Flex Ltd (FLEX) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to the Flextronics International second quarter fiscal year 2012 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 of Investor Relations.

Sir, you may begin.

Thank you, Lisa, and welcome to Flextronics' conference call to discuss the results of our fiscal 2012 second quarter ended September 30, 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 section of our website under Conference Calls and Presentations, and can also be accessed directly from a link on our homepage.

Our agenda for today's call will begin with Paul Read reviewing the financial highlights from the second quarter of fiscal 2012, and Mike McNamara will follow-up with a discussion of the current business environment and developments and trends within our individual business groups.

He will conclude with our guidance for the third quarter of fiscal 2012, ending in December.

Following that, we will take your questions.

Please turn to Slide 2 for a review of our 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 the 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 our Investor section of our website, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

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

Paul?

Thank you, Kevin, and welcome everyone to our call.

Please turn to Slide 3.

We generated $8.04 billion in revenue for our fiscal 2012 second quarter, which was above the high end of our guidance range of $7.6 billion to $8.0 billion.

Revenue rose $622 million, or 8%, from the $7.42 billion we reported last year and 7% sequentially.

Our second quarter adjusted operating income was $176 million, down 17% year-over-year, and GAAP operating income was $161 million for the second quarter, down 19% versus our prior year.

Adjusted net income for the second quarter was $158 million, down 12% from a year ago, and GAAP net income for the second quarter was $130 million, down 10% year-over-year.

We reported adjusted earnings per diluted share for the September quarter of $0.22, which was within our adjusted EPS guidance of $0.21 to $0.23 and up 5% sequentially.

Our GAAP EPS for the second quarter was $0.18, which was up 6% sequentially.

Our diluted weighted average shares outstanding, or WASO, for the quarter was 731 million.

This was a reduction of 7%, or 53 million shares in float, compared with the 784 million shares reported a year ago, which was driven by our share buyback program.

During the quarter, we started our fourth $200 million share buyback program since June of last year and we repurchased approximately 19 million shares, or $106 million, at an average cost of $5.51.

Overall since our recent share repurchase began back in June of last year, we've repurchased $706 million worth of our stock totaling approximately 114 million shares, or roughly 14% of our expanding shares prior to the commencement of these programs.

Please turn to Slide 4.

September quarterly revenue expanded both sequentially and year-over-year.

We experienced revenue growth on a sequential and year-over-year basis in all segments, our industrial and emerging industries -- barring our industrial and emerging industries, which Mike will expand on further in his prepared remarks.

Adjusted operating income totaled $176 million and adjusted operating margin was 2.2%.

This was negatively impacted by losses equating to approximately 50 basis points in our ODM PC business that were expected and we are in the process of exiting.

It was also significantly impacted by the large reduction in revenues experienced in our industrial and emerging industry segment, which was primarily isolated to the capital equipment business in this segment.

Recall that this segment carries greater than the corporate average adjusted operating margins, and therefore had a 20 basis points negative effect on margin in the quarter versus expectations.

During the quarter we also incurred certain one-time restructuring costs to right-size certain facilities, which had an approximate 15 basis points negative effect on our adjusted operating margin versus expectations.

These 3 elements together create an overall negative impact on our adjusted operating margin of 85 basis points.

Our EBITDA was $295 million in the September quarter, flat with the prior quarter; however on an EBITDA margin basis, we declined 20 basis points to 3.7%, due to the strong sequential sales increase which provided no meaningful earnings contribution.

Our LTM EBITDA expanded to $1.22 billion from $1.15 billion a year ago.

Our adjusted EPS of $0.22 was up 5% from the $0.21 we reported last quarter.

The ODM PC business losses negatively impacted adjusted EPS by almost $0.03.

Please turn to Slide 5.

In our September quarter, the ODM PC business, which we are exiting, generated $743 million in revenue and accounted for a $20 million adjusted operating loss, as projected.

This business has peaked for us in the seasonally strong September quarter.

We're in the process of accelerating the exit and will have completely disengaged from this business during the December quarter.

As a result, we anticipate a sequential reduction of $550 million in revenue from our last quarter of production.

This is earlier than anticipated exit will increase operating losses as we absorb the increased transition-related costs.

Mike will provide more details around this when we discuss guidance for our December quarter later.

Please turn to Slide 6.

Net interest and other expense was $1.5 million, down from $22.2 million last quarter, due to greater FX gains and a reduction in other non-operating expenses.

Our FX performance this quarter exceeded our expectations providing an almost $16 million upside, due primarily to certain strategic (inaudible) positions.

This quarter was dramatically lower than our expectation for net interest and other expense, which was to be in the range of $15 million $20 million.

We continue to believe this range is appropriate to model going forward.

Adjusted tax expense for the second quarter was $16 million, reflecting an adjusted tax rate of 9.2%, which approximated outlook for the quarter of 10%.

For our upcoming quarter, we believe modeling a 10% tax rate is appropriate.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS.

Stock-based compensation was $14.2 million in the quarter, above last quarter of $12.3 million and represented a $0.02 EPS impact.

Intangible amortization net of tax was $14 million in the quarter, up from $12.7 million last quarter and represented a $0.02 EPS impact.

Please turn to Slide 7.

