捷普科技 (JBL) 2008 Q4 法說會逐字稿

Good morning. My name is Kelley and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil fourth-quarter and fiscal year 2008 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 fourth-quarter and fiscal 2008 fiscal year 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 Investors section, along with today's press release and a slide show presentation on the quarter. You can follow our presentation with the slides that are posted on our website beginning with our first slide on the forward-looking statement.

During this conference call today, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected first quarter of fiscal 2009 net revenue and earnings results, our long-term outlook for our Company, 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.

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, 2008 and on subsequent reports on Form 10-K and Form 8-K for all of 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 3, 4, 5 and 6 I will be referencing for our results on the quarter. On revenues of $3.26 billion, our GAAP operating income was $87.8 million. This compares to $50.5 million GAAP operating income on revenues of $3.12 billion for the same period in the prior year. For operating income, excluding amortization of intangibles, stock-based compensation, and restructuring charges for the quarter, was $104.6 million or 3.2% of revenue as compared to $103.8 million or 3.3% for the same period in the prior year.

Core earnings per diluted share was $0.30 as compared to $0.29 for the same period in the prior year. On a year-over-year basis for the quarter, this represents 4% growth in revenue while core operating income profits grew 1%. On a sequential basis, revenues increased by 6% while core operating income increased 23%.

Revenues for the fiscal year 2008 were $12.8 billion. GAAP operating earnings were $251.4 million compared to $12.3 billion and $181.9 million, respectively, in fiscal 2007. Core operating income, excluding amortization of intangibles, stock-based compensation, and restructuring charges for the year, grew 15% year-over-year with $379.9 million as compared to $331.6 million in fiscal 2007, resulting in core diluted earnings per share of $1.12 versus $0.95. This is a growth of 18%.

Please turn to slide 7, turning to a discussion of revenue by division and for sector for the fourth fiscal quarter. In our EMS division, represented approximately 65% or $2.1 billion, consistent with the third quarter. Core operating income for the division in the quarter was 3.5% revenue.

Our sector movements are as follows. Production levels in the automotive sector declined 13% versus the prior quarter, primarily reflecting typical summer seasonality and a continued difficult automotive industry. Computing & Storage sector declined 1% from the third quarter. Industrial, Instrumentation & Medical sector increased 7% from the prior quarter, reflecting growth across multiple customers in the sector, including new assemblies within our medical customer base and strength in our point of sale products. The networking sector levels of production decreased by 2% from the previous quarter. Telecommunications sector increased 6% sequentially, reflecting strength in Europe for microwave products.

For the full fiscal year, EMS revenues represented approximately $8.2 billion, or 64% of total Jabil revenues, a year-over-year growth of 9%. For the full fiscal year, core operating income was 3.4% of revenue.

In the Consumer division, we represented approximately 30% of revenues or $1 billion in the fourth fiscal quarter, a sequential increase of 21%, reflecting the business wins across the Mobility and peripherals sector. Core operating income for the division in the quarter was 1.8% of revenue.

Sequential sector movements are as follows. The display sector increased 8% from the third quarter, reflective of a very challenging European demand environment with our customers in this sector. The Mobility sector increased 15% from the prior quarter. The peripheral sector increased by 39% from the third fiscal quarter as a result of strength in printing products and the ramp of a new set-top box product with existing customers.

On a full fiscal year basis, revenues represented approximately 31% or $3.9 billion, a decline of 6% on a year-over-year basis as a result of declines in the Displays & Mobility sectors. Core operating income for the full fiscal year was 1.3% of revenue.

The Aftermarket Services division represented approximately 5% of overall company revenue in the fourth fiscal quarter. Core operating income for the division in the quarter was 8% of revenue. Revenue was consistent with the prior quarter. For the full fiscal year, revenues of $0.7 billion represent 5% of total Jabil revenue with growth of 13% from the prior fiscal year and core operating income of 7.5% for the full fiscal year.

Please turn to slide 8. Our divisional and sector information for the quarter in percentage terms is as follows. Automotive represented 4% in the fourth quarter. Computing & Storage represented 12% of revenues. Instrumentation, Industrial & Medical represented 19% of revenues. Networking accounted for 21% of revenues. Telecommunications 7% of revenues and other represented 2%. Again, the total EMS division 65% of revenues.

Displays represented 5% of revenues in the fourth quarter. Mobility 12%, and the peripherals sector was 13% of overall revenues for the fourth fiscal quarter, again, the Consumer division at 30% of overall company revenues. And the Aftermarket Services division, 5%.

In the fourth fiscal quarter and full fiscal year, two customers accounted for more than 10% of revenues, Cisco Systems and Hewlett-Packard. Top ten customers in the quarter accounted for approximately 60% of our revenue as compared to 63% last quarter. For the full fiscal year, top ten customers accounted for approximately 62% of our revenues.

