捷普科技 (JBL) 2007 Q3 法說會逐字稿

Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Jabil third quarter earnings 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)

Thank you, Ms. Walters, you may begin your conference.

Thank you, welcome to our third quarter fiscal 2007 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 third quarter results. You can follow our presentation with the slides that are posted on the website and begin with us now on slide one.

During this conference call, we will be making forward-looking statements including those regarding the anticipated outlook for our business. Our currently expected fourth quarter fiscal year 2007 net revenue and earnings results, our long-term outlook for our company, and improvements in our operational efficiency and in our financial performance. The statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.

These risks and uncertainties include, but are not limited to the Securities and Exchange Commission having views different from ours on the results of the review of our past stock option grants conducted by a special committee of our board and governmental authorities, and a review of our historical recognition of our revenue by our audit committee; the impact of the restatement of our financial statements and any other actions that may be taken or required as a result of any such reviews; the risks and costs inherent in litigation, including any pending or future litigation relating to our stock option grants; the restatement of our financial statements, and as a result of the evaluation of our historical stock option practices and our revenue recognition and associated financial statements, or any declines on the price of our stocks, whether our realignment of our capacity will adversely affect our cost structure; ability to service customers and labor relations, and our ability to successfully address the challenges associated with integrating our acquisition of Green Point, our ability to take advantage of (inaudible-technical difficulty) benefits of offering customers vertically integrated services; our ability to respectively address certain operational issues that have adversely affected certain of our US operations; 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; managing 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 electronics manufacturing services industry, our customers and our businesses.

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, 2006, subsequent reports on Form 10-Q and Form 8-K 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.

Please turn now to slides two and three for the results of our fiscal third quarter 2007. On revenues of $3 billion, GAAP operating income was $33.6 million. This compares to $77.3 million in GAAP operating income on revenues of $2.6 billion for the same period in the prior year.

Core operating income, excluding amortization of intangibles, stock based compensation and restructuring charges for the quarter was $87.1 million or 2.9% of revenue as compared to $93.4 million or 3.6% for the same period in the prior year. Core earnings per diluted share were $0.23. Legal and accounting costs associated with the recent reviews in the quarter were approximately $4.1 million.

Excluding these costs, operating income was 3% of revenue with earnings per diluted share of $0.25. On a year-over-year basis, this represents a 16% growth in revenue, a 7% decline in core operating profit. On a sequential basis, revenues increased 2% while core operating income increased 57%.

Please turn now to slide four for a discussion of revenue by sector for the third quarter. Production levels in the automotive sector increased 16% from the prior quarter reflecting strength in assemblies for our European-based customers. Computing and storage sector was consistent with the second quarter and our expectation.

The consumer product sector including revenues associated with our Green Point acquisition decreased by 9% from the second quarter reflecting the transition of business mix as discussed last quarter. Our instrumentation and medical sector was better than our expectation, increasing 7% from the second quarter as a result of strength across multiple customers in this diversified sector.

The networking sector levels of production increased 6% from the previous quarter. The peripherals sector increased by 19% over the second quarter reflecting new business awards with an existing customer. The telecommunications sector increased 4% sequentially.

Please turn now to slide five. For our sector information for the quarter and percentage terms is as follows -- automotive, 5%; computing and storage, 11% of revenues; the consumer sector represented 26% of revenues for the quarter, the instrumentation and medical sector was 18% of revenues, the networking sector, 21%; peripheral sector represented the 9% of revenues for the quarter, Telecom 5%, and other sector represented 5% of revenues.

Research and development expenses were $10.5 million in the quarter reflecting the addition of Green Point resources and our ongoing success in product development related programs with existing and new customers. Amortization of intangibles was $8.8 million for the quarter, an increase of $2 million over the second quarter is reflective of the revised preliminary estimates of identifiable intangibles associated with the recent Green Point acquisition as well as a full quarter of amortization for these intangibles during the third quarter. The fourth quarter amortization of intangibles is expected to be consistent with the third quarter.

Stock based compensation expense and related charges increased $7.6 million in the third quarter to $19.4 million. This is a result of costs associated with the Internal Revenue code section 409A relating to the recent stock option review and stock appreciation rights and restricted stock grant granted to certain Green Point and non-executive employees during the quarter. Full details on the 409A can be found in our fiscal year Form 10-K. Stock based compensation expense is estimated to be approximately $15 million in the fourth quarter.

I'll now turn the call over to Forbes Alexander.

Thank you, Beth. Good afternoon.

