捷普科技 (JBL) 2004 Q1 法說會逐字稿

Good afternoon.

My name is Debbie, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Jabil Circuit first-quarter fiscal 2004 earnings release conference call. (OPERATOR INSTRUCTIONS).

I would now like to introduce Ms. Beth Walters, Vice President of Corporate Communications and Investor Relations of Jabil Circuit.

Thank you.

Welcome to the fiscal Q1 of fiscal '04 conference call.

We will be reporting our results this afternoon.

With me are Tim Main, our President and CEO;

Chris Lewis, our Chief Financial Officer, and Forbes Alexander, our Treasurer.

During the course of the call, we will be making some projections and other forward-looking statements regarding future events and the future financial performance of the Company.

We do caution you that such statements are merely estimates and protections and that actual events and results may differ materially.

We refer you to the documents we file with the SEC, including our most recent 10-K which was filed November 12, 2003.

These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements.

This call is being recorded today and will be posted for audio playback on the Jabil Website in the Investor Relations section, along with a press release and a slideshow presentation on the first-quarter results.

The results for Q1 of '04 on record revenues of $1.5 billion, GAAP operating earnings were $53 million.

This compares to 2.9 million in GAAP operating earnings for the same period in the prior year.

Core operating earnings, excluding amortization of intangibles and acquisition-related targets for the quarter, were $64.5 million.

Core earnings per share were a record 25 cents.

On a year-over-year basis, this represents a 41 percent growth in revenue and a 65 percent growth in core operating profits.

On a sequential basis, revenue and core operating income increased 16 and 22 percent respectively.

So looking at the results for the quarter, revenues as I mentioned increased 16 percent from the prior quarter.

Looking at our specific sectors, the automotive sector was up 17 percent above the prior quarter.

The computing and storage sector decreased slightly by about 1 percent from the August quarter.

The consumer products sector increased by over 65 percent in the quarter, reflecting seasonal higher levels of production along with stronger than anticipated demand.

The instrumentation and medical sector increased slightly in the first quarter, maintaining consistent production levels following the 100 percent sequential growth in the previous quarter.

The networking sector was consistent with the first quarter.

Actual demand for this sector increased.

While production was slightly gated by material constraints in our first quarter, the demand profile increased throughout our November quarter, and we are planning to ramp significantly higher levels in our second quarter.

This is due to improving demand, along with commencement of new assemblies with our existing customer base.

Chris will talk a little bit more about that in our forward-looking guidance.

The (inaudible) sector was down 4 percent in the current quarter.

The telecommunications sector decreased slightly sequentially.

So looking at the total of all the sectors for the quarter, I will run through the actual percentage of revenues that each of these sectors were for the quarter.

So the automotive sector represented 8 percent of overall revenues; computing and storage 13 percent; the consumer sector of 31 percent of revenue; instrumentation and medical sector, 10 percent; the networking sector represented 18 percent of revenues; the peripheral sector, 6;

Telecom, 10 and the other sector 4 percent.

Now I will turn the call over to Forbes Alexander.

Thank you, Beth.

I would just like to review our sales cycle and some balance sheet movements with you.

Our inventory turns were (inaudible) consistent with the previous quarter.

The Company's sales cycle improved by four days to 33 days.

Cash flow from operations was approximately 75 million in our first quarter, our twelfth consecutive quarter of positive cash flow.

This is a significant accomplishment in the quarter as our overall business grew by 16 percent on a sequential basis.

Our capital expenditures were approximately 41 million.

Depreciation for the quarter was approximately 46 million with EBITDA approximately 110 from $5 million, a record for the Company.

Our cash balances were 749 million as of the end of the first quarter.

Our return on invested capital increased to 14 percent compared to 12 percent last quarter.

On a sequential basis, operating earnings grew by almost 12 million or $46 million annually against an increase in invested capital of $35 million.

This represents an incremental operating return on invested capital (technical difficulty) of 134 percent on an annualized basis.

On a year-over-year basis, we have maintained efficient control in capital deployed, so greatly increasing our operating earnings from a year ago.

