捷普科技 (JBL) 2005 Q3 法說會逐字稿

Good afternoon. [OPERATOR INSTRUCTIONS] At this time, I would like to welcome everyone to the Jabil Circuit earnings release conference call. I would now like to introduce miss Beth Walters, Vice President of Corporate Communications and Investor Relations of Jabil Circuit. Ms. Walters, you may begin your conference.

Thank you. Welcome to Jabil's earnings call. With me today are Tim Main, our President and CEO; and Forbes Alexander, our Chief Financial Officer. 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 a slide show presentation on our third quarter results and guidance outlook.

So, if you could turn to Slide 1, our forward-looking statement, we do need to remind you that during the course of this call we may make projections or other forward-looking statements regarding the future events or the future financial performance of the Company. We caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents that Jabil files from time to time with the SEC, including our most recently-filed 10-K, which was November 5, 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.

Moving onto Slides 2 and 3, the results for our third fiscal quarter of 2005 on record revenues of $1.938 billion, our GAAP operating income was 73.2 million. This compares to 55.9 million in GAAP operating income for the same period in the prior year or an increase of 31%. For operating income, excluding amortization of intangibles for the quarter, was 84.7 million or 4.4% of revenue as compared to 66.7 million or 4.1 for the same period in the prior year. Core earnings per share were $0.33. On a year-over-year basis this represents a 19% growth in revenue and a 27% growth in core operating profits. On a sequential basis, revenues increased 13% while core operating income increased 28%.

Looking at the revenue by sectors on Slide 4. As I mentioned, third quarter revenues increased 13% sequentially. Production levels in the automotive sector increased 11% from the prior quarter. The computing and storage sector increased 5% from the second quarter. The consumer products sector increased by 24% in the quarter, reflecting the on-going ramp of existing and new products. Instrumentation and medical sector increased 26% from the second quarter, reflecting the addition of revenues associated with the Varian acquisition and the continued ramp of existing and new products with the number of existing customers. The networking sector was consistent with the prior quarter. The peripherals sector was also consistent with the second quarter. The telecommunications sector increased 10% sequentially.

Turning to Slide 5, our sector information for the quarter in terms of percentage for Q3, automotive: 8%; computing and storage 13%; the consumer sector 27%; instrumentation and medical sector was 16% of total revenues; the networking sector was 16% of total revenues; the peripherals sector represented 7%; telecom represented 9%; and other business made up 4% of Jabil's overall revenues for the third quarter. To review the balance sheet, I'll turn it over to Forbes Alexander.

Thank you. Good afternoon. I'd ask you to refer to Slides 6, 7, and 8. The Company's sales cycle improved by 3 days to 20 days in the quarter. Day sales outstanding were consistent with the previous quarter at 42 days. Payables days increased by 1 day to 59 days. In absolute dollar terms, inventory increased by $62 million as compared to the second quarter. Approximately $30 million of this increase is associated with our recent Varian acquisition. Overall days of inventory improved by two days, resulting in 10 inventory turns as compared to 9 in the previous quarter.

Our cash balances at the end of the quarter were $681 million as compared to $780 million at the end of the second quarter. The lower cash balance is reflective of cash used for the purchase of the electronics manufacturing business, of Varian, Inc., offset by positive cash flow from operations during the quarter. Also during the quarter we replaced our revolving credit facility. This new credit facility has capacity of $500 million and has a 5-year tab. There were no borrowings outstanding at the end of the third quarter.

Cash flow from operations was approximately $190 million in the third quarter. Our 18th consecutive quarter of positive cash flow. This positive operating cash flow number, being generated while growing revenues at 13% sequentially. Our capital expenditures during the quarter were approximately $63 million, our depreciation for the quarter was approximately $47 million, and EBITDA in the quarter was approximately $131 million. Our return on invested capital increased to 18% from 15% in the previous quarter.

In the first nine months of the fiscal year we have generated approximately $415 million of operating cash flow. While growing the business by approximately 20% over the same time period. As we move into the final quarter of the fiscal year and beyond, we continue to be very well positioned to generate incremental operating cash flows. On a year-over-year basis, we continue to maintain efficient control on capital deployed while increasing revenues and our operating earnings. Our net capital investment for the end of the quarter was $1.67 billion. And from this base we are currently generating approximately $530 million in annual EBITDA. That is a cash return of approximately 30%. Our business model continues to demonstrate the returns on invested capital in excess of our weighted average cost of capital and strong cash flows are sustainable.

I will now ask you to turn to Slide 9. As we discussed on our last quarter's earnings call, we completed the acquisition of the electronics manufacturing business of Varian Inc. on March the 11th, 2005. This acquisition add low-volume, high-mix capacity to our capability set in the United States cost instrumentation and medical and military and aerospace sectors. We are pleased with the way this business has integrated into the Jabil organization and we thank our new colleagues for their contribution in the quarter. Regarding capacity, our business outlook is consistent to increasing production levels across all geographies. As we were off to the fourth quarter of our fiscal year and into fiscal '06, we will be challenged in numerous plants with ramping requirements, but we are in a position to have adequate capacity.

