Flex Ltd (FLEX) 2011 Q2 法說會逐字稿

Good afternoon, and welcome to the Flextronics International second quarter fiscal year 2011 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 meeting over to Mr.

Kevin Kessel of Flextronics, Vice President of Investor Relations.

Thank you.

You may begin.

Thank you, and good afternoon everyone.

And, welcome to the Flextronics' conference call to discuss our results for our fiscal 2011 second quarter, ended October 1.

Joining me 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 the link titled Conference Calls and Presentations, and can also be accessed directly from our home page.

During the call today, Paul will first review our financial results and highlights, and Mike will comment on our business environment and trends we're currently experiencing.

Additionally, Mike will provide guidance for the third quarter of fiscal 2011, ending December 31, and conclude with some quarterly highlights.

Following that, we will take your questions.

Please turn to slide two, where I will cover the risks and non-GAAP disclosures.

This presentation contains forward-looking statements within the meaning of the US securities laws, including statements related to revenue and earnings guidance.

Our expectations about our future operating margins and return on invested capital, expected revenue growth in our market segments, expected improvements in profitability of our components' business units, our expectation about the availability of components for our products, and our expectations regarding end-market demand for our products and our business in the current economic environment.

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

Information about these risks is noted in the earnings press release, on slide 12 of this presentation and in the risk factors MD&A sections of our latest annual and quarterly reports filed with the SEC, as well as in our 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 adjusted financial results, which are non-GAAP financial measures.

Please refer to the schedules on the earnings press release and the GAAP versus non-GAAP reconciliation on the Investor section of our website, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

I will now turn the call over to our Chief Financial Officer, Paul Read.

Thanks, Kevin, and welcome to everyone on the call today.

I'll review some of the highlights of our financial performance for the second quarter of fiscal 2011, and Mike will provide some additional insights on our current business trends, including our guidance for the third quarter of 2011, ending in December.

Please turn to slide three.

Second quarter revenue came in at $7.4 billion, which was above the high end of our guidance range of $6.8 billion to $7.2 billion, and represented a very strong 13% sequential increase in sales.

The increase was nearly double our 10-year sequential growth rate for the September quarter of 7%, and was the third highest growth for this quarter in the last decade.

In addition, for the second quarter in a row, we saw sequential growth across all of our market segments.

This was principally driven by new outsourcing programs with both new and existing customers, combined with favorable seasonal trends experienced by our Mobile, Consumer Digital, and Computing businesses.

Adjusted operating income was $213 million, up $23 million, or 12% sequentially, and 43% above the $149 million of a year ago.

GAAP operating income, which includes stock option expense, was $199 million, up $24 million, or 14% versus the prior quarter, and more than 60% above the year-ago level of $123 million.

Adjusted net income for the second quarter was $179 million, an increase in 16% sequentially from our first quarter, and more than 70% from $104 million a year ago.

GAAP net income, which includes the impact of intangible amortization, was $144 million, expanding 22% from last quarter's strong results and coming in at more than seven times the $20 million a year ago.

GAAP net income represented an all-time record high for Flextronics.

We reported adjusted earnings per diluted share for the September quarter of $0.23, which was above the high end of our EPS guidance of $0.19 to $0.21, and grew sequentially by 21% from $0.19 last quarter, and was almost twice the $0.13 from a year ago.

Our GAAP EPS was $0.18, tying an all-time Company high and almost 30% above the $0.14 last quarter.

Please turn to slide four.

Adjusted SG&A expense totaled $188 million in the quarter, up $4 million sequentially and $23 million year-over-year on revenue increases of $856 million and $1.6 billion, respectively.

We were able to keep SG&A dollars within our expected range despite the significant revenue upside in the quarter.

As a result, we leveraged our SG&A percentage of revenue down to 2.5% from 2.8% last quarter and a year ago.

Despite this being the third lowest quarterly level for SG&A as a percentage of sales, we remain confident that we can further leverage SG&A in the future as we grow revenue.

Our adjusted operating margin was 2.9%, and improved 30 basis points from the 2.6% last year.

We're continuing to see strong performance from our core EMS businesses, and are confident in their continued execution and growth.

Unfortunately, their strong performance and related margin expansion is being masked by continued below-normalized profitability of our Components businesses.

We're making very good progress in the operational performances necessary to improve the profitability of the Components businesses, which experienced substantial sequential revenue growth during the quarter.

Though it has taken time for these business to work through their growth issues, we feel confident that they will have meaningful contributions to profitability, as a whole, by year-end.

Our EBITDA rose $317 million in the September quarter, up 10% from $289 million in the prior quarter.

Our LTM EBITDA grew to $1.2 billion.

Year-over-year, our EBITDA rose 30%, or $74 million, from $243 million in the year-ago quarter.

Our adjusted EPS rose to $0.23 from $0.19 in the prior quarter, an increase of 21%, and was more than 75% above the $0.13 we earned a year ago.

Please turn to slide five.

Looking at the income statement items below the operating line, adjusted net interest and other expense was $21 million, down from $23 million last quarter, and $33 million a year ago.

The Company has seen the benefits of deleveraging over the past year, but we suggest, for our current quarter modeling, in the range of $20 million to $25 million to capture the interest in our new term loans and any FX fluctuations.

The adjusted tax expense for the quarter was $11.9 million, reflecting an adjusted tax rate of approximately 6.2%, which remained beneath our stated guidance range of 10% to 15%.

Our reduced tax rate in the quarter was due to some one-time credits received as a result of settling some outstanding tax audit matters and finalizing certain filing positions.

For this current quarter, we would suggest modeling approximately a 10% tax rate, which is at the low end of our 10% to 15% range.

Our weighted average diluted shares outstanding came down more meaningfully this quarter, from $824 million to $784 million, as a result of seeing the full impact of our first $200 million share buyback, and a partial impact of approximately $100 million repurchase related to our second $200 million approved share buyback.

