Flex Ltd (FLEX) 2008 Q3 法說會逐字稿

Good afternoon, and welcome to the Flextronics third quarter results conference call.

All lines will be on a listen-only mode 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 the call over to Mr.

Mike McNamara, Chief Executive Officer.

Thank you, sir, you may begin.

Thank you.

Ladies and gentlemen, thank you for joining the conference call to discuss the record results of Flextronics third quarter ended December 31, 2007.

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

Please go to the Investor's 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.

We'll start on slide two.

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

securities laws including statements related to future revenue and earnings growth, expected improvements in operating margin, our expectation of continued growth in the current economic environment, the expected benefits resulting from our geographically diverse business and our broad-based product portfolio, services and component technology offerings, the expected benefits from our acquisition and long-term investment strategy and our expectations of the benefits, cost savings and revenues to be obtained from the Solectron acquisition.

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 12 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 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 to the earnings press release, Slide 4 of this presentation, and the GAAP versus non-GAAP reconciliation in the investor's section of our website which contain the reconciliations to most directly comparable GAAP measures.

Slide three.

Revenue increased $3.7 billion, or 67% from the year-ago quarter, to a record high $9.1 billion in the December 2007 quarter.

Adjusted gross profit increased 83% from the year-ago quarter, to $532 million, while adjusted gross margin improved 50 basis points from 5.4% in the December 2006 quarter, to 5.9% in the December 2007 quarter.

Adjusted operating profit increased 86%, from the year-ago quarter, to $300 million, while adjusted operating margin improved 30 basis points from 3.0% in December 2006 quarter, to 3.3% in the December 2007 quarter.

Adjusted net income increased 84%, from the year-ago quarter, to $250 million while adjusted EPS increased 30% from $0.23 in the December 2006 quarter, to $0.30 in the December 2007 quarter.

Slide four.

During the December 2007 quarter, the Company recognized pretax restructuring, integration and other charges of approximately $270 million, primarily related to the restructuring and integration activities resulting from the Solectron acquisition and other pretax charges of approximately $61 million related to the impairment and related charges for certain non-core investments.

The previously announced restructuring activities which include closing, consolidating and relocating certain manufacturing and administrative operations, elimination of redundant assets and reducing excess workforce and capacity will optimize the Company's future operational efficiency.

As part of the previously announced acquisition related charges, the Company also wrote down its U.S.

deferred tax assets by $661 million during the December 2007 quarter.

Pretax intangible amortization and stock based compensation amounted to $23 million and $16 million respectively in the December 2007 quarter, compared to $9 million and $8 million respectively in the year-ago quarter.

GAAP net income amounted to $119 million or $0.20 per diluted share in the December 2006 quarter compared to a net loss of $774 million or loss of $0.94 per share in the December 2007 quarter.

Slide five.

Revenue from the computing segment comprised 17% of December quarter revenue, which represents an increase of $985 million or 168% over the year-ago quarter and a sequential increase of $828 million or 111%.

Revenue from the consumer digital segment comprised 15% of revenue, which represents an increase of 205 million or 18% over the year-ago quarter and a sequential increase of $168 million or 15%.

Revenue from the infrastructure segment comprised 35% of revenue which represents an increase of $1.95 billion or 155% over the year-ago quarter, and a sequential increase of $1.72 billion or 116%.

Revenue from the mobile segment comprised 21% of revenue, which represents a decrease of $58 million or 3% over the year-ago quarter, and a sequential increase of $333 million or 21%.

Finally, revenue from the industrial, automotive, medical and other segment comprised 12% of revenue which represents an increase of $569 million or 113% over the year-ago quarter and a sequential increase of $457 million or 74%.

Our top ten customers accounted for approximately 55% of revenues in the December 2007 quarter, with only Sony-Ericsson exceeding 10%.

Our top 10 customer percentage has decreased from 65% in the year-ago quarter, reflecting further customer diversification.

Slide six.

Return on invested capital improved 70 basis points to a record high 11.9% in the December 2007 quarter, from 11.2% last quarter.

Slide seven.

We ended the quarter with $1.8 billion in cash and $3.1 billion in debt, with a debt-to-capital ratio of 27%.

Including our revolver, total liquidity was $3.5 billion at quarter end.

Slide eight.

Cash conversion cycle came in at 21 days, achieving our objectives in this very important metric.

Inventory turns were 7.8 times in the quarter, while days sales outstanding was 36 days, and days payable outstanding was 62 days.

Slide nine.

During the December 2007 quarter, we generated $534 million in cash flow from operations and free cash flow of $470 million after capital expenditures of $64 million.

Depreciation and amortization amounted to $126 million in the quarter.

Operating cash flow generated $1.05 billion and free cash flow was $840 million in the first three quarters of our current fiscal year.

Thank you, ladies and gentlemen.

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

Thanks, Tom.

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

Overall demand in the December quarter was better than expected as revenues and earnings exceeded the high end of our guidance.

