捷普科技 (JBL) 2009 Q1 法說會逐字稿

Good morning, my name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the Jabil first quarter fiscal 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

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

Thank you. Welcome to our first quarter of fiscal 2009 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 play back on the Jabil website in the investors section along with today's press release and a slide show presentation on the first quarter. You can follow our presentation with the slides that are posted on the website, and begin with Slide 1 now, our forward-looking statements.

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 of fiscal 2009 net revenue and earnings results, our long-term outlooks for the Company and improvements in our operational efficiency and in our financial performance. The statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31st, 2008. And subsequent reports on Form 10-Q and Form 8-K and our other Securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I'd like to turn the call now over to Tim Main.

Thanks, Beth. And as most of you know we provided fiscal Q1 guidance in mid-September. Prior the worst of the financial crisis and result in abrupt reductions in end market demand. And we don't normally do this but I think it'd be helpful to review how we looked at our guidance then as will be instructive later on in the call when we cover our guidance for the second fiscal quarter. In September, we were looking at customers' schedules which translated to $3.85 billion in revenue for fiscal Q1. The demand behind this revenue was broad based but also included a significant ramp of production for our mobility customer. Anticipating that our schedules could be reduced if the economy worsened, we handicapped our revenue guidance by 9% at the midpoint with a commensurate reduction in earnings. The launch of the new mobility program was delayed until very late in the quarter which reduced our expected revenue another 3% overall. Therefore the total reduction from the beginning of the quarter revenue expectation was 12%. Excluding the effect of the new mobility program the intraquarter reduction was 9%, right on our expectation.

Given the rather severe reduction in orders over the course of the quarter, we actually worked very hard and I think well to maintain inventory turns at eight. We are positioned to rapidly generate cash and liquidity over the course of the current quarter as we collect receivables and liquidate inventory. We expect to exit fiscal Q2 with inventory turns of eight or better and with accounts receivables at normal levels. Our pace of capital expenditure will also slow as we adjust to the lower revenue level. This should all result in a cash level of about $750 million by the end of February.

These are very turbulent times and I hope the additional transparency is helpful to your understanding the dynamics of our business. Recessions are unpleasant but we've taken a fairly hard blow and yet it seems very clear to me that Jabil's weathering it very well. Now we'll take a look at the detail we typically provide and then I will close with additional commentary on our guidance and expectations.

Okay. If we could please now turn to Slides 2 and 3 for our results for the first quarter of fiscal 2009 on revenues of $3.38 billion, GAAP operating income was $77.7 million. This compares to $98.9 million GAAP operating income on revenues of $3.37 billion for the same period in the prior year. Core operating income excluding amortization of intangibles, stock-based compensation and restructuring charges for the quarter was $101.2 million or 3% of revenue as compared to $122.1 million or 3.6% for the same period in the prior year. Core earnings per diluted share were $0.30 as compared to $0.36 for the same period in the prior year. On a year-over-year basis for the quarter revenue was consistent while core operating profits declined 17%. On a sequential basis revenues increased by 4% while core operating income declined by 3%.

Please turn to Slide 4 now for a discussion of revenue by division and sector for the first fiscal quarter. For the EMS division, represented revenue represented 59% or $2 billion. A decline of 6% as compared to the fourth quarter of fiscal 2008. Core operating income for the division in the quarter was 2.7% of revenue. Sector movements are as follows: Production levels in the automotive sector grew 7% versus the prior quarter primarily reflecting seasonality across much of our customer base. Computing and storage sector decreased 5% from the quarter reflecting scheduled declines across the majority of customers in this sector. Industrial, instrumentation and medical sectors declined 4% from the prior quarter primarily reflecting declines in point of sale products. Networking sector levels of production decreased by 10% from the previous quarter. Telecommunications sector increased 4% sequentially reflecting new product ramps with new and existing customers.

Taking a look at the consumer division. It represented approximately 36% or $1.2 billion in the first fiscal quarter, a sequential increase of 24% reflecting seasonal growth and the ramp of new business wins across the mobility and peripheral sectors. Core operating income for the division in the quarter was 3.1% of revenues.

Sequential sector movements are as follows: Display sectors increased 41% from the fourth quarter, and reflected the seasonal European demand across our customer base in this sector. Mobility sector increased by 43% from the prior quarter reflecting seasonal volume growth and the ramp of new program wins with a broad range of customers in this sector. Expectations came in lower than our previous guidance as a result of the new product launch being a little bit later in the quarter than previously anticipated. The peripheral sector increased by 2% from the fourth fiscal quarter as a result of muted seasonal demand for set top boxes than previously anticipated. The after market services division represented approximately 5% of overall Company revenue for the first fiscal quarter. Core operating income for the division in the quarter was 6% of revenue. And revenue was consistent with the prior quarter.

