捷普科技 (JBL) 2008 Q1 法說會逐字稿

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  • Operator

  • Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil first-quarter fiscal year 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.

  • Beth Walters - VP Communications & IR

  • Thank you. Welcome to our first-quarter of fiscal year 2008 conference call. Joining me on the call today are President and Chief Executive Officer, Tim Main, and our Chief Financial Officer, Forbes Alexander.

  • This call us being recorded and will be posted for audio playback on the Jabil Web site in the Investor section, along with today's press release and a slide show presentation on our first-quarter results. You can follow our presentation with the slides that are posted on the Web site, and begin with Slide 1 now, our forward-looking statement. During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected second-quarter fiscal year 2008 and full-year fiscal 2008 net revenue and earnings results; our long-term outlook for our company and improvements in our operational efficiency, and in our financial performance. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2007 and on subsequent reports on Form 10-Q and Form 8-K and our other Securities findings. Jabil disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

  • Please turn to Slides 2 and 3, the results for our first fiscal quarter of 2008. On revenues of $3.4 billion, GAAP operating income increased to $98.9 million. This compares to $61.1 million GAAP operating income on revenues of $3.2 billion for the same period in the prior year. Our operating income, excluding amortization of intangibles, stock-based compensation and restructuring charges for the quarter was $122 million or 3.6% of revenue, as compared to $85 million or 2.6% for the same period in the prior year. Core earnings per diluted share were $0.36. On a year-over-year basis, this represents a 4% growth in revenue and a 44% increase in core operating profit. On a sequential basis, revenues increased 8% while core operating income increased 18%.

  • Please turn to Slide 4 for a discussion of our revenue by division and sector for the first fiscal quarter. In the EMS division, our revenues represented approximately 59% or $2 billion. Sequential sector movements are as follows. Production levels in the automotive sector were consistent with the prior quarter. Computing and storage sector increased 8% from the fourth quarter. Industrial, instrumentation and medical sector declined 8% from the prior quarter, reflecting the decline in product revenues associated with the housing and new construction. The networking sector levels of production decreased 3% from the previous quarter as a result of lower production levels for the European customer in this sector. Telecommunications sector increased 15% sequentially as a result of one month's revenue from the recently announced Nokia Siemens Networks relationship.

  • Looking at our Consumer division, it represented approximately 36% or $1.2 billion in the first fiscal quarter, and the sequential sector movements are as follows. Mobility and display products sector increased 36% from the prior quarter, reflecting strong seasonal growth in this sector across both displays and mobile products. The peripheral sector increased by 12% over the fourth fiscal quarter, reflecting seasonal growth in this sector from printers and home entertainment products. The aftermarket services division represented approximately 5% of overall Company revenue in first fiscal quarter and saw revenues increase 4% sequentially.

  • Please turn now to Slide 5. Our divisional and sector information for the quarter in percentage terms is as follows -- automotive, 4%; computing and storage, 11%; industrial instrumentation and medical, 17% of revenues; networking, 20%; Telecom, 5%; and other, 2%, for a total of 59%. In the consumer division, 25% for mobility and display, 11% for the peripherals division in fiscal Q1 from 36% overall, and finally in the aftermarket services, 5%.

  • In our fiscal third quarter -- or excuse me, in our fiscal first quarter, three customers accounted for more than 10% of revenue -- Cisco, Hewlett-Packard, and Philips. Our top ten customers in the quarter accounted for approximately 64% of our revenue. Selling, general and administrative expenses declined $5 million in the quarter, reflecting the benefits of previously announced restructuring plans and approximately $1.6 billion less in legal and accounting fees associated with the recent reviews.

  • Research can develop costs were $6.5 million in the quarter or approximately $3 million less than the fourth fiscal quarter, reflecting an increased level of consumer-funded design projects than in our previous quarter, along with some repositioning of design resources to lower-cost regions.

  • Stock-based compensation expense in the quarter was $5 million. This expense is lower than estimated due to the reversal of stock-based compensation expense previously incurred as a result of performance-based restricted stock grants that is now no longer expected to vest.

  • The tax rate in the quarter was 21%, reflecting higher levels of income in higher tax jurisdictions in the quarter.

  • Finally, our divisional operating performance -- we do plan to provide divisional core operating performance on an ongoing basis, as we are now organized in this manner. In the first fiscal quarter, core operating income for the EMS division was approximately 3%. The consumer division, as a result of the seasonal nature of this division, was approximately 4%, and the aftermarket services division was approximately 7%.

  • I will now turn the call over to Forbes Alexander.

  • Forbes Alexander - CFO

  • Thank you, Beth. I will ask you to turn to Slides 6, 7 and 8, where I will review our balance sheet and some ratios.

  • The Company's sales cycle in the quarter expanded by 3 days to 22 days. Days Sales Outstanding expanded by four days, reflecting the seasonal consumer revenue stream, while Accounts Payable to date (inaudible) improved by one day as compared to the prior quarter. Inventory (technical difficulty) with the prior quarter or eight turns.

  • Cash flow from operations was approximately $143 million in the first fiscal quarter, an increase of approximately $400 million over the same period in the previous fiscal year. Our return on invested capital improved to 13% as compared to 11% in the previous quarter.

  • Cash and cash equivalents were $664 million, consistent with balances at the end of the last quarter.

  • Our capital expenditures during the quarter were approximately $62 million, including approximately $30 million related to our building expansions in China, India and Poland.

  • Depreciation for the quarter was approximately $57 million, and EBITDA in the quarter was approximately $180 million.

  • At the end of the first fiscal quarter, $400 million remained outstanding in the bridge facility entered into on the 20 of December, 2006 to fund the Taiwan Green Point acquisition. This facility was paid down fully to date with funds drawn on our five-year, $800 million revolving credit facility. At the same time, we have entered into a 180-day, $200 million revolving credit facility. We intend to replace the $400 million with (inaudible) longer term capital sometime in the new calendar year.

