Flex Ltd (FLEX) 2013 Q1 法說會逐字稿

Good afternoon, and welcome to the Flextronics International first quarter fiscal year 2013 earnings conference call.

Today's call is being recorded, and all lines have been placed on a 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 to Mr. Kevin Kessel, Flextronics' Vice President of Investor Relations.

Sir, you may begin.

Thank you, Sarah, and thanks for joining Flextronics' conference call to discuss the results of our fiscal 2013 first quarter, ended June 29, 2012.

The slides for today's discussion are posted on the investor section of the Flextronics website and can also be accessed from a direct link on our home page.

Joining me on the call today is our Chief Financial Officer, Paul Read who will be reviewing the quarterly results, followed by our Chief Executive Officer, Mike McNamara, who will discuss the current business environment and conclude with September quarter guidance.

Today's call is being webcast live and recorded.

Our presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors.

All non-GAAP measures have been reconciled to the related GAAP measures in accordance with the SEC rules.

You will find reconciliation charts on our website and in the Form 8-K submitted to the SEC.

During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could materially differ because of the factors discussed in today's earnings press release, in comments made during this conference call, and in the risk factor section of our Form 10-K, Forms 10Q, and other reports and filings with the SEC.

We do not undertake any duty to update any forward-looking statement.

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

Paul?

Thank you, Kevin.

Good afternoon.

We generated $6 billion in revenue -- this is on slide 3, sorry -- we generated $6 billion in revenue for our fiscal 2013 first quarter ending June 29, 2012, which was within our guidance range of $5.9 billion to $6.3 billion.

Revenue declined $1.5 billion, or 20% year-over-year, driven almost entirely by the transformation of business model mix to include significantly less high-velocity solutions business.

Our first quarter adjusted operating income was $177 million and our GAAP operating income was $167 million.

Adjusted net income for the first quarter was $156 million and our GAAP net income for the first quarter was $137 million.

We reported adjusted earnings per diluted share for the first quarter of $0.23.

This was up 10% year-over-year and was within our adjusted EPS guidance of $0.20 to $0.24.

Our GAAP EPS for the first quarter was $0.20, which is up 11% year-over-year.

Our GAAP EPS was a new first quarter record for the Company and speaks to our quality of earnings resulting from the improvement in our business mix.

A diluted weighted average shares outstanding, or WASO, for the quarter was 688 million.

This was a reduction of 9%, or 72 million shares compared with the 760 million shares reported a year ago.

This decline reflects the result of our share buyback programs.

During the quarter we repurchased approximately 20 million shares.

Please turn to slide 4. Our Integrated Network Solutions Business group totaled 46% of our sales during the quarter, up from 44% last quarter.

Revenue was $2.8 billion in the quarter, reflecting a slight decline of 2% both year-over-year and sequentially.

This quarterly revenue performance was slightly below our expectations of stable revenue, as continued strength from several of our new outsourcing wins was offset by some softening across most of our top customers in the last month of the quarter.

On a positive note, INS had an extremely strong bookings quarter, which Mike will discuss shortly.

Industrial and Emerging Industries sales grew 7% sequentially to $1 billion.

The group comprised 17% of total sales, up from 15% last quarter.

We were in line with our expectations of high single-digit revenue growth, which was fueled by solid growth in our capital equipment business, coupled with several new customer program ramps.

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

In the first quarter, the group comprised 11% of total sales up from last quarter's 10%.

Quarterly revenue totaled $671 million, growing 4% sequentially and a healthy 20% year-over-year, marking yet another quarterly revenue record.

This performance was in line with our June quarter expectations of low single-digit growth as we saw revenue expansion balanced across the customers in industries that we serve.

This marked the tenth consecutive quarter of sequential and year-over-year revenue growth for our medical business, as it grew healthy high single-digits sequentially, driven by strength in drug delivery and medical equipment business.

Additionally, we continued to see great traction with both new and existing customers, and our sales pipeline is holding strong at over $1 billion across the broad areas of medical industries that we serve.

Our automotive business continues to be a strong performer.

We grew several new customer programs and had solid bookings during the quarter.

Our ability to continue to penetrate top-tier OEMs across a broad portfolio of products will propel this business beyond $1 billion revenue level this fiscal year.

During the quarter, we completed our acquisition of Stellar, through which we have expanded our manufacturing capabilities specifically around microelectronics.

We expect our High Reliability group will experience accelerated penetration in the aerospace and defense business as we leverage these new capabilities and technologies during fiscal 2013 and beyond.

High Velocity Solutions comprised 26% of total sales, down from 31% of total sales last quarter as revenue declined sequentially to $1.5 billion from $2 billion.

HVS sequential decline of 22% was within the range of our expectations of a 15% to 25% sequential decline.

This revenue decline was the result of continued reduction of business with our largest mobile customer as we continue to execute our focused portfolio management action.

