Flex Ltd (FLEX) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Flextronics International fourth 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, Flextronics' Vice President, Investor Relations.

Sir, you may begin.

Welcome to Flextronics' conference call to discuss the results of our fiscal 2011 fourth quarter ended March 31, 2011.

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's section of our website under conference calls and presentations and can also be accessed directly from our home page.

Our agenda for today's call will begin with Paul Read reviewing the financial highlights from the fourth quarter of fiscal 2011 and from the year end for fiscal 2011, and Mike McNamara will follow up with some insights on our current business trends, how our business performed during fiscal 2011, and he will conclude with our guidance for the first quarter of fiscal 2012, ending in June.

Following that we will take your questions.

Please turn to Slide two for a review of the risks and non-GAAP disclosures.

This presentation contains statements that are forward-looking.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those set forth in this presentation.

Such information is subject to change and we undertake no duty or obligation to revise, update or inform you of any changes to forward-looking statements.

For a discussion of the risks and uncertainties you should review our filings with the Securities and Exchange Commission, specifically our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and any amendments thereto.

This presentation references both GAAP and non-GAAP financial measures.

Please refer to the schedules to the earnings press release and the GAAP versus non-GAAP reconciliation in the investor's section of our website which contains 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.

Paul.

Thank you, Kevin and welcome everyone to our call.

Please turn to Slide three.

We finished the year in our strongest financial and competitive position ever, driven on the success of our diversified business model, which delivered $4.6 billion of organic growth and [fueled] a 19% year-over-year increase.

Our fourth quarter itself, however, proved more challenging on revenues than our guidance anticipated.

Revenue of $6.9 billion was $241 million or 3% below the low end of our guidance range of $7.1 billion to $7.4 billion.

While our revenue was below our expectations for the quarter, we don't believe the underlying reasons for this weakness require us to revise our overall revenue growth expectations for the next fiscal year.

Michael will discuss this in detail when he reviews our market segments and guidance.

Our fiscal 2011 fourth quarter adjusted operating income was $189 million, up $19 million or 11% year-over-year.

GAAP operating income was $176 million for our fiscal 2011 fourth quarter, up $41 million or 30% versus the prior year level of $135 million.

Adjusted net income for the fourth quarter was $162 million, increasing 25% from a year ago levels.

Our GAAP net income for the fourth quarter was $135 million expanding 125% from last year's result.

We reported adjusted earnings per diluted share for the March quarter of $0.21, which was within our EPS guidance of $0.21 to $0.23 and grew 31% from the $0.16 we earned last year.

Our GAAP EPS for the fourth quarter was $0.17, more than twice the $0.07 we earned in the year ago period.

Our weighted average diluted shares outstanding ended the quarter at 776 million, slightly below the 777 million of last quarter and 6% below the 827 million of a year ago.

Additionally, our weighted average diluted shares outstanding were reduced by 31 million shares, or 4%, to 790 million for our fiscal 2011 from 821 million in fiscal 2010.

These reductions are driven by our share buy-back program.

During the quarter we completed our second $200 million share buy-back program as we repurchased 4.5 million shares for $32 million, with an average cost per share of $7.25.

Overall, since our recent buy-backs began in June of last year we've repurchased $400 million of our outstanding shares or 65.4 million shares with an average cost of $6.12.

In addition, we just announced today that our Board of Directors authorized a new $200 million stock buy-back program.

Turning to the full fiscal year, I would like to focus on something that's easy to forget or overlook when it comes to our growth.

Namely, how far we've gone in just the past year and what we believe fiscal 2011 signals about our future.

Our $6.9 billion in sales rose more than 15% from March quarter levels of a year ago of fiscal 2011 sales of $28.7 billion grew $4.6 billion or 19% above our fiscal 2010 of $24.1 billion.

Our $4.6 billion in organic growth was generated by broad-based year-over-year growth across all our market segments with all recording year-over-year growth.

Every segment grew double-digits, industrial, medical, auto and other, up 31%;consumer digital, up 27%; mobile, up 23%; infrastructure, up 11%; and computing, up 10%.

The components businesses also grew nearly 50% year on year in aggregate.

Our growth continues to be organically driven by new outsourcing programs with both new and existing customers, our market share gains, which we anticipate continuing into fiscal 2012.

We experienced strong operating leverage through a 38% increase in our adjusted operating income to $824 million, up from $598 million a year ago.

GAAP operating income exhibited an even stronger result rising 77% to $769 million versus $435 million in the year ago period.

Fiscal 2011 also marks strong progress on improving our quality of earnings as evidenced by GAAP net income reaching a record level of $596 million and generating a record GAAP EPS of $0.75.

Our adjusted EPS came in at $0.87, up 64% from last year's $0.53 result.

Please turn to Slide four.

March quarter revenue rose more than 15% above year ago levels and we have achieved four straight quarters of solid, double-digit, year-over-year revenue growth, a trend that we believe will continue into fiscal '12.

Our adjusted operating margin was 2.8% which was lower than we expected resulting from the revenue shortfall and related rise in SG&A of 30 basis points despite a reduction in overall spending levels.

While our core EMS businesses performed well and we are confident in their continued execution and growth, our operating margin was negatively impacted by losses in personal computing due to substantial revenue ramps.

Our components businesses improved on their December quarter performance, but still sustained a slight loss due to lower revenue than anticipated for the quarter.

Our EBITDA rose to $299 million in the March quarter, up 13% from $264 million in the prior year March quarter.

Although sequentially EBITDA increased $36 million, our EBITDA margin rose by 10 basis points to 4.4%.

Our last 12-month EBITDA expanded to $1.24 billion, increasing 28% from the prior year period.

Our adjusted EPS rose $0.21 from $0.16 in the prior year and March quarter, an increase of $0.31.

Please turn to Slide five.

