Flex Ltd (FLEX) 2011 Q3 法說會逐字稿

Good afternoon and welcome to the Flextronics International third 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 call over to Mr.

Kevin Kessel, Vice President of Investor Relations.

Sir, you may begin.

Thank you Victor, and welcome to Flextronics' conference call to discuss the results of our fiscal 2011 third quarter, ended December 31, 2010.

Joining me on the call today is Chief Executive Officer Mike McNamara, and Chief Financial Officer, Paul Read.

The presentation that corresponds to our comments today is posted on the Investor section of our website under the Conference Calls & Presentations link.

And it can also be accessed directly from our homepage.

Our agenda for today's call will begin with Paul Read reviewing the financial highlights from the third quarter of fiscal 2011.

And Mike McNamara will follow up with some insights on our current business trends and conclude with our guidance for the fourth quarter of fiscal 2011 ending March.

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, business prospects of our market segments, expected benefits from new business wins, and expected improvements in profitability of our components' business units.

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 12 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 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 to the earnings press release and the GAAP versus non-GAAP reconciliation in the Investor section of our website which contains the reconciliation of the adjusted financial measures, the most directly comparable GAAP measures.

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

Paul?

Thank you, Kevin.

And welcome, everyone, to our call.

The third quarter was another solid quarter for Flextronics with revenue exceeding the high end of our guidance range of $7.5 billion to $7.7 billion by $133 million, which represented -- which resulted in 6% sequential increase.

We continued to see broad-based year-over-year growth across all our market segments, and almost all segments saw healthy sequential growth for the third consecutive quarter.

Our growth continues to be principally driven by new outsourcing programs with both new and existing customers, market share gains, and the extension of favorable seasonal trends experienced by our mobile and consumer digital segments during our September quarter.

Adjusted operating income was $232 million, up $19 million or 9% sequentially, and 23% above the $189 million of a year ago.

GAAP operating income was $219 million, up $20 million or 10% versus the prior quarter and 31% above the year-ago level of $167 million.

Adjusted net income for the third quarter was $193 million, increasing 8% sequentially from our second quarter and 40% from $138 million a year ago.

Our GAAP net income for the quarter reflected a $35 million benefit from the favorable settlement of certain tax litigation and also includes the impact of intangible amortization and stock compensation expense.

Our GAAP net income was $198 million, expanding 38% from last quarter's all-time record result and more than double the $93 million from a year ago.

We reported adjusted earnings per diluted share for the December quarter of $0.25, which was at the high end of our EPS guidance of $0.23 to $0.25, and grew 9% sequentially from $0.23 last quarter, and close to 50% from the $0.17 of a year ago.

It's also noteworthy that our GAAP EPS is $0.26, marking a new record for the Company and eclipsing the $0.18 we delivered last quarter by a wide margin.

Please turn to Slide Four.

Adjusted SG&A expense totaled $204 million in the quarter, up $16 million sequentially and $34 million year over year on revenue increases of $411 million and $1.3 billion respectively.

Adjusted SG&A dollars trended slightly above our targeted range of $190 million to $200 million due to increased discretionary investments in design and engineering resources as well as other general infrastructure costs necessary to support our anticipated future growth.

As a result, our SG&A, as a percentage of revenue, rose slightly to 2.6% from 2.5% last quarter, and was in line with a year ago.

Despite our SG&A percentage of sales picking up slightly this quarter, we still remain confident that we can further leverage SG&A in fiscal 2012 as we grow our revenues.

Our adjusted operating margin was 3%, and improved 10 basis points from 2.9% both last quarter and last year.

We continue to see strong performances from our core EMS businesses and confident in their continued execution and growth.

We're making good progress in improving the operational performance required to realize consistent profitability in our components' businesses, which experienced low double-digit sequential revenue growth during the quarter.

We acknowledge that it has taken time for these businesses to work through their growth challenges, but we remain confident that they will approach breakeven in our upcoming March quarter and be profitable during the upcoming fiscal 2012.

Our EBITDA rose to $335 million in the December quarter, up 6% from $317 million in the prior quarter, and our LTM EBITDA expanded above $1.2 billion.

Year-over-year quarterly EBITDA rose 19% or $54 million from $281 million a year ago.

Our adjusted EPS rose to $0.25 from $0.23 in the prior quarter, an increase of 9%, and was almost 50% above the $0.17 we earned a year ago.

This marks the fifth consecutive quarter our year-over-year adjusted EPS has grown.

Please turn to Slide Five.

Focusing on the income statement items below the operating line, adjusted net interest and other expense was $24 million, up from $21 million last quarter, and within the targeted range we discussed last quarter of $20 million to $25 million.

Included in this number is the realization of $13.2 million loss on the early extinguishment of our 6.25% senior subordinated notes, which was offset with some favorable FX gains and other income realized during the quarter.

The adjusted tax expense for the third quarter was $15.6 million, reflecting an adjusted tax rate of 7.5%, which is above last quarter's tax rate of 6.2%.

But we still remain below our stated guidance range of 10% to 15%.

We also experienced a large favorable tax resolution related to a previous tax matter resulting in a $35 million non-cash credit to our GAAP net income that I previously discussed.

This is not, however, included in the 7.5% adjusted tax rate.

