Flex Ltd (FLEX) 2009 Q4 法說會逐字稿

Good afternoon, and welcome to the Flextronics International fourth quarter fiscal year 2009 earnings conference call.

Today's call is being recorded, and all lines have been placed on mute to prevent any background noise.

After the the speakers' remarks, there will be a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr.

Warren Ligan, Flextronics' Senior Vice President, Investor Relations and Treasury.

Sir, you may begin.

Thank you, operator.

Good afternoon, and welcome to Flextronics' conference call to discuss the results of our fiscal fourth quarter ended March 31, 2009.

On the call today is our Chief Executive Officer, Mike McNamara and our Chief Financial Officer, Paul Read.

The presentation that corresponds to our comments today is posted on the investors section of our website under Calls and Presentations.

We will refer to each slide number so you can click to the appropriate slide.

During the call today, Paul will review our financial results.

Mike will comment on the quarter and the business outlook and provide guidance for the first quarter ending July 3, 2009.

After Mike's comments, we'll take your questions.

Please turn to slide two.

This presentation contains forward-looking statements within the meaning of US Securities Laws including statements related to revenue and earnings guidance, our expectations about our future operating margins, cash conversion cycle, inventory management, liquidity and capital structure.

The expected changes in savings associated with our restructuring activities and our expectations regarding end market demand for our products and our business in the current economic environment.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements, are based on our current expectations and we assume no obligations to update them.

Information about these risks is noted in the earnings press release on slide 18 of this presentation and in the risk factors and MD&A sections of our latest annual report as filed, amended with the SEC, as well as in our other SEC filings.

Investors are cautioned not to place undue reliance on these forward-looking statements.

Throughout this conference call, we will reference both GAAP and non-GAAP financial measures.

Please refer to the schedules to the earnings press release on slides eight and nine of this presentation and the GAAP versus non-GAAP reconciliation in the investors section of our website which contain the reconciliation to the most directly comparable GAAP results.

I will now turn the call over to Paul.

Thanks, Warren.

Good afternoon everybody.

Please turn to slide three in the presentation.

Our fourth quarter revenue was $5.6 billion, which came in at the low end of our guidance range and represented a decrease of 28% year-over-year.

The end-market demand weakness we experienced at the end of the December quarter continued into the March quarter.

Adjusted operating profit was $51 million compared to $263 million last year, which was a decrease of 81% and adjusted net income for the fourth quarter was $22 million compared to $215 million a year ago.

Adjusted tax expense for the quarter was a credit of $18 million due to a number of items including lower than estimated taxable income for the year for certain jurisdictions and some tax benefits from the disposition of several foreign companies during the year.

Adjusted earnings per diluted share was $0.03, which came in at the low end of our guidance range and represented a decrease of 88% year-over-year.

Our fiscal year 2009 revenue was $30.9 billion, adjusted operating profit was $811 million.

Adjusted net income was $605 million and adjusted earnings per diluted share was $0.74.

These results clearly reflect the macroeconomic environment that has contributed to unprecedented end-market demand deterioration, which accelerated in the latter half of the fiscal year.

Please turn slide four.

Here we show each market segment's quarterly revenues and percent of total quarterly revenue trended for the past five quarters.

Revenue for the infrastructure segment was $1.9 billion, which comprised 33% of total revenue and decreased 33% over the year ago quarter.

We saw demand weakness across each of the product categories we support as well as each of our major customers in this segment.

Most notably, our revenues with Nortel continued to decline to $244 million for the quarter, reflected our planned reductions in business levels coupled with the impact of the bankruptcy process.

While the infrastructure segment experienced significant demand weakness, we are still confident in our broad offering and ability to maintain market share.

Revenue from the computing segment was $1 billion, which comprised 18% of total March quarterly revenue and decreased 24% over the year ago quarter.

We witnessed significant demand erosion across almost every customer in our portfolio, which was expected given the decline in IT spending and the dislocation in PC demand during the latter part of the fiscal year.

Offsetting these negative impacts was the initial ramping of several notebook wins that we've previously announced.

Revenue from the mobile segment was $1.1 billion, which comprised 20% of total revenue and decreased 22% over the year ago quarter.

The global demand deterioration from mobile devices clearly impacted our results.

However, our portfolio has been bolstered by new program wins with several new customers.

One of those customers, RIM, has quickly become one of our top ten customers.

Revenue from the consumer digital segment was $714 million which comprised 13% of total revenue and decreased 29% over the year ago quarter.

Weak consumer demand has significantly impacted this segment of our business as volume declined across most of our product offerings.

The slowing economy contributed to a large post-holiday inventory build that affected our main customers.

Contributing a degree of stability to our revenues on a year-over-year basis was our penetration into the LCD TV space.

Finally, our industrial, medical, automotive and other category comprised 16% of our fourth quarter revenue and decreased 28% over the year ago quarter.

We continue to broaden the available market by expanding product categories within these segments, such as solar, self service and disposable medical devices.

However, the macroenvironment has weighed heavily on demand trends across all of the product categories and geographies in these segments.

End market demands remains very challenged as evidenced by the sequential and year-over-year quarterly revenue trends.

The deteriorating demand environment accelerated during the December quarter and continued through the March quarter, reflecting weak global economy.

We are encouraged by signs of stabilization in the March month within some regions of the market we serve.

However, it is too early to be sure of longer term stabilization and we anticipate challenging industry conditions to continue into fiscal 2010.

The significant breadth and depth of our service offering and our extensive diversification are strategic advantages that we believe position us to capture market growth opportunities once the global demand picture improves.

Please turn to slide five.

This slide demonstrates a continued trend of diversifying our customer base as we expand available market and product categories.

In the March quarter, our top ten customers accounted for approximately 46% of total revenue.

No customer accounted for more than 10% of revenue during the quarter, and we note that Sony Ericsson is no longer our largest customer.

We're pleased with the progress of this trend and consider the lack of significant dependence on any one customer to be a strategic advantage.

Please turn to slide six.