Focusing on the income statement items below the operating line, adjusted net interest and other expense was $7.6 million, down from $24.1 million last quarter due to overall lower interest costs, stronger than anticipated FX gains, primarily on certain Chinese renminbi positions and realization of a $13.2 million loss on early extinguishment of our 6.25% subordinated notes that were recorded last quarter.

We anticipate our net interest and other expense in the $15 million to $20 million range for this June quarter.

The adjusted tax expense for the fourth quarter was $19.2 million, reflecting an adjusted tax rate of 10.6%, above last quarter's tax rate of 7.5% and was in line with our stated guidance for the quarter of 10%.

For our upcoming quarter guidance we are once again modeling a 10% tax rate.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS, stock-based compensation was $13 million in the quarter, slightly below last quarter's $13.8 million, and represented a $0.02 EPS impact.

Intangible amortization net of tax was $14.1 million in the quarter, down from $15.2 million last quarter, and also represented a $0.02 EPS impact.

Please turn to Slide six.

Inventory held roughly flat at $3.5 billion however the decrease in sales sequential resulted in inventory turns decreasing a full turn to 7.3 times from 8.3 times last quarter.

While there remain some uncertainties around Japan and component availability which could cause inventory levels to run above optimal levels in the near-term, we're still confident that fiscal 2012 will see continued improvements in our inventory management and that our inventory turns will trend back up throughout the year.

Our cash cycle rose six days to 20 days as a result of the six-day increase in inventory days.

We believe we can manage our cash conversion cycle in the mid to high teens range going forward.

Now, turning to net working capital chart on the top right hand side of this slide, overall net working capital was consistent quarter to quarter.

However, our net working capital as a percentage of sales rose to 5.7% from 5%, stemming from the decrease in sales.

We believe we are well positioned to manage our net working capital to around 5% of sales going forward.

The seasonally lower profitability drove our return on invested capital to 25% from 33.6% last quarter and 28.8% last June.

Overall, ROIC for fiscal 2011 was 30.5%, the highest level in the company's history.

Please turn to Slide seven.

Cash flow from operations was a positive $275 million during the quarter.

Net capital expenditure for the quarter was $66.5 million and free cash flow amounted to $208 million.

For fiscal 2011 we generated $857 million in cash, cash flow from operations and after investing $394 million in CapEx, we generated $463 million in free cash flow.

Please turn to Slide eight.

We ended the quarter with $1.75 billion in cash, up $150 million versus the prior quarter, principally reflecting free cash flow generation offset with $32 million in cash payments to repurchase stock.

Total debt remained constant at $2.2 billion.

Our net debt decreased to $472 million from $633 million last quarter.

Our debt to EBITDA level ended the quarter at 1.8 times, a slight improvement versus last quarter's 1.9 times and down from 2.3 last year.

Chart on the bottom of the slide shows our significant debt maturities by calendar year compared with our current liquidity.

Our next material debt maturity is in 2012.

Overall fiscal year 2011 was a very good year with healthy growth in revenue and EPS, a return to good quality of earning and our balance sheet and capital structure in excellent shape as we move forward.

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

Thanks, Paul, and thanks to everyone who dialed in for our call.

Throughout the past fiscal year I've highlighted an overall healthy business environment and our broad-based growth across all of our market segments and business units.

As Paul mentioned, we achieved double-digit growth in all of our market segments in fiscal 2011.

I remain confident in this theme as we head into the next fiscal year.

In fiscal 2011, we grew sales over $4.6 billion or 19% organically.

We were able to effectively leverage this top line growth through to our adjusted operating income which rose 38% from fiscal 2010 levels and adjusted earnings per share which rose 64% versus our prior fiscal year.

Perhaps most importantly fiscal 2011 marked numerous historic achievements for our company regarding our quality of earnings as we set records for both GAAP net income and GAAP earnings per share.

I'll touch on some of these annual highlights again in a few minutes but let me now turn to March quarter, specifically.

March quarter was lower than expected but it was still a strong growth quarter year-over-year.

We prepared and staffed to a higher revenue level but orders from various OEMs were lower than forecast.

We do not anticipate this to continue into the following quarters and instead expect a steady pickup in orders in fiscal 2012.

Before moving on to our segments and business units, I'd just like to explain briefly the impacts of the crisis in Japan.

For Flextronics specifically we have two facilities in Japan, a manufacturing site in Ibaraki and a servicing site in Koriyama.

Neither site experienced material damage however both sites and employees were faced with business disruptions that lasted roughly one week due to the infrastructure and logistics issue.

The supply chain situation is clearly the more difficult one to assess and certain parts of our business are more impacted than others.

Our global procurement organization has been actively managing and reducing our exposure to inventory that may be constrained although we still can't say with certainty what the ultimate impact will be as many constraints are further down in the supply chain.

Overall, we anticipate only a modest impact to our business at this time.

Please turn to Slide nine.

Communications infrastructure remained our largest segment at 27% of sales.

Infrastructure sales were $1.9 billion and declined 12% sequentially.

This was below our expectations for flat -- for a flat revenue.

We experienced delays in new program ramps and some unexpected softness in customer orders.

We view this as temporary and expect improvement in this segment beginning this quarter.

While this was below expectations the communications infrastructure segment had been growing very rapidly for us in the second half of 2010, rising 17% in the six months preceding this quarter.

The segment grew 11% for the year and its recent March quarter levels were 6% above the prior March quarter.

Our June quarter outlook indicates high single or possibly low double-digit revenue growth.

We still see sales in fiscal 2012 rising more than 10% and being spurred along by continued strong bookings with both existing and new customers.

Industrial, Automotive, Medical and Other comprised 23% of total sales, up sharply from 18% last quarter.

This segment had a strong rebound from last quarter rising 8% sequentially.

This was our fastest growing segment for fiscal 2011 and its 31% growth for the year illustrates the quality of the capabilities we have put in place.

Let now me break this group down in order to better understand the dynamics.