Comparing our November quarter results to a year ago, we increased operating income -- operating earnings -- by $25 million to $100 million annually while deploying only an additional $120 million in (technical difficulty)-- in 90 percent operating return on additional capital (technical difficulty)--.

Additionally our return on invested capital improved on a year-over-year basis by 49 percent to 14.3 percent at the end of the November quarter.

As we operate throughout the remainder of the fiscal year, we are in excellent position to continue to produce solid positive cash flow from operations, while producing very good and incremental return from the capital deployed.

Our improving returns are a function of continued good operating performance are enjoying the benefits of an increasing organic growth profile across a broader base of sectors as compared to prior years.

Also, during the quarter, we incurred $1.3 million of integration and acquisition charges relating to the Philips and NEC acquisitions in the quarter.

Now I would like to hand the call over to Chris.

Our integration activities at Philips and most recently with our NEC acquisition are now substantially complete.

Turning to our operating performance, we are pleased by the operational execution of our plant in the most recent quarter, particularly with our relatively new plant executing to a very steep ramp in consumer electronics.

Our focus for this fiscal year will be to execute to a healthy demand profile across various segments throughout this fiscal year.

Regarding capacity, our business profile is for consistent to increasing production across all geographies.

While we continue to transfer business as a normal course from high value-add locations to lower-cost locations, the rate of transfer is now more under a normal steady course.

As we ramp throughout this fiscal year, we will be challenged in numerous plants with ramping requirements but are in a position to have adequate capacity.

The investments we have made in our footprint, primarily on a greenfield or organic basis over the last ten years, will now serve as the majority of our capacity needed for the foreseeable period of time.

Our incremental investments are expected to be primarily related to existing plants, but we're also reviewing certain geographies, China and Eastern Europe, for further expansion.

Our capital investment plan is now somewhat above our previous estimate.

We estimate capital expenditures now to be 100 to 120 million versus the $80 to $100 million estimated previously.

I would now like to take everyone through our second-quarter guidance as well as our fiscal year update.

For our February quarter, we are now guiding to an overall range of 1.35 billion to 1.4 billion for our second quarter.

We expect gross margin will be 9 to 9.1 percent reflecting our current mix of business.

We expect SG&A expenses to slightly decrease in absolute dollars as compared to our first quarter.

As a percentage of sales, we would expect SG&A to be 4.7 to 4.8 in our second quarter.

As a percentage of revenue, we estimate an operating margin of approximately 4 to 4.2 percent.

We estimate interest expense for the second quarter to be 3.5 million with a tax rate of 16 percent.

Excluding amortization of intangibles, we estimate core earnings per share to be 20 to 22 cents in our February quarter.

Reviewing the revenues by sector, again our production levels are anticipated to be 1.35 billion to 1.4 billion for our second quarter.

The automotive sector is estimated to decrease 15 percent, reflecting seasonal lower levels of production.

Computing and storage sector is estimated to have higher production levels by approximately 2 percent.

The consumer sector is expected to decrease by 35 percent in our second quarter, reflecting a normal seasonal lower-level of production from our November quarter.

New wins in this sector, along with normal seasonal higher production levels in our May and August quarter, will allow this sector to grow to higher production levels in the latter portion of our fiscal '04.

The instrumentation and medical sector is anticipated to have consistent levels of production.

The peripheral sector is estimated to increase 4 percent.

The networking sector is estimated to increase by 15 to 17 percent.

Demand for the product has been consistently higher over the last few months.

We are additionally benefiting from new assemblies with our existing customers.

The Telecom sector is estimated to increase by 5 percent.

We are pleased to see this sector in a position to increase sequentially for the first time in over two years.

Reviewing our full year guidance, we are now estimating our revenues to be 5.7 to 5.9 billion for our fiscal '04.

Our operating earnings are anticipated to grow by over 30 percent, and we currently expect earnings per share to be 93 to 97 cents for the year or an increase of over 30 percent.

This compares to our previous estimate of 5.6 to 5.8 million in revenue and earnings per share of 90 to 96 cents, estimates made in September at the beginning of our year.

This estimate is based on a current demand basis, taking into account various ramps of new business occurring in the latter half of our fiscal '04.