Selling, general and administrative expenses of $117 million were consistent with the third quarter. Research and development costs were $8.6 million in the quarter. Stock-based compensation was $7 million in the quarter, lower than anticipated as a result of the reversal of stock-based compensation associated with performance-based restricted stock, which is no longer expected to vest.

Net interest expense is in line with previous guidance at $23 million, an increase of approximately $3 million from the third quarter, reflecting a full quarter of interest associated with the $150 million 8.25% ten-year senior unsecured note offering completed during the third quarter.

The tax rate on net core operating income in the quarter was 25% as compared to our previous forecast of 20%. This represents approximately $4 million of additional tax expense in the quarter as a result of higher income levels than forecast in higher tax jurisdictions during the quarter.

I will now turn the call over to Forbes Alexander.

Thank you, Beth. Good morning, everyone. I'll now ask you to turn to slides 9 through 11 to follow along to my comments.

The Company's sales cycle in the quarter improved by one day to 20 days. Days sales outstanding grew by three days to 41 days. Accounts Payable days outstanding improved by two days to 66 days, and our inventory days declined by two days from the prior quarter with inventory turns consistent at 8.

Cash flows were approximately $7 million used in the fourth fiscal quarter, primarily reflective of growth in our accounts receivable balances as a result of the ramping of new volume wins in the peripherals sector in the second half of the fiscal quarter. Our return on invested capital was 10% as compared to 8% in the third quarter. Our cash and cash equivalents were $773 million.

Our capital expenditures during the quarter were approximately $123 million. This level of expenditure reflects capacity being put in place to support higher revenue levels in our first fiscal quarter and beyond. For the full fiscal year, capital expenditures totaled approximately $338 million. Depreciation for the quarter was approximately $62 million, and EBITDA in the quarter was approximately $167 million or 5.1% of revenue.

We're very pleased with our performance in the quarter in a very challenging macroeconomic environment, executing to above the midpoint of our revenue and core operating income guidance, continued positive steps in our operating performance.

The results for the full fiscal year 2008 was revenue of approximately $12.8 billion and core operating income of $380 million or 3% of revenues represents growth in revenue of 4% over fiscal year 2007 and core operating income dollar growth of 15%.

Cash flows from operations for the full fiscal year were $412 million. Fiscal year 2008 free cash flows or cash flows from operations after capital expenditures and dividend payments are approximately $17 million. We're well positioned to continue to produce very healthy cash flows during our fiscal year 2009.

During fiscal year 2008, we completed a series of long-term debt transactions as a result of ample liquidity of approximately $1.6 billion available in cash and our revolving credit facilities to fund our future growth and capital expenditure requirements.

I'd now just like to take a moment to update you on our restructuring activity. Charges recorded in the third quarter -- in the fourth quarter, excuse me, were approximately $300,000. Our overall rationalization plan continues to be managed according to our previously announced plans with charges recorded totaling approximately $244 million. We continue to expect our total restructuring charges to be approximately $250 million as we previously discussed.

During the quarter, cash payments associated with this restructuring activity were approximately $12 million. With total cash payments to date against the plan of approximately $130 million. The cash costs for such charges remains estimated to be $175 million, and we currently estimate $23 million of cash payments to be made in the first fiscal quarter of 2009.

If you now please turn to slide 12, I will give you a business update. Given the present macroeconomic environment, we're not providing guidance for full fiscal 2009. The guidance we are providing for our first fiscal quarter at its midpoint reflects a consistent revenue stream from the fourth quarter in our EMS and Aftermarket Services divisions, while our Consumer division is anticipated to grow by 30%.

Our overall company guidance the first fiscal quarter is as follows -- revenue is estimated to be in the range of $3.4 billion to $3.6 billion. As a result, core earnings per share are expected to be in the range of $0.30 to $0.38. As a percentage of revenue, we estimate core operating margins to be in the 3% to 3.4% range. Selling, general and administrative expenses are estimated to be $121 million. Our research and development costs are expected to be approximately $9 million in the quarter. Our intangibles amortization $9 million also in the quarter.

Our stock-based compensation expense is estimated to be approximately $15 million in the first fiscal quarter. Our interest expense is also estimated to be consistent with that of the fourth quarter or approximately $23 million. Based upon the current estimate of production and income levels, the tax rate on core operating income for the quarter is expected to be 20%. Capital expenditures for the first quarter are estimated to be in the range of $75 million to $90 million, reflecting ongoing IT infrastructure refreshes and ongoing investments in our Mobility sector.