As we've discussed throughout the fiscal year, our capital investments in fiscal 2005 are expected to be related to existing plants and additional expansion in China, Eastern Europe, and India. I'm pleased to report that groundbreaking has taken place in Hungary and in China and we expect these plants to be completed during the second quarter of our fiscal 2006. In India construction is well underway and we expect the first phase of this facility to be available later this summer. As a result of pre-positioning the Company for increasing levels of production as we move into fiscal 2006, we have now revived our estimate of capital expenditures to be approximately $250 million for the fiscal year 2005. Depreciation is estimated to be between 190 and $200 million.

I'd like to ask you to turn to Slide 10. Our fourth quarter fiscal 2005 guidance. We're guiding for an overall revenue range of 2 to $2.1 billion for our fourth quarter or an increase of 6% over the third quarter. Core earnings per share for the August quarter, are expected to be in the range of $0.35 to $0.37. As a percentage of revenue, we estimate operating margins to be in 4.3 to 4.6% range. Research and Development costs are expected to increase slightly from previous quarter to approximately $6.5 million, reflecting our on-going success in design-related programs with existing and new customers. Tax rate is expected to be 16%, consistent with that of the third quarter.

Please turn to Slide 11. Looking at revenue by sector for the fourth quarter, our automotive sector is estimated to decrease by 10%, reflecting seasonal low levels of production; computing and storage is estimated to have production levels lower by 10% from third quarter; the consumer sector is expected to increase by approximately 20% in our fourth quarter, reflecting the ramp of new products within this sector; instrumentation and medical sector is anticipated to increase by 5% in the fourth quarter, reflecting the addition of new products within this sector; our networking sector is expected to increase by 5% in the fourth quarter; the peripherals sector estimated to increase by 15% over the third quarter; and finally, the telecom sector is estimated to decrease by 10% in our fourth quarter.

Please turn to Slide 12. On a full fiscal year basis, revenue levels should be approximately 7.48 to $7.58 billion. Core earnings per share are estimated to be $1.27 to $1.29. Core operating income for the full fiscal year improving by some 20 basis points on a year-over-year basis. This estimate reflects 21% revenue growth and core operating income and EPS growth of approximately 25% in the fiscal year. This equates to adding approximately $1.3 billion in revenue and operating margins of approximately 5% during the year.

I ask you to turn to Slide 13. The benefits of our strategy of positioning the Company to capitalize on the continuing trend to outsourcing have been evident in this fiscal year and continue to be so as we move into our fiscal 2006. As a result, the level of integration and product ramp activity is increasing in our factories as we expand our relationships with existing core customers across multiple product platforms and industry sectors. We're providing you with insight into our first fiscal quarter of 2006 and guiding to a revenue range of 2.2 billion to 2.4 billion or sequential growth in the range of 8 to 17% over the fourth quarter. This revenue growth is being driven by a consumer sector as we move into the high season for these products, continued healthy double-digit growth in instrumentation and medical sector, and healthy growth across our remaining industry sectors. Core earnings per share is forecast to be in the range of $0.40 to $0.44 for the first fiscal quarter of '06.

In summary, we continue to execute to the plan we set throughout the year. Revenue growth for the fiscal year of 20%, core operating income and EPS growth of 25%, while maintaining control of capital decline. Returns on invested capital as we exit the year of between 18 and 20% and cash flows from operations of $500 million. With growth well positioned and set to continue through fiscal 2006 and beyond. I'd now like to hand the call over to Tim Main.

Thank you, Forbes. Good afternoon. We had a very solid third quarter and we look forward to continuing growth in the quarters ahead. Our track record of growth in revenue earnings and return on invested capital continue to place Jabil in the top quartile of S&P 500 companies. The results are consistent with our objectives and we expect to continue to grow the business at leading rates and returns. I am frequently asked at times with a thinly-veiled scepticism to provide an explanation for our cheerful outlook on the business, and I think the first step to understanding is not over complicating the basic elements.

To help with that, I'd like you to turn to Slide 14, please. Our strong revenue growth is principally driven by the secular trend to externalize manufacturing and the movement to simplify supply chains through supplier concentration. It's interesting to note that our two largest industry segments are the consumer and the instrumentation and medical sectors. Secondly, given the revenue growth, we focus on operational execution and customer satisfaction. OEMs outsource, in order to get their products faster, better, and cheaper, and market share expansion with outsourcing OEMs is driven by fundamental performance. Therefore, execution is the key to converting revenue opportunity and to good long-term relationships with appropriate earnings.