Please turn to slide 5. Adjusted gross margin was 6%, up 40 basis points from the prior quarter, reflecting a trend we believe will continue as we transition our portfolio to greater concentration of low-volume, high-mix business, which carries higher margins.

Adjusted operating income increased 12% sequentially, totaling $177 million; and adjusted operating margin was 3%, which was up 50 basis points from the prior quarter.

During the quarter, we incurred approximately $10 million as planned in transition costs as we reduced our exposure to a significant mobile customer.

We expect similar transition costs in the September quarter to finalize our activities with this customer, as we had previously discussed.

Additionally, as we previously discussed, we continue to optimize our components business, which absorbed approximately $5 million in realignment costs during the June quarter.

We expect a similar level of realignment costs in the September quarter.

Our adjusted operating margin was within our margin guidance range and we continue to believe that our business is structured at our targeted 70/30 mix to produce operating margin returns of 3.5% on increased revenue level.

Our adjusted EBITDA was $282 million in the first quarter and totaled over $1.1 billion over the last 12 months.

Our adjusted EBITDA margin increased 20 basis points to 4.7%.

Our adjusted EPS from continuing operations of $0.23 was up 10% from the $0.21 we reported last year.

Please turn to slide 6. Interest and Other net was $9.3 million expense in the quarter, a change of $24.6 million from the prior quarter, which had income of $15.3 million.

A major driver for the increase was the absence of a $19 million foreign exchange currency translation gain, which resulted from the liquidation of certain foreign entities in the prior quarter.

We also realized strong foreign currency gains primarily due to certain strategic RMB positions, although to a lesser degree than prior quarters.

We do not anticipate this level of foreign currency gains to continue.

As such, we believe a range of $15 million to $20 million for net Interest and Other expense next quarter and going forward, remains appropriate and is the level forecasted in our guidance.

The adjusted tax expense for the first quarter was approximately $12 million, reflecting an adjusted tax rate of 7.1%, which was slightly more favorable than the 8% to 10% tax rate we'd estimated for the quarter.

The favorable tax rate was primarily due to a shift in the mix of taxable income during the quarter.

For our September quarter we believe modeling 8% to 10% tax rate remains appropriate and is also what our guidance is based on.

Turning to the reconciliation between GAAP and adjusted EPS, stock-based compensation amounted to $9.8 million in the quarter and intangible amortization net of tax was $8.5 million in the quarter.

The two combined items represent a $0.03 EPS impact.

Our previously announced Vista Point Technology divestiture closed during the quarter.

As discussed last quarter, the operating results for this business and impacts from the transaction have been recorded as Discontinued Operations.

Our Discontinued Operations reflect a net loss of $9 million, which equated $0.01 EPS impact in the quarter.

Please refer to the Investor section of our website for a detailed reconciliation.

Please turn to slide 7. Inventory declined by 5% sequentially, or $150 million, in line with our sequential revenue reduction, to approximately $3.2 billion, and our inventory turns remained flat at 7 turns.

Our cash cycle expanded three days sequentially to 30 days, which was within the 25- to 30-day range we'd expected to manage our business following our continued reduction in our High Velocity business, that carried significantly higher asset turnover.

The current three-day increase was a result of a decline by one day in our DPO, coupled by a DSO expansion of 2 days to 47 days.

As seen from the Net Working capital chart in the top right hand side of this slide, our net working capital as a percentage of sales increased slightly to 8.5% from 8.3%.

This was just above our targeted range of 6% to 8%.

Our ROIC for the quarter was 20.8% and remains well above our 8.5% weighted average cost of capital.

Please turn to slide 8. We generated $46 million in cash flow from operations, which marked our sixth consecutive quarter of positive cash generation.

Our net capital expenditures was $105 million in the June quarter.

As a result, we consumed $59 million of free cash flow.

Completion of the Vista Point Technologies divestiture, combined with a couple of strategic acquisitions to close this quarter, results in approximately $15 million of net cash used related to these investing activities.

During the quarter we also spend $134 million repurchasing our stock.

Please turn to slide 9. We ended the quarter with $1.3 billion in cash, down $233 million versus the prior quarter.

Total debt remained constant at $2.2 billion.

Our net debt increased by $220 million to $912 million, while our debt-to-EBITDA level remained at a very healthy 1.9 times.

That concludes my comments, and I will now turn the call over to our CEO, Mike McNamara.

Thank you, Paul.

Today we will discuss the underlying global macroeconomic conditions facing our business and how we are responding to these conditions, and the progress we have made with our ongoing business transformation outlined at our May 31 Investor and Analyst Day.

I will conclude with guidance for our September quarter.

The macroeconomic environment has deteriorated over the past few months, which should not surprise anyone listening to the call.

We are all well aware of the challenges facing Europe, China, and the US from a macroeconomic standpoint.

