捷普科技 (JBL) 2005 Q1 法說會逐字稿

Good afternoon. My name is Kelly, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Jabil Circuit first quarter fiscal year 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to introduce Ms. Beth Walters, Vice President of Corporate Communications and Investor Relations of Jabil Circuit. Ms. Walters, you may begin your conference.

Thank you and welcome. Thank you for joining us today for our fiscal first quarter 2005 conference call. With me today are Tim Main our President and Chief Executive Officer; and Forbes Alexander, our Chief Financial Officer. We will be referring to slides that are available on the Jabil website, and will be using those during the presentation today.

During the course of this conference call we may make projections and other forward-looking statements regarding future events and the future financial performance of Jabil. We caution you that these statements are just predictions, and that actual events or results may differ materially. We refer you to the documents that we file with the SEC, including our most recent 10-K, which was filed November 5th, 2004. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call is being recorded and will be posted for audio playback on the Jabil website in the Investor Relations section along with the press release and its slide show presentation that we will be working with today.

If you now will turn to Slide 2 and 3, our results for the first fiscal quarter of year 2005, on record revenues of 1.83 billion, our GAAP operating income increased 32%, to a record $70.3 million, compared to $53 million in GAAP operating income for the same period in fiscal 2004. Core operating income, excluding amortization of intangibles for the quarter was 80.9 million, or 4.4% of revenue. Core earnings per share were a record 32 cents. On a year-over-year basis, this represents 21% growth in revenue, 25% growth in core operating profits and a 28% increase in diluted core earnings per share. On a sequential basis, revenues grew 13%, with core operating income increasing 19%. Looking at the results of the revenue by sector, production levels in the automotive sector were 7% above the previous quarter. Computing and storage sector increased 10% from the August quarter. The consumer products sector increased by 50% in the quarter, reflecting seasonally high -- higher levels of production for our 7 customers in that sector. Instrumentation and medical increased 12% sequentially, reflecting continued organic growth and ramping of programs with multiple customers in this sector. The networking sector decreased by 5% from the previous quarter. The peripheral sector increased 13% in the current quarter, in line with our previous expectations. The telecommunications sector decreased 3% sequentially.

Turning to Slide 5 -- is that correct? Looking at our quarterly industry sectors, our automotive sector for fiscal Q1 was 7% of revenues. The computing and storage sector accounted for 12% of revenues. The consumer sector was 31% of revenues. The instrumentation and medical sector was 14%. And networking sector accounted for 16% of revenues during the quarter. The peripheral sector represented 7%. The telecom sector was 9% of revenues for Q1. And other represented 4% during the quarter. I'll turn the call over, now, to Forbes to review our balance sheet and ratio trends.

Thank you, Beth. I'd ask you to refer to Slides 6, 7, and 8. The Company's sales cycle was 28 days, versus 26 days in the previous quarter. Days sales outstanding grew by 9 days to 52 days, reflecting longer payment terms associated with consumer-related business, on the assumptions of 6 days of receivables connected with the Philips whole (ph) and final assembly transaction, which we completed on the 29th of November. Payables days grew by 7 days to 65 days, again, 6 days of this expansion related to the assumption of payables liabilities associated with the Philips transaction. Days of inventory and turns remained consistent with the previous quarter, turns being 9. We plan to make progress with inventory turns, with a near-term goal of reaching 10 turns through a number of ongoing supply chain and enterprise-resource planning system initiatives.

The cash balances were 620 million, as of the end of the first quarter, consistent with the August quarter balances. Cash flow from operations is approximately $35 million in the first quarter, our 16th consecutive quarter of positive cash flow, continuing to demonstrate the ability to generate positive cash flow from operations in a significant growth environment. Our capital expenditures in the quarter were approximately $55 million. Depreciation for the quarter was approximately 45 million, our EBITDA in the quarter was approximately $126 million. Our return on invested capital was 17%, as compared to 15% in the previous quarter. We were pleased with this improvement, accomplished in a quarter where the business grew 13% sequentially, and in an environment where inventory turns are not where we would wish. As we operate throughout the balance of the fiscal year, we are in an excellent position to produce solid positive cash flow from operations while producing very good incremental returns on our capital deployed.