Our Industrial segment saw positive growth trends with solid single-digit quarter-over-quarter growth driven by strength in office equipment, semi-cap equipment, smart meters and clean tech.

For the year Industrial grew over 25% driven by strong outsourcing momentum.

Industrials business development activities remain successful during the quarter as it booked new business wins totalling over $300 million, bringing its total for fiscal 2011 to roughly $1.3 billion, and providing for a strong growth momentum for fiscal 2012.

These new program wins were spread across a diversified base of customers and markets.

For next quarter we see continued strong performance and high single digit revenue growth.

Our Medical segment's performance in the quarter was in line with our expectation.

Most impressively, Medical ended fiscal 2011 with over $1 billion in sales for the first time in history.

This translated to a 31% year-on-year growth for fiscal 2011 versus 2010.

During the quarter, we performed well in diabetes, drug delivery and medical equipment markets.

We saw multiple new design wins throughout fiscal 2011 which bodes well for our pipeline of business going forward.

Overall the segment booked over $250 million in new wins during fiscal 2011, and the size of its sales pipeline more than doubled with a couple of large new manufacturing opportunities.

We see single-digit revenue growth for Medical next quarter and we believe fiscal 2012 will be another strong growth year for the business.

Our Automotive group marked its sixth consecutive quarter of sequential growth.

It achieved over 10% sequential growth in what is normally a seasonally challenged quarter.

For fiscal 2011, Automotive grew approximately 50%.

We continue to see strong trends in in-car connectivity, ambient lighting and LED electronics, power electronics and electrical vehicle markets.

Our backlog of book to business in Automotive has continued to grow and we expect mid-single-digit growth next quarter.

While our Mobile segment March quarter sales declined 15% sequentially which was in line with guidance reflecting the normal seasonal decline, they were 24% above a year ago level.

Mobile sales were very strong for fiscal 2011, rising over $1 billion and growing 23% from fiscal 2010.

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

For next quarter we see the segment experiencing softness driven primarily by reductions in demand for our Japanese-based mobile phone customers, partly offset with market share gains for smartphone customers outside of RIM.

As a result, we are expecting a roughly 10% sequential decline.

In Computing we posted $1.2 billion in sales, which was 17% of our revenue, down slightly from 18% last quarter.

This segment declined 50% sequentially which was below our expectations for a single-digit decline.

During the quarter our personal computing business grew but not as much as we forecasted due to some supplier delays causing some slippage of new program ramps.

Overall our Computing segment grew sales by 10% in fiscal 2011 versus 2010.

Our fiscal year growth was driven by multiple new ramps in the personal computing part of our business which will partially offset with declines in our enterprise server business.

We expect the volumes associated with the delays in our personal computing program ramps in the fourth quarter to be made up in our June quarter, where our Computing business is expected to rise over 25% sequentially.

These ramps are not without their challenges as we are experiencing significant costs to ramp to new production levels in these programs and we are counting -- encountering inflationary pressures in component pricing as challenging our profitability.

Consumer Digital grew 27% from fiscal 2010 driven by strength in new programs for game consoles, peripherals and printers.

Revenues for the March quarter was $844 million, or 12% of our total sales, and 35% higher than at the same point last year.

On a sequential basis this segment declined 30% which was in line with our expectation.

For the June quarter we are currently forecasting a mid-teens decline, primarily driven by lower game console demand followed by a strong ramp period.

Partially offsetting this are new program ramps with e-readers and printers.

Our Component businesses which include Multek, Vista Point and FlexPower declined sequentially by high single-digits as expected.

While these businesses continue to experience significant impacts from commodity price increases and higher labor costs, we again managed to make improvements in reducing the operating loss of this group and we ended the quarter just below break-even.

Looking forward we expect these businesses to continue to improve on a sequential basis through fiscal 2012, towards the target of the 4% operating margin exiting fiscal 2012.

Multek experienced 30% growth in revenue in fiscal 2011 and this revenue expansion will lead to margin expansion as factory utilization is increasing rapidly.

Multek's flexible printed circuit board or FPC business saw a record high month of incoming orders in March and overall FPC demand remains very solid.

This combined with multiple new wins across various market segments points to a very good year ahead for Multek.

FlexPower grew sales over 25% in fiscal 2011 and continue to make good progress on its move inland to Guangzhou as we mentioned in the past.

However, this business remains negatively impacted by rising labor rates and increasing commodity costs that we're working hard to pass on to our customers.

FlexPower has booked numerous new wins in tablet servers, mobile and networking markets.

Vista Point more than doubled its sales in fiscal 2011 and saw its quarterly revenue remain at record levels and its operating loss substantially reduced, driven by improvements made in manufacturing yields and efficiency.

Our Services business focusing on the aftermarket activities such as logistics, repair, warranty, and service part logistics.

That business continues to grow operating profit on a quarterly basis, establishing an all-time high in this quarter in operating margin.

This business also saw some new traction with new services expanded into the tablet and the e-reader spaces.

Please turn to Slide 10.

In fiscal 2011, we achieved strong year-over-year growth that was broadly distributed across all of our market segments.

Each segment grew double-digits and overall for the company we delivered $4.6 billion in organic growth.

This was 19% above fiscal 2010 and above our targeted range of 10% to 15%, and was accomplished with no material acquisitions.

This growth was achieved with CapEx spending trending below depreciation and therefore a key contributor to our company achieving record ROIC for the year.

Our capital efficiency is at record levels and we anticipate this to continue into fiscal 2012.

Adjusted operating income grew twice as fast as revenue in fiscal 2011, achieving 38% growth.

Adjusted earnings per share grew an even faster 64% for the year.

All this was accomplished while posting the best GAAP net income and GAAP EPS in Company history.

We generated $208 million in free cash flow for the quarter and $463 million for the year.

We deployed $400 million of this free cash flow to buy back shares at an annual cost of $6.12.

The net impact was a 6% reduction in shares outstanding versus a year ago.

