捷普科技 (JBL) 2007 Q2 法說會逐字稿

Good afternoon. My name is Serena, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil fiscal year 2007 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS]

Ms. Walters, Vice President of Investor Relations and Communications, you may begin your conference.

Thank you. Welcome to our second quarter call. Joining me on the call today are President and CEO, Tim Main, and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website in the investor section along with today's press release and a slide show presentation on the quarter. You can follow our presentation with the slides that are posted on the website and, if you could, please begin with the first slide, our forward-looking statement for the quarter.

During this conference call, we will be making forward-looking statements, including those regarding our unaudited second quarter fiscal year 2007 net revenues and certain other financial measures. Our currently expected third and fourth quarters of 2007 net revenues, core operating margins and core earnings per share, as well as the acquisition of Taiwan Green Point, estimated capital expenditures for fiscal 2007, the anticipated outlook for certain aspects of our business and our long-term outlook for our Company, our industry, our business sectors and our realignment of our manufacturing capacity and the related costs and timing. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcome and results to differ materially.

These risks and uncertainties include, but are not limited to, the finalization of our fiscal year 2006 financial statements and the audit thereof and the finalization of our first and second quarter fiscal year 2007 financial statements and the reviews thereof; including those portions relating to our historical stock option grants, the review -- the results of the review of our past stock option grants being conducted by a Special Committee of our Board and governmental authorities and a review of our historical recognition of revenue by our Audit Committee; the accuracy of the measurement dates we use for accounting purposes for our historical option grants and whether all proper corporate and other procedures were followed; the impacted restatement of our financial statements and other actions that may be taken or required as a result of any such views; risks and costs inherent in litigation including any pending or future litigation relating to our stock option grants, the restatement of our financial statements as a result of the evaluation of our historical stock option practices and financial statements or declines of the price of our stock, whether we will -- whether or when we will realign our capacity and whether any such activity will adversely affect our cost structure, ability to service customers and labor relations, our ability to successfully address the challenges associated with integrating our acquisition of Taiwan Green Point, our ability to take advantage of perceived benefits of offering customers vertically integrated services; changes in technology, competition, anticipated growth for us and our industry that may not occur, managing rapid growth, managing any rapid declines in customer demand that may occur, our ability to successfully consummate acquisitions, manning the integration of businesses we acquire, risks associated with international sales and operations, retaining key personnel, our dependence on a limited number of large customers, business and competitive factors generally affecting the electronic services industry, our customers and our business, other factors that we may not have currently identified or quantified and other risks, relevant factors and uncertainties identified in our annual report on Form 10-K for the fiscal year ended August 31, 2005.

Subsequent reports on Form 10-Q and Form 8-K account and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I would now like to call -- turn the call over to Forbes Alexander, our Chief Financial Officer.

Thank you, Beth. Good afternoon. We regret that we are not in a position to provide GAAP results and full financial statements at this time as we await the completion of ongoing review processes. We shall be able to file our 2006 Form 10-K once our Board of Directors Audit Committee has concluded this evaluation of historical financial statements and Jabil's independence registered public accounting firm is able to complete its audit of the financial statement to be included in Form 10-K. However, we are pleased to be able to provide full forward-looking guidance. The ongoing inquiries have reached a stage where we are reasonably comfortable with the impact they will have on the third and fourth quarters.

With that, I'd like to ask you to turn to slide two, please. Revenue for fiscal second quarter of 2007 was at the high end of our previous guidance at $2.935 billion. This includes revenue from our Taiwan Green Point acquisition for the period of 15th of January to 28th of February, 2007, of approximately $59 million. The quarter represented a 27% growth in revenue on a year-over-year basis and a 9% decline on a sequential basis reflecting the seasonal nature of our consumer sector. Excluding Green Point revenues, our revenues declined 11% sequentially.

Now I ask you to turn to slide three, and turning to a discussion of revenue by sector for the second quarter. Production levels in the automotive sector decreased 5% from the prior quarter, slightly better than expectations and consistent with seasonal patterns in previous years. The computing and storage sector decreased 5% in the first quarter, consistent with our expectations. The consumer products sector, including revenues associated with Taiwan Green Point, decreased by 31% from the first quarter, reflecting traditional, seasonal lower demand levels for consumer products. While the overall sector met our expectations in terms of total revenue, we did experience lower unit volumes offset by additional LCD panel flowing through the revenue stream. The instrumentation and medical sector was better than our expectations and increased 4% from the first quarter. Networking sector increased by 1% from the previous quarter and the peripheral sector was consistent with the first quarter as expected. And finally, the telecommunications sector increased 16% sequentially as production levels with a major customer recovered.

Our sector information for the quarter in percentages is as follows. Remind you the consumer sector includes revenues associated with Taiwan Green Point. Automotive was 5%, computing and storage 12%, consumer 29%, instrumentation and medical 17%, networking 20%, peripherals 7%, telecom 5%, and other 5%. On a year-over-year basis, we have added revenue in the quarter of $550 million with all segments except consumer and telecom contributing to this growth. Over the last three fiscal years, we've seen an average of approximately 3% decline in revenues from our first fiscal quarter reflecting the seasonal nature of the consumer sector. For the first time since our entry into the consumer sector, we have seen double-digit sequential declines in our overall revenues which is more representative of our current revenue profile, bringing along with it dilution to operating income as a result of the semi-fixed nature of costs supporting the seasonal demand.

For the second quarter, two customers exceeded 10% of the revenue stream. Our top five customers, Cisco, Nokia, Hewlett-Packard, Phillips and IBM, accounted for approximately 51% of our revenue, and our top ten customers accounted for approximately 65%.

I now ask you to turn to slide four reviewing our balance sheet trends. Excluding Taiwan Green Point, the Company's sales cycle in the quarter expanded by two days. An improvement in the level of day sales outstanding was offset by two additional days in inventory and a reduction in accounts payable days outstanding. While inventory fell in dollar terms, days was at 48 days in the quarter, or 7.4 turns. With the consolidation of Green Point, the sales cycle at the end of the second quarter was 29 days.

Cash and cash equivalents were $559 million as compared to $651 million at the end of the first quarter.

Current debt at the end of the second quarter totaled approximately $1 billion as a result of drawing down approximately $870 million to fund the tender of Taiwan Green Point shares and draws of the combined Company's revolving credit facilities to fund operational activities.

Our capital expenditures during the quarter were approximately $74 million.

Now I'd like to take a moment to discuss some operational issues, restructuring and our Taiwan acquisition. Firstly, I know many of you have been inquiring as to the impact of the three operational execution issues we identified in June of 2006. Two of these items have been fully resolved and the third, the electrical mechanical tooling capability, had a smaller impact on our second fiscal quarter and is expected to continue to decline in importance in our future quarters.

