Flex Ltd (FLEX) 2008 Q2 法說會逐字稿

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

All lines will be on a listen only until the question-and-answer session of today's conference.

(OPERATOR INSTRUCTIONS) Today's call is being recorded, if you have any objections, please disconnect at this time.

I would now like to turn call over to Mr.

Mike McNamara, Chief Executive Officer.

Thank you, sir, you may begin.

Yes, thank you and ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' second quarter ended September 28, 2007.

To help to communicate the information on the call we have provided a presentation on the internet.

Please go to the Investors section of our website and select calls and presentations.

You will need to click through the slides so as a reference we will indicate 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.

Go ahead, Tom.

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

Slide two.

Please note that that conference call contains forward-looking statements within the meanings of the U.S.

securities laws including statements related to the future revenue and earnings growth, the success of our vertical integration strategy, new customer programs, expected improvements and SG&A expense levels, inventory management, operating margin, future cash flows and ROIC, the success of our long term initiatives and weighted investments and our expectations of the benefits, cost savings and revenues to be obtained from the acquisition of Solectron by Flextronics.

These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these statements.

Information about these risks is noted in the earnings press release, on slide 14 of this presentation and in the risk factors in the ND&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 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 attached schedules to the earnings press release, slide seven of this presentation, and the GAAP versus non-GAAP reconciliation in the Investors section of our website which contain the reconciliations that most directly comparable GAAP measures.

I would like to remind everyone that the September quarter results reflect Flextronics' pre-acquisition performance and do not include Solectron which was acquired after quarter end.

Slide three.

Quarterly revenue increased $855 million or 18% from the year ago quarter to a record high $5.6 billion while quarterly adjusted net income increased 25% from the year ago quarter to a record $146 million.

Slide four.

Revenue from the computing segment comprised 13% of total September quarterly revenue, an increase 41% sequentially and 35% from the year ago quarter.

Products in this category include desktops, notebooks, servers and electronic gaming consoles.

Revenue from the consumer digital segment comprised 21% of revenue and increased 9% both sequentially and on a year-over-year basis.

Products in this category includes cameras, copiers, printers and other consumer electronic devices.

Revenue from the infrastructure segment comprised 27% of revenue and increased 1% sequentially and 36% from the year ago quarter.

Products in this category includes enterprise, networking, telecommunication infrastructure for wire line, wireless and optical equipment as well as set-top boxes.

Revenue from the mobile segment comprised 28% of revenue and increased 2% on both a sequential and year-over-year basis.

Products in this category include cell phones and other hand-held devices, and lastly revenue from the industrial, automotive, medical and other segments comprised 11% of revenue and increased 6% sequentially and 29% from the year ago quarter.

Products in this category include appliances, capital equipment, controls, meters, kiosks, car [infotainment], navigation, marine equipment and blood glucose monitors.

Our top 10 customers accounted for approximately 60% of revenue in the September quarter with Sony Erickson being the only customer that exceeded 10% of quarterly revenues.

Slide five.

Adjusted operating profit increased 20% from the year ago quarter to a record high $172 million.

Adjusted operating margin increased 10 basis points to 3.1% from 3.0% last quarter.

SG&A as a percentage of sales improved 10 basis points sequentially to 10--excuse me, to 2.6%.

Slide six.

Adjusted net income in the September 2007 quarter amounted to a record high $146 million which is a 25% increase over the year ago quarter.

This resulted in a record high adjusted earnings per share of $0.24 which is a 20% increase over the year ago quarter.

Slide seven.

After tax and tangible amortization and stock-based compensation amounted to $15 million and $11 million respectively in the September, 2007 quarter.

Compared to $12 million and $8 million respectively in the year ago quarter.

Additionally, in the year ago quarter the Company recognized $83 million of after tax restructuring charges as well as an after tax gain of $171 million on the divesture of its software business.

There were no restructuring charges in the September, 2007 quarter.

After reflecting these items GAAP net income was $121 million compared to $185 million in the year ago quarter.

This resulted in GAAP earnings per share of $0.20 in the September 2007 quarter compared to $0.31 in the year ago quarter.

Slide eight.

Return on invested capital improved 80 basis points to 11.2% in the September 2007 quarter from 10.4% last quarter.

Slide nine.

We ended the quarter with $1 billion in cash which is a sequential increase of $236 million.

Net debt which is total debt less total cash was reduced by $225 million sequentially to $494 million at quarter end.

Including our undrawn revolver, total liquidity was in excess of $3 billion and the debt to capital ratio was 19% which is a record low.