Actual revenue in the December quarter was $9.1 billion, versus our guidance of $8.5 billion.

And adjusted earnings per share was $0.30 a share, versus our guidance of $0.26 a share.

We are extremely pleased with the operating results achieved this quarter as we met or exceeded each financial commitment made for the quarter, while establishing many financial records.

We have successfully and fully integrated the acquisition of Solectron and as such it is no longer separately identifiable inside of Flextronics and we are no longer able to talk about Solectron results separately.

Our teams management of the Solectron integration was nothing short of exceptional.

Customer feedback is very positive.

Operational execution is high.

And the original synergy target will be achieved this quarter with further potential upside.

Our culture was very positively received and our people now act and operate as one.

While we have had high expectations for this integration, I believe the actual execution was nothing short of outstanding and we are operating the combined company business as usual.

Our financial position remains strong with 1.8 billion in cash.

No significant short term debt maturities and a conservative debt-to-capital leverage ratio of 27%.

This provides us with substantial flexibility to make synergistic investments in our business and infrastructure, to enhance our competitiveness, expand our capabilities, drive revenue growth and enhance profitability, even in the current economic environment.

Operating cash flow was $534 million in the quarter and we have already exceeded our $1 billion fiscal year target.

Free cash flow amounted to $470 million in the current quarter, and $840 million in the first three quarter of our current fiscal year.

We continue to believe we should generate at least $1.2 billion in cash flow from operations and at least $800 million in free cash flow in the next fiscal year ending March 2009.

I would now like to discuss the current state of business and economic environment.

First, I would like to remind everybody that we are not an OEM in the product business.

We are in a service business that supplies many OEMs over a broad cross-section of the economy.

Our services include manufacturing, product design, repair distribution, mechanical products, as well as a broad range of components and other key technologies.

With this broad service offering, we are very well positioned to supply the OEMs with more and more services even in a slowing economic environment.

In fact, we have historically found that the secular outsourcing trend actually increases during periods of economic slowdown as OEMs often reassess the need to have in-house manufacturing as they can reduce costs by outsourcing.

In addition, which have increasingly invested over the last several years to expand our capabilities across more product categories which increased the available market for us to participate in, as an example, we have added machining capability to more broadly penetrate the industrial sector.

We have added over 1500 design engineers across many new product categories which have allowed us to expand our ODM CDM businesses for markets in which we did not previously participate.

We have made significant investments to add component technologies in the area of flex power, touch panel, flex rigid assemblies, rigid flex circuits, LCD displays as well as dramatically expanding our capabilities and mechanical technologies.

We have diversified our product exposure by winning new business in areas that we did not previously participate in, such as servers, LCD TVs, set top boxes, digital cameras, white goods and semiconductor equipment.

Just this week we completed the acquisition of Avail Medical Products.

This company has no electronics but provides many new business opportunities in the medical field such as building catheters, wound closure systems and other disposable medical products which leverage our worldwide scale and plastics capabilities.

With the pending acquisition of Arima we will significantly enhance our ODM server offering and more importantly leverage us into the rapidly growing notebook market which will expand our current available market opportunity by another $80 billion of revenue.

All pure upside to Flextronics' current revenue base.

We have created an incredibly broad-based company that is geographically product and services diverse.

Our strategy of expanding our product and service offering as well as our component technologies all with a strong focus on outstanding execution is proving to be an exceptional business model.

Not surprisingly, our new win pipeline for organic business remains very strong.

We are a diversified company that should still grow in a down market, with robust growth expectations in an up market.

The Solectron acquisition has broadened our capabilities in the high end telecom and data com and computing markets while adding additional services capabilities.

In addition, it has also allowed us to leverage our combined operating expenses.

Through effective deployment of the best operational ideas of both companies, we are positioned to realize sustainable market expansion through productivity gains.

Additionally, the cost synergies from the Solectron acquisition are exceeding expectations which potentially provides substantial earning leverage above and beyond any top line earning contribution.

In summary, we couldn't be more pleased with our current competitive positioning and feel we are strategically well positioned to perform positively in any market environment.

With regard to the current market environment, we are not seeing any aggregate weakness in customer forecasts and therefore we believe, based on what we are seeing today, that there is a disconnect in forecasted customer demand and the economic headlines and stock market reaction.

Certainly we are not totally immune from the cyclicality of technology or economic slowdowns, and things can certainly change in the future but given our diversification, we are not seeing any overall weakness in our customer forecasts.

The scale we have created in each of our market segments and resulting diversification not only enhances our ability to weather end markets, customer or product downturns, but also enhances our ability to win new customer programs.

Our pipeline of new business opportunities remains robust and we believe we have realistically forecasted the level of business, new customer program wins and the current market environment.

Lastly, please remember that even if we are underestimating the impact from an economic downturn on our top line, our cash flows would actually increase because of the compression of working capital as the cash flows are counter cyclical.

Slide 11.