Please turn to Slide 15. As an example of the trend to outsourcing, we frequently share our experience with our two largest segments. From a combined level of less than $500 million in fiscal 2002, the consumer and the instrumentation and medical segments will contribute over 3.2 billion of our $7.5 billion in revenue in fiscal 2005. I've also added what we're seeing from Japan-based OEMs. This has been a slow process, but I think Japan-based OEMs will comprise as much as 5% of our total revenue in fiscal 2006. This is another positive data point on the health of the trend.

Please turn to Slide 16. Our revenue in fiscal 2005 is anticipated to grow by approximately $1.3 billion. About half of that growth will come from vertical conversions while 22% will come from supplier concentration. The relative sources of growth have been consistent over time. As we look forward to fiscal 2006, although the numbers may change to some degree, we do expect the primary drivers to remain the same.

Please turn to Slide 17. We place a strong emphasis on capital efficiency in our company and it shows up in our external financial results. Since fiscal 2002 we have deployed $330 million in additional invested capital. That invested capital produced $204 million in incremental operating income from fiscal 2003 to 2005. As a result, our overall return on invested capital is now in the high teens. At the low end of our long-term objective.

Please turn to Slide 18. Capturing revenue, focusing on execution, and being efficient with capital results in expanding cash flow. Our compound annual growth rate and cash flow from operations is 32%. When we compare this to our capital expenditures, we see increasing free cash flow and intended and desirable outcome. Admittedly, this graph excludes acquisitions, but we are growing the business at 20% per year, making select acquisitions, and we are still generating substantial free cash flow. For example, free cash flow in fiscal 2005 after the Varian acquisition will be approximately $100 million or about 44% of our GAAP net income. We look forward to expanding our business with this simple formula in the years ahead. Beth?

Operator, this concludes the formal part of the presentation that we have. We'd like to now open it up for questions from our audience.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Brian White with Kaufman Brothers. Please pick up your handset before asking your question. Sir, your line is now open.

Okay, thank you. Can you talk a little bit about the sequential growth expected for the first quarter? You talked about some seasonal strength in the consumer business, instrumentation and medical. What percent of that growth do you think is new program wins and what percent is just the business that you have right now?

I don't think we're in a position to really break that out for you. Clearly, I mean, consumers should be expected that that's going to grow. There isn't a big, new customer that we're counting on to ramp in fiscal Q1. I think that's a legitimate concern. It is generally customers that are already in the barn. That is not the only source of growth in that quarter. We also, as Forbes mentioned, continue to see pretty good growth in the instrumentation and medical segment, which is our second largest segment now. And then throughout the year, I'd expect to see good growth out of the computing and storage segment and somewhat out of the peripherals segment and virtually all the other segments.

just I'm trying to get at visibility maybe in the November quarter, it's a ways out. Are there programs that you booked or you're just expecting a certain seasonality in consumer and other businesses to see that type of sequential growth?

Brian, obviously there is a seasonality in our high consumer season in our November quarter, but yes, I know, the guidance we've given we feel comfortable with in terms of how business is doing. There's a number of programs ramping across multiple segments.

We wouldn't put the number out there if we didn't think visibility was sufficient enough. I mean, we read the data points just like everybody else. There's enough negative data points out there to fill your head full of concerns, but unless somebody cancels Christmas this year, I think it's going to be a quarter that -- and a number we can probably hit.

Okay, and just provide a little color maybe on the press release yesterday about Memphis hiring 500 people and starting a new program there.

Yes, I mean, we can't talk specifically about that, Brian, but again, that goes to the comments I made about new product platforms across a number of customers and as the press release stated we are expanding that Memphis facility as those programs ramp towards our fiscal 2006.

Okay, thank you.

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

Okay, thank you. I was hoping you could maybe comment on the overall marketplace in general in the sense of what you're seeing from just -- whether telecom and the other areas are doing what they normally do at this time of the year and going into the summer or if you think that things might be a little bit weaker. Obviously, we've been hearing about weakness over in Europe.

Yes, I think overall the business trends are pretty strong. We had a great quarter. We're continuing to support the guidance that we provided 90 days ago. We're moving into a pretty robust Q1. It's hard to be depressed when the business is growing at 20% a year and earnings are growing faster than revenue. I think it would be nice if end markets were a little bit more robust, but as we've said all along, the Company is positioned to capitalize on the trend to outsourcing, and the benefit from supplier concentration is OEMs simplify their supply chains and that's how we grow the business four, five, six times end market growth rates, and so we feel really good about our ability to do that. And if end markets came around to be stronger, that would be all the better for us.

Have end markets been on the softer side, though?

This is all -- this is all relative discussion. I don't think, Lou, that we would provide a data point that would be any different than what you're seeing in the rest of the marketplace. I mean, it's softer than it was maybe a year and a half ago. I mean, it's really -- again, I come back to end markets are growing at a very slow rate. I mean, we've been saying that consistently. And there's no -- we don't discern any big change in that kind of stable to sideways temperament to the end markets, and that's exactly why we think the investor community really needs to take a look at Jabil, because we're growing, again, we're growing at four, five, six times end market growth rates, based on the trend outsource. So we feel great about the next quarter and the quarter after that, so.