Slide 10.

Cash conversion cycle improved two days sequentially to 11 days which continues to be industry leading.

On a year-over-year basis inventory turns improved from 7.3 times to 8.0 times.

Day sales outstanding improved two days to 33 days and accounts payable days decreased three days to 68 days.

Slide 11.

During the September 2007 quarter cash flow from operations generated $371 million.

CapEx amounted to $74 million and free cash flow amounted to $297 million.

Depreciation and amortization was $84 million in the quarter.

On a year-to-date basis cash flow from operations generated $516 million.

CapEx amounted to $146 million and free cash flow amounted to $370 million.

Depreciation and amortization was $171 million on a year-to-date basis.

Slide 12.

As previously announced, the Solectron acquisition closed on October 1, 2007.

As of closing, Solectron had 918.4 million shares outstanding which were converted into 221.8 million shares of Flextronics and $1.07 billion in cash which was financed through an unsecured term loan at an interest rate of LIBOR plus 2.25%.

We also announced our redemption and repurchase offer of Solectron's $150 million 8% senior subordinated notes and their $450 million 0.5% convertible senior notes.

We will refinance these notes during the September quarter through an unsecured term loan at LIBOR plus 2.25%.

Thank you very much, ladies and gentlemen.

As you slide--as you turn to slide 13, I will now turn the call over to Mike McNamara.

Thank you, Tom.

I'm very proud of the dedication and hard work of our employees and management across the globe in making this a very, very successful quarter for Flextronics.

I remain confident that our organization will continue to execute on our normal day to day operations and customer service requirements as we work through the integration of Solectron.

The overall demand in the September quarter was stable.

Our September quarterly revenues and earnings were at the high end of our guidance range.

Actual revenue in the September quarter was $5.6 billion versus our guidance of $5.3 billion to $5.6 billion and adjusted EPS was $0.24 versus our guidance of $0.22 to $0.24.

We're thrilled with the operating results for the quarter.

Quarterly revenue increased $855 million or 18% from a year ago quarter while quarterly adjusted net income increased 25% over the same time frame.

We believe we are executing very well on the controllable aspects of our business which should provide an excellent foundation to add the capabilities of Solectron into the Flextronics' framework.

We are very excited about this acquisition and our confidence level in our ability to successfully integrate it into Flextronics is extremely high.

We expect to realize all of the anticipated benefits and synergies within the previously discussed time frames.

We continue to maintain a strong financial position with $1 billion in cash, no short term debt maturities and a record low debt to capital leverage ratio of 19%.

Inventory in turns improved to 8 times while cash conversion cycle improved by two days sequentially to an industry leading 11 days.

Fixed asset throughput remained below 10% of sales.

We remain intensely focused on generating a higher return on capital while growing our business as evidenced by the 80 basis point sequential increase in return on invested capital to 11.2% which approximates our cost to capital.

Operating cash flow was $371 million in the quarter and $516 million in the first half of our current fiscal year.

Free cash flow amounted to $297 million in the quarter and $370 million in the first half of our current fiscal year.

Before I move into the Q&A segment of our call I want to reiterate our previous announced communication plan to the investment community.

We are currently not issuing guidance at this time.

We will do so at our analyst and investor meeting on November 6th in New York City where our senior management team will present our strategy and vision as well as the Company's revised financial guidance for the remainder of fiscal 2008 to reflect the Solectron acquisition.

All of the details of this acquisition will be provided during this meeting along with longer term financial targets for Flextronics.

Slide 14.

There are real risks of operating in this business which includes a macroeconomic or technology slowdown among other things.

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

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

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

Only the actual results for the September quarter, all forward-looking questions need to be saved for our November 6th presentation.

Go ahead, Holly.

Thank you.

(OPERATOR INSTRUCTIONS)

Amit Daryanani from RBC Capital Markets, your line is open.

Thanks.

Good afternoon, guys, just a really quick question now.

There's some news out of Asia earlier this month regarding Flex signing an MOU with Arima.

Could you update us with that and what would make that asset attractive to Flex?

Yes, we do not have a definitive agreement yet but we've been in talks and have an MOU with Arima.

The prime objective for us there is to start penetrating more into the server market where we made a number of steps last year to get into that marketplace through the acquisition of Iworld and have had quite good success subsequently to that.

They have a very good position in servers or a position in developing ODM servers but in particular what's attractive for us is to begin penetration into the notebook market where we do not have as much of a--well, we don't really have much of a position at all and it's a rapidly growing market.