We are reaffirming the previously provided March quarter revenue guidance of 7.5 billion to 7.9 billion and adjusted earnings per share of $0.22 to $0.24.

GAAP earnings per share are expected to be lower than the March quarter guidance provided here and by approximately $0.05 as a result of quarterly intangible amortization and stock based compensation expense and by approximately $0.19 to $0.27 per share as a result of the previously announced remaining restructuring and other charges primarily related to the Solectron acquisition in the amount of 160 to $230 million.

Parts of our stock based compensation includes restricted stock grants to executive officers that vest each year in April and May.

As a result, we would like to advise you that this will once again result in some income tax driven insider selling under 10B51 plans and you should not interpret this as any indication of insider views on valuation or outlook.

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

Slide 12.

There are real risk operating in this business which include a macroeconomic or technology slow down among other things.

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

I will not turn the conference call over to the operator for questions.

Please limit yourself to one question and one follow up.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

One moment for our first question.

Our first question then is from Brian White with Jefferies.

Your line is open, sir.

Hi, good afternoon.

Mike, I'm wondering if you could talk a little bit about the number of Solectron facilities that have been closed and how many we have to go yet.

Yes, I think I'm going to have to thing back to my November analyst presentation.

I think we decided that all together, both from a Flextronics and a Solectron standpoint, because we didn't -- we really tried to rationalize the cumulative business, not each one individually, but I think we were looking to close around 14 or actually 19 facilities, that included both manufacturing and service facilities.

Some of those were Solectron, some of those were Flextronics but we do not have any left to close.

I mean, that doesn't mean we won't close any in the future but it will be a normal course of business and they'll be minor in nature.

We already completed the closure of the factories that we want.

Most of these factories were closed either on a three or six month time frame and the time frame, the clock started ticking in the first week in October.

Most of these 19 facilities actually are no longer with us today, I'd say about half are no longer with us today and I would say the remaining half are running out their course and I would say 90% of the facilities that we talked about actually have the lights completely turned off and people gone by the end of March.

So there really isn't any additional work to be done at this point, all the work is in process.

So half the facilities have been closed, and you said the other half are in the process?

Well, half is like -- I mean, I literally got to the point where they're either sold or the lights are completely turned off and there's not one employee left.

The other half they're in the wind-down mode.

Typically it takes about six months to relocate the business out of these facilities so anywhere from three to six months, so there's no new event coming.

There's no new announcements coming.

It's just completing the job that we've already started at the beginning of October and so we anticipate that to be literally of those 19 facilities probably 17, maybe even 18 will have the lights completely shut off by the time March 31st hits.

Okay.

And all the business would have been transferred except for the remaining two?

Right.

Exactly.

And just end market demand you say exceptionally strong demand.

What market, because we don't have a comparison sequentially, because Solectron skews it a bit but what market surprised on the upside, what surprised on the down side?

If we look at last quarter and look at some of the upsides, our computing market was very strong.

Relative to our expectations, the mobile market was a little bit stronger than we anticipated.

And even infrastructure strengthened up a little bit and actually exceeded our own forecast.

So probably more than anything else, those three markets were a little bit stronger than we anticipated.

And but it's hard to say much beyond those market segments.

Everything else was pretty minor.

What was weak, Mike?

What were weak?

Really, nothing was weak.

You know, the rest of the markets, we think about the market being segmented into seven different groups and three of them really hit above expectation and it's why we ended up hitting about 600 million more revenue than we anticipated.

The other four were substantially on forecast.

I actually wouldn't say any were weak.

Okay.

Thank you.

Thank you.

Our next question is with William Stein with Credit Suisse.

Your line is open.

Thanks.

I appreciate your guys reiterating the next quarter's guidance but I think we're all waiting to hear about fiscal '09.

Can you please comment on that?

Yes, so we're not going to make any comments about fiscal '09.

During the November analyst meeting we put together the targets of where we were driving the Company to and what we thought we had the ability to go accomplish back then and we gave you a good view of what we thought FY '09 looked like and that's really all the additional guidance we're going to give.

From now on we'll just hit quarterly guidance as per our normal way of operating and then next November or this coming November we'll give you a fresh look of what we think the next year looks like.

But I'd encourage you to go back, look at some of the FY '09 guidance that was delivered at that November analyst meeting and that's what we're driving the company to.

So should we think of your comment just now as essentially reiterating that view that those are still the current goals of the Company and that that's what you're proposing investors look at and potentially model or is the economic uncertainty driving a lack of reiterating that guidance explicitly.

No, I think you should look at it as those are our targets and that's what we're driving the Company to and we'll expect our managers to perform accordingly and -- but we're not reaffirming.

It's not guidance, really, per se but it is our target and where we're driving the Company to and we're going to keep driving to that target and expect our people to hit it.

Great.

Thanks very much.

Matt Sheerin with Thomas Weisel Partners.

Your line is open now.

Yes, thank you.