Inventory modestly increased by 3% sequentially, or $128 million, to $3.9 billion; however, our sales growth of 7% was more than double our inventory growth rate, resulting in inventory turns increasing to 8.1 times from 7.8 times last quarter.

We remain confident that we can drive continued improvements in our inventory management throughout fiscal 2012.

Our cash cycle remained flat at 19 days sequentially.

Our inventory days decreased by 2 days, which was offset by an increase of 2 days in our DSO.

Our DPO was consistent with the prior quarter.

We expect to manage our cash conversion cycle in the high teens range going forward.

Now turning to the net working capital chart at the top of the right of this slide, overall net working capital increased a modest $61 million sequentially.

Our net working capital as a percentage of sales decreased to 5.8% from 6%.

We believe our business is structured to run net working capital at a level between 5% and 6% of sales going forward, even as we disengage from the ODM PC business, which has been running at negative net working capital.

As a reminder, our ROIC calculation, which is documented in a footnote below the graph, is LTM adjusted operating income net of tax divided by the sum of the stockholders' equity plus net debt.

Our ROIC for the quarter remained very healthy at 25.8%, slightly below the 26.5% last quarter and below the 29% from the September quarter a year ago.

Please turn to Slide 8.

Cash flow from operations was a positive $300 million during the quarter.

Net capital expenditure for the quarter was $124 million and free cash flow amounted to $176 million.

We've generated $437 million cash flow from operations and $200 million in free cash flow for the first half of fiscal '12.

During the quarter, we spent $106 million buying back our stock, and have spent $306 million year-to-date.

Please turn to Slide 9.

We ended the quarter with $1.596 billion in cash, up $38 million versus the prior quarter.

Total debt remained constant at $2.2 billion.

Our net debt decreased to $613 million from $656 million last quarter.

Our debt to EBITDA level ended the quarter at 1.8 times, which is stable with last quarter and down from 1.9 last year.

The chart at the bottom of the slide shows our significant debt maturities by calendar year compared with our current liquidity, reflecting our -- this reflects a completion this week of a new credit facility.

We are pleased to announce our successful completion of a $2 billion credit facility, consisting of a $1.5 billion revolving credit facility and a $500 million term loan facility which matures in October, 2016.

The $1.5 billion revolving credit facility replaces our existing $2 billion revolving credit facility, and the $500 million term loan facility refinances our existing term loan facility which was set to mature in October, 2012.

The new $2 billion credit facility is unsecured and contains customary covenants.

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

Thank you, Paul, and thanks to everyone who joined the call today.

Before I cover the details of our business groups performance, it's worth taking a step back and set the context for the macro climate that we are in.

We are currently experiencing a sluggish and slowing macroeconomic environment.

While we don't see any major corrections on the horizon, clearly the technology supply chain continues to be plagued by uncertainty and pockets of softness.

We have seen instances where customers are displaying weakness due to inventory corrections, and others strictly due to end demand and weakness, given the broader macro back drop.

On balance, our business groups were able to weather the macro challenges, with one clear exception being our industrial and emerging industries business group, which suffered a 17% sequential decline versus our expectation of a mid-single digit decline.

Its decline was driven by broad based weakness, including a substantial decline in the capital equipment business which focuses on both semiconductor and solar capital equipment.

Outside of our industrial and emerging industries business group, our three remaining groups grew both sequentially and year-over-year, driven by new outsourcing programs that outweighed the macroeconomic headwinds.

Their strength was enough to help us deliver revenue above the high end of our guidance range, despite the much sharper than expected decline in our industrial and emerging industries business group.

Our revenue performance amongst our top 10 customer base was also healthy, primarily driven by new outsourcing wins, with 8 of our top 10 customers growing sequentially and 7 of our top 10 customers growing year-over-year.

Our working capital management remains strong, which aided our ability to generate quarterly free cash flow of $176 million, allowing us to continue to aggressively buy our stock back.

In terms of our ODM PC business, we have clear line of sight to exit this business completely during this quarter.

This is one of the major initiatives we have been managing the past couple of quarters in our drive to our targeted operating margins and we are confident that we will successfully eliminate this burden on our profitability.

As a result, our March quarter should reflect a full 50 basis points improvement in our operating margins.

Please turn to Slide 10.

Our Integrated network Solutions business group is comprised of our Telecom infrastructure, Data Networking, Connected Home, and Server and Storage business.

Integrated Network solutions revenue was almost $3 billion in the quarter, up 9% year-over-year and 7% sequentially.

The strong performance was slightly above our expectations for mid-single digit growth sequentially, as we saw strength with the majority of our core Data Networking Telecom and Storage customers, and only 2 of our INS customers experienced a revenue decline above $10 million sequentially.

This performance comes on the heels of last quarter's strength, in which the segment rose double digits both year-over-year and sequentially.

For next quarter, we expect revenue from Integrated Networking Solutions to decline in the mid- to high single digits sequentially, driven primarily by reduced demand across some of our larger Telecom customers.

For fiscal 2012, we continue to believe growth in the 10% range is achievable, spurred by continued strong bookings with both existing and new customers.

Industrial and Emerging Industries comprised 12% of total sales versus 15% last quarter.

Sales were disappointing and came in just above $950 million, reflecting a 17% sequential drop and a 4% decline from a year ago levels.

The biggest driver of this decline was Capital Equipment, which fell more than 40% quarter-over-quarter.