For our current quarter, we suggest modeling 775 million shares outstanding, which takes into the account the full impact of all our buybacks to date.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS, stock-based compensation was $13.9 million in the quarter, and represented a $0.02 EPS impact.

Non-cash interest expense was $1.6 million, but is now ceased, as our convertible bonds were retired in August.

The EPS impact of this non-cash interest was less than $0.01.

Intangible amortization, net of tax, was $19.5 million in the quarter, up from $16.7 million last quarter, and also represented a $0.02 impact.

Please turn to slide six.

Flextronics' working capital management remained at industry leading levels of 12 days, which is two days less than the prior quarter and three days below the prior year.

A two-day sequential decrease resulted from achieving off-balance sheet treatment for our global ABS program, reversing the two-day increase we experienced last quarter.

We remain confident we can maintain our cash conversion cycle in a 10 to 15 day range, which we see as important, as it will allow us to continue to grow our business efficiently with significant positive free cash flow and low working capital requirements.

We believe that at these cash cycle levels, our net working capital as a percentage of sales will remain in the 3% to 5% range.

This quarter, we were at the low end of that range at 3%, which is a great accomplishment.

Inventory rose $318 million, or 9.6%, sequentially, and inventory turns improved slightly, to 8.1 turn from 8.0 turns.

We expect more improvement, once the component supply environment returns to a more normalized state.

DSOs declined one day, to 36 days, and still remain within our targeted range.

The EPO was flat at 69 days.

Flextronics' asset management continues to improve, and has driven substantial improvements in consistency in our return on invested capital.

For the quarter, ROIC increased to 31.9%, a record high for our business, well above the 22.2% of a year ago, and up from 28.8% last quarter.

Please turn to slide seven.

Flextronics generated $509 million in cash flow in operations during the quarter, marking the ninth consecutive quarter the Company has generated positive operating cash flow.

Our cash flow from the quarter was benefited by $150 million, due to the amendment of our global Accounts Receivable Securitization Program during the quarter.

Net capital expenditures for the quarter were $123 million, versus a depreciation expense of $98 million.

Free cash flow for the quarter was $385 million, or $235 million, if you exclude the impact to the amendment to our global ABS program.

During the September quarter, we repurchased 29.2 million shares for $195 million, with an average purchase price of $5.62, finishing our original $200 million repurchase plan and also executing on $100 million of our newly approved $200 million repurchase plan.

Year-to-date, we have repurchased 51.1 million shares for approximately $300 million, with an average purchase price of $5.86.

Please turn to slide eight.

We ended the quarter with $1.8 billion in cash, up $57 million versus the prior quarter, principally reflecting our free cash flow generation offset with $195 million in cash payments to repurchase common stock.

Total debt fell $162 million sequentially, mainly as a result of amending our global ABS program to achieve off-balance sheet treatment.

Our net debt, which is defined as total debt less total cash, fell to $444 million from $663 million.

Net debt has declined by over $1.4 billion, or 76% from our June 2008 level.

Our debt to EBITDA level continued to decline, and ended the quarter at 1.9, down from 2.2 last quarter, and 3.0 last year.

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

With our $240 million 1% converts now retired, our next maturity is not until 2012.

During the quarter, we also put in place $180 million in attractively priced term loans with a couple of our Asian banks.

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

Thanks, Paul.

The healthy business environment that I discussed last quarter remained intact for us, and we feel confident about the broad based strength in our business, our competitive position and the solutions we were able to offer to our customers, which remain in high demand.

Our orders and forecasts continue to improve as we approach the end of 2010.

In our upcoming quarter, we are forecasting modest sequential growth across virtually all the markets we serve.

I will expand on this in -- further when I discuss each business in more detail.

Please turn to slide nine.

Our low-volume, high-mix business were led by Communications Infrastructure growth this quarter.

Infrastructure sales were $2 billion, and represented 27% of total sales.

This segment grew a healthy 12% sequentially and came in above our forecast as a result of broad based strength across our existing customer base, new market share wins, and the lessening impact from component shortages.

In general, component shortages across our entire business moderated.

We estimate a $125 million to $150 million impact for the overall Company, down from the roughly $200 million plus last quarter.

Based on a declining number of shortage escalations, lead time trends and incremental component capacity coming online, we expect component shortages to alleviate further in the current quarter and to reach normalized level sometime in early calendar 2011.

Our September quarter outlook for Infrastructure costs for continued sequential revenue growth in the low- to mid-single digits.

Our growth is being supported by strong new bookings with both existing and new customers.

We added seven new Infrastructure customers during the quarter, and also had multiple new market share wins.

We expect the growth in our Infrastructure segment to continue over the next several quarters, and remain confident in our double-digit growth forecast for the fiscal year.

Industrial, Automotive, Medical and Other comprised 20% of total sales, down from 22% last quarter, which was the fifth straight quarter this combined group achieved sequential growth, and its 30% year-over-year growth rate ranked second only behind Mobile.

Our Industrial segment was stable during the quarter, in line with what we forecasted.

We had another very successful quarter of new program wins, which totaled over $250 million and were spread across the diversified base of customers and markets.

We continue do be optimistic about all the various areas of our Industrial segment, including kiosk capital equipment, clean tech, meters and controls, appliances, aerospace and defense.

Overall, we remain very well positioned in this segment.

Our Medical segment strong performance continued this quarter, growing sequentially in the high single-digit range, setting new quarterly and monthly revenue records.

Medical growth was driven primarily in our medical equipment and consumer health and diabetes businesses.

In general, our major new program ramps are either on or ahead of schedule.

Medical has booked close to $150 million of new medical [increase] in the first half of fiscal 2011, and it seems even more attractive sales pipeline ahead.

We see low single-digit sequential revenue growth for Medical next quarter, which translates to a roughly 30% year-over-year growth rate.

As a result, we'll also be expanding our Medical presence by opening a new operation in Malaysia.

We expect to announce the details in a press release shortly.