I'd like to review with you our balance sheet and ratio trends. I'd ask you to follow along on slides 6, 7, and 8. The Company's sales cycle in the quarter improved by 3 days to 26 days. Days sales and accounts payable days outstanding were consistent with the second quarter. Inventory days improved by 3 days to 47 days for a term, a reduction of $90 million in the quarter.

Cash flow from operations was approximately $192 million in the third quarter. Cash and cash equivalents were $558 million as compared to $555 million at the end of the second quarter. Our current debt at the end of the third quarter totaled approximately $926 million. Our capital expenditures during the quarter were approximately $88 million. Approximately $22 million of this expenditure was related to assets previously utilized under an operating lease.

Depreciation during the quarter was approximately $55 million with EBITDA in the quarter approximately $142 million. Our return on invested capital improved to 10% as compared to 7% in the previous quarter. As we enter the fourth quarter, we're in good position to continue to produce positive cash flows from operations while producing incremental returns on our capital deployed.

We're pleased with the progress we've made in the quarter, improvement in our core operating income margin and high-end of previous guidance, reducing inventory levels, returning positive cash flow from operations, and improving our returns on invested capital to double digit returns. This is a positive first step on our path to returning the Company to our long-term targeted return levels. I'd now like to cover acquisitions, capacity, operations, and our restructuring activities.

Firstly, our Green Point acquisition. On April the 24th, we completed the acquisition of Green Point, acquiring the final 3% of outstanding shares. Our transition plans have been running smoothly and we continue to see very bright prospects for this new part of our service offering in the consumer sector.

Turning to operations, the electro mechanical tooling capability will have an immaterial impact to our fourth fiscal quarter. This capability remains an important part of our value proposition and will be supported by our Green Point operations.

An update to restructuring, we continue to manage our overall rationalization plan according to our previously announced plan. During the third quarter, we recorded charges of approximately $25 million. Total charges recorded to date against our overall plan of $153 million.

During the quarter, cash payments associated with these restructuring activities were approximately $13 million. Total cash payments are $57 million. We continue to expect our total restructuring charges to be at the high end of the $200 to $250 million range we've previously announced.

The cash cost of such charges for this plan remain an estimate in the range of 150 to $200 million. Discussions with our employees and our representatives continue, and we are complying with all statutory and consultation periods required of us.

With regards to capacity, as we've previously discussed, additional square footage and capacity is currently being added in China, Poland, the Ukraine, and India. These facilities are expected to ramp production levels during the balance of calendar 2007, but we continue to ramp significantly high levels of production in our sites throughout China.

In May, we announced the addition of 55,000 square feet of capacity in Ho Chi Minh City, Vietnam. New product introduction activity commencing during the upcoming fourth fiscal quarter with full production plans commence prior to the end of the calendar year.

Our investments in the fourth fiscal quarter are expected to be related to these locations and existing plants as we continue to invest for increasing production levels in the first half of fiscal 2008. Capital expenditures for the fourth quarter are estimated to be approximately $65 million. An estimate of capital expenditures for the year was $280 million.

I'd now ask you to turn to slide 9 for a business update, specifically, the fourth quarter 2007. Our revenue guidance continues to reflect a muted view of end market growth, along with the impacts of the transition of the mix of business within our consumer sector. Our guidance for the fourth quarter includes ongoing legal costs.

We estimate our revenue in the fourth fiscal quarter to be consistent with that of the third or $3 billion. Core earnings per share for the August quarter are expected to be in the range of $0.25 to $0.31. As a percentage of revenue, we estimate core operating margins to be in the 3% to 3.5% range.

We are reducing the overall range of core operating margin by 25 basis points to reflect the prepositioning of resources to support new program wins in the automotive, computing and storage, peripherals and networking sectors anticipated to ramp in the first fiscal quarter of 2008 along with seasonal growth in our consumer sector.

Research and development costs are expected to be approximately $9.5 million in the fiscal quarter. Our interest expense is estimated to be consistent with that of the third quarter or $28 million, and based upon the current estimate of production levels, the tax rate is expected to be 17% for the quarter.

Now I'll ask you to turn to slide 10. Revenue by sector for the fourth quarter. Our automotive sector is expected to decrease by approximately 10% for the quarter reflective of normal seasonal lower levels of production. Computing and storage sector is estimated to increase by 5% from third quarter.

The consumer sector is expected to be consistent for the third quarter. The instrumentation and medical sector is estimated to be consistent to slightly better than the previous quarter. The networking sector is expected to be consistent with the third quarter. The peripheral sector is estimated to increase by 5% in the fourth quarter reflecting ongoing new business awards with existing customers, and finally, the telecom sector is estimated to decrease by 10% from the third quarter.