The Capital Equipment business was a little larger than $1 billion a year and, due to the product complexity and the capital employed, we operate this business at an above corporate average operating margin.

As a result, the dramatically reduced Capital Equipment operating profitability had a meaningful impact on our consolidated operating profit.

It is worth noting for perspective that our Industrial and Emerging Industries group achieved record quarterly sales of $1.15 billion just last quarter, on the back of a very strong 17% sequential growth.

We continue to see very positive activity levels with other customers across our Industrial Engineering and Emerging Industries group.

Our business development activities remained very strong during the quarter, with roughly $300 million in new wins booked.

We've now booked roughly $700 million in new wins in the first half of fiscal 2012 versus $1.3 billion booked during the entire fiscal 2011.

So our overall pace so far this year is tracking well.

For next quarter, we believe this group will experience low single digit sequential growth.

Our High Reliability Solutions group is comprised of our medical, automotive and defense and aerospace businesses.

It comprised 7% of total sales, consistent with last quarter.

Sales grew 3% sequentially and 32% year-over-year, and it eclipsed its all-time record quarterly revenue achieved last quarter.

Overall, sales in this group were in line with our expectation for mid-single digit growth.

The momentum in this group remains very strong, particularly in the medical and auto areas.

Next quarter we forecast this business to be flat; however, it is still forecasted to grow greater than 20% on a year-over-year basis.

Our medical business saw healthy growth, both sequentially and year-over-year, led again by strength in medical equipment and drug delivery.

During the second quarter, we booked roughly $100 million in new programs, which is approximately twice the level booked last quarter.

And our sales pipeline expanded even further, approaching $650 million, and being split amongst consumer health, medical equipment, disposables and drug delivery.

Our automotive business recorded its ninth consecutive quarter of sequential growth and remains on track for another very strong growth year in fiscal 2012, after posting close to a 50% year-over-year growth this quarter.

We continue to see strong trends across-the-board in the areas we engage in, such as in-car connectivity, ambient lighting and LED electronics, power electronics, and the electric vehicle market.

High Velocity Solutions comprised 44% of total sales, up from 41%, and revenue rose above $3.5 billion from just over $3 billion last quarter.

This business group includes our mobile Smartphone business, consumer electronics, including game consoles and printers, and our high velocity computing including the ODM PC business we're exiting, and the EMS PC business we are keeping.

This business group had the strongest growth in the quarter, rising 15% sequentially and 8% year-over-year, and drove the majority of our sequential revenue growth.

Our mobile and consumer businesses rose sharply on a sequential basis and were stronger than our more conservative expectations.

Strengths from new program ramps with our largest mobile customer, combined with favorable seasonality in the game console market, drove the majority of the growth.

In High Velocity Computing, our business experienced strong double digit sequential and year-over-year growth, driven principally by the final peak product ramps in our ODM PC business, as well as growth in our high velocity enterprise EMS PC business.

Overall next quarter, we expect our high velocity solutions business to decline high single digits, driven by the significant revenues decline associated with our exit from our ODM PC business and less seasonal demand for consumer electronics.

Our components business which includes the Multek, Vistapoint ,and power revenues roughly mid-single digits sequentially, which is half the rate of growth we had forecasted, due to inventory rebalancing within the supply chain that mostly impacted our Vista Point and Flex Power businesses.

Nevertheless, from a profitability perspective we saw improvement in all 3 component businesses during the quarter, with the consolidated bundle breaking even overall.

Our Services business which is focused on various post manufacturing and after market activities, such as logistics and repair and warranty, rose high single digits during the quarter.

Operate margins remained well above the corporate average.

In addition, a number of significant new program wins will begin to ramp late next quarter, which should position our Services business well going into fiscal 2013.

Now turning to our guidance on Slide 11.

For our third quarter, revenue is expected to be in the range of $7.3 billion to $7.7 billion, which includes a sequential reduction of approximately $550 million of ODM PC revenue associated with the accelerated exit of this business.

This is the largest driver of our sequential decline in sales, which corresponds to a range of 4% to 9%, and 7% at the mid point.

Our adjusted earnings per share guidance of $0.18 to $0.22 includes a cost of approximately $0.06 a share associated with the early exit of the ODM PC business.

Our adjusted EPS guidance is based on an estimated average weighted shares outstanding of approximately 725 million, which incorporates a full quarter benefit of the share buyback we completed during our second quarter.

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

The September and December quarters for us represent a period of transition and we expect our March quarter operating margins to rebound to roughly the 3% to 3.5% range.

That concludes my comments and I'd now like to open the call for Q&A.

Operator, can you please poll for questions?

Sure, one moment.

Shawn Harrison, your line is open.

First on the ODM PC business, just a clarification in terms of that $0.06, is that in addition to the losses of $0.03 you experienced this quarter so it would be a total of $0.09 drag, or is that $0.06 inclusive?

Shawn, it's Paul.

No, that's inclusive.

It's a total cost of $0.06.

Okay.

And then there would be a $250 million sequential revenue drop, give or take, into the March quarter from the ODM --?

Roughly that.

It's more $200 million.

Okay.

And then moving on to the components business.

It broke even this quarter.

Were all businesses above breakeven?

It doesn't sound like that.

It sounds as if maybe Multek helped out the rest of the group.