For our upcoming quarter's guidance, we are modeling a 10% tax rate.

Our weighted average diluted shares outstanding came down from 784 million to 777 million as a result of the continued impact of our share buybacks which totaled $68 million during the quarter at an average purchase price of $6.92 per share.

In the past nine months, we've reduced our shares outstanding by nearly 61 million or retired approximately 7.5% of our common shares.

We've accomplished this by spending $368 million for an average purchase price of $6.04 per share.

For our current quarter, we suggest modeling 775 million shares outstanding which takes into 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 $13.8 million in the quarter and represented a $0.02-per-share EPS impact.

Intangible amortization net of tax was $15.2 million in the quarter, down from $19.5 million last quarter, due to certain intangibles becoming fully amortized and also represented at $0.02 EPS impact.

These expenses were more than offset by a $34.7 million tax credit realized during the quarter.

Please turn to Slide Six.

As we had expected, inventory declined $116 million or 3% sequentially, and inventory turns improved to 8.3 from 8.1.

We continue to believe that we should be able to drive improvements in our inventory management and that our inventory turns can increase as there are numerous actions underway and we'll also benefit from a different blend of our business as we see increased computing revenues.

As far as cash conversion cycle and working capital management continued to be industry leading at 14 days, which is consistent with the prior quarter and prior year.

As highlighted in the footnote on this slide, we have recalculated the cash conversion cycle days to exclude the impact of non-cash reductions to our accounts receivable from our AR sales programs.

Historically these reductions had a one to two-day favorable impact on our cash conversion cycle.

But this quarter they had a more meaningful six-day impact.

We believe it's appropriate to make this adjustment given the non-cash nature and to improve compatibility.

We remain confident that we can maintain a cash conversion cycle in the mid-teens going forward, excluding the non-cash benefit of our ABS program.

Now turning to the net working capital chart on the top right of this slide.

While this quarter's working capital management was negatively impacted by a conscious paydown effort of our accounts payable, we still ended within our targeted range of 3% to 5%, coming in at 5%.

It is important to note that we have added the non-cash benefit of our ABS programs of $821 million into the December quarter, back into the working capital calculation of this metric and have adjusted the historical presentation for consistency.

Flextronics asset management coupled with our improving profitability drove substantial improvements in our return on invested capital.

For the quarter, return on invested capital increased to 33.6%, another record high for our business, above the 30.1% of a year ago and up from 31.9% last quarter.

Please turn to Slide Seven.

Our cash flow from operations reflected a modest use of $15 million during the quarter.

Capital expenditures for the quarter were $106 million, which essentially matched our depreciation expense of $105 million, as we continue to invest in our business for our anticipated growth.

Free cash flow for the quarter was eased to $120 million.

Please turn to Slide Eight.

We ended the quarter with $1.6 billion in cash, down $190 million, versus the prior quarter, principally reflecting our negative free cash flow as well as $68 million in cash payments to repurchase common stock.

Total debt remained essentially flat at $2.2 billion.

Our net debt which is defined as total debt less total cash, rose to $633 million from $444 million, a debt-to-EBITDA level ended at the quarter of 1.9, flat versus last quarter and down from 3.0 last year.

The chart at the bottom of the slide shows our significant debt maturities by calendar year compared with our current liquidity.

The chart reflects our early extinguishment of the $302 million of our 6.25% senior subordinated notes back in December and highlights that our next debt maturity is not until 2012.

With that, I will turn the call over to our Chief Executive Officer, Mike McNamara.

Thanks, Paul.

And thanks again for everyone joining us on the call.

For the past two quarters, I've highlighted a theme focusing on our overall healthy business environment and judging by this quarter's results, I think it's fair to say the theme remains strongly intact.

The breadth and strength of our competitive position continues to improve, which is reflected in our value-added supply chain services and solutions experiencing strong demand.

Please turn to Slide Nine.

Our low-volume, high-mix businesses were once again led by communications infrastructure growth this quarter.

Infrastructure sales were $2.1 billion, and represented 27% of sales.

This segment grew another 5% sequentially on top of the exceptionally strong September quarter, having now risen over 17% during the past six months and again came in above our forecast.

We attribute infrastructure's growth to broad-based strength across existing customer base, and continued new market share wins.

We saw strength coming from multiple technologies and geographies within our infrastructure segment such as optical, Metro Ethernet, wireless base stations for multiple technologies, radio access and broadband access equipment.

Our March quarter outlook for infrastructure calls for continued high production levels consistent with the December quarter.

We see infrastructure ending fiscal 2011 in March, with more than $1 billion in incremental sales growth, which will consolidate positions for the 10% to 20% growth rate target which we discussed at our May 2010 Investors and Analysts Day.

For the fiscal year, our growth was propelled by strong new bookings with both existing and new customers.

We expect the growth in our infrastructure segment to continue into fiscal 2012, and are confident that our industry-leading position can be further strengthened.

Industrial automotive, medical, and other comprised 18% of sales, down from 20% last quarter.

This was the first quarter in 18 months that this combined group did not see sequential growth.

However, it makes sense to break down this group in order to better understand the dynamics.

Both medical and automotive continued to enjoy sequential growth.