With regards to restructuring, during the second quarter, we continued to manage our overall rationalization plan consistent to our previous comments. We continue to expect our total restructuring charges to be at the high end of the $200 to $250 million range we previously announced. The cash costs of such charges for this plan remain an estimate in the range of $150 to $200 million. Discussions with our employees and their representatives continue and we are complying with all statutory and consultation periods required of us.

With regards to capacity, as we've previously discussed, we are adding additional floor space and capacity in Poland, the Ukraine and India. These facilities are expected to ramp production levels during the balance of calendar 2007, while we continue to ramp significantly higher levels of production in our existing Chinese sites. Our investments in fiscal 2007 are expected to be related to the above locations and existing plants where we see increasing levels of production. An estimate of capital expenditures remains in the range of $200 to $250 million for the fiscal year.

With regards to the Green Point acquisition, on January the 15th, 2007, shareholders controlling over 97% of Taiwan Green Point shares tendered their shares. The minority interest shares will be purchased with finalization of the acquisition which we expect to close during the last week of April, 2007, subject to the timing of government approvals. Our transition plans have been running smoothly and we continue to see very bright prospects for this new part of our service offering for the consumer sector. As of January 15th, we drew down approximately $870 million from our bridge facility to fund a tender. The balance of this facility shall be drawn down upon purchase of the minority shares in late April. In addition, as of January 15th, Taiwan Green Point's results have been consolidated with those of Jabil's for U.S. GAAP reporting processes excluding the minority interest element.

Now let me turn to business update and ask you to turn to slide five, third quarter fiscal 2007. Our shorter term revenue guidance continues to reflect a more muted view of end market growth, along with our deliberate and disciplined actions in pricing allowing us to move towards our targeted operating income levels over the course of the next two to three quarters.

I'd like to remind you all that comments with regards to our guidance for future periods reflect the consolidation of Jabil and Taiwan Green Point. We estimate revenue in our third fiscal quarter of 2007 to be in the range of $2.9 billion to $3 billion, consistent at the midpoint of this range with our second fiscal quarter. Our revenue expectations, excuse me, our core operating income, excluding any -- excuse me -- Our core operating income is expected to be in the range of 2.5% to 3%. Our core earnings per diluted share are expected to be in the range of $0.17 to $0.23 reflecting higher levels of interest expense associated with the acquisition of Taiwan Green Point and utilization for the revolvers to fund working capital needs during the quarter.

Now I ask you to turn to slide six, discussing revenue by sector for the third quarter. Our automotive sector is expected to increase by approximately 5% for the quarter. Computing and storage sector is estimated to be consistent with the second quarter. The consumer sector is expected to decrease by approximately 10%, reflecting the timing of product transitions set in consumer products offset by revenues associated with the Green Point acquisition. The instrumentation and medical sector is estimated to be consistent to slightly better than the previous quarter. The networking sector is expected to increase by approximately 7% from the first quarter reflecting the award of new assemblies within this sector. The peripheral sector is estimated to increase by 15% in our second quarter reflecting new business awards with existing customers, and the telecom sector is estimated to be consistent to slightly better than our second quarter.

Now I ask you to turn to slide seven. Our current estimates for revenue guidance for the fourth quarter are consistent with those of the third. That is a range of $2.9 billion to $3 billion. This guidance shows the revenue growth for the fiscal year 2007 in a range of 17% to 18% including revenues from our Green Point acquisition in the fiscal year. Green Points revenue is estimated to be in the range of 4% to 6% for our -- of the second half of the year's revenue guidance.

We now estimate our revenue to be split as follows across the industry sectors we serve. I remind you that the consumer sector does include revenues associated with Taiwan Green Point. The automotive sector 5%, computing and storage 11%, consumer 29%, instrumentation and medical 17%, networking 20%, peripherals 8%, telecom 5%, and the other sector 5%.

Core operating income for the fourth quarter is expected to be in the range of 3.25% to 3.75% of revenue with core earnings per diluted share to be in the range of $0.28 to $0.34.

While it is too early to provide you with specific guidance for fiscal 2008, we are optimistic that revenue growth will be strong. We have won new business in the storage, automotive, peripherals, instrumentation and networking sectors, all anticipated to ramp over the course of the next three quarters. I'd like to remind you that our short term revenue guidance does reflect a somewhat more muted view than market growth along with our deliberate and disciplined actions in pricing, allowing us to move towards our targeted operating income levels over the course of the next two to three quarters.

Thank you and I would now like to hand the call over to Tim Main.

Thanks, Forbes. There are a few areas I would like to cover before we go to Q&A. I will provide some color on overall end market demand, Jabil's growth profile short and long-term, as well as our anticipated margin profile. Overall end market demand for most of our sectors is relatively weak when compared to previous quarters. However, I think we are now entering a period of relative stability and are at a somewhat lower risk of significant further erosion. I believe my comments to be consistent with the economic press in recent weeks. There was a discernible slowdown in demand in late 2006 but I am now actually feeling better about our prospects for the balance of 2007.

Jabil's growth over the next two quarters will be below our previous expectations, principally due to a few isolated factors within our consumer sector. Revenue in our consumer sector is expected to decline sequentially for the balance of 2007. There are several reasons for this. One, we are positioned with one of our largest customers in one of their weakest product areas.

Two, we are transitioning our business model with two large customers in the sector. We are moving to a more product development based relationship with one customer and with another customer from our historical horizontal supply chain strategy to a more vertical solution integrated with our recent acquisition.

Three, we are committed to margin expansion and are exercising tighter pricing discipline, exiting areas with poor returns and targeting areas in the sector that align well with our value proposition and the needs of our customers.

In the short term, the impact of our actions in the consumer sector will inhibit our overall revenue growth in the next two quarters. This transition in our consumer sector will conceal strong growth in the balance of our business.

Excluding the revenue impact of certain top five customers in our consumer sector, and excluding Green Point, revenue in the balance of our business is expected to increase approximately 17% in the second half of '07 over the second half of '06. We also expect a profitability of this additional revenue to be at or above our targeted long-term profitability objectives.

Additionally we have been awarded sizeable new business wins in the networking, automotive, storage, instrumentation and peripherals segments. This is a mix of significant market share gains with existing customers as well as new customers to Jabil. Revenue contribution from these new business wins will become increasingly material in fiscal 2008.

As we transition the business mix of our consumer sector, our operating margin expansion will be a bit slower than desired due to lower operating leverage. However, if end market demand remains stable, we expect our margins to recover sequentially over the next two quarters. We also expect -- and this is an important point, revenue in the consumer sector to rebound and regain growth as we exit fiscal 2007 and move into 2008.

We anticipate our business relationships to expand and our business volume to grow with all of our top, present top five customers. In fact, we have recently been awarded new programs with all of our top five customers in the consumer sector, including vertical integration wins with our recent acquisition of Green Point.

In summary, we are in excellent position to grow profitably with a wide range of customers over the long term.

Operator, we are ready to begin the question and answer session.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Lou Miscioscia.