The momentum in our Automotive group continued as its record -- as it recorded its fourth straight quarter of sequential growth.

The demand environment has remained strong, especially for our premium European car customers who are seeing significant growth in the APAC region.

Our group continues to have success winning new in-car connectivity and interior lighting programs, where we focus and have a strong confidence.

It was also announced during September that Flextronics Automotive was selected to be the global manufacturing for Brammo's electric motorcycles.

We believe we are very well suited to pursue and win additional business in the electrical vehicle technology market, as it grows and matures.

Mobile sales expanded another 15% sequentially to $1.5 billion, or 21% of sales, which was ahead of our expectations, as improved seasonality and multiple new program wins drove the majority of the segment growth.

For next quarter, we see this segment growing further, increasing mid- to-high single digits sequentially.

In Computing, we posted $1.3 billion in sales, which accounted for 18% of our revenue.

This segment rose 6% sequentially, and, during the quarter, we launched two new all-in-one programs into full volume.

We also had two other mobile commuting programs ramp to full volume.

Our Enterprise Server and Storage business also grew again sequentially, as we saw solid growth across a number of different accounts.

For the December quarter, we are forecasting consistent levels of overall production.

We still expect to achieve our long-term growth rates for our ODM business.

Consumer Digital rose 49% sequentially in the September quarter, a further acceleration off a 15% sequential growth in the June quarter.

The segment ended at $1.1 billion, or 14% of total sales.

New program ramps and favorable seasonality were the clear drivers of growth.

For the December quarter, we are currently forecasting modest single-digit growth, as a majority of ramp-ups in the segment took place in the September quarter in order to get products built and into the supply chain for holiday consumption.

Our Components business is comprised primarily of Multek, Vista Point and Power.

All three have continued to perform below optimal levels.

As we discussed last quarter, our Components business are in the midst of a significant revenue expansion, and we anticipate the revenues growing in excess of 30% from fiscal 2010 levels.

This steep growth has proved challenging, due to the complexity of the products and the processing involved.

Our strong revenue expansion in our Components business is an endorsement from our customers that we have the right capabilities and products.

Now, it is up to us to expand margins through the fiscal year and into next.

On a positive note, Multek continued to make improvements, and we are confident in its growth outlook.

Flex Power also saw its operating loss shrink as we continued to make progress in the relocation of manufacturing to inland China, in addition to winning multiple new adaptor and charger designs, including a few for tablet products.

Vista Point saw its quarterly revenue double sequentially.

This was much deeper sequential growth than experienced in June quarter, when we grew over 40% sequentially.

We made significant progress in improving yields and efficiency for our Camera Modules division, and expect improvements in profitability beginning this quarter.

Our Global Services business focused on after-markets activity such as logistics, repair and warranty and service parts logistics.

This business continues to improve on a quarterly basis and our capabilities continue to grow.

We have announced several more operations in India, expanded operations in Europe, and were recently awarded the Brocade Service Partner Award for the service of all their SAN and IP switches.

Our Regional Technical Services, or RTS business, provides competitive and flexible field services for customer operations such as Verizon, American Express Open, Systemac and AT&T.

Also, during the June quarter, RTS launched our new branded Firedog business.

The initial launch has gone well, and the customer satisfaction ratings are very high to date.

Firedog fits nicely into our services portfolio, and is focused on business-to-business and business-to-consumer field technical service.

It also provides in-store, in-home, phone and web-based installation, maintenance and support services for electronic products.

You can find more information on this new business at www.firedog.com.

We ended up with the quarter with two customers slightly over 110% of sales, RIM and HP.

Now, returning to our guidance in slide ten.

Our guidance is for revenue in the range of $7.5 billion to $7.7 billion, which corresponds to a sequential growth rate of 1% to 4%, and is up 2.5% at the midpoint.

We expect our adjusted earnings per share to be in the range of $0.23 to $0.25 versus the $0.23 just reported.

Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.04 for our intangible amortization expense and stock- based compensation expense.

Please turn to slide 11.

Key takeaways.

Our second quarter continued a record -- a recent trend of broad based revenue and profit growth.

For the quarter ahead, the midpoint of our guidance range once again points to continued growth and revenue, operating income and earnings per share.

Our key takeaways are as follows.

First, we delivered strong sequential and year-over-year revenue growth of 13% and 27%, respectively.

Also, every market segment and business unit posted quarter-over-quarter and year-over-year growth.

Second, we experienced continued profitability and EBITDA growth.

Our adjusted operating profit rose 12% sequentially, and 43% year-over-year.

Adjusted earnings per share has grown even faster, rising 21% sequentially and 77% year-over-year.

We've also seen our LTM EBITDA increase to $1.2 billion, which is up 7% over the prior quarter and 37% over the prior year.

Our debt to EBITDA ended the quarter at 1.9 times, down from 2.2 in the prior quarter and 3.0 a year ago.

Third, ROIC entered the quarter at 31.9%, our highest level ever, and up from 28.8%.

And lastly, our strong cash flow and free cash flow that we generated has fueled our recent stock buybacks.

During the quarter, we generated $509 million in cash flow from operations, and $386 million in free cash flow.

We also purchased $195 million worth of stock during the quarter.

Now, I'd like to open up the call for questions.

Operator?

Thank you.

(Operator Instructions).

And our first question will be from [Amit Tasi].

Your line is open.

Thank you.

Can you hear me?

Yes.

First question was, gross margins came in about 30 basis points down sequentially.

Was that purely a function of mix given how strong Consumer was?

Any [incremental] color in terms of what might have affected the margin performance in the quarter?

Yes, Amit, it's Paul.

Yes, that's correct.

It was a big season ramp for the Consumer products, so historically, if you look back, it's always had a negative impact on gross margins for us.

So, that's principally the reason there.

So Paul, would you expect some of that to maybe reverse as we go into the December quarter?

Yes, I think it can.

September and December are fairly similar.

But I think that will see a little bit more of a balance out in the December quarter.

So, hopefully we'll see some improvement there.

