捷普科技 (JBL) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Jabil Circuit, first quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] Thank you. I would now like to introduce Mr. Alexander, Vice President of Corporate Communications and Investor Relations at Jabil Circuit. Mr. Alexander you may begin your conference.

Thank you. Good afternoon. This is Forbes Alexander and with me this afternoon is Tim Main our CEO and President. During the course of this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are just predictions and that actual events, or results, may differ materially. We refer you to the documents that the Company files from time to time with the SEC including our most recently filed 10-K, which was filed on October the 28th, 2005. 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 a slide show presentation on the first quarter and fiscal year.

Now I ask you to turn to slides 2 and 3. Results of the first quarter of fiscal '06 were as follows. On revenues of $2.404 billion, GAAP operating income increased 26% to $88.8 million. This compares to $70.3 million in GAAP operating income for the same period in the prior year. Core operating income excluding amortization of intangibles and stock based compensation for the quarter was $111.8 million or 4.7% of revenue. As compared to $80.9 million or 4.4% for the same period in the prior year. Core earnings per share were $0.44. On a year-over-year basis the quarter represented 31% growth in revenue and 38% growth in core operating income. On a sequential basis, revenues increased 18% while core operating income increased 20%.

Please turn to slide 4. Now I'd like to discuss results of the quarter and look at our revenues by sector. First quarter revenues increased 18% from the fourth quarter. Production levels in the automotive sector increased 9% from the previous quarter, computing and storage sector increased 11% from the fourth quarter, for fiscal 2005, as a result of higher production levels and forecast across a number of customers. Consumer products sector increased by 46% in the quarter reflecting seasonal higher levels of production and the ongoing ramp of existing and new products with our largest customers in this sector. The instrumentation and medical sector increased by 8% from the fourth quarter reflecting the ongoing growth of assemblies across multiple customers in this sector. The networking sector increased by 2% from the previous quarter, peripheral sector decreased by 7% over the previous quarter and finally the telecommunications sector increased 10% sequentially.

If you would now please turn to slide 5. Our sector information for the quarter in percentage terms was as follows. Automotive 6%. Computing and storage 10%. Consumer 38%. Instrumentation and medical 16%. Networking 12%. Peripherals 7%. Telecom 7%. Other sector was 4%. I'd now like to review our balance sheet and ratio trends.

Please turn to slide 6. Inventory dates reduced in the quarter by 1 day to 38 days. Turns were consistent with those of the fourth quarter at 9. In absolute dollar term inventory increased by $123 million, reflecting a prepositioning of inventory for continuing strength and demand in the first half of our second fiscal quarter of '06. Day sales outstanding improved by 1 day to 41 days from the previous quarter. Accounts payable days were consistent with those of the previous quarter at 64 days, or $1.573 billion. The Company's sales cycle was at its lowest point in our history at 15 days. An improvement of two days over the previous quarter. Our return on investment capital increased to 23% from 19% at the end of the August quarter. And the rate of 17% from the same period in fiscal 2005.

I'll now ask you to turn to slides 7 and 8. Cash and cash equivalents were $876 million as compared to 796 million at the end of the last quarter. Our cash flows from operations were approximately $144 million in the first quarter. Our 20th consecutive quarter of positive cash flow, continuing to demonstrate the ability to generate strong cash flows from operations in a significant growth environment. Our capital expenditures during the quarter were approximately $67 million. Depreciation for the quarter was approximately $42 million, amortization was approximately $6 million, and EBITDA in the quarter was approximately $154 million. On a year-over-year basis we continue to maintain efficient control in capital deployed while increasing revenues and our operating earnings. Our business model continues to demonstrate the returns of invested capital in excess of weighted average cost of capital and operating cash flows are sustainable and predictable. Our net capital investment at the end of the quarter was consistent with that of the previous quarter at $1.67 billion. We're pleased with this result. I've outlined in our last quarter's call we believe we're extremely well positioned to produce operating cash flows in excess of those in fiscal 2005.