If you would now please turn to slide 13. Revenues in our EMS division are estimated to be consistent with those of the third quarter, or an increase of 4% on a year-over-year basis. The sector breakdown is as follows. The automotive sector is expected to increase by 5% from the fourth quarter, reflective of some seasonal uptick in levels of production with our European customer base. The Computing & Storage sector is also estimated to increase by 5% from the fourth quarter. And our Instrumentation, Industrial & Medical sector also expected to increase by 5% from the fourth quarter. Our networking sector levels of production are expected to decline by 12% while our telecom sector is estimated to decline by 5% from the fourth quarter.

The Consumer division is estimated to increase by 30% in our first fiscal quarter with a sector breakdown as follows -- the display sector is expected to increase by 15% in our first quarter reflective of modest seasonal increases in a continuing very challenging European TV demand environment our customers are experiencing. Revenue levels in this sector are expected to be approximately 50% of revenue levels as compared to the same period a year ago, a decline of $180 million.

Our Mobility sector is estimated to increase by approximately 30% from the fourth quarter, reflecting some seasonal increasing levels of demand with the largest driver of growth this quarter being associated with new program wins with a broad range of customers in this sector.

Our peripherals sector is estimated to increase by 10% in the quarter, reflecting some seasonal uptick with our set-top box customers. The Aftermarket Services division is expected to remain consistent with the fourth fiscal quarter.

I'd now like to hand the call over to Tim Main.

Thanks, Forbes. Our results for fiscal Q4 were very good, particularly when we take into account an unreceptive macroeconomic environment. Core operating margins were 40 basis points higher than the previous quarter and 23% higher in absolute dollars. Our balance sheet remains in good condition with no major concerns regarding inventory, and our liquidity is an excellent condition.

Clearly the financial markets are mired in a deepening crisis and emotions can play an exaggerated role in this type of environment. I will try and give you the most unemotional and objective take on our forward-looking expectations as possible. Our capital expenditure level in fiscal Q4 was significant. New program wins with new and existing customers has been robust in the last year and all sectors, with the exception of displays, are growth oriented in coming quarters. This is particularly true in Mobility.

We're gaining traction with our vertically integrated value proposition and have several rapidly expanding relationships in the sector, resulting in a substantial pipeline of business positioned for fiscal Q1 and for the balance of fiscal 2009. We began to see a revenue contribution in fiscal Q4 '08 and expect the contribution to expand further throughout the fiscal year.

We are attempting to handicap a number of factors into our guidance for fiscal Q1 '09. Our guidance at all revenue levels does contemplate erosion in end market demand during the quarter. While this has not yet manifested in reduced schedules from customers, we believe it is prudent given the highly unpredictable environment and the potential fallout from tightening credit.

We did note a decline of end market momentum in late July and throughout August across most sectors. In addition to the macro environment, we have a significant level of new program revenue ramping during the quarter, the results for which are always difficult to predict.

Operating margin progression should become more straightforward as the new program stabilized and end markets find a more predictable equilibrium beyond the first fiscal quarter. With this in mind, our guidance is a bit more accommodating to variants than is typical for us, but that is a reflection of the environment, and not any foundational weaknesses in the business. In fact, business levels are very good and we do expect very solid revenue growth. This, in spite of the typically strong seasonal display sector being down 50% year over year. Diversification has also been a positive trend and we expect this trend to continue throughout fiscal 2009.

Growth in fiscal 2009 will be led by Mobility, Industrial, Instrumentation & Medical, peripherals and telecommunications. Our approach to the market will be to aggressively deepen our participation in targeted sectors while being mindful of our drive to expand margins and returns.

We base our growth on the secular trend to outsource the design, manufacture and service of electronic products in a wide range of industry sectors. This has been good for us throughout our history dating all the way back to our initial public offering in 1993. The most severe economic downturn in that 15-year history occurred in 2001, following the .com bust in 9/11.

In that downturn, our revenue levels declined 30% over a six-month timeframe. That was a tough period, but the post recessionary period in 2002 outward was incredible. In fact, since 2002, Jabil has produced over $50 billion in revenue and earned more money in that period than in the entire previous 28-year history of the Company. Our post-recessionary growth after the 1991 recession was similarly robust.

Conditions for Jabil to do well in a soft economy and to accelerate growth in a recovery have never been better. It is a good time for calm prospective in my opinion, taking advantage of our relative strengths in the market.

Operator, we are ready for a question-and-answer period. Thank you.

(Operator Instructions). Steven Fox.

Couple quick questions. First of all, you mentioned higher levels of cap spending. I was wondering if for this quarter and next quarter, could you be more specific on where you are adding capacity and what types of new programs especially you're spending on?