All right, and then just secondly looking at the strength on the computing segment could you just talk about what drove that as your Xbox ramp or year end seasonality helped you quite a bit, was there was any other product lines that were pretty strong in the quarter there?

Yes, kind of across the board, we've done real well there as you mentioned the Xbox is a very significant seasonal ramp that occurs in September.

It ramps quite high from June and then actually it's even a better ramp in September than it is in the December quarter.

We also have some server business that we've been ramping that's now starting to come online and generate some pretty good revenues and also we've have a number of different miscellaneous accounts which are also generating quite a bit of revenue.

So this is a group that we've been anticipating to be one of the stars for us this year and it's been a little bit slower than anticipated for a number of different reasons, but it's now starting to kick in and it's a group that we anticipate to aggressively pursue as we look to grow our business in the future.

All right.

Thank you.

Matt Sheerin with Thomas Weisel Partners, your line is open.

Yes, thanks.

So your handset business was up just slightly sequentially and normally you see a pretty big build seasonally.

Could you just talk about the environment there, specifically one of your big customers that had some issues--demand issues earlier in the year?

There's some signs from suppliers that that customer is starting to come back.

Could you just tell us what you're seeing in that market?

Yes, so the big thing for us as we look at some of the sequential build, we normally anticipate a substantial pickup during this time frame.

As you mentioned, we've had some customers that have had some growth problems and maybe even struggled in the marketplace from a market share standpoint.

So that more than anything else is kicking in.

We're also a little bit in a transition, we've acquired a couple more handset customers over the last basically last quarter.

Some of those are ODM products and new products that we're designing so it takes a little bit of time to ramp and I think to a certain standpoint some of the product mix that we have is off a little bit just in terms of which models and the timing of when those models kick in.

So we're a little bit flat year on year, as you said it's just up 2% and so as we work through a couple of these different transition elements, we do expect next year to be again growing in the low double digits as we bring on some of these new customer wins that we have.

Okay, great and then as a follow-up regarding some of the vertical component areas you've been moving into like flexible circuits and power supplies, etc., some of which drive your opportunities in handsets.

Could you update us on that?

Yes, we're making--I'd say we're making progress on all those things.

We had a little bit of a dip, also, due to some of the customer issues that we're very, very strong with.

We've recovered from that, we've diversified that business and right now we're starting to we've crossed over the EMS margins in most of those businesses.

If I take them as a bundle, we probably crossed the EMS margin position and now need to--are heading into more positive territory.

The--our power business is ramping very substantially.

So this year we expect to do maybe about $80 million in our power systems business and we probably have enough design wins and new business booked to generate about $250 million going on into next year.

So we have quite a bit of step up coming up and that's not until next year.

We're investing pretty heavily as you can imagine, so we're struggling a little bit on profitability and the power systems just because we are ramping so nicely.

So we expect that to be a contributor next year, but all in all I think the revenues went a little bit flatter than we anticipated due to customer mix and--but alternatively the profitability will increase and be higher than last year's profitability.

So all in all we're starting to build a more stable business and broadening our customer base.

So I think a little bit of a slowdown this year, but we are bullish about it going forward.

Okay.

Thanks.

Louis Miscioscia with Cowen and Company, your line is open.

Okay, thank you.

You mentioned for the quarter that demand was stable.

Can you just give us an outlook for the different industries that you're seeing just on a demand standpoint, does it seem like it's changing at all since obviously it looks like the environment is somewhat uncertain?

Yes, well, year on year you saw some of those numbers and you saw some of the sequential numbers.

The--we're seeing infrastructure go a little bit flat even though we're up 36% year on year and probably for FY '08 versus FY '07 we'll probably be up about 20% on that segment, so we're pretty happy with it, of course, but at the same time you can see some of the slowness in the industry.

Our mobile, we talked a little bit about industrial, medical and automotive continues to crank along.

It was only up 6% sequentially but year on year it's up 29% and we do anticipate very nice growth for that for the year.

Again, we probably see some softness in some of the existing customers but at the same time we're growing our market share very nicely which is kind of offsetting some of that softness that we're seeing in the industry itself and I think consumers is a little bit softer than we anticipated.

That being said, we'll probably be up close to 10% year on year but we can see some of the flatness in each of those different industries.

So computing is growing very, very nicely for us.

So all in all we kind of view the market as being somewhat stable.

We're seeing a lot of growth, but I attribute that to a lot of new wins and a lot of market share gains and--but going forward we'll continue--we continue to see our overall business being pretty much at expectations.

Okay.

Great.

Maybe a question for Tom it.