Regardless of the environment, we are maintaining a disciplined cost structure while aggressively expanding our efforts to create supply chain solutions for our customers that grow our revenue and improve our overall operating profile.

We have been adding new customers and new business into a portfolio that will help us grow and diversify.

Three of our four business groups are expected to be stable to up slightly, and our HVS business is expected to benefit from consumer seasonality and grow sequentially.

Our pipeline of outsourcing opportunities is expanding, and we are converting these opportunities into strong bookings.

The June quarter turned out to be one of our best bookings quarters, reaching $2 billion on an annual basis.

Breaking down our bookings in INS, we saw over $1 billion, which were distributed across 13 different programs for data networking server, storage and telecom.

IEI was over $300 million and spread across more than 50 programs in many sub-industries such as point of sale, appliance, security, lifestyle products, energy, navigation, smart meters, and capital equipment.

HRS was over $170 million with approximately 50% in automotive programs, primarily in the connectivity and the body electronics markets; and the majority of the remaining HRS bookings supporting our medical equipment and drug delivery businesses.

HVS totaled $600 million, with over $450 million in mobile consumer and the remainder in high volume computing.

Perhaps even more noteworthy is that over 80% of our new HVS bookings are in higher value-added services, mechanicals, and nonassembly technologies.

Our bookings this quarter are vital to reigniting our growth engine, and we expect the benefit in fiscal 2014, with some programs ramping later this fiscal year.

While it remains challenging to predict where the global economy goes from here, we remain confident in our ability to improve our operating margins toward the 3.5% we've outlined, and we will generate strong free cash flow in fiscal 2013.

We have accomplished a transformation of our business to our desired portfolio model.

Our current portfolio model is structurally established to reduce volatility as a price for more diversification across markets and customers.

Evidence of our diversification was seen through our continued reduction in the concentration of our top 10 customers.

Our top 10 customer concentration came down to the lowest level in nearly three years, at 48%.

This is down meaningfully from 51% last quarter and 55% in fiscal 2012.

The quarter also marked our first back-to-back quarters without any 10% customers in over three years.

Our mix shifted to 74% low-volume high-mix and 26% high-volume low-mix, and we expect that we will maintain a roughly 70/30 mix for fiscal 2013.

We expect this to occur even as our HVS business grows again from the bottom it established in Q1, but now our HVS growth will be driven by higher quality businesses using more of the nonassembly manufacturing technology businesses.

Extending our lead in low-volume high-mix manufacturing and achieving increased customer diversification utilizes more of our manufacturing technologies, will lead to increased predictability.

Our low-volume high-mix business grew sequentially in a difficult environment, and we exited the quarter with a low-volume high-mix annualized revenue run rate of approximately $18 billion.

Our successful transformation is also very important to supporting and enhancing our quality of earnings, which remained strong in June.

Margin expansion is a key pillar of our transformation.

Operating margin for the quarter settled at 3%, in line with our guidance range, despite slightly lower than expected revenue.

We are forecasting operating margin expansion for the September quarter despite the macroeconomic uncertainty.

The bridge that Paul unveiled at our recent Investor and Analyst Day, detailing our targeted expansion to a 3.5% operating margin, remains on track for our fiscal 2013.

Other transformation involved in our free cash flow will increase, which will create numerous investment options.

Despite a slower start to the fiscal year, our free cash flow performance was in line with our internal forecast.

Our business is structured to generate free cash flow in the range of $500 million this fiscal year.

Our capital structure is in excellent shape and will remain disciplined around our CapEx investments.

We have continued to aggressively deploy free cash flow toward share repurchases, and we completed our most recent share repurchase program during the June quarter, bringing our total share buyback for the year to 73.1 million shares, or 10% of our shares outstanding.

Now, turning to guidance on slide 11.

For our second quarter, revenue is expected to be in the range of $5.9 billion to $6.3 billion.

Our September quarter revenue guidance reflects a range of down 1% to up 5%, or a 2% increase at the midpoint.

At the midpoint of our guidance range, we are forecasting all of our business groups to be stable to up slightly sequentially, with the exception of our HVS business that will benefit from consumer seasonality and bounce off the bottom it established in the June quarter.

Our adjusted EPS range is $0.21 to $0.25 a share and is based on an estimated weighted average shares outstanding of 680 million, and assumes an operating margin range of 3.0% to 3.3%.

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

With that, I would like to open up the call for Q&A.

We ask that you please limit yourself to one question and one follow-up.

Operator, please open the line for questions.

Our first question comes from Sherri Scribner with Deutsche Bank.

Your line is open.

On behalf of Sherri Scribner.

I was wondering if you could just address your components profitability this quarter and the trends you're seeing in the components business.

On the profitability side, this is Paul, for the June quarter absent of the charges, we are roughly breakeven.

But we said that we took about a $5 million charge as we continue to realign that business.