  • We are extremely pleased with the continued progress we've made in the quarter -- 30 basis points of continuing improvement in our core operating income margin, positive cash flow from operations, while growing revenues 8% sequentially, and continued improvement in our returns on invested capital to above our weighted average cost of capital. It is particularly pleasing to note cash flows from operations remain strong in the quarter, $143 million. Over the last nine months, we have generated approximately $580 million from operations, or approximately $300 million after capital expenditures and dividend payments over the same period.

  • On a year-over-year basis, we continue to maintain efficient control of our invested capital while growing revenues and our operating earnings. Our business model continues to demonstrate that, on an annualized basis, returns on invested capital, in excess of our weighted average cost of capital and strong operating and free cash flows, are sustainable.

  • Now, I'd like to very briefly cover our restructuring activity. We continue to manage our overall rationalization plan according to our previously announced plan. During the first quarter, we recorded charges of approximately $9 million. Total charges incurred to date against our overall plan are approximately $200 million. We continue to expect our total restructuring charges to be at the high end of the $200 million to $250 million range that we have previously discussed.

  • During the quarter, cash payments associated with the restructuring activities were approximately $20 million. Total cash payments to date against the plan are approximately $95 million. The cash cost of such charges for this plan remain an estimate in the range of $150 million to $200 million.

  • Discussions with our employees and their representatives continue, and we are complying with all statutory and consultation periods required of us. As a result, we currently estimate that cash payments totaling approximately $45 million will occur in the balance of this fiscal year, the majority of this in the third and fourth fiscal quarters and $25 million in the first fiscal quarter of 2009. We would expect to see the benefits of such actions in our fourth fiscal quarter of 2008 and first quarter of fiscal 2009.

  • Turning briefly to the Nokia Siemens Networks agreement, on November 1, we entered into an agreement to lease two manufacturing facilities in Italy from Nokia Siemens Networks and to produce GSM and radio access products, microwave devices for wireline and wireless networks. We would like to take this opportunity to welcome approximately 600 new colleagues to Jabil as a result of this agreement.

  • I will now ask you please to turn to Slide 9, where I'd like to give you a business update specifically, talk to you with guidance for the second quarter of fiscal '08. We estimate revenue in our second fiscal quarter of 2008 to decline $250 million to $350 million, in the range of $3 billion to $3.1 billion, reflecting the typical seasonal decline in consumer products. As a result, core earnings per share are expected to be in the range of $0.16 to $0.20. Core operating income is expected to decline at the rate the revenues decline, consistent with historical seasonal patterns. Specifically this year and in each of the last two fiscal years, every dollar of revenue decline from the first fiscal quarter to the second carries with it approximately $0.18 of income decline. As a percentage of revenue, we estimate core operating margins in the 2.2% to 2.4% range.

  • Selling, general administration expenses are estimated to be $150 million, reflecting the addition of the Nokia Siemens Networks relationship.

  • Research and development costs are expected to be approximately $7 million in the fiscal quarter. Intangibles amortization is expected to be approximately $9 million. Stock-based compensation is estimated to be approximately $14 million in the second quarter. Interest expense is estimated to be $25 million.

  • Based upon the current estimate of production and income levels, the tax rate on core operating income is expected to be 16% for the second quarter and 18% for the full fiscal year.

  • Capital expenditures in the second fiscal quarter are estimated to be in the range of $60 million to $80 million, depending upon the timing of the completion of our building expansions, which are underway. Capital expenditures for the full fiscal year remain in an estimated range of $250 million to $300 million.

  • Now, I'd ask you please to turn to Slide 10, where we will discuss revenue by division and sector for the upcoming quarter. The EMS division is estimated to increase by approximately 2% from the first fiscal quarter.

  • Sector breakdown is as follows. The automotive sector is expected to be consistent with the first quarter, reflecting seasonal declines offset by ramping volumes with a new customer. The Computing and Storage sector is estimated to be consistent with the first quarter. Industrial Instrumentation and Medical sector is estimated to decline by 3% from the previous quarter. The Networking sector (inaudible) levels of production to increase by 3% from the first quarter. The Telecom sector is estimated to increase by approximately 25% as a result of the new relationship with Nokia Siemens Networks.

  • Turning to the Consumer division, it is estimated to decrease by 30% in the second fiscal quarter. The sector breakdown is as follows. The Mobility and Display sector is expected to decrease by 35% in the quarter. The Peripheral sector is estimated to decrease by 15% in the second fiscal quarter, both sectors reflecting the seasonal nature of these products.

  • Finally, the Aftermarket Services division is expected to be consistent with that of the first fiscal quarter.

  • With this guidance, overall company revenues for the first half of fiscal 2008 are estimated to be approximately $6.4 billion with core operating income of approximately $190 million or 3% of revenues. This represents growth in revenue of 4% for the first half of fiscal 2007 and core operating income dollar growth of 37%.

  • Please turn to Slide 11. With regards to the second half of our fiscal year, we are extremely well positioned to continue growth in revenue and core operating income for the first half of the fiscal year over the same periods of fiscal 2007, along with continued positive cash flows from operations and increasing returns in invested capital.

  • From a divisional perspective, at the midpoint of the overall company guidance range, we estimate the second half of this fiscal year revenues in the EMS division to be approximately $4.45 billion; The Consumer division, approximately $2 billion; and the aftermarket services division, approximately $0.35 billion. Core operating income expectations are estimated to be 4% or above for the EMS division, approximately 2.5% for the Consumer division, and approximately 7% for the Aftermarket Services division.