Okay, and then just looking at then the EMS marketplace. Obviously you all have been getting, I guess what you could characterize almost as the lion's share of growth. Would you say -- and unfortunately, many of your competitors are actually not growing at all. Would you say that the EMS outsourcing marketplace is starting to re-emerge and that the pipeline seems to have refilled and it's doing well or would you say that similar to the last couple of years, you're just winning more than your share?

Lou, I guess I take exception at that. Benchmark is growing, Flextronics is growing, Ohne high (ph) is growing, there are growth stories out there. The companies that are growing are focusing on the trend to outsourcing, they're focusing on market ditches, they're expanding their services. Companies that aren't growing today probably have to be more inwardly focused to rationalize operations and do some other things and maybe not -- maybe it doesn't pay for them to be as focused on revenue generation, and we're not winning all the business. I mean, that's -- there is enough business out there to support a pretty big industry. I mean, it's already a big industry and there's plenty of growth opportunities for multiple players in our business, so I take exception with the basic market notion that there is no growth out there for people in our industry. I mean, it's just not true. There's more than a handful of companies that are growing today.

Okay. Fair enough. Congratulations on a nice quarter. Good luck on the next one.

Thanks, Lou.

Your next question comes from the line of Scott Craig with Bank of America.

Hey, good afternoon. Tim, just a quick question on a couple of the end markets and versus your expectations. It looks like the computer storage area was stronger than you thought heading in. I think you're looking for a decline because some business got pulled forward. Can you comment on that and the consumer market, which was a lot stronger also? And then second question, just on the margins, last quarter you commented you felt they were getting held back a little bit by your ramps and your ramps certainly aren't decelerating, so do you think you're still going to be getting impacted by around 10 basis points as we work into the next quarter or two from a margin perspective? Thanks.

Hey Scott, it's Forbes in terms of your first question around some of the variance around some of the sector guidance we've given, I think the first one is computing and storage. That was up 5% sequentially and I think we guided down about 5% in the last quarter. Again, we saw some strength around some of the server platforms there. I can't really comment around if that was a shift from quarter to quarter, but again, we just saw some strength there. Some of the other areas were pretty consistent. Consumer sector, yes, that increased about 24%. I think we guided 10% up. And that's just really reflective of our on-going ramp with some new products in that space across a number of customers. We feel pretty good about that.

In terms of your, I think your second question was dilution in terms of our product ramp. As I said in the prepared remarks, we are ramping a number of programs as we move through the fourth quarter and into our first fiscal quarter, and I think overall it's tough to put a number on it, but as we integrate these businesses and we're growing a number of plants for that Indian facility coming on-line in late summer and obviously some costs associated with starting that up, and 10 to 15 basis points is a reasonable number.

Okay, thanks.

Your next question comes from the line of Alex Blanton. Please remember to pick up your handset before asking your question. Mr. Blanton, your line is now open.

Good afternoon. Beth, just a hint. The slides didn't appear until a couple of minutes ago, so you might want to get after your web master for that.

Okay, thank you.

My question to Tim is, could you update us on the slide that you presented in March, March 30, at the analysts meeting on the pipeline where you said -- you gave a number which is a total of $21.8 billion with a breakdown within that.

I don't really have an update for that. That's basically everything that was moving out there.

Yes.

And some of those are big pieces and some of them are little pieces, and we've probably landed a couple of little ones. I don't think anybody's landed any huge ones, so I'm not aware of any reason to say that that pipeline is substantially bigger or smaller. It's probably still a good approximation of where we are, Alex.

The business that you mentioned in Memphis yesterday, where does that fit in? Is that one of the larger ones or the smaller ones? I don't think you quantified exactly how much it's going to be.

Yes, I'm not sure that's big or small. It's just right. (Laughter)

Okay. When does that start coming in?

What's that?

The Memphis business, what quarter do we see that ramping?

Oh, that will take several quarters to ramp and I think will start in July or August.

Yes, some comes in in August, but the principal ramp starts in the first fiscal quarter, and will continue through quarters 2 and 3 of '06.

And what segment with you say that's in? What segment will it be in?

I believe that will be in the instrumentation and medical segment.

That is correct.

Okay, thank you.

Thank you.

Your next question comes from the line of Steven Fox with Merrill Lynch. Sir, pease go ahead.

Good afternoon. Two questions. First of all, on the cash flow. Forbes, you guys are still generating cash with considerable growth. Is there a level of growth where you would not be generating cash? I mean 20% sales growth and still putting up $500 million or so of cash flow this year. Any thoughts on that?