We now estimate our revenues to be split for the full fiscal year across the industry sectors we serve as follows -- automotive 5%, computing and storage, 12%; consumer, 29%; instrumentation and medical, 17%; networking, 20%; peripherals, 8%; telecom, 5%; and other, 4%. We continue to execute the plan we have set for the second half of our fiscal year growing operating income dollars and percent to 3% and beyond, improving capital deployed and returning to producing positive cash flow from operations through disciplined pricing, cost containment, working capital management, and operational excellence.

This execution along with the recent inquiries behind us affords us the window of opportunity to replace the current bridge financing in place with permanent longer term capital instruments. As we enter the fourth quarter of the fiscal year, we believe we are well positioned for continued improvements and resumption of sequential revenue growth in fiscal 2008 allowing us to build upon the progress we're making towards our long-term targeted returns.

And I'd like to hand you over to Tim Main.

Thank you, Forbes.

A year ago we entered what has turned out to be an extremely challenging period for us. We are not where we wanted to be a year ago, but we are not necessarily in such a bad place either. Many of you have asked for an explanation of the last year's seemingly chronic disappointments and adversity.

A year ago, we believed we had three manageable discrete issues which could be resolved in relatively short order, however, we had a number of challenges emerge that we didn't count on at that time. One was a long, expensive, and ultimately distracting inquiry and review process.

End markets largely stalled and demand has been tepid for the past three quarters. The pricing environment was more severe, particularly in the consumer area, and we changed course in the product development focus. All of these issues have played a role on our financial performance being below the standards we set for our company.

We have taken corrective actions. We're in the process of a worldwide rationalization of our capacity and infrastructure. Low return activities are being eliminated, including our Greenfield electro mechanical site and certain consumer product categories. We have also made a priority of improving productivity and quality across the board in our operations as well as our corporate infrastructure and activities.

Thankfully, throughout this period, our people have shown a heartening degree of character perseverance. We have wonderfully resilient people who have performed very well under difficult circumstances. Our factories have been executing well and overall our customer satisfaction is at reasonably high levels. We made a game-changing acquisition of Taiwan Green Point. Green Point is critically important to our mobile products strategy and we are encouraged with early results.

We have continued to land new customers and programs at a brisk pace, broadly across our sectors. We have a strong position in high technology, high complexity sectors, and this will remain a key part of our strategy. In 2007, we expect the instrumentation and medical sector to grow 20% over 2006. Computing and storage is also anticipated to grow approximately 18%. Even our after market services and peripherals sectors will show outstanding growth of about 30% each.

Our result for fiscal Q3 is the first step and an indicator that we are on the right path. Margins have improved. Revenue in fiscal Q3 was $223 million lower than our first fiscal quarter, yet core operating income increased and margin improved 30 basis points.

From Q1 to Q3, gross margin improved 130 basis points. Cash flow from operations was $192 million in the third quarter and core ROIC improved 300 basis points from Q2. We are gaining control over inventory and feel good about improving returns in future quarters.

Looking forward to fiscal Q4, we see incremental improvement in our operating margin and return on invested capital on flat revenue. A flat revenue profile for fiscal Q3 to Q4 is generally consistent with past years. We believe our consumer sector is bottoming and expect to see a typically stronger seasonal profile in the first fiscal quarter of '08.

Balance of our business is also in good condition. Excluding our consumer sector and Green Point, on an organic basis, our business will grow 20% in the second half of '07 over the second half of '06. We are happy to be reporting earnings on time and pleased to have taken an important first step in demonstrating our long-term value potential.

On an industry note, we heard some big news come out of California recently, the Flextronics acquisition of Selectron is interesting in a number of ways. As a consolidation acquisition, I think it's generally positive for the industry, but it also exemplifies the structural change to the industry overall. The three largest players in the industry today are Foxconn, Flextronics and Jabil. While the guard has been changing, we have been growing and doing relatively well.

Consolidation is likely to continue, and there will be willing and unwilling participants in that process. We are actually quite pleased with our position and look forward to continue refining our value proposition for our customers and partners. Our scale is sufficient to compete, and we expect to maintain our present course and acquisition strategy.

Operator, we're ready to begin our question and answer period.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Louis Miscioscia with Cowen and Company

Okay. Thank you. Glad to see decent results here.

Let me see, I guess the first question I have is that I thought on the last call you had that you were not going to--you were going to pull out the legal expense, and it sounds like you decided to include that? Maybe if you just clarify that both for this quarter and next?

Yes, Louis, Forbes.