Please now turn to Slide 5 for divisional and sector information for the quarter in percentage terms. Automotive 4%, computing and storage 11%, instrumentation -- excuse me, instrumentation, industrial and medical 18%. Networking represented 18%. Telecom 7%, and other 1%, for total EMS division of 59%. Displays were 7% for the quarter, mobility was 16% for the quarter, peripherals was 13% for the quarter, for a total of 36% for this division. As I mentioned, the after-market services was 5%.

In the quarter two customers accounted for more than 10% of revenues, Cisco and HP. Top 10 customers in the quarter accounted for approximately 57% of revenue as compared to 60% last quarter. Selling, general and administrative expenses were consistent with the fourth quarter at $117 million. Research and development costs were $5.7 million in the quarter. Stock-based compensation was $14.8 million in the quarter. Net interest expense for the quarter was $23.8 million and tax rate on net core operating income for the quarter was 19%. I'll now turn the call over to Forbes Alexander for a look at the balance sheet.

Thank you, Beth and good morning, everyone. As Beth said I'd like to review our balance sheet and some of our [recent] trends. I would ask you to turn to Slides 6, 7 and 8, which will allow you to follow along with my comments. The Company's sales cycle in the quarter expanded by 4 days to 24 days. Days sales outstanding grew by 4 days to 44 days reflecting growth in seasonal consumer sales in the new product ramps during November. Times table days and inventory days were consistent with the prior quarter, inventory turns remaining at eight. Cash flows used in operations was approximately $33 million in the fiscal quarter reflective of net working capital expansion. A return on invested capital 10%, consistent with that of the prior quarter. Our cash and cash equivalents were $580 million.

Our capital expenditures during the quarter were approximately $115 million. This level of expenditure primarily reflects investment or IT infrastructure, capacity to support new programs being ramped in the mobility sector. Capital expansion in the quarter were planned and permitted to support significantly higher revenue levels. Depreciation for the quarter was approximately $64 million. With EBITDA in the quarter roughly $165 million or 4.8% of revenue. Our operating performance at the low end of our previous guidance was a function of broad-based schedule declines in the second half of the fiscal quarter. While our net working capital expanded by approximately $160 million, we were pleased with this performance given the volatile nature of the demand environment. Inventory levels remain at eight turns, a good result given when we entered the quarter with revenue forecast levels significantly higher than the end result.

Accounts receivable days expanded by -- excuse me, accounts receivable expanded by approximately $200 million, as a result of the revenue profile within the quarter associated with the consumer seasonal demand and the launch of new product volumes in November. As we enter the second fiscal quarter we have assessed our inventory and accounts receivable positions, some plans are in place and being executed to to reduce inventory levels to reflect the forecasted demand levels to which we are guiding. Accounts receivable at the end of the second quarter should be back to more recently normalized levels of 40 days. Our capital expenditure levels should also significantly slow as we move through the balance of the fiscal year given the macroeconomic demand environment. As a result, cash levels at the end of the second quarter are expected to be approximately $750 million.

Now I'd briefly just like to update you on the cash impact of the previously announced restructuring. During the quarter cash payments associated with our restructuring activity was approximately $19 million. Total cash payments to date against that plan now approximately $140 million. The cash cost of such charges remains estimated to be $175 million and we currently estimate approximately $6 million of cash payments to be made in the second fiscal quarter.

I'd now just like to take a moment to discuss goodwill impairment analysis that we're undertaking. Due to the macroeconomic environment, the overall decline in equity values and the decline in our market capitalization, we have determined that an indicator of potential goodwill impairment is present for the first fiscal quarter. Accordingly we're performing a goodwill impairment analysis using the two-step approach as required under SFAS 142. This is anticipated to be completed in early January. In the event that we determine good will is impaired in whole or in part, a non-cash charge would reduce reported GAAP net income and earnings per share. The goodwill balance for the end of the first fiscal quarter was approximately $1.1 billion.

