Flex Ltd (FLEX) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Flextronics International second quarter fiscal year 2010 earnings conference call.

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

After 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.

Warn 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 our results of our fiscal 2010 second quarter ended October 2, 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 investor section of our website under calls and presentations.

We will refer to each slide number as we move through the presentation.

During the call today, Paul will review our financial results and Mike will comment on the business environment and demand trends for our company.

Mike will conclude with our guidance for the third quarter ending December 31, 2009; and after that, we will take your questions.

Please turn to slide two.

This presentation contains forward-looking statements within the meaning of the US security laws including statements related to revenue and earnings guidance, our expectation about future operating margins and return on invested capital, the expected charges and 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 obligation to update them.

Information about these risks is noted in the earnings press release on slide 14 of this presentation, and in the risk factors and MD&A sections of our latest annual and quarterly reports filed with the SEC, as well as with 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 slide five of the presentation and the GAAP versus non-GAAP reconciliation in the investor section of our website, which contain the reconciliation to our most directly comparable GAAP measures.

I will now turn the call over to Paul.

Thanks, Warren, and good afternoon, everyone.

Today, I will recap the financial highlights and performance for the second quarter; and Mike will provide an overview for the business, identify in segment the custom trends, as well as good quarter guidance.

Please turn to slide three.

During the second quarter, Flextronics posted solid financial progress reflecting our continuing efforts to resize our business to adapt to current market conditions.

Our second quarter revenue was $5.83 billion, which is towards the top end of our $5.2 billion to $6.0 billion guidance range.

Adjusted earnings per diluted share were $0.13, which represented an increase of 63% sequentially from $0.08 in our June quarter, and exceeded the top end of our $0.07 to $0.11 guidance range by $0.02.

Adjusted operating profit of $149 million increased 65% sequentially, and our adjusted operating margin expanded substantially rising 100 basis points sequentially to 2.6%.

These improvements were driven primarily by the realization of cost savings from our previously announced restructuring activities and improvements in our vertical performance.

Interest and other expense increased sequentially by approximately $4 million to $33 million, mostly due to lower interest income driven by divestiture of our [Harrison] note receivable.

The adjusted tax expense for the second quarter was $12.5 million, reflected in our adjusted tax rate of 10.8%.

We expect that our adjusted tax rate will remain in the 10% to 15% range for the remainder of fiscal 2010.

Finally, our adjusted net income for the second quarter was $104 million, increasing 65% sequentially from $63 million in our first quarter.

Please turn to slide four.

As this slide indicates, we have had healthy expansion of our adjusted gross margin, which rose by 90 basis points sequentially.

With our restructuring activities in full gear and improvements in our vertical performance, we are now seeing the benefits positively affect gross margin across our business.

Adjusted SG&A expense, which includes R&D costs, totaled $165 million in the quarter compared to $170 million in the prior quarter.

On a year-over-year basis, we have reduced our quarterly adjusted SG&A spend by 25% or $56 million.

As a percentage of revenue, the adjusted SG&A was 2.8% and we continue to focus the organization on driving down discretionary spending.

Combined impact from our adjusted gross margin expansion and adjusted SG&A expense management led to a sequential improvement of 100 basis points in adjusted operating margin, which is tracking to our targeted operational levels.

Our strong operational cost control and manufacturing efficiencies will provide an opportunity to continue to drive improving profitability as well as increase.

Please turn to slide five.

During the September quarter, the Company recognized asset tax, intangible amortization, and stock based compensation of approximately $21 million and $13 million respectively; compared to $21 million and $16 million respectively in the prior quarter.

Also during the September quarter, we recognized after tax restructuring charges of $12 million compared to $64 million in the prior quarter.

The quarter also reflects the GAAP charge of approximately $92 million associated with the impairment of certain non-core investments and notes receivable.

With this charge, we believe we have fairly valued the non-core assets, and do not expect any further significant re-evaluations in the near term.

Our non-core assets, comprised of equity investments and notes receivable from non-publicly traded companies, now totals only $31 million.

In addition, this quarter we had favorable conclusions to unresolved tax audits resulting in a one time benefit to the tax provision of $59.7 million.

As we have stated in the past, as a large multi national company we have constantly have tax audits in process in several jurisdictions.

And as they conclude, we will highlight them in our financial statements.

After reflecting these items, the GAAP net income was $19.7 million, compared to the GAAP net loss of $154 million in the prior quarter.

GAAP EPS for the December quarter was $0.02, compared to a loss of $0.19 in the prior quarter.

Please turn to slide six.

In March 2009, we announced a restructuring plan intended to resize our business in order to return to more normalized operating margins as quickly as possible and inline with customer requirements.

During the September quarter, we recognized $12.6 million of restructuring charges, comprised of $8.9 million of cash charges, and $3.7 million non-cash charges.

To date, we have recognized $228 million of the expected 250 million in restructuring charges.

We do not see any significant changes to our original plans and expect to recognize the remaining charges over fiscal 2010.

We remain confident that upon completion of this restructuring, our assets will yield annualized savings between $230 million to $260 million.

You will see the majority of those savings realized in the 90 basis point improvements in adjusted gross margin this quarter and the 100 base margin improvement in adjusted operating margin.

Our ability to resize the business to fit its current revenue run rate is an exceptional accomplishment for our organization.

Please turn to slide seven.

Flextronics continued its industry leading working capital management with a further improvement in its cash conversion cycle to 15 days.

A 4 day sequential reduction for this important gauge of efficient asset management.

We improved our inventory dates to 44 days, decreasing sequentially by 3 days as inventory was held relatively flat.