And then secondly, Tim, I was wondering when I look at the outlook for Q1, the revenue growth obviously is doing pretty good in that tough environment, but is there any drags on operating leverage? And shouldn't we be looking for a little bit more margin expansion quarter over quarter?

Sure. Let me answer that; two parts to your question, where the CapEx is going and the margin progression.

The CapEx is going into a number of areas, investing in Mexico, continuing to invest in China, particularly our vertical operations there, associated a lot with the Mobility sector. We are also expanding other sites throughout the world. So we are expecting and have been positioning for a substantial increase in revenue, not just in the next quarter, but over the ensuing 12, 18 months and beyond.

In terms of margin progression, I said in my prepared remarks that our guidance at all revenue levels contemplates some erosion in end market demand. At the high end of our range, that would be relatively modest. At the low end of our range, more significant. That will impede our margin progression in Q1.

A second factor that I mentioned in the prepared remarks, Steve, had to do with a very high level of new program revenue ramping during the quarter, the results for which are always unpredictable. And I think as we move into an economic environment with a little greater equilibrium than we have today, margin progression will be a little bit more straightforward and utilization rates will go up.

Okay. Thanks for clearing that up.

Amit Daryanani.

Thanks. Guys, just a question on the Mobility side. We're expecting a pretty large jump in sales, up 55%. Is there a way you can slice that $215 million of incremental sales? How much of that is kind of coming from the casings operations versus assembly?

No, we don't break that out. We expect growth in both areas though, Amit. We will see a substantial increase in (multiple speakers) operations as well as a much higher contribution from assembly operations around the world.

All right. And then I guess I don't want to get too ahead of myself here, but I think last year when I look at the [fourth] quarter, there was quite a bit of disappointment on the street -- I think you had 9% sales decline and the margins went down 140 basis points or so. When you look at the mix of the business today versus last year, if you see a similar kind of decline in the fourth quarter, do you think you should get a comparable margin degradation? Or is there some offsets in place of that?

We'll have to see. We don't want to get too far ahead of ourselves either. We can stand in November and see the second quarter, but we can't stand in September and see it, so we'll have to see how it goes.

Last year, the economy stalled late in Q1 and Q2. I think that disappointed a lot of people, but it turns out that the economy was in a contraction period in the fourth calendar quarter. And I don't know if we will see that same thing play out this year. We will see.

Right. Just finally I want to hop off of that. Can you just update us on your part on the display segment? And in addition, if you have had any new wins that may change the strategic outlook we have had there?

There have been new wins in the display sector and we don't have a strategic update at this time.

Thanks a lot.

Lou Miscioscia.

Thank you. Tim, I realize that we are all not economists here and it's very hard to predict the future, but do you see any parallels to where we are now if you look back to 2001 and 1991 and from a big picture standpoint in the sense that back then, I guess everyone -- there were so many false rallies in hopes that we were pulling out of the abyss and then it ended up being let's call it three years both times of either double-dipped recessions or just difficult times. Do you think this is going to be a really elongated turnaround or just to get some of your thoughts on that.

It's a good question. I think if you look at a long enough timeframe, the parallel that I prefer to draw is that post recessionary periods of growth for Jabil have been extremely robust, both from a very good end market environment, but also from a very, very pronounced increase on level of outsourcing from vertically integrated OEMs. And there's still a significant level of vertical capacity in the world that will be under intense, intense competitive pressure over the next 12 months.

Now you ask an interesting question. How long will the recovery take. Who knows, but I think one of the things to talk about is so what is your starting point? And I think the emotional kind of panic period that we're going through right now feels as though we are starting today; I would assert that we started in the fourth calendar quarter of 2007.

That was a period in which the economy turns out did go through a contraction. The initial GDP numbers shortly after that quarter was I think growth of 2% to 2.5%. Turns out that that was a contraction period.

And aside from the federal stimulus induced growth quarter in the last four, I would think that we've had little too negative growth throughout those quarters. So when I look at it, we've been through a year of it already.

So will it get a lot worse? I don't know. We don't see that in the demand signals from our customers today, and I think in terms of Jabil's position, we have an incredibly better level of diversity than we did in 2001. 2001, I mentioned that we went through a contraction of about 30% of our revenue over a six-month period; about 65%, 70% of our business was concentrated in the communications industry and most of our productive capacity was located in the United States.

Today, we have great diversity throughout the Corporation. We have ten significant electronic sectors we pursue and most of our productive capacity is dispersed throughout the world, primarily in low-cost locations. So we are actually in a, I think, a very good position to make hay during the recession, as well as to very, very well in the post-recessionary period.

And one last thing I would like to add, Lou, is that times like these can be very stressful for customers. And the fact that Jabil is standing with great factories in the best locations in the world with a very strong financial condition gives us relative strength through a number of players in the industry.

