rate.

And does that start here in the June quarter?

I don't know.

I'm forecasting it for the year.

So -- .

June will be up double-digits sequentially.

Actually, June looks like it is going to be up around 20%.

And then it will go up a little bit from there.

So I think it's in good shape.

So I wouldn't -- I think this is just a one quarter, one-off kind of program, and not indicative of unhealthiness.

Thank you.

Jim Suva, Citigroup.

Great, thank you, guys, and congratulations especially in such a difficult environment.

Over the last, I'd say quarter or so, we've seen some pretty meaningful changes in the competitive environment, like with Jabil acquiring Taiwan Green Point, and kind of going vertical there.

Have you see any disruptionary things as far as like market share goes between you guys and FIH, and them, or anything going on there?

Like, can you get a new handset customer?

Are people trying to steal them from you?

What's going on there with that landscape?

Well, it's a market that -- of course, we spend our time trying to steal everybody else's customers, and they spend their time trying to steal ours.

So I think that goes on.

There are more customers to be had in the mobile market.

In fact, we picked up two new customers in the mobile market that we're pretty excited about.

And hopefully, they'll -- if they have meaningful ramps, we will be talking about them at a later stage.

So there are still some very nice opportunities out there.

But in terms of big market share shifts, maybe not.

We have accelerated some of our penetration into Motorola, as you know.

They are up to about a 10% customer in this last quarter, which is up significantly where we've had them in the past.

And I think some of the other dynamics, a lot of people ask about Sony Ericsson.

But we have very, very substantial revenue with Sony Ericsson.

They are growing very rapidly.

And I think it's only natural that Sony Ericsson, over time, will bring on a second source outside of their own operations.

So I think there are shifts going on here and there.

And the key thing is we grew our mobile business last year about 50%.

We expect it to grow this year in double-digits again.

And we continue to be bullish on it.

It's very competitive, but there's still business to be won out there.

And we are still aggressively fighting to drive it up.

And as my follow-on to that, relative, you guys versus say, a Hon Hai or FIH, and going down the vertical model, is there something that you need to acquire, whether it be magnesium alloy or batteries or something else?

It seems like Hon Hai continues to be a beast that goes even more and more vertical.

How do you see yourself stacking up in that metric?

Yes, I think their ability to go vertical more quickly across more verticals is actually a little bit better than ours, as in almost all the components in the world are in Taiwan, or are headquartered out of Taiwan and built in China.

And I think there's a little bit of an advantage there.

But the key -- the question is, which ones are really critical and which ones aren't.

And I think the only key and critical components that we tend to lack are around the metal casings and potentially magnesium and aluminum alloys and such.

So I think those -- that's really the only area that we are lacking anything that's meaningful.

I think once you take out camera modules and antennas and power supplies, we actually have a relationship on the battery front that we are happy with.

And we will stick with that.

LCD displays, I mean a large percentage of the cost of that cell phone is incorporated in things that we already have.

So I think the only last piece is really trying to figure out how to close the gap on the metal piece, which, as most of you guys know, is a very, very big strength of FIH's.

With positive free cash flow this year, would you be using it to pay down debt or make acquisitions and grow the business?

Or how should we think about that?

Well, we'll just -- we are opportunistic, as you know, Jim.

So we will deploy that cash flow wherever we best see it being able to be invested.

I think everything is on the table and we'll evaluate all options and -- and pick the one that generates the highest return.

Great.

Thank you and congratulations again.

Alex Blanton, Ingalls & Snyder.

Tom, I'm happy to see that you have taken one of my suggestions and given us actual numbers for the segment breakdown instead of percentages so we don't have to calculate that.

Are we going to get the historical data on the same basis?

Yes, we could -- we could get that out to you.

No problem, Alex.

I mean, that would be nice.

Because last quarter you had five quarters of history on percentages, percentage of sales.

Maybe we could get the last couple years or something quarterly in the actual numbers, so everybody is on the same page.

I would be happy to provide that for you.

Okay.

Great.

Now, I think somebody referred to your previous statement that operating margin might be up 10%, or go from 3% to 3.3% this year.

But if you look at the midrange of your current guidance, it's not quite that at the midrange sales.