Industrial on the other hand was off due to some End-of-Life programs and inventory rebalancing within our semiconductor capital equipment and office equipment customer base.

The overall group's 20% year-over-year growth rate remains very healthy, and we are encouraged by a backlog of new wins across a multitude of areas.

As a result, we expect this combined segment to grow low double digits sequentially in Q4.

Our industrial segment's business development activities were exceptionally strong during the quarter as it booked a record amount of new business wins totaling over $450 million, a win rate nearly double that of the past couple of quarters.

As is typical in this segment, new program wins were spread across the diversified base of customers and markets.

We're optimistic about new segment wins which range from the two new CleanTech wins we announced publicly during the month of December, MEMC and Amonix to several new kiosk wins within the retail automation space for varied activities such as airline baggage handling, digital media procurement, self-service copy, package handling.

We also see forecasts from our capital equipment customers improving following a quarter of demand readjustment and overall industry segment growth in the mid-to high single digits.

Lastly, we continue to improve upon our position in both meters and controls and appliance product categories with new wins in each.

Our medical segment's strong momentum continued this quarter, growing sequentially in the mid-single digit range, and finishing in the December quarter at the highest monthly sales level in Company history.

Medical growth has been mainly driven by our medical equipment and consumer health diabetes businesses which we expect to post 60% and 20% year-over-year growth in fiscal 2011.

In general, our new major program wins continue to progress well.

Medical booked $225 million in new wins during the first three quarters of fiscal 2011 and its sales pipeline remains very strong for the next quarter and into fiscal 2012.

We see consistent revenue performance for medical next quarter which could translate to close to 30% year-over-year growth, and should put us on pace to surpass the $1 billion sales level in fiscal 2011 for the first time.

We announced last quarter that we're expanding our medical presence with the opening of a 180,000 square-foot medical operation in Malaysia.

Our automotive group continued to accelerate its growth during the quarter, growing over 15% quarter on quarter and reporting its fifth straight quarter of sequential growth.

Perhaps even more impressive, it's at 50% year-over-year growth rate which signifies its strong industry position within a very fragmented market.

The demand environment has remained strong especially for our premium European car customers who continue to see significant growth in the APAC region and specifically within China.

Our automotive group continues to have success winning new in-car connectivity, interior lighting, and LED programs.

Our mobile segment followed up on its 15% sequential growth during the September quarter with a further 11% sequential growth during the December quarter to end at $1.7 billion or 22% of sales, as seasonality and new program ramps filled the majority of the segment growth.

Our only 10% customer this quarter was in this segment and was RIM.

For the next quarter we see this segment experiencing typical seasonality and declining mid-teens sequentially.

In computing, we posted $1.4 billion in sales which remain at 18% of our revenue.

The segment rose 5% sequentially as new program ramps were slightly offset with server declines due to program transitions.

During the quarter, we successfully launched a couple of new ODM programs -- ODM products including our first tablet and the new all-in-one desktop.

For the March quarter, we expect a single digit decline as increased levels of production in our ODM business are offset by normal seasonality in our enterprise and storage business, in addition to the completion of the server program transition we mentioned last quarter.

We remain confident in our ability to achieve our long-term target for our personal computing business, which we beltlined at $2 billion for fiscal 2011, and $4 billion for fiscal 2012.

Consumer digital saw its third consecutive quarter of strong sequential growth, increasing 12%.

The segment ended above our original forecast at $1.2 billion or 15% of total sales.

Successful new program ramps were the primary growth catalysts for the quarter.

I'm also proud to share with you that this segment received a very important customer award during the quarter, the Microsoft Value Excellence Award in recognition of exemplary partnership support for the launch and mass production of its Xbox and Kinect products.

For the March quarter, we are currently forecasting a double-digit seasonal decline.

Our components' business which include Multek, Vista Point and FlexPower saw aggregate growth slow a little sequentially but it still remained in the low double digits.

We are encouraged by the improving manufacturing efficiencies for our component product offerings and during the quarter, we made solid progress, reducing aggregate operating losses.

And we expect these businesses to be breakeven exiting the March quarter.

Turning to Multek.

We continue to believe that revenue expansion will lead to margin expansion and the business has the potential to comfortably operate in the high single-digit operating margin range.

During the quarter, Multek's flexible printed circuit business saw strong growth in both North America and Asia, and multiple new program wins were secured across many market segments.

FlexPower also saw its operating loss decline as it benefited from operating efficiency across its factories as a result of strong initiatives coupled with continued progress on the relocation of certain manufacturing processes to inland China, and improving mitigation of commodity price increases.

Vista Point saw its quarterly revenues increase to a record level and its operating loss reduced substantially as well driven by improvements made in our manufacturing yields and efficiency.

Our global services business encompasses roughly 15,000 employees and focuses on after-market activities such as logistics repair and warranty and service parts logistics.

This business continues to grow operating profit on a quarterly basis reaching the highest level since prior to our Solectron acquisition.

The new operations we announced last quarter in India and expanded operations in Europe have been performing exceptionally well and gaining traction with key customers.

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

We are now two quarters into the launch of our branded Firedog business.

In addition we launched firedogbusiness.com this quarter which offers a full spectrum of technology and business support services to the business community, and nicely complements the more focused firedog.com.