Now I refer you to Slide 9. We are pleased with the operational execution of our plans in the most recent quarter, particularly those executing to a very steep ramp in consumer electronics. As discussed in our last quarter's call our capital investments in fiscal 2005 are expected to be related to existing plants and the additional expansion in China, Eastern Europe, and India as a result of the needs of our customers and the continued secular growth in the industry. Including these expansions we estimate capital expenditures to be in the range of 180 million to $200 million for fiscal year. Depreciation is estimated to be in the range of 180 million to $200 million.

If you'd please turn to Slide 10. Second quarter guidance for the fiscal year. We are guiding to an overall range of 1.65 billion to $1.75 billion in revenue for our second quarter, reflecting the seasonal decline in demand for consumer products, and the continued positioning of the Company for a strong growth profile in the second half of our fiscal year. Core earnings per share are expected to be in the range of 26 cents to 28 cents. As a percentage of revenue, we estimate operating margins to be in the range of 4% to 4.2%. Research and development costs are expected to be consistent with the first fiscal quarter, reflecting our ongoing success in the design-related programs with existing and new customers. Tax rate is expected to be 16%, consistent with that of the first quarter.

Turning to Slide 11, our revenue by sector. In the second fiscal quarter, our automotive sector is estimated to be consistent with that of the first fiscal quarter. Computing and storage are estimated to have decreasing production levels by approximately 5%. The consumer sector is expected to decrease by approximately 30% in our second quarter, as we exit peak-demand season for our consumer products. Instrumentation and medical sector is anticipated to increase by 15%. The sector is anticipated to represent 15% of our revenue stream, or 1.1 billion a year, in fiscal 2005. The networking sector, peripheral sector, and telecom sectors are estimated to have levels of production consistent with that of the first fiscal quarter.

Turning to slide 12, and our full-year update. We are pleased with the start we have made to fiscal 2005, executing in our first fiscal quarter to the upper end of our guidance. The fiscal year continues to be well-positioned to meet the guidance we provided you 90 days ago, with revenue in the range of 7.2 to $7.4 billion, and core earnings per diluted share in the range of $1.20 to $1.24. And now I'll hand you over to Tim Main.

Thank you, Forbes. Good afternoon. Our first quarter was a solid start to the fiscal year. As expected, the quarter was paced by the seasonally strong consumer sector. In spite of initial reservations regarding consumer spending, end markets turned in a solid quarter. In the past year we have diversified our consumer electronics sector. We enjoy new and growing relationships in the white goods and wireless product areas, complementing traditional home electronics. This was clearly evident in our results, as our consumer sector turned in a respectable year-over-year growth rate of 20%, well above single-digit end-market growth. The balance of our sectors performed as expected. In spite of a pull back in the semiconductor equipment industry, our instrumentation and medical sector turned in another double-digit sequential growth quarter. New business wins and growing relationships in this sector will continue to be an important part of our growth story this fiscal year. We are slightly more optimistic regarding our communications sectors. The combination of expanding services, market-share gains and stable end markets could position the sector for a more meaningful contribution in the second half of our fiscal year. We feel confident about our prospects for the balance of the year, as organic growth alone should satisfy our expectations for EPS of $1.00 to a $1.24.

Consistent with last quarter's call, I'd like to spend a few minutes discussing our view on the business apart from quarterly results. Last quarter we addressed the fallacious notion that gross margins serve as a proxy for pricing, and instead reflect the relative material and low-cost product content in revenue. We also talked about the relationship between end-market growth and Jabil's growth, concluding that the trend to outsourcing was a much more powerful impetus to long-term growth than end markets. This quarter I hope to illuminate the economic return trend in our business. In the past 3 years, the scale and content of our business has changed. However, the impact of these changes on our financial results is not fully understood. Since 2002 the relative contribution of low-cost production has increased to approximately 75% of our output, while communications product content has declined from 53 to 30%. Over the same period, revenue and core operating earnings have doubled. Today, we are in a growth business with a trend to outsourcing thesis. Single-digit operating margins are sufficient to afford us the opportunity to deliver superior return on invested capital and long-term cash flow comparable to the leading S&P 500 companies.

Please turn to Slide 13. In this example, we compare high-cost and low-cost location business models. In the top portion of the matrix we compare high-cost with low-cost business models using identical profit margin assumptions. The primary difference between the 2 models is the cost of production, and, therefore, the relative material content. As most of you are aware, we accept execution about ownership risk on materials and, therefore, material content generally carries a lower level of profit. We have ownership risk of our manufacturing assets and have significant know-how imbedded in our global supply chain infrastructure. Therefore, our value-add content represents a more meaningful profit opportunity. With identical profit assumptions, operating margins and the low-cost model are diluted with the relative shift to lower risk material content. In this example, materials comprise 81.67% of revenue in the low-cost model, as compared to 73% in the high-cost model. This margin dynamic has generally been regarded negatively.