I'll be taking the same amount of charge in the September quarter, and the September quarter we'd expect to be slightly profitable, even with that charge.

Okay.

And just turning now, changing pages a little bit.

You mentioned that you had about $2 billion of annualized deal wins this quarter, but you're not really going to see the major benefit of those until fiscal '14.

Just given than we are dealing with very uncertain macro and end demand picture, what do you expect to drive growth for you in fiscal '13?

I think you will see a recovery over the next couple of quarters, you'll see a slight increase in revenue.

A lot of the new wins that we are winning aren't a lot of consumer wins that occur in the near term, so as a result they don't ramp as rapidly near term.

Some of those wins will come in in the fourth quarter, maybe some even will touch into the third quarter but predominantly, they will be based -- they will reach their full run rate in FY '14.

We will continue to book business.

Some of them will fall into the existing quarter.

But as we book more complex business, longer product lifecycle business, it tends to have a little bit slower ramp rate.

And in the meantime we will continue to live off some of the wins that we've made over the last six or nine months, and you should see some expansion in revenue as a result over the next couple of quarters.

Our next question comes from Shawn Harrison with Longbow Research.

Your line is open.

Good afternoon.

I just wanted to first touch on RIM and the declining business there.

How much of a drag will it be into the September quarter in terms of revenues?

I guess what is also the margin drag with that business right now?

Well the margin track -- Q1, we will have some revenue decline going into Q2.

From Q1, it's probably not very significant, but it will be a slight downward trend.

The margin trend, it really depends on how we end up in terms of the overall realignment charges that we have talked about.

We've talked about a $10 million charge in the second quarter.

That's the amount to think about that comes out over time.

We would actually hope to be substantially out of that in Q3.

We are actually hoping those -- the ending realignments actually occur in Q2.

We see some slight reduction in revenue.

Not that meaningfully, and we still see about a $10 million realignment cost to us and then after that, we will be pretty much at steady state.

On a net/net basis, you will have a total of $5 million in restructuring charges with the components business, $10 million with the realignment within mobility.

You should see a $15 million benefit to EBIT moving into the December quarter.

Is that the correct way to think about it?

Yes, that's roughly correct.

Our next question comes from Wamsi Mohan of Merrill Lynch.

Your line is open.

Yes, thank you.

Good evening.

Mike, can you talk a little bit about what is driving the higher nonassembly business in HVS and what percentage of revenue in HVS is nonassembly and where that could go over the next year?

What's driving the nonassembly business is a lot of the pure assembly business on consumer kind of products tend to be very low profitability programs that have high competition with some of our Taiwanese competitors.

We've found that to be difficult to really drive any kind of meaningful value for our shareholders.

If you look at even the results this quarter, you see that revenues are down substantially.

But actually, net income is higher and earning per share are up 10%.

What we are trying to do with our High Velocity business, it's really important to us.

It's something that we will continue to penetrate.

It's something that we continue to have billions of dollars in.

But we will try spend more time booking businesses that are in what I'd call the non -- just not the just pure volume business but also things like services and mechanicals and power and multi boards.

And maybe it's other regions such as Brazil, maybe it's locally built products.

There is still a lot of different ways to go penetrate those consumer products, and we are actually focused on booking all those kind of things which we think are better businesses.

As far as how does that trend evolve over time, well, it is evolving as we speak.

I would say I don't know the numbers exactly, but what you will find as we move from computing ODM and we move out of some of the pure assembly business from our big cell phone customer, you are actually seeing that transition occur very, very rapidly.

I wouldn't want to quote a number except to say it's moving very, very rapidly over the course of the last six months and will continue to over the next six months.

Okay, thanks, Mike.

As a follow-up, Paul, you mentioned the $5 million charge this quarter and next quarter for a components.

Can you remind us what those charges are specifically geared toward, and is this primarily still transitioning and consolidation and in China of the factories?

Or is there anything else?

Primarily the power.

We have one last facility to transition out, and we will be done by the end of September, so it's primarily related to that.

And so that's -- what was the other part of your question?

I'm sorry, one moment.

Your line is re-opened.

Did that answer your question?

Yes, it did.

Thank you.

Okay, thanks.

Our next question comes from Matt Sheerin with Stifel Nicolaus.

Your line is open.

Yes, thanks.

At your analyst day, you threw out a target of $1 to $1.10 in earnings for fiscal '13.

Given that you have got a lower revenue run rate here and that EPS is a little bit lower than some expected for the September quarter.

Are you still comfortable in that target given that you've got some costs are rolling out in the back half?

Or should we bring that in a little bit?

I think the -- our objective to talk about our targets once a year at the analyst day and then give you guys guidance on a quarterly basis.

I think the new data that you have is that the macro tends to be a little bit tougher than -- has continued to become tougher over the last few months, a little bit more than we would anticipate.