But if you could maybe elaborate on the components, how each of them trended during the quarter and the expectations for profitability into the December quarter as well and hitting your margin trajectory?

Yes, certainly.

You're right.

Multek is carrying the weight of profitability.

The other 2 were slightly unprofitable, not materially unprofitable but just slightly unprofitable.

But as a bundle, it's a breakeven kind of thing.

We're expecting continued improvements through the March quarter.

Certainly, operationally, these businesses are generating profits.

We have some charges, like we talked about in Power for example, that we're right sizing or closing some facilities, which is affecting some short-term net profitability of these businesses.

But they're definitely showing some improvement.

And the expectation is they would be profitable in the December quarter and into the March quarter as well?

I think the December quarter will be flat.

I think we have some revenue challenges there in Power and camera modules.

Multek is making very good progress.

But I think that you have to look at a flat performance in the December period.

But certainly, March looks much better for us.

And that 15 bips that you mentioned in terms of one-time cost, was that excluding some of the charges you were taking in the components business or that 15 bips includes some of the charges taken in the components business?

That would include that.

Okay.

And does that go away in the December quarter, that 15 basis points, or do you continue on that same type of restructuring in the aggregate?

We still think we'll have that level of restructuring in the December quarter.

And then it goes to zero on the March quarter?

Yes.

Okay.

March is really a period for us that's kind of getting a lot of things in shape and being fairly clean from an operational perspective.

Thanks so much for taking my questions.

No problem.

Thank you, Shawn.

And Sean Hannan with Needham and Company, your line is open.

So just a quick question.

And thank you very much for providing some of the detail around your expectations for the different segments.

On an ex-ODM basis, you're essentially looking for a flat quarter.

Some of that was explained.

Is there a way of perhaps when you think about your Top 10 customers, how many of those are actually looking for up versus flat versus down quarter?

Some perspective around that would be helpful.

Boy, that's kind of a tough question.

I think you're correct in your analysis that it's roughly flat September to December, once you strip out the ODM PC business.

We'll have some downside in some of the consumer-related business.

Typically the September quarter ramps higher on those consumer-related business, so things like gaming consoles and that will be down.

We do expect some continued strength in our Smartphone business, particularly in one of our larger customers with RIM, as they continue to ramp the supply chain as they seek to manage demand from a number of their new product ramps.

We expect to probably have some downside in some of our networking customers coming forward.

So some of our Telecom and Data Networking, we see a little bit of softness and we expect that going down a little bit.

But it's kind of a mix overall, but a little bit less, a lot of seasonality coming in, in terms of the consumer, some offset with RIM trying to catch up with its supply chain and its channel inventory, trying to fill that channel inventory, and some slowdown in the general rest of the businesses that we're seeing in terms of the overall macro.

That's helpful.

And then secondly, on the business development front.

And again, you had provided a little bit of commentary.

Just looking to see if we could expand there.

Can you characterize how you viewed the pace of business development and winning new programs today, considering the current macro environment and uncertainty for each of your 4 segments?

And what kind of changes are you seeing perhaps now in those segments versus a quarter or two ago?

How has that value proposition perhaps changed or even become enhanced or modified?

Yes, I can try to roll through the groups.

Automotive, for whatever reason, continues to hold up very, very nicely.

And I think that's pretty representative of what you hear through the entire automotive supply chain.

There continues to be a lot of Smartphone business that is helping some of the growth.

The medical and aerospace and defense kind of business, and still many of the different industrial categories, even though we talked about a 17% reduction in industrial, remember that's on the following a very, very strong quarter last quarter.

But in general, the industrial business has continued -- while they have slower growth rates, the underlying OEMs have slower growth rates I think as a result of the macro, alternatively the adoption of outsourcing continues to increase.

So we're continuing to be bullish about the ability to grow that on a go forward basis in the double digit range.

Medical continues to do more and more outsourcing, so I think its probably been enhanced by this environment as opposed to being a problem.

And Telecom/Datacom is really kind of no change.

I think that tends to reflect a little bit more the overall environment and whether or not they have strength or whether or not they have weakness.

So I think some of the things are being helped.

What I'd call kind of the new product categories are being helped, such as automotive and medical, aerospace and defense and many industrial categories.

We're obviously having a slowdown in capital equipment, and we actually expect that to continue for the next couple quarters.

And Smartphones continues to be actually pretty strong across-the-board.

If I could just summarize too, so I think the ability to book business in this environment is actually pretty good.

I think our pipelines are as good as they've ever been.

I think our bookings rate, I mentioned a few of them, I think are as good as they've been.

So I think in all these, what I consider to be new product categories, I think there's no shortage of business to be won.

And as a reminder for those asking questions, please allow just one question and one follow-up question, so that others may have a chance to ask as well.

And Mr.

Jim Suva with Citi, your line is open.

Thank you.

My first question is probably for Mike and then the follow-up will be for Paul.

Mike, can you just help us clarify a little bit on the high velocity one, when we remove the ODM, you mentioned it's going to be flat to down a little bit if I heard you right, but it looks like one of your key customers is going to be up about 30% in units.

So it seems like, I don't know if you're not on some of the new design wins or you're losing some share there or you pre-built some stuff or just seems like a very big bridge there of the differences between that outlook.

Maybe you can help us understand or bridge that difference for understanding?