So I would expect to see some defensive moves from customers to get their production with players that have long-term financial liability, as well as are in a position to be able to make the investments they need for us to keep them competitive in years to come. So I think it's a good period for us to take market share and put some distance between ourselves and some of the weaker players in the business.

Okay, great. That's helpful. And pulling it much more back into the here and now, I guess when you look at your guidance, networking and telecoms, looks like it's going to be down on a quarter-to-quarter basis; and this is even off of I guess somewhat tepid results here in the fourth quarter. Is it just the end demand for those two areas or weaker? Is there something else going on there? And then alternatively, you actually did pretty well in peripherals, both in the quarter that we just reported and guidance going forward. So maybe if you could just give a little bit more detail on that, that would be very helpful.

Sure. In the peripherals sector, we've got some significant market share gains going on there and so that's really what's driving the growth there. In telecommunications and networking, nothing going on there other than a softer end market environment.

To the contrary on anything else going on, we are actually gaining significant market share in the telecommunications space. So I would expect -- I said in my prepared remarks that after we get through this soft period, I would expect telecommunications to be one of the top four or five growth sectors for us for the year. So that should be okay for us.

And networking is really is a reflection of end market demand in the particular mix of products that we have quarter to quarter. So no major concerns there.

Okay, thank you.

Kevin Kessel.

Thank you, guys. Tim, I was wondering if maybe you could talk a little bit about just the overall inflationary nature of costs in China and throughout Asia, and whether or not that was something that you guys started to see stabilize maybe a little bit here as oil prices came down? And at the same time, if you could just help explain the whole pass-through nature of some of those costs, like freight and so on and so forth.

Okay. We have seen inflation in China, both in terms of basic labor costs as well as because of the appreciation of the Rennin relative to major currencies. I would expect that to continue, although maybe at a more modest pace going forward. How that plays out for Jabil, we've tended not to pay minimum wage to begin with in China. I know some of the ODMs and some of the other competitors there have experienced more significant direct cost increase because of their pay policies and that type of thing.

I think we will induce a little bit more turnover and our costs have definitely not increased as well there.

I think in terms of the logistics costs and oil prices and that type of thing, freight out is typically an expense of our customer. Freight in is part of the bill of material costs that we have for customers, which is typically looked at on a quarterly basis.

Not a perfect pass-through condition, principally on a timing, but generally that's a cost that we look to recover.

You bring up some interesting points though that I think play to Jabil's strengths long-term as this global environment changes. One, of course, is our diversified global footprint. In the last couple of years, we have focused on diversifying our Asian footprint and I think that will pay dividends for us in the next couple of years.

We opened up a site in Vietnam. We have two sites in India, one of which is reaching very significant levels of production; the other we hope to reach significant levels of production in the next 12 to 24 months. So we think it's important to have a diversified global footprint within Asia and globally.

When you talk about logistics costs, we have a significant amount of our production in very bulky, heavy, large-scale telecommunications gear, networking gear, medical instrumentation products.

Our analysis is indicating that we are very close to inflection points to localize production. Some of that Chinese production actually -- Asia-based production ending up back in places like Mexico and Eastern Europe. I'm in a more complex environment in terms of how we architect the overall supply chain for customers, essentially producing printed circuit board assemblies in low-cost locations, shipping them into consuming regions and finishing final assembly and order fulfillment within the consuming regions.

We have a great capability to do that and I think that will pay dividends for us in the next few years. And I think actually a continued increase in oil costs, although I hope it doesn't accelerate because of the impact it might have on consumers, that that will actually be good for us, because we do have a diversified global footprint; very sophisticated IT systems; and the ability to architect supply chains that work for customers.

Okay, great. And then also you had mentioned Mexico as one of the areas I guess that has been earmarked for CapEx expansion. Is that an area that you're noticing is maybe sticking out in the minds of some of your customers in terms of an area where they want to have more exposure going forward or more of a diversified manufacturing footprint?

Again, I've just kind of gone through some reasons why we think that localizing, particularly final assembly and order fulfillment in the consuming regions, makes sense. Mexico is the final assembly and fulfillment site in a wide range of products for shipment into the United States, Canada, Mexico and other parts of the North American market generally -- makes a lot of sense.

So we've been in Mexico since 1997. We have operations in Chihuahua, Guadalajara; smaller operations near the border, particularly our AMS operation in Reynosa. So we're pretty well positioned to the extent customers want to continue to consume the higher levels of capacity in Mexico.

Okay. And then I just wanted to clarify. I thought when Forbes spoke about the mobile segment, he mentioned up 30% sequentially. But I know that your presentation says up 55%.