Today's announced $200 million stock buy-back authorization from the Board of Directors further affirms our commitment to return value to shareholders through prudent financial management and free cash flow generation.

Turning to our guidance on Slide 11.

Our orders and forecasts are pointing to a healthy sequential growth next quarter, however our guidance reflects a wider range given some supply chain uncertainties that still exist as a result of the crisis in Japan.

As a result, our guidance is for a range of between $7.1 billion to $7.6 billion, which corresponds to a sequential increase ranging from 4% to 11% growth.

We expect our adjusted earnings per share to be in the range of $0.20 to $0.23.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted earnings per share guidance I just provided by approximately $0.03 for intangible amortization expense and stock-based compensation expense.

Lastly, before I turn my call over to the Operator, I'd like to mention that we'll be hosting our Investor and Analyst Day in New York City on May 24 at the Hilton on 53rd Street.

Investor relations will email all the registration information early next week.

Please note that we changed the location of the meeting from our previous save-the-date of the NASDAQ market site due to venue size limitation.

Thank you for listening and I'd now like to open up the call for Q&A.

Operator?

Our first question comes from Sherri Scribner with Deutsche Bank.

Your line is open.

Hi, thank you.

Thank you for that detail, Mike.

I just wanted to get a sense of in the Communications segment it seems like we've heard a lot from lots of different companies that that segment has been weak.

I just wanted to get a sense of was that one particular customer for you?

I know you have got a couple of strong growing customers or at least you have over the past couple of quarters.

Was that primarily one customer or did you see broad-based weakness or maybe a little more detail on Communications.

Hi Sherri.

We have quite a few customers just, just in -- I've heard noise in the past about optical people talking about the optical market.

We have 11 different customers that are in the optical space.

We have such a broad portfolio we have a lot of ups and we have a lot of downs.

Suffice it to say, we were expecting pretty much a flat -- a flat result off the December quarter.

We ended up getting 12% down.

So we were a little bit surprised.

I think our customers were a little bit surprised.

It's more than just one customer.

It's a bundle of customers.

But the comment that I made was also that we don't expect that to continue, and we actually expect to recover all that March downside in the June quarter, so we think it's coming back, and we don't think that structurally the end marketplace is weak.

So if there is potentially an inventory correction or a correction, you really only see it as being one quarter?

Yes, it is hard for us to say and going into the March quarter in January, we thought we would have much larger numbers.

So it is hard for us to say, but usually we're pretty accurate on these, and I would say it's going to come back this quarter, and I would guess it to be a little bit of an inventory correction.

We also had, to be fair, two or three different product ramps that we were expecting, that slowed down.

A lot of our business was on the very, very high end of the marketplace and some of the product ramps on the very high end were slower than anticipated.

Or a few delayed, too.

So there were a couple of product transitions that slowed down a little bit.

But I think fundamentally the -- that Communications segment is actually reasonably healthy, and I think it will come back the rest of the year.

Okay.

That's helpful.

Then just quickly, I want to ask you about the notebook business.

I think there's been some speculation in the press that you guys are not committed to the notebook business anymore.

It sounded like you're still committed to the business but want to know, are you still committed and do you still expect to double that business this year?

Yes, so we'll probably -- we've been on this track to do 1-2-4, I think everybody knows the four would be this FY '12.

We have enough orders to go and go do that $4 billion.

So we've hit our objective of what we thought was kind of a minimum level that was necessary to be relevant in that business and to have any sorts of scale to have a high quality business.

So going forward, you know, we don't have a strategy of going 1, 2, 4, 8.

There is no objective of that.

You never heard us communicate another step.

So our strategy going forward is to, and has been for some time, is that it is our objective to have a broad penetration into all the electronic markets.

And then once we have a strong enough position, then it is our objective to balance our business between margins and return on capital.

So in the end the objective is to look across all our businesses and run them so that we deliver value to the shareholders.

So, in summary what that means is, we'll portfolio manage our business in a very active way and some business units will try to push on the accelerator and other businesses will slow down.

I would not say we're not committed, I would just say that we're going to manage our overall portfolio of businesses to optimize cash generation, return on capital and growth.

Okay, great.

Thank you.

You're welcome.

Our next question comes from Matt Sheerin with Stifel Nicolaus.

Yes, thanks.

So I just wanted to follow up your comments on the notebook business.

Mike, you've talked about getting to break-even at the $4 billion revenue, but you also talk about a lot of headwinds, materials cost, labor costs, et cetera.

Are you still looking at break-even at that $4 billion revenue mark and also, when do you expect to get there?

Sounds like you're hedging a little bit, because you're talking about you're managing profitability versus growth.

When would you expect to get there?

So right now we're in a significant transition period, so we're literally between March, when we really started ramping, and June, we'll mostly go from a $2 billion run rate to $4 billion run rate.

I would call the ramp that we're under is pretty severe.

That in itself is creating some losses for us.

Not too atypical about ramping any program too fast or real fast.

But that's a ramp kind of scenario.

Now what we didn't anticipate is that the commodity prices are driving a significant amount of price escalation in the commodity business.

And I would say that we find that price escalation of commodities higher in the notebook business than we find in any other parts of our business.

I think, on average the market, or that entire business, tends to be a little bit stressed from a performance standpoint, and I think it's put a lot of pressures over the years on a lot of the component suppliers, and I think a lot of them, as they see the labor wages going up and the commodity prices going up, it is putting a lot of pressure on them to raise prices.

So we didn't anticipate as much headwind on that, as -- when we went into -- you know, than two quarters ago.

So for sure that's an additional headwind.

So I would say, you know, so -- and as a result of that, we're looking and I think you've seen some of this data in some of the other presses that over time we're going need to be raising prices on these products.

So we do have some additional headwinds that we didn't anticipate and yes we did expect to be break-even at $4 billion.

The question is will we get there with the headwinds that we're seeing now?