I think again, Tim's comments addressed. One of our core focuses is focusing on capital deployed. I've not run the numbers, but my guess would be certainly when you start growing around about a 40% level, that starts to get pretty tough in terms of free cash flows because of the capital expenditures that go with that, but certainly in the 20 to 30% range there is certainly lots of room for continued cash flows, and clearly if you look at our cost of deployed levels, we want to continue to focus on inventory turns. I think receivables and payables are very much where they're going to be, it's a function of the business in revenue stream, but you continue to ring out days out of inventory and that helps fund that and that continued growth. So overall, I would say once you're up to 40% type levels, that's clearly, there's strong cash flows ahead.

Thanks. Then a second question. With a consumer customer like Phillips, if you saw a change in their demand outlook, how long before it filters back to you guys these days?

It wouldn't take very long.

So your production levels are pretty reflective of Phillips' current outlook?

That is correct.

Thank you.

Your next question comes from the line of Matt Sheerin with Tom Weisel.

Thank you. Forbes, you talked a little bit about the strength in the consumer sequentially in your forward guidance, but could you give a little bit more specifics about the customer wins there, the types of products that you've been ramping and what kind of products you're looking at in the pipeline?

In consumer electronics?

Consumer electronics.

Yes.

Yes, we've talked about that consistently. We can't talk about specific customers or specific product ramps. We have about I think 11 to 12 customers in that segment. There are wireless customers; there are home electronics customers; there are white goods customers; and there are several of each of those, so you're just going to have to accept the notion that we've got more than one strong horse in that segment that is growing the area and it's indicative of the trend to outsourcing. That's what makes it a good robust sector for us.

Sure. And Tim, you also mentioned before about supplier consolidation being an opportunity for the EMS industry. There's -- and we're hearing more and more about that, and obviously you're not always on the right side of those types of decisions, but how are you faring in those kind of pitches and are you looking at potentially losing any business in any of your segments as a result of that?

Yes, there was some distracting comments that came up this quarter on maybe one that we might have lost, and we won't provide any color or comments around that, but you are going to lose some of them, and, but I think the ones that -- our won/loss column looks pretty strong in the win side, and I think that will be true for the top, the top suppliers in the industry from a financial conditions standpoint, from a performance standpoint, from a global footprint standpoint. I think it's an environment. When you have a slow end market growth environment, the strong get stronger, so to speak, as they kind of gain momentum and continue to feed off the inertia associated with, hey, I want to simplify my supply chain, hey, I want more services from a smaller group of suppliers, I need more design externalized, and some of that's kind of challenging to keep up with and if you're distracted with a lot of other stuff, it's difficult. So to answer your question, I can only characterize it as we have been winning more than we lose there and I'd expect that to continue. And on balance, our outlook incorporates all of that, so--.

Okay, great. Just lastly, given your growing cash balance, have you given any more thought to stock buy-backs or dividends?

Well, we're giving a lot of thought to it. Forbes is being contemplative right now as we speak. We'll probably take another quarter or two to determine our posture. We're right kind of at the cusp of having enough excess cash flow and perspectively sufficient-free cash flow to make concrete decisions about that, but there's a number of growth opportunities. It's a pretty big opportunity pipeline out there that we might be able to use cash, we can use cash at 5, 6% and get an 18% return on invested capital. We really want to employ our cash in our business. We'll continue to do that, and then over the next two, three quarters we'll make a determination of whether we can get a look at stock buybacks or dividends at the same time.

Okay, thanks very much.

Your next question comes from the line of Bernie Mahon with Morgan Stanley. Please be sure to pick up your handset before asking your question. Mr. Mahon, your line is now open.

Okay, thank you. Question for you on the gross margins. What's the right way to think about that as you have some of this consumer -- more consumer business ramping? Do you think we've kind of hit a peak at 8.4, 8.5 and it starts to trend a little lower or do you think as utilization fills up, that it could go above the 8.5 mark?

Yes, that's something we don't really ring our hands over or focus on as a business. Our key focus is our operating income growth, and what I would say to you is, and other investors out there, is focus on our operating income percentage growth and as we add additional consumer business this year, I think almost what, 50% of our growth, about 1.3 billion let's call it was consumer-based business, and those incremental operating margins were at 5% a little bit north of that. We expect that to continue as we move through fiscal '06 and we plan on continuing to grow that operating income percentage as we move through the back half of this year and into '06.

Okay, and just on the computer and storage, just following up on the earlier question. The August guidance is for down 10% sequentially, but I thought you had said that it was -- you had some new programs ramping? Is that -- what's the disconnect there? I mean, yes, for the August quarter, the 10%?

No, we didn't say we had any new programs ramping in computer and storage in this timeframe.

Oh. Is that just kind of--.

Certainly there's opportunity as we move through '06 for those, absolutely.

All right, thanks a lot.

Your next question comes from the line of Thomas Hopkins with Bear Stearns.

Yes, good afternoon, guys. I guess Forbes, you can tell one of the things historically we haven't been used to seeing is you to grow revenue at this rate and simultaneously take the cash cycle days lower, it's something that people probably aren't used to. Can you just talk -- I mean obviously we can see the individual pieces of it in terms of the turns and the DSO's and the payables, but what's allowing you to grow at these kind of rates and drive your cash cycle days lower and lower?