Adjusted gross margin of 4.2% and adjusted operating margin of 0.9% decreased 200 basis points and 250 basis points respectively from the year ago quarter.

Despite our restructuring and cost reduction efforts, the substantial decline this sales drove significant margin erosion.

We experienced substantial under absorbed overhead cost as a result of capacity utilitization issues create by the large decline in revenue.

Swift action on our part to implement our restructuring plans was partially muted by the speed and degree of the drop in demand.

Please turn to slide seven.

Adjusted selling, general and administrative expenses, which include research and development costs, total $185 million in the fourth quarter ending March 31, 2009 compared to $212 million in the third quarter ended December 31, 2008, representing a 13% decrease sequentially.

Our quarterly adjusted SG&A hasn't been less than $200 million since the September quarter of calendar 2007 which was prior to the Solectron acquisition.

As a percentage of revenue, adjusted SG&A was 3.3% in the March quarter.

As discussed in our last quarter call, we have established clear action plans to drive reductions in our discretionary spending and align our cost structures with a prospective business level.

There's a lag in the realization of our actions on the cost structure and related operating margin, but we anticipate there will be an improvement in our operating margins going forward as a result of our actions and as the economic environment improves.

Please turn to slide eight.

During the March quarter, the company recognized pretax restructuring charges of $151 million and a $74 million impairment charge related to the reduction in the estimated recoverability of certain notes receivable.

Also during the March quarter, the company recognized after tax intangible amortization of stock-based compensation of approximately $25 million and $9 million respectively compared to $59 million and $15 million respectively in the year ago quarter.

The decline in intangible amortization is due to the realization in the prior year quarter of a one time writeoff of certain intangible assets.

After reflecting these items, the GAAP loss was $240 million compared to the GAAP loss of $93 million in the year ago quarter.

GAAP loss per share for the quarter was $0.30.

Please turn to slide nine.

Fiscal year 2009 GAAP results reflect many non-cash charges including the impairment of non-core assets, distressed customer charges and an impairment charge of $5.9 billion to writeoff the carrying value of recorded goodwill.

The company also recognized the gain of $28 million associated with the extinguishment of $260 million of our 1% convertible notes.

After reflecting all items, the GAAP loss for the fiscal year 2009 was $7.41.

Please turn to slide ten.

As revenue visibility improved during the quarter, we acted promptly to rationalize our global manufacturing capacity and infrastructure to meet the current demand.

On March 10, 2009, we announced a restructuring plan intended to improve our operational efficiencies by reducing excess work force and capacity, while shifting manufacturing to other locations to achieve higher efficiencies and in most instances, lower costs.

The objective is to resize our business in order to return to more normalized operating margins as quickly as possible.

Our restructuring costs are primarily related to employee severance which has the most immediate impact on margins.

Other restructuring costs are related to the disposal of non-essential facilities and equipment plus other costs associated with the exit of certain contractual arrangements due to facility closures.

In the March quarter, total charges related to restructuring were approximately $151 million, which consists of $95 million in cash charges and $56 million in non-cash charges.

Approximately 86% of the restructuring costs were included in cost of sales.

We do not see any significant changes to our original plans and expect the majority of the remaining $70 million to $100 million of the associated charges to be realized in our June quarter with any residual amounts to be recognized in our September and December quarters.

We remain confident that upon completion of these restructuring activities, a potential savings will lead annualized savings between $230 million and $260 million.

We expect to achieve savings from cost of sales through lower depreciation, reduced employee expenses, reduced operating costs and improved operational efficiencies as well as reduced SG&A operating expenses.

Please turn to slide 11.

Our cash conversion cycle was 22 days in the March quarter, which was a three day improvement over the prior year period.

On a sequential basis, it increased by four days.

This trend is typical for our fourth quarter which is historically increased by three to four days.

We believe that a cash cycle of approximately 20 days going forward is the reasonable target in this environment.

We're extremely pleased with our inventory management which is reflected in the reduction of inventory by more than $1.1 billion in the March quarter compared to a year ago.

Day sales outstanding increased slightly by one day to 43 days while days payable outstanding increased by six days to 76 days when compared to the year ago period.

These two metrics in this period are somewhat misleading, especially with the 32% sequential drop in revenue.

On a more normalized basis, DSO would have been 35 days and CPO 68 days.

The company has successfully generated healthy cash flows by focusing on rapidly reducing working capital during a period of end-market volatility.

Please turn to slide 12.

We remain strategically focused on building liquidity by improving our working capital management.

During the past two quarters, revenues decreased 37% and we have aggressively reduced inventory levels by approximately $1.5 billion or 34%.

In the December quarter, we decreased revenue by more than $1 billion.

We continued this effort in the March quarter which resulted in a further decrease of more than $500 million.

However, due to the severity of the revenue decrease, our inventory turns declined to 6.6 turns in the March quarter compared top 7.7 turns in December quarter.

We expect to achieve more normalized inventory turns in the June quarter.

Please turn to slide 13.

Our cash flow from operating activities generated $286 million in the quarter as we significantly reduced our net working capital resulting from lower inventory balances and strong reductions in outstanding accounts receivable despite realizing a reduced benefit from receivable sales in excess of $200 million.

Our cash flows from operations also reflected the absorption of approximately $76 million of restructuring related payments during the quarter.

This brings our cash flow from operations for fiscal year 2009 to approximately $1.3 billion.

Net capital expenditures were $89 million and total depreciation and amortization were $129 million in the March quarter.

Our modest capital spending during the quarter combined with strong cash generation resulted in approximately $197 million of free cash flow.

We're pleased with our ability to reduce working capital, capital expenditures, acquisitions and other discretionary spend to generate free cash flow for fiscal 2009 totaling $855 million which exceeded our target fiscal year level of $800 million.

During the March quarter, we used $200 million to fully pay down our revolver providing capacity of $2 billion.

For the year, we deployed over $600 million of cash on financing related activities as we successfully tended to the repurchase of $260 million of our outstanding 1% convertible notes at a meaningful discount to par.