If we did, it wouldn't be this next quarter because we're under such a ramp and we have incremental operating expenses as a result of the ramp but by the end of the year when we hit the $4 billion is when we would have expected to be at break-even.

Okay.

And then it looks like you're obviously growing pretty rapidly in the industrial, quote, unquote, other markets, auto, medical, et cetera.

And you would think that the margins in those -- the margin profile in those segments would be larger or higher than the company overall, yet you've been stuck at this 2.8%, 2.9% operating margin for a few quarters here.

Do you think that is going to continue to drive operating margins for the company higher or are there just other headwinds in things like components and the ODM notebook business that's going to continue to be headwinds and keep you from getting past that 3% number?

So those businesses do carry higher than company average operating margins and I would expect that to continue into the future, and I would expect that the growth rate we have in those businesses to continue.

The headwind we had last year that really kept that flat was the increment -- was really the component businesses, more than anything else.

And those things we said again, we said last year that we thought by the end of this year, in 2011, we had hoped that the -- that those businesses would return above break-even and start to contribute.

That didn't happen.

As we look at those businesses now, the component businesses now, we expect them to be back up to 4% by the end of the year.

So, you know, we have to go prove that.

We can go make that happen, but that's again what it looks like.

There are a lot of structural changes that are quite different than last year.

That was a headwind last year.

Right now the headwind we're seeing is that we're having these additional computing ramps, which are significantly below the company average.

And I think it's offsetting all the incremental good news associated with higher and higher revenues associated with the higher margin businesses.

So, I would say we're turning the corner on components.

We have an additional headwind with components, with computing, and still keeping it pretty much flat.

As a result we're achieving the operating margins that we are, which are pretty much flat.

Got you, okay.

Thanks.

Our next question comes from Steve O'Brien with JPMC.

Your line is open.

Hey, thanks for taking my question.

Can we talk a little bit more about the mobile devices outlook?

I think you ran through a number of pushes, puts and takes there.

It seems like there is a little bit less seasonality than would have normally seen for a June quarter.

You mean June quarter would have been higher than --

Precisely.

Yes, I think that's right.

I think you know maybe a few of our programs are a little bit in transition in terms of one product to the next product.

And one of the other things that we did mention is we had a number of different Japanese customers.

We had several.

And some of those are seeing some of that volume either slow down or maybe they're trying to do it in their own factories, whatever the case may be.

I think it is a little bit different for each one.

But that has been a little bit of a headwind.

That is not necessarily representative of the market.

So I think between those two it has created a little bit of a slowdown.

That being said, as we look out over our forecast on the September and the December quarter, those numbers get significantly higher.

So I think on a yearly basis we would still expect to continue to grow that business nicely, but there is no doubt you're correct that the June expectation that we have is below what normal seasonality is.

Are these transitions maybe with some of your existing customers, or any of your customers, really, impacted by ODMs entering the smartphone market?

Are you seeing pressure there that's maybe inhibiting growth, inhibiting margin?

No, I don't see that as -- no, we don't see that at all as a threat.

I mean, it's always a threat, but we don't see that impacting anything, no.

Maybe I can just ask a quick question on the share count this quarter, maybe, it was a function of share price, or something else, Paul, maybe you can help us understand the sequential and share count was fairly flat even compared to the purchases this quarter or the purchases in the prior quarter.

Yes, like I said, we repurchased the remaining balance of that $200 million program so we took about $32 million, 4.5 million shares, so the share count was fairly flat because every year, every quarter, there is a sequential increase with stock options, you know, and so that's an addition and then you take that away with the amount of shares that we repurchased and you get a flat number for this quarter.

I understand that.

I guess I thought that option exercises in the past were sort of running in the $2 million a quarter range.

Maybe I'm getting too granular or precise here, but maybe you can just help us understand going forward what you think the quarterly or annual dilution from awards would be?

We tend to model about $3 million to $5 million a quarter for that, and so, $12 million, $15 million, $20 million, depends on the share price, of course, throughout the year.

Thanks.

Our next question comes from Jim Suva with Citi.

Your line is open.

Thank you very much, gentlemen.

If we take a look at the bigger picture, and as the quarter progressed, Mike and Paul, maybe can you walk us through about, was it kind of a linear downtick in the demand softness as you've progressed, or was it back end loaded?

Was it share loss or was it double orderings that are now back into equilibrium, or just true end market softness?

I'm just trying to get a grasp around the linearity of it, and then what gives you the confidence going forward?

Well, if you look at the sequential numbers for each one of the different market segments, you see kind of a broad slowdown, if you think about it.

I think the only market segment that was up, was one of them, and that was Industrial.

So you know outside of that, every one of them went down a little bit.

Computing went down, Mobile went down, Infrastructure went down way more than anticipated.

So it wasn't reasonably linear, it just seemed to slow as the quarter went on.

It almost felt like as the GDP kept getting weaker and weaker it just seemed like our numbers kept getting weaker and weaker.

It just trended down a little bit.

It was kind of across the board.

It wasn't really one thing or another.

If we add up our segments, well you can see and look that some of the biggest adjustments were in Infrastructure and some of the big adjustments were really in a lot of different segments.

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

It's not one customer.

I don't think it's market share, because I think we'll still see 10% to 15% growth this year for the entire year, so we're not coming off that number.

I just think it was just a little slower, and I think it comes back, and as we look at our forecast for the next two quarters, it looks quite strong again.

Great.

Switching gears for my follow-up question on the PC sector.

You know, with the tablet share gains and a lot of the other manufacturers in the PCs getting more aggressive on pricing, I believe it was the industry was getting close to 3% margins for the PC sector.

Now it's looking like it's less than that.

Does that cause you to reevaluate your efforts there, or shift gears, or how do you as your executive management team look at something you're going after and that target has now deteriorated in its industry profitability?

Yes, there's no question the target has deteriorated, Jim.

That's for sure true.

The way we look at it is, and maybe there is some revenue that's going to come out of the industry going forward because of tablets and other things.