It looks like CapEx is coming in lower than I guess the expectations maybe you had at the beginning of the year and just--is that actually the case and is that part of obviously the synergies that you expect to get as you work Solectron into your plans and obviously more comment on that on November 6th?

Yes, I would say, Louis, it's more just a function of timing than the Solectron acquisition.

Certainly we do expect some post integration synergies but I would say for the first half of this fiscal year it's more timing than anything else.

Excluding the Solectron acquisition and on a stand alone basis, our objective was to keep CapEx for Flextronics in parity with depreciation and I would say for the year that would continue to be our expectation before any of the acquisition synergies are laid on top of that.

Okay.

Thank you.

Tom Dinges with JP Morgan, your line is open.

Hi.

Maybe a quick one to follow up on the consumer commentary that you made.

One of the things that we've been hearing from a number of other companies is folks talking about the consumer build season being a little bit shorter and I little bit maybe more intense than it's been in prior years with customers trying to push the supply chain even faster to respond to fill shelves and then sort of waiting in the wings as to what you're going to see from the sell-through going out after that.

Could you just kind of comment on that characterization and then I have a quick follow-up for Tom?

Yes, it's hard to get--I would say we probably don't have enough detail to be able to comment that specifically on it.

We don't have a broad enough product range and enough experience to really say--to be able to pick up those subtleties.

A lot of that business is printing and imaging and we see that as being pretty typical with the two seasons, the Back To School season and the Christmas season, although not real robust pickup but kind of a little bit--a little bit slower and as far as some of our new businesses that we're looking at, things like some of we're starting to penetrate TVs a little bit and digital cameras and some other audio devices.

Some of them are very new to the marketplace.

As you know, there was announcement about Zune which hits our numbers which is all incremental upside for us but I don't know that we can say there's a different characteristic in terms of the buying pattern, so I think we just have to pass on that, any other comment beside what I just gave.

Okay, and then a quick one for Tom.

Inventory was up maybe a little bit more than I had anticipated, maybe separate between just pre-positioning for the next quarter that you may have done and was there any impact from 4X translation or anything there that was material?

No, nothing material relating to foreign currency translation or anything like that.

I would say inventory turns did go up quite nicely in the quarter.

They're all the way up to 8.0 turns up from 7.3 last quarter.

And the dollar build I believe is primarily related to just the expected ramp in the December quarter.

Okay.

Thank you.

Alex Blanton with Ingalls & Snyder, your line is open.

Thank you.

I don't know whether this is a permissible question on this call or not, but you did mention as you were closing your remarks that you expect to realize all the synergies that you have forecast with Solectron in the timeframe that you had given, however, as you know, there's a lot of skepticism about that.

Can you say anything on this call that will provide more confidence to investors as to whether you can do that or not?

I mean what can you add to that statement?

I don't know whether you want to on this call or not.

Well, we're going to get into a little bit more detail in November, but I mean I could add some comments.

We developed a plan about what this integration should look like in terms of timing, in terms of facilities, locations, operations strategies, expectations around customers and products, and we developed those over the summer and we're kind of itching to get them launched by the time October 1 came and now that it's come we're moving right along the original plan to go execute those and I would say--the only thing I could say is that we haven't found anything to be out of line, abnormal.

We didn't have any major surprises.

There's always a surprise here and there, but we viewed them as minor, so the key thing is is we're just moving right along and we're moving as aggressively as we ever anticipated and I know some of you guys, and you in particular, Alex, follow some of the announcements that are going on out there in the marketplace.

So we're just moving along at the integration activities that we anticipated for this quarter and we viewed them to be aggressive and quick and we're just not finding anything that causes us to delay those plans or to not be able to realize the original synergies.

So we're continuing to be quite confident.

Okay.

Thank you.

On the Arima subject, [Timeline] is now doing about 90% of all the laptops and it strikes me that North American OEMs might not really like that much dependence on Taiwan for their notebook supply.

I mean that's a tremendous potential vulnerability there.

So is--I mean clearly you're not buying Arima for its business--current business, Gateway which has already been purchased by Acer.

Is it your strategy to provide a second source to Taiwan for North American OEMs and what do you hear from them as to their desires in that regard?

Yes, so I think that's quite astute.

We're excited to have Acer as a customer, just so you know.

They continue to grow their market share and that, so hopefully we'll be able to maintain our position with Acer and be able to sell them more and more products over time as we complete this transition, but the real thing is we're looking to create the capability to go do notebooks.

If you're going to be in the notebook business, you have to be in the ODM business.