I would like to now turn the call over to Tim Main.

Thanks, Chris.

Our seventh consecutive quarter of growth resulted in record revenue and earnings.

We opened the year with a strong quarter, and all indications are that this momentum will continue into future quarters.

We are providing a positive (technical difficulty) full year guidance and continue to gain execution of momentum across our global plants as new programs and new customers come online and as end markets strengthen.

For the full year, we expect revenue to increase $1 to $1.2 billion. 70 percent of this growth will come from truly organic sources unrelated to any acquisitions we made in the past two years.

Coming closer to full year contributions from organic growth, as well as full year contribution for acquisitions closed in fiscal 2003, give us a solid foundation for topline growth in fiscal 2004.

In addition to this foundation, customers are gaining confidence that the economic recovery is real and sustainable.

As the quarter unfolded, we saw confidence build across our entire customer base, including the business (inaudible) -- networking, telecom and computing and storage sectors.

On a combined basis, these three sectors will be up sequentially in our second quarter, typically a seasonally weaker quarter.

This is a stronger forward-looking profile than we have seen from these sectors in some time.

Operationally we continue to improve our performance as the challenges of integrating acquisitions, restructuring operations and moving production to lower-cost locations receded into the background.

We still need to improve our execution in a number of areas and feel very good about our ability to do so.

We asked a lot of our people over the past two years and have managed through a high number of complex variables.

This year we expect to have much greater balance and focus entirely on the quality and reliability of our solution.

We have some great people, and now with fewer variables for them to manage, we expect to continuously improve our value proposition to customers.

I am delighted that our return on invested capital increased to over 14 percent and that operating margins continued to improve.

Following a small seasonal setback in Q2, we expect continued improvement in operating margins, return on invested capital and absolute operating profits.

The midpoint of guidance would indicate we expect operating income and EPS to grow in excess of 30 percent over fiscal 2003, a year in which we grew operating income and EPS 48 and 58 percent respectively.

We are, in fact, back on our trendline of 30 percent year-over-year growth and earnings and are, in fact, planning well above our weighted average cost of capital.

We are delighted to put the question of whether or not this could be achieved again to rest for ourselves and for the EMS industry.

We will take some questions now.

Operator, we are ready for questions.

We have about 35 days minutes available today for questions.

(OPERATOR INSTRUCTIONS).

Patrick Parr, UBS.

A question about your current capacity utilization.

I was wondering if you could give us a sense of what it is enterprisewide and then maybe break it down a little bit regionally?

We modeled our business again on an individual (inaudible) business unit basis, but if you do look at geography and you want to follow that metric, we are now more at 70 percent of capacity and moving towards 70 percent throughout the world with the exception of the United States, which is 50 percent capacity and moving up slightly.

In aggregate terms, that means we are at 65 or 67 percent capacity.

So if you suggested that CapEx is going up and you would be potentially adding some capacity in lower-cost geographies, would I assume you're going to be reducing capacity in higher cost geographies, or would the total capacity go up?

That is a great question because the point we wanted to make is across our geographies we are looking at steady production to increasing production throughout fiscal '04.

What we did mention is we're looking to add investment capacity, some of it we did in our first quarter as far as building additions in Eastern Europe and China.

But it is more an issue of where we are just adding some of our building requirements, and we are also in the process now of acquiring machinery and equipment for additional production lines throughout the world.

Okay.

So obviously the industry has had a tough go of it in terms of pricing given that there is so much excess capacity.

At what point would we expect to see perhaps more favorable pricing for you guys as well as the industry in terms of -- maybe expressed in terms of your capacity utilization? 80 percent? 75 percent?

Patrick, we are not really laying in wait for an improved pricing environment.

We have really structured our business and running our business around a previous profile (inaudible).

We are running at decent capacity utilization levels in most of our low-cost locations.

I don't think the pricing environment needs to get (inaudible) or Jabil to continue to improve margins and operating margins, operating profit and return on invested capital, which are really the key financial metrics for us.

If overall industry utilization rates improved and pricing got better, that would be just an additional benefit.

But that is not something we need to have our economic model really well.