But one thing to keep in mind going after that target also enables you to go after tablets as well.

So there is a switch in products that are certainly possible and available.

But as we think about it, the way we think about as Flextronics is, is our computing business on a go-forward basis is $4 billion out of whatever you want to call the number -- I think the analysts have us down for $32 billion this year.

It is a small part of our business and it is our objective that -- and our objective is to run this diversified portfolio.

So if one market segment, like a personal computer, starts to deteriorate and become less valuable, hopefully we can switch our energies and effort and put more efforts into another area of the business.

That is the objective of having a diversified portfolio.

We're happy that we're not like the PC ODMs that could have 60%, 70%, 80% of their business in the personal computer market and we're fortunate to have a diversified portfolio.

But certainly the world is going to change on a regular basis and it is for sure our objective to continually to change with it and try to optimize our ability to generate cash and earn a return on our money.

Thanks for the details.

I'll look forward to seeing you in a few weeks at your Investor Day.

Thank you.

Our next question comes from Lou Miscioscia from Collins Stewart.

Okay, great.

Maybe if you can talk about if you're willing to give a projection for free cash flow for fiscal '12 and maybe then, also tie that back into the buyback in the sense of obviously, you've just come out with a $200 million one, is there any chance if the stock is weak here in the first half that you could materially increase that, given the $1.75 billion of cash on the balance sheet?

Yes, Lou, you've seen us being fairly optimistic on the price buying 400 million at $6 I think is great accretion for us going forward, for sure.

We generated over $400 million of free cash flow in fiscal '11.

It's our expectation to continue those levels of cash generation.

Any share repurchases that we may do would be coming out of free cash flow, and if we weren't generating the free cash flow we probably wouldn't be buying back our stock.

So that is the way we look at it.

We'll continue to look at it that way.

We have regular dialogue with the board about these issues and to date you've seen us be pretty active.

So we just got a new program approved by the board, and we are just starting the year.

So we'll look ahead, look forward to what the year brings and the share price, et cetera, and make our decisions as we go.

Okay.

But there's no -- in the past at times there have been some restrictions but there is no real restriction from Singapore law or something else?

No, we have 10% per year allowed, and we've roughly spent about 6%, and so we have enough of the program left to spend the remaining $200 million, which would take it 10% up to about July, when we have a new AGM which would re-up another 10% for us.

So we have no restrictions in front of us now to repurchase the other $200 million.

Okay.

Great.

And realize when we all model and you all give guidance, a lot of it is sequential.

But it sounds like from what Mike said that a lot of the business is bouncing back and I realize you've given a guidance number.

But in comparison to what the Street was modeling before, you know, somewhere for June around 7.6, is there --what is the likelihood or odds that you could actually hit the high end or maybe just go through the dynamics that would get you there?

It did seem like Mike was suggesting a lot of stuff should bounce back pretty quickly.

Yes, we do.

We think that apart from on the consumer and the mobile side, we think there is a strong bounce-back on the other sectors, albeit Industrial actually had a strong sequential growth anyway in March, so that's going really well.

We've given you a wider range this time of some $500 million, you know, representative of, you know, a few things.

Japan being one.

We just can't quantify that in terms of risk to that number.

Computing ramp is huge for us, and we missed it a little bit in March, we think we'll get it back in June, so there is some risk there.

But, no I think that we've come out of this, you know, we realized that we were below the guidance range and we want to make sure we can hit our numbers in the June quarter, so I think the range that we've given is appropriate, and we will look to end up somewhere in between those numbers, I hope.

Okay.

Thanks, guys.

Good luck.

Thanks.

Our next question comes from Amitabh Passi, from UBS.

Mike, sorry, not to harp on this but, just wondering, why stay committed to the computing business?

I thought at one point we were looking at break-even margins at $2 billion.

We're now looking at break-even around $4 billion.

I'm just wondering what the rationale is to stay committed to this, this segment.

And then related to that, at one point I think we were also looking at a 3.5% operating margin goal.

Is it more realistic to essentially assume a 3% type target for the rest of fiscal '12?

Yes, all I can answer is to say kind of the same thing that I said before.

As the world changes, let's talk about the computing first.

As the world changes, there is different profitability levels associated with these things.

There's different margins.

There's new products that come on the marketplace like a tablet that could be disruptive to an existing product category, like a PC, and as those things happen, it will be our objective to shift with them.

Three years ago when we went into business the PC market was growing very rapidly and most of the operating margins were 3% and the ROICs in the industry were between 20% and 25%.

Being a $30 billion company we wanted to go participate in that growth and we thought we should be in it.

And we set a goal of hitting 1, 2, 4 and then we decided we'll see where we go from there because that is the minimum level required to be in the business with any sort of capability and competence.

So as we move forward, as the world changes, it doesn't matter if it is computing or it it's any of the other businesses, as the world changes we'll evolve with it.

And what we're trying to do in our company is to have enough diversification that when the world changes we can go change with it.

So I would say we're committed to the business in so long as we can earn our return on capital that is consistent with the rest of our business.

And if we don't earn a return on capital consistent with our business, we'll spend more time on other markets.

That goes the same whether it's computing or anything else.

As computing comes under pressure we'll obviously spend more time trying to understand whether or not we can earn an appropriate return on capital or not, and then move accordingly.

But certainly moving more into tablets and other products which may yield a better return, we'll certainly do that.

Okay.

Perhaps related to that, can you just update us in terms of where you are on tablet opportunities?

I mean, there seems to be a slew of them coming to the market.

One of your largest mobile customers has already launched one but I don't believe you're engaged in that opportunity.

Maybe you could just update us where you're at with respect to just the opportunities with tablets.

Yes, we'll -- we delivered one tablet to the marketplace.

We'll deliver a second one to the marketplace somewhere around the October time frame.

So we have kind of two that would be coming out of our ODM design group.