Our inventory turns are now at 8.2 times, which is the highest level since December 2005.

Our team has done an exceptional job in managing inventory over the last several quarters by reducing inventory by 41% from $4.5 billion last year to $2.7 billion this quarter, helping fuel our cash generation during the period.

DSO improved 1 day to 34 days and DPO remained consistent at 63 days.

We've worked very hard to get our cash conversion cycle down to 15 days for the first time since acquiring Solectron and its higher mix programs.

We are approaching the type of working capital results we had prior to the acquisition.

The take away is that even with the larger mix change and tremendous top line pressures, we are now operating at very efficient levels again.

The Company's asset management continues to be strong and coupled with the improving margins has resulted in an improving return on invested capital.

For the quarter, return on invested capital improved to 22.2%, up 800 basis points sequentially.

This result is one in excess of our cost of capital.

Our top priority is centered on business growth, improving operating efficiencies, controlling costs and managing our working capital.

Thus we expect to derive continued improvements in this important metric.

Please turn to slide eight.

Flextronics generated $312 million in cash flow from operations during the quarter.

Marking its fifth consecutive quarter the Company has generated positive operating cash flow.

Our cash flow from operations also reflected the absorption of approximately $43 million of restructured related payments.

Flextronics has generated approximately $1billion in cash from operations over the past 12 months.

Net capital expenditures were $42 million and total depreciation and amortization amounted to $114 million.

Our modest capital spending during the quarter combined with strong cash generation resulted in $270 million of free cash flow.

Our ability to reduce working capital, capital expenditures, and other discretionary spend has resulted in generation of approximately $750 million in free cash flow over the past year.

Please turn to slide nine.

We ended the quarter with around $2 billion in cash up $289 million versus the prior quarter.

As a result of the $195 million pay down of the 0% converts on July 31, 2009, total debt was $2.55 billion at quarter end compared to $2.75 billion at the end of the June quarter.

Since June 2008, we have reduced the consolidated debt level of the Company by 30% or $1.1 billion.

Net debt, which is total debt less total cash, was further reduced this quarter by $483 million and was $587 million for the quarter.

Our net debt has decreased by approximately $1.1 billion from one year ago.

We are very pleased at our ability to deliver the balance sheet during these challenging economic times while at the same time increasing our cash balance.

We also closed the period with no borrowings under our $2 billion revolving credit facility.

Also during the last two months, we have successfully renewed both our North American and global asset backed securitization programs at $300 million and $500 million respectively.

Both were renewed at similar terms for a one year period and remain utilized at approximately $450 million in total, which is relatively flat sequentially.

It is important to maintain the liquidity currently available to us and we are encouraged by positive reception of the banking community.

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

The $240 million 1% convertible notes will mature in August of 2010.

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

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

Thank you, ladies and gentlemen.

I will now turn the call over to our CEO, Mike McNamara.

Thanks, Paul.

Today, I will update you on what we see in the business environment regarding our market segments and business units, including demand trends and some highlights of our achievements in the second quarter.

I will close with some takeaways and our financial guidance for the third quarter ending in December.

Let's start with our results of outlook for each of our marketing segments and business units.

Please turn to slide ten.

We believe our infrastructure segment hit a downward inflection point this quarter and we expect profitable sustained growth going forward, moderate at first and then gaining traction as the economy turns around.

Infrastructure sales came in at $1.6 billion representing 28% of revenue.

On a sequential basis, infrastructure revenue declined 12% as this segment was generally weak and we had some continued optimization of customers to help improve ROIC.

With regard to Nortel, the pace of revenue erosion has been slowing and Nortel now accounts for 3% of our sales.

That being said, Nortel's recent sale of its CDMA wireless business to Ericsson and it's enterprise solution business to Avia, is a positive for Flextronics.

We have strong, existing relationship with both Ericsson and Avia; and given the sticky nature of the products and our cost competitiveness we expect to retain a significant portion of these businesses, which now appeared poised to show revenue growth.

During the quarter, Flextronics also received CISCO's prestigious 2009 EMS partner operational excellence and the B2B collaboration awards.

We would like to thank our infrastructure team for their hard work and outstanding operational performance, which was recognized by this important customer.

Our long-term relationship with CISCO is obviously very strong, and we will continue to provide them with the best-in-class customer service and operational excellence.

Now turning to our computer segment, which was $1.1 billion or 19% of sales.

This segment was flat sequentially and the OEM portion of our business is growing nicely with the continued ramp up of our notebook production.

However, offsetting this was some weakness within our legacy EMS server business due to weakened markets for the programs we support.

We expect significant growth in notebooks this fiscal year, as our production ramp will accelerate in the December quarter.

We are very encouraged by our market penetration thus far and the success that we have achieved winning future products from multiple notebook customers including HP, Dell, and other major OEMs.

To support future laptop growth, we recently announced and expansion of our capacity in Wuzhong, China with a new manufacturing and development center.

In addition, we have recently gotten to include our verticals in our notebooks such as printed circuit boards, cameras, touchpads, and mechanicals.

Our high mix low volume segment outside of our communication segment performed well during the quarter.

Specifically, our industrial, medical, automotive, and other category rose 17% sequentially to 19% of our total second quarter sales.

Breaking this category down, the medical segment grew sequentially in Q2 as we continued to win new business with our diverse platform of offerings.

Our base medical equipment business is growing and we have added over $100 million in new manufacturing wins, which we expect to take 6 to 12 months to fully ramp.