  • Our current estimate for the full fiscal year is revenue in the range of $13 billion to $13.4 billion. Core operating income is expected to be in the range of $400 million to $480 million or 3.1% to 3.6% revenue for the full year. This guidance reflects the year-over-year growth in revenues of 8% and core operating income of $110 million or 33%, EBITDA of approximately $670 million, or growth of 23% on a year-over-year basis. Finally, cash flow from operations are estimated to be in excess of $600 million for the full year, providing approximately $260 million of free cash flow after capital expenditures and dividend payments.

  • I'd like to hand call over to Tim Main.

  • Tim Main - President, CEO

  • Thank you, Forbes. Q1 was a pretty good quarter all-around and it was great to see operating margins come in at the higher end of the range, but I was especially gratified by the strong cash flow from operations performance.

  • In last year's first quarter, we consumed $252 million of cash, but this year we produced $143 million. This allowed us to pay for a good deal of NSNs, cover our CapEx fees and still have some free cash flow for the quarter. It was also good to get ROIC back in the teens and in a position from which we could really drive further improvement. This is our third consecutive quarter of improvement on the critical financial metrics we are driving, namely margin expansion, cash flow generation, and increasing return on invested capital.

  • As expected, we will take a step back in margins and ROIC in fiscal Q2. However, we will generate very strong cash flow from operations as our working capital needs contract a bit. In the second half of the year, we expect to resume margin expansion and cash flow generation and increasing return on invested capital.

  • The Consumer division performed well during the quarter. Revenues in mobility and displays were particularly strong. Global demand was very good with U.S. demand a bit weaker than other areas of the world. We are fortunate to have improved diversity in this sector, and we will continue to focus on diversity in the coming quarters.

  • The second quarter may be a bit deeper V-shaped than what we would like, but it is not a great deal more than in previous years on a secular basis.

  • The division is expected to perform for the year consistent with our previous indications -- that is, on a year-over-year basis, down the first half with the stabilization, and then growth over the second half of the year.

  • The EMS division performed close to plan, although the housing-led slowdown in the U.S. economy did have some impact. Keep in mind that our industrial instrumentation and medical sector now encompasses white goods and residential and industrial control customers that absorb some demand reductions. Overall, revenue for the division was about $70 million less than expected after considering that NSN transactions contributed $27 million in the quarter. With the additional $70 million in revenue, we would have hit a 4% operating margin for the Company for the quarter.

  • For the division, we expect modest growth in fiscal Q2 and expect growth for the full year to be in the low to mid teens, and that's being the EMS division.

  • Our Aftermarket Services division performed well, and we expect this good performance to continue for the balance of the year. The Company is in a very good position to expand margins, generate cash flow, and increase return on invested capital, particularly as revenue gains steam in the second half of the year. At the midpoint of guidance, we expect an EBITDA margin of over 5%, close to $700 million for the year. With CapEx requirements of about $300 million, we expect to have the highest free cash flow year in our history.

  • With that, we can take questions.

  • Operator

  • Thank you.

  • Beth Walters - VP Communications & IR

  • Operator, we're ready to begin the Q&A session.

  • Operator

  • (OPERATOR INSTRUCTIONS). Amit Daryanani, RBC Capital Markets.

  • Beth Walters - VP Communications & IR

  • Operator?

  • Tim Main - President, CEO

  • (multiple speakers) determine what that technical issue is here. Be right back with you.

  • Operator

  • (OPERATOR INSTRUCTIONS). Lou Miscioscia, Cowen.

  • Lou Miscioscia - Analyst

  • Am I coming through okay? Operator, are you there?

  • Operator

  • I am here.

  • Lou Miscioscia - Analyst

  • I don't think the Company is hearing us.

  • Tim Main - President, CEO

  • Go ahead.

  • Lou Miscioscia - Analyst

  • Hi Tim. Lou Miscioscia here. Can you hear me?

  • Tim Main - President, CEO

  • Yes, we lost it.

  • One moment. We are still trying to determine what the technical issue is here. We'll be right back with you.

  • Operator

  • Ladies and gentlemen, this is the operator. We are experiencing a technical difficulty. Please stand by. (technical difficulty)

  • (background noise)

  • Beth Walters - VP Communications & IR

  • Operator?

  • Operator

  • Yes?

  • Beth Walters - VP Communications & IR

  • We're ready to begin.

  • Operator

  • (OPERATOR INSTRUCTIONS). Amit Daryanani, RBC Capital Markets.

  • Amit Daryanani - Analyst

  • Guys, just looking at next quarter's guidance, margins seem to be down about 130 basis points. That seems to be a lot more softer than what we've seen for the last few quarters in the third quarter. I'm wondering if there's something else beyond the consumer softness that may be impacting that, maybe some, say, higher-margin business seeing a bit of softness over here. Could you talk about that?

  • Tim Main - President, CEO

  • It's actually what Forbes said during the prepared remarks, in terms of the dollar decline and the margin decline, very consistent with previous years. So we're not seeing that being out of line. A $318 million decline in revenue creates that lower operating margin dollars, and that is really actually a little bit less than it was in fiscal '07, and the same amount of income decline per dollar of revenue in FY '06. So that's actually pretty consistent.

  • We also said we did have some softness in our U.S. housing facing industries in industrial controls, white goods, that kind of stuff; it's in our industrial instrumentation medical segment. That was forecasted to be up 8% for the quarter and it was actually consistent or down a little bit, so we lost (inaudible) of revenue there so call that about $70 million of better-margin business in the instrumentation, industrial medical control segment. It does have somewhat of a negative impact on margins.

  • (multiple speakers)

  • Amit Daryanani - Analyst

  • All right, how much did total revenue (multiple speakers) to the U.S. housing?

  • Tim Main - President, CEO

  • I'm sorry?

  • Amit Daryanani - Analyst

  • I'm saying how much of your total revenue base do you estimate is tied to some of the U.S. housing market?

  • Tim Main - President, CEO

  • We don't have any number like that at all. The industrial instrumentation and medical segment is a pretty big segment, but we did talk about the EMS division in Q1 being about $70 million less than expectation. So if you wanted to look at that impact, that would be about the level of the impact.