Obviously you had a very strong quarter.

But concerning your guidance, given the upside in December it implies that there's perhaps some more sequential drop in some end markets in the March quarter.

Is that just basically the fact that we're seeing more seasonality in your businesses or do you think you're being conservative?

Well, I think the seasonality that you see with the guidance, I think it's 7.7 and plus or minus 200 million, that's kind of a normal drop for us.

If you look at our historical drops, it's very typical.

So we view it as being, you know, quite normal.

It's actually where we expected to be several months ago so we don't think the current economic environment has affected that at all and so we kind of view it as kind of, a very right on the mark in terms of our expectations.

The only thing that was higher than expectations at this point was the December quarter, which we overachieved on revenue an EPS and that was above expectations.

But really the March quarter is always down for us and we view it as being a very normal downturn and very much predictable as what we were looking at for that quarter even three, four months ago.

Okay.

Great.

And then there's been reports of a major snowstorms in China disrupting some production there.

One moment, please.

We'll get him back for you.

One moment, please.

Sir, could you please press star one and we'll get you back in line.

Maybe we should go to the next question.

Yes, I'm not sure what happened there.

Maybe he got stuck in the snowstorm.

Here he is.

So the question is was are you starting to see any disruptions from the snowstorms in China or from your suppliers?

No, actually none whatsoever.

Okay.

Thank you.

One moment for our next question.

Shawn Hannon, Needham & Company, your line is open now.

Great.

Thank you.

So you had provided a little bit of color around how some of your markets had performed, at least the strength that you saw in December.

Now that we're a month into January, is there a way to perhaps talk a little bit around what you're seeing or what you're thinking of in terms of your different markets for this March quarter on a specific basis, and then if there is any added seasonality or stronger seasonal impacts that you may be seeing in businesses such as either mobile or digital, et cetera.

Thank you.

Yes, what I can say, from a high level standpoint is that each of the markets are performing reasonably predictably.

I do want to emphasize the fact that how the markets perform is not necessarily a function of how we perform.

While a market may be down doesn't mean we can't book additional services.

I do want to remember that we're not in the OEM and in the consumer market, in the consumer digital market.

We're actually in a services business.

But if we look at where we were, we actually saw some softness last year in places like Telecom and industrial pieces of business that we thought were more home related.

Those have not really become any worse.

They've been very predictable.

We think the adjustments were taken even back a couple months ago.

The mobile market has remained very, very stable for us, even Telecom infrastructure typically sees a little bit of a seasonal slowdown in this first quarter but that's very typical and we don't see that being substantially out of whack.

The consumer business, we anticipate maybe being a little bit soft but again, we have such upsides and markets that we haven't historically participated in such as LCD TVs, we'll do a lot more cameras and other products this year that we actually, even in a softer market, we would expect our business to be actually going up in that business.

So computing remains -- has remained very, very strong for us.

A real surprise upside for last quarter.

So all in all, it's been -- all of our markets have been very, very stable and very predictable.

There was some softness a quarter ago and that really hasn't deteriorated much over the last few months and as we get even now into the end of January, we're not seeing a substantial downturn in any of our businesses.

That's great.

Also, then, just to follow up, you had talked about the strength in your pipeline.

Can you perhaps elaborate a little bit on that, at least in terms of what's developed since your analyst day and as we move forward with Solectron integrated into your operations?

Well, I can only hope one of the things that we looked at in the analyst day or had a projection of what next year looked like is that we were actually anticipating virtually all of our markets having almost a double-digit growth rate.

So last year, if you look at FY '07 to FY '08 we had had every single market segment with the exception of mobile generate a double-digit growth rate so this is one of the messages we've been trying to get across in terms of the amount of diversification.

Going forward, we also anticipate a very balanced portfolio going forward.

We expect mobile growth to grow into double-digits.

We think we may be able to get -- we're anticipating consumer digital being maybe a little bit softer but certainly above zero and we would expect things like computing, industrial, medical and automotive to all be in substantially high -- much higher double-digit growth rates.

We've just -- and again next year we would expect probably five out of seven of our market segments to be growing at double-digits, even in this environment.

We have a pretty broad based pipeline.

It's hard to identify just one or the other.

We'll have the biggest growth in the computing segment because we've added -- we've been very, very successful in terms of bringing on additional server business as a result of our iWill acquisition and some of our ODM wins.

In addition, Solectron had a very strong position in computing and we'll add the Arima acquisition this year which will make notebooks and anything we do around the notebook space and desktops be pure upside for us.

So we would expect that to be really robust growth.

But we actually are driving our markets, every one of our market segments to try to hit double-digit growth.

Probably they won't all hit it but we'll probably get five out of seven to hit it.

That Arima lift is not until the very back half of fiscal '09; correct?

Well, we'll probably complete the acquisition within the next two months, say, so we probably will get a full FY '09 revenue upside from Arima.