Yes, thank you. Lou Miscioscia from Cowen and Company. I guess Tim, when you look back over the last four quarters, can you sort of sum up maybe what's going on under the covers? Do you think it was the option situation maybe took some focus off of things or do you think that given such incredible revenue growth rates over fiscal '06 that you just grew too fast? Is there anything that you can sort of try to pinpoint for the operational issues of last May and the last couple quarters, and obviously here now too?

Well, I think it's important to distinguish between things that happened in late '06 and things that are happening now. We've put the operational execution issues pretty much to bed, the issues that we identified last year. The option inquiry and the overhang on the Company, I can't argue that it hasn't been a distraction for management, but I think we are doing a relatively good job of working through it. The current margin issues are, as I explained, we will expand margins. We will exit areas that are unprofitable for the business. We will target profitable pockets of revenue in the consumer segment. We will be successful doing it. We are successful doing it, and we are still growing. So when I kind of look at those issues, I think that we are, over the last few quarters we seem to have had a recurring one-time issue that we talked about. I think those are behind us. I think we have our arms around the business and I think we will be able to grow revenue and our margins from here.

Okay. One quick follow-up, I guess historically obviously you are trying to pin top line growth at 20%. Do you think that just given getting to maybe to the law of large numbers here, it's more likely going to be a 10% to 20% or 15% kind of top line growth expectation, just long-term Company goals?

No and I'm sure I'll be criticized for not backing off of a 20% top line growth rate but I think that there's ample opportunity in the marketplace to do that. Were it not for the transition in our consumer sector, we would be able to do almost 20% in an environment where our market growth is just terrible. And I think if we were to put out the 17% year-over-year revenue growth rate, which is what we are growing excluding Green Point and excluding the pockets of issues we have in the consumer segment, that's what we would have. So there's plenty of opportunity in the marketplace for us to grow.

Okay. Good luck turning things around.

Your next question comes from Jeff Rosenberg with William Blair.

Forbes, I think you guys said that you are expecting sequential operating margin improvement over the next couple of quarters, so does that mean we can infer that the operating margin guidance for Q3 is up sequentially over what things look like to you in the quarter that just ended?

I'm sorry, Jeff. I can't comment on that.

Okay. And then can you talk a little bit about the timing of when the transition in the consumer business came about and maybe just looking at the overall effect of the fact that we can now assume that the margins for the second half are no longer affected by the operational issues and what the margin effect is of this transition specifically and a little bit more color about the connection between that transition and your commentary about needing to take more disciplined pricing stance?

Timing of the transition of the consumer segment, things happen relatively quickly in that marketplace. We've been making long-term investment decisions. It's where our acquisition of Green Point comes into play. So I think our short term, it will inhibit our revenue growth, longer term be very good for the business, and I think we will experience a lot of growth in the segment in both our mobile product areas as well as our home electronics area. In terms of where things are in terms of operational execution issues, again, I think those are relatively understood and we are looking more in the rearview mirror at those types of issues. So going forward in terms of margin expansion, we will have operating leverage from continuing revenue growth and a more favorable mix of business.

Okay. I guess my last question is, Tim, you've talked about a target margin and returning to that but can you quantify what that number is in your mind today?

We are still at a targeted operating margin of 5% and we are a little bit farther away from that than where we would want to be at this point but I think we will see sequential improvement in our margins from here on out.

Okay. Thanks.

Your next question comes from Steven Fox with Merrill Lynch.

Can you hear me?

Yes, we can hear you.

Okay. A couple questions, first of all can you comment at all on the revenue recognition issue?

No, we can't.

Okay. And then I will try another one. You mentioned a weak product with one of the largest customers. Can you describe what kind of product that was?

No, we can't.

Okay. And then I will try one more, Tim. Not to be the first to criticize you on the 20% goal but if you look at your comment around pricing discipline, I guess I'm interpreting that to mean that you have others in the industry pricing irresponsibly which makes it harder to grow. Can you sort of comment on what the industry dynamics are like and whether that conclusion is accurate?

That comment was directed specifically at the consumer electronics segment. We are talking about a transition of two very large customers to essentially what is a different business model, in one case to a more vertically integrated model where the value proposition is much better with us. We have to find the right opportunities with those customers, be awarded new programs and roll those into the revenue stream. The other customer we are moving to a more product development focus and product platform focus relationship. Again, that means we are exiting some of the unprofitable EMS areas and moving into areas where there is much more collaborative design and a much richer value proposition for Jabil.

So you are saying this is just a shift of your own strategy with those customers, not necessarily something that was brought on or forced by the competition?

That's actually correct, yes.

Thank you.

Your next question comes from Thomas Dinges with JP Morgan.

Good afternoon, guys. Tim, just another one for you on the consumer side to kind of help me understand this a little bit better. If you look at the delta between where you guys are putting revenue over the next couple of quarters relative to where you kind of expect it to be, you talked about several different factors. Can you quantify as best you can which was either the most impactful, it's the transition of business that you talked about, the pricing discipline and/or the end market demand because especially in the end market demand side, earlier commentary was, hey, it's weaker than we expected and then I think the word you used to describe it was terrible, so a little bit of help there would be great, and then I have a quick follow-up for Forbes.

I don't think I can quantify the three issues. I think generally --

Maybe just which one is probably a bigger factor in your mind right now over the next couple of quarters would help.

Over the next couple quarters, I would say the transition to a vertically integrated model with one of our top five customers and in that area is probably more significant. Over the, in the second half of '07, we will have a decline year-over-year of a fairly significant level and again I think that is masking or concealing the fact that in the balance of our business, we will have approximately 17% growth. And so longer term, we are moving the business to a, what we think is a more stable platform, better value proposition for our customers in the consumer segment with a much more stable stream of products and programs for us. And then the balance of our business, when we look at peripherals, computing, storage, automotive, networking, we're winning big deals and that part of the business is growing very, very well. So I'm not -- I don't want to sound Pollyannish but we have 2.5% to 3% margins next quarter, 3.75% to 3.75% in Q4, and I think we will continue to see sequential improvement from there. And so I think we are doing the right things with the business and I think that's what investors in the long-term want.

Okay. And then, Forbes, just a quick one for you on the cash cycle. Up, as you said, inventory was an impact, payables was an impact but maybe just a bit of a longer term question if you are willing to go there, you look at it year-on-year, up almost 50% in terms of days. I think you probably reached an all-time low at that point but maybe just, where do you think this settles out as you look out a little bit further considering acquisition of Green Point, some of the transitions in the business that you guys are doing?

Yes, I think longer term, I think the sales cycle in the low 20s is a reasonable target. As you pointed out, the acquisition of Taiwan Green Point offers us some opportunities there to facilitate reduction of working capital to bring some of our metrics and systems to their operations. So I think there's good opportunity there and we are working hard in terms of opportunity around our inventory levels and getting those where we want them to. So I think a reasonable level is in the low 20s as we look forward over the next two to three quarters.

Okay. Thank you.

Your next question comes from Shawn Harrison with Longbow Research.