And then perhaps for you, Mike.

You talked about particularly in your Consumer and your Telecom Infrastructure segments, new consumer wins that allowed you to perform pretty well in the quarter.

Could you shed some light on what these programs are -- well, I'll leave it there.

If you could shed some color on these two segments and what the new program wins are.

Yes.

As you know, we don't normally announce new program wins unless we get authorization from the customer to do so.

What I can tell you, is the existing customers, the progress in the ramps that they had were well above -- I wouldn't say well above expectations, but above expectations.

And I think we saw a little bit more of that happen in the September quarter, where normally it happens a little more in the December quarter.

So, I don't know if they're pre-building for the Christmas season, putting more on the [sea], which we think might be part of it.

But, we saw very significant strength in the September quarter and much more than our normal seasonality, and I think it tended to [fuel] some of the growth in the revenue above expectations.

I can, in general, say the existing customer base provided a lot of that growth.

Okay.

And one final question.

On your Components business, you talked about having made some progress.

Again, could you perhaps elaborate?

How should we think about the margin progression as we go from fiscal 2011 into fiscal 2012 for your Components?

Yes.

The September quarter we thought would be a difficult quarter from a profitability standpoint because we were right in the middle of very significant ramps and also simultaneously working to improve operations.

So, in the Multek area, it's going along fine.

So, I don't think there's any real transition that we need to make.

It has continuously added revenue, which has continued to add additional profitability.

So, I think Multek is well on its way.

We probably in our Company don't need to really focus on it too much.

We think that one's making good progress.

In the Power, it got hit particularly with direct labor, as we talked about last period.

We've got the inland strategy underway.

We have multiple new wins that are improving the topline.

And between the two of those, we also think that's making nice progress.

So, once again, we expect just continuous improvement there.

Vista Point was a little bit different.

We were implementing new process technologies that were challenged with yields.

Revenue doubled quarter-on-quarter.

We focused very heavily during this quarter and last on improving those operational efficiencies.

And these are very significantly improving, so I would say that we've almost had a [change] during this quarter for the operational efficiencies that we need to move this thing into profitability.

So, between the three of them, they're all on a positive track.

And while September was difficult for us, we'll expect to see continuous improvements going forward.

So, [I believe with] with those occurring starting next quarter, I expect them to carry on for the next few quarters.

Thank you.

And congratulations.

Thank you.

Our next question comes from the line of Matthew Sheerin with Stifel Nicolaus.

Your line is open.

Yes, thanks.

Mike, you talked a little bit just now on some of the seasonal trends, and it looked like in the September quarter you had some customers that were better than normal, maybe pulling in.

Does that account for the fact that your guidance seems to be a little bit less than seasonal than what you've seen in prior years?

Or, is it the mix is different now?

Yes, I think in one case, we did have a strong September, as we talked about, we're up 13% sequentially.

And a good part of that was Mobile and Consumer.

Going forward, we see a little bit less seasonality in the December quarter.

I think that's partly because it's moved into September.

But the other thing I would say is, in general, we're going to be a little bit less seasonal as a Company.

We've kind of alluded to that.

There's really two implications of that.

One is, December is going to have a little bit less pop.

At the same time, we think March is also going to reflect a little bit more stability and a little bit less of that seasonal downturn that we've had in the past.

So, I think you're going to see both those effects, not only a slower December, but I also think you're going to see a better March.

Okay.

I wanted to get back to the issue on the Components, because I think it's an important part of your margin expansion story, and your operating margins have been sort of capped here below 3% despite very strong revenue growth.

So, I guess the question is, could you give us a little bit more granularity in terms of what kind of margin goals you have for the different Component divisions.

And when they get to those targets, what would the overall operating margin of the Company look like relative to what it looks like now?

Yes.

It is Paul, Matt.

So, we think that it's certainly negatively affected us for the last few quarters, and as they work through these really big ramps in revenues.

We think going forward, we had a very good month in September, which was very encouraging from an operational perspective, to see that things are kind of getting on track.

So, they will start to contribute more positively now through December.

And certainly by year-end, I think that we'll see a good, meaningful contribution.

But I think we're looking to next year in fiscal 2012.

As I outlined back in the analyst day back in May, [kind of] the size of things, when these businesses are running at 4% and everything else with revenues and mix being equal as I outlined then, we're going to be running margins in the mid 3% range.

And that's still what we think about, the way it should contribute.

Certainly, the Components are going to be a contributor for a majority of the way toward that from where we are today.

But also increased revenues and obviously, the quarter that we're in, the mix that we get is important, as well.

Okay.

That's helpful.

Thank you.

Next, we have a call from Sherri Scribner, with Deutsche Bank.

Your line is open.

Hi, thank you.

I think I'll follow up on the Components question, Paul, talking about getting the Components businesses back to 4%.

How many quarters do you think that takes.

Is that a two or three-quarter phenomenon?

How long do you think that takes?

Well, they're going to make steady progress.

I would have thought that we'll see that go [into] next year, next calendar year would be our target, to get them up to those levels.

They're certainly showing great signs of improvement, December quarter over March quarter.

But it's real early days to say.

They're heading in the right direction, which is very positive for us.

Okay.

And then in terms of your cash priorities now, clearly you're buying back debt and you're doing share buybacks, which are all good for investors.

What do you focus on now as you continue to generate cash over the next couple of quarters?

We still like to be in a good cash -- strong cash position.

$1.8 billion is strong.

We've hovered around $1.8 billion to $2 billion for some time and feel pretty comfortable at those levels, having some dry powder to be opportunistic.

Both in the debt and equity markets, we have a number of M&A opportunities available to us.

They'll be typically tuck-in, small in nature.

But we're a pretty big Company [running] very diverse operations.

There's a lot of things that we will look at that will be very good to bolt on.

I think that you'll see us kind of running around these levels.

We'll fluctuate quarter-to-quarter with some working capital needs.