We also purchased approximately 30 million ordinary shares at $260 million and we reduced our other bank borrowings by approximately $173 million.

Please turn to slide 14.

At end of the March quarter, we had approximately $1.8 billion in cash, which was essentially flat compared to the end of the December quarter.

As a result of the $200 million paydown of our revolver, total debt was $2.97 billion at quarter end compared to $3.17 billion in the December quarter.

Net debt, which is total debt less total cash, was $1.1 billion the March quarter end, down from $1.38 billion at December quarter end and down $550 million from one year ago.

We closed fiscal 2009 with no borrowings outstanding under our revolving credit facility and are comfortably within the limits of our most restrictive financial covenants.

Our total liquidity declined as available cash plus our undrawn revolving credit facility improved to $3.8 billion in the March quarter compared to $3.6 billion in the December quarter.

We believe we have built ample liquidity to support our business.

The graph at by the bottom of the slide shows our significant debt maturities by year.

The first maturity is due in July of this year, which is our $195 million, privately placed convertible junior subordinated notes.

The second maturity is due in August of 2010 which is $240 million of 1% convertible notes.

No additional significant balances of debt are due until calendar 2012.

Based on our existing cash balances along with our anticipated cash flows from operations and the additional liquidity available on our revolving credit facility, we remain extremely comfortable that we have sufficient liquidity to meet our needs.

Thank you, ladies and gentlemen.

As you turn to slide 15, I will now turn the call over to our CEO, Mike McNamara.

Thanks, Paul.

I would like to now provide some comments on the results of our quarter and fiscal year ended March 31, 2009 and provide some insight into the current industry and market trends.

Fiscal 2009 was comprised of two drastically different halves.

Our first half of fiscal 2009 reflected the continued strong operating performance that was achieved in fiscal 2008 as we met or exceeded our financial commitments and established many financial records.

The first two quarters also reflected record revenues and adjusted operating profits as our organic pipeline continued to offset some sluggishness in orders from existing customers.

The September quarter was our tenth straight quarter of year-over-year adjusted EPS growth.

Our scale geographic diversification and product diversification provided us with competitive advantages that drove this continuous growth.

Because of the recent global economic crisis, the record-breaking achievements during the first half of fiscal year 2009 were followed by a very challenging second half.

Our operational performance in the second half of fiscal 2009 reflected the detrimental impacts of the global economic crisis and the resulting effect it had on customer demand.

Our revenues and adjusted operating income were down 20% and 59% respectively for the second half of fiscal 2009 as compared to the first half.

The weakened worldwide economy has had a significant impact on our business.

Almost every product category in every geographic region we operate in has sustained a substantial reduction in demand.

Last quarter, I mentioned that the deteriorating demand environment had accelerated and then this trend continued through most of the March quarter.

Our March quarter revenues amounted to $5.6 billion and our adjusted diluted earnings per share were $0.03, both which came in at the lower end of the guidance rage.

These results are a direct reflection of the very challenging environment we're operating in, which was exacerbated by the deterioration in demand in one of our large cell phone customers and a large telecom infrastructure customer.

In response to this challenging marketing environment, we've been adjusting our operations and continuing our focus on the controllable aspects of our business.

As previously discussed, our top priorities in this environment are to control cost, improve internal efficiencies, reduce inventory levels, aggressively manage our working capital, generate strong cash flow and improve our capital structure.

Additionally, we are adjusting our operating scale in order on return to normalized levels of profitability.

And in that regard, I am extremely pleased with our execution this past quarter on several of the controllable aspects of our business.

For example, we reduced inventory by over $500 million sequentially.

Even more impressive in the last six months, we have reduced inventory by over $1.5 billion.

We view this result in particular to be outstanding.

We have successfully generated $197 million of free cash flow for the quarter, in spite of a reduction of approximately $200 million of AR sales, and we've generated $855 million of free cash flow for the full year.

We further strengthened our capital structure with additional reductions in net debt this quarter of $229 million, bringing our net debt to approximately $1.1 billion, which is down almost $550 million for the full year.

We continue to keep our capital spending below current depreciation levels.

We reduced our SG&A sequentially by $27 million, which was our lowest level since September of 2007 and we implemented the restructuring actions necessary to achieve profitability at lower revenue levels.

We continue to maintain strict cost controls across the entire business and are executing very well on these controllable aspects of our business.

This will continue to be a focus for us as the global economic uncertainty remains.

Next, I would like to comment on each our end markets and provide more color on how we see the business evolving during these difficult market conditions.

Infrastructure.

We're extremely pleased with the competitive position of our infrastructure business.

While we have a well diversified portfolio and are strategic aligned with our key customers, this segment has not been immune to the eroding demand environment.

Additionally, our revenues in this segment have been negative impacted by the reduction in Nortel revenue, which has been significantly reduced as that business works its way through the bankruptcy process.

While we anticipate that challenging industry conditions will continue, there are pockets of strengthening demand, such as with the continued China 3G expansion, and we're very pleased with the encouraging number of new business opportunities that continue to present themselves.

In computing, there are now really two parts of our business.

The traditional EMF high-end computing business and the ODM business dominated by notebooks.

The EMF portion of the business has been experiencing the predictable slides similar to the other segments, however, the notebook business is on plan as we are ramping our volume HP notebook that started last month, and we expect this segment to be a significant revenue growth engine as the year develops.

The ramp is mostly upside, so the economic slowdown has had little impact.

The medical market we serve has been challenging, but we have been successful in sustaining only marginal reductions in this business.

Our long-term initiatives continue to work well, and we continue to see very positive customer interest in our broad platforms of medical services.

During the recent quarter, we were awarded preferred supplier status by several new top tier medical customers and we remain confident that our broad service offering is exceptionally positioned to capitalize on the increased outsourcing opportunities developing within the space.

We are hopeful that this will be a growth business for us this year.

Our industrial business encompasses a diverse set of market subsegments including capital equipment, meters and controls, test equipment, solar products, appliances, self service kiosks and other miscellaneous products.