Hi, good evening. First question, just on Taiwan Green Point. Safe to assume EBIT margins in the business are still north of 10%?

We will not be providing margin information on Green Point. We are not going to break that out. I will say though that we've been very pleased with the performance of Green Point for the very short time, brief time that we've had a majority interest. We are very excited about the business.

Okay. And secondly, maybe just a different way if we can potentially talk about margins. The last known EBIT margin data point we had was at 3.6% in May of '06. With most of the operational issues behind you at this point in time it sounds like, if you could maybe segment out what is leading to the decline year-over-year in EBIT margins, maybe where the biggest chunks of margin degradation are coming from and that way we can get an idea of how to model the rebound?

It's really a function of much lower revenue in these quarters than we expected. I mean, you need to listen to that part of the story here. We are transitioning the consumer segment. The consumer segment is going to sequentially decline in fiscal Q3 and Q4 as we've indicated in this call whereas the typical seasonal pattern would be sequentially up from our Q2. The last known data point was 3.6%, you are saying is 3.6% in fiscal Q3 of '06. I think we've done as much as we can over the last couple of quarters to give investors an idea about where we are. Certainly, our EBIT margins are lower than where we would like them to be. But with the operating leverage being much, much lower given our lower revenue streams, it's a big challenge for us to have 3.5% to 4% margins at this point. I think given the guidance we've given you, though, looking at fiscal Q4, the 3.25% to 3.75% range, I think we will be showing demonstrable progression to our previous levels.

Okay. Is there a revenue level that we should look for Jabil to achieve to get back to a 4% operating margin?

I don't want to give you -- if we hit this level, we will get to 4% but I think that once we get above $3 billion, it will be much, much easier for us to get closer and closer to that level. And I'd say by the time we get to a $3.2 to $3.4 level, $3.2 to $3.4 billion level, we should be there, controlling for all of the other thing in the business that might or might not go wrong. But based on the portfolio business we have and the growth we are seeing, and I need to emphasize two things. One is, again, the rest of our business is growing at 17%, excluding Green Point and excluding the consumer segment, and we do expect we are not losing a customer on the consumer segment. It's not happening. We've been awarded new programs and we expect our inflection point in the consumer segment to occur over the next couple of quarters and we will see a rebound in growth there so that will be good, too.

All right. Thanks a lot.

Okay.

Your next question comes from the line of Kevin Kessel with Bear Stearns.

Thanks. Can you guys just go into -- give us a little bit of detail in terms of what is left to still accomplish in Europe in terms of the restructuring? What's maybe been closed to date and what you still plan to close or what you still plan to do?

Kevin, I can't talk to what's to go on there out of respect for our employees and discussions going on with our employees' representatives. I can tell you that we are over about halfway through our plans in Europe with certain facilities, discussions ongoing, and announcements have been made in Italy, in Belgium, and in Scotland, and I believe in our facility in Ireland.

Okay, and then just could you remind us in terms of the cost savings because as I recall the cost savings were originally expected to help in the second half of this fiscal year. Have they been pushed out at all or are they part of the margin recovery?

They are part of our margin recovery, Kevin. The -- as I said, we are on track with our restructuring activity and over the back half period, we are giving gains, deciding probably somewhere in the region of 25 to 30 basis points as we see that cost leaving our manufacturing and SG&A costs.

That would be the second half of this fiscal year?

That's correct, within the range of -- the period we have given guidance through today.

And is there any additional that would be expected for fiscal '08 or not?

Yes, there will be and that very much depends upon the continuing negotiations and discussions across our various sites. But, yes, we certainly expect to see somewhere in the range of another 20 to 30 basis point improvement during fiscal '08. Little bit difficult at this point to pin that at exact quarter for you. Again, really much depends upon the discussions underway.

Lastly, could you address the inventory? I think you said that dollars were down in the quarter but can you address where inventory, where you kind of see it now for Jabil and where you imagine you could get it to in turns, for example, over the next couple of quarters?

Sure. Inventory was down in terms of dollars, remembering also that it does include the acquisition of Taiwan Green Point, so we did consolidate their inventory balance, prelim inventory balance, at the end of the quarter, also. So overall, we have taking that down. In terms of overall turns, certainly the next milestone is let's get it back to 18 in this next quarter and a little bit beyond that and certainly as we move into fiscal 2008, drive that towards nine turns. We have a number of processes, process activities in place and we are certainly driving hard towards that.

Thank you.

Your next question comes from Matt Sheerin with Thomas Weisel Partners.

Yes, thanks. I'd like to go back to that issue of your consumer revenue guidance. The one area where you talked about the transition from volume to product development focus, is that where you are losing most of the revenue and is that a conscious decision on your part or are there any share issues there?

Again, we are not quantifying the three elements that I had mentioned. Moving from an EMS model to more of a product development based model is something that is kind of reflective of the overall industry in that sector. In terms of share, I don't think -- I think that plays very, very little in that particular relationship.

Okay, and you talked about gaining share or gaining wins with all your top five customers. So you're not telling us that you are losing share significantly with any of those customers, right?

We are saying we are not losing any customers in the top five and in fact we've been awarded new programs with all of our top five customers.

Okay, and you talked about seeing sequential gains in gross mar --- operating margin over the next couple of quarters getting to around 3.75%. Is it still within reach of getting to 4% by the end of calendar '07, then?

We will provide guidance for fiscal Q1 of '08 in a quarter or two depending on how things go. We do expect continued growth with top line growing and getting additional operating leverage. I think we will continue to move to that 4% range.

Okay, and Forbes earlier talked about the capacity expansion plan still being on track. So you haven't backed off of that despite the slower revenue growth, is that right?

That's correct, yes. Where we're continuing to see expanding revenue streams cross, I think my comments alluded to our Chinese operation and we continue to see demand profiled for a facility in the Ukraine. We're adding capacity in Poland and is doing very nicely so yes, things are looking good in those regions.

Okay, and just lastly, could you remind us, Forbes, what the interest rate on that bridge loan is?

I don't have it exactly at hand but it's approximately 6.5%, I believe.

Okay. Thank you.

Your next question comes from Yuri Krapavin with Lehman Brothers.

Good afternoon, everybody. Another question on operating margins. Maybe you can indicate to us what the operating margin would have been for Q3 and Q4 if you exclude the consumer business? Is it possible to indicate it to us?

I don't know if that's possible. I don't have the number in front of me so I don't want to speculate.

Okay, but is it fair to say that other segments are performing more or less in line with your expectations margin wise?

I think that's fair and I did make the statement in my prepared remarks and I will reiterate it that the 17% growth that we are seeing in the balance of our business, that being the part of our business that is not consumer and not Green Point, 17% growth in the second half of '07 over '06 is at or above our long-term profitability objectives. So that's very good business, and consistent with what's going on with many other sectors.

Right. You mentioned you had two 10% customers. Can you name them?