More large health care OEMs are looking to outsource, and our investments in this space over the last four years make us exceptionally well-positioned to benefit from this trend.

A recent example of our medical investment is our announcement last week to acquire SloMedical, leading manufacturer of disposable medical devices ranging from tubing sets to complex devices for minimally invasive surgery.

This strategic deal will expand our capability for medical disposables through SloMedical's Eastern European location and customer base.

In conjunction with our recent expansion of our Tijuana, Mexico and Wuzhong, China medical campuses provides and ideal high quality, low cost solution for US and European customers.

Our industrial segment experienced double digit growth sequentially.

We believe that the downward pressure of the past several quarters has subsided for this segment, as we have experienced revenue expansion with many major customers this past quarter.

This was the third quarter in a row we secured multiple new program wins with this quarter totaling over $200 million across the diversified customer base.

Areas of strength include capital equipment, green energy such as smart grid and solar modules, and automation products.

In addition, we are seeing a strong interest in our industrial design services.

Our automotive business was stable during the quarter and we expect it to remain so going forward.

As a reminder, automotive is about 2% of our total sales, and heavily focused on European automotive OEMs.

Moreover, we are focused on growing market share of electronics content in newly developed cars and expect to add additional design and product competencies over time.

Switching to consumer digital where we saw very strong 34% seasonal sequential resulting in consumer digital reaching $866 million or 15% of sales.

We attribute the strong growth to a more normalized seasonality patterns, especially in home entertainment systems, gaming consoles, and portable AV products.

We have been successfully ramping LCD-TVs for LG Electronics in our Juarez, Mexico plant.

In addition to our new LG business, we were selected as a supplier for another new tier one LCD OEM to produce plastics in Europe.

This new win ties in well with our existing European TV plastics business.

Another positive development for Flextronics is HP's announced consolidation of its printer supply chain.

During Q2, we began producing desktop printers for HP in China and are planning for this business to expand.

In general, we believe that we will continue to be a key beneficiary of this consolidation trend.

Sales from our mobile segment declined 9% sequentially to $1.1 billion or 19% of our total revenue.

This decline was largely driven by further reduced volumes from Sony Ericsson due to both weakened market and certain products going end of life.

Revenue erosion from Sony Ericsson has moderated, and this customer now accounts for 3% of our total sales, down from over 10% a year ago.

There were also some supply chain shortages that impacted our ability to meet mobile demand in Q2.

In spite of the pressures within our mobile segment, we have continued to win multiple new products with customers and believe we are now back on an upward trend.

I would now like to spend a few minutes discussing our business units and vertical offerings.

Our component businesses began to display signs of a rebound in the second quarter.

We won business from new and existing customers and our pipeline of new business gained momentum.

There is still a good opportunity for margin expansion within our component businesses as it still remains below the EMS average.

We remain strongly committed to our vertical model and confident in our competitive positioning.

So far strong orders for components are continuing into the third quarter, and w e expect to introduce additional new products in the coming year.

Our flex power business unit which makes chargers, adapters, and power supplies for a range of products from cell phones through to high end severs and switches, continue to expand its innovative product offerings, and is growing rapidly across the strong customer base.

Our services business focussed on logistics for our repair business and service by logistics.

During the second quarter, our quota activity was solid across all regions as was our win rate.

Our retail technical service business provides competitive and flexible appeal to services for customer operations, such as our relationship with Verizon that we have mentioned in the past.

We continue to be very enthusiastic about the expansion of capability in all of our services business.

Please turn to slide 11.

This slide depicts our success in expanding our relationships with targeted top tier OEMs across various markets we serve.

Our top ten customers now account for 47% of sales versus 53% a year ago, and we have no 10% of customers.

Sales to three of our largest historical customers, Sony Ericsson, Nortel, Motorola, have been under pressure and contracting for the reasons mentioned earlier.

Our ability to work through declines with those OEMs while growing our relationships with other top caliber OEMs has been key to building a stronger, more diversified Flextronics.

Please turn to slide 12.

In summary, our goals remain fully in tact and achievable.

We are confident that we are heading in the right direction and I would like to summarize the key take aways for the quarter.

Despite relatively flat sales quarter on quarter, both our adjusted growth and adjusted operating margins expanded meaningfully.

We still see additional margin expansion opportunities ahead.

Our 8.2 times inventory turns this quarter are our highest since 2005; and overall, we have reduced our inventory by $1.8 billion or 31% over the past year.

For 5.75 three quarters, we have successfully reduced debt and net debt.

During this span of time, we have reduced our debt by $1.1 billion and our net debt has declined almost 70% to $587 million this quarter, a record low since acquiring Selectron.

ROIC increased by 800 basis points sequentially to 22.2%, well above our cost to capital and the highest in recent history.

This superb result reflects our ability to effectively manage working capital in a very difficult environment coupled with our increased profitability.

Over the past year, we have generated $1 billion in operating cash flow and nearly $750 million in precash flow resulting in a record balance of approximately $2 billion.

Now, turning to our guidance on slide 13.

We are seeing signs of a strengthening in the economy and the general improvement in business conditions.

As a result, we expect our December quarter revenue to be between $6 billion and $6.4 billion, with it sequentially up 3% to 10% and adjusted earnings per share to be in the range of $0.14 to $0.16 versus $0.13 last quarter.

Quarterly GAAP earnings per diluted share expect to be lower than the guidance provided herein by approximately $0.07 for intangible amortization expense, stock based compensation expense, non-cash interest expense, and estimated restructuring charges.