But additionally a lot of the penetration, we're getting a lot of penetration in tablets, because they're multiprinted circuit boards.

This is the exact same technology they use.

So we probably have three or four different tablet manufacturers we're building boards for or building flex circuits for or doing power charges for and also doing services for.

We're actually starting to build a very nice portfolio of new wins on the tablet market in addition to just doing the assembly.

So this is actually a more attractive market for us and for our verticals.

So we're also engaged in the design of products at the same time.

So which have a -- which, we've been out with one and we'll be out with the second one shortly.

Okay.

Thank you.

Our next question comes from Brian Alexander, your line is open.

Yes, thanks, Mike, I think you said you're still expecting to hit your double-digit growth objectives for FY '12.

Just wondering if you still expect double-digit growth in all segments ex- components which I think you said last quarter, or has the composition of growth changed in terms of individual markets maybe being below double-digits versus a quarter ago and just overall confidence level in getting to double-digit growth given you're starting the year low double-digits and the comparisons get tougher as we move throughout the year.

Yes, I would agree.

At this point we're driving to have balanced growth.

We don't want everything to be driven by one thing like in computing, for instance, we don't consider that to be strong balanced growth.

We drove our business since last year that every market segment in terms of how they structured their business plans and how they grew -- that we expect them to grow double-digits.

We think the same thing going forward.

We actually think that at this point in time we would like to see everyone of our market segments grow in a double-digit format.

We may have some more detail on that when we get to Analysts Day and when we talk in a little bit more detail about each of the segments and their strategies.

But that is for sure the expectation at this time is that every one of them grows in a double-digit way.

Just to follow up on computing but a non-notebook computing question.

How much of the revenue shortfall that you saw in the March quarter was driven by other computing areas, server storage, et cetera?

When I look at your June quarter guidance it looks like all of the sequential growth in that category is coming from notebooks.

So, what I'm really asking is, what are you expecting to see out of the enterprise server storage space for June?

Well, that whole Infrastructure business we actually expect to grow, and we would expect the enterprise -- I'm not sure I know the answer to that for June -- but we don't expect it to be down.

So and as far as the March quarter, how much of it was out of the personal computer market, not as much as you would think.

That was a contribution that like multiple other product categories.

All of our downside in revenue in the March quarter was not computing; it was partially computing, but we did have some other softnesses, as you know, that we mentioned across Infrastructure and other product categories.

Just one last follow-up.

Just on profitability, is there any way, Paul, maybe quantify the total losses that you saw from both the Components business and the PC business so we can just get a sense for how much of a drag that was on operating profits for the quarter?

Yes, it certainly was significant for us, less so on the Components side.

We saw some improvements from December to March.

We were disappointed we didn't hit the break-even.

We weren't far short, but we had good progression through the March quarter on Components, which is encouraging for June.

Computing is having these headwinds Mike talked about.

They aren't significant.

It is a big program ramp for us and -- but I can't quantify for you the absolute numbers on these areas.

It's not something that we break out, and but nevertheless it is causing some headwinds on the margin side for us.

Okay.

Thank you very much.

Thanks.

Our next question comes from Craig Hettenbach with Goldman Sachs.

Your line is open.

Yes, thank you.

Just on the computing market and the discussion of tablets as a new category, any reason to think that that market too, longer term, won't be challenged in terms of profitability?

You know, we're seeing it originally in desk tops and then in notebooks, just what your thoughts are on that type of category's ability to generate attractive margins longer term?

I think that's certainly a good thought but alternatively, even if cell phones themselves -- I wouldn't expect them to be any different than a cell phone, for example.

They actually match the cell phone's cost structure and our profitability much more than a computer because they're much less complicated.

But if you think about cell phones, the profitability on those products are -- smartphones, the profitability on those products are much less as well, but alternatively the ROIC might be very, very strong.

So we still can do, with two points profit on a cell phone and if you do 12 inventory turns it is still a very, very nice ROIC.

So I think tablets can fall into that category.

But I think the attractiveness in tablets to us, as well, is we don't have to participate in the assembly which drives the margins down.

We can participate where it makes sense and then hopefully be able to do things like power and printed circuit boards and flex circuits and services and the kind of things that generate higher margins.

So that's kind of our -- that's kind of our objective.

Let's figure how to penetrate the tablet market in a smart way.

But I think you can get higher -- you can still get a very reasonable ROIC on these different products, and I think there's ways to penetrate and earn money without necessarily doing the assembly and doing the components only.

Okay.

If I could follow up just on the commentary on Japan in the prepared remarks mentioned a modest impact and you do have a wider range.

Any way within that wider range, whether it is a percent of sales or anything else, to quantify how you're thinking about Japan?

Yes, we -- as we look through it, we obviously track every part that we're getting out of Japan and what the implication is.

And it continues to get better.

Is there a way to track it?

It is hard for us to say.

So the answer is, no, we really can't.

And it's because the top tier component supply base is only partially the question, it's also the sub-components.

Those are really, really hard to understand how they get impacted and how their capacity is consumed.

I'm uncomfortable putting a range on it, except to say we just think it's pretty modest.

Okay, thank you.

Our next question comes from Wamsi Mohan with Bank of America, Merrill Lynch.

Your line is open.

Thank you.

The reasons for the pressure on margin improvement for the Components business were somewhat similar to what you mentioned last call as well, on inflationary environment, commodity cost increases, rising labor costs.

So now starting with the lower revenue base in absolute dollars, versus where you thought you might have started the year, can you give us some more detail around what you're doing more specifically that can give us some comfort on your path to the 4% margin (inaudible) fiscal '12 and how linear do you expect that progression to be?

Thanks.

So, 4% is -- our first goal and objective is to get this thing to 3.5%.

We think that the business model that we have penetrating the markets that we are currently after generates -- can generate when everything is running well, a 3.5% margin.

So that's really our near-term target and something that we always hold as a midterm target.

Once you get to 4%, you probably need to change the business mix.