  • Amit Daryanani - Analyst

  • All right. Then just finally, I mean, last year, you guys provided some full-year revenue and EPS guidance but I don't (inaudible) you could maybe just talk about what led you to (inaudible) provide this guidance this time around when you (inaudible) that you refrain from giving it at the start of the year.

  • Tim Main - President, CEO

  • Well, I think, at the start of the year, we were entering a period of economic uncertainty, and the subprime stuff was gaining some steam. We were very reticent to provide full-year guidance at that time because we felt it would be wiser to wait until some of that could be embedded into our customer schedules and our forward-looking expectations.

  • At this point, we think we've absorbed what needs to be absorbed. In order for investors to get a better appreciation for how the year looks to us at this point, given what's occurred over the last quarter, we think it would be much more helpful for you to have a rational, reasonable outlook on what the full year looks like for Jabil at this point and not simply have to go off of the Q1/Q2 experience.

  • If you look at the year, in the back of the year, we're looking at pretty significant revenue growth in the second half of the year over the first half of the year and really outstanding operating margin performance coming in the second half of the year as well. So the full year actually looks pretty good. I mean, [it Q2] certainly acknowledge that the numbers from a margin standpoint are below where analysts had them. That was a little bit of a guess since we hadn't provide any guidance to analysts, but the full year looks pretty good.

  • Amit Daryanani - Analyst

  • Fair enough. Thanks a lot.

  • Operator

  • Lou Miscioscia, Cowen.

  • Lou Miscioscia - Analyst

  • You guys have given operating margins by different sector. Could you -- I think you only just gave the round number. Could you actually go into at least another decimal point? Then maybe something that might be helpful to us in understanding the February quarter operator margin guidance -- could you maybe give us some thought as to where, on a quarter-to-quarter basis, the three different groups are going?

  • Forbes Alexander - CFO

  • Well, Lou, in terms of the actual Q1 guidance we gave, those numbers are very approximate and you know, they are pretty much dead-on, you know, round numbers that we're seeing here across these divisions.

  • With regards to the second fiscal quarter, you know, clearly if -- let's deal with the Consumer division first. Clearly, our first fiscal quarter is seasonally led, if you will, in terms of revenues, hence you're seeing that 4% in terms of core operating income margin.

  • With the guidance we've given across the various sectors in terms of revenue, you know, doing that math, you'll see that revenue falls somewhere north of the $300 million across our sector, again purely from a seasonal demand perspective. What happens there is that margin profile then falls pretty dramatically in terms of the consumer business to sub-1% type number. If you look at it on an overall basis, and we've given using guidance here in the back half of the year to try and help you through this -- is we are expecting the Consumer division, as we see the sequential growth come back from the lows of Q2, Q3, Q4, it's an overall 2.5% for the fiscal year.

  • In terms of the EMS division, 3% in the first fiscal quarter, and we expect that to drive towards 4% in the back half of year, so we could see steady increments in that as we move through the fiscal year in that regard. With the aftermarket services division, they've got a relatively consistent margin profile around about that 7%.

  • Lou Miscioscia - Analyst

  • Okay, great. Maybe on the consumer side, Tim, if you could give us an update. At the analyst meeting, you had talked about really improving the relationship with Nokia. Could you give us maybe an update there, how things look for qualifying and winning new programs with them, and/or some other big cell phone customers I guess coming in towards the tail end of the year?

  • Tim Main - President, CEO

  • Yes, I can't speak specifically to Nokia because we just don't discuss direct customer relationships, but the progress in the mobility area has actually been pretty good. We have, I think, four of the top five device manufacturers in the world as customers. We're getting very good penetration in the visual mechanics area as well as Jabil's core business. So in terms of performing to plan and what we've communicated previously, it's really right on track. We expected that that business, on a year-over-year basis, would be down in the first half; it will be down in the first half although we're making more money in the segment than we did in the first half of '07, and then in the second half stabilizing really in Q3 and then seeing significant growth again in Q4 of '08. So that's looks on track, Lou, you know, very, very good progress across all the customers there, pretty good diversity, and we are pretty excited about it.

  • Lou Miscioscia - Analyst

  • You said four of the top five. Were they Taiwan Green Point or are they moving into then the EMS side of the business too?

  • Tim Main - President, CEO

  • It's all one company now, and I'm not going to kind of distinguish between the two, but you can be assured we're working on an end-to-end solution for all of the customers.

  • Operator

  • Kevin Kessel, Bear Stearns.

  • Kevin Kessel - Analyst

  • Thank you very much. I just wanted to actually go back at this margin question that was asked earlier. When I look at your midpoint of your guidance and then I look at your SG&A guidance, essentially what I see is a gross margin that, on a percentage basis, would be down about close to 20%, or 19%, and in terms of basis points, a little over 135. Then I look back over the same time frame over the last five years since you've acquired Philips and your (inaudible) has been growing, and really on average, it has only been about a 1.5% gross margin decline from November to February (inaudible) basis points wise, gross margins have only really declined about 11 basis points, on average. So I'm just trying to understand what maybe the disconnect is. If SG&A is right, it's around $122 million, then I guess that would imply that the degradation is happening at the gross margin level, so maybe it's something within the mix or, you know, I'm not sure.

  • Tim Main - President, CEO

  • It's kind of tough for us to follow that. In the last five years -- '04, '05, '06, '07, '08 -- the operating income decline, as a percent of revenue, starting in '04 has been 14%, 11%, 18%, 18%, and then this year it's 15%, so very, very consistent with previous seasonal patterns.