That's new data that that's continued to kind of slightly deteriorate.

I don't actually consider it to be a significant down, but it seems to be a little bit -- leaking a little bit.

But we are not prepared to readdress the targets.

We've set our targets and we are going after those.

But certainly, the macro environment is not helping us go and achieve those targets.

Okay.

That's helpful.

And then just clarifying the relationship with RIM.

I know you have -- you are basically closing down some operations or -- where you supported RIM in a couple of plants.

What's going to be left in terms of that relationship when all of this restructuring and realignment is done?

Well, we will have to see, but we will continue to work on a number of different projects such as flex circuits, printed circuit boards, maybe there will be services involved, maybe there will be power products involved.

We will continue to try to work that relationship much as I described earlier about trying to do the production technologies around the edges as opposed to being involved in the significant variability that test occur with the pure assembly businesses.

So, all of the volume business is going away, basically?

Assembly business, line assembly business.

That's right.

Okay, thank you.

Correct.

Our next question comes from Brian Alexander with Raymond James.

Just to confirm, on the 3.5% operating margin target that's still intact, is that still intact for the December quarter?

I think it was dependent on about $6.6 billion in revenue which would require about 8% sequential growth in December versus September, using the midpoint of your guidance.

You weren't specific in your comments about when you'd get the 3.5% on what revenue levels, so just looking to see if anything is changed there.

And then I have a quick follow-up.

We'd said in our analyst day that we need a revenue level of right about $6.6 billion per quarter to help us get to that 3.5%.

On whilst, like Mike says, the environment's challenged.

We still see growth through the September, December quarters.

That will be a challenging number for us.

However, there is always compensating aspects that could help us still get to that.

And as we roll off some of these charges the second half of the year, I think that would help, and components, that would certainly help.

But we certainly think that the 3.5% is still achievable for this year, at the back end of the year.

Great, okay.

And then on the bookings, the $2 billion, remind me, how does that compare to total bookings in recent quarters?

It seems like a pretty big number if I annualize it more than 30% of your revenue run rate.

And then how should we think about the gross margin profile of those wins in aggregate relative to your current gross margin of 6%.

It sounds like it's higher, but I just wanted to confirm that.

Thanks.

Yes, I think you ought to think about it.

I'm not sure about gross margin on that -- on those businesses, but I think you should assume that the operating profit is roughly consistent with our target operating profit of 3.5% as a bundle.

And I would say, yes, I think the $2 billion -- we view this last quarter as one of the best bookings quarters that we have seen in the last several years.

So, we view it as being very, very strong across the variety of different segments.

And it just makes us somewhat happier about the potential for FY '14 and kind of resuming the revenue growth as we get off a lot of this HVS business.

We are pretty excited about that.

It's probably not an accident.

We struck when we restructured the Company to move to this new portfolio, we tried to create a structure and create an organizational profile that is much heavier weighted toward revenue -- driving revenue growth and good revenue growth that meets our target margin profile and meets our portfolio, our target portfolio.

And we believe we are being successful in terms of that transition and some of those changes we made and really be able to drive some supply chain solutions that create value for our customers so that we win additional revenue.

It seems to be going really well for us, and we are pleased with that.

But it unquestionably one of the best bookings quarters we've had in quite some time.

Do you know roughly what percentage of those are from new versus existing customers?

And that's it for me, thanks.

Well, the largest percentage of them would be from existing customers.

The problem is we have most of the customers in the world.

We have not all of them, but we have a lot.

It's kind of hard to book $2 billion of brand-new guys that we are not involved with.

But I would say you have to assume you're roughly looking at at least 80% of that coming from existing customers.

Fair point.

Thanks, Mike.

Our next question comes from Amitabh Passi with UBS.

I had a question for Mike and then a follow-up.

Mike, just hoping you can drill down a little further into the INS segment.

We've heard a lot of conflicting data points in terms of trends in certain key subsections of that segment.

I was just wondering if you would just maybe talk to trends across the major subsection, networking, wireless infrastructure, storage.

Yes, it's -- I actually believe it's -- we are getting some confusing data points.

There are a lot of companies out there that are small, nimble, agile companies that are actually doing quite well and are producing pretty strong results.

And there is other companies that -- even within some of the larger companies, they are having niches within their portfolio that are doing well.

On average, we see datacom and telecom being reasonably weak, but there are bits and pieces of telecom and datacom that are actually doing quite well.

I think that's the reason for some of the difficulties.

As a bundle, we think they are lower.

But there is different places to play within those companies that could have very, very nice growth rates, and there tend to be a number of different smaller companies that are doing actually quite well.

So, I would say it's weak, but again, pretty spotty.

Without doubt, we were hearing from our customers that Europe is slower.

We were hearing China is slower, we hear the US is actually pretty good.