One quick final one then.

Tim, remind me of what your longer-term operating margins and return on capital goals are again?

Our longer-term goal is to grow operating income year after year of 30 percent to the absolute dollar.

The guidance that we are suggesting for fiscal '04, for example, is operating income of 245 to 255 million for fiscal '04.

That is compared to 182 million in the prior year, so well over 30 percent.

Having said that, we also are in the position and want to continue to improve our return on invested capital, and we are positioned for fiscal '04 to have our ROIC move up 40 or 50 percent relative to the prior year or 14 or 15 percent ROIC compared to 10 percent the prior year.

And with those kind of metrics and returns in mind, we are also in a position to generate $300 to $350 million of positive cash flow from operations.

So that is our goal, is to grow operating income 30 percent a year and also have appropriate returns.

Great.

Thank you.

Scott Craig, Morgan Stanley.

One thing on the return on capital, as you exit the year '04, can you give us a sense if you hit your guidance numbers on what sort of a return on capital you think you will be at exiting the year?

Thanks.

Along the lines of 15, 16 percent is where we would like to be.

Okay.

Thanks.

Stephen Fox, Merrill Lynch.

Could you talk a little bit about the new business mix in terms of whether it changes, what your full system assembly mix is versus printed circuit board assembly and how that could be impacting profitability?

How much full system assembly are you doing today as a percentage of sales?

The systems assembly we do is not as materially intensive as some of the other EMS providers.

I don't have the exact percentage for that.

As far as the diversification across the sectors, that has changed for us over the last couple of years.

It has created in some cases a higher material content or a lower gross margins.

But what we look at is again the absolute dollar of operating income against the capital deployed is more how we model the business and look at it.

It is fair to say (multiple speakers) those metrics look similar to the makeup that you have had in the past?

The returns are comparable.

Again, this ROIC of 14 percent, for example, is within 70 basis points of the best ROIC we have had three years ago.

I think we were 15 percent ROIC in our November 2000 quarter.

We are getting close to some really good ROIC.

It is certainly a trend for us to do more and more system assembly and take more and more product ownership.

That tends to be a labor-intensive business with high dollar material content, but I don't think it is distorted to our financial results.

Thank you very much.

Alex Blanton, Ingalls & Snyder.

Just a clarification.

The CapEx figure you mentioned, 100 to 120 million, that is for what period?

For this fiscal year.

For fiscal '04.

And you had 41 in the first quarter?

We are off to a big start, that is for sure.

Some of it was a building addition in Eastern Europe, and the rest of it has surfaced now and sent throughout the world.

Again, we are growing in all areas throughout the world.

How did that compare with the peak year for you in CapEx?

This is really off the top of my head, but I think it was maybe 250 million or something along those lines.

We are in a position now where our CapEx relative to our depreciation should be somewhat lower.

That is the point I made as far as our capacity and the investments we made over the last ten years.

This year, for example, we will be about $185 million in depreciation, but our CapEx should be more in the range of 100 to 120 million.

Okay.

You mentioned you are well above your weighted cost of capital.

What is that number?

Approximately 11.5 to 12 percent.

Thank you very much.

Dave Miller, Tradition Iso (ph).

Good evening.

You just mentioned in the call talking about some material constraints in the networking area.

Cold you be a little more specific and talk about where you are today on that front?

We are in better shape, and it wasn't material but it probably gated us by about 2 or 3 percent.

We would have probably been sequentially up.

So it is a couple percentage points in that particular sector.

Was it printed circuit boards or any ASICs?

I am not sure the exact component.

I just really wanted to bring it up that the order rate was building, and we were like I said 2 to 3 percent off and just wanted to bring that up that those gates have been corrected for our February quarter.

Could you just give us an update on the CDM initiative?

Thanks.

The CDM initiative, I would not characterize what we are doing in the CDM/ODM area, if I have what you are talking about correct, as a new one for Jabil.

The development of our design resources and the capability to provide collaborative design, as well full product design, to our customers has been a part of our solution for years and years.

We have accelerated some growth in that area and have been quite a bit more focused with some of the new industry segments, particularly consumer electronics that we are involved in today, and have also spread that capability into Asia.