Now, in terms of being able to create any additional value associated with adding it to Flextronics and leveraging our relationships with the customer and leveraging our supply chain and leveraging our worldwide position, probably take another year to really drive that forward.

But effective April 1, say, as a target, we will have Arima's full for revenue adding to Flextronics.

Right.

I follow.

Okay.

All right.

Well that's helpful.

Thank you.

Thank you.

Our next question is from Steven Fox with Merrill Lynch.

Your line is open.

Hi, good afternoon.

Two questions.

You mentioned not only in the quarter but in your outlook that computing is strong but I'm not 100% clear on what specifically is driving that, if you could be more -- provide more details there.

And then secondly --

I'm sorry, could you repeat that question.

Yes, on the computing business you mentioned that it was stronger that you were expecting and then for the outlook you said it was looking stronger as well.

But I'm not sure specifically why that's the case.

Could you provide some more detail?

Yes, a lot of our computing business is a function of new wins coming off a base that is extremely small.

And a lot of those customers actually outperformed and I think some of the outperformance, I can't go into specific customers, but I would say virtually across the board those customers actually did a little bit better than anticipated.

Maybe we were a little bit of conservative forecasting the revenue as it came on.

But we just didn't find any strength and with us the case is we don't on the computing business we do not really run off of the existing computing worldwide demand because a lot of the computing business that we brought on as Flextronics was pure upside.

So one year ago we actually literally had no server business and very little computing business so for us it was pure upside.

So what we're seeing is a lot of that growth as a result of new product wins as opposed to responding to economic upturns or downturns.

And we have a lot of that going on into this next quarter as well because we have a lot of new wins as a result of the acquisition we did a while back in Taiwan called iWill where we brought on an ODM server manufacturer and we ended up getting a lot of wins off of that new business, which is all going to kick into this year.

So to us it's all pure upside because last year we really didn't have hardly any ODM server wins so it's just kind of pure upside for us and our business has gone well and as we've tried to penetrate into the server space the customers have been very receptive to bringing us on.

That's helpful.

You mentioned that your original synergy target could prove conservative.

I'm just wondering what specifically would drive more synergies that you're seeing now with Solectron?

Yes, so original target was about 200 million we thought we'd be able to realize that within 18 months or 18 to 24 at the beginning and then we moved that into 12 to 18.

It's really a whole cross-section of things.

It was everything from what we anticipated the base revenue to do at Flextronics, all the way through to the SG&A, in addition into the savings that we can get out of the supplier base and I would just say on average, across the board, all of those are a little bit better than anticipated and really the thing that I really think is important is that the execution of the team in terms of bringing these synergies to bear, understanding what we needed from the Solectron overhead structure and how to go leverage, figuring out which factories to go shut and how to go leverage the best operational practices of both companies was really outstanding.

And we ended up just getting right to getting those things fixed very quickly.

One of the other things that I think was really beneficial is the cultural integration of Solectron was really exceptional.

So, we really do act and run as one company.

We're not fighting who's in charge.

We're not dealing with a lot of cultural issues that a lot of times you have with big acquisitions and overcoming that and just getting right back to work and having a knowledgeable management team that knows how to get the cost out I think has really proven itself and so as a result, we're just hitting a little bit better, a little bit faster, kind of across the board.

Okay.

I must have misunderstood.

I thought you were saying there was more measurable dollar synergies beyond $200 million.

Yes.

So as a result, there's more than $200 million available but it's across a broad variety of things, whether it's SG&A or less customer attrition or savings in the supply base or maybe we ended up getting more synergies out of the manufacturing plants that are closed.

The 200 million of synergies are going to be better and it's just a combination of a whole host of different costs that we went and attacked.

Great.

Thank you.

Our next is from Yuri Krapivin with Lehman Brothers.

Your line is open.

Good afternoon.

My first question is also about China.

China has implemented a new labor contract law as well as new tax law, effective this calendar year.

Could there be any negative impact on Flextronics' profitability in China as a result?

Yes, I think there are a lot of laws.

The good thing is we're pretty well diversified.

We run about just over 50% of our business in Asia.

And even within Asia, we probably run only maybe 75% of that within China.

So when we think about the impact, we're talking about an impact of about maybe 35 or 40% of our cumulative business.

And as these changes have gone in place, we think we've matched those changes with productivity improvements.

And the amount of people we've added relative to revenue dollars that we brought on over the last year has been exceptional.

It's just been less and less people to bring on those incremental dollars and at the same time, some of that we're able to pass back on to the customer because a lot of the labor cost impact is a result of, can be picked up as the next generation product comes for quote.

And typically in consumer driven kind of products that are more likely to be in China, those product life cycles are a little shorter.

So we're able to recover some of that.

We view this as an advantage.

A lot of our competition is in Asia.

A lot of our competition has 90% of its workforce in China that are affected by this.

We have maybe 35% of our cost structure affected by this.

We actually view this as an advantage relative to our main competitors.