Yes, there was some confusion. What we decided to do was be consistent with the way we historically reported numbers, clear down the confusion, and continue to provide guidance, including the legal expenses.

So those numbers you see on our press release and Form 8-K filed earlier today include those expenses. So our core operating margin was 2.9% for the quarter including those, Louis, and that makes it consistent with the way we've reported historically. Our forward-looking guidance of 3% to 3.5% includes those expenses.

I apologize for the confusion.

Okay. That's okay, then. Maybe just--and you said that they were actually $4 million or 4.1 in the quarter and $0.02?

4.1 and $0.02, that's correct.

Okay, and then what would be the thought for the August quarter coming up, and then just when do you think they actually do start to drift off? And I guess if you could add them all together in one lump sum being the accountants, the consultants, the lawyers, everything that happened to do with the backdating the other stuff?

Yes, for the fourth fiscal quarter, I estimate somewhere between $2 and $3 million. I think you're going to continue to see some of the expenses through our fiscal Q1, but beyond that, I don't have much visibility at this stage. But (inaudible-heavily accented language) hopeful that we can conclude those expenses by the end of the November quarter. In terms of overall costs to date as a result of the inquiries and reviews including our estimates for the fourth fiscal quarter, it's somewhere in the region of about $17 million--$17 to $18 million.

Okay. Great, and just sort of have to ask. I have gotten a lot of questions about it lately. I guess there's a lot of folks who just believe you can't get above 4% operating margins or higher again, maybe if you could just sort of talk a little bit restructuring and how you get here? You're almost, obviously basically a 3, but how do we get to 4 and above again? Thank you.

Yes, we certainly believe we can get to 4 and above. We don't think anything is structurally broken in the business. There are a couple of things that have--have a more permanent impact on margins like the additional material revenue that we've taken on in order to do increased order fulfillment activities.

Having said that, there's a lot of new areas that we've opened up that we think will be profitable, as well, but I think we'll stop short of making any predictions about when that'll happen. This is a step by step process, and we'll work on incremental improvements in our operating margin. We'll continue to rationalize factories, and that'll have a contribution and has made a contribution.

We'll continue to diversify our business, be judicious in pricing in the more commoditized areas and really just run a tight ship, and the combination of those things along with the resumption of top line growth, which we do expect to see in future quarters this Q3 to Q4 flatness in the revenue profile is relatively normal for us this time of year.

With some top line growth, we should be able to see further improvements in operating margins. So I understand there's a lot of skepticism, and the only way to--the only way to deal with that skepticism is to execute and put the numbers up and that's what we're committing to do.

Okay. Thank you. Good luck.

Okay.

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

Great, thank you very much and congratulations on the operating profit margin improvement and all.

But when we look ahead with flat margin or flat revenues and considering that you've got some new program ramps and your operating numbers for your revenue--or margins came down a little bit, can you help us triangulate about why you're taking it down about 25 basis points on both ends? And just to maybe think about seasonality is we always knew seasonality was going to come in August and the top line hasn't changed a lot. Did maybe something slip out a little bit, and now this automotive is coming in and is a little more cost heavy? But how can we triangulate around why we slipped the operating margin outlook down 25 basis points?

So let's do one thing first. When Forbes provided--when we provided the guidance back in March, I guess it was.

March.

We excluded the legal costs. That's responsible for --

10 basis points.

10 basis points so really we're taking--reducing our March guidance by about 15 basis points which in this environment, I don't think is really a big deal. We certainly don't want to take guidance down, but it's relatively small and modest decrease.

I think it's pretty simple. We underestimated some of the costs associated with some new business ramps that will start occurring in fiscal Q4 and extend into fiscal Q1. Nothing major that slipped out, nothing major that came out. So we're talking about 3 to $5 million of additional costs. So it's relatively modest.

Okay. That's very helpful. And as a quick follow-up, Tim, you'd talked about kind of the changing game in the industry, both of Jabil acquiring Taiwan Green Point as well as the mega-mergers here in California.

Can you talk a little bit about--if people view it as a race with three horses, it seems the other two horses are considerably bigger, that there's a big gap. Does Jabil want to remain with that big gap, or would they be interested in closing that gap? I know organically you're growing, but it's just a big gap. How should we think about that, do you have room for acquisition appetite?

I grew up in Detroit, Michigan, and for a long time General Motors had a huge gap on Toyota, and quality companies, you really--you don't focus as much on the gap as you focus on who your targeted customers are, what you're doing for those customers, the quality of your solution, what you're doing. I think if Toyota were building 100 cars, it would be very difficult for them to compete.