Now turning to our guidance in Slide 10.

Our orders and forecasts continue to show more seasonal resilience than in prior years.

Looking back over the past five years, our average organic December to March decline was 17%, which is adjusted for acquisitions to provide an appropriate organic comparison.

If we exclude the large recessionary decline of fiscal 2009, our average organic decline was 13%.

In our upcoming quarter, we are currently forecasting a more modest sequential design roughly at 7% at the midpoint, our lowest since fiscal 2004.

Our guidance is for a range of $7.1 billion to $7.4 billion which corresponds to a sequential decline ranging from 5.5% to 9%.

We expect our adjusted EPS to be in the range of $0.21 to $0.23 per share versus the $0.25 just reported.

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

Please turn to Slide 11, key takeaways.

Our third quarter continued our trend of sequential and year-over-year revenue and profit growth.

For the quarter ahead, the midpoint of our revenue guidance range points to less seasonality than our business has traditionally experienced, and we expect our trend of healthy year-over-year revenue and profit growth to continue.

Our key takeaways are as follows -- we are executing well on the top-line growth.

We delivered strong sequential in year-over-year revenue growth of 6% and 19% respectively.

Every market segment and business unit posted year-over-year growth and the same holds true for quarter-over-quarter growth with the exception of one segment.

We're also continuing to invest in our Company to fuel above-average industry growth in fiscal 2012.

Our investments are backed by a very strong pipeline of opportunities as well as booked business slated for the coming year.

Our profitability and earnings are also improving.

Adjusted operating profit rose 6% sequentially and 23% year over year.

Adjusted EPS was also up 9% sequentially, and a solid 47% year over year.

We also set new Company records for GAAP net income and GAAP EPS during the quarter.

At the same time, it's worth mentioning that we absorbed $13.2 million in debt, extinguishing cost for buying back our 6.25% senior notes early.

Lastly the worth of these improvements are evident in our ROIC which ended the quarter at 33.6%, the highest level we've achieved.

Thanks for your time and attention, and I'd like to open the call for Q&A.

Operator?

Thank you.

(Operator Instructions)Our first question comes from Shawn Harrison from Longbow Research.

I wanted to follow up just on the incremental gross margin this quarter, it was the best I think you've done in four or five quarters.

But it doesn't sound like the components business was breakeven.

Maybe if you could just talk about the components of the sequential gross margin this quarter and then maybe what we should expect going forward as the components business gets into profitability?

Yes.

Hi, Shawn, it's Paul.

I said that we'd approach breakeven in the March quarter and that heading into next year we'll see a gradual improvement of that with the target that the back end of the fiscal year we'll see the bundle probably operating around 4% operating margin.

And so I think that for the December quarter, there was improvement which we were encouraged by, and there's the continuing improvement going into March.

Just to that -- more thinking about the incremental gross margin for the quarter at 9%.

Was it a mix of business that drove that, or was it the components business getting back closer to breakeven?

Was it just --.

Yes, a bit of both.

You've got increased revenues, of course, for increased absorption.

And there was an improvement in the components business through the quarter over the September quarter.

So both of those contributed to the increased incremental gross margin that you referred to.

Okay.

Then as a follow-up, looking at the 10% to 15% year-over-year growth rate target, as we move into calendar '11, maybe if, Mike, you could discuss just which end markets you would see tracking above that?

It looks like computing would definitely be above, maybe which end markets would be above versus below?

Yes.

As we look forward to next year, we would certainly expect all of our segments to hit over double-digit growth.

So we'll accomplish that this quarter.

We saw very, very nice growth across every single one of them.

The only one I would suggest may not hit the double-digit growth rate is the components business.

And that's to [thoughtfully] make sure we hit the profitability targets, and that we're emphasizing -- substantial emphasis on operating profit targets as opposed to revenue growth targets in that segment as it's grown to very significance.

All those segments have grown to very significant sizes.

To answer your question directly, there's not one answer.

We run a very, very broad diversified portfolio.

We drive all our businesses to hit double-digit growth rates and to invest in a way that they can do that.

And we'll actually expect to see that next year with the exception of components.

Okay.

Thank you.

Our next question comes from Jim Suva from Citi.

Your line is open.

Congratulations.

I think the sales results and the sales outlook are remarkably impressive.

Taking it down a little bit further below the sales line and looking at operating margins and EPS flow-through, can you help me better understand if components are seeing progress, which I don't doubt they are, I'm sure they are, given the situation, and your sales this quarter was meaningfully above your guidance, yet your posted EPS was only at the higher end and you were helped a little bit by taxes, lower taxes, it just seems like the flow-through's not coming through to the bottom line.

Can you maybe explain what's going on operationally or why we didn't see more on the EPS line, and the same holds true for the outlook?

Thanks.

It's Paul.

We did see 20 basis points improvement in gross margin.

So I think some of it did flow through from the revenue.

9% incremental gross margin improvement.

But you saw some SG&A expense increases.

We would typically have a reduction in SG&A percent in the December quarter with higher revenues but actually had the reverse.

It went up because the spend did go up sequentially.

I think we lost a little bit there.

And the reason for that is we've been investing in this, what we see in the future, strong organic growth that we have both here in fiscal '11 and fiscal '12, so we're putting in place more design, engineering resources, more infrastructure, people around the world to support next year's growth.