It looks like $0.94 is about 3.17%.

So is that correct?

At the midrange, you are not really giving us the 3.3%?

I mean, Alex, I just think there's a range of potential outcomes that are possible.

So the 3.3% is a target, and what we are really driving is earnings growth and return on invested capital.

Right.

And I don't want to get too many people focused on the margin and the margin target.

So we're just viewing that as a means of getting to EPS.

I understand.

I understand.

But we expect to grow earnings 15% to 20%, revenue growth of 10% to 15%.

So if we hit that objective, margins will increase, return on invested capital should increase if we hit our cash conversion cycle targets.

But don't duck the question.

Let me answer -- .

I guess I'm suggesting that it's not a very challenging goal, this earnings guidance that you've given us, because it doesn't even get -- in the midrange, it doesn't get to what you said you intend to get to on the net margin.

So here's what I think -- what you guys ought to think about in terms of modeling and all that.

The range that we think that you should be modeling around is 15% to 20% EPS.

We have a target, we have an internal target and a goal at our Company to go drive to a 10% increase -- a 10% increase in operating profit.

Okay.

That being said, the first half of this year is definitely down.

Again, it's not meaningfully down, but it's just definitely a softer demand environment that we anticipate, and that will delay our ability to go get to that -- get to that goal.

And I think about that as kind of an internal target, an internal goal.

This is what we're driving to.

We are hoping for a strong second half.

Maybe it will come, maybe it won't.

But we are pretty sure we can go manage that business to a 15% to 20% EPS.

And -- or operating profit increase.

And maybe it comes in a little bit higher revenues or maybe it comes in a little bit lower revenues.

We are not sure.

We are going to book deals based on ROIC.

So I think there's a lot of range around that.

But I think what you ought to be modeling is 15% to 20% operating profit growth.

And we will be modeling in our Company, we won't be modeling, we'll be driving in our Company to go try to hit 10% increase in margins.

And if they come a little bit later, then -- as a result of the economy, then they come a little bit later.

Okay.

One more try.

Because when I do my modeling, I don't start with the percentage increase in EPS.

I start with the pieces, and then the percentage increase in EPS sort of drops out of that.

So I'm looking at the pieces, and I see 5.9% gross margin in the first quarter.

Now, if you could maintain that for the year, and get your SG&A at 2.4%, which seems reasonable, you would have a 3.5% operating margin.

Which would put the EPS and the growth rate way above what you are targeting.

Do you see what I'm saying?

So just doesn't seem like -- I'm just trying to figure out what -- how you are thinking about this.

Hey, Alex, maybe instead of taking up everyone's time on this call to work your model, maybe I would be happy to do that with you after the call.

Okay.

All right?

All right.

Thanks a lot.

I appreciate it.

Matt Sheerin, Thomas Weisel.

Mike, could you update us on the various component verticals that you have gotten into and where you are in terms of profit contribution?

The ones related to handsets, but in the other areas as well?

I can give you approximate numbers.

Again, a lot of what we try to sell is the system, and don't necessarily -- obviously, we have internal goals around each of the components and such.

But you do have to remember, we will compromise profitability in one component in order to overachieve in another component, et cetera.

So it's kind of -- and a lot of the competitive advantage is a result of that in terms of pricing and such.

So, again, it's not perfect.

But what I would say is, in Multek we continue to run in the double-digits.

Want to come more along the high double-digits.

And that doesn't mean like 80s.

But it means a pretty significant contribution there.

In the components business -- and I kind of bundle up things like the camera modules and the LCD displays and others, we actually said we had a goal last year of getting that to be roughly EMS equivalent.

And, in fact, we probably missed that goal by about 1 point.

We were probably more like 2% operating profit instead of 3%.

And we intend on -- we certainly expect and -- expect that to go maybe up to 4 -- anywhere from 4% to 6%, 4% or 5%, maybe even 6% this coming year.

On the -- and the other major piece we have is like on power supplies, and power supplies has been an investment all this time.

It continues to be an investment.

We expect to turn that -- we actually hoped to turn that breakeven by the end of FY '07 and we did not accomplish that.