I'd now like to review our capacity and operations. We're pleased with the operational execution of our business units and plants in the most recent quarter, in particular those executing to a very steep ramp in consumer electronics. As we continue into fiscal '06 we shall be challenged on numberous fronts with ramping requirements but do remain in a position to have adequate floor space capacity. During the first quarter we're pleased to note that our Wuxi, China facility commenced production operations. Our Ranjangaon, India facility commencing goes at the end of the fourth quarter. We're well positioned to see production levels continuing to ramp in both facilities throughout the remainder of fiscal '06 supporting customer demands across multiple sectors such as peripherals, consumer telecom, and industrial instrumentation and medical sectors. Our investments in fiscal 2006 are expected to be related to the above locations and existing plants. As we continue to see increasing levels of production across multiple sites and geographies. We estimate capital expenditures to remain in the range provided last quarter of 250 to $350 million for the fiscal year. Depreciation is estimated to be in the range of 180 to $200 million.

I'd now like to -- excuse me, I'd now like to discuss briefly stock-base compensation. As we discussed in our last earnings call, companies now are required to expense all costs associated with stock-based compensation as a result of the implementation of Financial Accounting Standard 123R on the 1st, of September 2005, or first fiscal quarter. Stock-based compensation for the first fiscal quarter was $17.1 million on a pretax basis of $0.05 per diluted share. This was at the high end of our previous guidance as our outperformance in total shareholder return to our peer group over the last two years triggered the accelerated vesting of previously awarded options. For the full fiscal year such compensation is expected to be approximately $0.12. Such costs along with intangible amortization shall be excluded from our core earnings guidance to you as we wish to provide you with an alternative method for assessing operating income. Earnings and earnings per share from what we believe to be our core manufacturing operations.

I'll now ask you to return to slide 9 in our business update. Our second quarter guidance for fiscal '06, we estimate that our second fiscal quarter of 2006, our February quarter, to have revenues in the range of 2.1 billion to $2.3 billion. Reflecting the seasonal decline in demand for consumer products. As a result, or core earnings per share is forecast to be in the range of $0.34 to $0.38. As a percentage of revenue, we estimate operating margins to be in the range of 4.1 to 4.4%. Section development costs are expected to increase by approximately $1 million to 7.5 million in the fiscal quarter, reflecting our continuing success in design related programs with existing and new customers. Capital expenditures are estimated to be in the range of 60 to $90 million in the second fiscal quarter and our tax rate is expected to be 16% consistent with that of the first quarter.

Please turn to slide 10 for our revenues by sector for the second quarter. The automotive sector is estimated to decrease by 7% in the quarter, reflecting seasonal lower levels of production. The computing sector is estimated to have increasing production levels by 10% from the quarter, our consumer sector is expected to decrease by approximately 30% in the second quarter as we exit peak demand season for consumer products. The instrumentation and medical sector is anticipated to increase by 10% in the second quarter reflecting the ongoing growth of assemblies within this sector across multiple customers. The networking sector is expected to increase 2% in the second quarter, the peripheral sector is estimated to increase by 5% in the quarter, and the telecom sector is estimated to have consistent levels of production with the first fiscal quarter.

Please now turn to slide 11. A full fiscal year update. As we've discussed in our previous calls, our strategy has been and continues to be position the Company to capitalize on the trend to sourcing. We are pleased with the start we've made to fiscal 2006, executing in our first fiscal quarter to the upper end of our previous guidance. As we move into our seasonally lower second quarter, fiscal '06, the level of integration and product ramp activity is increasing in numerous factories as we expand our relationships with existing customers across multiple product platforms and industry sectors. This positions the Company for a strong growth profile in the second half of our fiscal year. Our current estimates for fiscal '06 are to the upper end of the guidance we have previously given you. Our revenues of 9.3 billion and core earnings per dilutive share of $1.65. This represent's a 24% growth in revenues and a 29% growth in core earnings over fiscal 2005. I'd now like to hand the call over to Tim Main.