We still have authorization for $100 million remaining of the $200 million share buyback program that we'll constantly look at.

Great.

Thank you.

Thanks very much.

Steve O'Brien with JPMorgan, your line is open.

Hi, great.

Thanks for taking my question.

There's been a fair amount of written concern over the IT and computing industries.

And maybe we're biased towards Western Hemisphere.

Mike, if you could touch on what you're hearing from customers there in terms of inventories, at the OEMs, at the distributors.

Because it seems like there's not really a correction here implied in guidance, so there's not some kind of slowdown to catch up to demand.

I think that's a pretty broad set of categories.

But, clearly, we read the same thing you guys do.

On the IT front, we have a pretty broad based position.

I would say it's probably broader than anybody, all the way through into the Chinese customer base.

So, a lot of where you see weakness in some of the US and European customers, you see some strength in the Chinese customers.

So, some of that balances out for us.

So, it may not impact us much at all.

If you look at our Infrastructure business, which is very, very heavily dominated by telecom -- maybe not heavily but it's equally datacom and telecom, we see pretty strong growth.

We've had at least four straight quarters of increasing revenues.

We see for the next three or four quarters, probably continuous increases in revenues.

For us, being as balanced as we are across the world demand, we actually feel pretty good about it.

We have a very diverse portfolio, we have a very strong market position, and with the broad base of customers, I actually think we outperform the market pretty well.

We haven't been real nervous about that, and haven't really been taking much in the way of any customers' downsides.

On the Computing business, you've seen a lot of comments all the way from the Best Buy CEO all the way through to whether the tablets are infringing on that space.

It's still a growth business.

And as that business changes, whether it is notebooks, or netbooks, or tablets or smart phones, no matter what the dominant trend ends up being, we end up participating in it.

So, we're in all those markets.

It's definitely a new benefit that we have as a result of being in the computing business -- or in the PC business -- and we'll take advantage of those trends.

So, for us, it's going to be significantly up.

We're continuing to pursue the PC business pretty aggressively, and we expect to [double-up] the business again next year.

So, for us it's up.

While there may be trends down, at the same time we can offset those downward turns with kinds of businesses or customers in different regions.

Great.

And if I could just clarify, so the $2 billion to $4 billion revenue goal is unchanged.

And then also, on the tablet side, I just want to maybe follow up to your previous answer and ask, the Asia ODMs have certainly made a lot of noise about their positioning within tablets.

Do you feel Flextronics is also getting its fair share of tablet business here?

Or, does the ODM notebook strategy need some fine tuning based on the potential for tablet cannibalization of the market?

Well, we use the same base of design engineers to work on both.

The fact that we have such a strong position in smart phones, along with a developing position in computing, kind of puts us right into the sweet spot of these kind of products.

So, we feel that we're very well positioned.

We are not producing and we are not manufacturing tablets today.

We have some in design, which we will be producing.

But, those have not hit yet.

So, as far as whether we're positioned exactly the same way, I don't know.

But being a computing Company that also has a real strong position in smart phones, is actually extraordinarily helpful.

We think as this transition occurs, if you will, and new product categories seem to be developing, we actually feel pretty positive about it.

The other thing, too, that you have to keep in mind, as we participate in these kind of markets, like the tablet markets, we are now doing flex circuits, we're [offering] circuit boards and we're doing power products off those businesses.

That positions us kind of nicely.

Because, where we did do raw printed circuit boards in the computing business because it's just a different, lower end technology, the tablets actually use a smart phone kind of technology in the printed circuit board business.

And we're very well positioned in that place.

So, as a result, we think it's going to actually help our growth rates go forward with Multek.

But to answer your first question, yes, the $2 billion to $4 billion is still on track, and that's our expectation and we feel quite comfortable about hitting it.

Great.

Thanks.

William Stein with Credit Suisse, your line is open.

Great, thanks.

I'm wondering if you can give us an update on component lead times and ASPs as you see them, certainly in your Components business.

What you're able to do with customers, but also what you're facing from suppliers?

There are a lot of different components, but on average, they're starting to come down, and we expect that trend to continue over the next couple of quarters.

So, we think --

Lead times now?

Yes.

Lead times.

Lead times are starring to come down.

So, I think once again, the capacity of the industry continues to get closer and closer to the actual demand.

Our shortages are mitigating the amount of escalations that we chase on a daily basis are going down.

And we think you've probably two more quarters before everything's kind of in balance again, is what our best guess is.

Once that becomes more and more in balance as it approaches towards that balance, I think we'll see lead times come in.

Thanks, Mike.

But typically along with that trend, you see ASP erosion accelerate.

Have you seen that at all yet?

What are your thoughts on that?

I think there'll be a little bit.

Yes.

I think that's consistent with our thinking.

That ASP erosion is good for our business, by the way, as those prices come down.

We usually view that as positive.

But I think that for sure goes hand in hand with lead times coming in.

Then one quick one, if I can, on inventories.

The result was fine.

I think this quarter you've had fairly stable inventory days over the last couple of years.

Should we expect this to change significantly over the next few quarters?

We would expect probably continuing improvements.

I think the current base of business running at roughly eight turns is probably about the right number.

But, I think as we move our business, or as we pick up more computing business, we're going to run those even faster.

So, as we build a balanced portfolio of all these different product categories, one of the characteristics is going to be a little bit stronger inventory turns.

So, I think once we get past the March quarter, which typically dips a little bit in inventory turns, I actually think you'll see a little bit of a pick-up in inventory turns.

Great.

Thanks, Mike.

You're welcome.

Amit Daryanani, of RBC Capital, your line is open.

Thanks for taking my questions.

If I could just continue on the inventory question, looks like on a dollar basis, the inventory was up quite a bit sequentially.

Could you talk about what drove that, especially given the fact the September quarter [guide] doesn't provide any big robust revenue uptick?

Amit, so, yes, it is up roughly 9% or 10%.

You're right, the midpoint of the guidance is less than that.