I can now turn to our business update and ask you to turn to Slide 9. Our overall Company guidance for the second fiscal quarter of 2009 is as follows: Revenue is estimated to be in the range of $2.8 billion to $3 billion. The result of core earnings per share are expected to be in the range of $0.12 to $0.16. At the midpoint of guidance as a percentage of revenue, we estimate the core operating margins be 3.1%. Selling, general and administrative expenses are estimated to be $118 million. Research and development costs are expected to be approximately $7 million in the quarter. Intangibles amortization $9 million. Stock-based compensation is estimated to be approximately $15 million in the second quarter. Our interest expense is estimated to be consistent for the first quarter of $24 million. And based upon the current estimates of production and income levels, the tax rate and core operating income is expected to be 20% for the quarter. Capital expenditures for the second quarter are estimated to be in the range of $40 million to $50 million reflecting ongoing IT infrastructure refreshes and ongoing investments in our mobility sector.

If you will now please turn to Slide 10 where I'd like to cover revenue by our divisions and sectors for the second quarter. As a result of the continuing very difficult broad-based macroeconomic environment revenues in the EMS division are estimated to decline 14% as compared to the first quarter, or a decrease of 13% on a year-over-year basis. The sector breakdown is as follows: The automotive sector is expected to decrease by 35% in the first quarter, reflective of typical seasonal decline in production levels, and continued difficult worldwide environment in the automotive industry, and our concerted effort to rationalize the economic performance of this sector. The computing and storage sector is estimated to decrease by 5% from the first quarter. Our industrial instrumentation and medical sector is estimated to decrease by 7% from the first quarter. Our networking sector levels of production are expected to decline by 20% from the first quarter due to end-market demand levels. And also our telecom sector is estimated to decline by 20% also, again due to end-market demand levels.

Turning to the consumer division. Estimates here are to be-- revenues are to decrease by 16% in the second fiscal quarter. That estimate is historically typical for this time of year. This decline is reflective of the macroeconomic environment more than offset by continuing new product ramps during the fiscal quarter. A sector breakdown is as follows: Displays, an expectation the revenues will decrease by 70% in the first quarter reflective of traditional seasonal decreases and there are continuing efforts to rationalize the economic performance of the sector. As we deemphasize our participation in this sector, we expect revenue levels to be less than 50% of those levels as compared to the same period a year ago, a decline of $120 million. The sector will comprise approximately 3% of revenue for the quarter.

The mobility sector is estimated to increase by approximately 13% from the first quarter, reflecting a very difficult demand environment, more than offset by the continued ramp in new program wins. With Nokia's decision to in-source (inaudible) assembly and their efforts to rationalize the economic performance of (inaudible), we expect Nokia to be a less than 4% customer in the quarter and the fiscal year. The peripherals sector is estimated to decrease by 20% in our second fiscal quarter reflective of a difficult economic demand environment. Finally, our after-market service division we expect it to remain consistent with levels of the first fiscal quarter. And now I'd like to hand you over to Tim Main for some closing remarks.

Thanks, Forbes. I'll make a few closing comments regarding where we go from here. First, let's consider our guidance. We are taking an approach in fiscal Q2 similar to the approach that we took in handicapping our guidance for Q1, roughly a 9% reduction to our present schedules with customers. I don't think we've hit the bottom yet but I do believe this is reasonably conservative for several reasons: Number one, customers have already severely curtailed their demand for this period relative to 90 days ago. Two, I think it is a bit less likely we will experience abrupt intraquarter schedule reductions on the order of what we experienced in Q1. And, three, the large new mobility program has ramped up well. We will not be providing any guidance beyond the second quarter but I do think there are valid reasons to believe our earnings will improve in Q3 and Q4 from second quarter levels, and let me go through a few reasons behind this statement.

Some of the severe cutbacks in Q2 will be related to balancing pipeline and inventories and this will dissipate in the second half of the year. We have cut back our exposure to underperforming sectors and you're seeing evidence of this as our displays and auto sectors continue to decline as a percentage of our overall business. We have new customers, new programs, which will begin to contribute to our business, the pipe line of opportunities is actually very good right now. Finally, in this environment customers will favor financially strong suppliers with deep capabilities and a solid record of execution. And we fit that description pretty well.

Many of you will be concerned with the industry dynamics in this environment. I'm sure we will see some unsavory behavior from time-to-time but we see that even in good times. And I can't tell you exactly how things will turn out but I can tell you how Jabil will behave. I expect there will be a number of occasions where customers will move to consolidate the vendor base. In past recessions on balance, we benefited from vendor consolidation. We will be aggressive in adding market share where we can in taking advantage of our relative strengths but we will do so with an eye toward building margins, profitability and returns over revenue.