Thanks, Forbes. What a great start to the year of outstanding growth and outsourcing service. Year-over-year operating results tell the story well. Year-over-year fiscal Q1 revenue increased 31% and core operating income increased 38%. We also improved core return on invested capital to 23% from 17% in fiscal Q1 of 2005. Demand for outsourcing services is clearly very good and the solid performance of our people in this environment is delivering better financial returns. In calendar 2005 we expect the 25 largest providers of outsourcing services to post revenue growth of approximately $20 billion.

Demand is increasing as OEM's around the world seek to reduce costs, and accelerate time to market for broadening product lines. Demand is also increasing as OEM's change their approach to outsourcing. From one which primarily utilize suppliers to managed portions of the supply chain to one in which we are asked to manage an end to end solution from design through assembly, delivery, and service of their electronic hardware. Even in mature outsourcing markets such as computing and communications there remains significant levels of vertically integrated activity. For example, configure to order operations. Jabil's growth reflects our demonstrated ability to capture share of the growing outsourcing revenue stream.

We now expect revenue in fiscal 2006 to be approximately $1.8 million higher than it was in fiscal 2005. About half of that growth will come from customers converting to an outsource supply chain model. Primary sectors contributing to growth are the consumer, instrumentation medical, and the computing and storage segments. In fiscal 2006 we expect our two largest segments to be the consumer and the instrumentation medical segments. These two segments combined will drive well over $4 billion in revenue in fiscal 2006. The environment for growth along our long term front line is better than ever. We're off to a great start for 2006 and anticipate sustained growth in coming years. All in all it was a great quarter and good prospects looking forward. Operator, I think we can begin the question-and-answer session of the call.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Brian White with Kaufman.

Good afternoon. Could you talk a little bit, Forbes, about margins moving into next quarter, you did 4.7 this quarter in operating margins and you're guiding to 41.to 4.4, maybe some of the reasons behind that, despite the fact that consumer electronics is declining next quarter?

Sure, Brian, yes. The main reason behind that really is consistent with previous years. The first fiscal quarter is our seasonal high in consumer as you pointed out there. The revenues dropping some $200 million quarter-over-quarter at the midpoint of our guidance and with that we see a degradation in the operating margin of roughly about 40 basis points again consistent with the previous couple of years and this is primarily caused due to the fact that we have an element of fixed cost that is still in our business model and you're really leveraging that in your first fiscal quarter. You feel the effects of that on the margin in the second as that revenue falls off, and then that fast to pick up again in Q3 as our revenue stream picks up again.

Same thing we saw last year. It's about a 50 basis point decline and I think for the year we've talked about improving our annual operating margin performance 10 to 20 basis points and we still feel very confident in our ability to do that and we're particularly kind of emboldened in that whole process of improving returns by a 23% return on invested capital which really places us well into the top quartile of S&P 500 companies.

Okay. And just inventories up 15%, is there a particular market where that's concentrated? It sounds like you're ramping a lot of new programs. But is there a particular market that is concentrated?

Yes, we're still -- one, we're still kind of building out the consumer electronics segment, there's -- December is still a month where consumer electronic sales are strong. And, then, yes, we've got a $1.8 billion increase in revenue for the year and we're positioning inventory for a great year. Primarily for this quarter it's around -- it's around the final build-out December for the consumer segment and really we did take a day out of inventory, days in inventory so actually notwithstanding the fact the absolute dollars have increased somewhat from a day's in inventory standpoint we're actually a little leaner than we were last quarter.

So it could actually decline next quarter, is that fair sequentially? It could actually decline as we get through the December -- month of December?

Yes, that's fair.

Okay. Thank you.

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

Thank you. I guess my first question, is there anything new and exciting going on in the computer sector? It looks like that was increasing back to a little bit higher percentage of revenues and grown nicely and you just mentioned obviously, configure to order. So have you won some new programs there? Maybe you could share some thoughts with us?

Yes, we have won some new programs there. I think the configure to order services is a growing part of our business. Storage has really been an outstanding market for us. We have some new customer wins there and some new program wins and I've looked for that segment to be a great contributor as we extend in '06 and even '07.