We have sufficient scale to compete, and that's really the important thing. There will be some markets that we just won't pursue. We're not going to try and duplicate Foxconn's model, for instance. They have a very distinct business model that works very well for them, and our hat's off to their success.

But it's a big marketplace, a lot of customers, and more than one way to get to--to have a valuable company, and so we feel we have sufficient scale. We don't think that gap is necessarily a problem for us. We think customers believe we have sufficient scale, and ultimately customers are the final arbiter on who brings a compelling value proposition in the marketplace.

So we'll continue to focus on diversification. I think, actually, much of our marketplace in medical instrumentation and some of the higher mix areas kind of like the fact that we're who we are and we have more focused operations and additional diversity. And finally I guess my final comment is that there are a number of examples in our industry where the illusion of scale being a competitive advantage has been disproved, and what it will come down to is the quality of execution and your ability to translate your size into efficiencies and a cost benefit for the customer base.

So that'll be the challenge for people that do make consolidation moves and, again, overall, I think it's healthy for the industry. But we are--we will continue with acquisitions I think that help customers virtualize their capacity or bring us a capability or technology we don't have presently.

Great. Thank you very much, everyone.

Okay.

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

Hi, good afternoon. Two questions.

First, on ramping the new programs next quarter, what is the implication for inventory metrics in the August quarter? And then secondly, Tim, any more color on Taiwan Green Point in terms of how it's integrating into the operations, the impact on financials, and what the customers are saying?

This is Forbes, I'll take the inventory question.

I don't see any significant impact in terms of inventory levels as we move through the fourth fiscal quarter. Certainly from our perspective we think holding inventory at eight turns is certainly realistic. We're striving for more than that, but I think we should certainly see continued reduction in our inventory levels as we move through the balance of this quarter, even though we are preparing to ramp these new programs coming into the Company.

And on Green Point, it's early, and so these things to generate full value takes some time. It's so early that really just a matter of are you sure you have what you bargained for? And in that respect, I think we're very, very happy, very passionate people.

We think a great culture, super technology, and I've said a couple times over the last 3 to 6 months, the early returns and reactions from our customer base have been very, very positive, and so I continue to have a lot of optimism, enthusiasm about a combined vertical solution for our mobile products customers, with their customer base, with our customer base, with their people who are really great, strong people, and with our people.

I guess, Tim, what I was fishing for, I don't know if I'm going to get it was just sort of some examples of how this could be moving the revenue momentum later on as you get into November or the quarter after?

I know you were fishing for that. We won't speak to that until really things really start to pop.

Okay. Thanks.

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

Yes, thanks. I'd like to ask a question regarding your forward revenue. You gave guidance for August and I know you haven't given guidance for the November quarter, but Tim you talked about some nice new program wins and also it sounds like the consumer area's bottoming out for you. Should we expect to see mid-single digit growth? Could you get back to the $3.2 billion level by November?

Yes, we're not going to be providing any guidance for Q1, you've been hearing (inaudible), but I think the thought process around the consumer segment looks like it's bottoming. We've got consistent revenue quarter to quarter. Even taking Green Point out, it's a relatively consistent quarter in Q4 to Q3. So we would expect to see a somewhat typical seasonal pattern in Q1 in that segment, and we'll speak more to that in our September call.

Okay, and then on the gross margin, which came up nicely from last quarter. How much of that was due to some of the operational issues that were resolved versus the mix with the lower consumer? And as we look to the next quarter, should we expect gross margin to be impacted by these ramp costs, or is that going to be an SG&A issue?

Yes, in terms of the gross margin improvement, there's a number of factors going on. I don't want to get into breaking those into basis points or anything. It's fair to say that some of the operational issues we'd had earlier in the year are now resolved and we don't see any impact--ongoing impact into our fiscal Q4. We're very pleased with the stage we're at in terms of restructuring, and the operational job that's being done this fiscal quarter.

As we move into Q4, you talked about ramp costs. Principally those costs are in the gross margin line. I'd expect our SG&A to hold pretty steady with Q3 with perhaps some opportunity to bring that down a little bit given we expect the legal costs generally to be under $4 million we saw in Q3.

Okay thank you.

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

Thanks a lot, good afternoon, guys. Just a question, we expect in the November quarter non-consumer business to be up--actually in the back half of the '07 non-consumer business to be up 20%, is that right?

That's correct.

And we expect consumer business to be up in line with seasonality that we've seen historically in the November quarter? Right?

That's correct, yes.

I was just trying to make sure I had all of those things right. And then just from a [tubing] perspective, could you just tell us what sort of a headwind was there in the May quarter for you guys, I believe you said it would be immaterial next quarter?