In summary, I'm actually confident we have solid control of our business and understand the dynamics very well. Conservatively I think we build significant liquidity in the short-term and can use our financial strength to tactical advantage. It is true we are operating in a severe environment. So severe that I believe the vast majority of customers will be motivated to outsource more of their electronic content and that new customers and markets will become available to us over the next year. I would characterize our attitude as calm determination to manage well through the bottom of the cycle and position ourselves for even better results when the recovery cycle begins.

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

(Operator Instructions) Your first question comes from the line of Lou Miscioscia with Cowen & Company.

Okay, thank you. Hopefully I'm coming through okay. Forbes, can I guess-- can you walk us through I guess your thoughts about the debt coming due in '09 and 2010, and maybe also sync that up with Tim's opening comments about getting the cash balance back up to $750 million, just how you guys are going to get it back up?

Surely, yes. Absolutely. So in terms of our debt profile, in 2009, we have two accounts receivable programs. I think everyone is aware of that. The total right about $400 million that we applied. Those come due in March and April respectively of 2009. So our plans are to renew those; that marketplace remains open and in fact securitizations are getting done on a regular basis. So feel very comfortable in that regard.

In regards to the next maturity that's in mid-to-late 2010 and those were some senior notes we put in place in 2003 for $300 million. In terms of our need to refinance those, that parlays into the cash generation that we expect in the balance of this fiscal year and beyond. As we note in our comments, we'll exit the February quarter, this coming quarter, with cash of at least $750 million, which is a nice position to have with $800 million of available credit on our revolver, so about $1.5 billion to $1.6 billion of liquidity. As we move through the balance of the year I would expect continued cash generation for the fiscal year somewhere in the region of certainly $400 million to $500 million of operating cash generation. Our CapEx levels are slowing. I'd estimate somewhere in the region of $200 million to $225 million for the year. So some pretty good free cash flow generation there, that call it (inaudible) $300 million plus which gives us plenty of flexibility should we decide to refinance those bonds or not. So we feel pretty good about that.

In terms of how we're going to get there, between now and the end of February, our accounts receivable will liquidate, excuse me, very naturally, to exit the quarter with about $1.7 billion there. And if you look at the profile of our revenue in the first fiscal quarter with the new product ramp, 100% of that revenue came in the last-- in two or three weeks in November. So about that cash is flowing in in the month of December, we'll continue to do so in January here. So no issue there. And inventory, as we've talked about, we have some pretty firm plans there and some actions to reduce inventory levels, and honestly there needs to be a modest reduction there, Lou, maybe a day or two. And we'll easily see that $750 million at the end of this fiscal quarter.

Okay. Great. One quick follow-up to Tim. Obviously you gave us first quarter guidance or second quarter guidance, I appreciate that. I guess when you look at the rest of the year and know you had said that you didn't want to give guidance, I mean do you think that we'll hit the low point in the first quarter just from let's say from a revenue standpoint? Or do you think that it's going to be pretty choppy or possibly even continue down on a sequential basis from a revenue standpoint?

For the balance of the year?

Yes.

That's pretty speculative. Right now based on -- based on continuing softness in fiscal Q2, so let's just say things get softer from here, I don't think we've hit the bottom, yet. And if things start to bottom out, let's say early spring and summer, then I think we would see some revenue growth in the back half of the year from Q2 levels.

Okay. Thank you.

Yes.

Your next question comes from the line of Brian Alexander with Raymond James.

Thanks. Tim, with displays becoming a much lower percentage of your business and that having been a significant drag on profitability in the consumer space and with mobility gaining momentum, do you think the consumer segment will be profitable in the second quarter and for the rest of the fiscal year?

Yes, I think it will be, and we -- I don't think we provided any guidance for divisional profitability, but, yes peripheral segment tends to be-- our peripheral sector, excuse me, tends to be a lower margin-- operating margin business but a very good on return on invested capital business. Mobility is a mix of assembly services and mechanic services that the mechanics side are higher margins and the assembly side is tighter margins but again accretive returns on invested capital. The displays have been the principal drag on-- the primary drag on earnings in the division. And we think what we're doing there to rationalize operations and we may still continue to build TV sets but it will be a smaller part of our business, and in tune to economic performance as opposed to a strategic penetration of the space. And so, yes, I think for the year it'll be a profitable business for us. In Q1 it was actually an accretive division to the overall corporate margins and I think it certainly has the opportunity to do that for the year. But we'll have to see how the rest of the year goes.

Great. And then just, Forbes, a follow-up. I don't know if you touched on this earlier, but do any of the loan agreements that you have have total network covenants that could be affected by a goodwill impairment charge?

No, they do not, Brain, no.