We named our top five and -- bear with me and I'll get those for you.

That would be Cisco and Nokia.

Okay, and then my last question is on free cash flow, your comments about the cash cycle and investing the cash balances. It appears that you generated negative free cash flow for the first half of fiscal '07. What's your expectation for the second half?

Yes, I think for the second half, you will see us generate positive cash flow, particularly in terms of the guidance we've given here in terms of the range of EPS. And also we should start to see continued improvement in our inventory levels and reduction in working capital levels. So I think there's very good opportunity for positive cash flows and we expect that in each of the third and fourth fiscal quarter.

Okay, and lastly Forbes, can you indicate what kind of restructuring expense have you incurred to date out of this $200 to $250 million?

I don't have that number at hand. I think certainly in the fourth fiscal quarter of last year, we did make filings that indicated we've incurred about $84 million. So I can certainly tell you it's that much. And looking forward, our GAAP guidance anticipates a restructuring in the range of $45 to $60 million on a pretax basis.

Thank you.

Your next question comes from Jim Suva with Citigroup.

Great, thank you very much. Tim, last time you were very blunt about returning confident operating margins, around 4% to 5% in the next few quarters. And even with Taiwan Green Point, who has as you stated about 11% operating margins, it appears that now that 4% to 5% in the next couple of quarters and as you detailed is not going to happen. I appreciate the color on the lower volumes and exiting the lower profitable work. But I wonder was this structural change all brought about in the last couple of quarters or have you been thinking about it for quite sometime?

It sounds like a psychological question to me. I don't want to be flippant with you but this is the best information we have at this point. Our margin recovery is a bit slower than what we would have liked. I think I've gone through the reasons why we are faced with a little bit slower margin progression with Q4 being in the 3.25% to 3.75% range and expected additional operating leverage from growing revenue and I think there's very ample evidence that revenue outside of the consumer segment is growing very well, that we feel very confident about getting our margins sequentially improving and continuing to sequentially improve as we get into fiscal '08.

Okay, but with revenues actually being up year-over-year and margins and EPS both being down year-over-year, is it attributed to your strategy shift then, because you mentioned the operational issues are resolved, is that the best way to think of it?

There's a lot of factors and I appreciate it's been difficult, particularly without the benefit of historical financial statements, but also remember in fiscal '07, we went through a lean initiative with a customer that added a lot of material based revenue to our Company. Forbes talked about a mix in the consumer segment being more material intensive. We've ended up with more material intensiveness in our business than we ever anticipated. And that's not necessary a bad thing. Because we are providing valuable services to customers, we will be able to take those revenue streams and improve their profitability going forward, and I have every expectation that we will. So that's been happening. And this lack of revenue leverage, operating leverage, because of revenue means that we have quite a bit of infrastructure in place and we are $2 to $300 million short of revenue in order to adequately provide for the infrastructure that we have. So we're a little bit heavy there and I think we will grow our way out of that over the next couple of quarters.

Great, thanks for the details. As a quick follow-up, the Taiwan Green Point, if you exclude the revenues for year-over-year, does it now look like your full year will be up approximately 15%, is that math about right?

That's about right, Jim, yes.

Okay, well thank you. And last question, Phillips used to be greater than 10% and now it's not, and I know that the contract renewal was set for around November. Is it fair to say they are still an important customer and growing or are we seeing them as I guess just being outgrown by others as opposed to losing?

Yes, Jim, Phillips is one of our top five customers, a very, very important customer to Jabil. I would point out while Phillips are not a 10% customer in this fiscal quarter, this is the seasonal low for consumer. So if you go back to, I think, last quarter, I think we had indicated they were a 10% customer. So don't read into my comments that Phillips are not a 10% customer in this quarter. Don't read into that little vignette loss of revenue, material loss of revenue or deterioration in the relationship. Very important customer and one of our top five.

Okay, great. Thank you for clarifying that, I think that was very important. Thank you, everyone.

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

Thanks. Forbes, just a quick question, under purchase accounting, did you have to mark-to-market any of TGP's work-in-progress and if so, how much of an impact did that have on your margins?

No, we did not.

You did not. All right, and how much of an incremental headwind did you have from legal and audit expenses this quarter?

In this quarter, I believe we spent approximately $3 million.

Just kind of going back to the margin question, next quarter we are looking about 2.75%. That's still 125 basis below the long-term target. Could you just quantify, I know you've talked about the buckets that can get us to 4%. Could you just quantify which is the most important bucket and kind of talk about the three or four variables there?

Revenue. Revenue is the most important factor.

All right. And what about the transition on the consumer segment, does that play on the margin side or is that just more for a revenue driver?

That's costing us a little bit but I think the most important thing is to get the new product platforms that we've been awarded into the revenue stream, continue to build that capability, continue to build our vertical solution in the other parts of our business in that sector and continue to grow, and we have concrete evidence in visibility that that's going to take place at this point.

All right. And then --

What we need really is just to grow the revenue stream and the thing that gives me very, very good confidence about that is that the rest of our business is growing well and we're winning new customers and winning market share with existing customers and we will go through this process and start to rebuild our business in consumer and get the revenue and the top line growing again, we will get the margins up as a result.

All right. Thanks.

Your next question comes from Alex Blanton with Ingalls and Snyder.

Good afternoon. Tim, am I correct in we don't have any numbers for the first and second quarter earnings?

That's correct.

Okay, so we are in a curious situation here in which we have guidance for the third and fourth quarter but no actual numbers for the first and second. Is that the way it is?

Alex, this is Forbes. Yes, it is.

Can you give us any guidance for the first and second quarters? No, we can't. I'm sorry.

That's a nice plan. I'll try that on our various advisors in the legal and accounting community.

Alex, we've reached a stage in the ongoing inquiries where our board, the Audit Committee and the various counsel and committees that are reviewing these matters are reasonably comfortable with the impact that they may have on the third and fourth quarter. Given that, we've been able to give you some forward-looking guidance. And ultimately, once we conclude these reviews, we will be able to file our 10-K and quickly thereafter our fiscal Q1-K and, excuse me, and our second quarter Q.

Okay, I guess from a legal point of view because you have already completed the first and second quarter and they are in the past, you can't say anything about them. Very curious.

I think the second question is, sort of, it's sort of been asked before but not exactly. To get to the 5% ultimate target for operating margins, what would be the components of gross margin and operating expense as a percent of sales?

It depends on revenue mix and a lot of other variables. I think that as we continue to grow revenue, depending on how large consumer and higher material intensive industries that we play in, for us to get to that 5% is going to take additional revenue, operating leverage and SG&A expenses in the low threes, high twos.

In the what?

Low 3s, high 2s.

On the OpEx side?

Correct.

And what about the, a 4% figure?

So Alex, 10 was referring to the SG&A number.

Yes, I know. But to get to 4%, what do you need there?

It could be 100 basis points less.

On the gross margin?

Yes, we are not indicating on gross margin.