Well, we're ramping that customer pretty significantly.

So I don't want to say how much, but it's a significant ramp.

Our non-PC ODM high velocity business going from September to December is actually up, so there's actually pretty significant growth.

So when you look at the overall high velocity group, we're guiding it down of course, but that's because we're taking $550 million of ODM PC out of it.

If we strip that away, we are actually having a growing high velocity business.

And that's actually a pretty strong rate, considering a couple of the programs will have seasonal declines.

So as we do gaming consoles, they will have seasonal declines in the December quarter, because most of that volume is shipped by the end of September.

When we look at printing, which is another big category there, that also has a seasonal decline in the December quarter.

So you really, once you strip out the ODM PCs, you have a seasonal decline in gaming and printing, and it is being offset significantly by pretty significant and strong growth in Smartphones.

So causing the entire group to go up, it's probably close to 10%.

Okay.

Now that makes a lot of sense.

So once you strip it all out, I actually think --we're definitely seeing a very, very strong growth rate in our key Smartphone customer.

Thanks, Mike.

That makes a lot of sense for the details.

And then my follow-up question is probably for Paul.

Paul, on your stock buyback, if my math is correct, I think you just are about halfway through or just over halfway through with your stock buyback.

Is the rule still with Singapore law that you can buyback up to 10% of the Company?

And if so, once you do this $200 million, does that put you there?

Or what should we think about for your cash deployments going forward, because you're in a good situation of actually having excess cash.

What are you looking to do with that cash?

We're very pleased with the strong free cash flow that we're generating.

We bought 19 million shares back in the September quarter, which is roughly half of the authorized amount from our Board of Directors.

But it's still, compared to Singapore law where we're allowed to repurchase 10% for the year, we still can repurchase approximately 56 million shares now right through to July next year.

And you've seen how active we've been in this space, but it really is dependent on the pricings and the free cash flow generation.

So we've still got 100 million, roughly, authorized with by Board of Directors from now on.

Matt Sheerin with Stifel Nicolaus, your line is open.

Thank you.

So in terms of your commentary on the industrial side, particularly the semi cap side, it sound the like your expectations, Mike, is that's going to be weak for a while, and you talked about some cost cutting efforts.

I know a lot of that is on the PC ODM side.

But are you looking to lower your cost structure or your fixed costs in that side of the business, because it's so depressed now?

Yes, we won't lower our investment or -- in industrial.

So capital equipment is -- it responds very, very quickly down in the downturn and responds very, very quickly up in an upturn.

And it tends to have these short cycles.

More and more the cycles seem to be short and aggressive.

So we for sure consider that whole industrial bundle to be a double digit growth kind of business.

We won't lower any of our investment to go after that.

Where we will see an investment change is you'll see SG&A probably peak in the December quarter, and then you'll probably see it come down to about $190 million in FY'13, and we'll probably hold it reasonably flat at $190 million.

And I think in the December quarter it's probably going to peak up to $205 million or $210.

So that is a structural change that you'll see, and that's a result of exiting a major business group.

So we'll, as we go to exit the computing business, it's going to give us an opportunity to be aggressive at taking down some of our fixed costs to respond that we're going to have one less major business group in the Company.

So you can bet we're immediately responding to that.

You won't see that in the December quarter because we're still closing it out and cleaning it up and there's charges associated with it, but you will see that fully implemented in the June quarter.

Okay.

Because it seems like you talked about obviously the margin mix works in your favor when semi cap is doing better, so to get to that 3% to 3.5% operating margin number you talked about, one thing has to give.

And it sounds like SG&A will be one way to get there.

And then just on the components business, just a follow-up from some of the other questions.

You've basically been breakeven for a few quarters.

I know Multek is doing well.

But you seem to be spinning your wheels, so to speak, in the other businesses, next quarter, next quarter.

At what point are you looking at some of those businesses in terms of long term strategic way, either getting out some of it or changing the mix, just trying to get that more profitable.

Because you've been talking about this now for 4 or 5 quarters.

Yes, I think that's right.

Once again, they all have different situations associated with them and they just take time to fix.

And in our case, its taken longer than we would have hoped.

Multek continues to make more and more progress every single quarter, so we're not too worried about that organization.

But some of the other businesses, we're having to continually restructure.

And we'll get some headwind now from a little bit of the slower economy, which is just going to take a little bit longer as a result.

But I think how long do we keep them around or not keep them around?

We're always evaluating what the right thing to do with each of these businesses are, and we'll continue to evaluate that and take appropriate action as necessary.

But in the meantime, we'll work to bring them up.

And we think March quarter will be a transitional quarter for them.

Because mostly because our restructuring activities will be done and we can just continue to run more and more volume through Multek.

So between those 2, we think we'll have a pretty decent business and we'll just have to -- as we make any kind of strategic decisions about what to do with whole businesses, we'll just plan on doing the right thing on that as situations are made available.

Sherri Scribner with Deutsche Bank, your line is open.

Hello.

Thank you.

This is actually Kevin Labuz on behalf of Sherri Scribner.

And I've also got a question on the components business.

I believe you've previously guided on your last call that you expected sequential improvements in that business for profitability throughout fiscal '12.

And now if I'm correct, you said this quarter you're expecting it to be flat, in the December quarter.

And so I was just wondering, what's changed between last quarter and now with respect to the profitability there?