Yes, that's right. Immaterial next quarter. It's relatively minor in Q3

All right. And then just kind of going back to the Green Point question and I may have missed this, what sort of revenue or margin contribution did it have this quarter, and also just in terms of integration, how are you guys doing, or have you integrated your ERP system at Green Point? Because one of the issues with them I think historically was you had a one-time margin because of inventory writeoffs due to program fluctuations consistently. So how do we address that issue there?

So we're not going to get into providing details on Green Point and Jabil. We're a combined company so we plan to give combined results going forward.

With regards to the ERP systems, we only finally acquired them in--effectively in the last week of April. So we've only got a couple of months under our belts. So there's no integration of ERP systems to date, but that's certainly on the agenda.

We're hopeful we have some of that done during the balance of calendar '07. Remembering there are multiple operations across three geographies with the Green Point acquisition, but it's certainly on our--one of the first items on our agenda in terms of integration, and we expect to commence that prior to the end of calendar '07.

All right, and then just finally, the researching plan that's underway, does that involve shutting down some sites in India that you may have acquired from Silitronics or at least curtail some of those operations?

We've--there are some costs associated with India. We have restructured certainly head counts and some transfer business amongst our existing operations there. I don't have that number handy, but certainly that's included, yes.

All right. Thanks a lot.

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

Hey, good evening. Question for you on the operating margins. So it looks like the midpoint in August you're looking for operating margins to be up 40 basis points sequentially.

Forbes, maybe could you just walk through how is that mix--it sounds like some of it's the legal cost burning off, are there any other kind of costs that are going to be going away? What is really driving that improvement? Because revenue is flat, so there's no--there's nothing from the revenue improvement side.

Right. Yes, the main driver is our continued cost containment programs on existing sites, and also the impacts of our ongoing restructuring activity. As you see revenues are principally flat quarter to quarter. So it's really a continued focus on our cost structure within the corporation.

Okay, and then just a question on the revenue. If you look at the computing and storage on a year-over-year basis and instrumentation and medical, we've seen pretty big deceleration over the last four quarters, the midpoint of guidance for the August quarter for computing and storage looks like 2%, instrumentation medical goes down to 13%.

What's going on there, or is it just that the growth before maybe was a little bit inflated, and what kind of growth prospects should we look for? Should we look for it to get back to the 20s, or is it going to be at these lower levels?

Computing storage in the 20s in terms of percentage of our total revenue?

No, in terms of a year-over-year growth. If you look at the last three quarters it's gone from 20% year-over-year growth in February to 10% and the midpoint of guidance looks like 2%. So should we see a reacceleration there?

No. End markets are pretty sloppy and enterprise spending as everybody is kind of familiar with, and even so, we have been posting some growth in that segment, which I think indicates that we're doing reasonably well there, and as we look forward, I think it's going to continue to be a very, very strong segment for us.

Okay, and then on the instrumentation medical, we've seen that come down the last few quarters. Should we expect reacceleration there in growth?

I think the--we're getting into some larger numbers there, and I don't--I wouldn't see a deceleration, I still think that's going to be a really strong segment for us.

Yes, earlier this year, Bernie, there was some slow-down in that sector. I think there was some inventory corrections going on with two or three customers. They have corrected that, and I think you're going to see some relatively strong resumption of growth there.

Okay, that's great, thanks a lot.

Okay.

Your next question comes from the line of Long Jiang with UBS.

Yes, hi, good afternoon. Related to the Flextronics acquisition of Selectron, in talking to your customers have you seen any feedback in terms of some of their customers potentially defecting--seeking further supplier diversification, and also can you comment about your expectation for the industry pricing situation given this consolidation at Flextronics?

Great questions, those are kind of the million-dollar questions, and unfortunately, they're not questions that I can directly answer. On the first count, if it were happening, we wouldn't talk about it, and secondly, a more rational pricing environment would be good for everybody.

I don't know that this will make that happen or not. But we share some customers, there isn't a heck of a lot of customer overlap, but there's a little bit, and we're just going to run a tight ship, and if customers end up being unhappy in the confusion that may or may not result, they could end up doing a fabulous job of integration.

I think they--even Flextronics and some of the things that I've seen says that they're planning on some level of attrition, which I think would be expected in this type of deal when you have high levels of customer concentration, and we're not making a point of trying to destabilize the deal for anybody. We're really just going to focus on our business, and to the extent that there's any confusion, of course, we'll try and benefit from that.

That's not really what we're looking for. Flextronics, I think is a good company. They've done very well in the previous years, and I think the best thing is that they're a company that likes to make money too, and that's a good thing.