At the end of the day if you add all that up and you do that math, it's negligible.

So you should not see an impact.

Do we have a target for operating cash flow for the March quarter.

I believe your target for the full fiscal '08 was about $1 billion in terms of operating cash flow and I think you're already at 1 billion for the first nine months.

Yes, so cash flow from operations for the March quarter we're projecting somewhere in the 100 to $150 million range.

Okay.

Thank you.

Thank you.

Thank you very much.

One moment, please.

Our next question is from Kevin Kessel with Bear Stearns.

Your line is open.

Great.

Thank you very much.

I just wanted to go back, Mike, to that question earlier on your comments about the full synergies.

I think you said that the full synergies which I guess was a target of 200 million should be realized now in the March quarter which is, again, a little bit sooner than expected.

That I guess would imply about $50 million in cost savings that would flow through the March quarter P&L, is that right?

Yes, and maybe it won't be exactly linear.

But what we anticipate is that $200 million yearly synergy target and we think we're already in that period of that first year where we're already realizing -- we'll realize that 200 million plus more.

So if you linearize it it says 50 million in the March quarter.

When you alluded to still being positioned for future upside, I just want to understand better what exactly would be driving that.

I mean, the plants that were part of the plan are well on their way to be closed, if not already closed, and so I would think from an SG&A point of view maybe it would be somewhat limited.

Maybe there's more efficiency gains to happen and potentially underperforming sites that are still being looked at in the Solectron network or maybe the Flex network I'm not sure.

Where would those come from.

Is it something that would be significantly meaningful in the longer-term perspective or is it just a little bit here and there?

Well, there's still some synergies that we haven't hit yet.

More and more vertical integration is one of the ways, one of the reasons, one of the places where it takes quite a bit of time to go pick that up.

SG&A is continuing to flow out of the company.

We did have a big transition to work here and we did have people and workout programs.

Additionally, as we close these factories, that business is going to other Flex sites, ideally.

And a lot of that business going to other Flex sites is going to create SG&A leverage in those sites and take it out of what's normally a more higher cost site that's being closed down.

Some of the purchasing power is -- and some of the, maybe the benefit associated with having a little bit less competition in the supply base takes time to work out, both with the supply base and also with the customer base, as we look to kind of tweak our portfolio of how we're going to manage the customers and as well the -- how soon we're able to really burn off the inventory and try to take advantage of additional purchasing power.

So I think there's still a number of different places that we can pick up.

And one of the biggest things that I do want to emphasize is the fact that we're working really hard to grind productivity out of each of the different operations.

The idea of taking the bet idea out of both of these companies that -- doesn't matter if it's a Flextronics site or a Solectron site, we just want to take the best ideas, apply them across the board and grind out some productivity improvements.

All that is going to be really a multi-year benefit.

I think there's a lot of places that we'll continue to work.

It gets to be less and less value as time goes on, I think, because I think there's right up front there's a big opportunity to go save.

But there's still a lot of opportunity left and we'll hope to use that opportunity to drive our margins up over time.

Okay.

And then just lastly, I think also to go back to kind of a prior question, and I think probably maybe one of the concerns that I've been hearing on this call is you guys deliver a very good quarter, you leave March quarter as is and then when you spoke about seasonality you said it's pretty much in line with normal Flextronics, which I agree with, Flextronics on the stand alone basis was typically down 14, 15%.

I think your prior guidance was looking for seasonality and just percentage terms more like on the order of 10% and Solectron as a stand-alone used to see very limited seasonality, at least in its February quarter.

I know they were off cycle.

That begs the question, again, is Flextronics being conservative or does it go back to what you were saying earlier about the fact that there's a disconnect and you guys, maybe are expecting at some point to see some -- to see some response from your customers?

Yes, so all I can say is three or four months ago we were modeling about 7.7 billion for the March quarter, plus or minus and we're still seeing the same.

So this is month after month after month, we're rolling up a very, very similar forecast.

I actually view it as being quite typical.

Flex has always seen more than a 10% down side in its cycle in the March cycle and maybe we just had excess revenue that we didn't anticipate in the December quarter, which makes that seasonality look a little bit more.

But , we've been rolling up about the same number for this March quarter for several months now so we're very comfortable that we're not having a big deterioration.

We view it as being right on target.

This is the same number we were rolling up when we put together the targets back in November.

So we view this as being very predictable, very stable, very consistent, I think when we put together those numbers in November and put together the forecasts for March, I think we were thoughtful about where we thought the economy was going and what some of the pros and cons were and we continue to be very predictably hitting the numbers that we expected.

He we just don't view it as a sandbag or being conservative or not being aware of the market going down.

We just view it as like we're right on target and again, to reiterate, we'll go drive to those November forecasts or not forecasts but those November

That's very helpful.

And then just Tom, can you just give us an idea in terms of interest expense, what the expectations, what's built into the model for both that and tax rate for March?

Sure.