Once again we want to thank our employees all over the world for working together as a team to ensure that Flextronics is in an advantageous position to not only meet the ongoing challenge of this economic environment; but more importantly, to remain ready to capitalize as the market turns.

As a final reminder, on November 17th we will be hosting our mid-year business update meeting in New York at the Grand Hyatt.

We plan to be providing an overview of our businesses, strategies, and segment trends, and we'll look forward to seeing many of you there.

Please contact our IR department for an invitation.

We will also be webcasting this event.

Thank you, operator.

We will now take questions.

Thank you.

(Operator Instructions).

And I have a question from Jim Suva at Citi.

Go ahead, your line is open.

Thanks, Paul and Mike.

Operating margins at 2.55%, pretty impressive.

But I believe I heard Paul mention that the majority of the restructuring benefits are now built into the income statement.

I wanted to see if I heard that correctly.

Do you actually see 3% operating margins at some point on the horizon or what is the revenue run rate we need to get there?

Or what other milestones that we can look forward to to potentially getting there, or is that a little bit too high to expect?

Hey Jim, it is Paul.

We have recognized roughly 75% of the savings in the income statement so far in September quarter run rate.

So we still have a little bit left to go, I said the majority of the savings had been realized, which they have.

We will probably realize the remaining 25%, mostly in the December quarter and then tailing off into the March quarter, which will give at our run rate that we set: $230 million to $260 million on an annualized basis.

The 3% operating margin is our target still.

Like I said last quarter, we are looking forward to a little bit of a seasonal uptick in revenue, a good mix profile, verticals continuing to improve performance, and a little bit more restructuring coming in.

So that's our target.

Our guidance suggests a little below that at the midpoint level, which we understand at the high end when you model it out, it should come around 3%, which we are shooting for, but there's a lot of things have to come to play for that to happen.

Great and a quick follow-up.

I believe Mike mentioned that there were component shortages on the mobile side of things.

Given the recession and the relatively short supply lead times from the semiconductors and the glassmakers, and things like that, I guess I'm a little bit surprised to see and hear of some component shortages.

Can you talk about maybe what they were; and more importantly, have they been resolved, or are you still seeing some shortages that are constraining your revenues?

We are certainly seeing more component shortages.

We actually could have shipped more revenue last quarter had we did not have any.

And the component shortages really are not just in mobile, but they're somewhat across the board.

We are chasing quite a few parts in quite a few different product categories right now.

In general, what we are seeing is there is a little bit of a business expansion out there; and the flexibility in the supply base--on the components supply base is just not there.

A lot of the semiconductors fabs are running at pretty high utilization levels.

There are some challenges in getting people in some of the low cost regions, particularly in China, to ramp that quickly.

So we are actually chasing a lot of parts now and expect that not to really taper off until probably next quarter.

I would call it--and it's not just one or two different components supply charge components.

It's primarily a broad push out of quite a few lead times that we're seeing.

Thank you very much, gentlemen.

Our next question comes from Sherri Scribner.

Go ahead, your line is open and Deutsche Bank.

Hi.

Thank you.

I was hoping to get a little more detail on the charge you took to write off, I think you said, an investment; can you give us a little more detail on what that was for?

Yes, Sherri, thanks.

This is Paul.

We took the charge to write down some non-core investments both equity and notes receivable as a kind in the quarter; and we have said all along that we would be looking to monetize some of these non-core assets.

We did that in the June quarter and we realized $255 million of cash with the sale of the asset in notes receivable.

We have now roughly about $30 million to $40 million on the balance sheet left in non-publicly traded companies; and we see very little risk in that going forward, certainly in the near term that we can see.

But that's kind of been a pattern over the last couple of quarters.

Okay.

So the note receivable that you wrote off wasn't related to anything with customers.

It was primely related to non-public investment?

That's correct.

Okay.

And then just looking at your cash, you have done a great job generating cash over the past couple of quarters.

It seems like you guys ares peaking out now.

You did what, $300 million in cash flow from operations this quarter?

Do you think that number is the peak for you and we come down from here?

And then related to that, in the past you have talked about maintenance, CapEx somewhere around $200 million, maybe $250 million; but it looks like you are spending less than that?

What would you say your maintenance CapEx is right now?

The CapEx we've said for the year roughly $200 million, but we're currently underspending that; but we would anticipate that for the fiscal year, we'd probably be about at that run rate recognizing our depreciation is roughly $400 million.

So we're certainly underspending that considerably.

On the cash, to hit $300 million in the quarter I would say is a high point for sure.

And we have a couple of seasonal quarters with high revenue demands that typically you would get less free cash flow.

But nevertheless, we expect to see positive free cash flow through December and March also, but not at those levels.

Okay.

And just to clarify, it seems like you're going to be ramping CapEx a little bit in December or March; is that the way to think about it?

I think it will trend slightly higher than the current run rate; but nevertheless, stay within 200 for the year.

Okay, thank you.

Our next question comes from William Stein at Credit Suisse.

Go ahead, your line is open.

Great, thanks.

A little bit more on the restructuring, if I can.

You say that the benefits there will likely end after the March quarter.

When that's done, what kind of contribution margin do you think the Company achieves assuming relatively stable mix between assembly and components?

You're right.

Well, we will recognize the remaining of the restructuring charges, which is roughly $20 million or $30 million over the next two quarters.

And we're recognizing the savings, a majority of the savings now.

The contribution margin is very mixed determined.

We have, at least, 10 different business units in this company that range from 5% to 15% in contribution margin.

So it is hard to put a number on it other than that's the range that we have for each business unit.

Okay.

Follow-up if I can on the discussion about shortages.