Where would you end up actually doing the configure to order? A lot of times that's a lot more local to the market, so would that be done in Mexico or Central Europe or--?

Yes, that's interesting question, Lou. We actually do configure to order services in about 11, 12 factories around the world. We do that in a couple of sites in Asia, four or five sights in the U.S. We actually have a site in the U.S. dedicated to configure order operations in Memphis and several sites in Europe. So I think from a growth standpoint we'll probably see some additional growth in Europe as well as continued growth in the Americas and Asia.

Okay. Obviously numbers and guidance look pretty good here. I think when you were at our conference you gave us a comment I guess what the management team is fusing on for the future. Where is most of the attention? Is it '06 or '07, what are you all spending your time on?

Well, depends on the level. We have a lot of people focusing on today. Down at the ground level of the Company. But from a management team standpoint we're really building our business for '07 and '08 at this point. I think '06 is teed up to be a great year. We don't need any magical things to happen. So we're really -- we're looking at fiscal '07 and really anticipating another great growth -- great year of growth in '07 and '08, so we're pitching business and customer wins and targeting opportunities that will help us continue this growth trend that we've had for the last few years.

Good luck on the new year.

Thank you. You, too, Lou.

Take care.

Your next question comes from the line of Jim Suva with Citigroup.

Great, thank you, congratulations. Can you give some color on visibility kind of now versus a quarter or two ago or what is typical for this time of year? And on that same note, any color on the competitive environment? Is it stable, more competitive, less competitive on the pricing and talk of some companies buying some businesses. Thank you.

From a visibility standpoint, relative to a quarter or two ago, I would say things have improved somewhat. I think there was a lot of -- there was quite a bit of angst in the summer period around what's going to happen in the back half of '05, and will consumer spending really hang in there with the hurricanes and gas prices spiking and the rest of it, and we had a pretty decent year and I think most -- most of the consumer electronics companies will show pretty decent numbers for the quarter. So that turned out to be -- Jack who public really showed up in the stores this year. That is good and helps visibility. As we go into our Q2, we're typically a little concerned with how quickly consumer ramps down and managing our cost structure in Q2, which we really put cost in place to continue to build our business in Q3 and Q4 and Q1 of fiscal '07. So we need to tighten manage costs and yet have enough capacity in place to build out the new customer wins that we've had in the last year. So that is really kind of what has us preoccupied and -- but overall I'd say visibility is better than it was a quarter ago.

You asked a question about pricing. We get this question continuously. I think pricing is really no different than it has been for the last really if you look at a long enough period of time, the last 10, 11, 12 years. You will go through periodic ups and downs in pricing, a plant manager or a competitor will sometimes price a deal more aggressively than maybe they should, but the current environment is pretty stable, I would say, from a pricing standpoint. If anything there is a little bit of a, I don't want to say flight to quality, but I think customers are placing more of an emphasis on the quality of the Company they're doing business with, their balance sheet, the consistency in the management team, and they're putting in place programs -- typically when you talk about an end to end solution and configure to order operations where the complexity and the relationship is exponentially increased, they don't want to do that with suppliers that may have turmoil in their business for whatever reason. So we feel like there is good solid momentum and a real kind of gravitational force to quality names in the business. But I think that's a positive trend.

Great. Thank you very much and congratulations.

Okay.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Steven Fox with Merrill Lynch.

Good afternoon. Just a clarification. You mentioned in consumer your ramping programs, is it a multiple of customers in consumer? I wasn't quite sure if I got that right.

Yes, we actually do have a number within the consumer segment, 7 or 8 customers in there, but during the first fiscal quarter, yes, we saw multiple ramps across that customer base.

And then any chance of breaking out how much handsets is as a percentage of consumer?

Zero.

Zero chance or zero percent.

Zero chance.

And then lastly, Tim, you guys have--.

Sorry about that Steve.

No, I understand. Lastly, you guys had disclosed in your recent filings that you potentially were looking at an acquisition. Is there any update you can provide on that or is there zero chance on that, too.