In the lower section, however, we review the positive aspect of the lower cost production model. First of all, the opportunity for volume is larger, markets have expanded, and unit volume is up dramatically from 2002 levels. Secondly, the volume carries with it opportunity for higher working capital velocity on a comparable investment in fixed assets. In the end, low-cost model delivers higher total profit dollars. In this example, 30% more profit dollars and a superior return on invested capital. In practice, the picture is more complicated as mix, design contribution, final assembly, and other value-add services influence returns. However, this is a realistic depiction of the 2 models and their relative merits.

Please turn to Slide 14. The dynamic of higher asset velocity is evident in our financial results. Our fixed assets have been relatively stable, increasing only $67 million at the close of fiscal 2002. Over the same period, revenue is double, driving revenue per fixed asset from under 5 to over 9. Working capital efficiency has also improved over the same time period as velocity increased. Please turn to Slide 15. The increasing scale of our business, a financially sound low-cost model, and improving asset velocity is resulting in higher return on invested capital and increasing cash generation. ROIC has risen from single-digit to 17% in our most recent quarter, while EBITDA has consistently increased. We intend to continue to drive the business in this direction -- larger scale, more profit dollars, superior return on invested capital, and ultimately, higher levels of cash flow. Our goal is to generate return on invested capital among the leaders of the S&P 500. We are moving in this direction and will continue on our present course.

Operator, we're ready to take questions now.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before asking your question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Thomas Hopkins with Bear Stearns. Please be sure to pick up your handset before asking your question.

Afternoon, Tim.

Hi, Tom.

Beth, Forbes, happy holidays.

Thanks.

Just -- I don't have the slide -- the slides in front of me, Tim, that you're looking at there, but just picking up on the margin notion, it looks like the operating margin ticked up about 25, 20 bips, although you, clearly, had a huge sequential growth rate in your consumer business, which is, you know, typically thought of as being a lower margin business but a high asset velocity business as you just described. So, could you go into the mechanics of the operating margin result for the quarter, and given where the mix came in?

I -- you're -- I guess, by inference, you're saying would you expect operating margins to be softer?

Yes. I was saying the typical notion is, you know, wow, they're going to have a lot of consumer business in the quarter, you know, how are they going to be able to get the operating margin up quarter-quarter, when, in fact, it was?

Right. I think part of the -- part of the explanation, apart from the quarter drivers, is that the margin results, operating margin results are going to be more sensitive to relative material content in the revenue stream and the point of production, along with things like leveraging operating expenses and asset utilization. So pretty good quarter from an asset-utilization standpoint. Pretty good results from an efficiency standpoint and quality standpoint. And directionally, we've indicated all along that with the caveat that there would be a sawtooth effect here and there that will continue to increase operating margins over time as we build up the business. So I wouldn't think the operating margins improving in ROIC, improving to 17% would be a surprise to us. By the same token, I wouldn't expect that a small reduction in operating margins in Q2 is counterintuitive either, given that the consumer electronic content would be down. Again, because the differences margin between industry segments really aren't as big as they historically have been. Again, because most of these products are being produced in low-cost locations. And most of them are -- generally, have material, higher -- higher material content than they have historically.

Okay, great. And then, just a follow-up, just want to talk about on the margin, I think, you said, you're slightly more optimistic about the telecom outlook. Can you tell us why that might be? Is there something you've heard from the service providers or from the equipment vendors or something else you might be looking at?

I said the communications segment, Tom, so I don't want to forget the networking segment. Collectively, those were, I think, around 25, 26% of our business in Q1, about 30% on a normalized basis. And I -- telecom was not down quite as much as we anticipated in Q1. I think there's some additional strength there. I think customers are just feeling a little bit better about the prospects in '05 in those segments. We feel better about our position there. I don't think there's a (expletive) of a lot going on from an end-market standpoint, but we were almost pessimistic in the previous quarter, and I think I'm just saying that, I'm getting a little bit more optimistic about the stability in that market and our ability to generate additional revenue and profit in that segment in '05.