Okay, thanks very much.

You should mention that we have one covenant.

Yes, that's true. In terms of the covenants that we have as we arranged our books on our revolver and the key covenant there is the debt to EBITDA ratio of three and a half times. Which will run certainly well under three and we're in good shape there. So goodwill impairment would have no impact on any of our debt structure whatsoever.

Great. Thank you very much.

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

Hi, good morning, can you hear me?

Yes.

Yes.

Hi, couple questions, first of all in terms of outsourcing trends, I think you mentioned that Nokia was pulling some business back in-house. Can you talk about quantifying how much of that you saw across your customer base and how many more quarters of that do you think you're going to see where customers are more focused on pulling stuff in-house before they look at reducing costs by outsourcing?

It's very, very isolated and very counter to long-term, short-term, and in my opinion rational trend. So isolated case I know of two customers that have done that. In both cases it's generally relatively marginal business and business that we tend not to put a great deal of emphasis on anyways, because we hate being in a position where we're competing with our customers' internal capacity. So we try and avoid that as much as we can, here and there we run into it. It is typical though at the beginning of a recession like this for-- again it's an aberration, but several customers might be a little bit conflicted about the manufacturing strategy to pull a couple of things inside. That will be overwhelmed by the number of customers that will engage in new outsourcing initiatives, and eventually when these customers that end up pulling production back inside, they'll have an increasing difficulty justifying their manufacturing investments.

So we are seeing -- we haven't quantified this in the call, but I'd say in terms of just kind of organic business opportunity we're looking at $2 billion, $2.5 billion of pipeline of opportunity, which is actually really good. And a pretty good percentage of that are vertically integrated OEMs looking to move into the outsourcing space and taking this opportunity in terms of slower economic activity to do what they may have planned for a long time, but take the opportunity, to take a rationalization charge, on their side shut down their factories and move their production into, into more efficient manufactures like Jabil. So I think that will be, Steve, I think that will be a very pronounced trend particularly as we get into later into fiscal '09. So about mid-'09 I think you'll see a great deal of activity that will overwhelm the isolated instances where an OEM is pulling stuff inside.

Thanks, that's very helpful. And then just looking at the businesses that have been giving you trouble, or the segments, the auto and display. As you sort of rationalize down and focus a little bit more on profits there, is it -- obviously it's a drag this quarter. Is-- are those businesses still a drag next quarter incrementally, or as you go quarter-to-quarter do they actually help profits by some of the actions you're taking?

It's still dilutive. So we're still struggling with profitability there a little bit. But certainly a much smaller problem than it was a year ago. Unfortunately in this environment it doesn't show off as well simply because of the reduction in trajectory here. But we'll probably get whatever is left in a profitable footing by the back half of the year.

All right. Thank you.

Okay.

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

Hi, thank you. Forbes, I had a quick question on CapEx and the D&A. I thought that last quarter the CapEx guidance was to be-- for CapEx to be lower than the $115 million. And I know you commented a little bit about it coming down in the February quarter. But just sort of curious a little bit about that. And then also why did the D&A come down? It came down-- it seemed pretty significant. And what is the trend for that over fiscal '09?

Okay, in terms of the CapEx, yes Sherri, the CapEx came in I think right about $20 million to $25 million, a little bit heavier than we had anticipated. And that's really centered around higher levels of capacity we're putting in place for this ramping mobility. We've put in additional overall capacity to support that program and that was accelerated into the quarter a little bit. That's moving very nicely. In terms of the depreciation and amortization, those levels are relatively consistent. Our depreciation is $64 million or $65 million for the quarter. And our amortization was about, what $9 million -- that's relatively consistent, I believe.

Okay. It just seemed like it went down about $6 million versus the last quarter.

No, my notes here show it's relatively consistent. I can certainly follow-up with you after.

Okay, maybe I'm looking at it with the amortization, or maybe that's without the amortization.

Yes, intangibles was what, about $8 million.

And the depreciation was $64 million.

$65 million. Yes, $64 million, $65 million.

Okay, okay, that clarifies it. And then in terms of the mobility customer, I think last quarter you mentioned that you had a number of mobility customers ramping in this quarter. It seems like you're just emphasizing one significant customer that ramped later in the quarter. What happened with those other customers? Did you see a nice ramp there also and what would be your expectations as we move into the rest of fiscal '09?

We do have multiple customers ramping new business with us. There's one in particular that is relatively large, though. So that is still-- we're still seeing some broad-based penetration there, but there is one in particular that is quite a bit larger than the others.