All of the product markets we serve have been impacted by this tough economic environment with some significant market contraction.

However, we expect these industries to increase outsourcing as a strategy over the next couple years and believe our strengthening vertical capabilities and breadth of our services in this segment will enable us to win more new business opportunities.

While difficult at moment, we are quite optimistic about this segment and continue to add many new customers in these newly developing markets.

The consumer market continues to face significant macroeconomic headwinds as we discussed last quarter, and every sector of the consumer market we serve has experienced substantial demand erosion.

This is the -- reflected in the 56% sequential reduction in our revenues for this segment.

While there are some indications that we may be nearing a bottom we continue to be cautious with our outlook.

On a positive note, I would highlight that we have started to see some new opportunities with some Japanese customers and have some new wins in LTD TVs.

The performance of our mobil offerings has mirrored that of the overall mobile device market which has been experienced in an exceptional challenging macroenvironment since the deceleration of demand in the December quarter, followed by channel inventory corrections throughout this past quarter.

We believe that difficult industry conditions will continue as the global economy remains weak.

Flextronics specifically has also been hampered by significantly reduced demand from one of our core mobile customers.

To combat these negative trends, we continue to make solid progress with new mobile customers, focusing on opportunities within the Smartphone space and emerging markets.

Our relationship with the major Smartphone manufacturer continues to strengthen and we are in production in multiple geographies.

Our perspective on the automotive market can be somewhat misleading as our business is primarily focused on ODM products for European customers.

While we believe that opportunities to grow this business remain strong, as the electronic content in cars continues to increase, there are clearly challenges for many OEMs in this space.

This business currently represents less than 2% of our revenues, and we will continue to focus on ODM products with financially solid customers going forward.

Overall, we encouraged about what we're seeing in some segments of our business as there has been indications of stabilization.

Our most recent forecast cycle and the revenue trends over the past several weeks have demonstrated to us that the massive deterioration we had been experiencing has subsided and has, at least for now, stabilized.

Alternatively, we do not see signs of a recovery and therefore, we will be managing our business at the levels we have today with possibly some modest season upsides as we head into the end of the calendar year.

Clearly, the worldwide economic situation continues to drive a high level -- a degree of uncertainty around demand and will take some time for this to alleviate.

So while there are signs of stabilization in some of our end markets, we remain cautious yet optimistic as a sense of firmness appears to be returning to many of our customers by the 16th.

Turning to guidance, we expect the June quarter revenue to be between $5 billion and $6 billion which is essentially flat to Q4 and adjusted earnings per share to be in the range of $0.04 to $0.08 per share.

The current uncertainty and global economic conditions make it very difficult to forecast demand and related financial impacts across the markets we serve.

Our guidance reflects the challenging demand environment and some of the benefits of the actions we have taken to control costs and restructure our business.

Quarterly GAAP earnings per diluted share are expected to lower than guidance provided herein by approximately $0.15 for intangible amortization expense, stock-based compensation expense, non-cash interest expense and estimated restructuring costs.

Please turn to slide 17.

Before opening up the call to questions-and-answer session, I would like to thank our employees for the sacrifices they have made and continue to make to further our controls over our discretionary spend.

I'm extremely proud of their dedication execution in this very challenging environment for the company.

I would also highlight some key takeaways.

The overall environment has presented many challenges and has required us to revisit how we operate and structure our business and evaluate the types of products and programs we engage in.

And while this has been a demanding time, we have gained a deeper appreciation to the strategy we are setting in our competitive strength.

We continue to take necessary steps to fortify our balance sheet, our capital structure and maintain our focus on generating solid cash flows.

We believe that our existing cash balances, together with anticipated cash flows from operations and our availability on our revolving credit facility are more than sufficient to fund our operations and support our business opportunities.

We have a deliberate and consistent strategy to achieve product, geographic and vertical capabilities diversification.

We have concentrated our strategy with market focus expertise and capabilities and believe our key competitive strengths, including our low-cost industrial park concept, vertically integrated end to end solutions, significant scale, customer and end market diversifications and long-standing customer relationships will enhance our competitive position and allow us to capitalize on the numerous opportunities being created in these uncertain times.

In closing, we're as confident as ever that our strategy and organizational structure are intact and very appropriate.

We believe our management team has vast experience in dealing with the challenging demand environment and has the fortitude to carry out the appropriate measures needed to adjust to challenges we are facing.

We're confident that we will emerge from this down turn as a healthier, financially stronger and a leaner company built for future growth and profitability.

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

We ask that you please limit yourself to one question and one follow-up.

Thank you.

At this time, we are ready for the question answer session.

(Operator Instructions) Our first question comes from Jim Suva with Citi.

Sir, your line is open.

Hi Mike and Paul.

This is Jim Suva from Citi.

A quick question.

You mentioned that EPS came in at the low end of your guidance, and if my math is correct, it looks like you got about a $18 million tax benefit, which would actually put EPS closer towards break even and below your guidance, or do you believe that your guidance somehow included a tax benefit, which I don't think many of us got in our models.

And also on your outlook then, should we anticipate some other type of tax benefit coming through?

Hey Jim, it's Paul.

Correct roughly the tax benefit roughly with around $0.02, so our guidance -- EPS guidance is $0.0,3 includes the tax line of costs and therefore, anything that we pick up on that line -- we take credit for.

Going forward, of course, some of these one time credits we won't be getting, and we think the operating tax rate is roughly 10t to 15% on a go forward basis.

Okay, and then you had a note receivable write-off, or what was it called here?

Yes, no receivable impairment.

Can you give us some details on what that was?

Yes, sure.

We have a note from a previous spinoff that we made a few years back, and we've impaired that down to what we consider would be fair value, and that's based on what we estimate to be the recoverable value of that investment.

And that's the Hughes KKR transaction, I assume.

No, it's not that.

It's another one, but I don't want to give you details, but it's not that one.

Okay, after that, may be just a quick general question for Mike.