And so I think that took away from the margin slightly in the December quarter also.

Components did contribute positively on the margin for us in December.

And we expect that to continue through March of next year as well.

Okay, then my follow-up is, if that's the case, are we at the SG&A level now to support that double-digit growth, or is there still some more discretionary spending to continue to provide the funds to grow it to double digit?

Well, we'll see March probably the range is [$195 million to $205 million] levels.

And so we're at about certainly for the next three to six months anyway.

But we've got very strong growth next year organically that's already pipelined in.

What our intent is to gain leverage out of the SG&A as you would with increasing revenues next year.

We still think that there is -- there's going to be some leverage for us in the SG&A line for next year for sure.

Thank you and congratulations to you and your team.

Our next question comes from Steve O'Brien from JPMorgan.

Thanks for taking my question.

I wanted to ask a little bit about the infrastructure results which were strong.

You talked about some broad-based strength.

It seems like maybe others in the industry or the food chain aren't seeing that kind of strength.

So if you could elaborate on that a little more, that would be helpful.

And also maybe in context to the June quarter, I know it's a little early, but some are looking for that quarter to be seeing particular order pullbacks from OEM customers.

Yes.

I think there's a couple major reasons for our strength there.

One is I think we more represent what's happening in the industry because we're a little bit larger and a little bit broadly and a little bit more diversified.

We actually have some Chinese customers, one in particular, that has a very, very strong growth rate.

Most of our competitors aren't really positioned with that account, and a lot of the industry analysts in the United States don't spend a lot of time talking about the growth of the Chinese infrastructure customers.

But we're well penetrated into that customer base, and it allows us some nice growth rates as a result, that a lot of times you don't see from either the infrastructure analysts or from the other contract manufacturers.

The other interesting thing is our position is very, very strong in this industry, and I would say what's different about the wins that we've had over the last year is that the wins tend to be the future generation products.

And I would say that across a number of different customers.

We're really, really well positioned from a products category and a product line standpoint.

So a lot of the new investments that are going in, we're actually going to be the leading supplier to, I would almost say, most of the OEMs.

So I think our mix has transitioned over this last year to be very, very favorable for future growth and we're very well penetrated into the Chinese OEMs.

And I think that's going to, as a result, you're going to see -- we expect again next year to have this group, despite the fact that it's very large, to grow double digits.

Okay, thanks for that color, Mike.

If I could, one follow-up.

I appreciated the update on the components' profitability.

Any change to your outlook for ODM profitability going forward, ODM computing?

Thanks.

No real change.

We're still what I would say moving to our last phase of our transition.

We expect, as I mentioned, expect about $2 billion left or the year we're currently in.

I fully expect we've got everything booked to go to $4 billion for this next year.

At that time we would expect it to run more into the more normalized industry levels.

We still have to go through that transition.

There will be some costs associated with that.

In fact, our computing business from Q4 in the March quarter to the June quarter will double.

That's where you're going to see a significant amount of ramps.

And we'll have to get through those transitionary periods, and then we'll hope to -- we'll obviously work on hitting the operating profit targets then.

We have the business booked.

We have the revenue in sight.

And now we have to be able to deliver the operating profits.

Thanks, good luck.

Our next question comes from Amitabh Passi from UBS.

Your line is open.

Thanks, Paul just a question for you on the SG&A line again, as we look beyond the next six months, what's the best way to think about the operating leverage in the model and the level of SG&A?

Would it be at this 2.6% of sales level?

Do you think there's enough leverage that we could probably see the percentage trend down?

Yes, I think we'll definitely see it trend down post-March, of course.

March quarter revenues are down.

So you won't see it trend down then.

But in fiscal '12, we'll see it trend down from 2.6% with the revenues that are coming on stream and the costs even though dollars are increasing, the percentages will reduce.

And I think you could see 20 to 30 basis points even of reduction in that over the next year.

Got it.

And then any update on your stock buyback plan?

I think you've pretty much exhausted the remaining amount.

Any further updates?

Well, we still have some $30 million left of the approved from the Board of the current plan.

We're pretty opportunistic about that.

We update you every quarter.

From a shareholder perspective, we're positioned to purchase 10% a year.

And that goes through next July so there is still a significant amount available under that approval.

But we would need further Board approval for that.

Got it.

And then just one final question.

On the balance sheet, there was a big movement in the "Other Assets" line item.

Any clarification in terms of what happened there?

Yes.

We alluded to it in the script that the ADS programs that are off balance sheet, there is a need for us (inaudible) to come into that program.

That goes to Other Current Assets.

For the purpose of the slide deck, we pulled it out of Other Assets, put it back into Receivables, about $800 million.

And to show the CCC without that benefit because it's non-cash and just in Other Current Assets.

And that's why we adjusted the receivables, CCC and working capital percentage of sales to reflect that.

Okay.

Got it.

I'll jump back in the queue.

Thanks.

Our next question comes from Sherri Scribner from Deutsche Bank.

Hi, thank you.

I was trying to get a sense of what's driving the unusual seasonality in the March quarter?

Is it new program wins, is it any particular segment?

I'm just trying to get a sense of what's driving that.