It will end up going about mid FY '08.

But revenue will be higher than anticipated and we'll probably have a faster catch up.

So we're actually -- a little bit of timing issue on that.

But that one is running along nicely.

And that was all a home-grown operation.

And then we have metals and plastics and such, and that's really a broad range, because we do everything from sheet metal stamping on PC cases to high-end telecom racks to plastics and, boy, it's just hard to model just one number for that.

Because a lot of times there's value-add in those plastics or as a pure metal and it's kind of tough to say.

So it's kind of a broad range of things.

Okay.

And then what kind of traction are you getting with the flex circuit business?

Flex circuit.

We're getting reasonable traction.

I wouldn't say it's fabulous.

We are probably getting more traction in rigid flex, which is also a new technology we brought on.

We are actually seeing even more demand for that.

I don't know the growth rates of rigid -- or of the flex circuits business.

But I mean, for sure it's like double-digit kind of growth rates.

But I actually do not know the exact number.

Sorry about that.

Okay.

Thanks.

That's helpful.

Thanks.

Yuri Krapivin, Lehman Brothers.

My first question is on the tax rate.

I think the effective tax rate was 4% in the March quarter.

What should we model going forward, Tom?

Yes, so I continue to think 7% to 10% is our long-term reasonable tax rate expectation.

I think for fiscal '08, I would be comfortable if everyone is at a 7% tax rate.

So I think we will be at the low end of our longer term range out there.

So 7% would be a good rate for next year.

Okay.

And then Mike, you mentioned that you are seeing more and more competition, not just from your traditional EMS competitors, but also from Taiwanese ODMS.

So I'm just interested whether you are seeing more and more of that Taiwanese competition in the infrastructure space?

Yes, not really, to tell you the truth.

Most of our infrastructure competition comes out of the North American EMS.

And the Asian competitors have not really put forth a good enough offering to be that competitive.

And a lot of that higher end infrastructure really needs to be regional.

I think there's a pretty significant (inaudible) with the North American EMS companies to compete there.

So I would say not really.

Have not seen any incremental competition in that space from Taiwan.

And then, what's some of the other end markets where you are seeing incremental competition from them?

well, the rest of them, it's not really incremental.

It's been there for a long time, whether it's mobile phones or consumer devices or gaming systems, or whatever the case may be.

To me, these (inaudible) been going after this market for years pretty aggressively.

So I actually don't see the competition [increase].

I see it continually (inaudible) challenging.

But we have not seen that much coming out of Asia in (inaudible).

Amit Daryanani, RBC Capital Markets.

Why don't we make this the last call -- the last question.

Glad I snuck in there.

Hey, just a question on the fiscal '07 guidance, you guys have 10% to 15%.

Assuming there's no end market growth, where would you end up?

I'm guess I'm just trying to break that 10% to 15% between end market versus new ramps.

Well, I would -- I would say we will probably be at the lower end of the range.

So I (multiple speakers) 10%, do you think, Mike?

Yes.

I mean I guess the end market is probably growing 5% or 6%, maybe.

The overall electronics market is maybe growing 5% to 6%.

We are anticipating 10% to 15%.

So if there was like no growth and that 6% went to 0, I would suspect we would be 8% or 10%.

All right.

That's fair.

Kind of a tough question.

And I guess the second part just would be, (inaudible) you guys are talking a lot about just the product pipeline and new program ramps that you expect in fiscal '08.

Could you just touch on that subject a little bit, and where you continue to see the bigger opportunities for FLEX?

Yes, well, we -- we're pretty -- we try to attack the market pretty aggressively.

We talked about Computing being up potentially 40% year-on-year.

We actually anticipate each and every one of our end market segments to grow at a double-digit rate.

And again, that's anticipating that the overall market grows 5% or 6%, the overall electronics market.

So if you think about where it's coming from, it's really pretty broad based.

We expect our verticals to grow double-digit.

We expect our PCB business to grow double-digit.

We expect our segments to grow double-digit.

I actually think -- so I'd call it pretty broad based.

And it's just not one thing that's going to take us there.

All right.

Thanks.

There are no further questions at this time.

Okay.

Thank you very much, everyone.