Mike, in this environment where demand uncertainty is very unclear, the outsourcing model tends to go through different phases.

Are you seeing right now OEMs kind of in a bit of a freeze mode, or are they actually reaching out to do more outsourcing?

Because it seems like the demand and the dropoff in the revenues look like that outsourcing model right now is in a little bit a stall mode, or maybe I'm just off in thinking about it a little too negatively.

Yes, I don't know that it's as much as in a stall mode as there's just not a lot of -- there's just a lot less business available today.

I think the first reaction I think you pointed out in some of your previous communications is that the first reaction of the OEMs in the downturn is to -- whatever internal capacity they have is to go fill that up.

I think that was accelerated a little bit this downturn because the demand drops were so severe that they had to fill up the capacity that they lost as well as -- so I think that was a first step, and I think we've gone through that period.

I think that's been occurring over the last six months, and I actually don't anticipate more of that ,so I think that's pretty much subsided.

But the amount of new business coming out is just limited because still the volumes are down pretty substantially, as evidenced by the GDP announcement that was made just today.

So I think the process of bringing it back in, I would guess, if you want to talk about the cycle, is over.

It's pretty much over to me.

I think that's already been done, and I think the go forward model is going to be built around what additional revenue and businesses that the OEM has.

What normally happens in this cycle is the first reaction to fill up the internal capacity and the the second reaction is that once -- but keep in mind all of of these companies are stuck with this fixed capacity, and there's a new activity when we come out of this where the OEMs will say to themselves, did I really want to keep all of that fixed capacity around and recognize it as an opportunity then to go start reducing that fixed capacity and start turning their manufacturing capacity into variable.

So I think we haven't seen that uptick in the cycle yet, but we will, because it's happened every other time.

But I think we're -- the activity to bring work back in has kind of mostly slowed.

I think the activity to send it out has not occurred yet, and -- but we'll just be patient and believe over time that that will come back.

So I don't think the model's upside down.

I just think there's a lot less business out there and I think we're not yet on the back end of that cycle.

Great, thank you very much, Mike and Paul.

Our next question comes from Sherri Scribner with Deutsche Bank.

Your line is open.

Hi, thank you.

If I look at your revenue guidance in the past couple of quarters, this has been the case, but the range is pretty big.

It's about $1 billion dollar range.

Is there some conservatism in that number and as we go forward into the second calendar half of the year, do you expect revenues to pick up as would seasonally pick up?

I know you said things have stabilized, but you're not seeing a recovery.

And I guess in essence, would the range that you're giving get a little bit tighter?

I think the range will get tighter as we get more confidence into what the market is going to -- really what the market conditions are.

So I think until that happens, we're going to have a pretty broad range.

And the go forward for your other comments, is it going to get stronger towards the end, having a flat quarter-on-quarter result is actually somewhat of a positive news for us.

We've been in a situation where we went through about five straight months of just rapidly decelerating business, and that seems to have abated a little bit.

As I mentioned, it has stabilized a little bit over the last several weeks.

So just going from a March quarter to a June quarter with a pretty stable, flat outlook, we consider it to be kind of positive, because it's the first time we're seeing any kind of stability.

So whether or not that will hold, we don't know, but how we're going to run the business is that that is our new baseline.

We'll expect some seasonal upticks later in the year as we get into September and December, which I think are pretty normal,but view those as modest.

So we're going to run the business as if there's modest seasonal upticks going forward, but we're going to go try to figure out how to go make our full profitability based on these levels.

Okay.

And then in terms of the inventory numbers, you had -- on an absolute basis, inventory improved this quarter.

Do you expect on an absolute basis for inventory levels to come down again in the June quarter?

If they do, it will be modest.

Okay, so maybe flattish?

Yes.

So if you look at the total revenue that we -- over the last two quarters, which I consider to be the period of distress here, our revenues went down 37%, and our inventory went down 33%.

So in fact, we've actually matched inventory reductions pretty nicely with reduction in revenues.

So if a think about it, we plan -- and if you look at kind normalized inventory turns, we would expect this June to be running inventories very similar -- inventory turns very similar to last June, which was kind of a normal environment.

So we think we already are back to a little bit normal.

The inventory turns is kind of deceptive.

It looks like we have work to do because of a 6.6, but reality is if you take out the big swings of the beginning of the quarter, end of the quarter, the big swings in the cost of sales there, it ends up being a pretty good inventory level that we're at today.

So I would expect modest changes as opposed to any kind of significant step function.

Okay, thank you, and thank you for the detail on the segment demand.

Thanks.

Our next question comes from Alex Blanton with Ingalls & Snyder.

Your line is open.

Thank you.

A couple of -- I think it was last week, there was a report out of Poland that you were going to open a -- or expand your logistic center in Lux and add 250 employees to logistic center by the end of 2010, and of course that is located with where Dell has their large plant, and the Dell plant is going to reportedly about double its production, because the Limerick production that Dell has is going to transfer this year to that plant in Poland.

So is there a connection between the expansion of your logistics operation there and the expansion of the Dell production in that plant and will you be participating?

When they announced this, Dell said they were going to shift some of that production to contract manufacturers in eastern Europe.

From Ireland.

So the Lux operation is an operation that is a warehousing and logistics operation that in part supports that entire Dell production facility.

That's right.

They also support the facility in Limerick.

So as that moves from Limerick over to Poland for Dell when they do that final assembly, we would expect to have an equivalent in corresponding increase in activity as we support that operation.

So we do expect our Limerick activities supporting Dell to go down over the the next few quarters, and we expect our Poland operations supporting Dell to go up over the next few quarters.

So there is -- it's very correlated (inaudible).

Will that include doing some of the actual assembly of the computers?

What I think at this point, Dell is currently going to -- is planning to doing that in their own operation and if that changes, I'm sure they'll let us know.

But at this point, we're supporting distribution of warehousing activities directly, and that's it.

All right.

And on that topic, can you give us an idea of what kind of magnitudes we're looking at in the notebook business?