No. I think the 10-K disclosure, there was some negotiation mentioned in the 10-K, we hope that we'll be able to continue to make acquisitions that are positive like the Varian acquisition we made in March. Certainly Asia and certain geographic regions within Asia are of particular interest to us, and so we think that the particular acquisition at the 10-K referenced still might be in place for us and we won't be able to make an affirmative announcement on that acquisition until it is done. But we are still very hopeful that we can continue to make acquisitions again, like Varian that improve the Company's footprint and our services and our capability to service our customers around the world. So it is still very much in play for us.

So it is still on the table and then the strategy about looking at sort of a Varian acquisition a year if they become available is still relevant?

Yes.

Great. Thank you.

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

Yes, thanks. Tim, I'd just like to go back to the question of consumer and specifically handsets without saying how big that market is, could you tell us the growth there versus the growth in your overall consumer business. I know you have got a major customer there, but beyond that big customer what kind of opportunities do you see and what kind of competitive landscape do you see in the handsets right now.

The competitive landscape in handsets is interesting. There is certainly a very strong, robust, emerging ODM market there, and yet the top three players continue to really dominate that segment. So it is important for you to do business, I think, if you want to be in that segment, to focus on the needs and requirements of those top three customers. I think there is expansion opportunities for us there with the leaders in that industry, as well as design opportunities that we might be able to generate out of our own product development activities. So I can't specifically answer your question around handsets but I do think the opportunity is very good there.

The first part of your question was, can you kind of break out handsets for the other parts of consumer in terms of the growth? Actually consumer segment was a little bit stronger than we originally anticipated clearly 90 days ago. And we actually had stronger growth in our home electronics portion of our consumer segment as well as our handset segment. So they both contributed to the growth. Like some of the other areas of our consumer segment were pretty much on plan.

Great. And then just in line with handsets and consumer going forward, I know you've really -- haven't been -- haven't been interested or haven't gotten into vertical integration but as you are getting more involved on the assembly side, and there is a lot of mechanical expertise that you need, are you looking at doing anything there in terms of acquisitions or adding on some capabilities?

Well, we actually have added some capability. We do a heck of a lot more mechanical design than we ever have in our past, including owning and being responsible for the tool-making process. And that allows us to reduce lead time and still allows us though to employ our regional supply-base strategy. So really our strategy hasn't changed, we continue to utilize our rich and diverse supply base for our component needs, but there are elements to that supply chain that we think are critical to -- really critical path elements to tie into market. One of them is mechanical design and the other is tooling and the management of that process. So those are areas that we will focus on. I don't think you'll see us make any acquisitions in that area of any size.

Okay. Thank you.

Your next question comes from the line of Alex Blanton with Ingalls, Snyder

Hello, can you hear me.

Yes.

Tim, just I believe we need another number from you in order to calculate the gross margin before -- for the core operating earnings, because the option expense is deducted from both SG&A and COGS and with don't know how it is broken down. Can you give us the breakdown there?

That is going to have to go to Forbes.

It's predominantly SG&A, Alex.

Excuse me?

It's predominantly SG&A cost, so the element that came out of gross margin, I think was sub $1 million, I don't have the number here. But I believe it wasn't really material to that $17 million number.

If we calculate the gross margin, 8.1.4% as shown and take the option expense out of SG&A completely, right? For that calculation.

That's reasonable, yes.

Okay. Thank you. Secondly, I'd like to go on with the topic that was raised by the prior questioner, and that is, Tim, you mentioned at the beginning of your remarks that integration, or you implied that greater integration within your company was responsible for your guidance being at the top end of the range? Is that what you meant to say? In other words, you would be getting more business than you expected because of greater integration?

I'm not sure what you -- I don't remember saying anything about a greater integration.

You said the level of integration is increasing, we're expanding our work with a number of customers, and our full-year guidance is therefore at the upper end of our prior guidance.

Is that what you said?

Yes, what I meant by that, Alex, what I meant by that was--.

That was Forbes. Okay.