So, from a geographic standpoint it's a little bit mixed, and I think you get some mixed results in that most of the other emerging markets tend to be a little bit slower right now.

In storage and servers, there is also mixed data points.

It seems if -- once you get into government and enterprise it tends to be pretty slow, but once you get into the cloud and if you are penetrating into the cloud infrastructure of service storage, it's very, very strong.

So once again, I think it depends a little bit on where you are playing.

Consumer on average we view as weak.

We see -- I won't go into the rest of the markets because you asked about the INS.

But there is a lot of mixed data out there.

Okay.

I appreciate it.

And then Paul, just for you as a follow-up question, cash conversion cycle days continue to trend up.

Is there a way to maybe improve that metric?

I was just curious, relative to one of your larger North American competitors, your cash conversion cycle days is almost 2X what theirs is.

Would love to hear your commentary on that.

Sure.

I just want to make a point actually for the June quarter that we were negatively affected by a couple of days cash convergent cycle.

We'd probably be more around 27, 28 days.

As we reduce our business with our number one mobile customer, they had -- we had a significant last cash cycle days than the average of the Company, and so that negatively affects it.

However, there was a one-time adjustment also in that we would be getting some end of period kind of compensation from them for high inventory levels, and that went away.

So, that cost us about $150 million of free cash flow.

Really, if that one-time issue did not occur last quarter, we would have been $100 million free cash flow positive, and we expect to actually make that up now in the September quarter.

The inventory levels of that customer have come down considerably, so it's a two quarter issue.

With regards to comparing our customers, I don't think I have enough information around their business to compare with that.

There is a lot of things that go on and off on the balance sheet that affect the cash convergent cycle, and we certainly take advantage of that.

But we actually don't probably do it as to the same level or same extent as others.

And therefore, as a percentage of your cash conversion cycle, we don't get as positive a effect maybe as others would.

Got it.

Thank you.

Our next question comes from Osten Bernardez with Cross Research.

Your line is open.

Good afternoon.

Would you be able to share the rate of bookings for your component business?

I can't recall whether you said -- you mentioned that specifically.

Yes, I don't have a number of exactly what those bookings are, but basically, the -- what I would call the nontraditional assembly businesses that we have are all probably growing -- as a bundle, will grow well over 10% growth this year the way it's looking right now.

I don't have exactly a bookings numbers for you.

I can tell you that the revenue growth in those places is very strong and certainly much stronger than the Company as an overall average.

Okay.

And the follow on to your INS, the bookings that you highlighted earlier, would you be able to comment as to whether it would be of, I believe it was 13?

The split amongst those 13 relative to the subsegment in your INS, did they fall relatively in line with rare revenue -- where your overall book of revenue tends to be?

As it relates to networking communications and service storage area are you asking if --

Yes.

-- if it roughly is in that line with that?

Correct.

That's correct.

We were probably a little bit heavier in networking relative to our total exposure to networking.

I would say telecom was a little bit lighter than what we would -- than our overall average.

I would say we were pretty heavy on networking and we were probably pretty much in line with server storage and a little bit light on the telecommunications.

Thank you.

Our next question comes from Jim Suva with Citi.

Your line is open.

Thank you, and congratulations to you and your team there at Flextronics.

Could you just maybe help us better understand or bridge the statements that -- I think at the beginning of the call there is a comment talking about the last month of the quarter has seen some softening and then there were some commentary about the strongest bookings the Company ever had.

Help us maybe bridge those comments as well as how July has progressed thus far, then I will probably have a follow-up.

Yes, so the bookings aren't related to the shipments this quarter, so I would say they don't really bridge.

Most of those bookings, even with -- most of the bookings are INS bookings, which you will are going to see that's literally going to take 9 or 12 months to go really mature, especially in that product category.

It tends to take a little bit longer.

I actually don't think it bridges to the current quarter, but what we are trying to say by seeing some softness at the end of the quarter is that our last quarter tends to be a little bit bigger and the rest of the year, especially in -- or sorry, the last month of the quarter tends to be higher than the other two months of that quarter, particularly in that what I would consider to be the higher end product categories, the more complex products because there is a lot configured over that gets pulled at the last minute, and that was a little softer than we would have anticipated.

That tends to be a surprise because we don't really know what it is going to look like at that last month, and the pulls came through a little bit lower than normal.

But they don't bridge to the bookings.

That's not really that related.

And then the July progression, and then the follow-up would be a question more for Paul.

Should we think of stock buyback another 10% clip rate here for this quarter?

I think Singapore law allows up to the max of 12% -- or 10% for a 12 month period, if I'm correct.

And should we start to build that into expectations?

We have, for the year actually, we have exhausted our 10% authorization.

That gets proposed shareholders now in our AGM at the end of August.

And we will certainly take up that proposal and hopefully, as it usually does, get approved.