  • What happened in some of those years -- '04, '05 and even '06, to a great degree is we're adding a lot of market share with customers, and there was a lot of organic growth, and so even though, program by program, it was a seasonal decline, we were covering that with new program wins and new customer wins and that kind of thing, so the actual dollar decline wasn't nearly as much. So we're not doing that this year. Again, on year-over-year basis, it's going to be the first half of the year we will be down in consumer, but in terms of the core operating decline as a percent of revenue, right on exactly with what it's been in previous years, so a very consistent pattern.

  • Kevin Kessel - Analyst

  • Right. No, see, yes, I actually didn't analyze on the operating line; I was looking more at the gross line, because I figured, once we knew what SG&A was, then we could kind of look at just how the gross margin trends have changed.

  • Tim Main - President, CEO

  • Yes, I'm looking at operating income and I'm not sure if gross margins or SG&A plays heavily in that or not.

  • Kevin Kessel - Analyst

  • Okay, I'm not sure. Maybe we could talk about it off-line.

  • Then the other question I guess is just, in general on the SG&A line as we go forward, I'm assuming that the legal fees, at this point, are pretty much done as we go into next quarter and into the February quarter, and --.

  • Forbes Alexander - CFO

  • Yes, in that guidance, there is maybe $500,000 to $1 million. There is still some ongoing legal activity terms of core processes and such like, but it's certainly not material in any way, Kevin.

  • Kevin Kessel - Analyst

  • Okay, so then, Forbes, would you expect -- I mean, obviously, there is still restructuring that has to happen and there's still cash payments that will occur at some point in the second half of the year and in next year, but I think it was the 115 that you quoted for an expectation, including Nokia Siemens. Would you expect that to then start to go down I guess in May and August as some of the restructuring occurs and some of the headcount comes off the books?

  • Forbes Alexander - CFO

  • Yes, I think there's some opportunity in fiscal Q4, more so than Q3. Any activity in Q3 is likely to be maybe one month at best there. It's really more of a Q4 event. So there's certainly some opportunity, excuse me, Kevin, to maybe $1 million or $2 million come out there. We just have to see how those discussions continue with the various employees' representatives.

  • Kevin Kessel - Analyst

  • Okay. Then just lastly on R&D, I think Beth had said the reason it was down -- I guess almost a third as a percentage was because of more -- was it customers paying for the design activity or I (multiple speakers)?

  • Forbes Alexander - CFO

  • Yes, there's some of that and deploying some of our resource. You know, we've been wrapping up in terms of our design resource in Shanghai in particular for example, where costs tend typically lower than we've seen here in the U.S. or Western Europe. So some helmet of that, and some element of collaborative-type design where customers with ourselves are working in conjunction on product platforms and funding those jointly rather than there being a straight funding by Jabil. That was down about, what, about $2.5 million or $3 million.

  • Kevin Kessel - Analyst

  • Great, thank you.

  • Operator

  • Jeff Walkenhorst, Banc of America.

  • Jeff Walkenhorst - Analyst

  • Thank you so much. Forbes, I'm wondering -- well, actually maybe to both of you guys, Tim. When you looking at your different segments over the past year, can you give us an idea of kind of what, as you think about anything what managing a portfolio of revenue streams (inaudible) for that 4% operating margin, and I'm sure some of them are above that and other obviously below that. Are there any areas that are substantially lower than, say, a year ago because of market competition?

  • Tim Main - President, CEO

  • No. Actually, in terms of year-over-year, all of the segments are a little bit better, so in Q1 of '07 the EMS division was about 2.3%. This past quarter, Q1 '08, was 3%. The previous year in consumer was about 2.5%. Operating margin this past quarter Q1 '08 was 4%. The EMS division was pretty consistent.

  • So what we've been talking about and what we've actually have seen since our February '07 quarter when core operating margins was 1.9%, you've seen very significant improvements in our margin structure from 1.9% to 2.9% in Q3, to 3.3% in Q4, to 3.6% in Q1. Everybody should have expected that Q2, with the decline in consumer, would be a setback, but look at our guidance for the second half of '08 and we're talking about $6.8 billion of revenue, about $4.4 million in EMS and expect a core operating margin in EMS of 4; $2 billion in the consumer segment. We expect a core operating margin of about 2.5, and the EMS division of roughly $350 million with consistent core operating margins. So that blends out in the second half of roughly 2.6%, 2.7% in terms of core operating margin. You know really, looking at this past quarter again, if another $50 million, $60 million of that housing slump revenue -- we would have hit 4% this quarter.

  • So I think it's really clear now that the Company has a 4% operating margin potential and expectation. I think that's a near-term expectation and a long-term expectation. The performance in Q1 is -- very, very clearly puts us within a hair's breadth of that level.

  • And you look at Q3 and Q4, the back half of the year, we're looking for about $400 million of revenue growth from the first half of '08 to the second half of '08. That's only $400 million. We expect that to come about $75 million to $100 million from Nokia Siemens Networks, about $40 million from our automotive business, about $100 million from new customer wins and a modest recovery in the industrial instrumentation medical segment, about $50 million from defense and aerospace, and about $80 million out of our networking group -- so very, very identifiable where that's going to come from. That $400 million of additional revenue, along with the benefits of the rationalization program that we've been -- had underway, it feels very clear to us that the high 3%/4% operating margin range is achievable in the back half of the year.

  • The most encouraging thing for me in running the business for margin expansion but also capital generation, return on invested capital, is, given the additional size we have and with the rapidly improving margins, we are going to generate very significant levels of cash flow from operations and free cash flow. Looking at the midpoint of guidance, we are looking at cash flow from operations of $600 million, EBITDA of $680 million to $700 million, CapEx requirements of $300 million. We're going to throw off a lot of cash, and that's what we are in business for. So I think, notwithstanding maybe some of the angst about Q2, I think if you really stepped back and looked at it, it's very consistent with history and very understandable. Looking at the rapid, continued rapid recovery of margins, free cash flow and return on invested capital, even in this kind of murky, spooky economic environment, it's really kind of a good annual plan.