If you look at the percentage of notebooks out there which like you said is about 90% Taiwan, the percentage of them coming out of--and utilizing the design of the Taiwanese companies is extremely high.

So you have to have that know-how in order to participate.

When we look at it, we have power supplies, we have plastics, metals, we probably repair more laptops than anyone in the world today with the Solectron acquisition and we have last minute BTO CTO configuration capabilities in all the regions.

So we already have a lot of pieces, vertical pieces that we can apply to the notebook business, and I think the fact that 90% of the business is in Taiwan is probably concerning to the big multi-nationals, the U.S.

and particularly the U.S.

guys and I think it presents an opportunity for us to the extent that we can execute.

So, certainly there's a number of reasons that we would go after this market besides the fact that it's growing 20% to the year and it's perhaps the biggest market in the world or maybe will be in a year.

There's a reason we're going after it and that is for sure a consideration.

And as to what they would say about it, I think, their main position is is they want products, they want capacity, they want know-how and they want the right product at the right time and to the extent you can deliver it I think that's the supplier they're going to use, but I think diversifying their portfolio into a variety of different suppliers I think is valuable and in particular, I think that some of the Taiwanese companies have demonstrated that once given the opportunity to have the know-how that going and branding their own business is definitely within their business strategy and it's not in our business strategy, so I would view that as probably going to be positive for the American OEMs.

Okay.

Finally real quickly there was a report on the internet that Israeli Telecom company, ECI was going to transfer 700 employees to Flextronics along with business.

Could you comment on that?

Yes, the--ECI has been a customer of ours for many, many years.

We have a very significant presence in Israel and this is an operation that for us executes extraordinarily well and it continues to grow very rapidly and it's a pretty sufficient--pretty large in size.

So when we looked at ECI what we're trying to do is to build a stronger relationship with them over time and help them with their supply chain and just help--just try to be a better supplier.

So to me this is just normal course of business as we look to continue to expand the business and our presence in Israel is already very, very large, so we view this as just another way to continue to add value to that customer.

Okay.

Thank you.

Yes.

Steven Fox with Merrill Lynch, your line is open.

Hi, good afternoon.

A couple questions.

Just on new programs, given all the changes in the economy over the last couple months I was wondering if it affected any conversations you were having with customers about outsourcing and then secondly, is there any other sort of new business wins you can highlight in general that you've secured over the last few months?

Yes, I would say in terms of talking about new programs and that, I think we're probably going to give a little bit more data around that when we get to the analyst meeting coming up and I think it's an opportunity for you to meet each of our presidents and have them talk a little bit about some of their customers and how they're penetrating, and what competitive advantages they have.

So I'd say let's leave it for that, we didn't prepare any or get any approval from customers to get any kind of new information out and let's let them handle that in November.

As far as are any of the new programs affecting really an outsourcing strategy or is the outsourcing strategy changing any of the new programs that you want, maybe you can clarify what you mean by that.

Well, I'm just wondering if things have been put on hold as some of your customers or potential customers reassess their own profit picture or whether it's maybe done the opposite, accelerated some talks with any customers, just from what the economy has meant in terms of the conversations you're having?

I don't think so, I think there's always puts and takes.

There's always slowdowns or pickups depending on the economy and also depending on the customer's individual profit picture and strategy, so I don't know that anything's changed materially from a business as usual kind of approach, so I think it's pretty normal, I don't see a significant change.

Okay.

Thanks.

Yuri Krapivin with Lehman Brothers, your line is open.

Good afternoon.

Question regarding your mobile segment, you already commented as to why the growth rate in mobile is currently relatively slow.

The question is really more about the December quarter because December tends to be very strong for mobile, and historically December was up nicely over September for that segment.

I mean in light of your comments on this call, should we expect mobile business to be relatively flat sequentially and really expect the growth to resume in '08?

I would expect--we would probably expect December quarter to be a modest improvement, I don't view it as being significant at all.

Some of the past quarters we've had a real big pop up in December and we don't anticipate that this year.

Part of it is just the way that the customers and the timing, I mentioned we were ramping up a couple of new customers which will not hit in the December quarter and also in terms of just some of the product--the product timing for some of our existing customers sometimes products come in and go out and sometimes we have the phone, sometimes someone else has the phone.

So in general I would say that there's a little bit of a real transition period going on for the entire year and I think that transition period is really going to carry on through the December quarter.

So I'd say we're going to see a modest improvement in the December quarter, but not a significant step up and that we would expect as a result some of the investments we made this year with new customers, we would expect next year to grow nicely in the double digits, in the low double digits.