We have two design locations now in China and picked up some interesting designs capabilities via the Philips acquisition that we completed last year.

So we think we are on the right path in that area.

We feel like we are in better and better shape all the time to compete with ODMs in the marketplaces that we want to compete and continue to provide collaborative designs capabilities to the bulk of our customer base like we always have.

Great.

Thank you.

Matt Schering, Thomas Weisel.

Thank you.

Back to the issue of materials constraints, could you talk about the environment going forward? (technical difficulty) --

As customers have gained confidence, they are likely to put more inventory on order in the pipeline, and we are seeing the times extend somewhat in the PCB area, ASICs and some memory architectures.

Overall it is still a mature environment that we feel comfortable operating in, and the strategy -- it is really the same strategy we have used time and time again over the last 15 to 20 years -- and that is close partnerships with customers, cooperating on schedules of (inaudible), visiting suppliers, making sure there is as much visibility as they can have, and making sure that everybody is getting the best information they can as fast as they can and planning accordingly.

Okay.

Great.

And just a follow-up on your guidance for networking pretty good sequential growth there.

If you could give us -- separate the growth from your organic wins in new projects coming online versus the real end market growth that your customers may be seeing?

I think it is a combination of both but that the large portion of our business has been new outsourcing projects and assemblies that we have, but we are in a healthier environment than where we were in September.

The biggest driver is new assemblies.

Louis Miscioscia, Lehman Brothers.

Obviously these numbers are very good and probably the best in the industry.

But would you say that when you actually factor out the upside that you just had that basically you really kept full year guidance pretty much in tact?

So would you characterize that you are trying to be a little bit more conservative in the sense of trying to keep it where it was as opposed to as you just mentioned the tentative optimism?

You don't want to go out and start raising your numbers even though it seems like some of your customers are starting to do that for you?

Well, I think we have taken some of the '90 to '96 to '93 to '97, we clearly believe we are not as downside exposed as we were a few months ago, and that is a reflection of additional confidence to a great start.

I think tentative would be the way I would characterize people's temperament months ago.

I think their temperament today is quite a bit more positive, and I think we being somewhat conservative.

There is still a helluva lot of -- there is a number of risks out there.

I think most of them are external.

We still had geopolitical risks and the fiscal stimulus and how Europe will do.

I think from our standpoint it is a very positive change to our guidance.

It moved away from the downside exposure and tightened up the reins a little bit on the high-end, and we will see how the external factors shakeout in the next few months and take another look in March after our February quarter is finished.

One of Chris's comments is that when you added up telecom, computing and storage that usually that is down and it is going to be up 12 percent.

The prior question is really almost going to be the same one I am going to ask again.

If we could just a little more clarification.

How much of that is really just new wins that you have that you are ramping that maybe just more outsourcing or maybe one from a competitor, and how much do you actually get the sense is actually those companies actually seen better trends themselves?

That could help all of us.

I was just trying to figure out what kind of legs tech has these days?

I think we've said it a couple of times in different ways that customers are seeing more positive trends.

Breaking our networking growth out into what is already booked organic growth and new programs that we will be ramping with us regardless of end market activity (technical difficulty)-- it will get a little tougher for us to do that.

I don't think we could do that or actually would do that even if we had the ability to do it.

But I think it is clear to us that people are more optimistic than they were a few months ago.

My final question, we were just out at your new China site, which was actually very nice and obviously I know you also have the Philips side out there and a couple other ones, but you have also mentioned on this call and the one you recently purchased from the Lucent joint venture, but you also mentioned that you might be actually continuing to expand there.

Would there be a different geography within China, or would it just be one of the other locations, let's say, around the Shenzhen or the (inaudible) Delta or up near Shanghai?

Maybe some of what your thoughts might be.

Near-term our Wong Pu (ph) plant, which you just visited, we are looking to expand that from 25 production days to 40.

That is one of the investments that we are looking to do that I mentioned that is in our capital expenditure plan for this fiscal year, and we also have to look not only for fiscal '04, but we're starting to bring things together for fiscal '05 (technical difficulty)-- and that is one example where we are making an investment.