So for March, I think interest and other expenses will be somewhere around $45 million the tax rate, my guidance has always been 7 to 10%.

I think March will be probably right in the middle of that range.

So probably about 8.5% on the tax rate is the best number I can give you today.

That's what you just did, right, December?

That's is just what we did in December.

That step up in interest expense is a result of the taking out of the debt?

Right it was a refinancing of some of the lower coupon debt and we got some acquisition payments.

For instance, we just purchased Arima, so just the change in the cash flow from debt refinancing and working capital changes and acquisition payments and so on and so forth.

You mean Avail, right.

Avail, excuse me.

Thank you very much.

Our next question from Sherri Scribner with Deutsche Bank your line is open, ma'am.

Hi, thank you.

I was just wondering if you could comment a little bit on your customer response to the acquisition in terms of revenue loss from customers versus what you expected.

I think you commented a little bit on it in terms of synergies but maybe just a little more detail.

Yes, there's really not -- we've given some updates over the last few months.

The customer response has been better than anticipated.

The customers think this is healthy.

They kind of like where Flextronics is heading and some of the strategies of Flextronics.

On average I would say they view it very, very positively and as far as separating out, revenue loss and all that, we just can't do it any more.

And the reason is, it's just -- we actually see as much upside as we do down side in this thing and it's just getting harder and harder to separate out what the issue is.

But the only thing I can tell you is our customer response on this thing has been way above expectations and I think that's going to come through in terms of what our revenues are and when you think about what's the impact, just think about what our top line looks like now for this last quarter, think about what we're forecasting, think about what we said in the November analysts day and I think it give you a good sense.

But we've kind of gotten to the point where we can't separate.

Solectron is one with Flextronics and our customers are long over the issues associated with this and I think there are 90% of them are extremely happy with the acquisition and I'd say 90% of them are liked shocked with how well it went.

Okay.

Great.

And then could you give a little more detail on the mobile business an your expectations this quarter.

I think last quarter you said there was some product transition issues.

Just maybe a little more detail on that piece of the business.

Yes, we normally have a change in our mobile business.

I guess our normal down side is anywhere from -- usually about 20% is our typical seasonality in a normal market and we kind of expect the same for this March quarter.

We expect to be very typical, very normal and nothing out of the ordinary.

So to us, the mobile market looks kind of like business as usual.

Okay.

Great.

Thank you.

Our next question from Alex Blanton with Ingalls & Snyder.

Your line is open.

Some of my questions have been asked, namely how much business was lost.

Solectron doesn't look like much at all.

Could you just elaborate on a little bit in terms of how you are helping them market.

Did they have the -- and have always had the strongest capability at the high end, the most complex, the most difficult to make products.

Their manufacturing has been superior to anybody's in the world.

All along, since the Company was founded in the 1980s and you said that yourself when you announced the acquisition, that was one of the reasons for buying the Company.

So you bring some marketing and some balance sheet stability and so forth to that equation.

Could you just elaborate a little bit on that, how you are -- some of the successes you might be having at marketing, doing a better job of marketing the Solectron capabilities than they were able to.

Yes.

So the one thing I want to say is thanks for saying that.

Because I would like to add that Solectron is now no longer there, I would like to say Flextronics has unquestionably the highest and broadest, strongest capability on the high end marketplace.

I think that's true.

We thought that would be the case when we picked up Solectron and it in fact is overwhelmingly been a positive experience in terms of understanding what Solectron has and what we've brought on.

Flex has very aggressive marketing.

They're very aggressive in terms of investing in new technologies and related technologies that can create additional value for the customer, the pieces around the edges, whether they be ODM design or mechanical technologies or power systems or whatever the case may be and we view when you put both those together, it creates even a more formidable offering.

So we are actively, actively, actively, working and selling those combined capabilities.

I'd like to think we came out of the gate in October with that attitude and with that go to market strategy and I think we're having a lot of success in the marketplace making sure that we're positioned and stay positioned on the high end and win more than our fair share of business.

So I think it's moving right along really well.

I think the strengths of the two companies complemented each other extremely well and I think everything's gone really well.

The only thing I'd add is not just the high end technology and things like that Solectron brought, but also some of the lean practices that we're leveraging into the Flex factories is going really well and I would almost say actually a rapid adoption has gone on to take on some of those best practice out of Solectron and put them into the Flex factory.

Absolutely, those are being worked.

I can guarantee you they were being worked in October.

Hopefully you'll see as a result some nice wins coming on the heels of the existing business and it will just be even a stronger offering.

So we're working it very hard.

Thank you.

And have been.

And just could you give -- thank you for that.

That was very good explanation.

Could you give us an update, secondly, on global services.

Solectron global services added quite a bit to your service offering.

However, they had had a problem last year that drove their gross margin down and it was centered in global services, had to do with one laptop repair contract that hadn't been properly bid.

So that opened a possibility of some extra earnings when that problem got solved.

And I understand it got solved this summer before you acquired the Company.