  • Jeff Walkenhorst - Analyst

  • Okay, that's helpful color, Tim. Then just to follow-up, so the competitive environment (inaudible) margins in some of these different segments, say in the server segment, it hasn't deteriorated materially or it's flat or maybe even higher given your different mix from a year ago, or how can we -- any more color on that?

  • Tim Main - President, CEO

  • We are providing you operating margin by division, not by sector, and we will stay with that policy. I mean, some sectors, you know, we talked generally are higher-margin that others. The industrial/instrumentation medical segment tends to be very complex, very high mix, so the margins there are generally better, accretive to the overall corporate averages. However, it takes more infrastructure to run that business. Therefore, the return on invested capital is consistent with the other segments.

  • Computing and storage, there are some high-volume programs there where the operating margins might be a little bit lower, but there's also some very complex areas where the margins might be a little bit higher. We are not noting -- we're making great progress, particularly in the storage area, particularly enterprise storage area, and our margins are fine. We are not seeing any crazy competitor activity there. It's a great segment. It has been growing for us and we expect that to be -- that experience to continue.

  • Jeff Walkenhorst - Analyst

  • Okay, thanks so much, guys. Good luck with everything.

  • Operator

  • Jeff Rosenberg, William Blair & Co.

  • Jeff Rosenberg - Analyst

  • Good afternoon. I first wanted to ask if you could maybe give a little bit further color in the volatility this year in the mobility and display area. It was well above your plan for this quarter so maybe a loop of color there, if you can, on where that came from, whether it was handsets or displays.

  • Then also, if you look at, after this quarter's decline, you will be about 10% I think below where you started in Q4. I think that's a little more of a downstroke than you normally see, so if there some color there in terms of what you're seeing in terms of sell-through? Anything at this point that's causing that level of volatility?

  • Tim Main - President, CEO

  • Yes, I don't think there's any huge volatility there. I think we forecasted that sector to be up 25% and it was up 36%, something like that. Mobility products and display products were very strong and actually maybe even have been even stronger if some phone shortages had not transpired, so that's pretty good. I think people are being conservative about the second quarter, and I think that's probably correct in this type of environment. It's not to say anything negative about sell-through rates. I think actually I happen to be somebody who doesn't believes that we're in a recession or we are likely to go in a recession. I don't know. We've given you a wide enough range of guidance to accommodate some additional softening, along with the higher end of the range if things seem to firm a little bit, that we have a reasonable shot of achieving.

  • So it may seem to look more volatile to you, Jeff, but it's actually consistent with what we said. Maybe Q1 is a little better than we expected, but when you think about the first half of '08, we said, on a year-over-year basis, that would be down a bit; it will be. In the second half of '08, we see stabilization and then a resumption of growth -- and I think, if you look at the margin side of it, actually healthier growth.

  • Jeff Rosenberg - Analyst

  • Okay. I just want to clarify one thing you were talking about a minute ago with the $400 million of incremental revenue in the second half versus the first. Was that for the whole business or just the EMS segment?

  • Tim Main - President, CEO

  • That's for the whole business, because if you look at consumer, it's relatively flat, first half to second half.

  • Jeff Rosenberg - Analyst

  • Okay, so but yet the new programs that we've talked about that relate to the model that you formed by integrating Green Point, I mean that's in that $100 million. I mean I guess maybe a little bit of -- maybe that's peeling it back a layer just to understand the business that's building up and coming back through the seasonal present here. But how should we think about the magnitude of that benefit for you in the second half?

  • Tim Main - President, CEO

  • I think you should look at the magnitude of that benefit being actually pretty low in terms of new program contribution from the vertical model with mobility customers. Again, I'm not talking specifically about Nokia, but I think you should look at that as relatively low. So, it's a $2 billion second half versus roughly a $2 billion first half. That takes into consideration Q1 and then a very deep decline in revenue in Q2 on average, you know, about what we will see in the second half of the year. We will start to pick up a lot of steam in Q4 of '08 in that sector. So, you know, we feel very, very confident about that. We see it coming but for the annual buckets that we're talking about, $2 billion first half, $2 billion second half.

  • Now, also keep in mind that some of the program wins that we will see tend to have lower dollar value in absolute terms, so lower-end phones, and visual mechanics tend to have a lower revenue level than higher-end phones and printed circuit board assemblies and that kind of thing. So we're really driving the business not for revenue; we're driving the business for cash flow, margins and returns. We think the mix of our business will be much healthier in the second half of '08 than the second half of '07 or the first half of '07. So the mix has actually been improving for us to for the last six to nine months.

  • Jeff Rosenberg - Analyst

  • Okay. Then one last question I had was you've been talking about the way your operating margins will get back to in the second half and building on the success you've had through this quarter. But if we look toward the lower end of your guidance range, it seems as if that would imply you fall short there. What are the risks that you see that want you to give you that wider range and leave yourself that room toward the lower end of your range? Is it strictly a matter of operating leverage if the revenue doesn't come, or is there something else there that needs to happen to achieve the midpoint-type targets you've been referring to?

  • Tim Main - President, CEO

  • That's a great question and a good (inaudible). It's got nothing to do with things magically that have to happen or things negative that we think might happen. It's all got to do with how the revenue comes through and what the production levels are. That's got everything to do with the macroeconomic environment. So we are trying to give people a taste of what additional softening would look like at the low end of the range, kind of middle of the road at the midpoint and then maybe if things firmed up a little bit and we gained a little bit more steam in the second half, we could hit the higher end of the range. So it's really just about the economic environment and trying to discount what that might mean to us. So we think it's a reasonable range with additional soft as things get a little bit firmer.