Great. Does the month the December look typical to you at this point?

So far it looks pretty typical.

So far.

Okay. Great. Thanks.

Your next question comes from the line of Lou Miscioscia with Lehman Brothers.

Okay. Thank you. I was hoping we could into, maybe, design services a little bit deeper, in the sense of, I thought I saw somewhere in the press release that you had 400 engineers now, and, obviously, your R&D line ticked up. Would we look for, as you maybe build those people out, that the R&D line will actually come down, because, maybe, you'll, obviously, get some revenue and it'll go into cost of goods sold? Or, how would that actually play through?

Hi, Lou, it's Forbes. I'm not sure where you picked up the 400 engineers, but I think that's a reasonable number overall. In terms of your question, these costs here, I think, are pretty stable for the year. I just say there's a lot of investment going on with existing customers, in terms of production associated design and also, you know, collaborative design that's going on. So these costs, certainly for this fiscal year, are pretty consistent with the previous guidance. And I wouldn't imagine -- I wouldn't expect these to fall from the levels we talked about previously. Now --

Just to give you a little bit more color on that, you know, our activity in this area has really exploded over the last couple of years. It's gone from, really, kind of, a toy operation of 100 engineers to over 400. That's a pretty decent number. And the revenue associated with that activity has exploded as well. I mean, it's included in revenue results. But, you know, it's a -- it's an area that we're building more and more activity. By the same token as we've added breath to our participation in product development, and in more cases are developing complete products for customers that would, you know, some people might call very close to being an ODM model. We're adding some of our own pure R&D expense to this area. And, you know, so I wouldn't expect it to go down, I wouldn't expect it to increase dramatically. As Forbes said, for the year, we've provided a range of guidance for R&D expenses for the year. We think -- we think that the -- you know, we think that's a good number. But the level of activity in that area just continues to grow.

Okay. On that, Tim, if I could just ask again, couple quarters ago, I asked about where you were expanding most of your R&D footprint, and, obviously, I think you pointed to the Shanghai area. Just a question is -- How are you doing in hiring? Because I heard it has been pretty difficult to get experienced engineers out there. And then if I can layer in one more question, that when many of us were out there recently, it did look like you were doing a number of different expansions, 450,000 square foot site in Wushi, then, obviously, the Shanghai facility still had some open space, and, obviously, you got the Huangpu. Is there enough -- do you actually have that much visibility to fill up these square footage? Obviously, that's a -- I guess, coming online throughout 2005?

Okay. For the first part of the question, regarding hiring in the Shanghai area, it's, obviously, the center of hardware design, becoming a center of hardware design for the world. So, yes, it's tough to hire engineers there. We also have design centers in Huangpu and other parts of the world. It's our intention to mitigate the risk of availability engineers by having more than one location. We'll do that, including using our increasing India footprint, which we'll be building a new factory there in the next 12 months as well. On the question of -- what was the second part?

Sure, all the -- it's actual physical expansion sites.

Oh, right. Physical expansion, do we have visibility? You have to put the physical infrastructure building in place farther in advance than purchase orders. I mean, you can by machinery and equipment, basically, when you get the purchase order. But you have to make that decision 12 to 18 months. So, on a 12 to 18-month time horizon, we feel very good about the capacity we're putting in place. So, yes, I think we have enough visibility to give us very, very high levels of confidence that we won't be over capacitized in China.

Okay. Great. Thank you. Nice quarter.

Thank you.

Your next question comes from the line of David Pescherine with Smith Barney.

Tim, good morning -- good afternoon. Could you just clarify on the -- in the consumer strength, was that a result of existing programs a little bit stronger than you had projected, or did some new programs ramp a little bit faster than you anticipated?

I think it was a mix of new programs and existing programs. We have 7, 8 customers in that segment. Traditional home electronics did pretty well. I think, did a little bit better than our expectations going into the quarter. We had some reservations going into the quarter about how they'd do. And then wireless products, white goods, and some other areas we play in, you know, did pretty well so a pretty good mix.

Right. And then since the, you know, your consumer business in February is probably highly dependent upon what the actual sell-through is here through the rest of the holiday and the rest of December, I mean, is it possible that you'd see dramatic changes from some of your consumer customers, either late in December or even in the first couple of weeks of January? I mean, how do you normally plan for that?