Well, it is about a 2-day, 2, 3-day change, and moving inventory turns up to 10 certainly helps. I think we've talked about that in the past, and we believe the business model and focusing on execution and using our systems and their demand planning tools, achieving a higher level of B2B integration with our customers, actually doing more of the system assembly and having more visibility into realtime demand patterns, and having a very effective procurement organization that's using our tools effectively and contributes to a lower consumption of inventory to run the business. The fact that consumer electronics is increasing a little bit as a percentage of our overall revenue probably helps a little bit, but I think we'll continue to drive the consumption of capital associated with working capital in our business as low as we can and continue to improve there. That's really -- Tom, I just can't say it enough, it's a core focus of the business. We've actually been a little frustrated that we haven't been able to move faster. So it's our expectation that we would be able to continue to grow the business at this rate and keep our cash cycle very low.

Okay. And then just a follow-up. Can you -- this is a little bit of a housekeeping question. Can you tell us who the customers above 10% were?

No, we don't disclose those on a quarterly basis. We only do that on an annual basis.

Okay, and would anything have changed dramatically?

Since?

Since -- yes.

I can tell you there was two 10% customers in the quarter.

Okay, great. Thank you.

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

Thank you. Tim, in the past you've talked about investing in the building blocks for various products that you manufacture. Can you give us a little bit of an update on those initiatives and any insight into Jabil's long-term strategies for supplying some of the vertical inputs into the boxes that you're making and maybe give us a sense how important the building blocks are to revenue growth versus margin enhancement?

Yes, I don't think I've talked about that much. There are technology building blocks that are interesting and I think the ODMs have done a good job there in investing in technology blocks to go into notebook computers and cell phones, and I think the vertical guys in our industry have done a good job of vertically integrating components and they've talked a lot about that. I don't think that we've spoken specifically at all about embedding vertical -- the vertical integration building blocks of the business to enhance margins or drive revenue. All of the components in the products to be billed are already in our revenue stream, so it's got zero to do with revenue expansion, unless you're creating a merchants activity and we want to be in a components business. That's just not in our business, not that that can't be a valid business model, it just isn't ours. I don't think that's coming from me.

Forbes, maybe for you, Courtney Ryan during the analyst meeting had spoken about the campus strategy and pursuing a shared services model. So can you just give us a sense how much leverage is still available in the SG&A line from those initiatives?

Yes, there's still leverage there. That's an initiative that is really in its infancy and something that we would plan to put in place in fiscal 2006. So you're not seeing any efficiencies out of that initiative as yet.

Okay, great.

I wouldn't expect that to be, to move the needle substantially -- that's customer penetration strategies more so than a corporate-wide strategy and a way to reduce our SG&A. Our long-term thought process around SG&A is that we'll continue to drive it down as a percentage of revenue. We think it can be driven down below 3% long-term. I don't know that that will happen in the types of quarters that maybe you guys write about, but that's certainly the long-term direction and continuing to have very tight operating expense control is a big part of the financial formula for us.

Great, thank you.

Okay.

Your next question comes from the line of Michael Walker with First Boston.

Thanks. Just a question on the broader communications businesses, including both telecom and networking. If you look at the combination of revenues there, that group's down about 10% on a year-over-year basis. Your guidance has it going to about flat on a year-over-year basis. Just kind of stands out relative to the high-double-digit growth you've seen year-over-year in every other segment. Just wondering if you could give us some kind of color around that. Is that just because demand is weak? Is it because outsourcing's taking a break? Is it shifts among different customers and programs? Just any kind of color you have.

Yes, the end markets just aren't growing very quickly there and a lot of it's already outsourced, so they're mature legacy industries in terms of their outsourcing. Doesn't mean there aren't pockets of outsourcing left there, doesn't mean there aren't opportunities. We absolutely continue to think they're both valid, vibrant sectors for us to be in, and we have customer penetration strategies for both segments and expect them to be important sectors for us going forward, but yes, it's been end markets have been weak and there hasn't been a lot of new outsourcing opportunities there for us.

Out in the other markets, peripherals, auto, consumer, instrumentation and medical, obviously every other EMS is talking about that being where the growth is and that being where the focus is for them. Do you find that competition has gotten a lot worse in that area or do you think people are talking more than walking when it comes to actually bidding for and winning business in those areas?

Competition is a good thing, so I wouldn't look at competition as it's getting worse. Because what that means is that those markets are growing as an opportunity for our industry, and like all opportunities, the companies that are best at exploiting those opportunities will reap the highest amount of reward, and I think we have a bit of a head start in those industries, particularly in automotive in areas where it takes very specific manufacturing processes and qualifications and a different approach to manufacturing. We've got a substantial head start, a pretty big business in it, so we feel really good about our ability to compete in that area, but I think the more people are talking about it should be data points for you guys that hey, those are for real growth opportunities, and you look at automotive and it's a $60 billion electronics market with electronics continuing to increase in the content of a car. Look at defense and aerospace, look at peripherals, these are all industries that have some significant vertical aspects to it and there's a conversion opportunity for the best in the business.