So is that a source of some additional upside here that we're looking at and could you just update us on global service?

Yes.

So global services, there's a number of different elements to their global service so I would say some were broken and some were not.

We've actually changed that business pretty dramatically.

We've changed how we run and operate it to give it more focus on the parts that were good and to actually give it more focus on the parts that were not so good.

We closed some of the business.

We closed a number of the different sites.

We also discontinued some of the businesses.

I mean, just literally different kind of business models that we did not view had a good return on investment, we eliminated those.

There were some contract problems that you mentioned that Solectron was in process of working with.

Even before the completion of the acquisition.

So those continue to be worked.

I think those are a multi month problem as opposed to just being able to get out of those.

I think there was one whole element of it, one whole section of that services business which was just kind of broken and we have that on a program and we'll work to get that and we view that as being something like a six to nine month improvement plan where we're bring that back into a normal margin structure.

So I would say it's a real broad based attack at dissecting the problem, understanding the problem, figuring out better ways to go market it, figure out better ways to go focus on different aspects of the business, killing some of the parts of the business that we did not view as appropriate business models going forward.

Fixing a few contracts.

It's a little bit of everything.

What I can tell you is I think we're on track and without question this will be one of the things that fuels some additional margin expansion at Flex.

Thank you.

Our next question is with Lou Miscioscia of Cowen.

Sir, your line is open now.

This will be our last question as well, Lou.

You're the last one.

Okay.

I only have one question and 10 parts.

So you had said that there was three areas that were stronger in the quarter.

And obviously you said that computing, mobile and infrastructure was better than your expectation.

Did you mean that those were the three areas than that were the ones that were than above expectations, the other four came in as forecast?

Yes, exactly.

Okay.

We were originally anticipating about $8.5 billion in revenue and we actual hit 9.1 If you look at what changed, where did the incremental amount come from, it really came from computing, mobile and infrastructure.

The rest were pretty much on track.

Okay.

Great.

Quick question for Tom.

When do you thing you might get back to the 70 days payable that you mentioned at the analyst meeting.

I think you came in at 60 this quarter.

Boy, that's a point of contention inside our company, Lou.

So I think when we were kind of at the 70 days payable it was just a little too much.

I think we were exploiting the supply base maybe a little too aggressively so, I think it's doubtful that we'll get back at that level.

I think maybe there's a little bit of room to go above the 62 days, certainly, but 70 days I think is just not sustainable.

I think that's too aggressive.

But there's certainly room for improvement above the 62 days today.

You mentioned a very strong pipeline.

Maybe give us some kind of idea.

I don't know if you can frame it or not.

A lot of the brethren out there don't seem to be doing that well, obviously, with revenue growth.

Yes, so I mean, all I can say is you know the strategy lends itself to -- and strategy and good execution from the team lends itself to some good operating results.

Last year we probably grew the business a good $3 billion organically across it and every market segment except one I think I mentioned had double-digit growth rates.

Really, it's really a broad penetration across each one of these different market segments.

In medical in FY 2007 we only did 260 million and 90% of that is with two customers.

This year we'll do $900 million have a portfolio of 25 or 30 medical customers.

In automotive in FY '07 we did about 200 million maybe about 250 million.

This year we also expect to do about 900 million or this go forward year.

This FY'09 The computing business is straight up.

We entered into the server business, the ODM server business and we're now going into the notebook business.

To me it's just a straight up.

Things like consumer digital and our consumer business, while even if there is a bit of a slowdown in some of the market categories, we'll still have to see what that looks like in terms of the channel and the sell-through, what it really looked like.

We're adding new categories.

So we'll have substantial increase in business in things like LCD displays and in MP3 players and in digital cameras.

So we're expanding across really everything.

Alex talked a little bit about infrastructure on the high end.

If you take some of Solectron's really good high end competence and now you layer into it some of the verticals that Flex has, some of the marketing Flex has, and the combined team which is even a stronger team than to go manage the capability and even that segment has the ability to grow nicely.

So, we're driving our business to have every single market segment have double-digit growth and that's as simply as I can put it and that's our objective.

That's what we drive our guys to.

And , I don't know if we'll -- like I said earlier, I don't know that we'll get all seven out of seven segments to grow double-digits but we'll get pretty

Last question is just on China again.

Does there need to be a next China for the manufacturing industry or do you think that the benefits that China has are there to stay for let's say the next 12 to 24 to 36 months?

Yes, so I think you can move pieces of manufacturing into different places but I mean, I don't think there is such thing as the next China.

That supply base is so well-developed and there is so much investment and there is so much end market demand potential going into the future that I think it's hard to go replicate that.

So I think we'll all have models where we put plants and locations and other places to go either chase an end market or chase a little bit lower cost structure.

But I don't know.

It's going to be a while before you get something that can be competitive with China.

Great.

Good luck on the new calendar year.

All right.

Thank you very much.

Thanks everybody for joining.

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