Yes, thanks for the comments.

I have a quick follow-up question for your income statement. Now for restructuring benefits, obviously, a lot of that would be reflected in your fourth quarter guidance. Now, going beyond fourth quarter '07 and enter '08, do you expect some additional restructuring benefit, and also regarding your increasing investment for the automotive and other end market ramp up, do you think the fourth quarter will be reflective of a steady state for the increasing investment, or do you expect to see some further increase beyond fourth quarter? Thanks.

With regards to restructuring, yes, we'd expect to see continued benefit through fiscal '08. It's a little way over half of the plan we outlined I think four quarters ago now. Half way there.

So really depending upon the time of any further actions between now and the end of the calendar year will determine the timing of those--those benefits, but yes, expect to see some benefit--continued benefit as you move through fiscal 2008. With regards to infrastructure being put in place for these ramping programs, as we said earlier, it's maybe 3 to $5 million in the fiscal fourth quarter. There'll be some impact in Q1 as these programs ramp, but I don't believe it'll be anything of a material nature once we start to see these programs ramp and come up to volume through fiscal Q1 and into fiscal Q2.

Your next question comes from the line of Yuri Krapivin with Lehman Brothers.

Good afternoon. Tim, you continue to hold a muted view of the end market demand. Are there any actually signs that the end market demand may be improving, or conversely, are there any end markets which could be deteriorating at this point? For example, you're guiding the telecom sector to be down 10% sequentially.

Yes, Yuri, no I don't see any signs of a pickup, and I really don't see any segments that are in particular trouble, though either.

Okay, and back to the consumer segment I just wanted to clarify one point. I believe back on the February quarter earnings call when you discussed the issues in the consumer segment, you said that the consumer segment to be down sequentially in the May quarter, and then would be down again sequentially in the August quarter. Back then, were you excluding the Taiwan Green Point acquisition from your forecast?

I don't think so.

I'm just trying to determine whether the consumer segment is actually maybe performing ahead of your expectations back then?

Yes.

We expected the consumer segment, I guess to decrease by 10%, and that was excluding Green Point, actually.

Yes, that excluded the Green Point, Yuri.

Okay. Thank you.

Your next question comes from the line of Paras Bhargava with BMO Capital Markets.

Good afternoon, gentlemen. I know you're not giving a lot of information about how much Green Point generated in the quarter, but in the past, I believe you said in the second half of the year it was going to be 4% to 6% of Jabil's revenues. Can we stick with that number that you said in the past, or has anything changed?

I think that's probably --

That's reasonable, yes.

All right, great, and in terms of the consumer business, on a year-over-year basis, when would you expect that we should start looking for positive numbers in that segment? I understand there's a lot of seasonality in that and we've got to go back and forth, but if we look at that on a year-over-year basis, when might we expect positive contribution to growth? Should it happen in '08 sometime or do we really have to wait until '09?

Well, can't really get there without giving you some insight into some quarters we're not providing guidance on, but one is--is that we didn't even--I don't think we even had a full quarter with Green Point in Q3, and if the consumer segment is bottoming and we expect a normal seasonal pattern going forward and we think we're in good shape, then I think we'll provide more color on '08 and forward in the September call, and just leave it at that.

All right. Thanks.

We feel good about our direction. That's for sure.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Hi, good evening. First question, just on modeling. I think back in the March quarter call it was mentioned interest expense could potentially decline. I was just wondering if that is still the case or should we still use kind of this high $20 million number, and secondly, just a tax rate for '08?

Yes, the interest expense I would use $28 million, certainly for fiscal Q4. Really depending on the takeout of our bridge and how we go about that will determine interest expense for next year. For purposes of modeling I continue to use $28 million for the moment and we can update you certainly in our next time we speak to you in the September call.

In terms of the tax rate for next fiscal year, a little bit early on than that, but again, for modeling purposes use 17% at the moment. As we are entering fiscal '08, we'll take a view on where geographically income streams are being produced and give you some finite guidance, but for modeling purposes, I think 17% is reasonable.

Okay. My second question just has to deal with the wins that will be starting to ramp here in the fourth quarter more so than in the November quarter. I was wondering if there was a way to maybe quantify an aggregate of the total potential dollar value of those programs, and what end market were the greater chunks of business would be coming from?

No, we can't do that, not because we don't want to, it's just--I don't want, I think maybe our comments may have been a little misleading in that we have this enormous thing that's going to ramp in Q1, and that's not really at all true. We've got a number of new customer programs, and we had a fabulous back half--having a fabulous back half of '07 over '06 for everything outside of our consumer segment. It's going to grow 20% year-over-year, and embedded in that are a number of new program wins currently.