You mentioned that you started to ramp HP business in March, but that couldn't have been very big.

But where is it going this year?

Well we would -- it's a little bit hard to say in we're ramping, but we would be pretty disappointed if by the end of this year we were not running at a run rate of $1.5 billion to $2 billion just for notebook.

Okay.

Relative to last year's -- a good four or five times increase.

And is that for HP or for all customers?

That would be all the customers.

Final question -- that's good detail.

Final question is share repurchase.

You had a bond issue that your impairment charges triggered a provision there that prevented you from buying your own stock.

Has there been any change in that situation?

No, Alex, still the same.

You didn't get a waiver.

No.

Okay.

Thank you.

Our next question comes from Brian White with Collins Stewart.

Your line is open.

Just, Paul, on the restructuring.

When we're through with the restructuring charges here, what will the breakeven level be for the company?

Well, breakeven level is heavily mix dependent.

It's so difficult.

We have so many different businesses in this -- and they're so equally weighted, as you know, from the mix.

So you consider this quarter could be considered the breakeven quarter at this revenue level.

So it's our anticipation to just improve that margin profile with the restructuring efforts that we're making and realize those savings that we've quoted at a full run rate towards the back end of the year.

So it might be closer to $5 billion or over -- about $5 billion.

It's going to be lower than it is today.

Yes.

Okay.

And when we think about the notebook business, this is a big ramp.

What impact will this have to margins?

Well near term, it will improve them.

One of the things that we're experiencing as relates to bringing up the notebook business is that we had pretty good demand on our design resources, so we've been expensing those design resources.

The notebook business so far has been a drag on earnings with very, very little revenue offsetting it it.

So far it's been an investment period for us.

As that ramps up, each with minimal earnings and profitability, it will absorb a lot of those initial expenses.

So near term, we would expect it to improve quite nicely and -- which is not necessarily incremental earnings, but it's kind of reduction in losses, if you will, because the investment period will now be -- the investment dollars will now be absorbed by ongoing production.

But going forward, we anticipate where it's a little too early to say, but we certainly anticipate running at industry standard kind of margin levels and asset philosophy levels we've see in the other ODMs.

And what would that be?

Probably anywhere from 1.5% to 2.5% with very, very little working capital.

Just finally, mobile phones.

On the June quarter, are you saying mobile phones will go down sequentially?

Mobile phones going down sequentially?

I don't -- they were slight.

They were down may be a slight decrease, but pretty close to current levels.

So it could go down a little bit, but it's a modest change.

Okay.

Thank you.

I would guess it's pretty flat.

Thanks.

Our next question comes from William Stein with Swiss.

Sir, your line is open.

With Credit Suisse, thanks.

I'm wondering if you guys can discuss the performance in the component businesses.

I would have imagined, at this lower level of sales in particular on the handset side where I think you're more concentrated in the vertical integration, that that would be hurting margins more.

Can you discuss that business with us?

Yes, so I can kind of walk through kind of the main pieces.

So the biggest one is the printed circuit board business.

That's been, I would call it more severely affected.

The component businesses are going to go down and react more dramatically to a downturn than to a systems integration business which more reflects end-market demand.

So that's about been down significantly.

We are starting to see a recovery in that.

We believe that the March quarter will be the low, and what we see today is that we'll see continued increases in revenue in that business for the next two, three, four quarters.

So, we actually have hopes that the printed circuit board in this business overall, FY 2010 relative to FY '09 will actually be pretty flat.

We're actually hoping -- we think we're at bottom, the inventory adjustment period is over and we think we should start seeing that go up, and that's had a corresponding drop in profitability as you would expect.

So we also expect the profitability to start moving up each quarter.

The -- yes?

I'm wondering about camera modules and other --

Yes, the camera modules.

It's been heavily affected.

Our top customers in that field or in that product category were Sony Ericsson and Motorola.

So I would say that's also very, very significantly down.

Going forward, I actually also once again expect that to be a growth area for us in FY 2010.

We've diversified that base of business very substantially over the last couple of quarters, added some really nice new top tier accounts that you'll probably hear about over time.

And so we -- we all think that one's at the bottom and for the next three or four quarters, we actually expect it to be going up by about 25% a quarter, by about 20% a quarter.

Pretty significant.

We also have a big power business.

Our power business is probably -- is in the process of crushing the $500 million per year threshold.

So that business year-on-year in FY 2010 versus FY '09 will grow a good 25%.

So that business will grow nicely and probably one of our biggest growth drivers from a component business, and we'll have a substantial increase in profitability.

Just one quick follow up if it's okay.

Sony Ericsson no longer your biggest customer.

Do we view that as a permanent change, and in what segment is your new number one customer?

Well, we don't -- what we view as a permanent change.

Certainly for the forecast for the foreseeable future, we view thats a permanent change.

Who's going to be -- and after that, we don't have a number one customer.

The customers that are growing rapidly, not surprisingly are the ones in the PC industry, and we could see some new leaders emerge as a result of that.

So - but it's kind of early to say.

We don't have any 10% customers planned for this next quarter either.

There's a chance we can get to a 10% customer by the September quarter I think, and -- but I think it's going to be some new leadership.

Got it, thank you very much.

Objective is to grow them all simultaneously so that we don't have 10% customer.

I would like to say one other thing.

We just missed one of the other verticals, which is services.

We really have two services business.

One is a retail technical services business where we're actually out in the field servicing product.

That also has been a nice -- lower revenues, but higher margins, and that continues to be a nice growth business for us into FY 2010.

And also our distribution and logistics business worldwide has continued to deliver very, very strong results during the downturn here.

So we also view that to be a pretty strong business going forward.

Thank you.

Okay, so next question.

Our next question comes from Sean Hannan of Needham & Co., your line is open.

Yes, thank you.

If I could just actually follow-up on some of the vertical capabilities.

There is a question a little bit earlier.

Obviously in this environment, you're seeing some of the impacts in terms of what the headwinds that could be presented out of that type of model.