I think it's unlikely -- there's certainly, there's the possibility. But I think it's unlikely, and we feel good enough about where our inventory position is and where our customers' inventory position is, that we do not expect any type of aberrational result as December unfolds.

Okay. And then, to follow on that comment, then, you're talking about inventories, can you just give us a sense as to where you think OEM inventory adjustments are, or where the OEMs are in terms of their adjustment process? I mean, we've been of the opinion that things are moving a little bit faster than anticipated, and that's what we seem to be picking up from both the OEMs and the channels. So what is your take on that?

You know, I can't really go through segment by segment where I think customers inventory positions are, but generally, I think we feel pretty good about the state of -- excuse me -- inventory levels. Aside from the fact we are a 9 and we wanted to be at 10 or 11 turns. You know, in terms of end-market inventory and customer confidence, it's pretty good, it's pretty good.

Great. And then, just one final question for Forbes. Forbes, what was the inventory that you brought on with the -- with this Poland facility? So if we X that out, what would inventories have done?

Yes. The inventory there was pretty minimal. It was under $10 million.

So can you just explain why the inventory up 95 million going into, what would normally be a seasonally weak quarter, are you building some inventory for specific programs?

No, I wouldn't say that, David. It's -- it's really, you know, we have some pretty sophisticated inventory tools, as you know. And we pretty much use SAP, and one instance of SAP throughout the Company. And, quite frankly, we just need to execute somewhat more crisply in the use of those tools and deploying those tools, not only internally, but, you know, further into our suppliers and our customers. So, you know, it's not particular inventory build, it's just, you know, very disappointing that we didn't manage to nudge that needle up to 10. So we've got some work to do there.

Okay. Great. Thank you.

Once again, I would like to remind everyone, if you are using a speaker phone, please pick up the handset before asking your question. Your next question comes from the line of Dave Miller with Tradition.

Good evening, guys. I just wanted to ask a more philosophical question with regards to one of your competitors, who at their analyst meeting said, what would the competition do if we gave away the assembly. What have you guys talked about that internally, and what would your response be to going into quotations for business against something like that?

You know, I don't want to comment on that. I mean, that -- in my opinion, that was a silly statement, the whole thesis of the statements that were made as a follow-on to the economic model that that was associated with. It doesn't work if you give assembly away for free. And we don't give assembly away for free, why should you? It's got value. We compete against very strong companies that demand value for the infrastructure that they have. And we compete against stupid companies that give stuff away. We have for 30 years. And we will continue to win our fair share of business, and give our shareholders the right level of return.

Okay. Great. Thanks.

Your next question comes from the line of Bernie Mahon with Morgan Stanley.

Hi. Good evening. I had a question to follow up on the inventory on your balance sheet. It sounds like that was a bit of a surprise, then, Forbes, that you had built up the inventory throughout the quarter?

Yeah, a little bit. I mean, we -- you know, we -- I would have hoped that we could have hit 10 turns. So, yes, I would say it was a little bit of a surprise. And --

It was a surprise from an execution standpoint. But I think the listeners really need to keep in mind that the quarter -- the consumer build-out doesn't end on 11/30. So there's a tail that goes into December.

Right.

So you really can't leave November with your inventories cut to the bone.

Okay.

At least, we haven't learned how to do that yet.

Right.

Because you still have 2 or 3 really big weeks in December left. That's the good news. Then the bad news is, then you have nothing, you know, in that segment for the last week or 2 of December and January and then things start rolling again. So -- so that's how it results in a pretty seasonally weak quarter for us in Q2. But, you know, you just can't exit the quarter with inventories cut to the bone.

Right. So I guess along those lines, then when you look out through February, kind of on an absolute basis, would you expect to, you know, end February significantly lower levels of inventory.

That is definitely our plan.

Okay. And then, just going to the consumer end markets, you talked about some programs there. Are they fully ramped now, or are you still ramping some of them through the next couple of quarters?

We are constantly in a state of ramping and bringing on new programs and exiting other ones. So, I -- you know, I -- I would just consider it a, you know, a segment that's reaching some maturity for Jabil, but, you know, we'll continue to add customers in that segment.

I guess, though, I'm talking more in terms of the handset program. Is that fully ramped at this point? Or are you still working on that, you know, through December and January?

Yes. We have not provided any granular discussion on any handset programs. And I apologize, but I can't do that. And, you know, our guidance for the segment is what it is.

Okay. All right. Thanks a lot.