We certainly heard this across the supply chain for a while now, actually, about a lot of vendors going in allocation.

I guess it would be helpful to comment as to what you see happening over the next quarter or two.

Do you think that's going to loosen up?

Are you seeing some supply come online?

Are you seeing pricing adjust going to those shortages?

Yes.

So we are actually not seeing much in the way of pricing effects.

We are seeing these component charges kind of across the board.

I don't rule out pricing effects but we really haven't seen it that much.

The only real impact that we've seen is lead time switching out.

We have seen some of the other companies beginning to offer money in order to secure source and supply that is an activity that is going on in the marketplace.

We really haven't been pressurized very much.

We are seeing some components that are starting--which, I would say, firm up pricing.

So very often the component supply base electronics has continuous reductions in costs, and we are seeing some of those continuous reductions in costs kind of slow down.

So we are a little bit concerned about it.

So I think it is a trend that is continuing.

I would hope to see some of that mitigate by the end of this quarter, because a lot of what's pushing the upside here is the demand on the component suppliers, the continuous--the seasonal uptick.

So I think once that seasonal pop mitigates a little bit in the March quarter, we could see it moderate a little bit.

One other question you asked is--one of the other points about it is how long will it last; and we are actually seeing some orders being placed on the semiconductor equipment manufacturers in both fab capacity as well ass test capacity.

So I think that the component manufacturers are actually beginning to release CapEx to go fix that problem.

I think that is a very, very positive sign of them believing that maybe there is some continuity into the coming quarters.

Great.

That is helpful.

Thank you.

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

Go ahead, your line is open.

Okay.

Thank you.

First question is--and not really looking for guidance here.

But the March quarter has generally seen a wide range of seasonality.

You have got everything from being dead on 30% in ' 09, which obviously was probably an exception given the financial crisis; to only a modest let's say 9% decline quarter to quarter in the March quarter in '04 of 9%.

Can you give us an idea of what you might think normal seasonality would be?

Would it be somewhere in the mid teens or the low 20s for the March quarter sequentially from December?

Yes.

We are not ready to give any guidance on March.

In general, I would say as the more significant downward changes that Flextronics has seen in the past is not going to be as high.

We have some offsetting that the core business, which includes infrastructure and industrial and automotive and medical, and those kind of businesses tend to be a little bit larger percentage of the Company now.

The computing business that we have invested in over the years--over the last two years will show up--probably show a pretty strong growth in the March quarter.

I actually think the seasonality that we will experience this March is going to be substantially less than historical numbers.

So we'll have to wait to see what that looks like.

We actually anticipate--and I also mentioned that the infrastructure business, we actually expect it to strengthen up over the coming quarters and that includes the March quarter.

So there are some signs of strength into that quarter.

We think the mobile and the consumer typical downward pressures are not going to be as large as they have in the past.

So I would expect overall Flextronics to see less of an impact in the March quartern than we have seen in any of the previous quarters--and the previous years.

Great.

That's helpful.

Another question looking out to 2010.

With so many big cap infrastructure areas getting hit so hard, I guess the question be if we're going to see more of a rebound; and obviously, we are getting stabilization here, we're getting some upside with some companies.

When you look out to 2010, this isn't against Flextronics, what are your customers saying?

Are they starting to get reasonably optimistic and starting to ask you a lot of questions about your ability to upside?

And I guess maybe if you could handicap whether that's just--if that is happening, if it's optimism or there's some realistic expectation to that happening?

Yes.

You are talking calendar year 2010, I think; right?

Exactly.

We do see some customers that are getting nervous about the supply chain.

There are customers that are looking to secure component sources and supply; and we have some customers who are asking us to do what-if scenarios on upside.

We are seeing some of that.

Whether or not any of that comes through, I don't think they know for sure.

I think a lot of them that are even asking for this upside are nervous.

But nonetheless, the fact that they are asking us for upside scenario planning is a pretty positive thing.

We don't want to say we know what it looks like next year.

For Flextronics' business, we expect computing to grow just because we're introducing some additional new programs right at the end of September here that will kick in.

We won a number of different--we just won a number of different programs that we have Depesche, they haven't announced.

And some of those will start to kick in the March quarter.

We mentioned infrastructure, where we think it's probably going to be up each of the next few quarters.

So we do have some of that visibility from those customers.

It is hard to say, Lou, but we will probably get more positive signs about next year than we are negative signs.

One question, last question is just about the cash on the balance sheet.

Obviously, you have been taking debt down pretty steadily.

Do you think that will continue?

Are you looking to maybe buy some shares back or just let it sit there for a while?

Lou, it's Paul.

We have some debt repayment coming up in August next year, $240 million of the 1% converts.

And we plan on that and then really we are focused on investing in the possible growth of our business, whether it is organic or otherwise; and then of course, we always remain opportunistic with the debt and equity markets out there.

But it is also very good to have a substantial cash balance and a lot of liquidity at times like this, it's good to be prudent.

Okay.

Thanks, guy.

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

Go ahead, your line is open.

Thank you.

Paul or Mike, I asked this last quarter, let me ask it again.

The SG&A keeps going down and it looks as if when sales go back up, if you can hold it around $165 million, $170 million level, it can decline to around 2% of sales.

Let's say your sales go back to $8 billion to $9 billion where they were, it would be around 2%.

Is that an achievable goal?

That could mean a pretty high operating margin, above the 3% you are talking about.

Alex, this is Paul.

We haven't modeled out where 8, 9, 10 billion a quarter looks like to be perfectly honest.

But it would be hard to think that SG&A would to drop below 2.5% of sales.