Well, we tend to have a little bit more balanced portfolio.

We talked a little bit about that over the last year, ever since we did the Solectron acquisition, we actually did it to move our portfolio in a slightly different direction.

That's one thing.

And I think in general, we have a pretty strong book of business.

Part of what you're seeing there, and you can almost interpret that from looking at the SG&A, is that we have a pretty strong book of business and we expect to go into FY '12 with some pretty healthy growth rates.

So between the two, just in general, very strong book of business going forward.

We're seeing some of those programs hitting in the March quarter.

We're seeing some just reduced seasonality as a result of a little bit better of a blend as a result of our movement in the portfolio several years ago.

And it's allowing us to hit a much reduced seasonality.

Okay.

That's helpful.

And then I know, Mike, you mentioned strong growth expectations for calendar 2012 pretty much across the board.

In terms -- I know you've won a lot of new programs, and you've talked about it a little bit.

But are there any particular segments where you're seeing more strength than others?

Well, the percentage growth will probably be highest in computing.

But outside of that, I think they'll all be positioned to grow pretty steadily.

You're winning -- sorry, go ahead.

I was going to say, I think we're really well positioned in virtually every one of those categories.

As we look through our numbers, we have trouble finding any of them being weak.

Computing might get an extra pop because of the new incremental PC business that we talked about.

But kind of across the board, we've built a pretty strong portfolio and our competitive position's pretty strong.

We tend to win more than we lose.

And as a result, I think you'll see a growth pretty balanced.

This last year you saw a lot of good growth.

Industrial will grow over 20%.

Computing will probably grow around 12%.

Consumer digital's probably up in the mid-20%.

Infrastructure, we'll probably end up around 15% this year.

And the medical and the automotive and mobile are all up over 20% in FY '11.

They're all pretty broad-based growth this year.

And I'd actually expect to see more of the same next year.

Okay.

Right.

So it sounds like the new program wins are really across the board are broad based.

Yes.

Okay, great.

Super, thank you.

Our next question comes from Brian White from Ticonderoga.

Mike, just on the components business, you said it probably wouldn't grow double digits over the next year.

Just remind me why that's going to occur?

Because our -- we're trying to focus on execution.

And we're trying to focus -- and who knows, maybe it will end up growing.

But sometimes a year's a long way away and the quarter -- our year doesn't start for three months.

But our objective is to really try to drive profitability.

We're trying to control a lot of the problems that we had in this last year was actually too much growth.

The entire bundle was well over 30%.

Part of the problem was that some of the bundles grew 100% or 300%, and we're just trying to grow in a much more balanced way that drives a lot more profitability.

Okay.

Are you disengaging with programs?

I wouldn't say we're disengaging, I'd say we're being more picky perhaps.

But I wouldn't really call it disengaging, no.

Okay.

And I just want to be clear.

Components will be breakeven or profitable in the March quarter?

They'll cross over to breakeven, but they won't be -- they'll be close to breakeven in the March quarter, but they'll cross over into profitability through the quarter.

And then when we come into the June quarter, we should be profitable.

The one other thing I want to mention, Brian, is the other thing is the components business is very, very capital intensive.

And we also want to meter our business there, just due to how we want to balance our investments and where we want to spend our money for this next year.

So we want to keep a little bit of a balance in that group, that makes sense, as you can see, we're hitting real nice return on capital in overall Flextronics and we want to -- that's a high focus for us and something that's very important to us.

Okay.

I just want to be -- it's a minor nuance.

But on the last call, you said certainly profitable in the March quarter and now we're saying breakeven.

I just want to be clear -- is there a slight change in your thought for the March quarter?

No.

I don't think so, Brian.

Slightly breakeven, slightly profitable, it's all around about the same.

I mean it's a huge move from where it was this year, the fiscal.

And to end the year, roughly breakeven slightly profitable is actually a great achievement for us and positions us well like Mike said, going into the June quarter being profitable.

Okay.

Just finally, when we look at the computing business, is there any way -- can you break down what is the notebook ODM, PC business percent of computing so we can track that?

We don't break that out.

But you can do the math, $2 billion for the year and obviously December quarter's pretty big.

So ODM computing represents a fair amount of that, that we reported in total computing.

But we don't break that out except that we'd say for the year it's $2 billion.

Okay.

Thank you.

Our next call comes from Brian Alexander from Raymond James.

Just given the expectation that you laid out earlier for improved expense leverage over the next few quarters.

And then also the comment about hoping to get to 4% margins in the components business toward the back half of the year, does that suggest that you would expect the overall business to improve operating margins by about 40 to 50 basis points in the back half of the year?

Or are there certain offsets that we should consider that could mute the leverage for the overall Company?

Well, I certainly didn't want to spend the time here talking about guidance for next year.

I don't think that's appropriate.

We've still got another quarter left in this year that we want to get through.

We do expect incremental margin increases throughout next year and a lot of it is very much mix dependent and how fast our components business can get to that level, as well, next year.

So I think you'll see just trending improvements throughout each quarter.

And once we get through March, of course, through June and we get leverage from SG&A, we get components increases.

We'll want to make sure that we keep the mix in balance and can deliver that sequential improvements in gross margin next year.

Okay.

And then just a follow-up.