Okay. And let me just quickly ask a question on the accounts receivable. Obviously you talked a lot about it and it ticked up and it impacted your cash levels. How much of that accounts receivable would you feel like is at risk is sort of longer-dated accounts receivable, or do you feel like that all of that is finding you're comfortable with that? You made some comments that you thought that a lot of that would turn around in the second quarter and you'd get the cash from that.

Yes, no Sherri, I'm very comfortable in the quarter, our accounts receivable is very good. Our customers pay us on time and we're pretty vigilant about that. So I feel very, very good. It's really the profile of the revenue in the quarter and we typically see seasonal expansion here in this particular quarter of somewhere in the two to three days generally. Some of our customers in this space often have longer terms than perhaps in the EMS division, for example. So with the growth in consumer -- this is not unusual. It's maybe one to two days unusual, which is $50 million to $60 million and that's primarily around that, that new product that ramped in November.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from the line of Ryan [Jones] with RBC Capital Markets.

Good morning, I just had a couple of questions. The first being, I was wondering if you could give a little color on the market share opportunities that you discussed in the press release? And I was wondering if these are pickup opportunities with current customers or are these new customer wins that Jabil is winning?

That was a general statement, I really can't provide any color on customers we're talking to, but the dynamic in this type of environment generally is for the customer base to look to consolidate their vendor base. The kind of severe environment that we're in will really, I think, imperil some of the more thinly capitalized and less financially stable players in our business. That may contribute to some market share opportunities for Jabil, and so we'll have more color as we move through, but that's a general -- general statement not about specific customers.

All right. And then just one last question is as you work to restore the cash balance to $750 million, would Jabil ever consider reducing its dividend?

We don't see any need to do that at this point. We have ample cash flow even in this severe environment. Our operating cash flow will be more than sufficient to continue to support our dividend.

All right. Thank you.

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

Hi, good morning, a few questions. Just looking at the automotive and the displays business, is there a revenue run rate that we should think of when getting back to a level of break-even or profitability? Kind of getting to that number, is it facility closures involved or is it really just kind of pruning the mix of products you're involved with?

Right, I think as we look forward the two sectors combined will be 7% -- 5% to 7%. So I don't think it's actually going to be a topic in the back half of the year, simply because it will be down to a level and pruned to a point where it will be profitable or it'll be noise level. And at this point we don't -- at this point -- I mean, things can change but at this point we do not see any large-scale facility closures due to a deemphasize in the auto and displays business.

Okay. Secondly just on the gross margin profile this quarter. It looks like it's holding up relatively well especially given the down-tick forecast in the sales. Is a lot of that just driven by the kind of continued ramp of some of this higher-margin handset business?

Yes we're also seeing, we're seeing that certainly, but also in terms of the cost base, as we move forward here, we do have some impacts as we've undertaken rationalization over the last year or two, so it's holding up pretty well. We're going to continue to focus also around our SG&A which has been relatively consistent over the past few quarters; we plan to see that going forward. So certainly the ramping business helps in that regard. And that should continue to hold as we go forward.

Okay. And one final question. If you look out in terms of customer orders, do you-- what do you see -- what are you seeing in terms of, say, maybe inventory corrections coming with those orders in terms of excess inventory at the OEM level versus actual underlying demand if you can sort of split out what you're seeing in terms of customer orders?

I don't know how to -- I'm not sure how to handicap that at this point in a clean top-level way. I think if you looked at the cumulative revenue between the beginning of the fiscal year and where we'll be kind of half-way through the year, from original expectations, we're probably down about 25%, 20% to 25%. I think, certainly think there's been a significant level of inventory adjustments and pipeline management on the part of our customers in order for them to dissipate their inventory levels in fiscal Q2. Again, I think that activity will dissipate a little bit as we get into Q3 and Q4 and we'll have some seasonal recovery as well. So I'd expect that to be less of a factor.

And I think it's a little bit instructive, if I could just spend a minute talking about it, this recession versus the most recent recession in 2001/2002. Going into the 2001/2002 recession, Jabil was 70% communication space and about 70% of our production was in the United States. Since then we've significantly diversified our customer base, the markets that we serve. We've moved most of our production into low-cost locations, so we're much better positioned to enjoy the benefits of diversification and less exposed to dislocating structural events that would put Jabil in an uncompetitive position. So I feel very good from that standpoint. And when we look at inventory levels, in the last recession the communications business was just a high-margin business that [people] were chasing demand blindly, that inventory levels were very, very bad at that point and it took a very significant effort and some actually some customers that charged off millions of dollars of inventory in that recession. And I feel like going into this recession that the inventory management process, the fact that we do a lot of order fulfillment today, customer demands coming directly into our factories, that the entire inventory pipeline is much, much leaner than it was in the last recession.