It's always been our target.

At 30--it is in great shape right now; but there is an R&D component right now that's a little variable that will grow with sales as we continue to invest in some of our product businesses.

I would expect that to uptick.

I would have thought with another 10% or 15% growth in sales, we can keep it relatively flat dollarwise; but beyond that it's going to be under priced between crews.

Okay.

Okay.

Well, still, if it gets 2.5% and you have a 6% operating gross margin, which you've had in the past, you had a 3.5% operating margin.

I'm sorry, wouldn't you?

Yes.

No, I think that's right.

And the 6% margin that we've had in the past, it's obviously something that we think about.

It's very mix dependent in terms of this kind of businesses that we bring down and it's a good thing as you know.

Certainly getting down to 2.5%, we have already been down to 2.5%.

And since we have had that level, we have also simplified our operations.

On of the things we've done during the downturn is we just have a simpler structure.

We have fewer locations; and the opportunities to keep SG&A low, and maybe even challenge the 2.5 level is high.

So there is an opportunity to go after that.

The 6% gross margin is really mix dependent.

I'd just like to reiterate what Paul said, we have run about 0.4% of that SG&A is really R&D.

And when you think about some of the R&D we have.

We have materials business, and we have touch screen business, we have a power business, we have a lot of different businesses that require pure R&D.

So the fact that we are able to--so our pure EMS margins if we hadn't had all those would be even be quite lower.

But certainly, we will work to beat the 2.5% level.

We've been there before.

We will certainly work hard on the 6% level, we have been there before.

We are looking at being able to run and drive a more efficient company than we have had in the past.

When we have hit those numbers in the past, we have been in the midst of trying to consolidate Selectron, and really be able to manage the change, as well as being able to manage the actual numbers.

And going forward, we won't have as much of that effect.

We are optimistic about ability to get to real good level there.

Okay.

Second question is on--there was a report on DigiTimes last week.

They interviewed Sean Burke, who is President of Flextronics Computing, and Peter Chu, General Manager of your notebook sales units and here's what--would you comment on what they said?

They said that the current capacity is 7.2 million to 8.4 million units and if you use a $500 per unit, that would be 3.6 billion to 4.2 billion a year.

From what you said in the past, 1.5 billion to 2 billion by the end of this year, you would be by 45% of that.

But they said the new facility that you announced October 15th would boost that to 13 million units or about 6.5 billion a year.

They didn't say that dollars, but I'm estimating that at $500 a unit.

And then they said that if you get enough orders, you are prepared to expand to a capacity of 20 million units a year, which at $500 a unit would be 10 billion a year.

This was an interview that they gave and the story had pictures of them and so on.

Could you comment on that, because that's not something that you have announced, particularly; but yet it is out there in the public domain?

Yes.

Yes.

So what we're doing is, I think those numbers are roughly correct.

The capacity doesn't mean that the people are sitting there in idle waiting for work.

It just means we have enough facility and we have, what I would say, we're prepared to invest in equipment rapidly to achieve those kind of capacity levels.

So yes, we're probably at--our existing facility can go up to about 600,000 or 700,000 a month.

The new facility really has, when I would consider to be unlimited capacity.

So the first step we will take, will be to take it up to about a 1.2 billion unit in terms of facility space.

These are very, very big programs.

It is hard to book any business with a customer unless you have--that they can see some clear facility space for them; and very often when a customer gives them a piece of business their objective is to give us more business after that.

It is not meant to be static.

If a customer starts off--starts us off on a consumer notebook, the intention is that there will be more business after that.

So they actually like to see some ability to expand and grow and some of the times we get a little inefficience with the facility, it's just because we want to protect one customer from the other customer.

So we are getting ready for that.

We continue to be pretty bullish about our business, and we have always called it notebook business but we have also booked multiple all in one projects, we've booked some desktop projects now.

We've booked some notebooks that are both consumer and enterprise targeted for both consumer and enterprise markets.

So we are starting to build a pretty broad portfolio of different kind of products and also different kind of customers and for different kind of markets.

As we see that--those possibilities we're real interested in making sure we have enough run way, and we don't slow down that growth.

Okay.

Thank you.

That's a good overview of what--what is in your sights there, thanks.

You bet, thank you.

Our next question comes from Matthew Sheerin of Thomas Weisel.

Go ahead, your line is open.

Yes.

Thanks.

I'd like to just ask a question regarding your mobile business.

Can you talk, Mike, about--give us a rough idea of the concentration, customer-concentration in that business today?

And steps you are taking to diversify the business to avoid the issues that you have encountered in the last few quarters with the two big customers.

Yes.

So what you said is exactly correct.

We will look to continue to diversify it.

We probably have five or six different customers, we've probably got even more than five or six.

We have probably added five or six over the last year and a half.

We have added multiple customers in Japan, we've added some customer out of China.

We have--I don't know what to say except it is our objective to continue to diversify that portfolio.

We will also look to diversify that portfolio because we do chargers, we do camera modules, we do raw printed circuit boards, we do services around the world.

So we are looking to diversify that portfolio not just in terms of different customers in the EMS business, but also across each of the different product categories and component technologies that we participate in.

So that is exactly what what we are trying to do.

As we discussed, we feel we are kind of at the bottom now of the adjustment period that we have had to go through, which is significant.

And we now view it as a rebuilding exercise.

So we will look forward to taking it from the baseline that we believe we have today and moving it forward.

And looking to penetrate in all the different market categories that we can participate in not just EMS business.

Great.