So I think in terms of the ramp cost in Q4 was really just responsive to the net change from our March guidance to the current guidance, and helping people understand that, and when you consider the legal costs, which were excluded in March and 3 to $5 million of costs we underestimated associated with some new plants and ramps into those new programs. That kind of accounts for the difference, and it's relatively modest, we're talking about 3 to $5 million. So there isn't a--there are a number of new programs, but they're actually spread out over 4 or 5 different product launches.

We're also in the process of adding capacity in Vietnam. So there's some infrastructure to go in place there which in our previous guidance in March had not been contemplated. So that's just underway right now, and it's contributing also to that 3 to $5 million.

Okay, and just lastly on the restructuring costs going forward, if you could just give an update on some timing on when you expect the remaining 100 or so million in terms of when it should fall either the first half of '08 or the back half of '08?

Certainly Q4 we talked about somewhere in the region of $20 million, and then the balance, that's a tough one to predict right now. We're in consultation with various stakeholders in that regard, and as we sit right now, the opportunity could be Q2 or Q3. A little bit difficult to really put a fine point on that at this moment, but I would suggest Q2 or Q3.

But suffice to say don't expect the restructuring benefit until at least the fourth quarter of '08?

Q3 and Q4, yes, that's fair.

Okay, thank you.

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

Thank you. Just following up on restructuring, again. Forbes, I think last call you mentioned that you were expecting to realize about 25 to 30 basis points of margin improvement from restructuring in the August quarter, is that still a fair range to think about?

Yes, that's reasonable. Pretty much on track. There's obviously some a little bit of benefit in fiscal Q3 also, but that's reasonable.

Okay, and then--so like you were saying earlier, that would then account for the majority of the improvement that you guys are seeing?

Yes, it's really cost containment and restructuring activity.

Okay, and then in terms of what you were just mentioning about 2008. How should we think about that in terms of what the potential cost savings are from when the remainder of the activities are completed?

Yes, that's still (inaudible-heavily accented language) the previous question. That's tough to put a fine point on right now given we're still addressing particular locations and structure around there, but certainly I would expect somewhere in the region of another 20 to 30 basis points, and we'll give you finer detail on that when we get there during fiscal '08.

And then just on maybe you could mention any customers what percentage over 10%, as well as just on stock options, I think you said next quarter $15 million. How should we think habit that going forward into next year given that it's quite a bit higher than you guys were running at previously?

Yes, I can't give you any color on fiscal '08, but certainly $15 million for Q4 is correct, and we'll have to give you guidance in '08 when we get to our September call. Once we get through the fiscal year and our compensation committee has considered any potential equity grants that may be awarded for fiscal '08.

Your other question was with regard to 10% customers. There were 3 in the fiscal quarter, and that was Cisco, Nokia, and Hewlett-Packard.

Is that in any order?

No, it was not.

Thank you.

Thanks.

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

Hi, good afternoon. Did I get this right, your guidance of $0.17 to $0.23 for this quarter did not include--you didn't include the legal expense, so if you had done that, it would have been $0.15 to $0.21, is that correct?

That is correct, Alex, yes.

Okay. So you beat that by $0.02?

Yes.

Now, could you remind us why the SG&A is up so much? It's 200 after you take out option expense, it's $219 million in the May quarter versus $172 million in the February quarter. It's up 43% year-over-year and the sales are up 16%, and it's 4.04% of sales versus 3.25% in the prior year. So what is the reason for it--it seems to be--it seems a large increase, even quarter-over-quarter?

Let me address. So quarter-over-quarter, we have a full quarter of Green Point SG&A there, so that's somewhere in the region of $8 million.

That's $8 million added by Green Point, and what sales does that correspond to?

Well, we're not breaking out the Green Point sales--

Okay.

--for the quarter--

What you're saying is this is a high SG&A versus your own?

Yes, indeed it is. It profiles their business, yes. Yes, so that was incrementally. The legal cost was about another 1-1.5, and then it was ongoing SG&A costs we put in place, management in Vietnam, for example has been hired, and ongoing costs in particular facilities where we're adding capacity.

Does the 1.5 on legal is incremental?

That's correct, yes.

And the $8 million is incremental?

Yes, it is.

Okay, all right. Thank you very much. That gets it. Thanks.

Okay. Thanks.

Thanks.

Operator, that's all the time that I guess we have time for questions that we have for today. Thank you everyone for joining us on the call for our third fiscal quarter, and we'll sure be talking to you soon. Thank you.

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