All right. Well, if you get 4% and 3% OpEx, that's 7%. Or if you get 5% and 3%, that's 8%. So that's what I'm trying to get at. Okay. And finally, given what's happened in the consumer sector, and the fact that you are growing 17% in everything else, looking ahead from a marketing standpoint and from a utilization of scarce resources standpoint, would you necessarily deemphasize consumer as -- and seek to get business other than consumer to any degree compared with the past?

Alex, we believe that a diversified portfolio of growth opportunities is best for our Company. We believe that maximizing our exposure to industries that are going through a process of vertical to virtual outsourcing is important for us, that we think the consumer electronics today is still principally vertically integrated, that we think we have an excellent value proposition for them. We have very significant resources and a good management team to pursue the consumer electronics segment as well as pursue instrumentation and medical segments and so we have no intension at all to pull away or exit consumer electronics. We think for that to -- for our business in consumer electronics to meet our long-term profitability objectives, and to be a contributing, accretive part of our business mix, we need to have solutions that are different than what we've had two, three, four years ago. Part of that includes vertical integration, particularly in our mobile communications segment, and part of that includes additional reliance on our product development capabilities, which I think are very strong and have expanded to three, four different customers, some of them very, very big customers, some of the largest home electronic OEMs in the world today. We do business with, and do business with on the basis of significant product development content. And so that segment will not behave the same way in terms of relationship style and engagement style as customers and instrumentation, medical industrial controls and others that are very well supported and developed using our historical business unit model and EMS operating style. So we are seeing a change in our business that in consumer electronics, in some of the very higher volumes, commoditized industries, we are employing a different type of solution in order to gain business and build business relationships that we think will be profitable for us long-term, and deliver the type of profitability that we think will be accretive to the business overall.

At the same time, we will be pursuing these vertically integrated industries such as medical and instrumentation that provide us very good opportunities to grow profitably on the basis of a typical EMS model.

Okay. Thank you.

Okay.

Your next question comes from Brian White with Jefferies.

Okay. Tim, when you talk about the vertical integration in the mobile business, when is that exactly going to hit? When are you going to start providing that service and what percent of your existing business will you move to vertical with the [inaudible] business?

I think eventually, particularly in mobile communications, most of our business will end up being vertically integrated. The process has already started. I mentioned in my comments that we've already been awarded programs on a vertically integrated basis through our Taiwan Green Point acquisition, and I think we will continue to see that. And over the next couple of years, I'd say, we will see more and more of our business transition in that direction. I would say by the end of fiscal '08, I would expect that most of our mobile communications business will be on a vertical basis.

Okay. And then when we look at, you talk about product development, are you, can you maybe just define exactly what you are going to be doing there, is that ODM, JDM, you'll also do some volume production, or maybe just break down what you are going to be doing there?

I think it will be primarily collaborative, joint, I think that's what you mean by JDM.

Yes.

We call that CDM. But we both, I think, get the point. The customer would be providing, in some cases, the customer would be providing screen technology and some firmware, software technology. Jabil will be the primary provider of mechanical design, electronic hardware design, and then the full system integration and test of the product in volume.

Okay, and just finally, if we look out over the next 12 to 18 months, what market are you most excited about in terms of outsourcing wins in terms of end markets? You mentioned a few but what are you most excited about?

Yes, I don't know if I'm most excited about any of the segments. I think that in terms of dollar revenue, consumer electronics represents the largest overall opportunity for the Company in terms of dollar revenue. But we are seeing very good wins and very attractive wins in storage. Our peripheral segment is growing again and I think we have an excellent solution there. Our automotive segment, I think will recommence a growth profile in, particularly in '08. And I'm missing some -- the medical instrumentation, of course, continues to grow, but defense and aerospace is an area that I think will start actually to be material to our business, material, I don't mean 20% customer. I'm not trying to portend some giant win that we'll have but we've been steadily building a defense and aerospace business over the last couple of years and I think that could actually move the needle a little bit for us in fiscal '08.

Okay. Thank you.

Your next question comes from Scott Craig with Banc of America.

Good afternoon. Just a quick question with regards to the lean initiative. You discussed a little bit about the impact on the margins and what happens with inventory and stuff like that, but there was a positive revenue impact, if I remember correctly. Can you quantify that on a year-over-year basis, Forbes, how much the accounting change there adds to your top line?

I can't quantify it exactly but previously we indicated on a year-over-year basis, we expected that to be around about $600 million. So $800 million in total for the year, if I remember, there was $200 million or thereabouts in our fiscal '06, so $600 incrementally.

Okay. That's it for me. Oh, I'm sorry, just on the tax rate, actually, I know it's tough to discuss some of this stuff but is there any change or should we think about any change to the tax rate now that you folded Taiwan Green Point into the equation?

Not at this point. I'd continue to use 16% at the moment.

16%. Okay, thanks.

Your next question comes from Will Stein with Credit Suisse.

Thanks. Forbes, can you go over the CapEx guidance? I'm not sure I understand. I thought I saw $200 million for the year which appears to be very low given what we've seen in the first two quarters. Is that right?

Yes, $250 million. That's reasonable based on our current expectation. Some of the front portion of the year has included some initial constructions costs that have gone up and in the sites I mentioned. The first half of the year is approximately at about $140 million or thereabouts. But $250 million.

But that rate, we haven't seen CapEx that low since like early '04. That's -- it's interesting. Okay. Then --

Over in the last two or three-year period, we have been putting a lot of real estate up, if you will, with additions throughout China and ongoing additions in Eastern Europe. So while this year we are putting up a facility in India, we are actually leasing a facility in the Ukraine and some expansion in Poland, it's somewhat less than in previous years.

Okay, great. Then Tim, I'm wondering if you can comment about any vertical integration either more design activity or component integration outside of the consumer end market?

In terms of product development, product development has been a part of our business for a long time and in terms of our historical approach in collaborative design, that's still ongoing and it's very important in our storage segment and to many customers across the board. It gets to a much higher level of integration, design integration capability in the consumer cycle. So I would characterize it that way, the capability continues to grow within Jabil and continues to be an important part of our value proposition for many customers, but when you get into the consumer segment, you are really talking about doing more of a complete product design.

And is there anything in Taiwan Green Point that could be leveraged to any of the other segments or is that really strictly for the consumer electronics market?

Yes, I think they have capabilities that could be leveraged in other segments. I think we'll focus on the cross-selling opportunities that are most apparent and most urgent in the beginning. It's a great company with tremendous capability but they have a limited amount of bandwidth to go pursue many, many opportunities at once so we are going to try and make sure that we continue to support Green Point customers in the same excellent fashion as Green Point supported them over the last 15 years, and that will be priority one. Priority two will be cross-selling opportunities between Jabil's customers and Green Point customers. We've seen positive progress already there and then priority three will be kind of expanding the global footprint, and four will be where else can we go with that capability.

Great, thank you.

Your next question comes from Reik Read with Robert Baird & Company.