As a follow-up, you talked about your components--some of our components businesses and Multek on the PCB side, obviously, has a lot of exposure to hand sets.

Are you seeing that business bottom out as well, and signs of growth there?

Yes.

It has already bottomed out.

I think all of our businesses have already bottomed out.

I think it is on the recovery.

We are expecting, if I think about Multek only and address that question, we saw some revenue growth with them this quarter; we expect to see pretty nice revenue growth next quarter and we actually expect our March quarter to also show some nice revenue growth.

Partly, that is some diversification in terms of the products that we are building in Multek; and part of it ist just some of the recovery that we are seeing from the marketplace itself.

We're actually--it did grow this quarter, we expect it to grow next quarter; and we expect it to grown in the March quarter.

And in each one of those different quarters, we expect expanding margins.

It is one of the places that we expect to see some margin improvement going forward--well, it's at the 2.6% level now.

As Paul mentioned, we still have a little bit of room left on if we see revenue uptick and we still have some room left on some of the restructuring charges.

But one of the other key drivers for us is what we are seeing is a pretty good uptake of some of our verticals, and we are going to see expanding margins out of those over the next couple of quarters as well.

Okay.

Thanks a lot.

Our next question comes from Brian White of Collins Stewart.

Go ahead, your line is open.

I'm wondering if you could talk a little bit about the notebook market.

How big is that business right now on a revenue run rate, and where do we expect it over the next year?

Yes.

It is just hard to pick a moment in time.

We had a couple--a good run at it in the April time frame when we hit that cycle for notebooks.

We introduced another pretty high volume program just this September.

We didn't see that much of it in the computing numbers yet; it is beginning to ship and it just started at the end of September, which will catch the Christmas season, which is another pretty good volume notebook.

And I know we've got a number of other wins that we will kick it over time.

So it really depends on when in the quarter you are talking about.

September results are actually a lot different than July's results.

So I think the way to think about it is more on a year on year basis.

We do expect it to continue by the end of the year to be run at a 1.5 billion to 2 billion run rate.

And certainly next year, we would expect significant expansion from that level.

In the infrastructure business, you are saying this will grow sequentially through the March quarter.

That's what we're anticipating, yes.

Where is that?

What vertical within infrastructure is that coming from?

That's kind of--which vertical?

We have some customers that are just picking up.

We actually had a low point in Q2 in the infrastructure business.

So we actually think it bottomed there.

Most of our customers are actually seeing a sequential uptick in Q3 and we're also being pretty successful in terms of new customer wins.

Or new program wins at existing customers is probably a better--even though we're getting some new customers as well.

I think it's a little bit everything.

We have penetrated the Chinese marketplace in infrastructure.

We are actually seeing some pretty good strength there.

I would say it is a little bit of customer wins, it's penetrating the key Chinese infrastructure OEMs, and it's the fact that we are coming off a pretty significant bottom.

Between all those three, we are expecting a pretty good run for the next few quarters.

Just finally, in the December quarter, what market do you think will see the biggest sequential uptick.

The biggest sequential uptick will probably be--well it will probably be either mobile or computing, one or the other.

Okay.

Thank you.

Both have a pretty good move up.

Our next question comes from Brian Alexander of Raymond James.

Go ahead, your line is open.

Yes.

Thanks.

Just a question on the earnings guidance.

If I just use the mid-point of your EPS guidance, it implies operating margins are up about 20 basis points quarter on quarter.

Despite this fact, you'll be growing revenue by about 6%, which includes growth in the vertical components businesses and some leverage there; and also layering the remaining restructuring savings, or at least the majority of those, which should help you by 30 basis points in and of itself.

So I'm just wondering why wouldn't we see more operating margin expansion sequentially in the December quarter with all of those tailwinds?

Thanks.

This is Paul.

You have some significant mix changes always in this December quarter when margins are somewhat depressed.

The opposite being in March quarter.

So I think you have to offset that negatively.

And when you run the midpoint like you just said, you're probably at the high end of 2.8%, 2.9% operating margin.

Okay.

And just one the vertical component businesses specifically, any way you can talk about how far below peak margin those businesses are and how much growth you might need to see in those businesses to get back to peak in any color by vertical whether it be Multek versus (inaudible) versus flex power to help us gauge the magnitude of that would be helpful.

Yes.

So each one of those are kind of at a different lifecycle stage and a different opportunity for growth.

So it is hard to generalize across the bundle.

The key point is, as a bundle they are running lower than the EMS level.

They have the ability to run a pretty good notch above the EMS level.

And I think some of the revenue growth that we are seeing right now, if that continues for another couple of quarters, we will actually see those component levels exceed the EMS average.

So--but it is hard to generalize, because each one of them is so different and there are such different stages of lifecycle and investment in them.

But I think the key thing is they are below EMS levels now.

They certainly should result in something much better than EMS levels and if we continue to see the growth that we are seeing over the next two quarters, we would certainly expect them to overachieve the EMS levels next year.

As high as double digit or is that out of the question?

Yes.

Double digit is too high

Thanks.

Our next question comes from Sean Hannan of Needham Company.

Go ahead, your line is open.

Yes.

Sean Hannan.

Thank you.

Just a question on the computing environment.

Many of your customers have certainly argued that we are on a cusp of a refresh cycle.

I just want to see if I can get your perspective based on your current relationships, notebook wins, ramps, etc.

Can you comment on how you feel you are positioned to benefit from this dynamic?

As we look to counter 2010, and to what degree can this be incremental beyond how you've been thinking about the notebook portion of your business to date?

Thanks.

Yes, Sean, this is kind of tough.