We're being a little bit more aggressive.

2 things.

We're being a little bit more aggressive on restructuring the operations.

So we're actually being more aggressive about getting to our end goal.

So as a result of that, we're just taking more charges than we would have anticipated 6 months ago.

And what I mean by that is we're consolidating more factories, we're driving efficiencies higher, we're reducing some of the what we consider to be some of the fixed overheads.

And that's one thing.

So we're just being more aggressive there, because we want to get to the end goal.

And the second thing is that we do have a slowing economy, which is driving down the revenue a little bit.

So I call that the secondary effect.

I think the biggest thing is we're being aggressive on taking charges that can make it a healthier businesses.

But certainly, the slowing macro is putting a little bit of -- is reducing the overall revenues a little bit so it's from that standpoint it's dragging out a little bit.

But that probably is the secondary effect, as opposed to taking the operational charges.

Excellent.

Thank you.

Just when you talk about driving to the end goal in that business, is the goal still to have the business as a bundle 4% operating margin by the end of fiscal '12, or has that changed?

No.

That's still the target.

And as Mike said, we're aggressively doing some things to try and hit that number.

We got some headwinds there with revenues, but we still have that as our goal.

Brian Alexander with Raymond James, your line is open.

Yes, back to Matt's question, Mike, on the power supplies business.

You've talked about changing the mix there in the past to improve profitability.

So where are we in that evolution specifically on power supplies, and is that something that you do organically or is that something you have to do through M&A?

Well, we can do it organically, so we're in the process of doing that and we are making progress, but I actually consider that to be kind of a 2 year journey, if you will.

It takes time to -- on those high end power supplies, you have to get designed into whole systems.

We're having real good success at doing that.

We've actually tried to accelerate that activity.

One of the reasons that we took the power group and moved it under the management of the Infrastructure group, the Network Services group, is because we thought it was a way to accelerate that transition.

And having done that -- we just did that about 6 months ago, as you know, when we came out with the new 4 business groups, it's actually had a remarkable effect on building our confidence that we're going to be able to move that transition even quicker.

So that has paid off into a pretty smart move.

So I think it takes some time.

Would we do some like tuck ins, M&A to accelerate the high end?

The answer is yes, we would.

So I don't think it's a requirement.

It's just it would help move it quicker, faster by being able to do a tuck-in on the high end.

Okay.

And then, just post-ODM exit, you're going to be at 2.7% margins in March.

I know a lot of people have asked this question, but if I assume no more charges, that would get you to 2.85% in the March quarter.

Improvement in components maybe gets you to the low end of the 3% to 3.5%.

What gets you to the high end, and how long does that take?

Thanks.

I think there is we're varying some restructuring right now, 15-20 basis points both in the September and December quarters which is built into our guidance as well.

So that's going to get you more up to the 3.5% target.

Well, that would get you from 2.7% to 2.85%, Paul.

So if components gets to 4%, maybe that gets you 3.1%, 3.2%, and I'm still struggling how we get up to 3.5%.

Well, you have to, first of all, if you take the guidance we've given you for December, we've given you $0.06 a share, which is roughly 75 basis points of margin change, when that if you take that out.

So it's not a 50 basis points ODM PC.

We have 75 basis points in our model.

So that -- I think that's where your difference is.

And then 30 basis points on components.

And like I said, 15 basis points on other restructuring charges.

All that adds up to about 3.5%.

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

Yes.

When we look at the numbers that you're giving for ex- the ODM business for December, what should we think about from a revenue standpoint for March?

Should we think of normal down seasonality of 9% to 15%?

I know it's a big range there besides and outside of that range, but I've tried to pick the tightest one I could from historical numbers.

So one thing, Lou, is what we kind of talked about last year at this call, is as we moved from 60% high velocity probably 4 or 5 years ago to only 45%, and in fact our high velocity business we expect to be down probably more like 35% by the end of March, that adjustment or that change from December to March in terms of revenue of 15%, which was our historical number for many, many years is probably no longer valid.

So we think about the new structure of the business with it being 35% or 40% high velocity business, we probably expect to see March in a normal environment, but that structure of a business, we actually expect it to be down like mid-, high single digits.

So I think that's what you should think about on an ongoing basis in terms of the business model that we have today, and I think that's probably what you should anticipate this year.

Okay, great.

And not sure -- just two more quick follow-ups.

One, I heard you say that you expected 10% growth, but I wasn't sure what you were framing that to.

And then my last question would just be on what you're seeing over in Thailand, if you can give us any update from maybe components that you need to have coming in.

Yes, you know, I think the only comment I made about growth is we actually would still expect that the market will yield a growth rate of about 10% in those new business segments if you will, those new markets, things like industrial, medical and automotive.

And those kind of, even in a slower market, as a result of doing more and more outsourcing, we do hope to be able to grow those 10%.

So what that would translate into is FY'12 to FY'13 being able to grow those kind of markets at that kind of rate seems reasonable, even in a reasonably sluggish economy.

And as far as Thailand, we're still waiting to see.

This kind of reminds us all of Japan, I'm sure.

I think the implications could be significant.

We have to watch it.

I don't think we know the answer.

I don't think we'll see it this quarter, because typically there's enough inventory in the supply chain to go 2 to 3 months.

The question is what happens in the March quarter.