Can you discuss, at least in terms from a strategic point of view, how it is that you view that model going forward?

Whether you're considering eliminating perhaps some less strategic capabilities remaining as status quo or even continuing to build from here.

Yes, so we for sure will not change and reduce the amount.

It's a difficult time when you're vertically integrated, because like I said, at the component level, you get kind of a double hit.

You get the downturn of the economy plus you get an inventory adjustment.

On the go-forward -- but alternatively, we can see the value of the model, we see the value of being able to drive more business into the company, whether it even uses the vertical capabilities.

It's a strong sell point as we go into the customer base.

Every one of our top tier customers has become more and more engaged with Flextronics.

They use more and more verticals.

So without question, the value statement's there.

And also from a margin standpoint, I actually believe as these things mature, they actually will deliver a higher profitability, and if you just listened to my last commentary on the components businesses, the services business is going to be a growth industry for us in FY 2010.

The power industry is going to be a growth industry for us in FY 2010.

The camera modules will be growth.

Our PCB flex circuits touch panels that we've in the place is all going to be a growth driver in FY 2010 relative to FY '09.

So the real downsides to the FY '09 are the more traditionally -- or in FW 2010 are the more traditionally amassed businesses.

So we actually like the model.

We think it's right.

It's a little painful in a downmarket, because you get in a little bit of an accelerated margin impact, but that's over and as we look forward, we're actually quite bullish on these businesses.

So again, we think the inventory adjustment period's run its course, and we think each one of these businesses will have a substantially higher profit relative to last year.

That's helpful an quick follow-up on some of the restructuring comments, if I may.

There was a comment, I think that we had seen about 86% of the charges in COGS right within this past quarter, and wanted to see if there's a way we can get a sense when this is all wrapped up in the next two to three quarters and we look at the savings, the level that we should expect to see out of the COGS line versus SG&A?

Yes, sure, this is Paul.

So we would expect to see roughly 70/30 split cost of sales to SG&A in savings going forward and roughly $200 million within the range that we call it for the fiscal 2010.

Terrific, thanks so much.

Our next question comes from Amit Daryanani of RBC Capital Markets.

Your line is open.

Thanks.

You guys -- just a question the restructuring stuff as well.

Doesn't sound like you expecting a big uptick in sales anytime soon.

So that's going to be in at $5.5 million, $6 million range for the few quarters.

Based on the research you've announced, it looks like you're probably going to hit 2%, 2.25% EBIT margins on that revenue run rate.

Can you talk about revenues you eventually need to get to a 3%.3.5% target?

That's hard to say.

It's -- volume is one thing but also, mix is another, and there's also -- we're not done with trying to drive costs out of our business.

And one of the other things that we have at our disposal is, I've talked a little bit about whether the revenue driver is that much of components, but certainly there's some leverage in the profitability.

So when you put all of that into a bundle, it's not just volume that we need to end up driving us to what I would call normalized profitability.

We can work the mix.

We can work the components.

We do have some of the restructuring charges that haven't yet kicked in.

And so we still have a lot of levers that -- where we don't need the volume.

So we do expect to get some modest improvements in the volume and if we get anything more than that -- someday there's going to be a recovery, you would think, and we would think that would be upside to us.

So there's still a lot of levers for us to go pull to go try to drive to those normalized profit levels.

I'm just trying to get a sense of why not take a lot more capacity out of the model, because one of the things you guys have is it's a fairly flexible model, so it would be relatively easy for you to add capacity when demand comes, so why not get to the 3% margin, even on a $6 billion run rate?

Well again, we're not saying we can't do that, and we're saying there's a lot of levers left.

If we needed to do more restructuring, at this point and time from what we see in the future, we would do more restructuring.

We actually think this is the right amount out.

And the one thing that you have to keep in mind is the amount of people we have today are exactly equivalent to what we need to run the business.

There is no excess capacity.

And this is the largest cost of running our business is people, because we are a people business.

The second major element of capacity is equipment, and granted, we're not going to take good equipment and just idle it and then write it off and then bring it back online once the business comes back.

We doing think that's the right away to run a business.

We don't think it's appropriate, and it just mean we've have to go sell that business back -- we have to sell a certain amount of business to get that utilization back up, but that is a much lower cost on people.

In the third major element of capacity, just the number of buildings.

You can go write-off of a lot of buildings and not have a meaningful impact on the P&L.

So the fact that they're out there, it's real estate, it's really not going anywhere.

It's tangible, and you can touch it.

We just don't see the need to go write that off.

So rest assured that the actions that we've taken today, we have the amount of people we need to go run the business, and that is the largest cost of this.

And the meantime, we'll go try to book some more business to consume the excess equipment.

And just finally, Paul, may be you could talk about -- how should we think about CapEx in fiscal 2010 at this point?

We will just reiterate what we said last time, that our CapEx plans for the year should be roughly $200 million, and our depreciation is 400, so there's a positive pickup there in cash.

All right, thank you.

Thanks so much.

Our next question comes from Shawn Harrison of Longbow Research.

Your line is open.

Hi, just a follow-up on the restructuring questions.

May be you could discuss the linearity and then you say you get back to $6.5 billion, how much of these savings are actually permanent in nature?

Well they're all permanent in nature.

They're taking people out and it's reducing capacity in certain areas and yes, I would say they're all permanent.

Okay, and then just in terms of the linearity of the savings as we move through FY 2010, have we seen any so far, or is it back-end loaded to the December to March quarters?

We had a small amount in the March quarter, fairly insignificant.

But the run rates, we will see them the back end of this fiscal year, so Q3/Q4 for us you'll see more normalized run rates in those periods.

We'll build up to that.

We'll get full benefit as we go out of the third quarter and into the fourth quarter.

Okay.

Well, I think that's four quarters.

And the total by the the savings is -- we anticipate being anywhere from $230 million to $260 million.

There's a quick follow-up.

There was a joint venture announced with Asia Optical during the quarter.

Maybe if you could elaborate on exactly what that means for you?