Operator, do we have any further questions?

Yes, sir. Your next question is from the line of Jesse Pichel with Piper Jaffray.

Good evening. You mentioned that you could hit your full-year targets on the organic growth that you're seeing. What is the acquisition pipeline look like at this point?

Well, you know, there's -- there are opportunities out there. We've -- we've been pretty choosy in the last couple of years. Pretty much in '04 we really wanted to focus on improving our operational execution and, you know, fully integrating the operations that we acquired in '02 and '03. Having that behind us, I mean, we could -- we could do deals. We've the band width to do it. We've the money to do it. And if something were to present itself that looked good to us and was priced appropriately, we'd want to do it. There are opportunities in the pipeline. I wouldn't say it's a pipeline that's changed dramatically, though, over the next couple of quarters. So if you're looking for any type of directional read on, you know, gee, the pipeline's full of opportunities, I wouldn't say that. But the pipeline always has opportunities in it.

And as a follow-up question, you mentioned, specifically, strengths from white goods. What's your definition of white goods? And could you elaborate a little bit on the types of programs those are?

I just included that in our discussion what is in our consumer electronics segment. And it's washing machines, microwave ovens --

Refrigerators, tumble dryers, those types of products.

How much of those white goods are for the domestic economy?

In terms of our content, probably 60, 70%.

Yes. That's probably fair.

Well, great. Thank you, very much.

Thank you.

Your next question comes from the line of Max Hallot with Orion Securities.

Yes. Good afternoon, sir. Just a follow-up on the telecom segment, do you have a sense where you're providing some kind of a guidance for the whole year, in terms of where you think it would go year-over-year?

I think, year-over-year is pretty much consistent with our previous guidance, which was flat to down 3 or 4% year-over-year.

Yes. But in terms of full fiscal year for 2005, as you look out, you were saying you didn't see much surprise in terms of telecom equipment. As you look out for the remainder of your fiscal year, do you see, how do you see that shaking out?

For the balance of the fiscal year, I think, you know, there's some signs of life, as we said in the prepared remarks. (technical difficulty)

I may have lost you on the last portion there, but thank you for answering that. I'll pick it up on the replay.

Okay. Thank you.

Thank you.

Your next question comes from the line of Patrick Parr with UBS.

Good afternoon, guys, one quick one to lead off. Did you have any 10% customers in the quarter, and if so, could you name them?

We did. But, we'll only provide those on an annualized basis.

Okay. All right. Then alluding to your comment earlier about your adding capacity in China, would I read into that that you could potentially, as well as India and Eastern Europe, of course, would you be looking to reduce your capacity further in some of the higher-cost geographies? Or are these additions -- net additions to capacity?

Well, they're planned to be net additions to capacity. And I think our capacity utilization in low-cost locations is pretty high right now. Mexico, throughput's very strong, and our Asia footprint's in great shape. Malasia and China are very strong. Eastern Europe's ramping -- ramping very well. I think the only areas where we have, you know, some concern, where we're not quite happy with the capacity utilization is in some small pockets of high-cost capacity. But, you know, we'll work through those as time goes on. They're not -- they're not huge swing factors in our results. So these low-cost additions to capacity really, fundamentally, because most production wants to be in low-cost locations. We're adding year-over-year growth of over $1 billion. And we did that last year. So we need places to build in.

Sure. Okay. And then, longer term question, as you guys look out, say, 2 years, obviously for the last few quarters you've posted much higher growth in, sort of, your non-traditional sectors -- instrumentation, consumer, I guess, consumer has become more traditional, but, you know, your historic sectors, I guess, haven't been growing as much. What do you target, potentially, as a mix for the Company a few years down the road? Does that have any implications for the long-term return profile or margin profile of the Company?

I think the long-term profile of the Company is for -- for excellent growth, a return on invested capital, among the elite companies in the S&P 500, high teens, low 20s. I think our operating margins will continue to trend up, although, you know, not as dramatically as ROIC. We'll generate very strong cash flow. We'll have a very well-diversified portfolio of customers and industry segments in which to do business. We would hope that -- our plan is not to have any industry segment more than 25% of our business. And we'd like to continue to reduce our top-10 customer concentration, which is estimated to come down to the low-60% range this year. So we're making progress in that direction. So, you know, this story for the last, you know, for this past quarter has been consumer electronics, and that it's a seasonal issue, as well as new customers that we've added in that segment. But we're adding a lot of new customers in the instrumentation and medical segment. Again, I don't know how many consecutive quarters we've had of double-digit growth, but it's been quite a few. And that's a segment that didn't exist a couple of years ago. And I'll be, you know, over -- well over $1 billion in fiscal '05. So, we're just going to keep on converting vertically integrated OEM to an outsource model, continuing to gain market share with our existing customers, continuing to add services like system integration and order fulfillment, our repair on warranty services through JGS, and keep driving returns on invested capital up into the high teens, low 20s. That's, kind of, the business plan in a nutshell.