All right, thanks a lot,.

Okay.

Your next question comes from the line of Thomas Dinges with JP Morgan. Please be sure to pick up your handset before asking your question.

Hi, good evening, guys. Just a real quick one on the balance sheet for Forbes. Forbes it looks like the CapEx outlook for next year is maybe flat to slightly up a little bit. Is that a bit more front-end loaded in the year and a lot of the real strong cash flow from a free cash flow basis that you guys are looking for for the year probably comes a little bit later in the year as you still are spending some on some of the new plants? Then just a real quick follow-up on your footprint.

Yes, I think that's pretty true. As we move into the first fiscal quarter we've got the range of guidance we've given is pretty wide in terms of 17%, or something like that. So certainly as I look at it now we would be building, nearing completion and then as ordering placement gear, testing and getting that on the floor, that's certainly -- as we move into the first half of the year. Having said that, you will see positive cash flow from operations as in the first half of the year, but certainly the strong pieces are going to be in fiscal Q2 once we get through that high consumer peak period in fiscal Q1 and then beyond.

And then a quick one, just for Tim, as you look at your footprint out over the next year or so and you are adding some capacity in some lower-cost geographies, are there areas that at one time may have been considered the lowest cost, but now people are starting to say maybe we need to move maybe a little bit more inward and as you look out does that talk about maybe as you look to the end of next year trying to have to add some actual new either greenfield facilities or some things in areas that perhaps people hadn't really thought about yet in terms of a manufacturing footprint?

Sure. I think that will be a continuing trend as people move further into China to central and western China, further east in Europe, so people are talking a little bit more about Russia, it might be a little premature to talk about that specifically, but it's a big market, population-wise, and demand is growing there. We're pretty well positioned in India today, but sure, I think we'll continue to press in the areas that offer lower costs and we'll also continue to need to be in places our customers need us in because demand is growing, and if you look at places like Brazil and China and Russia and other areas, that would fit that goal.

Okay, thank you.

Okay.

Your next question comes from the line of Paras Bhargava with BMO Nesbitt Burns.

Good afternoon, folks. Tim, you had mentioned the 25% revenue growth was a stretch goal for you folks. Are you still keeping that stretch goal even in this sort of maybe difficult end market environment or have you backed off from that stretch goal a little bit?

I think -- we want to build as much stuff as we can for as many great customers as we can. And if that means -- if we're doing 20, let's go get more. So that's -- we aren't really driven by a revenue target. We want to go get as much stuff as we can from the best customers that we can find, and make as much money on that as we can. So you talk about a 20% revenue growth rate. We have to speak to you in terms of what's a rational expectation for our future growth. And we talk the size of business we are today a 15, 20% growth rate I think is a rational starting point for our discussions, and of course, any discussions we give you or any outlook we give you, we're going to press internally to hold ourselves to a little higher bar. So some years we might grow a little faster than kind of the mean expectation in some years it might be a little bit slower depending on how things go.

Great. Just a couple of housekeeping questions for Forbes. What percentage of your business came from the top 10 customers? What was your capacity utilization?

Top 10 customers, I believe was about 64, 65%. In terms of capacity, that's not really a measure that we focus on. Various facilities there are different capacity levels throughout the globe. I think the way I like to answer that in terms of from our capital expenditures, it's what we're doing is for any incremental dollar of revenue, we're now buying equipment. We don't have surplus equipment. Lying out there in crates anymore. Those days are long gone, but certainly we know we have adequate square footage to meet some of the revenue growth goals that we've put out there.

So if revenue growth comes in at the top end of your expectations in the next year, can your operating margins expand a little bit as a result of capacity getting better or have we peaked out for that reason? I know earlier somebody asked about gross margins and you said I only care about operating margins.

Yes, no,the operate -- yes, the goal is to grow those operating income margins, absolutely. That's the intent.

Is there a high end that you could: I mean, is there a range for the next year that you're envisioning, Forbes?

No--.

You shared ranges with us before, so I'm just wondering if you've changed them?

No, our long-term goal of getting to 5% operating income level has not changed. Absolutely not changed. I think at our analyst call we talked about getting there during the course of fiscal 2007. That goal has not changed and I think we've got a very good opportunity to get there.

Paras, I just want to mention, I think we're doing a reasonable job of adding accretive business to our margin line. I've heard some concern about the relative concentration of consumer electronics and our revenue stream, and if we just looked at the year-over-year revenue and operating income growth in Q3 and Q4, in fiscal Q3 of '05 we added $313 million in revenue and on that $313 million in revenue did $18 million of additional operating income. That's about 5.8%. And in Q4, based on our guidance, we'll do about $424 million year-over-year incremental revenue and we'll produce about $26 million of year-over-year incremental operating income, which is over 6%.