So this is kind of an unknown for us, but we think it's a real issue that we need to worry about and work on and work with our customer to try to come out with the best outcome.

And the things that we worry most about, of course, are disk drives and the disk drive component supply base.

And Steve O'Brien with JPMC, your line is open.

Hello.

Yes.

Thanks for taking my question.

Mike, you just alluded to HVS becoming a smaller part of the mix as you get out into March of next year.

I mean, is that really -- is that sort of improvement in your mix still on the table now with the lower run rate from capital equipment?

I mean, it would seem like the higher margin business, I mean the numbers just tell you took a little step back in terms of the percentage of the total in the September quarter.

So are you seeing something, hearing something from those customers that makes you think there might be some recovery as you get on out to December and March?

Well, one thing to remember is our industrial business is nice round numbers, a billion dollars.

And we're down about $100 million quarter-on-quarter, a little bit more.

But the change in our capital equipment group is around $1 billion, so it went down like 40%, so call that $100 million change.

So $100 million in a quarter is not really that significant to upset the revenue mix of the whole bundle of Flextronics.

It's significant this quarter, because it carries higher than normal profitability, and we didn't anticipate it being down so much, which means we stranded resources that created profitability issues even more than the core profitability of the capital equipment group.

So from a revenue standpoint and a mix standpoint, it doesn't change that much.

And quite frankly, the cycles of capital equipment tend to be shorter than they have been in the past, if we live across the last 6 or 7 or 8 years, we actually think that there's been a little bit of a transition into shorter cycles.

We actually expect it coming back soon enough.

That's why we won't be taking down any kind of fixed costs or anything else to adjust to it.

But the rest of the industrial business we continue to book very well.

We talked about some of the booking rates on the rest of the industrial business.

So we think even with industrial being a little bit soft even going into the next few quarters, it will probably recover after that.

And at the same time, our other industrial businesses will probably continue to grow.

So no, I think that overall mix won't be hampered much by industrial.

Great.

And then if I could maybe follow-up on the wireless infrastructure market right now, which I guess would be part of the Integrated Network Solutions, or even if you want to comment more broadly on the category as a whole.

But even with the sequential down guidance, hearing outlooks from other folks in the supply chain that are even more down sequentially and going into the December quarter, just wanted to see if your customers are discussing carrier CapEx cutbacks, carrier spending cutbacks, and potential for any kind of recovery deeper cuts in December and any kind of recovery into March.

Yes, we forecasted a down December, as you just mentioned.

So that's a result of what I'd call a reasonably broad based softening in those marketplaces, so I think that's true.

Will it be down even more than that?

I'm not sure.

Because we have it down sequentially, like high single digits I think.

So that already on a sequential basis is pretty significant.

Alternatively what our customers tell us is the amount of video rolling across the networks, the amount of carriers that are upgrading into 4G are significant.

One of the things that we've prided ourselves on and very pleased with is the amount of programs that we're on for LTE Next Generation network implementations, we're very, very strong in, in terms of our market share of the networking business, a lot of it is on LTE.

So I think that portion of it will be a beneficiary going into next year.

So I think it's soft, but I think we once again would believe that on a year-on-year basis we're still going to grow this business, maybe not quite 10%, maybe 8%, maybe 10% on a year-on-year basis.

And then going into 2013, we actually think we'll have a strong book of business because of the amount of optical and LTE that for Next Generation systems that we're already the manufacturer on for many of our customers.

But I think near term, it's going to be soft, no question.

And Amitabh Passi with UBS, your line is open.

Thank you.

Paul, my first question was for you.

Could you just clarify the commentary around the interest expense assumption for the December quarter?

Was it still in that $1.5 million range or does it normalize back to the $20 million range?

No, it's $15 million to $20 million for the December quarter, I'm advised.

We had some unusual issues in June --sorry, September with the FX, but $15 million to $20 million for December.

Okay, got it.

And then perhaps just for you, Mike.

Bigger picture question, I think one of your European competitors recently filed for bankruptcy.

Any incremental change in the industry?

Are there any customers there that are potentially interesting for you, any business coming your way?

The answer is yes.

I don't exactly know the quantity of revenue, but without doubt, there are multiple locations where we'll be a beneficiary of some of that business.

So without question, a lot of that business will be redistributed, and we are booking some business from those customers in a variety of different countries as a matter of fact.

So we definitely think we'll be heading in.

And I think we did an announcement about 2 weeks ago or maybe a week ago about Huawei picking up and doing their business in Hungary which was a direct outcome of that bankruptcy filing.

But there's definitely others coming our way.

So that's definitely a good thing for us.

And Craig Hettenbach with Goldman Sachs, your line is open.

Yes, Mike.

If you can just, getting back to the current environment, just how interactions with customers changed through the quarter in terms of forecasts?

And then also on your end just given some of the slowdown, how you're looking to manage your own inventory going forward?

Yes, I would say over the course of the quarter, we had kind of just a slowing.

It almost seemed like every month for the last 3 months we've had just a little notch down in terms of our customer forecast.

So I would say it continued to get slower as the quarter wore on.

We hope that activity is done.

We're not sure it is.

There could be more slowness coming forward, but I think if I was to characterize the conversation with the customer, it's just a continued tweaking down of demand.

So it's not alarming.