Okay, and then will you please review your current position and strategy in the flat panel TV assembly market.

One of your competitors at the recent analyst meeting discussed the opportunities in that particular space and they seem to be significant, although Taiwanese companies appear to be playing quite aggressively already in the flat panel TV market.

Right.

Well, I think the volumes are--there's a lot of opportunity as it relates to volumes.

I think it's a very, very competitive market and I think it's--well, we're just going to find that attaining excess or real good profitability in those segments are going to be tough.

That being said, you can turn your inventory pretty high and we think you can get a pretty good ROIC.

So we are actively working our TV strategy, we are actively working to put in our mechanical capacity around the world, to be able to add some of the verticals for the TVs.

We're looking to expand some of the repair activities we're doing and we're also investing pretty significantly in some of the ODM aspects of designs for these customers.

So this has been a mission we've been on for about a year now and we hope to have this be a reasonably significant product category for us next year.

I mean it's going to be minimal this year, but we'd expect it to kick up next year, but we view it as too big of a market and we have too many vertical potential opportunities in this space to ignore it.

So we're actively working it.

Thank you.

You're welcome.

Jeffrey Walkenhorst with Banc of America Securities, your line is open.

Hi, good afternoon.

I'm wondering if you could talk--I think in the last call you talked about the set-top box which is now included in the infrastructure segment being around 250 million in the June quarter, about a run rate of about a billion per year.

Can you give us an indication of where that's headed in the September quarter and kind of is that--* know you're not giving guidance, but is that an area where we could see continued growth like the computing segment?

Yes, our position in set-top boxes is pretty strong, particularly when you add the Solectron piece if you think about going forward.

The Solectron customers are pretty much the customers that Flex did not have and so we expect to own a very, very, very significant share of the overall set-top box market going forward.

So we view this as a market that's growing 15%, 18% a year, we view it as pretty significant.

We view our position extremely well.

Solectron had design resources in this space.

We have about 110 design resource in this space over in India and putting the two together we think it's quite a formidable position and yet down to that some of the verticals we have with the mechanicals and the power systems and such and I think we've got a real good strategy going forward so, this is a market that I view as where we'll have a very, very nicely dominant position and be able to grow it consistent with the market.

So we're very bullish on it.

I mean this quarter was down a little bit just due to some product transitions, but we anticipate that coming right back.

Okay.

Thanks, Mike, that's helpful, and then as you think about the total portfolio I'm sure you're going to talk a little more about this at the Analyst Day but has Flextronics achieved kind of a level of vertical integration where you have all these different product offerings and service offerings where it is easier to win business?

I know it's a highly competitive business and you talk about having to go out there every day and win these programs but is it getting a little bit easier and how has the pricing environment been for you?

Yes, I think it gets a little bit easier because the verticals that we bring to bear we continue to get better and better at and more of them are co-located in our big industrial parks and in the right location as the years go by.

So we continue to work and refine that model and put more and more competence in each of the verticals and also to co-locate them in the right way and in having the whole package that creates the value with verticals.

I mean just having verticals is not enough but if they're co-located and they are generally world class in themselves, that creates a benefit for the verticals and that's when it becomes easy to sell.

So I'd say it just continuously gets easier because ours just keeps getting better and we keep building our portfolio of these and we keep moving more and more of them so they're in the right location at the right time.

So I think it continues to get better.

As far as the pricing environment, I always view it to be very, very aggressive but I no longer talk generically about the business.

I think that the pricing characteristics of the mobile phone are very different than the pricing characteristics in the medical market or industrial or other markets, so I think they each have their individual competitiveness.

They have their each individual characteristics associated with the capacities in the industry and the aggressiveness of the players in the industry, so I think each one is different, so I think it's hard to generalize, but in general I'd say it continues to be a very competitive market and we're excited about having the verticals because they enable us to be able to compete to win business even in a very, very competitive market environment and still maintain our margins.

Okay.

Great.

Thanks.

Good luck, guys.

Yes, thanks.

Next question is Todd Coupland with CIBC World Markets, your line is open.

Good afternoon, everyone.

Just to follow up on the computing segment.

Would you say the strength quarter to quarter was better than you thought or in line with the seasonal ramp up that you normally experience?

Yes, I think partly it's a seasonal ramp up, at least particularly in Microsoft it's a seasonal ramp up, but in some of the other projects like in servers that it wasn't a seasonal ramp up, it's new business.

So I think a little bit of both.

So one is the seasonal piece picked up quite nicely, but at the same time we actually added a number of different customers or I should say we added a number of customers but a number of our other customers also ramped up their business and partly that's just us winning some new programs.