So I don't want to sound [Polyannish] about that, but I actually-- I've been through-- I was through both recessions, as, in the position I'm in and I actually feel even though this recession is more severe than the 2001/2002 from a global economic standpoint, I feel a lot more confident about Jabil's ability to get through the bottom of the cycle and to really grow the business and improve its attractiveness to investors on the-- when we start to come out of the down cycle, than I did in that one. And I feel less exposed to things like extremely high levels of inventory and obsolete inventory, because that's all of that stuff is in better shape this go around.

I guess just as a quick follow-up to those statements, Tim, have you seen kind of a slow-down in the negative order revisions as we've gotten here into the December time frame? I know it's a seasonally lower period to begin with, but--?

Yes, it has slowed down a little bit. I don't know if that's a (inaudible) or not. It is December; it's getting close to Christmas. There are still a lot of human beings that, they kind of go to sleep this time of year. So that's why we're taking a more conservative view of the fiscal quarter even though the amount of reductions has slowed down, simply because after the first of the year we could see another hair cut. And I don't think that we've seen the absolute bottom yet but it seems like the free-fall that we saw in October and November is slowing down a bit.

All right. Thanks a lot and happy holidays, everybody.

Okay.

Your next question is from the line of Jim Suva with Citi.

Great, thanks. Hey, Tim on the trends of the phases of in-sourcing from customers, and then order revisions and such and then eventually outsourcing, can you talk a little bit about do you-- sounds like you have one other customer in addition to Nokia that's doing some more in-sourcing. Do you expect any more? And then when we come out to the point that is even more favorable for Jabil, more outsourcing, can you talk about do you expect this round to be more asset sales versus pure outsourcing trends in the path from the asset sales for some of the EMS companies have not been absolutely the most glowing. Can you talk a little bit about that-- those phases that you see?

Sure. First of all I'd say that in-sourcing is not a trend. There's a couple of isolated cases. We have, I don't know, 80, 90 customers and two is not a big number. One of them has a big name but in terms of how important those product lines are to our overall profitability and the health of the Company, it's really not as material. And even in -- even in this environment I would say that the real trend is that we'll see -- we are seeing more opportunity come towards us, and more vertical integrated OEMs approaching us right now to engage in a dialog about how to move them from their vertical assets to new and outsourced models. So that trend has already started.

In terms of the asset sales, I don't think you're going to see that at all. There's not a lot of assets that are attractive. Nobody needs high-cost capacity. Here and there you may see an acquisition of a particular technology, a capability, a place in the world where people want to be. But that would be, I think that would be the exception more than the rule. So the days of big asset sales are over. And just kind of the to kind of close that out, Jim, I said during the prepared remarks that there'll be opportunities for us to build market share, we're going to be aggressive, better consolidation is generally good for us. I think in the last recession by my tally we were three in one in that consolidation. But we will, we will definitely favor returns and margins and the control factor will be how good is it for our business from a profitability standpoint and if we have to sacrifice some revenue to do that, we're going to sacrifice revenue.

Okay. And as a quick follow-up, this quarter you used some cash and inventory came up in front of the quarter where we're seeing some slowdown in sales outlook. I would have expected I guess inventory to come down going into a period of sales coming down sequentially. Was it just some programming as far as the timing of the mobility or some of the customer cuts came later in the quarter? Or can you just kind of help us connect those two data points?

Yes, not at all. I mean you should expect to see inventory build in that quarter. Particularly when you start the quarter at-- with a schedule expectation of $3.85 billion and you end at $3.4 billion, and a very significant program that was to launch early in the quarter didn't launch until two or three weeks before the quarter ended. So, again, I feel like given the deceleration in end-market demand and the position that we were in at the beginning of the quarter, I think our teams did a very good job to generate eight turns, and not saddle us with a huge inventory bubble. And as we move through Q2, we'll liquidate some of the inventory that's still here. So I think with the deceleration of orders to hold our inventory turns consistent was pretty good performance.

Thank you very much, everyone, and happy holidays.

Okay.

Your next question comes from the line of Sean Hannan with Needham & Company.

Yes, thank you, good morning.

Good morning.

Good morning.

So if we look at the current environment today and outside of some of the ramps that you have in mobility, is it possible, Tim, if you can explain to us a little bit where you view your strongest opportunities based on either current business development or quote activities as we look to the remainder of 2009?