What I meant by that wasn't specifically to the previous topic where Tim was talking about the vesicle type model, that goes from sure we're adding some final assembly pieces of business, some wins in that specific arena. That is what I referred to in terms of integration, but not the vertical model per se of warning board fabs or molding shops or anything of that nature.

Alex, I'm kind of going out of my way to attribute our growth to the trend to outsourcing which I think has been highlighted a number of times in our calls and again today, about half of the $1.8 billion in growth that we expect to post in '06, the incremental revenue, will come from vertically integrated OEM's converting to an outsource model and that that conversion to an outsource model and an outsource supply chain model is happening across many industry segments and this year principally consumer, computing and storage, and instrumentation and medical. So we're seeing a really strong trend to outsource the design, assembly, delivery, and service of electronic hardware and that's really what is responsible for our growth rate.

Okay. Has that trend increased in the last three months? Or stayed basically the same?

Yes, it's not a trend that we track ebbing and flowing over a quarterly basis. This is a trend that has been in place since the early '80's, we would expect it to continue to be in place for the next four, five, six years at least and we certainly don't see it moderating. If anything, we see it accelerating.

One more thing, can you attribute any of your current orders strictly to the new green laws that are coming into effect July 1, in Europe?

I wouldn't say in a material way. I will say that our -- Jabil's, and this is probably true of the other Tier 1 players in our business that really have their act together as it relates to RoHS and WEEE, we are seeing some customers show up that have been doing business with Tier 2, 3, 4, 5, 6, kind of suppliers that have no infrastructure to the component engineering necessary for RoHS, have no knowledge base or ability to help them manage the WEEE process and so we are seeing some customers show up although it is not a material part of our growth for the year.

Okay.

But I think -- it is one more reason why customers want to do business with globally-based, financially-sound, knowledgeable supply-chain partners.

Thank you.

Your point is well taken.

Thank you.

Your next question comes from the line of Shawn Severson with Raymond James.

Thank you. Tim, could you give us an idea of how much color you have into the inventory and sell through over to large customers in consumer. Is your visibility there pretty good that you know what they're taking in and what's going out to the best that they know at least? Or has it kind of come as a surprise to you at the end of the year what they have?

Yes, I think visibility is pretty good. At this late stage there is always a chance that -- actually we had this happen in years past when we put up in a warehouse and there was a lot of stuff in there they didn't realize they had and there is always a chance of a tale, but our visibility at this point is pretty good.

Okay. And then in most of the segment categories, end market segments you had pretty decent upside from what you had expected before. How much of that was kind of program ramps versus maybe some positive surprises on the end market demand? Just maybe a little color, and not asking about each specific segment but just in general what the variation was.

Yes. Aside from consumer, I would say end market activity was about what we expected. I mean, it kind of hung in there. It never was really enterprise spending in particular, it didn't seem to be heavily influenced by what was going on over the summer period, in terms of energy prices and the hurricanes, and so it's been very stable, and so our growth has really been more a function of program ramps and sell-through to customers and new program wins.

And then just lastly, could you give us a number on the percentage of system build where you are doing complete system assembly in this quarter and maybe what that was last quarter, if you have it.

We don't have it. We don't track it. We really -- it can be a separate activity, configure to order can be a separate activity in particular, but we really don't break that out. We would have to do some interesting things with our business unit model on accounting and we just never really accounted for it that way, so we don't talk about it being a separate activity.

Well, let me ask it another way then. Certainly that's a trend and you guys have been able to capitalize on it as well, more configured to order, build to order. But the impacts that that might have on the gross margins going forward, as again, that material content would start to increase a little bit, is that something we should look for over time or do you think it's not really material over the next three or four quarters?

I think you're right. So first of all, particularly anecdotally but from a broad-based trend standpoint, yes. System integration, configure to order is comprising a higher percentage of our revenue. That tends to be a lower margin business but a high return on invested capital business. As you know, we don't focus on gross margins and don't discuss directionally gross margins from an operating margin standpoint our plan is to continue to grow operating margins incrementally year-over-year, but, yes, configure to order activities tend to be lower margin, higher return on invested capital activities and we do expect that to grow in the next several years, actually.