The conversation with the customer are not around any kind of alarm or any kind of major adjustment, but it is a slowing economy and without question, we're seeing lower and lower demand as a result of it.

And then kind of call that kind of almost across-the-board kind of comment.

And then the second question is regarding year-end, what do we anticipate?

So we did in inventory 8.1 in the September quarter.

It was up a little bit.

We actually expect inventory to decrease about $100 million to $200 million going through the December quarter.

We expect to be around the 7.5 to 7.8 kind of range, and that's probably something that will be reasonably stable.

And a lot of that, coming off the 8.1 down to 7.5 is not really an inventory build as a result of the slower macro.

It's really more of a reflection of the PC ODM.

We actually ran at extremely high inventory turns.

In fact, sometimes over 30 turns.

So as we pull that $500 million in business out of our overall numbers, it just takes the inventory turns down a little bit.

So even though it goes from 8.1 down to a range of call it 7.5 to 7.8, it's really not an inventory build for us.

It's just a reflection of taking that PC ODM business out.

So we expect to not have a real inventory challenge as a result of the macro economy.

Amit Daryanani with RBC Capital Market, your line is open.

A couple questions.

One, I think given the slowing macro environment, are you guys still comfortable that with the expectation that you'll be able to absorb the extra capacity that comes to you post the PC wind down, and if that doesn't happen what sort of absorption drag could you have on your margin line going forward?

Yes, so the margin drag you'll see this quarter, that's part of the adjustment that we gave you.

One of the reasons that we actually worked with the customer to create an accelerated exit, it became clear that some of this business was going to move all the way out into the March month.

We wanted to get this behind us so that we can actually redeploy a resource, that we could reset our SG&A levels and we could move forward with booking business that is on the go forward instead of managing something on the way out.

So we actually worked with the customer to create an accelerated exit.

So we think we had about -- just to quantify, we had about roughly 135 machines that were employed in the PC ODM business.

We feel that we have 120 of those with homes already provided.

So the minute that ODM PC goes out, those machines will go to different places in the Company where they're needed.

And so we've been planning for this.

We've been looking forward to getting those machines and it's one of the reasons that we tried to get an early exit.

And what that's doing it's going to free up about $40 million to $50 million of CapEx, so it will actually put some downward pressure on our CapEx numbers as we go into FY'13.

So we've got that extremely well deployed.

There will be some inefficiencies associated with this quarter as we transition over, of course, and we send those machines around the world.

But we're like super pleased that we have like 120 of the 135 machines already spoken for.

So we did a quick adjustment.

That's really helpful.

And if I could just follow-up on the component line.

It sounds like we're taking a little bit more of an aggressive step here to lower the fixed cost structure.

I'm just curious, in March when your units are typically I will assume will be down across-the-board on the component side, why the conviction you could hit the 4% margin?

I'd imagine it could be pushed into June and September when revenues get in your favor.

Well, part of the reason right now is we're having a lot of restructuring charges.

So we don't really detail it out and you don't really see it.

But part of what you're seeing, when we say that they were breakeven, they were actually much better than that on an operating basis.

If we were to call out an OTC associated with it, then it would be a different situation.

We actually also anticipate March revenue being higher than the December revenue.

And I think the results are the macro and you're exactly correct that March is almost always lower, but it's more the timing of the new program wins and when they're coming in.

So between the timing of the new program wins, when they're coming in and at the same time if we were to look at the operating profit on an after restructuring basis, the core business is running actually a little bit better.

So we actually feel that we'll have more of that in December.

We think that's done in December by being more aggressive and taking some of the fixed costs out and being able to hit our targets, and it's why we're still working to by the end of the FY'12, by the end of the March quarter, we're hoping to run at a 4% rate.

The macro economy could derail it, but the one thing that we will have behind us is we will have a significantly lower fixed cost structure associated with those businesses.

Lisa, we're roughly at the end of our hour here, so we can take one more question.

Okay.

Our last question comes from Brian White with Ticonderoga.

Okay, just a quick question.

The $0.06 impact from the ODM business in the December quarter, what exactly is that?

Hello, Brian.

It's Paul.

So as we've accelerated this exit, most of the production will be done in the October month, for example.

And whilst there's losses with regards to the units that we ship, we also have a period then of inefficiency under absorption through the rest of the quarter.

So there's some of that.

As Mike said, we're redeploying a lot of this equipment around the world next month.

There's cost of doing that, of tearing it out and sending it around the world.

We've got some supply chain contractual costs that we're exiting early on, so those agreements that we're having are costing us some money to do that.

When we do that also, there's a small amount of E&O charges.

There's just a bunch of stuff really that is creating a delta there, 1-time in nature, that we get behind this so that we can go to a clean March.

Okay.

And just on the gross margin, some of us got on late, there was another conference call, gross margin dipping 5.3% to 4.7%.

What drove that in the quarter?

In the September quarter sequentially?

Yes.

Yes.

Well I'd said earlier that it was a couple of things really that we hadn't anticipated that it didn't go our way.

The equipment revenues were down significantly.

They are a higher margin business for us.

They accounted for about 20 basis points.

And we had some restructuring charges that we took that accounted for kind of 15 to 20 basis points.

So I think that's the majority of the delta in the gross margin.

Okay.

Thank you.

Thanks a lot, Brian.

Okay.

Thank you very much.

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