Well, we've talked about mobility, expect that to be a strong sector for us. I think there's significant opportunity for us in computing and storage, telecommunications and then the industrial, instrumentation and medical segment seems to be very vibrant right now and a lot of opportunity embedded in that sector. I think we'll hold our own in the other areas but probably we'll function more as a result of what end-market demand looks like. The sectors that I mentioned we'll be able to probably outgrow any expectations based on additional penetration.

Okay. Thank you. And then separately you've been in Mexico for a good period of time. You've been building some of your capabilities there. Is it possible if you can maybe provide us with a little bit of color in terms of where you stand with your current capabilities out of your various facilities there, and how that is -- whether it's driving any increased near-shoring discussions with current customers or prospective customers?

There was a lot more talk about that when oil was $140 a barrel. We have two large mass production sites in Mexico, one in Guadalajara and one in Chihuahua. And we have I think the world's largest after market services operation in Reynosa. So we're pretty mature there, the capabilities in the Chihuahua and Guadalajara sites are very, very strong. They serve everything from telecommunications customers to mobility customers. And I think long-term there will be some near-shoring, as you call it, it's a great term. As people look at logistics costs and we become more sophisticated in the way that we look at what lowest total cost analysis looks like. And so I think that with the increase in costs in China, the escalation of taxes and other things there, along with probably in a long-term trend logistics costs will increase in spite of the short-term reduction in oil prices, that will contribute to more of-- more near-shoring, more business for Mexico and I think generally will play into the hands of, in my opinion, will play into the hands of the service providers that have diversified global footprints that can offer customers a richer solution and more choices in terms of their manufacturing locations.

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

Your last question comes from the line of William Stein with Credit Suisse.

Thanks. I'm always last which is I'm glad to get in here. So, first, I'm curious about the decline in Op margin guidance for the next quarter relative to where we were this quarter. The decline is a little bit more than I expected. Is that going to-- more to the leverage, the negative leverage from revenue or mix or are there any kind of more unusual items that are in the cost basis that would get us down to two-one next quarter?

Well not-- no, nothing unusual. Historically, the decline is actually a little bit better, if you will, in other words, it's not as steep the decline quarter-over-quarter, Q1 going into Q2 than we've seen historically. Historically, as you move out, or as Jabil has seen, as we've moved out of a high seasonal quarter, we're seeing-- typically we saw over the last four or five years like $0.18 on $1 of revenue decline in operating. As we're moving into this quarter, it's certainly less than that. And, again you've got a cost base around seasonal demand, there remains probably muted more than previous year. There is seasonal demand as we sit here and [express for you past December]. And obviously we do have a continuing ramp of a product in the mobility sector. So we're actually pretty pleased with it. I'm pleased with it that it's not as steep of decline as we've seen historically over the last four or five years. It's certainly nothing extraordinary and we feel pretty good about it.

It's really all about the negative revenue leverage.

That's revenue, it's not the mix then, is that right? Did I get that right?

Yes, the revenue decline, yes.

Okay, another quick one on the credit side. I think Nortel has spoken about pursuing or at least hiring counsel regarding a potential bankruptcy filing. Would that impact Jabil if that were to happen?

Not in any material way.

Okay. And then one more quick one on the mobility segment, that's being guided up quarter-over-quarter. I think normal seasonality is about 25% down in the quarter. First, I'm wondering if you can comment as to whether that normal seasonal view is correct. And if so it's a pretty massive separation from normal, right? And I'm wondering if that's owing to a big ramp with the same customer that ramped in the November quarter, is it a greater number of customers and whether it is assembly or components or where the majority of it is, assembly or components?

Yes, it's more traction with several customers, but the large mobility program we talked about ramping in fiscal Q1 reaches more mature levels of production in fiscal Q2. And so that's really the primary driver behind the better than normal performance in that sector.

My view of down normal -- down 25% normal, is that about right or am I overstating--?

No, I think the last two years have been -- the last two years have been aberrations for different reasons. Last year it was down about that much but that was really from an industry standpoint. Motorola really imploded. And then this year we have the most severe recession we've had in a couple of decades. So I think normal patterns, if you look at analysts that cover that space, and they've covered it for a long time, it's generally about 10% to 15%. As an end-market that market continues to-- this year will not grow, but the typical growth pattern in that space has been 8% to 10% a year and the typical seasonality it's been more like 15% down.

Okay, great. Thanks very much, guys.

Okay. Thank you.

That concludes our call for the day. Thank everyone for joining us on today's call.

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