So, what I mean by that is, we can get to 4% but maybe we have to not participate in certain market segments so we would have to take that away.

That being said, the important part is to keep the whole return on capital and cash generation in balance.

Our model is built around a 3.5% when everything runs well and at that 3.5% we believe we can generate a 30% return on capital.

In fact we think we can generate a higher return on capital than that.

If we move to a 4% model, then we would have to exit certain businesses.

In our business, you can kind of dial in the operating profit that is desirable based on the mix of product categories you go after.

But that doesn't mean we can't go after 3.5% business model that generates the highest return on capital in the industry.

Right.

I guess my question was not on aggregate company margin but more so specifically for Components.

Oh, Components?

Yes.

Sorry.

So all we need to do is have a 10% growth in Multek, and we probably that's one category.

And we see no problem getting a 10% growth in Multek at this point in time based on our book of business.

Camera modules we just have to run a reasonably flat year in terms of revenue, and maintain the existing performance in terms of operating yields, so I think that will fill in.

And Power is a little bit more of a challenge.

We have to continue with the move into Guangzhou.

That's probably another six months.

As we do the full transition into Guangzhou, and we have to get some price increases off our customers which we're working real hard on, and we probably need a little bit of a portfolio shift in that business.

We're very heavily weighted towards the charger and adaptor market and we need to move that portfolio a little bit more towards the higher end products, which carry a higher margin.

So, that business as it matures needs a little bit higher margins.

But every one of those activities is in high gear.

We believe Multek is probably the easiest to turn around.

As mentioned by the 35% growth last year, it's just completely different than last year.

When you load up the -- what are mostly fixed cost factories with a lot of volume, you can move that operating profit needle pretty rapidly.

So, we'll see that turn around very nicely.

And the other businesses need a little bit of work.

But every one of these activities is in process.

So we're way more comfortable than last year.

Last year we grew that whole business, last year camera modules grew well over 100%, grew actually over 200%.

The Multek grew about 30% to 35%.

The power grew about 25%.

They were in heavy, heavy growth modes off a base that was much lower and our management competence much lower.

Now, our management competence is a lot higher.

We've got major initiatives underway about moving inland and other initiatives, and we have a more stable business environment in front of us, and most importantly, probably, we have Multek, which is loading up a fixed-cost kind of base of equipment.

So it's a little bit different, and we're, as a result, much more comfortable as we look about what we see going forward.

But, once again, we wouldn't be saying it if we didn't see it.

We still have to execute on it and we still have to have the demand hold in.

But we're probably way more comfortable and have many, many more variables eliminated this year than last year.

And just to follow up on that.

You would expect Components to sort of be about break-even next quarter.

And can you comment your thoughts on linearity heading sort of through the end of fiscal '12?

Yes, I mean it's kind of our objective it will probably be a reasonably linear increase all the way through the year.

But that's correct.

We'd expect break-even next quarter then we'd expect it linearly improve.

We actually thought it would be break-even this quarter.

That was, we probably shouldn't have picked March quarter to be calling for the break-even because March quarter is where we get a seasonally downturn in revenue in those businesses.

A lot of them are feeding the smartphone market and cell phone markets and consumer markets.

So a lot of them go down in that quarter.

So June will probably hit the break-even and then we'll probably see a linear upside to four points over the next three quarters.

Okay.

Thank you.

Operator, one last question, please.

And our final question comes from Shawn Harrison from Longbow Research.

Your line is open.

Hi, thanks, hopefully just a few clarifications.

The doubling in the ODM computing business to the $4 billion run rate, is that the September quarter, the time frame, or the December quarter?

It occurs over the period from March when we start ramping this all the way through to maybe, July.

It's over that four-month time frame.

Okay and then second, on the Components business, just another side of the equation, it sounds like there is a lot going on this year, you're facing some labor rate increases, but I guess are you seeing any supply chain issues right now either with Multek tied to just input costs, or just getting different raw materials from Japan, or within the -- within the Vista business or the power supplies business, anything there just Japan-related disruption that could create a potential hurdle going into the June quarter?

That's a hurdle in the March quarter.

A lot of these labor rates have been going up but the commodity price increases have been significant.

A lot of the components are going up in price.

So to me that's already part of our results in March.

It's for sure going to be part of our results in June.

And that's something -- and so part of it is Japan, but part of it also is just the commodity -- the commodity costs just keep going up.

So I think that's a real term.

I think it's important.

It is a real effect.

But it's already in our March numbers and for sure it will carry over to the June and maybe into September.

So we are seeing a reasonably inflationary environment in a lot of different commodities that we buy.

With those commodities, though, there is no issue in getting different components that would be either required to make the power supply or the camera modules?

Yes, there is some.

We're experiencing some trouble getting foil, for example, for like a flex circuit.

Or there are some sub components that are getting in the way of our ability to deliver.

So these are part of the Japan challenges.

We still have hundreds if not thousands of risk items associated with Japan.

And partly the implication of that is going to be higher prices as well.

So that for sure is something that we're working on on a continuous basis.

It's why we gave a wider range.

So it is still a real problem.

I just think the response of the marketplace to, as it relates to Japan, has been very, very rapid.

I think it has been impressive about how supply chains have moved around and I think a lot of the risk is coming out of the system.

We haven't seen that impact in terms of revenue yet because there is probably enough supply in the supply chain to last through May.

You know, really call it a three-month window, by which we can move those things -- move those parts.

But I think -- I think the risk continues to get lower each month.

Okay.

Thanks a lot for taking my questions.

Okay, Kevin.

Thanks for joining us on our call today.

You can access a replay of this call and obtain a transcript on our investor section of our website which will be posted by tomorrow.

As Mike mentioned, also, we plan to send out registration information for the May 24 Analysts and Investor Day early next week.

If you have any questions, please contact me directly.

Thank you, and this concludes the call.

Thank you for your participation in today's conference.

You may now disconnect.