When we think about the notebook business, we actually--our success and failure is built around winning a few programs and then the success of those programs in the marketplace, as opposed to the general market.

In other words, our computing business--our notebook business is going to be up 100% this year and I would expect it to be up another 100% next year.

That's not because the market's up 100%, it's just because we are new to this industry and our ability to penetrate these individual products; and the success of those individual products, are driving us more than anything else.

Granted, some of the success for those individual products will be based on what's happening in the industry.

But we hear the same thing in terms of the upgrade cycle.

We think it is positive going for us as we go into next year.

Where we're pretty thrilled that we are in the business.

We are having pretty good success across a broad range of different product categories.

So again, we have expanded beyond notebooks and other things, and we are having a good success with the OEM.

If there is an upgrade cycle, it will benefit us; if there is not an upgrade cycle, we will still expect to grow substantially more than the industry will.

That's helpful.

If we were to look at that business today, clearly you have been targeting industry margins for the business as we get out to a greater scale.

Can you comment today around how that business is contributing to the overall?

Yes.

So I would say it is not contributing and we would expect it to contribute perhaps as it hits the 2 billion run rate, I expect it to contribute; and I expect it to contribute at higher rates, or maybe industry average rates maybe when we get up to the 4 billion or 5 billion run rate.

So I would say the contribution is very low and--zero today, actually.

And I would expect it to increase substantially over the next two years.

When you say zero, do you mean that we are actually--we are break even?

Yes.

Okay.

Thank you.

Our next question comes from Steven Fox of CLSA.

Go ahead, your line is open.

Hi.

Good afternoon.

I was wondering if you can drill down a little bit into the margin improvement quarter-over-quarter?

How much of the roughly 100 basis point improvement was due to the improvements in the vertical--in the components margins?

Yes, this is Paul.

So the improvements September over June, like I said, a large part of it was the restructuring.

We certainly had the significant amount from there.

But the revenue and mix changed a lot and that contributed a lot also.

So I would say roughly two thirds of revenue and mix and one third from restructuring.

And within that--when you say mix, that's mainly because of the printed circuit boards and other components improving or is it also by served market?

No, it is by segment as well.

Whether it is the vertical or the segments themselves, and the revenue.

It's--I can't break it down any further than that but it contributed roughly two thirds.

Okay.

I know we are late on time, but just if I could look at it one other way.

Going forward, Paul, on the component business, after you get through the last of the restructuring, would that be the biggest driver in margin improvement since--or are the assembly margins still have room to go?

The assembly margins, they have room to grow.

But verticals have a lot more room to grow, but they consider--contribute considerably less dollars, of course.

But percentage-wise, have a long way to go.

If we could take one more question, please.

Thank you.

Our final question comes from Shawn Harrison of Long Bow Research.

Go ahead, your line is open.

Hi.

Good afternoon.

A follow-up on the components question, Would it be suffice to say that the key driver and just the continued recovery in that business would be your continued traction within the notebook computing business?

So are there other end markets and verticals that we should focus on, drivers of upside there as well?

Yes.

I think the recovery is more an industry recovery than it is anything else.

A huge percentage of these component technologies compete on the open market and I'm not dependent on Flextronics' wins to be successful.

So every time we do a vertical, whether it's a camera module or a printed circuit board or a flex circuit or a touch screen or an LCD display, or--just anyone--or a charger, or any of our power systems, they are all structured to compete openly in the marketplace.

What is a more important driver is actually not Flextronics.

The more important driver is the--just the general recovery of industry itself.

Because these are all very, very big businesses.

They are not only serving Flextronics; and, in fact, Flextronics is a lower percentage of the total mix as opposed to outside industry sales.

So that's really what's going to drive their success more than anyone else.

And what we're seeing is a general recovery of all the markets; and as a result, all of our vertical technologies are having a reasonably--are generally recovering as well; both from a revenue standpoint as well as a margin standpoint.

Okay.

And then just as a brief follow-up, you mentioned a number of new program wins.

Is it the outsourcing pipeline that you're seeing expanding; or are you taking market share and taking programs that were competitors?

I think, again, a tough question.

We have so many different businesses and so many different business units.

There are certainly--if we're growing our notebook business 100%, we'll obviously have more market share--we'll grow in market share.

Alternatively, there's still more in the business and expanding and we're getting some of that expansion.

So I think the answer is just a little bit of everything.

I think sometimes we take a little bit of market share, I think sometimes we have just some new product expansions that we're participating in.

It's just such a broad-based business for so many different market segments, and so many different businesses.

The answer is just a little bit of everything that ends up driving is.

We are not--one comment I want to make is, we are not required to take market share in order to grow the revenue in this company.

As we've expanded into things like power, and we've expanded into things like medical disposables like the SloMedical that we've just announced.

As we think about going into the different plastics technologies like mechanicals, or some of the machining technologies or the expansion of our power technologies where we're now moving all the way into server and higher end power supplies.

And as well, all the different notebooks that we've brought--not just notebooks, but notebooks, desktops, all in ones.

All this is expanding the market for Flextronics and allows us to participate in revenue growth without having to take just individual market share from other companies.

Alternatively, we try to make the offering as competitive as we possibly can and we try to do that as well.

But the revenue growth for the Company is not contingent upon taking that market share, it's just an additional opportunity.

So if that's okay, Shawn, we will close it up.

Thank you.

Thanks everybody for attending.

We appreciate it and we'll look forward to seeing people at the Analyst Day in November.

And look forward to a more detailed discussion at that time.

Thank you

That concludes today's conference call.

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