I still think we're working through some challenges in the supply chain that's making us run a little inefficient.

The shortages out there, we probably ran around $125 million, $150 million of stranded [revenue] at the end of the quarter, down from the previous quarter.

So, it's getting better.

It'll probably, like Mike said, take another couple quarters to get it there, and you'll see that ease off.

What we focus on are the inventory turns.

Turns were up, 8.1.

We expect the turns to be up in December again.

And like Mike said, next year as we get a different blend or business is a little bit more computing, we'll see the turns increase, as well.

So, we're actually feeling pretty good where it is.

It's working well for us.

And then, if I could go back to the component issue.

I may have missed this in the whole discussion, but are you guys breaking even currently?

Are you convinced at least on the camera side, the issues you have are not a reflection of the pricing that you guys initially implemented, and just true internal yield issue?

On the Components businesses, I like to think the worst days are behind us.

We were losing money, so I don't think that's a feature going forward.

We'll start to make some money now hopefully.

On the camera side, I don't think it's an ASP issue.

This is just about real extreme product ramps doubling the business quarter-over-quarter and getting to grips with the yield issues.

We had a pretty good September, so feeling pretty positive about the go-forward situation.

And finally again on the Components, are you seeing any impact from commodity and [rage] inflation, I guess more on the commodity side, being another headwind on the component margins?

It's a temporary headwind.

For sure, where we're building in China, for example, we're seeing a supply base increasing costs and of course, with us producing components, it's the same thing.

So, it takes some time to work through that with customers.

We've had some success with that over the last quarter and we continue to work on that.

But, there is somewhat of a lag and delay, which is reflected in our results here last quarter.

Got it.

Thanks a lot.

Thank you.

Shawn Harrison, of Longbow Research, your line is open.

Hi, afternoon.

A few clarifications.

Afternoon.

Just a few clarifications.

In terms of March quarter seasonality looking at what we've so far year-to-date, you've bee kind of twice as strong as typical for the second quarter.

It looks like half as strong for the third quarter.

Does that mean that, particularly that mid-teens type of decline you usually witness in the March quarter could maybe be half that range this year?

Yes.

That's correct.

I think that's a good way to think about it.

It would be significantly less and maybe half, so a good number to think about.

Okay.

And then two brief follow-ups.

Capital spending, it was targeted at $350 million to $400 million this year.

Is there any update on that?

And the other question is on operating expenses.

Where do you think -- at what rate can you take revenues up to before you start seeing a pretty larger movement in operating expenses?

I think for the full year, we'll be around $400 million in capital expenditure, [having to support] large growth this year and next year.

You'll see us probably spending out depreciation levels which is roughly $400 million, and that's in line with what we've been thinking.

In terms of operating expenses, I would that we'll be running in that $190 million to $200 million for the quarter.

There is some uptick that we're seeing, of course.

Growing revenues like we are, it's inevitable.

But it's under pretty tight control, but we will see a range between $190 million and $200 million.

Okay.

Thank you.

Thanks.

Craig Hettenbach with Goldman Sachs, your line is open.

Great, thank you.

Can you talk about on the computing ODM, just progress [for just] initial expectations in that market?

And also, any milestones we should be watching over the next year?

Well, from a revenue standpoint and our customers accepting and supporting us, investing into the market, we were right on target.

We've continued to believe that we'd be a $1 billion, $2 billion and $4 billion for the three-year period.

That's always been our objective.

That's right on the nose, and we thought we'd get good acceptance from our OEM customers.

So, I think all that has gone very close to plan.

The only thing I would say that's not gone to plan, is that here's been a deterioration on the average profitability of the entire ODM industry over the last, say, three quarters.

We didn't anticipate that going in, and I feel that there's been a whole percentage point drop in operating profit in that industry.

So, I think that's the surprise.

The good news is, we're making the progress that we thought we would and booking the business we thought we would.

The downside is, the result at the end of the tunnel might not be as strong as we had hoped.

If you follow any of our past correspondence, we always said once we got up to $4 billion or $5 billion, that we would expect to be at roughly industry-average profitability.

So those are the two real considerations we look at.

Just a follow-up on that.

If pricing does remain challenging, what is your view of the trade-off between getting to those targets, or at least the time it might take you to?

Would you be more selective, or is it more about ramping up to that scale?

Well, I think you need to ramp to that scale to leverage the R&D expenses.

As we ramp, our contribution margin dollars, even for 1.5% instead of 2.5%, our contribution margin dollars will still be positive.

So, for us in the stage that we're at, I think we need that volume to amortize our expenses.

Now, at the same time, we still think there's a lot to do with this business.

We have a lot of other businesses that are related to this.

The whole tablet business, like we talked about, being positioned in the computing business actually enables us to be positioned into the tablet business.

So, as different trends in the industry occur, I think you need to have these markets as some (inaudible) to be in.

One other thing I might add, too, in terms original expectations in the computing business relative to actuals, we always anticipated that we would run this business without burning cash.

So, what that means is, we always thought our net working capital would be zero.

In fact, this last quarter we actually hit a negative eight days of working capital running the PC business.

So, one of the things to think about, as you are in this business, we're actually not burning cash.

It's one of the reasons you see a lot of cash generation out of the Company.

We're not going into a business that actually consumes cash, otherwise we wouldn't be in it.

As long as we don't conserve cash, and we can have a position in the industry, then our strategy is to be selective and to make sure we don't chase these down.

I also believe that there's been kind of a temporary disruption in the business.

I'm not sure that that -- with a lot of competitiveness from certain competitors.

And I'm not sure that condition is going to exist in another year.

I think we may very well go back to a more normalized level of profitability in the ODM business.

I am actually reasonably positive that we'll return to a more normalized level.

Okay.

And then, following up on the comments about IT demand, are you able to distinguish new program ramps that you're winning versus the overall demand environment?

What you're seeing?

What customers are saying into year end?

Well, almost everything we have is new programs, just based on the maturity of the business.