But it is with our existing plant.

Good luck on the next quarter.

Thomas Dingus (ph), J.P. Morgan.

Just a couple of very quick ones.

The inventory was up about 15 percent quarter to quarter.

Can you talk to how much of that was related to some of that optimism that you are seeing from your customers as you were saying in more of the infrastructure-type products, and how much of that was perhaps just a few of those parts shortages that you alluded to that might have kept you from shipping a completed board during the quarter, and I do have a quick follow-up?

It is up in relative terms.

Our production levels were up 16 percent, so it is pretty symmetrical.

So it is more along that as opposed to any production shortages.

We still want to get to 10.

We were at 9.3 turns, and we think we are positioned in the rest of the year to get to 10.

So that is one that we are going to even make more effort in our February quarter because there is no reason that we cannot see 10 turns going into our February quarter.

So it was not really an issue.

There were definitely higher production levels and higher production levels now in our February quarter, but we think we will be able to be back at or at 10 turns in our February quarter.

We don't think it really related to any material gate.

One quick one on the long-term modeling income statement.

Thinking about product margins being in the ranges that you guys are talking about now on a longer-term basis, somewhere between the high 8 percent range and maybe 9 percent and continuing to work to drive operating efficiency through the SG&A line and so forth.

What kind of revenue figure do you guys think you can get the SG&A levels down to, say, somewhere in the low 4s?

You already pushed it 4.4 percent of sales, but getting it closer to, say, 4 to consistently or below 4 to really continue to get some leverage off of the operating line?

That is something we will continue to work on over the next couple of years, but we are in a position as a company to not only for fiscal '04 but fiscal '05 see good leverage with regards to SG&A.

That is for sure.

But, again, our goal is the absolute dollar of operating income growth this year, and part of it will be SG&A efficiency for us the next couple of years.

Q1 is a pretty good example where we were at 4.1 percent in SG&A, and we expect to be in the 4.3, 4.4 or something along those lines in the back half of our fiscal '04, and as we move into fiscal '05, there is no reason to not have further efficiencies in SG&A as well.

Michael Morris, Smith Barney.

I am beating the horse I suppose, but with regards specifically to the telecom segment, were there any new business wins that are contributing to the sequential growth in the February quarter, or is that truly the organic outlook for that sector?

That is my first question.

Along the lines of organic demand, with regards to telecom, the demand is better.

Okay.

And then I was expecting inventory to be a little lower than it was, and since production will be declining a little bit in February, were there specific reasons, Chris, or rationales for having inventories at the current levels?

No other than, Mike, we were probably two or three days -- I think we could have done a better job in terms of two or three days of inventory, and that is when we are going to work real hard in the February quarter with not anything more than that.

But I would say our February quarter is up from where we thought it would be in terms of production levels going back from three months ago.

You know our overall sales cycle improved by four days and that is good.

It is good that we went from 37 to 33 days in sales cycles.

What I would like us to do is continue that 33 days and improve from that, but let's go ahead and improve our inventory days in Q2, 3 and 4, and I think you will see us in a position to do that when we get our February quarter done.

My final question is simply on your restructuring.

It sounds as though that is substantially complete.

I think it is perfectly on schedule.

I was just wondering if the full benefit of the restructuring activities is really in the P&L, or might we expect a bit more impact over the next quarter or two?

I think most of it is in the P&L, but, yes, we are done with that as far as the restructuring.

Joseph Wolf, Bank of America.

Thanks.

One quick question on the auto market, which was up strongly.

Can you characterize the auto market by geography a little bit more?

Then, coming back to the inventories, it would seem that this quarter should have been better on the turns, but you are expecting less in November with consumers dropping (inaudible) February.

Is it just a learning curve with the high level of production with Philips in the quarter?

No, not so much that.

We had a very active quarter.

We grew revenues 16 percent, we grew operating income 22 percent, and it was just one of those where I think we could have had a little bit better inventory turns.

Again, I think 9.3 inventory turns and pretty close to 10 is not that far off.

I don't think it was anything more than that.