Hi, you guys have mentioned a couple of times on the call that margin improvement will really be predicated on revenue improvement. But you have flat revenue third quarter to fourth quarter and yet you have the margins going up. Can you comment on what the factors are there? Is that mix plus Europe and are there some other things as well?

Yes, there is some mix there and the Europe rationalization is also helping. And when we were talking about, Forbes and I were talking about margins being reliant on revenue growth, that was in response to questions around how to get to 4% and then how do you get above 4% and how do you get up to 5%. And really getting to 4% and above and approaching 5% is, based on the current mix of business, is probably a -- is a revenue growth factor, will be the dominant need that we have to get above -- to get to 4% and above. But in terms of the margin progression over the next couple of quarters, yes, there's more favorable mix there, there's the European rationalization, other vissitudes of the business that we've been gaining.

Okay. And then, Tim, can you just give us a comment on the businesses that you are looking to exit, can you give us a sense for how much business that might be and an example of what areas that might be in?

Yes, I don't want to give you any examples but if you look at Q3 and Q4, our revenue levels are several hundred million dollars per quarter less than what we had originally planned.

Okay.

I'd like to give you an idea about the magnitude of what we're talking about.

Okay, and then just last question on the guidance here with EPS, understanding that you are prohibited from giving us the past but now that you are giving us guidance in terms of EPS, are you going to be able to report against that in the future?

Yes, as soon as we have been cleared to file our 10-K, and sequentially it would be our 10-K, excuse me, restatement 10-K, our Q1 and Q2, so, yes, sequential [inaudible].

So if you can't do that, the expectation should be that will you just continue to report revenue and then provide EPS guidance?

That's correct, assuming all conditions being [inaudible], yes.

Okay, great. Thank you.

Your next question comes from with [Milan Jay] with UBS.

Yes, hi. I have a question about the consumer business, about the vertical integration and do you think that would be limited to the mechanical casing business of Taiwan Green Point or do you think that you are required to expand into other vertical areas of the consumer business?

I don't think we will be required to do other areas to be successful in the short term. I think long-term, we may elect to engage in other areas but I don't think that they would require us to acquire another business.

Okay. And also you commented about, you expect to have substantial part of your consumer business to be vertically integrated a year from now. Now in terms of your design capabilities, do you think that you would need to make additional investment in order to beef up your design capabilities so that you can facilitate vertical integration in the consumer business?

I don't think that we will need to. We are making additional investments in our design capability. We are actually struggling to keep up with the amount of demand that we have on the product development front in the, it's called the home electronics consumer segment. And our vertical integration is with our comments about being primarily vertically integrated by the end of fiscal '08 was primarily directed to the mobile communications area.

Okay. And can you comment about the EPS impact of Taiwan Green Point imbedded in your 3Q guidance?

We are not going to break that out on a go-forward basis so we are reporting in consolidated numbers.

But can you at least provide some kind of, in terms of how to think about the profitability levels of Taiwan Green Point, because you paid 14 times earnings for that business and I guess it would be useful for us to keep track of the performance of that business.

es, when we announced the acquisition, I think we talked about the publicly traded company on a Taiwanese stock exchange. Their numbers are publicly available and on a U.S. GAAP adjusted basis, I think we talked about operating levels of -- income levels right about 11%. So they are clearly incremental to our revenue stream on a go-forward basis but we certainly don't intend to break that out quarter-by-quarter.

Just to refresh you, though, I think we said we expected it to be neutral in '07 and accretive in '08, and we are very pleased with the progress of the business.

So that's on track against your expectation?

Yes, we are very pleased. There was no reason for to us to change our previous statement and we are very pleased with the direction of the business.

Great, thanks much, gentlemen.

Your next question comes from Carter Shoop with Deutsche Bank.

Hi. Wanted to focus one question here on operating income and operating margins, kind of on a go-backwards basis here instead of focusing on going forward. You suggested that operating margins would be up sequentially in 3Q, so at the minimum it looks like on flat revenue year-over-year, if you excluded the impact from the lean initiative at Cisco, your revenue is down about $20 or about 25% year-over-year on flat revenue there. Can you talk a little bit about the drivers behind that? I know the tooling investment is somewhat of a lingering problem. But can you also break out some of the other factors there in regard to the decrease in operating margins, in operating income?

Carter, we are not at liberty to discuss historical financial detail as that was not published so I can't really answer your question in that regard. Our indications are that on a go-forward basis, we are going to see incremental margin improvement as we go through the back half of the year. But beyond that, I really can't give you any color on our historical position until we do file our 10-K.

We actually provided a lot of detail on each of the calls so I would encourage you to go back and take a look at that.

But the other two issues were resolved in the -- by the February quarter. Is that correct? Wasn't the tooling issue the only problem in the February quarter?

Yes, our comments said that --

I think there's been three calls since then and in each call, we provided quite a bit of detail around issues that we had in the business so I would ask you to go back and kind of review the comments that we made in the three quarterly calls that we've had since then.

I'm sorry, maybe you misunderstood me. I guess I was looking at on a year-over-year basis. So if you look in between the two, we've had issues between February, '06 and February, '07, two of which appear to be resolved. And I assume those are no longer issues, and then there's only one lingering problem, so I'm just trying to understand on a year-over-year basis, not necessarily --

Yes, but you can't analyze year-over-year results without looking at the progression of the three or four quarters since. So we are not going to go back and reconcile the margins between the theoretical margins in fiscal Q2 of '07 with the margins in fiscal Q2 '06.

Fair enough. Another question here on potential acquisitions on a go-forward basis. Would you look to be either A) further develop your vertical capabilities or B) diversify away from the consumer market any time over the next six to 12 months or do you feel like your hands are full here with TGP?

In terms of additional acquisitions in the area?

Yes.

I think our, I think we are where we want to be in terms of that capability and where we need to be to be competitive in the consumer space. There is always, we can always be opportunistic and if something came up that we thought made sense for our business, we would be more than happy to take a look at it and make additional acquisitions. I think in terms of a digestion point of view and make sure that the wheels are on and bolted on tight and the business is in good shape, yes, we are going to be relatively conservative in doing big acquisitions and major acquisitions. We are going to focus on cash flow and our balance sheet and making sure that we get back to the Jabil metrics of very strong return on invested capital, free cash flow, cash flow from operations and a very strong balance sheet.

Great. Thanks a lot.

Your next question comes from Bernie Mahon with Morgan Stanley.

Good evening. Just a question for you. We talked about -- a lot about the weakness and the guidance on the consumer side of the business and it sounds like there is probably some Company-specific issues there. Can you talk about just the demand environment and what you are seeing and if you excluded kind of these product transitions, what are you seeing in the demand environment for the May quarter in the two bigger segments of your consumer segment?

Demands is okay, it's relatively stable. We are, we are not laying this off on end market demand. There are some product categories that are softer than others and some that are stronger than others but overall it's pretty good.