Back to the comment about June and September, I think one of your smaller competitors talked about broad-based customer forecast reductions that will affect their June quarter to a lesser extent, September.

Mike, you commented you aren't really seeing this.

You made a very good comment about how you're well positioned globally with next generation products and some of those low-volume, high-mix segments.

Do you also think that your wins in those segments are becoming smaller in nature per program and perhaps you're becoming more competitive to some of those smaller players?

Thanks.

You want to know if we're becoming more competitive but certainly we do more low-volume, high-mix business than anybody by far.

And we've been very, very focused on those businesses for many, many years, and they're sizable and they're very, very profitable for us.

So we are after certainly every $20 million I think you're kind of referring to infrastructure, but certainly any $20 million account, we go after.

And we have a system within Flextronics that handles the low-volume, high-mix customers.

So to us, we've already been after that business, and we'll continue to go after it in a pretty aggressive way and leverage the strength of the overall whole in order to be able to get that business.

I wouldn't say it's a new initiative.

I'd say it's an old initiative and it just works well for us.

Okay, thank you very much.

Our next question comes from Steven Fox from CLSA.

Your line is open.

Yes, hi, good evening.

Two questions.

First of all, can you just talk a little bit about tablets from a strategic standpoint, how important is it to be playing in this product category, and you mentioned a win in tablets.

Can you just talk about what drove that win for you?

And then secondly, Mike, just relative to the growth rate you talked about for next fiscal year, how would you compare that to the overall outsourcing market growth?

Yes, so tablets.

To me tablets whether it's a smartbook or a tablet or a netbook or a notebook or a polycom station, we actually participate in all these different product categories.

So we're well positioned.

We have a very, very big position in smartphones, as you know.

We have a very big position in PCs.

That's growing.

So to me, a tablet's kind of a blend of both of those.

A lot of the same technologies, a lot of the same supply base.

For us, it's just a category that will inevitably pick up and go manufacture.

Maybe we'll do some on an ODM basis, maybe we'll do some on an EMS basis.

So to us, we'll just -- it's just one more electronics product, and we build all of them.

So we'll -- I'm sure we'll end up participating substantially as that market picks up.

As far as the EMS rate and Flex rate, I think most of the analysts have -- you have the growth rate of next year down like at 8% or 9%.

And I think Flex we've always said that our target for our long-term growth rate has been 10% to 15%.

We structured and diversified our business in order to be able to achieve that 10% to 15% growth rate on a continuous basis, not as a one-year target.

And without giving guidance for next year, which we're obviously not going to do, we still continue to believe that our Company is well positioned to generate 10% to 15% growth ahead of the market of 8%.

Great.

Thank you very much.

Our next question comes from William Stein from Credit Suisse.

Your line is open.

Great.

I'm hoping you can give us -- or remind us a bit about the margin targets and the drop through on the operating line so that whether we model 8% or 15% for next year, we get an idea for assuming the mix doesn't change dramatically from where it is today where we think margins might wind up.

This is Paul.

You're right.

It's very mix dependent.

And we don't know the full picture of next year yet.

But needless to say, that 5% to 15% that we've always talked about in terms of incremental contribution margin is what's holding through this year and should hold through next year.

What's important to us is we'll certainly make improvements in the operating margin, no doubt.

I think you've seen us this year kind of flat line with all the investments we've been making in components in particular.

But we'll get, like I said earlier, leverage out of that.

We'll get leverage out of SG&A.

But even though the margins really have been flat this year, we've still been able to -- with the revenue growth of 20% organic for this fiscal year $5 billion of organic growth, we've had a 60%-plus increase in earnings per share this year and record ROICs, 33%, strong free cash flows.

That's really what we're driving next year, as well.

We want to continue to drive EPS and the quality of earnings up, the return on capital, the cash, as well as improve margins.

I think if you looked at the December quarter, we could have hit 3.5% if our components businesses had delivered that 4% operating margin.

And so it's definitely been something that's been hindering us, but next year is next year.

And we'll talk about that when we're in next year.

But there's a lot of leverage here yet.

Any change to the tax rate guidance?

No, we say 10% to 15%, but for March quarter probably around 10% would be fair to say.

You keep coming in lower.

Are we ever going to really see that 10% to 15%?

Of course.

Very good.

Thank you.

Our next question comes from Louis Miscioscia from Collins Stewart.

Clarification and a question.

I think you said that in from the March to June quarter, that either the ODM business would double or just the whole computing sector would double.

Could you just clarify that for me?

Our ODM business.

Going back to the tablet question, are you also currently manufacturing a tablet that's actually already out in the stores today?

We have -- yes.

We have one in the stores today.

Great.

I thought so.

Then finally, my main question has to do with components which we all keep asking you about.

Historically, many of those component businesses ran up to something in the 10% operating margin level.

Is there anything that you see structurally that would say that those businesses now will never get back to 10%, that maybe the cap is 5%?

And if it is 10% one day in the distant future, not obviously next year since you've already talked about that throughout the call, how long do you think it would take?

It would be a 24 month, 36 month type of effort?

I think 10% is a high bar.

And I think you get to 10%, you have to have a certain product mix within your components to be able to achieve that.

So you know what that means, it's like in your power business.