On the automotive question, our two largest customers are Johnson Controls and Bali on the automotive segment.

The two biggest markets that are served by those customers are Europe and the United States.

We have production in both locations.

Both locations are both regions that did reasonably well, and that is about all the color we could offer you.

Last question.

When you look at that CapEx budget, is it being driven by -- are you waiting for customer demand before you start looking to CapEx, or are you building in anticipation of recovery?

We will buy machinery only on real demand from our customers.

Our surface mount, our machinery and equipment, the buildings -- our capacity that we are looking at is growing not only for fiscal '04 but also fiscal '05.

Sf we don't really buy CapEx on any kind of a speculative manner.

That would not make any sense for us.

The gear gets triggered generally by customer demand and buildings.

Buildings are really long-term planning expenditures.

Thomas Hopkins, Bear Stearns.

Tim, a year ago the concern was that when you ramped this Philips business up that your margins would not hold and it would be really problematic for you.

It looks like you inched up the operating margin about 20 basis points from 4.08 to 4.28.

Could you comment on that and how the Philips is impacting the margins?

Then, secondly, if it is a lower margin business and when we go into the February quarter, you are guiding telecom and networking higher and obviously consumer will be lower.

Shouldn't maybe the margins be a little bit stronger in February?

That is the first question.

That is an interesting question.

I think as we look at Q2, really look back at Q4, we are doing 1 billion 350 to $1.4 billion range relative to a $1.296 billion Q4, and we are adding $5 to $6 million or $4 to $6 million of operating income.

So with operating margins stepping down a little bit, we are adding additional operating profit, stepping up the revenue in those areas.

We doubt we are going to have some unabsorbed capacity in Q2, and that is generally bad for margins.

So that is something we are learning to deal with.

I think if you looked at Jabil and the impact on margins and revenue of the seasonal slowdown, I think the impact to our P&L in our lower results will be less than what you might see in other providers in terms of what happens to them in that seasonally slower quarter.

With the current quarter, with the improvement in the margins and such a huge ramp with Philips and the consumer, is the pricing there better than you expected?

Were you just able to drive the business very efficiently?

You remember what the conversation was a year ago.

How did it play out as it has?

We are controlling operating expenses, SG&A expenses, and getting more contribution from the gross margin line in terms of absolute dollars and more of the falls to the bottom line, and we did $1.5 million of revenue.

It was kind of a helluva quarter for us, and it sets up our operating margins.

I think operating margins will probably continue to improve as we get beyond Q2.

After we take a little brief step back, Q3 and Q4 will continue to improve.

Finally maybe I can help you a little bit with this networking question in February?

Is the 3Com -- you know 3Com announced its business quite a while back to you, and I guess it reflects a kind of splitting of some business.

Is the 3Com outsourcing going to add any amount of revenue to the February quarter?

I guess the best way because it is hard to obviously for us to talk about individual customers, but our view at 3Com and we have some other things in networking is more the back half of '04.

Okay.

It's more of an impact for Q3, Q4.

Michael Walker, CSFB.

Just one question, which is on the computing and storage bucket.

I believe there was an end of life program that was taking place in the November quarter, and you seem to have been relatively flattish despite that.

I am wondering if there was some continued business in that particular program or if the underlying computing storage demand was stronger than you expected?

We have other programs that are dealing in production in that area.

So those were at higher production levels than what we expected.

Is that predominantly on the high-end server and storage side?

In the server area.

We have multiple server production assemblies that we are doing for multiple customers.

It is really just about all the enterprise level storage, and server business was a little bit stronger than anticipated.

That area feels pretty good.

James Savage, Wells Fargo.

I have actually got a couple of questions.

You have a convertible that you have classified as current debt.

Can you talk a little bit about if you do decide to retire that, to buy that back in, what the impact is going to be on EPS?

It would be a slight impact on our EPS, but we just have to look at it from the standpoint of we are generating close to $100 million cash a quarter.

Now we have $750 million of cash on our balance sheet, so we have the choice in May of '04, May 14th, to have a call option to retire the debt.

There is also an option for the bondholders to issue the notes at a 41.75 stock price as well.