The -- it is an attempt to go create a little bit a stronger company.

Asia Optical has a lot of optic capability in the digital camera space.

Flextronics has a lot of design capacity, particularly in the higher end camera space with the big design center in Japan, and we also have quite a bit of business with our biggest customer being Kodak.

So the idea is to put -- rather than have us compete against each other, it's actually -- we felt we were stronger putting those capabilities together into one stronger company, rather than being separate and having us having not quite enough pieces to compete by ourselves and Asia optical also not quite having enough pieces to compete on its own.

It's an attempt to create a full service, full scale, complete company, and that's the idea of the JV.

So as we looked forward -- and strategically how that fits in is if you look at digital camera space, even if you look at some of our biggest customers which were Polaroid and Kodak over the last couple of years, the real leadership is built around Canon and Olympus and Nikon.

So it's a lot harder to get into those companies.

It's a lot harder to create value, and we thought this was a way to -- realizing that the market is different, the end customers are a little bit different.

There's fewer of them and they're probably a little bit stronger and already have more capabilities, we thought this was a better way to go service that market.

Okay, thank you very much.

Our next question comes from Louis Miscioscia of Brigantene Advisors.

Your line is open.

Okay, thank you.

Mike, I was wondering if you could define how much business in the revenue drop actually was customers actually bringing the business back in house in comparison to the revenue that was just weakening demand, or just give us some kind of feel if that was a big portion or a small portion of the total.

Yes, Lou, I don't know if we can quantify that.

And even some of the customers just didn't have anything necessarily to bring it back in house.

Nokia made a big announcement that we're going to bring things back in house, and we don't service Nokia on the assembly side.

We only service them on the power charger side and some other of the products.

So we're more on the component side.

So I think that's genuinely bringing business back in house.

I don't think most of our customers, I can't think of anything specifically -- we don't quantify it, I guess is right.

I don't think I can give you a real good answer.

It's not as much as you might think, but I think the way to think about it is the biggest impact with us is somebody like Sony Erickson, where they had a reduction in the number of units, and they have a fixed capacity in their factory.

It's a joint venture, and they didn't really bring product back in house.

They just left that capacity full and at the same level and they didn't add capacity to that factory.

It's just that they left that full.

We kind of get what's left after that, and that was a lower number.

Nothing really came out of Flex factory into Sony Erickson factory, but it was more along the lines of of the available amount of business after they felt the factory was significantly down.

Great.

On the SG&A line, obviously you have brought that number down pretty significantly quarter-to-quarter, which is great ,but then we of your comments was that -- it's still lags, so some of those cuts are still going to be coming in.

Could you give us an idea as to where you think maybe it will go either next quarter or maybe towards year end or something just to help us understand how low we should look at SG&A moving to?

We're predicting some modest improvements now going forward, in I think a range of 170 to 180 is something you could model.

Okay, great.

And last question is just on the tax rate.

Historically, obviously you guys have had a fantastic tax rate, and it's usually been below 10% or maybe in the 8% to 12% range.

I think you mentioned 10% to 15%.

Anything changing there that it would go up into the higher end of the number?

Or when we look at it for the year, should we model 10% or 12%?

Well, it's a range of 10% to 15%.

We have to make estimates for the full fiscal year, and some of the catch up or true up we had during in the March quarter, because earnings significantly reduced in the second half in certain jurisdictions, and that's just very difficult to predict.

But the range of 10% to 15% is one you should be using.

It's heavily geographic or jurisdiction dependent.

There's been certain increases in certain jurisdictions around the world like China.

There's been some holidays that have rolled off in other parts of the world.

In the last 12 months, there's been a significant amount of volatility in this area and it's sort of difficult to predict.

An operating in tax rate go forward of 10% to 15% we feel comfortable with.

Why don't we take -- I don't know if there's a follow-up to that, Lou?

Just one last quick one, Mike and I guess -- as you look across your customers, I know you mentioned something positive about the medical side.

With the severity of the downturn, is there a lot of still captive demand that you can all go after or obviously, we already have com and computing mostly outsourced, so you really don't have the downturn pushing a lot of OEMs to bring significant material new amounts of business to you, and that's it, thank you.

You're exactly correct on com.

It's mostly an outsource market and over time, not counting market share gains it's going to float a little bit more with what the industry does.

The medical industry will have incremental outsourcing with -- we think without question.

And part of it is creating the capabilities in our company to be able to enable that decision by the medical OEMs.

I think the more we have first class facilities that can create value and have a broad set of platforms and different kind of product ranges that we can participate in, I think it opens up more business for us.

And that's how we're looking at the medical space.

We do think more's going to come out.

We expect this to be a growth driver for us this year, although modest.

And this is on the heels of quite a few cutbacks in the medical industry, because even in the medical industry, the hospitals stop ordering.

There's less elective surgeries, there's even things like less blood glucose meters, there's less sold because people start to test less.

And so there's actually a lot of headwinds in that industry, yet we expect to grow for the year.

So a lot of that is just we've put together a real broad portfolio of capabilities ,and I think the better those capabilities are, the more we'll enable a future there.

We think it's positive.

We're going to take one more question if we could, thank you.

Our last question comes from Steven Fox with CLSA.

Your line is open.

Thanks, good afternoon.

I will keep it brief, but just basically, could you talk a little bit more about the prospects of your customers now having stabilized and starting to talk more about outsourcing?

And is that something that could potentially surprise to the upside in your results maybe over the course of the next year, or is it too early to think about that?

Yes, if it's a tie up, Steve, if your question is like a tie-in to Jim Suva's question that -- I think it's too to early to have any real surprise, big factory announcements that are coming into the EMF.

There's going to be bits and pieces, there is some going on right now, but I wouldn't call it really a meaningful change.

I think it's bits and pieces here and there, so I don't think that's significant.

So I kind of view it as more a modest uptake that we'll see over time.

Okay.

Thank you.

Alright, I would like to thank everybody for joining us this afternoon, and we'll talk to you next quarter.

Goodbye.