Okay. Thank you.

Yes.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Thomas Hopkins with Bear, Stearns.

Yes, good afternoon, everyone. Nice quarter. Tim, you've talked about telecom equipment, or your telecommunications segment being still in the recovery mode from the bubble and it certainly hurt some of your bigger competitors. It was up 10% this quarter sequentially. Any particular reason why you made that move sequentially? And has your overall outlook, say for the next 12 to 24 months changed for what you see in the telecom equipments space?

On the positive side we have a couple of customers that are doing very well in access products. And in addition to that there is some vendor consolidation going on with a couple of our comps that are beneficial to Jabil. At the same time there is a better consolation that is a detriment to Jabil's revenue in the telecommunication space. So I think we'll see that segment be a little -- be more stable than -- to the external world it will look more stable than you might expect as we have these vendor consolidation wins but we also have a better consolidation loss that is moving out to another supplier. I think that's been pretty well documented in the marketplace but from a product standpoint it is really access products that have done very well in that space and we do have some exposure there that's helped us particularly in the last quarter.

Is there anything -- fiber to the premise, any wireless equipment, anything out there in telecom at all that looking at your mix of business today, you think, boy, we better get after trying to get some of that. Anything exciting?

Yes. I think we're really excited about the fiber of the premise, fiber to the home, fiber to the curb market and that is really what I'm talking about in terms of access products and fiber optic delivery products in the last mile. And exposure to those product areas. Long hall transmission products continue to be kind of a tough market to be in.

Okay. And then next quarter I think you touched on it, you talked about computing and storage ramps I think you're guiding computing and storage up double digits for the February quarter. You normally get a enterprise spending peak in Q4, not in January, February, and March. So can you elaborate on that at all? Any names you can name at this point? Are there any new 10% customers you would expect out of there next year?

We can't name names and I really apologize, I would love to, but that could be a detriment to our revenues. I think the indication would be is that there are new program wins and some new customer wins that are entering the revenue stream and that's why we're counter-seasonal to what the normal trend would be and again it is a segment that we think will provide a significant level of our growth in the next 24 months.

Okay. Great. Happy holidays.

You too, Tom.

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

Hey, good evening. Just a question on the Varian acquisition. Tim, could you just talk a little bit about the opportunities, when you first acquired it were to cross sell some services or to develop a deeper relationship with some of their existing customers? Could you just talk about how that's kind of transformed in terms of is the sales cycles more difficult than you had originally thought, or it's kind of tracking on plan and you're making some good progress there?

The Varian acquisition has done very well for us. I would say we are tracking to plan or a little above it. We've had really no attrition of the customer base in the acquisition and we actually anticipated there might be some. On the other hand, the customers that came in the Varian acquisition we've done very well with, and we are expanding our business relationship with some of those customers into other Jabil sites around the world. We like the management team a great deal. The people have been great. Our domestic factories have learned some things from the Varian acquisition. Again, iy'd something that we would hope to see, and if anything that is a little bit ahead of plan. So it's turned out pretty well.

Is there any way you can kind of quantify in terms of you've added some business with 10 or 20% of it and maybe you think by the end of calendar '06 you would be at 50%, or just any way to quantify the progress you've made?

I don't think I can quantify it but I'd say generally if we were to characterize middle market manufacturing, domestic middle market manufacturing as a segment, of which Varian is a large component, that segment is growing for us. We're actually adding capacity in our domestic factories today. As we've really kind of learned how to do the ultra high mix business model, some of our manufacturing operations, domestically are no longer dedicated work sell plants and so our ability to service customer requirements in the million to $20 million range has been greatly enhanced over the last year and really incrementally improved by the Varian acquisition. So our ability to address that market has improved and our ability to profitably be there has resulted in an expansion opportunity for us and as a result we're actually expanding our U.S. operations again.

No, it looks like you've done a great job especially keeping SG&A costs down. Thanks a lot.