  • I think the interesting thing, though, when you look at that, is, even if a down, lower end of the range scenario were to play out, we are still going to have decent operating margins, strong free cash flow, and we will produce a hell of a lot of cash as we go through that process. So this is a scenario where we're going to either produce a lot of cash and have a lot of cash sitting on the balance sheet in a low growth or negative-growth environment, or we are really going to have a firming of demand and look at very strong margin expansion and cash flow. That's really kind of the message of the call for us -- is it's really about the revenue at this point. It's business. There's nothing wrong with the business; there's nothing wrong with the customer base. We are really in an excellent position to show a very strong snap and very strong benefit from every dollar of revenue increase. That feels good to us. It's been little bit of time since we have been in that position, but I think the picture is pretty clear if you look at the progression from Q2 '07 to Q3 '07, Q4 '07, Q1 '08, very, very strong progression. So it looks good to us.

  • Jeff Rosenberg - Analyst

  • Okay, thanks a lot.

  • Operator

  • Alex Blanton, Ingalls & Snyder.

  • Alex Blanton - Analyst

  • Good afternoon. Tim, just a comment -- you need to get after your Webmaster because your release wasn't up on the web page until summer between 5:00 and 5:15. The slides were not there when you started the call. I actually had to sign on to the webcast in order to see the slides. So, for the future, just a comment.

  • Now, I would like to -- I don't want to beat a dead horse but the decline here that you're forecasting for the second quarter is far greater than anything that you've seen in the past. For example, EPS, first to second quarter in '04, was down 4%, and in '05, it was down 16%, and in '06, it was down 16%. Only last year was it down 52%. So we're looking here for a 50% decline this year, and this is comparable to last year but not to any other year. I think it's completely unexplained so far.

  • Now, the other thing that I note, and this is very unusual -- the incremental margins, given the guidance for the second quarter, it would be a detrimental 16%, as you said, 16% of sales, compared with 3.6% actual margin. So, that's a far bigger intermodal margin, negative, than we normally see in this business. It's kind of in-line, as an operating figure, not even a gross margin. It's kind of in-line with what you would see at Caterpillar or something. So if you ask the reverse, if you had a $317 million increase in sales for the second quarter over the first, you would -- and the same incremental margin on the upside -- you would add $0.21 to the earnings. Or if you would have a 9%, that would be a 9% increase in sales and you would have $0.21 plus $0.36 or $0.57 for the quarter, and you would have a 4.7% operating margin in the second quarter. So, if you reversed it and you had the increase, you would be blowing out the tops. So I don't really understand it. And you mentioned the $70 million would give you a 4% operating margin for the quarter if you had $70 million more in sales. Well, that would be a 23% incremental margin on the upside, and you would have had $0.43 this year if you just had that extra $70 million. So I just don't understand why, suddenly, this business has gotten so leveraged. Can you address that issue? I mean, there's an awful lot of operating leverage here implied in these numbers.

  • Tim Main - President, CEO

  • There is an awful lot of operating leverage; that's for sure. $70 million -- because of materials, depending on the business in this sector, materials can range anywhere from 70% to 85% of our revenue dollars. So if you're sitting there on a quarter (inaudible) doesn't show up, let's say it's an 80% material cost business, you're going to lose 20% of that $70 million in material margin or profit -- $14 million. That's kind of the easy math on how that would equate to a 4% operating margin. It wouldn't go into $0.43; it would be whatever that is.

  • In terms of --

  • Alex Blanton - Analyst

  • Wait, wait. I don't understand. If you had -- if you have a 4% operating margin and you had $70 million of sales, you would be adding $16 million to operating profit.

  • Tim Main - President, CEO

  • $70 million at --

  • Alex Blanton - Analyst

  • That would be 23% out of the $70 million.

  • Tim Main - President, CEO

  • $70 million at 20%, going with my examples (inaudible) $14 million. So, there is operating leverage there; that's for sure. So there is operating leverage on the second half of the year that's substantial for us.

  • Alex Blanton - Analyst

  • Yes (multiple speakers) you are implying, to get to $1.50 with these first-half numbers, but what I don't understand is why all of a sudden we are seeing this great operating leverage when in the past this business has not had that.

  • Tim Main - President, CEO

  • (inaudible) that's not true, not true. If you looked at the margins again, in '04 and '05, the actual revenue decline, Q1 to Q2, was $17 million in '04 and $117 million in '05; (technical difficulty) in '06. Operating leverage was exactly the same (multiple speakers)

  • Alex Blanton - Analyst

  • I know you did 16%.

  • Tim Main - President, CEO

  • I'm sorry?

  • Alex Blanton - Analyst

  • What you are talking about is incremental, negative incremental margin or 16%.

  • Tim Main - President, CEO

  • The operating leverage, negative and positive.

  • Alex Blanton - Analyst

  • It was, and you're saying it was in those quarters, too?

  • Tim Main - President, CEO

  • Yes, it was.

  • Alex Blanton - Analyst

  • But if you go forward and you have that on the upside is what I'm saying, and then the numbers go out of sight. If you have (multiple speakers) if you take a 16% incremental operating margin on an actual margin of 3.6%, it goes up pretty quick once you get a sales volume (multiple speakers).

  • Tim Main - President, CEO

  • (multiple speakers) infrastructure sitting there.

  • Alex Blanton - Analyst

  • What?

  • Tim Main - President, CEO

  • You get to a point where you've absorbed all of that manufacturing infrastructure.

  • Alex Blanton - Analyst

  • Yes.

  • Tim Main - President, CEO

  • (multiple speakers) dollar of additional revenue you have to add manufacturing infrastructure and the operating leverage then goes down. So there is a point. You know, if we snap back to a $3.3 billion level, there will be significant positive operating leverage, and then for revenue over that $3.3 billion level, theoretically we would begin to have to start adding additional manufacturing capacity --

  • Alex Blanton - Analyst

  • Which cuts into it, of course.

  • Tim Main - President, CEO

  • Yes, that's right. So the positive operating leverage would then be less.

  • Alex Blanton - Analyst

  • Okay, so then this big operating leverage is operative within a range of volume is what you're saying?