Okay. Appreciate that.

Thanks.

Once again, as a reminder, if you are using a speaker phone, please pick up your handset before asking your question. Your next question comes from the line of Todd Coupland with CIBC World Markets.

Yes. Good evening, everyone. I'm not sure if you answered the telecom question in terms of the specific outlook you thought you were going to get in 2005 because you cut out on that.

Okay, sorry. Well, let me try and address it again. Yes. We talked about this quarter, about seeing, you know, some signs of life there in telecom. But overall for the fiscal year, our guidance is, you know, slight -- slight better outlook than we had given 90 days ago, but pretty much, you know, flat to down 3 or 4% over the fiscal year, previous fiscal year.

Okay. And that's for all of '05?

That's correct.

And could you make the same comment on the networking market for all of '05, or the networking segment?

Yes, our goes assumes a growth there overall of about 5%.

Okay. Great. And then, one other question, I'm not sure if you can answer this, but on the 10% customers, can you tell us how many you had in the quarter?

Yes, there were 3.

There were 3. Great. Thank you, very much.

Your next question comes from the line of Jeff Rosenberg with William Blair.

Good afternoon. I guess I wanted to ask if you look at the guidance for the rest of the year, in terms of sales, it would sort of imply that the 21% revenue growth this quarter is perhaps the greatest revenue growth we're going to see and looking at, kind of, mid- to high- teens growth the rest of the year. But I don't feel like you guys have backed off your objective of continuing to grow the business 20 to 25%. So, I wondered if you might comment on, with some of the slight improvements you're seeing in the end markets, whether or not you, you know, feel better about your ability to, perhaps, reach your objective and just haven't raised the guidance at the stage? Or just maybe try to compare those 2 goals?

I'm not following your logic completely, Jeff, but, you know, we see, obviously, we see significant growth in the back half of the year in Q3 and Q4. That is not reliant on a robust communications recovery or GEP growth of 7, 8%. I mean, we're looking for end markets to grow on the 4 to 5% range. So that growth is going to come from new customers, market-share gains, and service expansion. And we still feel great about that. I don't think it -- I think it would be premature to raise guidance for the full year heading into a seasonally down quarter, when I think, privately, most analysts would agree with me. That's not the time to raise your guidance. When we get through this quarter and we see how it goes, and we get a little further into 2005 and we're heading into fiscal Q3 and fiscal Q4, we will take another look at it. We still feel very confident about where the numbers are today.

Okay. And I guess, maybe, phrased a little bit differently, if you look at the back half of the year, I think the numbers would suggest, sort of, what, historically, was your normal quarterly growth, you know, 7% per quarter. If you just, kind of, I mean, I know it might not be that linear, but if you look at what gives you the bottoms up view of that, is that mostly -- how much of that is new programs and that sort of a thing that's scheduled to ramp versus your expectations for how the end markets look throughout the rest of the fiscal year?

Yes. We haven't sliced and diced it that way, Jeff, but if you -- on your comment on 7, 8% sequential growth, that's spot on, I mean, that's kind of the reassumption of growth that we would look for in Q3 and Q4.

Okay. Thanks.

Okay.

Your next question comes from Jim Savage with Wells Fargo.

There are a few things, one is, if we are going into this seasonally down quarter now, is this November quarter you had the lowest cash flows from operation that you've had for quite awhile, and I think it was the first time that you didn't have free cash flow in quite awhile. Would we assume that the working capital reductions, because of the seasonally down quarter, would mean that cash flow from operations should be up substantially in the February quarter?

That's correct, Jim, it should be substantially. Again, as we -- as we look to contract that, you know, revenue -- excuse me, that inventory number in real dollar terms, and as these receivables, you know, come to fruition, in terms of collections, you should see substantial cash flows in the second fiscal quarter.