Well, he said it was -- well, Consumer Electronics was up 30%.

Yes, the division up 30%, Kevin.

Oh, in total.

(multiple speakers) up 55%, yes.

Okay. And Tim, at this point, can you give us an idea of maybe aside from your largest customer, how many other customers in the fourth quarter you would -- you've also transitioned into the assembly mode as well for Mobility? That should contribute in a major way [that's not] to your growth rate?

We do have some significant growth in the assembly area. Just leave it at that.

Okay. And Forbes, housekeeping, can you give us CapEx expectations for '09 and D&A? And I guess tax rate if you expect it to -- at this point if you guys would model it to kind of remain at the 20% level or not?

Yes, I think on the tax rate, 20% is reasonable for modeling purposes right now. In terms of CapEx, that's going to depend clearly how the fiscal year pans out. But I certainly would think it would be in the -- certainly sub-$300 million.

Okay. And not much change in D&A?

A little bit of an uptick, obviously, with some of the capacity put in this place, but nothing hugely dramatic.

Thanks so much.

Sherri Scribner.

Thank you. I just wanted to talk a little bit about the guidance in terms of you mentioned, I think, Tim, that obviously you have some conservatism baked into the numbers. But it sounds like the news coming out and the concerns that people have suggest that things are pretty bad. How conservative is your $0.30 estimate for the next quarter? And what is really baked in there?

I think it's a rational, practical, reasonable look at both our business levels, our anticipated business levels in the quarter, handicapped as best we can based on our judgment for a softening macro-economic environment.

Now, I did say that we noted a decline in end market momentum in late July and August. So we have already seen some degradation in end market activity. And so I don't think we entered the quarter with a particularly rosy outlook on conditions anyway.

So, to give you -- I'm not going to be more specific and provide percentages of decline. You have to make your own judgments there, and it's a very unpredictable environment.

We've done the best we could. We intend to, as always, we're not trying to be overly conservative. We're not trying to be overly optimistic. We are attempting to provide rational, reasonable guidance, handicap for what we know and don't know today. And the intent, obviously, is to be within the midpoints of the guidance.

Okay. That's helpful. And then in terms of the -- I mean if you look at the Consumer business, you guys are modeling a pretty regular uptick in that business, and there's been some concern about consumer spending in the US and Europe slowing. Do you think those numbers are --?

Let me -- I will let you finish your question so please follow up. But our guidance for the Consumer sector is really not regular. I know that the 30% sounds regular, but when you peel the onion back and kind of look at what we are guiding underneath, it's very irregular. Our display sector being up 15% is about half of what it would typically be in the November quarter. So that's a very significant reduction in forward-looking expectations for the display sector. And keep in mind the display sector is down something like 50% or $180 million year over year. So I think that is -- obviously, we have baked a significantly leaner outlook into the display sector.

The Mobility sector being up 55% is way outside of what a normal condition would be in the November quarter. That's clearly indicative of significant new business ramping during the quarter, as well as a modest seasonal uptick in the demand there.

And peripherals I think Forbes talked about new set-top box wins and some other things. I don't think that we expect a very significant seasonal uptick associated with the peripherals.

So I'd ask you to kind of look at the notes and what we said about that sector and consider it. It just so happens -- it's a coincidence that those numbers end up being a 30% increase in the sector overall, and that looks like a normal condition. But it's anything but a normal condition.

Okay. So if you look at the Mobility being up so much, obviously, you are commenting that you have business wins there, but how much are those at risk if consumer spending is weaker, those business wins?

The new business wins aren't at risk; if consumers buy fewer, the ramp would be lower if we sell fewer of them.

I think the risk in terms of new product ramps, it's partially what consumer demand is during the quarter. But another thing that I said in the prepared remarks I would like analysts and investors to keep in mind is that new product ramps are, by nature, unpredictable in and of their own right even in robust economic periods.

So, what manufacturing yields we have, how quickly they will come out of the gate, what design issues might be implicit, what supply chain gates might transpire as we move into higher levels of production; those are all risk factors to realize the anticipated levels of production.

Okay. And then just finally, on the displays business, obviously underperforming what you would usually expect. I know you said you are not going to give any update on the displays business. I think last quarter you said that business needs to be I think you said what -- $300 million to $350 million a quarter to be profitable? What are your long-term goals for that, considering this should be the best quarter for that business?

I don't think our narrative on the displays sector will change for this call in the next couple of months. That narrative is we look at the sectors that we do business in. We have return targets and growth targets for those sectors. If they fall below those return targets, they need to have remedial action plans or we will divest or move away from those sectors strategically.