Okay, thanks. And then just a quick question on the margins. In the November quarter, you had talked about the gross margins being negatively impacted by 50 basis points because of, I think it was higher material costs or mix shift. Could you just give an update on that issue? Is that kind of a one time issue for November and it reversed again in the February quarter or have you found that that's more of a secular issue for the business?

Yes, Bernie, we, I talked about in my comments, within our consumer products sector this quarter, in terms of more material based revenue flowing through the revenue stream, as we are providing what we believe are valuable services to our customer base in that particular area. So I've commented on that a little bit in the prepared remarks but we did see some of that in the second fiscal quarter. We also in our second fiscal quarter, remind you that this is typically a very seasonal section of our fiscal year and sequentially our revenues did fall 11% if you excluded Taiwan Green Point. And to support the seasonal business, there's a semi sick cough there, if you will, that in the consumer sector runs through the January period, and unfortunately our fiscal quarter doesn't go along with the calendar quarter. So you will naturally see some impact there on the margin which then falls out and back into Q3 in the back half of the year.

Okay, that's helpful. And then just on inventory, last quarter you had said you had probably three to five days of excess inventory in the networking segment. Were you able to work that down this quarter or do you think you will be working that down over the next couple of quarters? Where does that stand?

Yes, I think we are making some progress in that regard and, yes, you will continue to see us work through that as we move through the balance of the fiscal year, certainly Q3 and continuing into Q4.

Okay. Thanks a lot.

Your next question comes from Andrew Huang with American Technology.

Thanks, I just had a question on the consumer business again. When you said that you expect the revenue in your consumer sector to decrease sequentially for the balance of '07, is that calendar '07 or your fiscal '07?

Fiscal.

Fiscal, okay. And then when you talked about the second reason about I guess one of your large customers going to a more product development based relationship, does that mean that you were doing traditional EMS business with this customer and now going forward, you are going to do more R&D for this customer?

That's correct.

So if that's the case, does that imply that that customer is taking that EMS business to one of your competitors or are you not doing it any longer?

It's probably a little bit of both. I think it's, the implication there is the style of engagement and the style of relationship that that customer needs is changing. And it's been an observation that we've made and we've, it may seem like it's happened relatively abruptly and from a revenue standpoint it has, but we've been cognizant of the move to a, particularly in the consumer area, customers there want to have outsourcing providers that can do product development, complete product platforms and certainly in the area of mobile communications, provide technology and capability and enclosures and decorative external material like plastics. So I think from an EMS standpoint in the consumer segment, if you don't have significant capability in product development and can work with customers on complete product platforms and in some cases you are not vertically integrated, you're competing on the basis of a very narrow value proposition that we don't think will provide the types of returns that we want for the business. So we think a product development rich, and vertically integration rich value proposition for customers in that segment will provide us a more stable, a greater number of relationships and certainly better long-term value proposition and profitability.

Okay. And then I guess with the second customer, when I guess that customer is going from a horizontal strategy to more vertical, does that imply that the customer is bringing box build or board assembly in-house? I'm not exactly sure what that means.

It means that we have historically used a horizontal supply chain strategy, in which case we are doing assembly work primarily for that customer. What is the right value proposition for that customer is a fully, a full vertical integration model that incorporates not only our global footprint and assembly services but also the value that we can bring in electrical mechanical components, particularly in decorative areas. That value proposition is more meaningful to that customer in long-term our ability to continue to secure substantial material wins with that customer will depend on our ability to provide that vertically integrated solution. And I think that we can provide that in spades and we will be very, very competitive.

I've said in the prepared remarks and a couple of times in response to questions that we are already seeing business awards on that basis. So our confidence level is actually increasing.

Okay, so this customer, they used to use you on a horizontal basis. They are moving to a competitor that has a more vertical solution but in the future you expect to get more of that business going forward with your Taiwan Green Point?

That's not what I said.

Oh, I'm sorry. So I mean if you have business with them on a horizontal basis and they want to have a lot more vertical solution, does that necessarily mean that you have to lose that horizontal business with them?

I'm not sure why we are painfully going through this question again and again and again. There is a revenue, our revenue in the consumer segment will be lower than originally anticipated, and the reason is transitioning from horizontal supply chain strategy to a vertical strategy. That means we will have less business in the very short term, which would be the next couple of quarters, and probably more business than we ever would have had long-term. And we talked about the back half of '07 and certainly when we look at fiscal '08. We are building a capability that is not only applicable to one customer but it's applicable to the big industry that is growing very rapidly. Mobile communications -- there was over 1 billion mobile communication devices sold or will be sold in 2007. We would expect the secular growth rate in that industry to continue to increase and more and more convergence of not only voice and the types of things that you see today but other types of entertainment delivered through a mobile communication device. And so this is a broad based strategy not narrowed to a single customer.

Okay. Thanks for your patience.

Okay.

You do have a follow-up question from Lou Miscioscia with Cowen.

I thought it would circle back around to me. I guess just one last quick question. Tim, as you move to this new strategy and especially given, I guess, last quarter when you had to write off that product development cost, can you just maybe give us a comment on the risk level, I mean how much higher do you think the risk level goes up? And do you think you maybe could talk about how much more margins you can get to try to compensate for that? Thank you.

Well, I definitely can't talk about how much margin we can obtain. I can't believe that it's, the proof will be in the pudding in future quarters how we do. And I kind of have to leave it at that and I will say that it's a better value proposition for the customer. The product development category that we exited in fiscal Q1 that we talked about on our last call was a very narrow opportunity that was a vintage of decisions that were made a year and a half or two years ago. A particular technology and a narrow product category and the market changed. The market changed on us and we elected to exit it. The areas that we are focusing are on very large scale OEMs that have very well developed markets and we are sticking to product categories that are in very, very large volumes and where the product development capability is relatively well understood. And we think that by sticking with the major OEMs, the major providers of the product, sticking with mainstream products in which we understand very well what the product development needs are, that the risk factor will be no different or only slightly higher than our core businesses represented over the years.

Okay. Thank you.

Okay.

Operator, we have time for one more question tonight.

[OPERATOR INSTRUCTIONS] Your last question comes from Kevin Kessel with Bear Stearns.

Just a housekeeping question, Forbes. You mentioned that the tax rate going forward would be 16%. Can you give us some sort of a ballpark for what the guidance is -- what interest expense level the guidance is based on for the next couple of quarters?

Sure, Kevin. For fiscal Q3, the interest expense I would expect to be in the range of $25 to $30 million. And $20 to $25 in Q4.

And is there any way for us to think about the plans in which to pay down the bridge loan as we go into fiscal '08?

No, we haven't developed those plans fully but we will certainly advise everyone once we get to that point. Our key focus right now is to improve operating margin performance here and look forward to having our financial statements filed and then we can start that process.

Okay.

Okay?

Thank you, operator and thank everyone for joining us for our conference call today.

You're welcome. This concludes today's conference call. You may now disconnect.