We want to make sure that we have the flexibility on hand to deploy capital in whatever ways most beneficial for us to continue to grow this -- grow our earnings and make best use of capital.

I think that for now in the September quarter, you shouldn't really be thinking of anything because two of the three months is actually taken up without any authorization.

Great.

Thank you, and the comment about how July is shaping up?

We actually don't know yet.

The July month, we get --

You mean by month, Jim?

Yes, we get weekly reports and everything, but I think July months, we don't really focus on them.

We will get some numbers on that next week.

Thanks, and congratulations to you and your team there at Flextronics, gentlemen.

Thank you.

Our next comes from Craig Hettenbach with Goldman Sachs.

Thank you.

Mike, there's been a lot of starts and stops with demand for the overall tech market in the last couple of years.

Just want to get a sense of how you view the environment today and how it might be different from a year ago or two years ago, what you are hearing from customers.

Well, I think the -- just in general, if I look at the last two years, I think there is more disruption.

I think there is more disruptive technologies, I think there are more disruptive companies, and I think it becomes increasingly difficult to -- I think there is just probably -- a little more uncertainty in terms of the OEMs as to who is going to win and not win, and I think the world moves a lot faster than it did even just two years ago.

I kind of am a believer that technology shifts and the disruptive technologies that are coming out and the aggressiveness of some of the certain companies is very significant and it moves the markets.

And a good example of that is in the consumer markets, both Samsung and Apple are massive disruptors to the normal sense of order.

And you can argue that maybe there is a little bit of an oligopoly developing for a lot of products with those two companies.

That's different than two years ago.

I think you're -- I described some of the telecom, datacom storage server market.

You have some companies that are just tearing it up.

Often smaller companies in the disruptive technologies, and you have a lot of traditional companies that are -- that tend to struggle with being able to respond to that disruption with some of the bigger systems.

I actually just kind of -- I don't know if that's -- if I got your question right, but I just view it as the market as being a little bit more uncertain and a little more where disruptive technologies can move companies a lot quicker.

And probably the stability in terms of understanding who the market leaders are going to be, having those same ones be the market leaders year on year.

I actually start to become more threatened.

And that's how we think about our model and our diversification in our model.

We actually want to have more customers.

We want to understand and be sure those disruptive companies are in our portfolio.

We want to make sure that we are positioned in the right way and not heavily positioned in someone that can be disrupted.

And so to us the response to that is a significant amount customer and even customer geographic and even manufacturing technology diversification.

Did that get to your question?

It did.

I think that's part of it.

The other part, I was just curious on kind of the base business.

If you understand there is a lot of technology shifts recently, but just -- do your underlining base of business today versus a year ago when things also slowed, if there is any kind of comparison you can make, what you are hearing from customers.

Compared to like two years ago, you mean in 2009?

No, no.

Just last year.

One year ago when things slowed a little bit and concerns around Europe.

It seems like we're kind of repeat that.

Just curious what you see is the same or different from a year ago.

I just call it more of the same, if you will.

I don't think it's alarming.

I don't think any of the trends that we are seeing are alarmingly down.

I don't think there is a huge adjustment coming to us.

I just think it's a little bit slow, and I think it might be -- continue to be slow, at least our near term horizon.

But I don't think it's a significant shift or any real significant changes, I just think it's a little bit slow.

So, maybe very similar to last year.

And then if I could just quick follow-up on the component side, in Multek in particular, any kind of product cycles as you go into the back half of the year and into next year that you guys are excited about with that business?

Well, the biggest one would be the ELIC technology, which is the technology that most -- which is really in every layer interconnect technology.

It's a technology that is used on a variety of cell phones and tablets today.

Not all companies have shifted over to this technology.

There is still continuing to be a shift into this technology, and it just enables more advanced products to be designed and built on the printed circuit boards.

We have quite nice investment in that.

Have a lot of quotes and a lot of, in some nice new business wins in that market.

But that is kind of the most exciting structural change that we see coming to us.

Okay.

Thank you.

Our next question comes from Sean Hannan with Needham & Company.

Your line is open.

Yes, thank you.

Mike, if you could elaborate a little bit around the effects of the macro environment as you factored into your guidance for the September quarter.

Flat guidance for three of your four business groups other than the High Velocity, can you perhaps maybe rank and discuss which of these businesses saw perhaps the most pullback in terms of the expectations that you had previously, especially as you factor in new programs or what have you.

And then as kind of part B to that, where do you suspect we can see the most risk among those segments, given the dynamics we are seeing today?

I think the biggest pullback was probably in INS segment relative to expectation.

We saw -- we have seen this softening that we've talked about.

I think that's probably the biggest change in terms of total dollars that affected us, and it's probably the place where we saw the most change in June when we talked about quarter end being a little bit of a problem.

We also saw a broad base over the last quarter, even the last three months.