So we just really have to see where we are at in the May quarter to see what happens.

If that were to happen, though, that would reduce the number of shares?

Sure.

That is correct.

You had previously talked about some new customers in the last couple of quarters.

Were there any new customers that you could talk about during the course of this quarter or major new programs that you were anticipating?

We had a couple of smaller customer wins, Jim, but none that we can disclose.

Were there any 10 percent customers?

Obviously Philips was a 10 percent customer during the quarter.

Any other 10 percent customers other than Philips?

What would you be expecting for the full year in terms of 10 percent customers?

For the full year, Philips, Cisco and HP are expected 10 percent customers.

So there is no change in that?

No.

Okay.

That is pretty much it for me.

Thank you.

Shawn Severson, Raymond James.

You had mentioned that within the consumer business obviously normal seasonality was helping, but you also had some new wins.

Those new wins I assume are with new customers, or are they incremental business wins from existing customers?

The other areas we are working on is the mobile communications product, as well as set-top boxes, and there was very healthy demand in our first quarter.

In terms of the margins, obviously going up a bit on the gross margins, mix improves, but what should we expect out of Jabil just in terms of all their opportunities to improve gross margin, or are we simply looking at better capacity utilization and mix being the factors driving going forward?

I think we are looking at the back half is improving our operation margins 30, 50 basis points, continuing to prove improve our return on invested capital to 15, 16 percent, something along those lines.

But the leverage point being more SG&A at this juncture as opposed to any more opportunity on gross margin?

I would agree that is the biggest leverage point at this point in time.

Jeff Rosenberg, William Blair.

I just wanted to follow up on that last question on consumer.

I think you were about $80 million ahead of what you thought you would be on the consumer side.

Are you saying that most of that was increased demand relative to the existing programs -- Philips, things like that -- or was it a pretty significant increase from the mobile communications program you talked about last quarter?

That is a project that we are starting on, but it was mostly the consumer side relating to existing products that we had.

But the mobile communications product is another thing we are working on this fiscal year.

As I mentioned, we have set-top boxes.

We also have lots of other smaller consumer pieces of business that had good production levels as well.

But it was not so much the newer projects.

That kind of variation is pretty extraordinary for you guys in terms of your typical 90 day visibility.

I agree and this was the first quarter where we have had such a steep ramp, and we went into the quarter maybe a little bit conservative in that area because we had not ramped to that particular level, so I think we knew we had a good quarter ahead of us and we ended up have an extremely good quarter on the consumer side, so we were probably a little bit conservative in that area.

You guys have typically shown us tools to doing a pretty good job of looking back, looking at end market demand and that sort of thing.

What is your comfort level in terms of how much inventory your customers bill to finish goods and sell-through and that sort of thing in terms of the guidance you are giving for the 35 percent decline?

On the consumer side?

On the consumer side.

I think we have good confidence in our overall guidance, and specific to consumer, we have good confidence.

So you feel like they have not done too much in terms of building inventory and that sort of thing?

I don't know the specific inventory.

It is just relative to us, but I think we have an appropriate estimate out there.

Operator, we have time for just one more question.

Steve Savas, Goldman Sachs.

I think, Chris, maybe for you.

I know you commented on CapEx, and you certainly had good cash flow from operations in the quarter.

Just wondering roughly speaking when you look out over the next year with improving demand that tends to build inventories and historically that would start consuming cash, what is your view in terms of cash flow on the year.

Not precise numbers or guidance, but just roughly speaking, do you think you will start moving towards breakeven on cash flow or consuming cash, or do you think you can still be cash flow positive?

Absolutely not.

I think we're in a very healthy environment.

We just generated $75 million of operating cash flow when we grew our business 16 percent sequentially.

So even in a very healthy growth profile, I think we are in a position to generate $300 to $350 million of positive cash flow from operations.

That is great.

Thank you.

Thank you, operator, and thank everyone else for joining us.

I just thought I would mention we are going to be on CNBC tomorrow morning and also Bloomberg Television.

Thank you.

Ladies and gentlemen, this concludes today's Jabil Circuit conference call.

Thank you for participating.

You may now disconnect.