This is not the good -- this is not the best time to make announcements or pronouncements or admonishments to a sector like displays, given the fact that this is an important quarter, lower than historical levels for us, but important nonetheless. And we have a number of customers in that sector we care deeply about. And we will move through this quarter and make additional assessments over the next two, three quarters and make appropriate moves as we determine at that time.

At this point in time, like I said in the prepared remarks, Sherri, we really don't have an update in terms of strategic positioning for that sector. Right now, we're looking at ramping additional customers into production, making sure that we handle our customers' requirements this quarter and continuing to work on improving the return targets in -- or the actual returns in that business.

Okay. Thank you for that additional color.

Brian Alexander.

Thanks. Tim, the contribution margins, just to go back to an earlier question, on a sequential basis, that you are guiding to is about 3.5%. And that is obviously well below what you are striving for. And, to be fair, you did say that this would be choppy. But in light of the 55% sequential growth you're looking for in Mobility, which you described at the analyst day as having the richest contribution margin profile, I'm a little surprised we're not seeing more leverage in the model.

So can you just be a little bit more specific where you are seeing lower than expected contribution margins? You referenced program ramps as having a depressing impact, but I would have assumed those ramps were anticipated when you laid out the contribution margin goals at the analyst day. Thanks.

Yes, so dating all the way back to the analyst meeting, we talked about the first $1 billion in business, generating significant return levels. We didn't anticipate that that would occur. What we didn't handicap into those comments or we actually did, but it's soon forgotten, is it's highly dependent on where that additional production takes place, what sectors and what the timing is, and what the general environmental conditions are at the time.

So we have a big rush of new revenue, which is unpredictable new programs frankly occurring in some areas of the world where we're already fully loaded. So not providing an additional capacity absorption, on the contrary, we are actually having to create new capacity to accommodate that production. So that has a -- that provides an impedance to strong margin growth.

I also think you really need to consider that we are in a very choppy, unpredictable environment, and I don't think it makes sense for us to be too optimistic about what progression we'll see.

Having said all that, if we can make above 3% operating margin in this environment and successfully launched the programs that we have, I think it should turn out to be a great year for us and we will make a lot of money. We will produce excellent cash flow, our EBITDA margins continue to march forward, and operating margin expansion will certainly come as we achieve maturity of the new program ramps and as we achieve higher levels of utilization in some of the more underutilized areas of the world.

Just to follow up, can you say is the Mobility segment one of the segments specifically where you are not seeing the incremental leverage that you expected because of where the incremental business is coming from? Or are you seeing it in Mobility and not in other places?

I think we have seen very good margin progression in the Company overall. And we are focusing -- we are obsessing on Q1; I understand the reasons for that. But we had a 40 basis point improvement in operating margins in Q4. We printed an excellent quarter. On $3.26 billion of revenue, we showed a 40% operating margin improvement in spite of a significant addition of capacity around the world.

So I think in terms of the Mobility growth, there is a significant level of Mobility growth that is more EMS-related than it is vertically-integrated related. And that tends to carry lower margins with it. And because we are in the early ramps periods of some of those programs, then that also has a mitigating effect on strong operating margin improvement.

Brian, I think also from our comments, back -- if you go back to the analyst meeting six months or so ago, we -- in those remarks there, I don't think we had really contemplated continued degradation in the displays, that sector, quite frankly. We have continued to see degradation from that point I think down by another 30% to 40%. And as we said earlier in our prepared remarks, we're earning about 50% of same period a year ago type run rate. Where typically we see some very strong leverage and high utilization, sort of hyper utilization of that asset base that we have in place in that sector.

So clearly that's not performing where we want it to perform. And Tim in his remarks in the previous question, we will continue to revisit that over the next quarter or two and we will move forward from there.

Okay. Thanks a lot, guys.

Jim Suva.

Great. Thank you very much. First, a question for Tim and then a clarification one for Forbes. Tim, you mentioned networking down about 12% on the outlook and you mentioned macro concerns there. Is that basically across all your customers? Because it looks like that that is pretty sizably lower than normal than expected? I just wonder if there's some program shifts going on or is it just end demand related?

And then for Forbes -- Forbes, if you can just clarify, I thought I heard you say stock comp; and maybe I heard this wrong due to lack of sleep, but stock comp of $15 million next quarter? And if so, if this quarter was less than $7 million, it looks like that may be double. And are you paying people more in stock or what should we think of? Or then again, maybe my number is just wrong.

Sure.

Do you want to jump to that question first?

Sure. I'll absolutely answer the first question. So you're absolutely right, Jim. Approximately I want $7 million during this fiscal quarter.

Part of compensation for executives and certain employees is based around performance-based restricted stock. So what we mean by that is there's a specific performance target set; in this case, three years in advance. And we concluded at the end of this fiscal year, those performance targets were not met, and the accounting rules were such. Therefore, have you credit out that expense that was accrued in there over the previous three-year period.