So I think, and was it expected?

Yes, it was expected.

So I don't know if there was a call probably two quarters ago where I anticipated computing to be up about 40% this year and, in fact, it was pretty flat during the June quarter.

So I actually expect it to be quicker sooner, but we're now starting to get the kick-up in September and that will carry through into next year.

So we view this as being one of our stronger areas of growth over the next year, even without doing notebooks with Arima.

And just to follow up to the extent you're comfortable in answering this question, from a seasonal point of view, was it stronger than you've seen in the past?

Is there any color you can add on that?

Not really.

If you think about us last year in computing business, most of our computing business was Microsoft, maybe some graphics cards.

It really wasn't the core computing business that you guys more traditionally track and it's actually an objective for us to go get into that business.

So we almost view most of our server storage business as pure upside from where it was last year.

So really understand the characteristics of the seasonality we just haven't had to get into it and we do very, very little in terms of almost nothing in computers and notebooks.

So we don't pick up any of that seasonality.

It's really what we do with Microsoft and we have a very big position with customer and video which is doing real well for us and also some of these new server wins.

So I don't that know that we have a characteristic pattern of seasonality in computing that I think you're looking for.

Okay.

That's great.

Thanks very much.

Yes.

Will Stein with Credit Suisse, your line is open.

Thanks.

So we heard you guys talk about relatively flat demand, but, of course, we saw sales rise 8% in the quarter.

I'm wondering if you can kind of break that up attributing it to end market demand or seasonality versus converting customers to outsourced model versus competitive wins taking away business from other EMS companies?

Can you give us a rough idea?

That's a tough one to answer right off the top of our head here the one thing I could say in terms of generalities is we grew the business pretty substantially, so we grew the business 18% year on year and the business is not growing that fast, so the underlying business is as you heard from a number of the other EMS manufacturers is a little bit soft, even this last quarter and we're growing at 18% so, for sure we have to be picking up some additional wins and some additional business and gaining market share.

So I have to assume the delta between what you're hearing in terms of averages from the other manufacturers in the other industries, the delta between that and 18% is market share gains.

And like I said, in some cases where I'm sure we're picking up new business we didn't have last year in things like computing, our whole set-top box business this year relative to last year will probably triple.

So we're having a lot of growth in industrial, medical and other where we're growing pretty substantially.

We started ramping up some new programs like Cisco and Kodak and--which we didn't have last year, so we actually have a lot of new business that we're ramping in.

So I think 18% is not representative of the market growth and we're achieving it.

So I think we're being pretty successful from that standpoint.

That's clear, I'm just trying to get a sense as to whether it's more winning business away from other EMS companies or converting previously vertically integrated stuff, right, like the set-top boxes with Cisco I believe that's converting a vertically integrated customer.

Yes.

Could you give us a rough idea as to which endeavor you're more successful at these days?

We're kind of successful at both to tell you the truth, but if I think about some of the conversions that we did, I think some of the Motorola set-top box business came on the market out of their own facility.

I think some of the Kodak business that we're doing came out of their own facility, the Scientific-Atlanta that you mentioned but we don't actually track one versus the other because we just want to go figure out how to create a value statement that we go figure out how to go win the business, and whether it comes from a competitor or whether it comes from the OEM we're happy to take both.

I don't have a quantitative number except I can say we're probably making progress on both ends.

For sure the amount of business that's being outsourced from OEM factories continues to be on the rise.

So there continues to--the outsourcing market continues to grow beyond just the rate of electronics growth because more and more business does come out to the EMS guys and we're really well positioned when that happens because we have such broad capabilities in every single region.

Thanks.

Just one more quick one.

So we saw the sales grow about 8% sequentially.

Gross margins were flat and we saw a little bit of leverage on the operating line.

Is that how we should think about the model going forward, is there any leverage on the gross line at this point or is it all in the SG&A line?

Yes, so we do think there's more leverage there.

So first of all, taking leverage on operating expenditures works for us.

The lower we get our operating expenditures and still be able to execute that creates competitive advantage.

So we like that a lot, first of all, and at the end of the day our objective is to get our operating profit higher and higher.

The gross margin we've talked a lot about a gross margin being--struggling a little bit just because we continue to ramp, and as we continue to ramp we bring on new programs and we have to relocate the products and there's just a lot of costs associated with that and that continues to weigh down a little bit on the gross margin standpoint but we're just starting to catch up to that.

We saw a little bit of improvement in the operating profit this quarter by 10 basis points and we actually always talked about having a 10% growth in operating profit this year.