So, we for sure see that.

So, we don't run per the industry.

We're growing the business 100% this year, we'll grow it 100% next year.

We don't run with the industry yet because we're too small as percentage of total revenue in this industry.

So, what we see is mostly new product ramps, and then sometimes those ramps hit the targets that the OEM has laid out, and sometimes they don't.

But a lot of times it's [more] product-by-product specific as opposed to an industry characteristic.

I'm sorry.

I meant the overall business, the traditional EMS business.

Sorry about that.

Okay.

Say again, what about the overall EMS business?

Demand, trends and what you are hearing from customers versus the influence of new programs that might be helping you.

All right.

Yes.

I think that's a good question.

We see both.

What we in general -- our business grows from the macro economic factors, as well as any new product categories that we can bring on with EMS or any new incremental outsourcing.

Certainly, we see somewhat of a slowing in the base EMS business.

If you look at a lot of the data that's come out, of the companies reporting over the last two weeks, it seems like a lot of them are pointing to a flat quarter, which to us, is just a little bit slower growth.

We spend a lot of time trying to figure out how we grow our business incrementally, which we think is possible and we think is likely.

So, we're adding new product categories.

So, how much of it is just the macro economic effect and how much is market share and new product category, it's probably hard to say.

We're probably getting -- more of our growth next year will come from new product categories and market share wins than it will from just general macro economic effects.

Okay.

Thank you.

Thanks.

Jim Suva, of Citigroup, your line is open.

Thanks, and congratulations, gentlemen, for a great quarter.

I wanted to ask a quick, kind of detailed question about the upside to the sales this quarter.

They really came in extremely strong, anywhere between $600 million to $400 million compared to your outlook, depending upon low and high guidance.

Can you maybe help us better understand the magnitude or percent of the upside, not the total for the quarter, but the upside relative to your expectations, such as, was Consumer half of that?

Or was Mobility half of that?

And then I'll probably have a quick follow-up.

We probably ended up with about half that business being just the Mobile Consumer businesses.

And probably the other half of it just being pretty good strength across the other businesses.

And I'll throw in one other effect, Jim, which is the fact that we think we picked up a little bit in terms of the component shortages.

We probably picked up an incremental $100 million from some of these component shortages clearing.

So, between the $100 million of component shortages clearing, and then the rest of it being 50% maybe from the consumer mobile, because that was stronger and sooner than what we normally see, and the rest of the 50% percent came from the other business units.

You mean Mobile Consumer as in two segments, right?

Yes.

If I bundle those together, which are the two that normally have very strong seasonal ramps, those seasonal ramps were quicker and sooner, and more that occurred in the September quarter, it seems.

Okay.

Was it more Consumer or Mobile?

I'm not sure which, but they're both up pretty strong.

If you look on the -- we provided some of that data.

Consumer Digital was up 49% quarter-on-quarter, and Mobile was up 15% quarter-on-quarter.

Although Mobile is a little bit of a bigger product group.

Okay.

Then my last quick part is, when you look at your Mobile Computing segment, it's pretty clear that you have a very strong customer there that represents over 50% of that.

Is your strength being driven primarily by the strength there, or more diversification efforts?

Because there is a fear out there that Flextronics has a very high concentration of that segment tied to a particular customer that people like to avoid risk.

Yes.

I'd just say it's both.

I actually don't know the breakdown, but we had -- with a 49% growth, it is not just off of one customer, it's pretty broad-based to be honest with you.

We do have a large concentration, but it -- I don't know if we know the answer.

Maybe we can get back to you on that, Jim, and give you that number.

Great.

Thank you, and congratulations to you and your team.

You're welcome.

Brian Alexander, of Raymond James & Associates, your line is open.

Yes, going back to an earlier comment, Mike, about the lower expectation for profitability in the PC business.

I think you said that last quarter.

I wanted to confirm that nothing has changed since then.

Then also, it didn't sound like you're really leveraging your vertical capabilities in that business given your commentary around PCBs.

So, I'm just clarifying.

Is that a change in strategy, or is that consistent with your original intention when you entered that market?

Yes.

So, I would say it is -- first of all, I have said that last quarter, and I think I also said it when we did our May annual day, that the general profitability of the entire industry is off.

So, that's correct.

That's pretty consistent with what we've been seeing the last couple of quarters.

As far as not leveraging things, we'd never expect to leverage Multek very much, although going forward in the tablets, we will be leveraging Multek.

So, there are some categories that we just weren't planning on leveraging.

Certainly, Power was something where we planned on leveraging.

Certainly, our worldwide system to do worldwide repair and service and all that, we certainly expected to leverage.

Camera Modules, we originally anticipated leveraging pretty significantly, but I can tell you we backed off on that quite significantly.

The reason for that's pretty obvious.

We have so much smart phone business that's going [through] the Camera Module business, we just can't handle the design-in activities necessary to also be in the laptop business.

So, once that turns around, we'll change.

So, I would say there's a number of things that we planned on leveraging, and a number of things that we didn't.

So, I don't think it's much different than our original expectations.

Okay.

Then if I just extrapolate from the guidance for computing for the December quarter to be roughly flat sequentially and then make my own assumption about the March quarter, it looks like if you're going to add $1 billion in the PC business year-over-year, it implies the rest of your computing business is declining.

So, could you just drill down on that and help us understand what's going on in the rest of the Computing business?

Well, we've been up the last couple of quarters.

Going forward, we actually do expect some deterioration in the high-end computing business, like in the storage and servers, and most of that's gong to be driven by Sun.

So, Sun is in the process of redistributing its supply base a little bit.

So, there's a significant chunk of that business that will move out of Flextronics.

So, that is going on simultaneously with the ramps on the [Computing] business.

So, that's correct.

But the other businesses are all pretty strong.

I think it's mostly the Sun effect, but still expecting net gain out of it, of course.

And then finally just to clarify, the message on the Components business sounds fairly consistent with what you said a quarter ago, which is you saw sequential improvement in profitability, or the rate of loss, in all three of the sub segments.