So I think if you recall last quarter, it was $7 million came out. And this quarter, again, the final piece another $7 million came out. And actually around -- some of the subjectivity around meeting those targets that the accounting rules look at.

So as we move forward, we have performance-based targets that are rolling on a three-year basis, and we would expect $15 million to be a pretty accurate number as we move forward. And given there should certainly not be any reversal of contemplated expense there, given that really first quarter or fiscal year is not really a measurement period, if you will.

Also one looks at it, it's just not quite in that measurement range to look out two to three years yet. Does that make sense?

We'll probably follow up, but it just seems you even look in past history, the stock comp looks to be about more than double what it's been. I just wonder if you are paying people more in stock and moving stuff below the line?

We're not, actually. No, no, far from it. And I'd be happy to walk you through the last couple of years around this performance base.

Great. And then maybe on the networking question?

The networking, I think Lou Miscioscia asked that question. And there are no program shifts, no major concerns. And it's just generally flat to being a little bit down and we'll see how it turns out.

And that is across the broad base of customers in that sector.

Great. Thank you very much, everyone.

Shawn Harrison.

I will make it quick. Two questions, just on February seasonality within the Consumer business, given that the ramp you are seeing, as you mentioned, is atypical within handsets and weaker than normal within the displays business, should we expect kind of maybe a more moderate type of seasonal decline during the February quarter if everything stays in terms of consumer demand patterns, even with where we are at, at this point in time?

I think that's fair.

Okay. And so I guess the question I'm trying to get at is you mentioned earlier the majority of the ramp here in the November quarter is actually tied to new demand coming in, not a seasonal uptick. So an equivalent 50% falloff shouldn't be the type of dynamic for the February quarter?

Yes, that's true.

That's true.

Okay. And then secondly on the automotive business, I think last quarter you mentioned it reached breakeven. Given kind of the commentary regarding an uneven demand environment, how do we get profitability to improve in that business beyond single volume uptick?

Within the automotive sector?

Yes.

Yes, it's around that breakeven level. In terms of improving that particular sector, we talked about a very difficult marketplace. OEMs with a lot of vertical capacity, and that continues to be at work in progress in selling the capabilities of our Corporation. And also consolidating down some of our global footprint in terms of that regard.

So I'm not talking about restructuring there, but actually creating $0.02 or $0.03 of excellence across the Corporation, which we are in the process of doing. So we will see some leverage there at these types of levels of revenues. But we continue to sell in hard there across the OEMs and try -- looking to sell the virtues of an outsourcing model. But again, I think that's the work in progress over the next year or two.

Okay, thank you very much.

Operator, we have time for one more question, please.

William Stein.

Great thanks. I'm wondering if you guys can talk a bit about the linearity of bookings and billings coming out of August and into September. And then I have a follow-up.

The linearity of Q4, we -- I think August was our highest revenue level notwithstanding the fact that we noted a decline in end market momentum in late July and August. So we still had more revenue in August than the previous two months. And that's consistent with the ramping of the new programs and into a seasonally strong quarter in the new business wins that we have. So I don't know if that answers your question, Will?

Well, I'm thinking excluding kind of the end market shifts where -- pardon me, the share shifts where you seem to be gaining some share with customers. I think you said earlier that the end markets lost some momentum in late July and August. Did that continue in September? Did it improve or decline? I know you are giving us the quarter guidance, so that's the number we can use. But just to think about the trend would be helpful to understand if things are of late getting what you think might be better or worse relative to normal seasonal trends.

I don't know that I can answer that. I'd like to, but the 25th of September, we have seen some data from inside of our Company. We have tried to incorporate that into the guidance that we provided. I would say that we haven't seen the bottom fall out of anything. We haven't seen an acceleration of erosion, that type of thing. So I don't see a crumbling economy at this point. That said, we will see.

Prospectively, we don't know what's going to happen anymore so than you guys do. But there's nothing on our radar screen right now that suggests that we are in a complete stall out falling out of the sky.

Thanks. And one follow-up on that. Normally, for those of us with an historical perspective on this industry, we know that when times get tight like this, like in many industries, right, that the concern is you get some undisciplined competitors pricing things down and you see margins in the industry get damaged. Can you comment as to whether you are seeing that now? Is the industry restructured enough to avoid that, you think in this environment? Any comments around that would be helpful.

We're not seeing that now. And having been with the Company 21-odd years and been through a couple of recessions here and freak-outs by investors, competitors, customers and the like, I think that to the extent that happens, we will be able to manage through it.

Okay, thank you.

Thanks for joining us on the call today.

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