In order to hit 10%, you need to be way on the -- heavily skewed on the server end as opposed to chargers or adapters, as an example.

The same thing with printed circuit boards, you have to have technologies that are unique and different and not standard technologies that may go into a PC or a tablet or other things.

So I think that really depends -- that's really getting into margin management.

It's on the high end.

So I think we're not too focused on that.

We've set a goal that we think these ought to run between 5% and 10%.

A lot of it's going to be margin dependent.

A lot of it's going to be a blend of whether it's a modular or a charger or an adaptor or a high-end server, or if it's a printer circuit board.

We're just staying focused to try and get to there first.

Okay, great.

But it sounds like it's more likely a -- say a 4% to 8% or 4% to 7% would be the long-term target.

Well, we'll -- I think we'll stay with the target of 5% to 10%.

I think that's still a reasonable target.

I mean, you're just talking about 10%, and I think that's pushing it to the high end awfully quickly when we're trying to breakeven today.

But there's no reason these components -- and part of one of the things that we'll do with these things is work on mix over the coming years so we can get up to the higher end.

But right now the way the business is run, we think they ought to be in that 5% to 10% range.

We think that's still reasonable and something that's achievable that we have our target set on.

Fair enough.

Just a last clarification.

The 4%, was that the end of the fiscal year being next March, or was that the end of the calendar year being this calendar year?

It's -- probably be the end of the fiscal year, but we'll target the end of the calendar year, as well.

Okay, great.

Good luck on the new calendar year.

Operator, we'll take one more question.

Okay.

Our last question comes from Alex Blanton from Clear Harbor Asset Management.

The first question is related to the market share gains that you mentioned.

Right at the beginning when you said two of the sources of your growth are new outsourcing and market share gains.

Could you elaborate on just where those market share gains are coming from, which segments, and what kinds of customers are involved -- I mean, competitors, what kinds of competitors you might be taking share from?

And why?

Yes, that's such a real broad-based question, Alex.

Yes.

If I think about the whole bundle, let me start from a high level first.

If I think about the whole bundle and you look at the mid-point of our guidance, we're probably up year-on-year about a 20% organic growth rate.

Within that, literally every single segment is going to be over double-digit growth.

So the way we look at it is we're penetrating across the board on a pretty active way.

Our infrastructure business, we talked a little bit about.

I think that ends up growing 15% year-on-year.

I don't think the market's growing 15% year-on-year.

But we also expect on top of that 15% this year, we expect to grow double digit next year.

So just using that as an example, the reason we think this is going to do that is because we think we have a market competitive position that's stronger than anybody else.

We're much larger, we have more capabilities, we have more things to show.

And we're well penetrated around the world and all the way into Chinese marketplaces.

So we just have competitive advantage.

If I think about the industrial base it's about a $4 billion or think about industrial, medical, and automotive, it's about a $6 billion business for us.

It's substantially large.

It has a lot of different vertical capabilities that support it.

And there's just a lot of different ways to penetrate that market, which we feel that we're doing really well to go do.

So we have a bigger infrastructure.

We have more locations, we have more vertical technologies for those kind of components such as machining around the world, plastics around the world, sheet metal bending and soft tool and hard tool all around the world and cable assembly.

We just have a lot more things that are attractive to industrial companies.

So we think we can have a pretty strong growth rate.

And we think that -- in this last year we were probably up 25% on that bundle.

Things like medical, we've expanded our footprint to include things like disposables.

Again, a very, very broad footprint.

Very large, dedicated operations that have been through many, many FDA audits over and over and over again, very, very successfully and not only in China, in Mexico, and in Europe.

So by the time you put all those together, our competitive positioning is very, very strong.

And then you bundle into that some of the new product categories that we're going after such as CleanTech and other things.

And it just creates a very, very strong growth profile.

I don't know that it's in any one thing.

But we've tried to build each one of the segments to be themselves diversified, to each one of them to have themselves have the right vertical capabilities to be successful competing in the marketplace.

And by doing that, we expect each one of them to grow double digits, and we're being very, very effective in making that happen.

So I don't know that it's any one thing.

I just think it's a very, very strong base of business that is very, very broad based, very penetrated into China, and has a number of different verticals that help support a very attractive business model with the customers.

And the last thing I'll just add on that is services.

Services extend all the way into retail technical services that we talked about, all the way into Firedog.

While the revenue with selling Firedog is not that meaningful, the ability to create an end-to-end solution for our customers that they can use or not use or we can just penetrate the marketplace independently with those businesses is very, very strong.

So there's no one answer to it.

It's just the way we've built our business and how we've done our investments over the past.

And we think we're just extremely well positioned for the future.

So once again, we're somewhat bullish about FY '12, and I think we can again accomplish similar results.

A broad answer, but hopefully that works for you, Alex.

Is that everybody?

Yes, that's everybody in queue.

I'm sorry, operator?

Yes.

Okay, so we're done.

I think we're -- that was kind of a weird ending.

Hopefully you got what you needed, Alex.

And thanks, everybody, for attending the call.

And we'll look forward to speaking to you again next quarter.

Yes.

Thank you, and you can also access a replay of the call and obtain a transcript in the Investor section of our website.

Talk to you next time.

Thank you for your participation in today's call.

You may now disconnect.