We got delayed a little bit mostly due to some customer issues, but we said we'd probably hit it towards the end of the year and we're actually continuing to see that.

So from a Flextronics stand alone standpoint we actually are starting to see the margins and we'd actually like to anticipate that we're going to have a margin kick up to where we thought of the 10% towards the back half of the year just as anticipated, and the other thing that's going to drive margins, so we actually are going to see some improvements and that's not going to be all operating expenses.

The other thing that's going to help out a lot is the Solectron acquisition.

So Solectron has a number of--we talked last time on the call and Alex made a lot of comments about the--why aren't the gross margins higher at Solectron because it seems like it ought to be a product set that has higher gross margins and I think what we said at that time is we didn't separate out those margins, but I agree with those comments 100% and there's--and to me there's no reason we can't be able to find a way as a result of that product mix to create higher gross margins.

So we also have that under our belt to drive margins.

So I think going forward we're very optimistic that we'll see both margin and operating profit start to creep up.

Great.

Thank you.

You're welcome.

Thank you.

I'll take one more call.

Kevin Kessel with Bear, Stearns, your line is open.

Great.

Thank you.

Yes, I don't know, Mike, maybe if you're comfortable answering this question, but if there's a way without giving a lot of the specific detail, can you just give us a sense in terms of a preview at a high level what you guys plan to cover I guess at the Analyst Day as it relates to Solectron?

Is it going to be around what you were just discussing, the overall integration plan or is it more about the different verticals and how they--how they kind of form together and so on and so forth?

Yes, I'll answer and let Tom fill in what I miss, but for sure we'll update you just on the general strategy of Flextronics and its not going to be a whole lot different than the path that we've been going down, but we'll for sure update you our strategy as it relates to how we think about design, how we think about verticals, how we think about investing, we'll talk a little bit about acquisition strategy, we'll talk a little bit about how we plan to use--how we think about the use of our cash that we're going to generate as we anticipate a very, very strong cash flow as a result of this combined deal and from the Solectron standpoint we do expect to give you some additional guidance for FY '08 and we do expect to give you a high level view of what FY '09 looks like and then we'll also talk a little bit about what are some of the restructuring activities and implications that we anticipate.

So we'll probably go into a little bit of detail in terms of how we're thinking about which factories, where they're located and what's it going to cost to go adjust.

So hopefully it's going to be a complete comprehensive review of Flextronics' strategy.

We'll have the same kind of strategy or format as last year where we'll--Tom and I will do some of the high level strategy presentations and financial numbers and then we'll drop into--have you go into the booths with each of the operating guys so you can ask them more in detail what it all means.

So that's kind of the view, I don't know if I missed--

No, that's perfect.

I think it is going to be very comprehensive review of the strategy along with a financial expectations for the remainder of this year and next and even some longer term financial targets.

So I think this is a very material acquisition and we need to give you guys some real detailed guidance as to how to reset expectations and help you build out your models on both the P&L and the margins and cash flows and so on and so forth.

Okay.

Great, and then on that cash flow subject, I think at stand alone Flex your guidance was if I'm not mistaken like $300 million to $400 million in free cash flow for fiscal '08 and so far first half of the year you're almost at 400 now.

So how do we think about that?

Was it--should we expect similar performance during the second half or do you think it was more for whatever reason a front end loaded year because of the quarter you just had?

No, I just think we've done a superb job of managing cash conversion cycle, you saw it drop two days during the quarter to 11 days and I think we're just reluctant to continue to forecast Flextronics stand alone at that level and every time we're conservative around that we continue to beat those conservative expectations.

So I just think, Kevin, we continue to do a great job managing cash conversion cycle, managing CapEx.

We've kept it in line with depreciation as our objective was, we had a heavy investment cycle last year, we said we would leverage those investments into this year.

We're doing that successfully and our through-put--our fixed asset through-put as a percentage of sales continues to improve.

So there's no reason Flextronics stand alone wouldn't be able to continue managing its business like we have and, in fact, we think we can layer in Solectron and start bringing some improvements to the way they've managed their business and some of those similar metrics we think we can drive some very significant improvement through to the combined company.

So I just think we're--we work really hard at this stuff, it's an intense level of focus and I think the results are speaking for themselves.

Great, I appreciate it.

With that we'll wrap it up.

Thanks, everybody, for attending and we'll look forward to seeing everybody at the Analyst Day in a couple weeks.

Thank you.

This does conclude today's conference call.

You may disconnect at this time.

Have a great day.