  • Tim Main - President, CEO

  • That's correct.

  • Alex Blanton - Analyst

  • Okay. All right. Well, it is just a surprise, because the consensus was $0.31 for the quarter. You're telling people the you're going to have earnings about 40% below that. I really think you ought to recognize that. I mean, this is quite a big disappointment, this report, the second-quarter guidance and the full-year guidance. The consensus is right at the top of it, $1.50. So I think that that's what you're seeing reflected in the comments on this call and in the stock price.

  • I will get out and get to the end of the queue. Thanks.

  • Operator

  • Jim Suva, Citigroup.

  • Jim Suva - Analyst

  • Great. Thank you very much. Tim and Forbes, can you help me understand a little bit? We talked about growth a lot but when I look at your February quarter, if I got my math right, or revenues at 3.1 -- or $3.0 million to 3.1 billion, year-over-year, unless I have some bad math going on, it looks like organic growth, at best, is flat if not negative, because we've got to layer in Green Point as well as Nokia Siemens. Can you help me out about my math or maybe connect the dots about what's going on with organic growth and what was it for November?

  • Tim Main - President, CEO

  • No, your math is correct.

  • Forbes Alexander - CFO

  • That's correct and what (multiple speakers).

  • Tim Main - President, CEO

  • Nokia declined by about -- Nokia in that quarter was -- I can't remember what percentage was but certainly over a 10% customer, and so year-over-year revenue for that particular account now is probably $300 million.

  • Forbes Alexander - CFO

  • Yes.

  • Tim Main - President, CEO

  • Something on that order. So there's $300 million of organic growth. That makes up for that one, individual customer revenue decline.

  • Jim Suva - Analyst

  • Great, that's very useful. So the majority of the decline was due to that decision that customer made?

  • Tim Main - President, CEO

  • Virtually all of it.

  • Forbes Alexander - CFO

  • Yes, yes.

  • Jim Suva - Analyst

  • Great. Thank you, gentlemen.

  • Operator

  • Paras Bhargava, BMO Capital Markets. Paras, your line is open.

  • [Rashidul Dihn], [Credit Sites], Inc.

  • Rashidul Dihn - Analyst

  • Good afternoon. Thanks. I just had a quick question on your update for -- I'm sorry, your $400 million that you had remaining on your bridge facility. Could you provide us with an update on that real quick?

  • Forbes Alexander - CFO

  • Yes, of course. So, today, we actually, we paid that $400 million down on the bridge facility by using our $800 million revolver. At the same time, we entered into an 180-day, $200 million revolver with that same group of banks. So ultimately what we're looking to do is to take that $400 million we've drawn down on the revolver (inaudible) some form of permanent capital as we enter the new calendar year here.

  • Rashidul Dihn - Analyst

  • Okay, so with the increased cash flows you expect in fiscal year 2008, is there any plans on debt reduction or --?

  • Forbes Alexander - CFO

  • No, that's clearly an alternative that is open to us because, as you say, cash flows are very strong indeed. What we have done earlier this year impact is structured our capital, our balance sheet in such a manner to allow us to do that. We put in place in July a $400 million term loan A facility, started that structuring activity with no prepayments, penalties in that regard. That's certainly an alternative to us and that's something we will consider as we move through the second and into the third fiscal quarter.

  • Rashidul Dihn - Analyst

  • Okay, great. Just going back to a question we had earlier, when we talked about the $70 million to $80 million in incremental revenue you could've got from some of the manufacturing stuff, was that example where we had $0.80 on -- you know, $0.20 on the dollar -- was that $0.20 operating margin profit we're talking about?

  • Forbes Alexander - CFO

  • Yes, it was core operating income; that's right.

  • Rashidul Dihn - Analyst

  • So, now as we talk about the operating leverage, looking at Q2 then, what part of that was in -- I mean, as I'm modeling this, it seems like your gross margins are expected to be far below where it's been over the last three quarters, you know, more of this mid-6% level. You know, is there any kind of additional I guess color you can add on that in terms of what part of that -- it just it's not adding up for me I guess.

  • Forbes Alexander - CFO

  • Well, I mean your math is absolutely correct. There's mid-6s on the gross margin. What you're seeing is you're seeing over $300 million of revenue come out with a manufacturing cost base that remains in place, okay, from equipment, employees, overhead in terms of factory square footage and space. So whilst we do use some level of temporary labor to deal with these rapid seasonal growth periods, in the consumer products area, the majority of that labor that is in place is relatively fixed.

  • Remembering that the seasonal down is only a 90-day period we're talking about here, you know? And looking at the guidance we've given for the back half of the year, we are seeing additional $400 million of revenue coming in, which very, very quickly drives us back up into the 3.2, 3.3, 3.4, 3.5 type levels to achieve that back-half target. So you very much see that leverage of the manufacturing cost base coming back.

  • Rashidul Dihn - Analyst

  • Okay. We didn't see that significant in last year's Q1 to Q2, even though we had $300 million incremental decline. Is there a reason why --?

  • Forbes Alexander - CFO

  • We did, actually; we did. Last year, we had somewhere in the region of $290 million of decline with a $53 million decline in core operating income, which was about 18%. You know, we did have some write-offs in the first fiscal quarter, $12 million, but even that, you know, it's in that 16% to 18%, so it's the same type of number as this year.

  • Operator

  • Ladies and gentlemen, we have reached the end of allotted time for questions and answers. I will now turn the conference back over to Ms. Walters for any closing remarks.

  • Beth Walters - VP Communications & IR

  • Thank you for joining us on the call today. Sorry about the technical difficulties experienced. Also to let participants on the call know that Tim Main will participate or be on the squawk box tomorrow morning at 6:50 AM. Thanks again for joining us on the call.

  • Operator

  • Thank you for participating in today's conference call. You may now disconnect.