And you're still on track to be above breakeven in the March quarter.

I just want to make sure I understand that correctly.

That's correct.

There's nothing different than expectation.

We expected September to be difficult, and we expected that to be a transition quarter for us.

And now we expect continuous improvements, and certainly profitability by the March quarter.

Great.

Okay, thank you so much.

You're welcome.

And Lou Miscioscia, with Collins Stewart, your line is open.

Okay, thank you.

Question on the improvement in revenue quarter-to-quarter.

It looks like you're getting pretty decent margin contribution from that.

Is it above 10% quarter-to-quarter as you look out to December?

No.

I don't think it's above 10% in contribution margins.

No, I don't think so, Lou.

It's somewhat seasonal here in the December quarter.

And then, obviously it drops off a little in March.

From a net income, EPS perspective, for sure it's very additive.

Okay.

And then just a follow-up question, on the last earnings call there was obviously a lot of questions about the wages going up in China.

Obviously, with the numbers that you put up in the guidance, obviously no one has really asked the question.

Maybe you can give us an update how that's playing out.

I know you did say last quarter that it was just a normal part of your business.

But an update there would be helpful.

Yes.

We didn't talk about it just because this could happen over and over and over again.

It's just not in a condition that we should be whining about.

It's just is something we have to deal with and manage.

It's affected us most heavily in Power, which we talked about, and we have a number of different activities associated with that.

Some of our activities have been to offset it with productivity gains.

We've actually gone back and pushed pretty hard with customers in a number of different products for price increases.

So, all three of those activities have been going on pretty aggressively.

It's certainly a headwind; it's certainly affecting us this quarter.

It's part of the normal course of business.

So, we're dealing with it.

Okay.

And the final question on the pull-in for September, on the consumer stuff, is it basically more stuff is going on the sea?

And maybe that's why you've got so much more pulled in?

Or just anything else.

Then that's it for me.

Thanks.

We don't have real good quantitative data on that, but that is exactly our feeling.

We're starting to see earlier production and more going on the sea.

Maybe it's the cost of capital is so low for a lot of the companies that they're less concerned about committing that inventory to the sea.

But, we actually do agree with that statement and think that's exactly what's going on.

That's what I've been hearing from my OEM contacts.

Okay.

Thank you.

Operator, we will take this question and one final question after that.

Okay.

Alexander Blanton, with Ingalls & Snyder, LLC, your line is open.

Good afternoon.

Hello?

Yes, good afternoon.

I 'm sorry.

I guess you're on -- I don't know whether you are on speaker or not.

We can hear you, Alex.

Go ahead, Alex.

Okay.

I wanted to ask about -- or just make a comment and then ask you, about the 3% working capital to sales ratio.

What would you say the CapEx for your incremental investment would be?

Say it is 5%.

That means that your incremental investment is 8% of every sales dollar.

So that if you only earn a 4% return on the sales, that's a 50% return on investment, is it not?

I mean, if you earn 3%, then it's very high, also.

So, doesn't this really speak to the fact that you have a business that is -- where the materials are largely a pass-through.

And so, looking at the margin based on the sales dollar is really misleading?

Yes.

Well, first of all, Alex, I'd say that you're right.

Working capital is going to range 3% to 5%.

Capital expenditure, on a typical growth year, 10% to 15%, we'll spend roughly our depreciation, which is about $400 million.

So, you're looking at anywhere from 7% to 10% of sales in terms of cash needed to invest in the business for that sales growth.

And with a minimum 3% return on that, obviously it's a very accretive model and so our ROICs are 31%, 32%, and our cash bonds, builds, et cetera.

So, it's certainly very attractive for us as a business model.

Yes.

Well a 3% margin would be about 38% return on incremental investment.

Yes, it would.

And secondly, I wanted to ask you about the seven new customers you got in the Infrastructure business.

Is there anything you can say about that?

Not who they are specifically, but what kinds of infrastructure?

Are they large, small?

Give us some flavor for it, because that's a very interesting number.

Since you already have 50% or so of all of the outsourced Infrastructure business, you are picking up seven new customers.

That is a pretty good achievement.

Yes.

Alex, we think we have an enormous market competitive advantage in Infrastructure customers.

We already have all the big ones, not necessarily the number one market share with all the big ones, but with many of the big ones, we have the largest, or very, very large market share.

So, as we go to build our business and diversify it, we actually like taking some of the newcomers.

We think having companies that have $100 million businesses, or that may be able to grow up to $500 million, is an attractive way for us to continue to fill our factories.

We have a system that enables us to go take those low volume, high mix customers which tend to have a little bit better profitability simultaneously with the big guys, and be able to service them very effectively.

We like having it.

We like the diversifications, we like the little bit higher margins.

We certainly can create a lot of value for those set of customers as a result of our capabilities and size.

So, we'll continue to chase them.

We really like the low volume, high mix business.

They're part of it.

Okay.

Thanks.

You're welcome.

And you said you have time for one more, correct?

Correct.

Steven Fox, with CLSA, your line is open.

Thanks, good afternoon.

I'll keep it brief.

Very quickly, just to understand when you say that by the end of the end of calendar year, the Components business will be achieving acceptable profitability, can you provide more detail on what type of benchmarks we're talking about, that you'll be at?

We think at -- why don't we say the end of the year [and we mean the fiscal year], so a couple more quarters.

They're definitely pulling themselves out of the hole from last quarter.

They had a good September month.

We'll see them start to contribute, and more meaningfully contribute, probably in the March quarter.

And then next year, next fiscal year for us, gets to their target ranges that we talked about before.

So, gradual improvement, and a very positive improvement for us for the next few quarters.

Not to pin you down, but do they all exit the fiscal year in the black, at least?

Yes.

Okay.

Thank you.

Thanks.

Thank you.

Thanks, everybody, for attending.

Thank you.

That concludes today's conference.

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Thank you for participating.