On a continuous basis, some disruption in a lot of different industrial technologies, call it semiconductor equipment, just a variety of different companies.

So, I would rank that second.

We have seen almost no impact in our High Reliability segment, which is predominantly medical and automotive.

Both those continue to hold up and continue to be strong.

We have seen virtually no hold back on that.

And then HVS, we are seeing a very, very normal consumer recovery coming into this quarter.

And even while we talked about the HVS being up, we will still be taking some negative June to September revenue impact on RIM.

Though it's actually overcoming that impact and actually delivering some more.

I would say that's almost like -- I almost view that as third.

I would call INS the most aggressive downturn industrial, probably second.

And again, a lot of the industrial downturn is because our expectation, even though we grew 9% quarter on quarter, our expectations were actually to go higher.

It's actually down from a higher expectation as opposed to being down as a segment.

Okay.

And then, when you think about then the risk from here in September, would you assign a similar ranking to those segments just based on the movement you've already seen?

Yes, I probably would.

I mean, the risk I would assign to it is, do we have just another, little bit softer.

Can it move down as a result of some of the softness?

I would almost assign it almost the exact same way.

Okay.

That's helpful.

Then you talked about ramping the HRS business.

How should that materialize?

You did $671 million in the quarter, obviously, we are looking for flat next quarter.

Is there a step function that we would see then in either December or March?

Or is there more of a straight progression once we go through those two quarters, based on the ramps that you are aware of today?

Yes, I think we will end up with the same characteristics we have had in the business in the last couple of years.

In medical, Paul talked about steadily increasing numbers.

The medical and the automotive business are one of the most stable business cycles, and you have some of the most visibility that you -- of any other product categories.

What it does is it gives us a good view.

But basically, the answer is, I mean, we would just expect a nice continuous steady uptick, and we expect that for the next couple of years and certainly, almost hopefully on a steady basis quarter on quarter.

And a quarterly level roughly about $1 billion, say exiting March of '13?

Yes?

No.

No?

Okay, maybe I misheard that, I'll take that offline.

Yes, I could address part of that right now.

Our High Reliability Solutions in the June quarter was $671 million.

It won't go to $1 billion run rate in March.

There is not a step function that is going to occur in that business.

It is going to continuous, a nice, slow, continuous, steady march in a positive direction.

And I think the way to think about it is very consistent with the last few years' results issued, expect that we can grow that business segment 10% to 15%.

But there is not a step function change that we anticipate.

Okay, thanks very much for the clarification.

Operator, we have time for one more question.

Thank you, our last question comes from Amit Daryanani with RBC Capital Market.

Your line is now open.

Thanks, glad I snuck in there.

Maybe couple of questions.

One the component business, you guys, sounds like you will be done with restructuring by September quarter.

Could you verify the goal is still to achieve 4% margin by December, and do you need a revenue lift to get there?

Would the restructuring alone will get you there?

Then in the event you aren't able to get there post the restructuring, would you actually look to divest or shut down these operations?

We've always said our target is to get to 4% by the end of the year.

I'm not saying that's December, but December, March, is really what we are driving to.

That's why we are aggressive in getting these realignment -- sorry, these realignment costs done by the end of September which is something we planned.

No new news there.

Certainly revenue levels are going to impede some of that, particularly in printed circuit board business.

But we think we've looked at this carefully enough to think that we could still achieve close to that target, even with some downturn.

But it's for September we think they will be slightly profitable, even with the charges that we have talked about.

And on to the last question, we are just focused on building this business and investing in this business and continuing to plow ahead to make them accretive to our overall business and -- but we constantly are looking at options and opportunities for all of our businesses to continue to invest in.

Then maybe if I just look at the September guide of up 2% sequentially, your business has gone through a fair amount of transition on the portfolio.

Could you talk about, what, do you think normal seasonality is?

Because when I look our model, it looks like it should be up 7%.

I'm just trying to get a sense of how much are you discounting normal seasonality with the September quarter guide.

Yes, you're right.

September is normally up around, on average I think around 7%, and midpoint's around 2%, but the high end of the range is up around 5% or 6%.

We are just trying to be cautious here in our guidance.

It's quite a wide range, $400 million, and we want to make sure we hit the range.

We certainly set our sights towards the high end of that.

But at the midpoint, we feel pretty comfortable that we have taken into account what we see or what we've experienced in the last quarter is any downside that we have been expecting.

We will still have sequential growth, and whether it's 2% or slightly higher than that, we don't know at this stage.

The visibility is a lot less than it used to be, but.

We are clearly being a little bit more conservative as a result of the macro economy.

Fair enough.

Thank you.

Great.

Thanks for all of your interest and for joining our call today.

You will be able to access a replay of the call as well as obtain a transcript in the investor section of our website.

This concludes the conference call.

Thank you.

That does conclude today's conference.

Thank you all for participating.

You may disconnect your lines at this time.