Okay. And you have, in the last couple of quarters your R&D has doubled. I guess the question is -- you now think that you're going to stabilize it at around these levels for the rest of the year? Is that -- is that the expectation?

Yes. That's the expectation. I think on the last call I talked about a 10 to $12 million addition from fiscal '04, so that would put that number at about, you know, 23, $24 million for the fiscal year. So that's correct. Slight uptick as we move into the back half of the year, but, you know, around about that $6 million number.

Okay. I have another question regarding your guidance, because, I guess the assumption in your guidance is that the margins will probably decline a little bit from here in order to keep you within that $1.20 to $1.24 range. Is that -- is that an expectation? And if so, can you explain why you would anticipate that your operating margins would decline?

We don't have our operating margins declining. I mean, they decline in Q2, of course, it's based on the lower levels of utilization. But they improve sequentially in Q3, and then Q4 should be above Q1.

Q4 should be above Q1, okay. Okay. And as -- are you still unable to really discuss who the customers are in the industrial and medical sector that are going to be driving so much of the growth over the next year?

Jim, we'd love to go through each one, but some of them allow us to talk about them, as you know, we've been around for a long time, and some are pretty sensitive to it, so --

So, we should assume that some of them are the ones that you announced 12 months ago?

Well, yes, you should assume that. I mean, these guys tends to have very, very, very long gestation periods to become material businesses. And because they are, primarily, vertically integrated companies moving in an outsource model, and they're not big-bang kind of plays that don't sell all of their factories at once, typically. So -- so they're piecemealing, you know, their businesses to their outsource partners. And that, you know, takes a little -- has got a little bit long fuse to it.

Okay. Great. Thank you.

Your next question comes from the line of Steven Fox with Merrill Lynch.

Hi, good afternoon. Can you just talk about your cash flow from operations outlook for the full year? I think you were talking about 400 million, plus. Is that still reasonable?

I think that's still reasonable. Again, we got -- you know, we got to work this inventory level down as we move through fiscal (indiscernible.) But, again, we do that, you know, there's $90 million there. And, then, you know, we continue to push that as we move through the fiscal year. On an overall basis, you know, one day in terms of our sales cycle is approximately, you know, $20 million. That's a good number to use, a good gauge. So I think that's still very much achievable, and, you know, we continue to work hard on these inventory numbers.

Thanks. And just one other question on Eastern Europe, just eyeballing your geographic chart, it looks like Eastern Europe jumped a lot in the quarter. I assume a bunch of that is consumer-related. Is there anything else, in terms of transfers or new business going on in that increase as a percentage of sales?

No, it's primarily consumer.

That's consumer, yes.

Thank you.

Thanks.

Operator, we have time for 1 more question.

Your final question comes from the line of Scott Craig with Banc of America.

Hi, good afternoon. Just a question on the teleco side of things, again. Tim, is the (inaudible,) you know, feel better expectations for you guys relative to even 90 days ago, is that due to new programs that you've won that worked their way into the back half of next year? Or is that end-market demand related? And then, just a question on the, you know, more industrial or instrumentation medical area. You know, when do you, sort of, see a leveling off of the ramps that are going on there? Because you guys have done a really good job of winning new business there?

On the telecom side, Scott, I'd really call that more of an intuitive call than a black and white mechanistic call. And, I guess if I had to scale it, a little more than half of it would be associated with things that are going on with, you know, organic growth with a current customer base. And then a balance of it would be, you know, a little bit better end-market story than has been in the past. On the medical instrumentation stuff leveling off, yes, you'd think it'd level off at some point. But we do keep adding customers in that segment. And nobody wants to build their own products any more.

Right.

So, I mean, that's really the story. Nobody wants to build their own products any more. They keep outsourcing. They keep pushing stuff out. They keep consolidating the vendor base. We're getting, not only business out of vertically-integrated factories, but business from smaller companies, smaller EMS providers, financially insecure EMS providers that might be going out of business. And so, I don't see it leveling off yet.

Okay.

Eventually, it will.

Okay. Thanks a lot.

Thank you, Operator. And thank you, participants, for joining us on the call today. Might let you know that Jabil Management will be appearing on BloombergTV tomorrow at 1 -- 15 Eastern time. So, again, thank you for joining us for the call.

Ladies and gentlemen, this concludes today's Jabil Circuit conference call. Thank you for participating. You may now disconnect.