Your next question comes from Paris Verhargabuf with BMO MB.

Good afternoon, gentlemen. Tim, just earlier in the year you had mentioned that most of the new wins you were getting, wins from other people, were primarily from Tier 2 then you mentioned that again. Has that changed at all? Are some of the Tier 1s seeing some more losses now? And secondly, on the vendor consolidation side, it sounds like it may be even on the telecom equipment side, what about the rest of the portfolio? Are you coming out ahead or are you still seeing that as more of a neutral environment for you?

From a -- from a where the -- so vendor consolidation wins make up about maybe 20% of our growth, for fiscal '06, so it isn't the primary contributor. The primary contributor to growth is the trend to outsource. I really, the main message as it relates to Tier 1's is that there is a very rich marketplace out there with growth opportunities for everybody. This isn't an environment where one Tier 1 guy has to steal business from another Tier 1 guy and therefore let's track where program wins are going for the major customers. That is not the basis of our growth, not the basis of our business terms and I want to try and avoid discussions that want to go down that path. So most of the better consolidation wins really just strategically it happens a lot in the instrumentation medical segment where you find customers that have outsourced on a tactical basis doing business with 20-plus outsourcing providers that collectively might produce 10% of their overall requirements, and as they expand their requirements from 10% of their overall electronic spend to 30, 40, 50, 60% over a multi year period, they really can't afford to do that across 20 customers and they can never really generate the cost savings that would be predicted out of an outsourcing model with the vendor base that large. And so they consolidate their vendor base. We get down to two, three, or four long-term strategic suppliers and that is how we characterize a better consolidation segment.

All right. Thanks.

Your next question comes from the line of Amit Daryanani with RBC Capital Markets.

Thanks a lot. Just a question on your cash cycle days. True that you guys did an impressive job in improvement there but sequentially the largest improvement came from DSOs. I'm wondering if there have been structural changes in your customer contracts which should really enable you to maintain these DSOs or would they kind of revert back to a 43, $44 level over the next three quarters.

No. There have not been structural changes in terms of our customers contracts. What we -- what did happen in the course of this quarter was we increased our AR securitization by about -- not about, it was exactly $75 million which accounted for two or three days in the AR improvement. So what you see going forward, actually you should continue to see some improvement in AR days going forward as we see the concentration in consumer-based customers tail off a little bit as you move through the balance of the fiscal year. So I think overall, even with the securitization levels at -- consistent with those you've seen at the end of the first quarter, there is opportunity there to continue to improve that cycle.

So the off balance sheet receivables you said are about 250 million at the end of this quarter.

That's correct, 250.

All right. And then just a question, last quarter when you give fiscal '06 guidance, I think implied revenue guidance was 3 to 5% end market growth for Jabil and now you expect Jabil to see about 24% revenue growth in fiscal '06. I'm wondering are there any changes to your underlying end market assumption or is a lot of that moving to the high of the range driven more by new ramps faster than you were anticipating.

Yes, it is really the same premise as last quarter, Amit. End market 3 to 5% is reasonable, no change there. It really is driven by number of additional new programs that we're seeing coming into the company.

All right. And then just finally, what percent of your business came from the top 10 customers and also how many customers are over 10% of revenues for the year?

The top 10 I don't have at hand but over 10% customers there were two in the quarter.

All right. Thanks a lot, guys.

I think we have time for one more question.

Yes.

Your next question comes from the line of Todd Coupland with CIBC.

Good evening, everyone. I was wondering if you could tell us if the consumer ramps for new programs, will that continue? Do you expect that will continue throughout fiscal 2006?

Well, Q2 will be seasonally down. We are at the same time, though, adding new programs and customers and consumer, which our hope and desire will be that that would improve the segment in fiscal '07 and give us additional business that we would enjoy in Q3 and Q4, but really more of a year-over-year improvement to fiscal '07.

Okay. Great, thanks a lot. Have a good evening.

Okay. Thank you very much everyone for joining us on the call. We look forward to speaking to you in 90 days' time. Thanks.

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