So by that measuring, by that yard stick, we need to be doing more of the same. And if we keep doing it, then we're going to continue to march incrementally, our operating margins up towards the 5% objective. Having said that, again, we don't need to improve margins to have a great business. We're in an 18% return on invested capital, we're growing the business at 20% a year, we're producing free cash flow, we've got a 32% compound annual growth rate and cash flow from operations. The business model as it stands today with the margins exactly where they are is a great business in our opinion, but we'll continue to try and refine it and tune it and get margins up into that 5% objective range.

All right, thanks a lot, guys.

Okay.

Your next question comes from the line of Jesse Pichel with Piper Jaffray.

Nice job on turns Forbes, I know that was your KPI you were focused on. Tim, you mentioned that Japan may represent 5% of sales in fiscal '06, and that's about a double according to my calculations. Is that -- how many OEMs would that represent or is that all growth from high-def broadcasting equipment?

It isn't all broadcasting equipment, that's relatively flat. So it's about five customers, I believe.

Wow.

And in three or four different industry segments too.

Okay, and guidance for instrumentation and medical is 5% growth for fiscal Q4, but a year ago it was 16% growth and I think it's been double-digit growth sequentially for the last six quarters. When do you expect to see some sales synergies from Varian?

We'll start seeing them in the next few quarters, and I--.

Yes, again, we acquired those operations and those customers in mid-March, so what, 13, 14 weeks ago, but--.

As that segment gets bigger, it's going to be increasingly difficult for us to grow it at 60% a year or even double digit growth rates.

Might that plant closure have something to do with it?

What plant closure?

Didn't you close one of the Varian plants?

With 70 people in it?

That has nothing to do with it at all.

Okay.

So, I think--. I think you're going to see certainly good prospects towards double-digit growth as we move into fiscal '06 on a quarterly basis. As we bring in new programs and start ramping certainly two or three new product sets, Memphis was a good example, someone else asked that question earlier on the call, as we bring that into the Company.

Last question, if I could. There's been a lot of concern there about consumer business going to the lowest price players. Could you talk about the contracts you have in place with Phillips and when they expire?

No. We did a deal with Phillips, it closed in '03. It was a four-year deal, which you can look at the public filings on this. That comes up in November of 2006, and that's fine and we would expect that to continue and I think if you look at the practices in the industry, the power of incumbency is very strong and so you don't, you may not keep all of the business, but by the time you exit the contract, you're essentially have achieved free market pricing. For the practical reason that neither the OEM nor the EMS provider wants a substantial dislocation in the manufacturing. It's a very expensive process, so we work diligently over the term of these contracts to achieve pre-market pricing, to achieve improving operations and we do not expect the end date of the original contract to be a watershed event. In most of the deals, they're done with evergreen contracts, so that you just kind of continue with the terms and conditions you have, even though the guaranteed portion has been run out.

Fair enough. Thanks very much, great quarter.

Okay.

Operator, we have time for one final question.

Your final question comes from the line of Mark Hathenburg with Nottingham Capital.

Thank you, good afternoon. There seems to be increased pressure on China to let their currencies float. If that occurs, what would the impact be on Jabil and how do you see yourself positioned versus your competitor if that were to occur?

Mark, it's Forbes. Yes, let me just go back to the premise of currencies and fluctuations. Like our competition, we hedge currencies. That floating I think most of our customers understand that that's something that we cannot control. We hedge as appropriately as we can based upon their revenue forecasts and our cost base forecast. So clearly, that free flow would result in effectively pricing increases, if you will, or cost base increases. I would not anticipate that to be anything negative to Jabil or in the EMS space, given the nature of our business. What it may do is deter the continued shift of business both in terms of low cost, but one has to review that against other regions in Asia, in India, Malaysia or whatever, but overall, we hedge out these types of currency shifts and we'd not expect any impact in Jabil.

Mark, I think you really need to keep it in perspective too in terms of the impact. First of all, I don't think it will float. I think any changes will be incremental, so building in kind of a 10% revaluation I think would be a mean point of the estimates that we've seen and the experts that we've spoken with, but it's really a value add issue. On that value add, keep in mind that it went to China to produce that value add as much as possible. So the actual labor and operating costs components of our sell price to customers that will be based in Renmond D (ph) is relatively small. So if you had a 10% change on a very small portion of your revenue stream there, you're talking about a very -- a smaller impact than maybe people might think, and as Forbes said, we'll have to get that embedded in our pricing models with customers over ensuing quarters.

Congratulations. Great quarter. Thank you.

Thanks, Mark. Thank you. This concludes our conference call for today. I do want to let people listening in know that Jabil management will be on Squawk Box tomorrow morning scheduled to be on during the 7:00 block and also on Bloomberg TV during the 8:30 block. Thank you very much for participating today. Talk to you soon.

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